ACORN ENERGY, INC. 10-K

ITEM 1. BUSINESS OVERVIEW Acorn Energy, Inc. and its subsidiaries, OmniMetrix, LLC and OMX Holdings, Inc. (collectively, “Acorn” or “the Company”) is a holding company focused on technology driven solutions for energy infrastructure asset management. We provide the following services and products through our OmniMetrix, LLC (“OmniMetrix”) subsidiary: ● Power Generation (“PG”) monitoring. OmniMetrix’s PG activities provide wireless remote monitoring and control systems and services for critical assets as well as Internet of Things applications. This includes our AIRGuard product, which remotely monitors and controls air compressors. In 2020, we expanded our product offering to our generator dealers with the introduction of an Annunciator. The annunciator is typically sold with a new commercial or industrial generator and indicates the current status of that generator. In many instances having a generator annunciator onsite is mandated by law. ● Cathodic Protection (“CP”) monitoring. OmniMetrix’s CP activities provide for remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline companies. During 2020, 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. Year ended December 31, 2020 OmniMetrix Acorn Total Continuing Operations Revenues $ 5,922 $ — $ 5,922 Cost of sales 1,791 — 1,791 Gross profit 4,131 — 4,131 Gross profit margin 70 % 70 % R&D expenses 619 — 619 Selling, general and administrative expenses 2,932 890 3,822 Operating income (loss) $ 580 $ (890 ) $ (310 ) Year ended December 31, 2019 OmniMetrix Acorn Total Continuing Operations Revenues $ 5,490 $ — $ 5,490 Cost of sales 1,900 — 1,900 Gross profit 3,590 — 3,590 Gross profit margin 65 % 65 % R&D expenses 559 — 559 Selling, general and administrative expenses 2,854 876 3,730 Operating income (loss) $ 177 $ (876 ) $ (699 ) 3 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 and other industrial equipment) and multiple markets in the Internet of Things (“IoT”) ecosystem, as well as cathodic protection for the pipeline industry (gas utilities and pipeline companies). Acorn owned 80% of OmniMetrix until July 1, 2019 when it purchased an additional 19% of OmniMetrix from a former Acorn director, which brought its ownership interest to 99%, with the remaining 1% owned by OmniMetrix’s former CEO. 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 rapidly 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. As 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, and 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 believes it is well-positioned as a competitive participant in this market to continue to grow its customer base and expand its product offerings. Products & Services In the PG segment, OmniMetrix sells a line of devices and services built on its baseline TrueGuard wireless remote monitor. This device is 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 alsosells its AIRGuard product which remotely monitors and controls industrial air compressors. In 2020, OmniMetrix expanded its product offering to its generator dealers with the introduction of an Annunciator. The annunciator is typically sold with a new commercial or industrial generator and indicates the current status of that generator. In many instances having a generator annunciator onsite is mandated by law. In the CP segment, OmniMetrix offers two primary product lines: the Hero 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 the steel pipes used to transport natural gas. As the name suggests, the Hero Rectifier Monitor product monitors 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 Truegard 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 proactive service approach. 4 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 remote equipment before dispatching service. This was the beginning of the OmniMetrix SmartService Program. It allowed the service organization to put the right person in the right truck with the right parts to effect a one-trip or a zero-trip solution. At this phase, service organizations could be efficient, as well as proactive, in their operations. 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. 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, 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 to implement the OmniMetrix SmartService approach to analyzing the remote machines before dispatching a service truck. Since the majority of service and warranty costs are incurred from service people driving trucks, 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, the large majority of machine failures can be avoided completely. This migration from failure reporting to failure prevention is fundamental to the OmniMetrix 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 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 and pipeline corrosion programs, 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 project partners over the years has resulted in product offerings that are 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. In the past, those competitors positioned themselves at a lower-performance, lower-price quadrant of the market. (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 a broad application such as does the OmniMetrix SmartService, supporting service organizations that service all brands. They are also generally designed for the machine owners’ use, in a reactive application. 5 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 independent monitoring companies similar to OmniMetrix such as 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”. 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 five 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 and potentially sublease several available executive office spaces. BACKLOG As of December 31, 2020, OmniMetrix had a backlog of approximately $4.5 million, primarily comprised of deferred revenue, of which approximately $3.2 million is expected to be recognized as revenue in 2021. RESEARCH AND DEVELOPMENT EXPENSE, NET Research and development expense recorded for the years ended December 31, 2020 and 2019 for our OmniMetrix subsidiary in continuing operations is as follows (amounts in thousands of U.S. dollars): Years ended December 31, 2020 2019 OmniMetrix $ 619 $ 559 EMPLOYEES At December 31, 2020, we employed a total of 23 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 CFO, who also serves as COO of OmniMetrix, are hired as consultants to us. 6 Ten of OmniMetrix’s 23 employees are engaged in production, engineering and technical support, eight in marketing and sales and five 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 Note 11 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.