Acorn Energy, Inc.: Form 10-K for the period ended Dec 31, 2021

OVERVIEW

Acorn Energy, Inc. and its subsidiaries, OMX Holdings, Inc. and OmniMetrix, LLC (collectively, “Acorn” or “the Company”) is a Delaware corporation which is a holding company focused on technology driven solutions for energy infrastructure asset management. We provide the following products and Internet of Things (“IoT”) applications and services through our OmniMetrix, LLC (“OmniMetrix”) subsidiary:

• Power Generation (“PG”) monitoring. OmniMetrix’s PG services provide wireless remote monitoring and control systems and IIoT applications for residential and commercial/industrial power generation equipment. This includes our AIRGuard product, which remotely monitors and controls industrial air compressors and our Smart Annunciator product which is typically sold with a new commercial or industrial generator and has a display screen that indicates the current status of that generator.
• Cathodic Protection (“CP”) monitoring. OmniMetrix’s CP services provide remote monitoring and control products for cathodic protection systems on gas pipelines serving the gas utilities market and pipeline operators. The CP product lineup includes solutions to remotely monitor and control rectifiers, test stations and bonds, and offers a 21st century data management platform with OmniPRO.

During 2021, each of our PG and CP activities represented a reportable segment.

We continually evaluate opportunities related to our activities, and our goal is to maximize shareholder value and position our holdings for a strategic event, which may include co-investment by one or more third parties and/or a synergistic acquisition of another company.

FINANCIAL RESULTS BY COMPANY

The following tables show, for the periods indicated, the financial results (dollar amounts in thousands) attributable to each of our consolidated companies.

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OMNIMETRIX – POWER GENERATION MONITORING AND CONTROL AND CATHODIC PROTECTION MONITORING AND CONTROL

OmniMetrix, LLC is a Georgia limited liability company based in Buford, Georgia that develops and markets wireless remote monitoring and control systems and services for critical assets (including stand-by power generators, pumps, pumpjacks, light towers, turbines, compressors, fire pumps and other industrial equipment) and multiple markets in the IoT ecosystem, as well as cathodic protection solutions for the pipeline industry (gas utilities and pipeline companies). Acorn owns 99% of OmniMetrix, with the remaining 1% owned by OmniMetrix’s former CEO.

Following the emergence of IoT applications whereby companies aggregate multiple sensors and monitors into a simplified dashboard for customers, OmniMetrix believes it plays a key role in this economic ecosystem. In addition, OmniMetrix continues to see a rapidly growing need for backup power infrastructure to secure critical military, government, and private sector assets against emergency events including terrorist attacks, natural disasters, demand response and cybersecurity threats. Residential and industrial standby generators, turbines, compressors, pumps, pumpjacks, light towers and other industrial equipment are part of the critical infrastructure increasingly becoming monitored in IoT applications. Given that OmniMetrix monitors all major brands of critical equipment and continues to invest in research and development in response to customer and potential customer feedback, OmniMetrix is well-positioned to grow its customer base and expand its product offerings in this market.

Products & Services

In the PG segment, OmniMetrix sells a line of devices and services built on its baseline TrueGuard wireless remote monitor. These devices are broadly applicable across all brands and models of emergency power generators and industrial engine applications. The TrueGuard product family connects directly to the engine’s control panel and captures all data flowing through the control panel. As a result, the product provides the ability to identify whether an emergency generator is capable of operating as expected. OmniMetrix also sells its AIRGuard product which remotely monitors and controls industrial air compressors and our Smart Annunciator product which is typically sold with a new commercial or industrial generator and indicates the current status of that generator on a large touch screen display.

In the CP segment, OmniMetrix offers two primary product lines: the Hero 2 Rectifier Monitor and the Patriot Test Station Monitor. Both of these products are used to monitor cathodic protection systems, a process which reduces rust and corrosion on pipelines used to transport natural gas. As the name suggests, the Hero 2 Rectifier Monitor product monitors and controls the operation of the rectifiers, which are a critical component in the effort to prevent corrosion and are also the most common point of failure in the pipeline system. The Patriot Test Station Monitor is also used to provide data points along the pipeline segment powered by the rectifier.

Customers and Markets

At its core, the OmniMetrix PG monitors (TrueGuard PRO and TrueGuard 2) can remotely monitor and control a variety of industrial engine applications, including engines, standby generators, air and gas compressors, fire pumps, batteries, turbines, pumps and other equipment. Early in the company’s history, a strategic decision was made to focus primarily on the standby power generation market. In the past several years, the company has expanded its focus to add several additional applications where it sees demand. Standby generator monitoring is part of the IoT ecosystem, whereby multiple sensing and monitoring devices are aggregated into one simple dashboard for customers.

As OmniMetrix can monitor and control all major brands of standby generators, it is well-positioned to compete in this market.

In the first stages of OmniMetrix’s PG product and market development, relatively unsophisticated generator controls and early generation cellular and satellite communication processes limited the applications to alarm delivery. Customers were notified that some event had taken place after the fact. There was no diagnostic data opportunity, but service organizations could, at best, practice a reactive service approach.

With the advent of second-generation cellular systems and newer, computerized engine controls, OmniMetrix migrated to a design point of collecting large amounts of performance data from the remote machinery, allowing service organizations to perform diagnostics on equipment before dispatching service. These enhanced control panels allowed the service organization to put the right person in the right truck with the right parts to affect a one-trip or a zero-trip solution. At this phase, service organizations could be efficient, proactive, and provide a higher level of customer satisfaction. They could also manage more customers by using remote monitoring. Customers have provided OmniMetrix feedback telling how customer service teams are able to work “smarter” and more efficiently by going directly to sites with problems, thus increasing the value of their businesses.

OmniMetrix is now focused on expanding its product offerings while it also continues to execute in its third phase of evolution, maturing the high-performance data collection design point into the first provider offering of automated prognostic solutions. For example, as most generator failures are the result of consumables, and as those consumables can be monitored, the consumption trends can be extrapolated into predictions of the most common failure modes.

OmniMetrix’s PG monitors have been installed on commercial, industrial and residential generators from original equipment manufacturers (“OEMs”) such as Caterpillar, Kohler, Generac, Cummins, Briggs & Stratton, MTU Energy and other generator manufacturers. OmniMetrix provides dual value propositions to the generator service organizations as well as to the machine owner. The dealers benefit from the receipt of performance data and status conditions from the generators they service for their customers, which allows the dealer service organization to be proactive in their delivery of service to their customers, as well as analyzing the remote machines before dispatching a service truck. Since the majority of service and warranty costs are incurred from the service providers, preemptive analysis of customer site conditions prior to dispatch can reduce their labor cost. From the machine owner’s perspective, the OmniMetrix product provides a powerful tool to be used in their constant effort to avoid failures that come from consumables such as batteries and fuel. With proper monitoring, 95% of machine failures can be avoided completely. This migration from failure reporting to failure prevention is fundamentally OmniMetrix’s focus and is the result of a strong data collection and analysis design point. We believe that this transition to prognostics sets OmniMetrix apart from its competitors, many of whom are still in the failure reporting phase of application development. OmniMetrix has shifted its primary focus to the commercial and industrial segments from residential due, in part, to the ability to customize our products to the customers’ specifications. We have also increased our marketing efforts to end-users in an effort to increase demand for our services. These efforts have proven to be successful, and OmniMetrix continues to execute on that strategy.

Competition

OmniMetrix is a vertical market company, deeply focused on providing an excellent customer experience and product and service designs for a complete end-to-end program for its customers. Having been the first provider of wireless remote monitoring systems for standby generators, the company has had the opportunity to mature its offering to a level not offered by others who might like to compete in these two segments. This long experience working with key brand and project partners over the years has resulted in product offerings that are highly competitive.

There are two types of competitors in the PG marketplace:

(1) Independent monitoring organizations (such as OmniMetrix) that produce the monitoring systems, but not the equipment being monitored. Among these are companies such as Ayantra, FleetZOOM, Gen-Tracker, and PowerTelematics. The other competitors operate in the reactive “failure notification” mode described in the early stages of the OmniMetrix business model. These competitors position themselves at a lower-performance, lower-price quadrant of the market typically due to reduced amount of data their products can collect from the generator’s control panel compared to OmniMetrix

(2) OEMs such as generator manufacturers or generator controls manufacturers that offer customer connectivity to their machinery. They offer a current generation connectivity replacing telephone dial-up modems that had been used in the past. Their offerings are limited to their own brands, so they do not fit into broad applications like the OmniMetrix products that service all brands. They are also generally designed for the machine owners’ use, in a reactive application.

We believe OmniMetrix has a well-established and well-defended position in the high-performance PG monitoring segment, due to its long history and numerous industry partner projects. While the execution of our aggressive sales strategy was interrupted by the impact of COVID-19, the company has recently resumed an aggressive sales effort into the market segment requiring less technology and lower price (including the extremely large residential generator market) as well as developing more sophisticated, diagnostic products and custom solutions for commercial and industrial clientele.

Within the CP marketplace, there are no OEM competitors, but there are several companies that provide monitoring companies similar to OmniMetrix such as Mobiltex Solutions, Abriox, Elecsys, and American Innovations. We believe that OmniMetrix systems provide greater functionality than these competitors, though those competitors are much larger and have greater resources, potentially enabling better channel penetration than OmniMetrix can accomplish.

Intellectual Property

OmniMetrix has always focused on being the technology leader in its markets, and as a result has created many “industry firsts” and “trade secrets”. Initially, the company only pursued patents on the most valuable processes and systems and otherwise made public disclosure of many processes to prevent others from making later patent claims on those items. Nonetheless, OmniMetrix has six issued patents. Furthermore, the company has agreements with its employees and consultants which establish certain non-disclosure and, in some cases, non-compete, requirements. OmniMetrix continually evaluates whether and how to best protect its intellectual property, but there can be no assurance that its efforts will be successful in all cases.

Facilities

OmniMetrix’s activities are currently conducted in approximately 21,000 square feet of office and production space in the Hamilton Mill Business Park located in Buford, Georgia under a lease that has been extended from its original expiration date of April 30, 2020 to September 30, 2025. OmniMetrix is currently utilizing only a portion of these leased facilities and expects to grow into a portion of the currently unused space. On July 6, 2021, the Company entered into an agreement with King Industrial Realty, Inc., to sublease from the Company 1,900 square feet of unused office space. The sublease commenced on October 1, 2021 and will run through September 30, 2025 which is the end of the Company’s lease term with its landlord.

BACKLOG

As of December 31, 2021, OmniMetrix had a backlog of approximately $5.4 million, primarily comprised of deferred revenue, of which approximately $3.5 million is expected to be recognized as revenue in 2022. This compares to a backlog of approximately $4.5 million at December 31, 2020.

RESEARCH AND DEVELOPMENT EXPENSE, NET

Research and development expense recorded for the years ended December 31, 2021 and 2020 for our OmniMetrix subsidiary is as follows (amounts in thousands of U.S. dollars):

EMPLOYEES

At December 31, 2021, we employed a total of 25 employees – all of which were full-time employees employed by OmniMetrix in the U.S. Our CEO, who also serves as acting CEO of OmniMetrix, and our CFO, who also serves as COO of OmniMetrix, are hired as consultants to us. OmniMetrix also has consultants that supplement our employed staff and provide monthly recurring services in human resources, accounting and information technology.

Eleven of OmniMetrix’s 25 employees are engaged in production, engineering and technical support, ten in marketing and sales and four in finance and IT. We consider our relationship with our employees to be satisfactory. We have no collective bargaining agreements with any of our employees.

ADDITIONAL FINANCIAL INFORMATION

For additional financial information regarding our operating segments, foreign and domestic operations and sales, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 12 and 13 to our Consolidated Financial Statements included in this Annual Report.

AVAILABLE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

Our website can be found at http://www.acornenergy.com. We make available free of charge on or through our website, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such material is electronically filed, or furnished, to the SEC. Our website also includes our Code of Business Conduct and Ethics, and our Board of Directors’ Committee Charter for the Audit Committee.

We may from time to time make written or oral statements that contain forward-looking information. However, our actual results may differ materially from our expectations, statements or projections. The following risks and uncertainties, together with other factors not presently determinable, could cause actual results to differ from our expectations, statements or projections.

GENERAL FACTORS

We have a history of operating losses and have used significant amounts of cash for operations and to fund our acquisitions and investments.

Although we have had several consecutive quarters of profitability at our OmniMetrix subsidiary and also were able to cover corporate overhead in the fourth quarter of 2021, we have had a history of losses from our OmniMetrix subsidiary and corporate overhead and have used significant amounts of cash to fund our operating activities over the years.

While we believe we have sufficient cash to finance our operations for at least twelve months from the issuance of the consolidated financial statements contained in this Annual Report, we may need to seek additional sources of funding for long-term corporate costs or if OmniMetrix were not to grow at the rate anticipated and needed additional funds for their operations. Additional sources of funding may include additional loans from related and/or non-related parties, partial sale of, or finding a strategic partner for, OmniMetrix or equity financings. There can be no assurance additional funding will be available at acceptable terms or that we will be able to successfully utilize any of these possible sources to provide additional liquidity.

We depend on key management for the success of our business.

Our success is largely dependent on the skills, experience and efforts of our senior management team, including Jan Loeb, who beneficially owns approximately 20.1% of the Company’s stock, and Tracy Clifford. The loss of the services of any of these key managers could materially harm our business, financial condition, future results and cash flow. We do not maintain “key person” life insurance policies on any members of senior management. We may also not be able to locate or employ on acceptable terms qualified replacements for our senior management if their services were no longer available.

Loss of the services of a few key employees could harm our operations.

We depend on key technical employees and sales personnel. The loss of certain personnel could diminish our ability to develop and maintain relationships with customers and potential customers. The loss of certain technical personnel could harm our ability to meet development and implementation schedules. The loss of key sales personnel could have a negative effect on sales to certain current customers. Although most of our significant employees are bound by confidentiality and non-competition agreements, the enforceability of such agreements cannot be assured. Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel. If we fail to attract or retain highly qualified technical and managerial personnel in the future, our business could be disrupted.

There is a limited trading market for our common stock and the price of our common stock may be volatile.

Our common stock is traded on the OTCQB marketplace under the symbol “ACFN.” The OTCQB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities and provides significantly less liquidity than a listing on the NASDAQ Stock Market or other national securities exchanges. The OTCQB securities are traded by a community of market makers that enter quotes and trade reports. This market is limited in comparison to the national stock exchanges, and any prices quoted may not be a reliable indication of the value of our common stock. Quotes for stocks included on the OTCQB are not listed in the financial sections of newspapers as are those for the NASDAQ Stock Market or the NYSE. Therefore, prices for securities traded solely on the OTCQB may be difficult to obtain.

Trading on the OTCQB marketplace as opposed to a national securities exchange has resulted, and may continue to result, in a reduction in some or all of the following, each of which could have a material adverse effect on the price of our common stock and our company:

• the liquidity of our common stock;
• the market price of shares of our common stock;
• our ability to obtain financing for the continuation of our operations;
• the number of institutional and other investors that will consider investing in shares of our common stock;
• the number of market markers in shares of our common stock;
• the availability of information concerning the trading prices and volume of shares of our common stock; and
• the number of broker-dealers willing to execute trades in shares of our common stock.

In addition, the market price of our common stock could be subject to wide fluctuations in response to:

• quarterly variations in our revenues and operating expenses;
• announcements of new products or services by us;
• fluctuations in interest rates;
• significant sales of our common stock;
• the operating and stock price performance of other companies that investors may deem comparable to us; and
• news reports relating to trends in our markets or general economic conditions.

Penny stock rules will limit the ability of our stockholders to sell their stock.

The SEC has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock; however, we have the option to execute a reverse split which could mitigate this issue.

Compliance with changing regulation of corporate governance, public disclosure and financial accounting standards may result in additional expenses and affect our reported results of operations.

Keeping informed of, and in compliance with, changing laws, regulations and standards relating to corporate governance, public disclosure and accounting standards, including the Sarbanes-Oxley Act, Dodd-Frank Act, as well as new and proposed SEC regulations and accounting standards, has required an increased amount of management attention and external resources. Compliance with such requirements may result in increased general and administrative expenses and an increased allocation of management time and attention to compliance activities.

We may not be able to successfully integrate companies which we may invest in or acquire in the future, which could materially and adversely affect our business, financial condition, future results and cash flow.

Part of our business model includes the acquisition of new companies either as new platform companies or complimentary companies. Any failure to effectively integrate any future acquisition’s management into our controls, systems and procedures could materially adversely affect our business, results of operations, financial condition and cash flow.

Any significant acquisition could require substantial use of our capital and may require significant debt or equity financing. We anticipate the need to closely manage our cash for the foreseeable future and cannot provide any assurance as to the availability or terms of any such financing or its effect on our liquidity and capital resources.

Integrating acquisitions is often costly, and we may not be able to successfully integrate acquired companies with existing operations without substantial costs, delays or other adverse operational or financial consequences. Integrating acquired companies involves a number of risks that could materially and adversely affect our business, including:

• failure of the acquired companies to achieve the results we expect;
• inability to retain key personnel of the acquired companies;
• dilution of existing stockholders;
• potential disruption of our ongoing business activities and distraction of our management;
• difficulties in retaining business relationships with suppliers and customers of the acquired companies;
• difficulties in coordinating and integrating overall business strategies, sales and marketing, and research and development efforts; and
• difficulties in establishing and maintaining uniform standards, controls, procedures and policies, including accounting controls and procedures.

We incur substantial costs as a result of being a public company.

As a public company, we incur significant legal, accounting, and other expenses in connection with our reporting requirements. The Sarbanes-Oxley Act of 2002, Dodd-Frank Act and the rules subsequently implemented by the Securities and Exchange Commission (“SEC”) have required changes in corporate governance practices of public companies. These rules and regulations have already increased our legal and financial compliance costs and the amount of time and effort we devote to compliance activities. We expect that as a result of continued compliance with these rules and regulations, we will continue to incur significant legal and financial compliance costs. We continue to regularly monitor and evaluate developments with respect to these new rules with our legal counsel, but we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

We may in the future become involved in litigation that may materially adversely affect us.

From time to time in the ordinary course of our business, we may become involved in various legal proceedings, including commercial, product liability, employment, class action and other litigation and claims, as well as governmental and other regulatory investigations and proceedings. Any legal proceedings can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Because litigation is inherently unpredictable, the results of any such actions may have a material adverse effect on our business, operations or financial condition.

We have reported material weaknesses in internal controls over financial reporting as of December 31, 2021 and we cannot assure you that additional material weaknesses will not be identified in the future or that we can effectively remediate our reported weaknesses. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our consolidated financial statements that could require a restatement, or our filings may not be timely, and investors may lose confidence in our reported financial information.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As a result, we cannot assure you that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future or that we can effectively remediate our reported weaknesses. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our consolidated financial statements that could result in a restatement of consolidated financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information.

If we are unable to protect our intellectual property, or our intellectual property protection efforts are unsuccessful, others may duplicate our technology.

We rely on a combination of patents, trademarks, copyrights, trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our ability to compete effectively will depend, in part, on our ability to protect our proprietary technology, systems designs and manufacturing processes. The ability of others to use our intellectual property could allow them to duplicate the benefits of our products and reduce our competitive advantage. In the future, should we apply for new patents, we do not know whether any of our pending patent applications will be issued or, in the case of patents issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes. Further, a patent issued covering one use of our technology may not be broad enough to cover uses of that technology in other business areas. Even if all our patent applications are issued and are sufficiently broad, they may be challenged or invalidated, or our competitors may independently develop or patent technologies or processes that are equivalent or superior to ours. We could incur substantial costs in prosecuting patent and other intellectual property infringement suits and defending the validity of our patents and other intellectual property. While we have attempted to safeguard and maintain our property rights, we do not know whether we have been or will be completely successful in doing so. These actions could place our patents, trademarks and other intellectual property rights at risk and could result in the loss of patent, trademark or other intellectual property rights protection for the products, systems and services on which our business strategy partly depends. Furthermore, it is not practical from a cost/benefit perspective to file for patent or trademark protection in every jurisdiction where we now or in the future may conduct business. In those territories where we do not have the benefit of patent or trademark protections, our competitors may be able to prevent us from selling our products or otherwise limit our ability to advertise under our established product names and we may face risks associated with infringement litigation as discussed below.

We rely, to a significant degree, on contractual provisions to protect our trade secrets and proprietary knowledge. These trade secrets either cannot be protected by patent protection or we have determined that seeking a patent is not in our interest. These agreements may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors.

It can be difficult or expensive to obtain the insurance we need for our business operations.

As part of our business operations, we maintain insurance as a corporate risk management strategy. Insurance products are impacted by market fluctuations and can become expensive and sometimes very difficult to obtain. There can be no assurance that we can secure all necessary or appropriate insurance at an affordable price for the required limits. Our failure to obtain such insurance could lead to uninsured losses that could have a material adverse effect on our results of operations or financial condition or cause us to be out of compliance with our contractual obligations.

We may in the future be involved in product liability and product warranty claims relating to the products we manufacture and distribute that, if adversely determined, could adversely affect our financial condition, results of operations, and cash flows. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our products and our company. While insurance can mitigate some of this risk, due to our current size and operating history, we have been unable to obtain product liability insurance with significant coverage. Our customers may not accept the terms we have been able to procure and seek to terminate our existing contracts or cease to do business with us.

Our financial instruments could subject us to concentrations of credit risk.

Our financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and trade accounts receivable. Our cash was deposited with a U.S. bank and amounted to approximately $1,722,000 at December 31, 2021. We did not have any customers that represented 10% or greater of the accounts receivable at December 31, 2021. Credit risk with respect to the balance of trade receivables is generally diversified due to the number of entities comprising our customer base. Although we do not believe there is significant risk of non-performance by these counterparties, any failures or defaults on their part could negatively impact the value of our financial instruments and could have a material adverse effect on our business, operations or financial condition.

The COVID-19 pandemic could negatively affect various aspects of our business, including our workforce and supply chain, and make it more difficult and expensive to meet our obligations to our customers, and could result in reduced demand from our customers

The outbreak of the COVID-19 pandemic has caused governments around the world to implement quarantines of certain geographic areas and implement significant restrictions on travel. Several governments have also implemented work restrictions that prohibit many employees from going to work, both around the world as well as in certain jurisdictions in the United States. At this time, it is unclear if foreign governments or U.S. federal, state or local governments will further extend any of the current restrictions or if further restrictions will be put into place. In addition, many countries, including the United States, have placed significant bans on international travel. It is possible that restrictions or bans on domestic travel may be implemented by U.S. federal, state or local governments. As a result of the pandemic, businesses can be shut down, supply chains can be interrupted, slowed, or rendered inoperable, and individuals can become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions.

Governmental mandates may require forced shutdowns of our facilities for extended or indefinite periods. In addition, the pandemic could adversely affect our workforce resulting in serious health issues and absenteeism. The pandemic could also substantially interfere with general commercial activity related to our supply chain and customer base, which could have a material adverse effect on our financial condition, results of operations, business, or prospects. Some of the electronic devices and hardware we purchase, like antennas, radios, and GPS modules are very specific to our application; there are not likely to be practical alternatives. In some cases, our circuit boards were designed around specific electronic hardware that met our specifications. We are working closely with our contract manufacturers and suppliers in order to mitigate as much as possible the risks to our supply chain for these critical devices and hardware, including identifying any lead-time issues and any potential alternate sources. We are also examining all currently open purchase orders in an effort to identify whether we need to issue additional orders to secure product that is critical, already has questionable lead times and/or is unique to our requirements.

OmniMetrix, to date, has been deemed an essential business; however, if this were to change and our operations are curtailed, we may need to seek alternate sources of supply for services and staff, which may be more expensive. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. Further, if our customers’ businesses are similarly affected, they might delay or reduce purchases from us, which could adversely affect our results of operations.

RISKS RELATED TO OMNIMETRIX

OmniMetrix has had a history of incurring net losses since it was acquired by us and may never achieve sustained profitability.

Although OmniMetrix realized an operating profit of approximately $940,000 in 2021 and $580,000 in 2020, OmniMetrix has a history of incurring operating losses since it was acquired by Acorn in 2012. While OmniMetrix has significantly reduced its losses and its cash needs from us and we expect positive cash flow from its operations in 2022, we can provide no assurance that OmniMetrix will be able to generate sufficient revenues to allow it to sustain profitability and to have sustained positive cash flows.

An increase in customer terminations would negatively affect our business by reducing OmniMetrix’s revenue or requiring us to spend more money to grow our customer base.

Non-renewals or other monitoring service terminations could increase in the future due to customer dissatisfaction with our products and services, increased competition from other providers or alternative technologies.

If we have an increase in our non-renewal rate, we will have to acquire new customers on an ongoing basis just to maintain our existing level of customers and revenues. As a result, marketing expenditures are an ongoing requirement of our business. We incur significant costs to acquire new customers, and those costs are an important factor in determining our net profitability. Therefore, if we are unsuccessful in retaining customers or are required to spend significant amounts to acquire new customers, our revenue could decrease and our operating results could be affected.

OmniMetrix is a relatively small company with limited resources compared to some of its current and potential competitors, which may hinder its ability to compete effectively.

Some of OmniMetrix’s current and potential competitors have significantly greater resources and broader name recognition than it does. As a result, these competitors may have greater credibility with OmniMetrix’s existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products, which would allow them to respond more quickly to new or emerging technologies or changes in customer requirements. In particular, at the present time we are facing significant competition from certain generator manufacturers who offer their own monitoring solutions.

OmniMetrix may not be able to access sufficient capital to support growth.

Although OmniMetrix is not expected to need funding from us in 2022 to support its growth and working capital needs, OmniMetrix has historically been dependent on Acorn’s ability and willingness to provide funding to support its business and growth strategy. As of December 31, 2021, OmniMetrix owes Acorn approximately $4,217,000 from such funding support which includes accrued dividends of $190,000, a loan in the principal amount of $2,985,000 and accrued interest and other advances of approximately $1,042,000. During 2021, the intercompany amount due to Acorn from OmniMetrix decreased by approximately $359,000. This included repayments of approximately $677,000 offset by interest of approximately $194,000, dividends of $76,000 due to Acorn and approximately $48,000 in shared expenses paid by Acorn. During 2020, the intercompany amount due to Acorn from OmniMetrix increased by approximately $70,000. This included repayments of approximately $435,000 offset by interest of approximately $253,000, dividends of $76,000 due to Acorn and approximately $176,000 in shared expenses paid by Acorn.

We have no assurance that current cash balances plus cash flow from operations will provide sufficient liquidity for OmniMetrix’s working capital needs in 2022. Additional financing for OmniMetrix may be in the form of a bank line, a new loan or investment by others, a loan by Acorn, or a combination of the above. The availability and amount of any additional loans from us to OmniMetrix may be limited by the working capital needs of our corporate activities. Whether Acorn will have the resources necessary to provide funding, or whether alternative funds, such as third-party loans or investments, will be available at the time and on terms acceptable to Acorn and OmniMetrix cannot be determined at this time.

OmniMetrix sells equipment and services which monitor third-party products, thus its revenues are dependent on the continued sales of such third-party products.

OmniMetrix’s end-user customer base is comprised exclusively of parties who have chosen to purchase either generators or construct gas pipelines. OmniMetrix has no ability to control the rate at which new generators or cathodic protection systems are acquired. If purchases of such products decline, the associated need for OmniMetrix’s products and services is expected to decline as well.

If OmniMetrix is unable to keep pace with changing market or customer-mandated product and service improvements, OmniMetrix’s results of operations and financial condition may suffer.

Many of OmniMetrix’s existing products may require ongoing engineering and upgrades in conjunction with market developments as well as specific customer needs. There can be no assurance that OmniMetrix will continue to be successful in its engineering efforts regarding the development of its products, and future technological difficulties could adversely affect its business, results of operations and financial condition.

The cellular networks used by OmniMetrix are also subject to periodic technical updates that may require corresponding updates to, or replacement of, OmniMetrix’s monitoring equipment.

Cellular networks have evolved over time to offer more robust technical capabilities in both voice and data transmission. At the present time, the changes from the so-called “3G” to “4G LTE” service have resulted in only limited service interruptions. OmniMetrix anticipates, however, that as new capabilities come online, it will be necessary to have equipment that can readily interface with the newer cellular networks to avoid negative impacts on customer service. Not all of the costs associated with OmniMetrix’s corresponding equipment upgrades can be passed on to customers, and any increased expenses are expected to have a negative impact on OmniMetrix’s operating results.

A substantial portion of OmniMetrix’s revenues is expected to be generated not from product sales, but from periodic monitoring fees and thus it is continually exposed to risks associated with its customers’ financial stability.

OmniMetrix sells on-going monitoring services to both PG and CP customers. It is therefore dependent on these customers continuing to timely pay service fees on an on-going basis. If a significant portion of these fees are not paid on a timely basis and/or are not renewed from year-to-year, OmniMetrix could expect to experience deterioration in its financial condition.

OmniMetrix’s ability to provide, and to collect revenues from, monitoring services is dependent on the reliability of cellular networks not controlled by OmniMetrix.

OmniMetrix provides monitoring services through the use of cellular and satellite technology utilizing the networks of third-party providers. These providers generally do not warrantee their services to either OmniMetrix or the end users, and any dropped transmissions could result in the loss of customer renewals and potential claims against OmniMetrix. While OmniMetrix uses contractual measures to limit its liability to customers, there is no assurance that such limitations will be enforced or that customers will not cancel monitoring services due to network issues.

OmniMetrix’s business is dependent on its ability to reliably store and manage data, but there can be no guarantee that it has sufficient capabilities to mitigate potential data loss in all cases.

The efficient operation of OmniMetrix’s business is dependent on its information technology systems. In addition, OmniMetrix’s ability to assist customers in analyzing data related to the performance of such customers’ power and cathodic protection monitoring systems is an important component of its customer value proposition. OmniMetrix utilizes off-site data servers, housed within a commercial data center utilizing accepted data and power monitoring and protection processes, but whether a data loss can be avoided cannot be assured in every case. OmniMetrix’s information technology systems are vulnerable to damage or interruption from natural disasters, sabotage (including theft and attacks by computer viruses or hackers), power outages, and computer systems, Internet, telecommunications or data network failure. Any interruption of OmniMetrix’s information technology systems could result in decreased revenue, increased expenses, increased capital expenditures, customer dissatisfaction and potential lawsuits, any of which could have a material adverse effect on its results of operations and financial condition.

RISKS RELATED TO OUR SECURITIES

Our stock price is highly volatile and we do not expect to pay dividends on shares of our common stock for the foreseeable future. Investors may never obtain a return on their investment.

The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. During 2021, our common stock traded at prices as low as $0.38 and as high as $0.70 per share. Fluctuations in our stock price may continue to occur in response to various factors, many of which we cannot control, including:

• general economic and political conditions and specific conditions in the markets we address;
• quarter-to-quarter variations in our operating results;
• strategic investments or divestments;
• announcements of changes in our senior management;
• the gain or loss of one or more significant customers or suppliers;
• announcements of technological innovations or new products by our competitors, customers or us;
• the gain or loss of market share in any of our markets;
• changes in accounting rules;
• changes in investor perceptions; or
• changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.

We do not intend to pay dividends to our stockholders in the foreseeable future. We intend to reinvest earnings, if any, in the development and expansion of our business. Accordingly, investors will need to rely on sales of your common stock after price appreciation, which may never occur, in order to realize a return on their investment.

Our share price may decline due to the large number of shares of our common stock eligible for future sale in the public market including shares underlying warrants and options.

Almost all of our outstanding shares of common stock are, or could upon exercise of options or warrants become, eligible for sale in the public market as described below. Sales of a substantial number of shares of our common stock in the public market, or the possibility of these sales, may adversely affect our stock price.

As of March 28, 2022, 39,687,589 shares of our common stock were issued and outstanding. As of that date we had 35,000 warrants outstanding and exercisable with a weighted average exercise price of $0.13 per share and 573,492 options outstanding and exercisable with a weighted average exercise price of $0.34 per share, which if exercised would result in the issuance of additional shares of our common stock. In addition to the options noted above, at March 28, 2022, there were 355,298 options outstanding that have not yet vested and are not yet exercisable.

Substantially all of our currently outstanding shares and shares issuable under our outstanding options and warrants are or would be freely tradable.

We may have to offer additional securities for sale in the near future.

As of March 28, 2022, we had consolidated cash of approximately $1,825,000 which we believe is sufficient for at least the next twelve months. Despite this, we may ultimately not have sufficient cash to allow us to execute our plans, and the occurrence of one or more unanticipated events may require us to make significant expenditures. Accordingly, we may need to raise additional amounts to finance our operations. If we were to do so by selling shares of our common stock and/or other securities convertible into shares of our common stock, current investors may incur dilution in the value of their shares.

OmniMetrix’s activities are currently conducted in approximately 21,000 square feet of office and production space in the Hamilton Mill Business Park located in Buford, Georgia under a lease that expires, unless otherwise extended, on September 30, 2025. The annual total of rent payments in 2021 was approximately $118,000. For 2022, the annual rent payments will be approximately $121,000. OmniMetrix is currently utilizing only a portion of these leased facilities and expects to grow into a portion of the currently unused space.

On July 6, 2021, the Company entered into an agreement with King Industrial Realty, Inc. to sublease from the Company 1,900 square feet of the unused office space for a monthly sublease payment of $2,375 which includes the base rent plus a pro-rata share of utilities, property taxes and insurance. Fifty percent of any excess rent received above the per square foot amount that the Company pays will be remitted to the Company’s landlord less the allocation of any shared expenses and leasehold improvements specific to the sublease. The Company invested approximately $7,000 on leasehold improvements related to the sublease. Due to the offset of the capital expenditures, the Company does not expect to have any net rent due to its landlord for the first twelve months of the sublease. The estimated amount the Company expects to remit to the landlord each year of the sublease subsequent to the first twelve months is approximately $6,700 per year. The sublease commenced on October 1, 2021 and will run through September 30, 2025 which is the end of the Company’s lease term with its landlord. Below are the future payments expected under the sublease net of the estimated annual service cost of $2,220 (gross of the estimated amount we expect to remit to our landlord):

OVERVIEW AND TREND INFORMATION

The following discussion includes statements that are forward-looking in nature. Whether such statements ultimately prove to be accurate depends upon a variety of factors that may affect our business and operations. Certain of these factors are discussed in “Item 1A. Risk Factors.”

We currently operate in two reportable operating segments, both of which are performed through our OmniMetrix subsidiary:

• The PG segment which provides wireless remote monitoring and control systems and services for critical assets as well as Internet of Things applications; and
• The CP segment which provides for remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline companies.

The following analysis should be read together with the segment information provided in Notes 12 and 13 to our consolidated financial statements included in this report.

OmniMetrix

Following the emergence of machine-to-machine (“M2M”) and IoT applications whereby companies aggregate multiple sensors and monitors into a simplified dashboard for customers, OmniMetrix believes it plays a key role in this economic ecosystem. In addition, OmniMetrix continues to see a growing need for backup power infrastructure to secure critical military, government, and private sector assets against emergency events including terrorist attacks, natural disasters, and cybersecurity threats. Residential, commercial and industrial standby generators, turbines, compressors, pumps, pumpjacks, light towers and other industrial equipment are part of the critical infrastructure increasingly becoming monitored in IoT applications. Given that OmniMetrix monitors all major brands of critical equipment and continues to invest in research and development in response to customer and potential customer feedback, OmniMetrix remains well-positioned as a competitive participant in this market to continue to grow its customer base and expand its product offerings.

OmniMetrix Line of Credit

In March 2019, OmniMetrix reinstated its loan and security agreement which provided OmniMetrix with access to accounts receivable formula-based financing of the lesser of 75% of eligible receivables or $1 million. Debt incurred under this financing arrangement bore interest at the greater of 6% and prime plus 1.5% per year. In addition, OmniMetrix was to pay a monthly service charge of 0.75% of the average aggregate principal amount outstanding for the prior month, for an effective rate of interest on advances of 15%. OmniMetrix also agreed to maintain a minimum loan balance of $150,000 in its line-of-credit with the lender for a minimum of two years beginning March 1, 2019. The monthly service charge and interest was calculated on the greater of the outstanding balance or $150,000. From time to time, the balance outstanding could fall below $150,000 based on collections applied against the loan balance and the timing of loan draws.

OmniMetrix had an outstanding balance of approximately $149,000 at December 31, 2020, pursuant to the loan and security agreement. We repaid the outstanding balance in February 2021 and elected not to renew this line of credit, which expired in accordance with its terms on February 28, 2021.

Small Business Administration Paycheck Protection Program (“SBA PPP”)

On April 24, 2020, Acorn Energy, Inc. received SBA PPP loan proceeds in the amount of $41,600.

On April 30, 2020, OmniMetrix, LLC received SBA PPP loan proceeds in the amount $419,800.

Under the SBA PPP of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), up to the full principal amount of a loan and any accrued interest can be forgiven if the borrower uses all of the loan proceeds for forgivable purposes (payroll, benefits, lease/mortgage payments and/or utilities) required under the CARES Act and any rule, regulation, or guidance issued by the SBA pursuant to the CARES Act (collectively, the “Forgiveness Provisions”). The amount of forgiveness of the SBA PPP loan depends on the borrower’s payroll costs over either an eight-week or twenty-four-week period beginning on the date of funding. Any processes or procedures established under the Forgiveness Provisions must be followed and any requirements of the Forgiveness Provisions must be fully satisfied to obtain such loan forgiveness. Pursuant to the provisions of the CARES Act, the first six monthly payments of principal and interest will be deferred. Interest will accrue during the deferment period. The borrower must pay principal and interest payments on the fifth day of each month beginning seven months from the date of the applicable promissory note.

On October 20, 2020, OmniMetrix submitted its SBA PPP Loan Forgiveness Application to the SBA. On November 5, 2020, the SBA confirmed that OmniMetrix’s application for forgiveness had been approved and that its SBA PPP loan, in the amount of $419,800 plus accrued interest of $2,162, had been forgiven.

The Company elected not to apply for forgiveness of the SBA PPP loan proceeds received by Acorn Energy, Inc., in the amount of $41,600 plus accrued interest of $206. This loan was repaid to the lender effective October 22, 2020.

Intercompany

During 2021, the intercompany amount due to Acorn from OmniMetrix decreased by approximately $359,000. This included repayments of approximately $677,000 offset by interest of approximately $194,000, dividends of $76,000 due to Acorn and approximately $48,000 in shared expenses paid by Acorn. During 2020, the intercompany amount due to Acorn from OmniMetrix increased by approximately $70,000. This included repayments of approximately $435,000 offset by interest of approximately $253,000, dividends of $76,000 due to Acorn and approximately $176,000 in shared expenses paid by Acorn. We believe that OmniMetrix will not need working capital support in 2022. However, we have no assurance that this will be the case. Additional financing for OmniMetrix may be in the form of a bank line, a new loan or investment by others, an equity raise by Acorn which could then facilitate a loan by Acorn to OmniMetrix, or a combination of the above. The availability and amount of any additional loans from Acorn to OmniMetrix may be limited by the working capital needs of our corporate activities. Whether Acorn will have the resources necessary to provide funding, or whether alternative funds, such as third-party loans or investments, will be available at the time and on terms acceptable to Acorn and OmniMetrix cannot be determined at this time.

As of March 28, 2022, Acorn’s corporate operations (excluding cash at our OmniMetrix subsidiary) held a total of approximately $64,000 in cash.

Other Matters

On August 19, 2019, we entered into an agreement with a software development partner to create and license to us a new software platform and application. Pursuant to this agreement, we paid this partner equal monthly payments over the first seven months of the term of the agreement equal to $200,000 in the aggregate. We will also pay the partner (i) a per-sensor monitoring fee for each sensor connected to the developed technology, or (ii) a percentage of any revenue received above a specified amount per sensor monitored per month, in gas applications only. Commencing on January 1, 2021, we paid the partner a quarterly licensing fee of $12,500 which was renegotiated to $4,450 effective October 1, 2021. The annual licensing fee moving forward will be $17,800, which will be paid in quarterly increments of $4,450. The per-sensor monitoring fees have not yet commenced. The initial term of this agreement ends on August 19, 2022 but will automatically renew for one-year periods unless either party delivers a written notice of termination to the other party sixty days prior to the end of the respective term.

We entered into a new agreement effective May 1, 2020 for data hosting services, replacing an expiring agreement with the same vendor. The agreement has a twelve-month term. In January 2021, we elected to renew this agreement for an additional twelve months under the same terms, extending the agreement to April 30, 2022. Under the applicable data hosting services agreements, we paid approximately $158,000 and $137,000 in the years ended December 31, 2021 and 2020, respectively.

On March 17, 2021, we entered into a master services agreement for the development of a new user interface for its customer data portal. The cost of this project will be approximately $119,000 in design and development services ($14,000 was paid at the commencement of this project and four equal installments of approximately $23,000 were paid monthly starting in July 2021 with the fourth and final installment to be paid upon completion and launch of the new interface). This project is substantially completed and the launch of the new customer portal is expected in the second quarter of 2022.

This master services agreement also covers the design, set-up and deployment of a new Microsoft Azure cloud infrastructure to host our OmniView data servers which will replace our existing Peak 10 datacenter hosting environment. The new infrastructure will provide a more modern, agile and cost effective environment in which to grow our IoT connections and services. The new Microsoft Azure cloud infrastructure environment is expected to be completed and deployed on or about May 1, 2022. We invested approximately $166,000 in this initiative during the year ended December 31, 2021. Additional investment in this project is ongoing and the total investment is dependent on the professional hours required to complete, test and successfully deploy the new environment.

The cost of these projects are capitalized and amortization will begin once the new interface and the new infrastructure environment are completed and ready to deploy.

CRITICAL ACCOUNTING POLICIES

The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

The following discussion of critical accounting policies represents our attempt to report on those accounting policies, which we believe are critical to our consolidated financial statements and other financial disclosure. It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 2 of the Notes to the Consolidated Financial Statements included in this Annual Report. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which the selection of an available alternative policy would not produce a materially different result.

We have identified the following as critical accounting policies affecting our Company: revenue recognition and stock-based compensation.

Revenue Recognition

Our revenue recognition policy is consistent with applicable revenue recognition guidance and interpretations. The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this core principle, which includes: (1) identifying contracts with customers, (2) identifying performance obligations within those contracts, (3) determining the transaction price, (4) allocating the transaction price to the performance obligation in the contract, which may include an estimate of variable consideration, and (5) recognizing revenue when or as each performance obligation is satisfied. We assess whether payment terms are customary or extended in accordance with normal practice relative to the market in which the sale is occurring. Our sales arrangements generally include standard payment terms. These terms effectively relate to all customers, products, and arrangements regardless of customer type, product mix or arrangement size.

If revenue recognition criteria are not satisfied, amounts received from customers are classified as deferred revenue on the consolidated balance sheets until such time as the revenue recognition criteria are met.

Sales of OmniMetrix monitoring systems include the sale of equipment (“HW”) and of monitoring services (“Monitoring”). Sales of OmniMetrix equipment do not qualify as a separate unit of accounting. As a result, revenue (and related costs) associated with sale of equipment are recorded to deferred revenue (and deferred charges) upon shipment for PG and CP monitoring units. Revenue and related costs with respect to the sale of equipment are recognized over the estimated life of the units, which are currently estimated to be three years. Revenues from the prepayment of monitoring fees (generally paid twelve months in advance) are initially recorded as deferred revenue upon receipt of payment from the customer and then amortized to revenue over the monitoring service period. See Notes 12 and 13 for the disaggregation of our revenue for the periods presented.

Stock-based Compensation

We recognize stock-based compensation expense based on the fair value recognition provision of applicable accounting principles, using the Black-Scholes option valuation method. Accordingly, we are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which an employee is required to provide service in exchange for the award. Under the Black-Scholes method, we make assumptions with respect to the expected lives of the options that have been granted and are outstanding, the expected volatility, the dividend yield percentage of our common stock and the risk-free interest rate at the respective dates of grant.

For our Acorn options, the expected volatility factor used to value stock options in 2021 was based on the historical volatility of the market price of our common stock over a period equal to the expected term of the options. For the expected term of the option, we used an estimate of the expected option life based on historical experience. The risk-free interest rate used is based upon U.S. Treasury yields for a period consistent with the expected term of the options. We assumed no quarterly dividend rate. We recognize stock-based compensation expense on an accelerated basis over the requisite service period. Due to the numerous assumptions involved in calculating share-based compensation expense, the expense recognized in our consolidated financial statements may differ significantly from the value realized by employees on exercise of the share-based instruments. In accordance with the prescribed methodology, we do not adjust our recognized compensation expense to reflect these differences.

For the years ended December 31, 2021 and 2020, we incurred stock compensation expense with respect to options of approximately $75,000 and $35,000, respectively.

See Note 9 to the consolidated financial statements for the assumptions used to calculate the fair value of share-based employee compensation for Acorn options.

RESULTS OF OPERATIONS

The selected consolidated statement of operations data for the years ended December 31, 2021 and 2020 and consolidated balance sheet data as of December 31, 2021 and 2020 has been derived from our audited consolidated financial statements included in this Annual Report.

This data should be read in conjunction with our consolidated financial statements and related notes included herein.

Selected Consolidated Statement of Operations Data:

(in thousands, except per share data)

The following table sets forth certain information with respect to revenues and profits of our reportable business segments for the years ended December 31, 2021 and 2020 (dollars in thousands), including the percentages of revenues attributable to such segments. (See Note 12 to our consolidated financial statements for the definitions of our reporting segments).

2021 COMPARED TO 2020

Revenue. In 2021, OmniMetrix recorded total revenue of approximately $6,776,000, as compared to total revenue of approximately $5,922,000 in 2020, for an increase of approximately $854,000 (14%). As previously stated, OmniMetrix has two divisions: PG and CP. The PG segment includes our monitoring device for generators, industrial air compressors and our annunciator products. The CP segment includes our monitoring device for cathodic protection systems on gas pipelines serving the gas utilities market and pipeline operators. In 2021, revenue of approximately $5,787,000 was attributed to the PG segment and revenue of approximately $989,000 was attributed to the CP segment, as compared to the 2020 revenue of approximately $4,988,000 that was attributed to the PG segment and approximately $934,000 that was attributed to the CP segment. Increased revenue in PG was due to an increase in hardware revenue of 31% from approximately $2,103,000 in 2020 to approximately $2,746,000 in 2021. In addition to the increase in hardware revenue, monitoring revenue increased 6% from approximately $3,819,000 in 2020 to approximately $4,030,000 in 2021. The increase in hardware revenue is primarily due to an increase of hardware sales in the PG segment. However, we also had an increase in CP hardware revenue of approximately $48,000 (7%). The overall increase in hardware revenue was due to a higher percentage of commercial and industrial (C&I) customers versus residential (RESI) customers in our customer mix and an increase in the number of monitoring devices sold on a consolidated segment basis in 2021, when compared to 2020, which is, in part, as a result of the sunsetting of 3G units which are replaced with LTE units. The C&I products have a higher price point than the RESI products; thus, the customer concentration of increasing C&I customers has a positive impact on our revenue per unit. Monitoring revenue did not increase ratably with hardware revenue due to the sale of hardware units that replace sunsetting 3G units and our dealers focus on the impact to their business of the 3G sunsetting. These replacement units assume the remaining prepaid monitoring plan of the sunsetting unit at the time of the physical replacement of the unit.

Gross profit. Gross profit for 2021 was approximately $4,899,000 reflecting a gross margin of 72% on revenue, compared with a gross profit of approximately $4,131,000 reflecting a 70% gross margin on revenue in 2020. The 2021 gross margin slightly outpaced the 2020 gross margin despite increases in our cost of sales due to supply chain constraints, as we implemented a price increase to help offset the increasing cost of sales, in addition to the impact of the strengthening margin on our monitoring revenue, which increased from 84% to 91%. The increase in our margin on monitoring revenue is a result of the successful negotiation with our carrier of a more favorably-structured cellular data rate plan for our business in the first quarter of 2021.

Research and development (“R&D”) expense. During 2021, OmniMetrix recorded approximately $739,000 of R&D expense as compared to approximately $619,000 in 2020, an increase of approximately $120,000 (19%). The increase in R&D expense in 2021 is related to increases in wages and bonuses paid to our engineering personnel in 2021 and the expenses and materials paid to third party consultants in the continued development of next generation PG and CP products and exploration into new possible product lines. We expect an increase of approximately 15% in R&D expense in 2022 as we continue to work on certain initiatives to redesign products and expand product lines to increase the level of innovation and gain more market share.

Selling, general and administrative (“SG&A”) expense. Consolidated SG&A expense in 2021 increased by approximately $346,000 (9%) from approximately $3,822,000 in 2020 to approximately $4,168,000 in 2021. Corporate overhead increased by approximately $43,000 from approximately $890,000 in 2020 to approximately $933,000 in 2021, due to increases in the cost of insurance and audit fees. OmniMetrix’s SG&A expense increased approximately $303,000 (10%) from approximately $2,932,000 in 2020 to approximately $3,235,000 in 2021. This increase was primarily due to increases of (i) $151,000 in personnel expenses related to bonuses, promotional wage increases, staff additions and stock compensation expense, (ii) $83,000 in software license fees due to the launch of our enhanced customer interface software for CP customers in 2021 and additional fees from the increase in the number of users of certain accounting and operations software, (iii) $53,000 in depreciation and amortization expenses attributed to the launch of the customer interface software for CP customers and also the depreciation of new office equipment and computers purchased in 2021 and (iv) $38,000 in commissions due to the increase in cash-basis sales in 2021 and the achievement of established sales targets. The increases in these categories were offset by decreases in occupancy expense, travel and entertainment expenses and dues and subscription expenses. We anticipate that our annual SG&A costs in 2022 will increase approximately 15% due to increasing wage and benefit expenses and due to our continuing investments in technology and operations.

Finance expense, net. Finance expense in 2021 was comprised of interest expense and service charges of approximately $4,000 associated with OmniMetrix’s line of credit and miscellaneous net interest expense of approximately $1,000. Finance expense in 2020 was comprised of interest expense and service charges of approximately $28,000 associated with OmniMetrix’s line of credit, miscellaneous net interest expense of approximately $3,000 and currency exchange loss of approximately $4,000.

Gain on SBA PPP loan extinguishment. On April 24, 2020, Acorn Energy, Inc. received SBA PPP loan proceeds in the amount of $41,600. On April 30, 2020, OmniMetrix, LLC received SBA PPP loan proceeds in the amount $419,800.

Under the PPP of the CARES Act, up to the full principal amount of a loan and any accrued interest can be forgiven if the borrower uses all of the loan proceeds for forgivable purposes (payroll, benefits, lease/mortgage payments and/or utilities) required under the CARES Act and any rule, regulation, or guidance issued by the SBA pursuant to the CARES Act (collectively, the “Forgiveness Provisions”). The amount of forgiveness of the PPP loan depends on the borrower’s payroll costs over either an eight-week or twenty-four-week period beginning on the date of funding. Any processes or procedures established under the Forgiveness Provisions must be followed and any requirements of the Forgiveness Provisions must be fully satisfied to obtain such loan forgiveness. Pursuant to the provisions of the CARES Act, the first six monthly payments of principal and interest will be deferred. Interest will accrue during the deferment period. The borrower must pay principal and interest payments on the fifth day of each month beginning seven months from the date of the applicable promissory note.

On October 20, 2020, OmniMetrix submitted its PPP Loan Forgiveness Application to the SBA. On November 5, 2020, the SBA confirmed that OmniMetrix’s application for forgiveness had been approved and that its PPP loan, in the amount of $419,800 plus accrued interest of $2,162, had been forgiven.

We elected not to apply for forgiveness of the PPP loan proceeds received by Acorn Energy, Inc., in the amount of $41,600 plus accrued interest of $206. This loan was repaid to the lender effective October 22, 2020.

Net loss attributable to Acorn Energy. We had net loss attributable to Acorn Energy of approximately $21,000 in 2021 as compared to net income of approximately $69,000 in 2020. Our income in 2021 is comprised of net income at OmniMetrix of approximately $921,000, corporate expense of approximately $934,000, offset by approximately $8,000 representing the non-controlling interest share of our income in OmniMetrix.

Our income in 2020 is comprised of net income at OmniMetrix of approximately $549,000, corporate expense of approximately $894,000 offset by the gain on the extinguishment of the PPP loan of approximately $421,000 and approximately $7,000 representing the non-controlling interest share of our income in OmniMetrix.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2021, we had a negative working capital of approximately $60,000. Our working capital includes approximately $1,722,000 of cash and deferred revenue of approximately $3,541,000. Such deferred revenue does not require significant cash outlay for the revenue to be recognized. Total deferred revenue increased approximately $839,000 at December 31, 2021 from approximately $4,554,000 at December 31, 2020 as a result of a significant increase in cash sales which we have to amortize over a three-year period in accordance with GAAP. Net cash decreased during the year ended December 31, 2021 by approximately $341,000, of which approximately $132,000 was provided by operating activities, approximately $324,000 was used in investing activities, and approximately $149,000 was used in financing activities.

During the year ended December 31, 2021, our operating activities provided approximately $132,000 of net cash. Our OmniMetrix subsidiary provided approximately $1,035,000 from its operations while our corporate headquarters used approximately $903,000 in its operating activities during the period. OmniMetrix’s inventory balance increased $381,000 at December 31, 2021 due to our efforts to mitigate the supply chain challenges and have adequate safety stock on hand. During the year ended December 31, 2020, our operating activities provided approximately $464,000. Our OmniMetrix subsidiary provided approximately $1,366,000 from its operations while our corporate headquarters used approximately $902,000 in its operating activities during the same period.

During the year ended December 31, 2021, net cash of approximately $324,000 was used in investment activities, primarily in our technology infrastructure. These investments include the development of a new user interface for our PG customers and the design of a new cloud server environment, as well as investments in hardware and software upgrades. In addition, we had capital expenditures of approximately $7,000 related to minor leasehold improvements. Net cash of approximately $101,000 was used in investing activities in 2020 which was primarily investments in software.

Net cash of approximately $149,000 was used by financing activities during the year ended December 31, 2021 as repayments on our line of credit. Net cash of approximately $453,000 was provided by financing activities which was comprised of approximately $421,000 in proceeds, net of repayments, from the SBA PPP loan, approximately $13,000 in net proceeds from OmniMetrix’s line of credit described above under the heading “OVERVIEW AND TREND INFORMATION — OmniMetrix Line of Credit”, and approximately $19,000 in proceeds from the exercise of stock options.

As previously discussed, we elected not to renew OmniMetrix’s line of credit and it expired in accordance with its terms on February 28, 2021. If we decide to pursue additional financing for OmniMetrix in the future, it may be in the form of a bank line, a new loan or investment by others, an equity raise by Acorn which could then facilitate a loan by Acorn to OmniMetrix, or a combination of the above. The availability and amount of any additional loans from Acorn to OmniMetrix may be limited by the working capital needs of our corporate activities. Whether Acorn will have the resources necessary to provide funding, or whether alternative funds, such as third-party loans or investments, will be available at the time and on terms acceptable to Acorn and OmniMetrix cannot be determined at this time.

Other Liquidity Matters

OmniMetrix owes Acorn approximately $4,217,000 for loans, accrued interest and expenses advanced to it by Acorn. OmniMetrix has made monthly payments to Acorn of varying amounts since the second quarter of 2019. In 2021, OmniMetrix made payments to Acorn of $677,000 offset by interest of approximately $194,000, dividends of $76,000 due to Acorn and approximately $48,000 in shared expenses paid by Acorn. OmniMetrix will continue to make payments to Acorn against this balance as long as OmniMetrix is generating sufficient cash to allow such repayments. This intercompany balance is eliminated in consolidation.

We had approximately $1,722,000 of cash on December 31, 2021, and approximately $1,825,000 on March 28, 2022. We believe that such cash, plus the cash expected to be generated from operations, will provide sufficient liquidity to finance the operating activities of Acorn and OmniMetrix at their current level of operations for the foreseeable future and for the twelve months from the issuance of these consolidated financial statements in particular. We may, at some point, elect to obtain a new line of credit or other source of financing to fund additional investments in the business.

Contractual Obligations and Commitments

The table below provides information concerning obligations under certain categories of our contractual obligations as of December 31, 2021.

CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS

*Reflects the gross amount of the operating lease liabilities. Does not include rent amounts to be received under the sublease.

**Reflects open purchase orders for components/parts to be delivered over the next twelve months as sales forecast requires.

General

We are required to make certain disclosures regarding our financial instruments, including derivatives, if any.

A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that imposes on one entity a contractual obligation either to deliver or receive cash or another financial instrument to or from a second entity. Examples of financial instruments include cash and cash equivalents, deposits, trade accounts receivable, loans, investments, trade accounts payable, accrued expenses, options and forward contracts. The disclosures below include, among other matters, the nature and terms of derivative transactions, information about significant concentrations of credit risk, and the fair value of financial assets and liabilities.

Fair Value of Financial Instruments

Fair values of financial instruments included in current assets and current liabilities are estimated to approximate their book values due to the short maturity of such investments.

Concentrations of Credit Risk

The Company’s financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade accounts receivable. The Company’s cash was deposited with a U.S. bank and amounted to approximately $1,722,000 at December 31, 2021. The Company did not have any one customer that represented at least 10% of its accounts receivable at December 31, 2021. Credit risk with respect to the balance of trade receivables is generally diversified due to the number of entities comprising the Company’s customer base. The Company does not believe there is significant risk of non-performance by these counterparties.

Interest Rate Risk

In March 2019, OmniMetrix reinstated its loan and security agreement which provided OmniMetrix with access to accounts receivable formula-based financing of the lesser of 75% of eligible receivables or $1 million. Debt incurred under this financing arrangement bore interest at the greater of 6% and prime plus 1.5% per year. In addition, OmniMetrix paid a monthly service charge of 0.75% of the average aggregate principal amount outstanding for the prior month, for an effective rate of interest on advances of 15%. OmniMetrix also agreed to maintain a minimum loan balance of $150,000 in its line-of-credit with the lender for a minimum of two years beginning March 1, 2019. From time to time, the balance outstanding fell below $150,000 based on collections applied against the loan balance and the timing of loan draws. We elected not to renew this line of credit and allowed it to expire in accordance with its terms on February 28, 2021. OmniMetrix no longer has interest rate risk related to debt.

COVID-19 Pandemic Risk to Supply Chain

As discussed above under the “RISK FACTORS” heading, the COVID-19 pandemic could substantially interfere with general commercial activity related to our supply chain and customer base, which could have a material adverse effect on our financial condition, results of operations, business, or prospects. Some of the electronic devices and hardware we purchase, like antennas, radios, and GPS modules are very specific to our application; and there are not likely to be practical alternatives. In some cases, our circuit boards were designed around specific electronic hardware that met our specifications. We continue to work closely with our contract manufacturers and suppliers in order to mitigate, as much as possible, the risks to our supply chain for these critical devices and hardware, including identifying any lead-time issues and any potential alternate sources. We also continue to examine all currently open purchase orders in an effort to identify whether we need to issue additional orders to secure product that is critical, already has questionable lead times and/or is unique to our requirements. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. Further, if our customers’ businesses are similarly affected as a result of the pandemic, they might delay or reduce purchases from us, which could adversely affect our results of operations.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our CEO and CFO concluded that, due to the material weaknesses in our internal control over financial reporting as described below, our disclosure controls and procedures were not effective as of December 31, 2021.

Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021, based upon the document “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon this assessment and those criteria, management concluded that due to the material weaknesses described below, our internal control over financial reporting was not effective as of December 31, 2021.

The Company employs a decentralized internal control methodology, coupled with management’s oversight, whereby its subsidiary is responsible for mitigating its risks to financial reporting by implementing and maintaining effective control policies and procedures and subsequently translating that respective risk mitigation up and through to the parent level and to the Company’s external consolidated financial statements. Also, as the Company’s subsidiary is not large enough to effectively mitigate certain risks by segregating incompatible duties, management must employ compensating mechanisms throughout the Company in a manner that is feasible within the constraints it operates.

The material weaknesses management identified were caused by an insufficient complement of resources at the Company’s OmniMetrix subsidiary and limited IT system capabilities, such that individual control policies and procedures could not be implemented, maintained, or remediated when and where necessary. As a result, a majority of the significant process areas management identified for the Company’s OmniMetrix subsidiary had one or more material weaknesses present. This condition was further exacerbated as the Company could not demonstrate that each of the principles described within COSO’s document “Internal Control - Integrated Framework (2013)” were present and functioning.

A material weakness is defined as a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weakness identified, however, did not result in any material misstatements of the Company’s consolidated financial statements and disclosures for any interim periods during, or for the annual period ended December 31, 2021.

Remediation Actions

Management intends to focus on strengthening the Company’s internal controls. Management expects to make progress towards reducing the risk that the material weakness could result in a material misstatement of the Company’s annual or interim consolidated financial statements. As business conditions allow and resources permit, management will continue to systematically build the necessary capabilities and infrastructure to implement corrective action.

Changes in Internal Control Over Financial Reporting

Other than those changes associated with our material weakness described above and the corresponding remediation actions, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended), during our last fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.