ACORN ENERGY INC

NOTE 1—NATURE OF OPERATIONS

(a) Description of Business

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. The Company provides the following products and Internet of Things (“IoT”) applications and services through its OmniMetrix, LLC (“OmniMetrix”) subsidiary:

Acorn’s shares are traded on the OTCQB marketplace under the symbol ACFN.

See Notes 12 and 13 for segment information and major customers.

(b) Liquidity

As of December 31, 2023, the Company had $1,449,000 of consolidated cash.

At December 31, 2023, the Company had a negative working capital of $571,000. Its working capital includes $1,449,000 of cash and deferred revenue of $4,034,000. Such deferred revenue does not require a significant cash outlay for the revenue to be recognized. Total deferred revenue decreased by $587,000, from $6,171,000 at December 31, 2022 to $5,584,000 at December 31, 2023, as a result of the sales mix of products sold. Based on the current products being sold, the Company expects continued decreases in the deferred revenue balance in the foreseeable future. The balance of deferred hardware revenue at December 31, 2023 will continue to be amortized over the months remaining in the three-year period since the hardware’s original date of shipment. Net cash decreased during the year ended December 31, 2023 by $1,000, with $72,000 provided by operating activities, $78,000 used in investing activities, and $5,000 provided by financing activities.

As of March 5, 2024, the Company had cash of $1,236,000. The Company believes that such cash, plus the cash expected to be generated from operations, will provide sufficient liquidity to finance the corporate activities of Acorn and operating activities of OmniMetrix at their current level of operations for at least the twelve-month period from the issuance of these audited consolidated financial statements. The Company may, at some point, elect to obtain a new line of credit or other source of financing to fund additional investments in the business. If the Company decides to pursue additional financing 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 any combination thereof. 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.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All dollar amounts are rounded to the nearest thousand and, thus, are approximate.

Principles of Consolidation and Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. In these consolidated financial statements, “subsidiaries” are companies that are over 50% controlled, the accounts of which are consolidated with those of the Company. Intercompany transactions and balances are eliminated in consolidation; profits from intercompany sales are also eliminated; non-controlling interests are included in equity.

Use of Estimates in Preparation of Financial Statements

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods.

As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to uncertainties with respect to income taxes, inventories, account receivable allowances, contingencies, revenue recognition, management’s projections and analyses of the possible impairments.

Accounts Receivable and Credit Losses

Accounts receivable consists of trade receivables. Trade receivables are recorded at the invoiced amount, net of any allowance for credit losses.

The Company’s trade receivables primarily arise from the sale of our products to independent residential dealers, industrial distributors and dealers, national and regional retailers, equipment distributors, and certain end users with payment terms generally ranging from 30 to 60 days. The Company evaluates the credit risk of a customer when extending credit based on a combination of various financial and qualitative factors that may affect the customer’s ability to pay. These factors include the customer’s financial condition and past payment experience.

The Company maintains an allowance for credit losses, which represents an estimate of expected losses over the remaining contractual life of its receivables considering current market conditions and estimates for supportable forecasts when appropriate. The Company measures expected credit losses on its trade receivables on an entity-by-entity basis. The estimate of expected credit losses considers a historical loss experience rate that is adjusted for delinquency trends, collection experience, and/or economic risk where appropriate. Additionally, management develops a specific allowance for trade receivables known to have a high risk of expected future credit loss.

For the Company, ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” applies to its contract assets (deferred COGS and deferred sales commissions, see Note 13), lease receivables (sublease, see Note 7) and trade receivables. There are no expected or estimated credit losses on the Company’s contract assets or its lease receivable based on the Company’s implementation of ASU 2016-13. See Note 4, Allowance for Credit Losses.

Inventory

Inventories are comprised of components (raw materials), work-in-process and finished goods, which are measured at net realizable value.

Raw materials inventory is generally comprised of radios, cables, antennas, and electrical components. Finished goods inventory consists of fully assembled systems ready for final shipment to the customer. Costs are determined at cost of acquisition on a weighted average basis and include all outside production and applicable shipping costs.

All inventories are periodically reviewed to identify slow-moving and obsolete inventory. Management conducted an assessment and wrote-off inventory valued at $8,000 and $41,000 for the years ended December 31, 2023 and 2022, respectively.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, such as property and equipment, intangible assets subject to amortization, and right-of-use assets on operating leases for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These events or changes in circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset group. If the asset group is not recoverable, the impairment loss is calculated as the excess of the carrying value over the fair value.

During June 2022, the Company conducted an evaluation of the status of an ERP software customization project that had been initiated in July 2019 and was ongoing. As a result of this evaluation, the Company elected to terminate this project effective June 30, 2022 and recorded an impairment against the capitalized investment in this project of $51,000.

Non-Controlling Interests

The Financial Accounting Standards Board (“FASB”) requires that non-controlling interests be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and upon a loss of control, retained ownership interest be re-measured at fair value, with any gain or loss recognized in earnings. The Company attributes the applicable percentage of income and losses to the non-controlling interests associated with OmniMetrix (see Note 3).

Property and Equipment

Property and equipment are presented at cost at the date of acquisition. Depreciation and amortization are calculated based on the straight-line method over the estimated useful lives of the depreciable assets, or in the case of leasehold improvements, the shorter of the lease term or the estimated useful life of the asset, a portion of which is allocated to cost of sales. Improvements are capitalized while repairs and maintenance are charged to operations as incurred.

Capitalization of Software

The Company capitalizes certain implementation costs incurred in a hosting arrangement that is a service contract to develop or obtain internal-use software. During the years ended December 31, 2023 and 2022, the Company capitalized internal-use software costs totaling $29,000 and $279,000, respectively.

Deferred Sales Commissions

The Company pays its employees sales commissions for sales of hardware and for first sales of monitoring services (not for renewals). In accordance with Topic 606, Revenue from Contracts with Customers, of the FASB Accounting Standards Codification (“ASC 606”), the Company capitalizes as a contract asset the sales commissions on these sales. Contract assets associated with hardware are amortized over the estimated life of the units which are currently estimated to be three years. Contract assets associated with monitoring services are amortized over the expected monitoring life, including renewals.

Commissions earned from the sales of the new hardware products will be recognized when the product is shipped. Commissions earned from the sales of monitoring services continue to be deferred and amortized over the period of service.

The contract assets of deferred COGS and deferred sales commissions are subject to review under ASU 2016-13 (see Notes 2 and 4); however, no credit losses on contract assets are expected based on the Company’s implementation of ASU 2016-13.

Leases

The Company determines if a contractual arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities on the Company’s consolidated balance sheets. The Company evaluates and classifies leases as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option would result in an economic penalty. All of the Company’s real estate leases are classified as operating leases.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of the lease payments over the lease term. The lease payments included in the present value are fixed lease payments. As most of the Company’s leases do not provide an implicit rate, the Company estimates its collateralized incremental borrowing rate, based on information available at the commencement date, in determining the present value of lease payments. The Company applies the portfolio approach in applying discount rates to its classes of leases. The operating lease ROU assets include any payments made before the commencement date. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not currently have residual value guarantees or restrictive covenants in its leases.

The Company also made accounting policy elections by class of underlying asset to not apply the recognition requirements of the standard to leases with terms of 12 months or less and to not separate non-lease components from lease components. Consequently, each separate lease component and the non-lease components associated with that lease component will be accounted for as a single lease component for lease classification, recognition, and measurement purposes.

The lease obligation liability was $221,000 and $336,000 as of December 31, 2023 and December 31, 2022, respectively, which includes the office space lease and an office equipment lease entered into in April 2019.

Treasury Stock

Shares of common stock repurchased are recorded at cost as treasury stock. When shares are reissued, the cost method is used for determining cost. In accordance with GAAP, the excess of the acquisition cost over the reissuance price of the treasury stock, if any, is charged to additional paid-in capital, limited to the amount previously credited to additional paid-in capital, if any. Any excess is charged to accumulated stockholders’ deficit.

Revenue Recognition

The Company’s 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. The Company assesses whether payment terms are customary or extended in accordance with normal practice relative to the market in which the sale is occurring. The Company’s 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. See Note 13, Revenue, for further discussion.

Revenue from sales of the hardware products that are distinct products are recorded when shipped while the revenue from sales of the hardware products (product versions sold prior to September 1, 2023) that were not separable from the Company’s monitoring services was deferred and amortized over the estimated unit life. Revenue from the prepayment of monitoring fees (generally paid twelve months in advance) are 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 the Company’s revenue for the periods presented.

Any sales tax, value added tax, and other tax the Company collects concurrent with revenue producing activities are excluded from revenue.

Warranty Provision

OmniMetrix generally grants their customers a one-year warranty on their products. Estimated warranty obligations are provided for as a cost of sales in the period in which the related revenues are recognized, based on management’s estimate of future potential warranty obligations and historical experience. Adjustments are made to accruals as warranty claim data and historical experience warrant. The Company’s warranty obligations may be materially affected by product or service failure rates and other costs incurred in correcting a product or service failure. Should actual product or service failure rates or other related costs differ from the Company’s estimates, revisions to the accrued warranty liability would be required.

Concentration 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 $1,449,000 at December 31, 2023. The Company does not believe there is significant risk of non-performance by these counterparties. See Note 12(d) with respect to revenue from significant customers and concentrations of trade accounts receivables.

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 instruments.

Research and Development Expenses

Research and development expenses consist primarily of labor and related expenses and are charged to operations as incurred.

Advertising Expenses

Advertising expenses are charged to operations as incurred. Advertising expense was $24,000 and $16,000 for each of the years ended December 31, 2023 and 2022, respectively, and are included in selling, general and administrative expenses on the consolidated statements of operations.

Stock-Based Compensation

The Company accounts for stock-based awards to employees in accordance with applicable accounting principles, which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the consolidated financial statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, the Company recognizes expense over the requisite service period on an accelerated basis over the employee’s requisite service period (generally the vesting period of the equity grant). Stock-based compensation expense is included in selling, general and administrative expenses. The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.

Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with applicable accounting principles. Such options are valued using the Black-Scholes option pricing model when the services are performed.

See Note 9(b) for the assumptions used to calculate the fair value of stock-based employee compensation. Upon the exercise of options, it is the Company’s policy to issue new shares rather than utilizing treasury shares.

Sales Taxes

On June 21, 2018, the U.S. Supreme Court issued an opinion in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), whereby the longstanding Quill Corp v. North Dakota sales tax case was overruled, and states may now require remote sellers to collect sales tax under certain circumstances. In 2020, the Company began collecting sales tax in nearly all states that have sales tax. The Company accrued sales taxes in the states with sales tax. The Company accrued the liability from the effective date of a state’s adoption of the Wayfair decision up to the date the Company began collecting and filing sales taxes in the various states. At December 31, 2023 and December 31, 2022, the amount of such accrual was $13,000 and $51,000, respectively.

The Company accrues sales taxes based on determination of which of its products/services are subject to sales tax, and in which states and jurisdictions the tax applies. Further, the Company must determine which of its customers are exempt from the Company charging sales tax because the customer is a reseller or self-assesses and direct pays to states and other jurisdictions on purchases the customer makes from the Company. These determinations contain estimates and are subject to judgment and interpretation by taxing authorities in various states and other jurisdictions, which could result in recognizing materially different amounts in future periods.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are classified as non-current. Valuation allowances are established against deferred tax assets if it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in operations in the period that includes the enactment date. See Note 10(d) for the impact of the Tax Cuts and Jobs Act of 2017.

Income Tax Uncertainties

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on the two-step process prescribed by applicable accounting principles. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Company to estimate and measure the tax benefit as the largest amount that is more likely than not being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires the Company to determine the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period. The Company recognizes interest and penalties as incurred in finance income (expense), net in the consolidated statements of operations.

As of December 31, 2023 and 2022, no interest or penalties were accrued on the consolidated balance sheets related to uncertain tax positions.

During the years ending December 31, 2023 and 2022, the Company hadno changes in unrecognized tax benefits or associated interest and penalties as a result of tax positions made during the current or prior periods with respect to its continuing operations.

The Company is subject to U.S. Federal and state income tax. As of January 1, 2023, the Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2019, or for years before 2018 for state income taxes.

Basic and Diluted Net Income (Loss) Per Share

Basic net loss per share is computed by dividing the net loss attributable to Acorn Energy, Inc. by the weighted average number of shares outstanding during the year, excluding treasury stock. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares outstanding plus the dilutive potential of common shares which would result from the exercise of stock options and warrants. The dilutive effects of stock options and warrants are excluded from the computation of diluted net loss per share if doing so would be antidilutive.

The combined weighted average number of options and warrants that were excluded from the computation of diluted net loss per share, as they had an antidilutive effect, was 17,000 (which have a weighted average exercise price of $9.42) and 62,000 (which had a weighted average exercise price of $6.29) for the years ending December 31, 2023 and 2022, respectively (as adjusted to account for the September 2023 1-for-16 reverse stock split).

The following data represents the amounts used in computing earnings per share and the effect on net loss and the weighted average number of shares of dilutive potential common stock (as adjusted to account for the September 2023 1-for-16 reverse stock split) (in thousands):

Fair Value Measurement

The Company follows the provisions of the accounting standard which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The carrying amounts for cash, accounts receivable, and accounts payable approximate their fair value because of their short-term maturity. The Company determined that the carrying amount of the lease liabilities approximate fair value since the applicable interest rate approximated fair value at the time the leases were entered into. While the Company believes the carrying value of the assets and liabilities are reasonable, considerable judgment is used to develop estimates of fair value; thus, the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange.

Recent Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires disaggregated information about a reporting entity’s effective tax rate reconciliation, as well as information related to income taxes paid to enhance the transparency and decision usefulness of income tax disclosures. This ASU will be effective for the annual period ending December 31, 2025. The Company is currently evaluating the timing and impacts of adoption of this ASU.

Recently Adopted Accounting Standards

On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This guidance was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Specifically, this guidance requires entities to utilize a new “expected loss” model as it relates to trade and other receivables. The adoption of the standard impacts the way the Company estimates the allowance for doubtful accounts on its trade and other receivables. Refer to Note 4, “Allowance for Credit Losses,” for further information regarding the Company’s allowance for expected credit losses.

NOTE 3—INVESTMENT IN OMNIMETRIX

The Company owns 99% of the Company’s OMX Holdings, Inc. subsidiary (“Holdings”) and the former CEO of OmniMetrix, LLC owns the remaining 1%.

NOTE 4—ALLOWANCE FOR CREDIT LOSSES

The Company has historically experienced immaterial write-offs given the nature of the customers that receive credit. As of December 31, 2023, the Company had gross receivables of $546,000 and an allowance for credit losses of $10,000.

The following is a tabular reconciliation of the Company’s allowance for credit losses:

NOTE 5—INVENTORY

At December 31, 2023 and 2022, the Company’s inventory reserve was $8,000 and $4,000, respectively.

NOTE 6—PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

Depreciation and amortization in respect of property and equipment amounted to $161,000 and $122,000 for 2023 and 2022, respectively.

NOTE 7—LEASES

OmniMetrix leases office space and office equipment under operating lease agreements. The office lease has an expiration date of September 30, 2025. The office equipment lease was entered into in April 2019 and has a sixty-month term. Operating lease payments for 2023 and 2022 were $128,000 and $124,000, respectively. The future minimum lease payments on non-cancelable operating leases as of December 31, 2023 using a discount rate of 4.5% are $221,000. The 4.5% used is the incremental borrowing rate (established at the commencement of the lease) which, as defined in ASC 842, is the rate of interest that a lessee would have to pay to borrow, on a collateralized basis, over a similar term and in a similar economic environment, an amount equal to the lease payments.

Supplemental balance sheet information related to leases consisted of the following:

The table below reconciles the undiscounted future minimum lease payments under non-cancelable lease agreements having initial terms in excess of one year to the total operating lease liabilities recognized on the consolidated balance sheet as of December 31, 2023 (in thousands):

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 office space of the Company’s 21,000 square feet of office and production space in the Hamilton Mill Business Park located in Buford, Georgia, for a monthly sublease payment of $2,375 (plus an annual escalator each year of 3%) 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. As of December 31, 2023, after the offset of the investment in leasehold improvements and other expenses related to the sublease, the Company paid its landlord $12,000 for its share of the sublease profit since the lease commencement. The estimated amount the Company expects to remit to the landlord each year of the sublease subsequent to December 31, 2023 is $6,500 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 $2,750 (gross of the estimated amount expected to be remitted to our landlord):

NOTE 8—COMMITMENTS AND CONTINGENCIES

The Company has $221,000 in operating lease obligations payable through 2026 and $119,000 in other contractual obligations. The Company also has $374,000 in open purchase order commitments payable through December 31, 2024. See Note 14, Subsequent Events, for contractual obligations entered into and effective subsequent to December 31, 2023.

NOTE 9—EQUITY

All information below includes adjustments where applicable to account for the September 20231-for-16 reverse stock split.

(a) Summary Employee Option Information

The Company’s stock option plans provide for the grant to officers, directors and employees of options to purchase shares of common stock. The purchase price may be paid in cash or, if the option is “in-the-money” at the end of the option term, it is automatically exercised “net”. In a net exercise of an option, the Company does not require a payment of the exercise price of the option from the option holder but reduces the number of shares of common stock issued upon the exercise of the option by the smallest number of whole shares that has an aggregate fair market value equal to or in excess of the aggregate exercise price for the option shares covered by the option exercised. Each option is exercisable for one share of the Company’s common stock. Most options expire within five to ten years from the date of the grant, and generally vest over a three-year period from the date of the grant.

At December 31, 2023,76,769 options were available for grant under the Amended and Restated 2006 Stock Incentive Plan and no options were available for grant under the 2006 Stock Option Plan for Non-Employee Directors. In 2023 and 2022,14,936 (11,874 to directors and executive officers and 3,062 to other employees) and 9,110 (7,187 to directors and executive officers and 1,923 to other employees) options, respectively, were granted. In 2023 and 2022, there were no grants to non-employees (other than the non-employee directors and executive officers). The fair value of the options issued was $47,000 and $54,000 in 2023 and 2022, respectively.

2,187 warrants and no options were exercised in the year ended December 31, 2023.2,187 options were exercised in the year ended December 31, 2022. The intrinsic value of options outstanding and of options exercisable at December 31, 2023 was $40,000 and $35,000, respectively. The intrinsic value of options outstanding and of options exercisable at December 31, 2022 was $16,000 and $13,000, respectively.

The Company utilized the Black-Scholes option-pricing model to estimate fair value, utilizing the following assumptions for the respective years (all in weighted averages):

The expected term of the options is the length of time until the expected date of exercising the options. With respect to determining expected exercise behavior, the Company has grouped its option grants into certain groups in order to track exercise behavior and establish historical rates. The Company estimated volatility by considering historical stock volatility over the expected term of the option. The risk-free interest rates are based on the U.S. Treasury yields for a period consistent with the expected term. The Company expects no dividends to be paid. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in determining the estimated fair value of the Company’s stock options granted in the years ended December 31, 2023 and 2022. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

(b) Summary Option Information

A summary of the Company’s option plans as of December 31, 2023 and 2022, as well as changes during each of the years then ended, is presented below:

Summary information regarding the options outstanding and exercisable at December 31, 2023 is as follows:

Stock-based compensation expense included in selling, general and administrative expense in the Company’s consolidated statements of operations was $55,000 and $80,000 for the years ending December 31, 2023 and 2022, respectively.

The total compensation cost related to non-vested awards not yet recognized was $18,000 and $33,000 as of December 31, 2023 and 2022, respectively.

(c) Warrants

The Company has issued warrants at exercise prices equal to or greater than the market value of the Company’s common stock at the date of issuance. A summary of warrant activity follows:

NOTE 10—INCOME TAXES

(a) Composition of income (loss) before income taxes is as follows (in thousands):

Income tax expense consists of the following (in thousands):

(b) Effective Income Tax Rates

Set forth below is a reconciliation between the federal tax rate and the Company’s effective income tax rates with respect to continuing operations:

(c) Analysis of Deferred Tax Assets and (Liabilities) (in thousands):

Valuation allowances relate principally to net operating loss carryforwards related to the Company’s consolidated tax losses as well as state tax losses related the Company’s OmniMetrix subsidiary and book-tax differences related to asset impairments, deferred revenue, capitalized Section 174 expenditures, and stock-based compensation expense of the Company. The Company continually evaluates the likelihood of the realization of deferred tax assets and adjusts the carrying amount of the deferred tax assets by the valuation allowance to the extent the future realization of the deferred tax assets is more likely than not. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectation of future taxable income or loss, the carryforward periods available to the Company for tax reporting purposes, and other relevant factors. As of December 31, 2023, based on the Company’s history of earnings and its assessment of future earnings, management believes that it is more likely than not that future taxable income will not be sufficient to realize the deferred tax assets. During the year ended December 31, 2023, the gross deferred tax asset and the valuation allowance decreased by $567,000.

(d) Summary of Tax Loss Carryforwards

As of December 31, 2023, the Company had various operating loss carryforwards expiring as follows (in thousands):

Effective for tax years beginning after December 31, 2021, taxpayers are required to capitalize any expenses incurred that are considered incidental to research and experimentation (R&E) activities under IRC Section 174. While taxpayers historically had the option of deducting these expenses under IRC Section 174, the December 2017 Tax Cuts and Jobs Act mandates capitalization and amortization of R&E expenses for tax years beginning after December 31, 2021. Expenses incurred in connection with R&E activities in the US must be amortized over a 5-year period if incurred. R&E activities are broader in scope than qualified research activities considered under IRC Section 41 (relating to the research tax credit). For the year ended December 31, 2023, the Company performed an analysis based on available guidance and capitalized the required R&E costs. The Company will continue to monitor this issue for future developments.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examinations by federal, foreign, and state and local jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from 2019 to the present in the U.S. and from 2017 to 2018 in the Company’s foreign operations. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state and local tax authorities to the extent utilized in a future period.

The Company is also subject to certain non-income taxes such as value added taxes, sales taxes, and property taxes. The Company has taken certain positions that management feels, although not free from doubt, should not result in a successful challenge by certain tax authorities.

NOTE 11—RELATED PARTY BALANCES AND TRANSACTIONS

a) Officer and Director Fees

The Company recorded fees to officers of $522,000 and $522,000 for the years ended December 31, 2023 and 2022, respectively, which is included in selling, general and administrative expenses.

The Company recorded fees to directors of $71,000 and $59,000 for the years ended December 31, 2023 and 2022, which is included in selling, general and administrative expenses.

The Company issued 14,936 (11,874 to directors and executive officers and 3,062 to other employees) and 9,110 (7,187 to directors and executive officers and 1,923 to other employees) options, in 2023 and 2022, respectively.2,187 warrants and no options were exercised in the year ended December 31, 2023.2,188 options were exercised in the year ended December 31, 2022. See Note 9 for further discussion.

Each Director of the Company may elect by written notice delivered on or before the first day of each calendar year whether to receive, in lieu of some or all of his or her retainer and board fees, that number of shares of Company common stock as shall have a value equal to the applicable retainer and board fees, based on the closing price of the Company’s common stock on its then-current trading platform or exchange on the last trading day immediately preceding the first day of the applicable year. Once made, the election shall be irrevocable for such election year and the shares subject to the election shall vest and be issued one-fourth upon the first day of the election year and one-fourth as of the first day of each of the second through fourth calendar quarters thereafter during the remainder of the election year.

b) Intercompany

The intercompany balance due to Acorn from OmniMetrix is $2,657,000 for amounts loaned, accrued interest and expenses paid by Acorn on Omni’s behalf as of December 31, 2023 as compared to $3,677,000 as of December 31, 2022. This balance is eliminated in consolidation. During 2023, the intercompany amount due to Acorn from OmniMetrix decreased by $1,020,000. This included repayments of $1,285,000 offset by interest of $164,000, dividends of $76,000 due to Acorn and $25,000 in shared expenses paid by Acorn. During 2022, the intercompany amount due to Acorn from OmniMetrix decreased by $540,000. This included repayments of $985,000 offset by interest of $179,000, dividends of $76,000 due to Acorn and $190,000 in shared expenses paid by Acorn. This intercompany balance is eliminated in consolidation.

NOTE 12—SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

(a) General Information

As of December 31, 2023, the Company continues to operate intwo reportable operating segments, PG and CP, both of which are performed through the Company’s OmniMetrix subsidiary. See Note 1,Nature of Operations, for a description of these segments.

The Company’s reportable segments are strategic business units, offering different products and services and are managed separately by the Chief Decision Maker (CDM) as each business requires different technology and marketing strategies.

(b) Information about profit or loss and assets

The accounting policies of all the segments are those described in the summary of significant accounting policies. The Company evaluates performance based on net income or loss before taxes.

The Company does not systematically allocate assets to the divisions of the subsidiaries constituting its consolidated group, unless the division constitutes a significant operation. Accordingly, where a division of a subsidiary constitutes a segment that does not meet the quantitative thresholds of applicable accounting principles, depreciation expense is recorded against the operations of such segment, without allocating the related depreciable assets to that segment. However, where a division of a subsidiary constitutes a segment that does meet the quantitative thresholds, related depreciable assets, along with other identifiable assets, are allocated to such division.

The following tables represent segmented data for the years ended December 31, 2023 and 2022 (in thousands). The Company does not currently break out total assets by reportable segment as there is a high level of shared utilization between the segments. Further, the CDM does not review the assets by segment.

(c) The following tables represent a reconciliation of the segment data to the consolidated statement of operations and balance sheet data for the years ended and as of December 31, 2023 and 2022 (in thousands):

All of the Company’s long-lived assets are located in the United States.

(d) Revenues and Accounts Receivable Balances from Major Customers (in thousands):

NOTE 13—REVENUE

OmniMetrix sells monitoring equipment (“HW”) and monitoring services (“Monitoring”). Prior to September 1, 2023, sales of OmniMetrix equipment typically did not qualify as a separate unit of accounting. As a result, revenue (and related costs) associated with sale of equipment was recorded to deferred revenue (and deferred cost of goods sold) upon shipment of PG and CP monitoring units. Revenue and related costs with respect to the sale of equipment were recognized over the estimated life of the units which was estimated to be three years. On September 1, 2023, OmniMetrix launched an updated version of its products that includes new functionality in its TrueGuard, AIRGuard, Patriot and Hero products that allows its customers to have options as it relates to obtaining and utilizing the data that is provided by its hardware devices. This new functionality allows for SIM card options, configuration options regarding IP address endpoints and DNS routes, and access to OmniMetrix’s over-the-air data protocol. This product update allows customers to have the option to purchase OmniMetrix’s monitoring service, monitor the products themselves if they have the ability in-house, or choose another monitoring provider if they so desire. OmniMetrix’s prior hardware product version could not function as a distinct product from its monitoring services. This new version’s functionality results in OmniMetrix’s hardware and monitoring services being capable of being two distinct products and services. OmniMetrix recognizes revenue, COGS and commissions from the sale of the new version of its hardware products sold when the product is shipped rather than over the estimated time that the unit is in service for the customer. The remaining balance of deferred hardware revenue from the prior version of these products will continue to be amortized each period until it is fully amortized. The modification to the circuit boards and embedded firmware of hardware enclosures in inventory as of August 31, 2023 were made such that only the new version of these products was sold subsequent to this date.

The following table disaggregates the Company’s revenue for the years ended December 31, 2023 and 2022 (in thousands):

Deferred revenue activity for the year ended December 31, 2023 can be seen in the table below (in thousands):

The amount of hardware revenue recognized during the year ended December 31, 2023 that was included in deferred revenue at the beginning of the fiscal year was $1,890,000. The amount of monitoring revenue during the year ended December 31, 2023 that was included in deferred revenue at the beginning of the fiscal year was $2,054,000.

Deferred revenue activity for the year ended December 31, 2022 can be seen in the table below (in thousands):

Deferred charges relate only to the sale of HW. Deferred charges activity for the year ended December 31, 2023 can be seen in the table below (in thousands):

Deferred charges relate only to the sale of HW. Deferred charges activity for the year ended December 31, 2022 can be seen in the table below (in thousands):

The following table provides a reconciliation of the Company’s sales commissions contract assets for the year ended December 31, 2023 (in thousands):

The capitalized sales commissions are included in other current assets ($202,000) and other assets ($162,000) in the Company’s Consolidated Balance Sheets at December 31, 2023.

The following table provides a reconciliation of the Company’s sales commissions contract assets for the year ended December 31, 2022 (in thousands):

The capitalized sales commissions are included in other current assets ($196,000) and other assets ($203,000) in the Company’s Consolidated Balance Sheets at December 31, 2022.

NOTE 14—SUBSEQUENT EVENTS

On January 2, 2024,4,400 options were issued to the CEO and CFO in the aggregate with an exercise price of $6.09 and that vest in equal increments on January 2, 2024, April 1, 2024, July 1, 2024 and October 1, 2024 with a fair value of $1,000 in the aggregate. On January 1, 2024,2,500 options in the aggregate were issued to directors with an exercise price of $6.09 and that vest in equal increments on January 1, 2024, April 1, 2024, July 1, 2024 and October 1, 2024 with a fair value of $600 in the aggregate. On January 31, 2024,1,000 options were issued to the Company’s Director of Business Development with an exercise price of $6.00 and that vest in equal increments over three years on the anniversary date of the issuance with the last tranche vesting on January 31, 2027 with a fair value of $700. On January 1, 2024,625 options that were set to expire on January 1, 2024 were exercised at an exercise price of $2.88 per share by one of the Company’s directors. The transaction was a cashless exercise in which 296 shares were deposited to treasury stock in payment of the exercise price and 329 shares were issued to the director. On February 21, 2024,2,187 options that were set to expire that day were exercised at an exercise price of $5.76 per share by the CEO.

On January 12, 2024, we entered into a new contract with our current primary data provider for Internet of Things (IoT) wireless services for a 36-month contract term with automatic one-year extensions, subject to termination notice. The pricing structure involves account setup, SIM charges, monthly revenue obligations, and various rate plans based on data usage and regions along with other optional services. The monthly revenue obligation is $10,000 for the first 6 months and $15,000 thereafter. We will also be eligible for volume discounts based on total monthly service revenue. Additionally, the agreement includes an IoT Enhanced Support and Priority Care Services Rate Plan with various support service types and pricing tiers based on the number of devices and terms for SIM migrations, including tiered pricing and conditions for waiver of certain charges during migration. This new agreement will allow us to migrate our customers to higher tier data plans for nominal additional cost.