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DSIT Solutions, Ltd. ('DSIT')

12 Months Ended

Dec. 31, 2018

Net income (loss) before income taxes for reportable segments

NOTE 3—DSIT SOLUTIONS, LTD. (“DSIT”)

The assets and liabilities related to the deconsolidated operations of DSIT are reflected in the table below. The Due from Acorn balance at December 31, 2017 is comprised of a loan of $340 from DSIT and unreimbursed expenses of $999, both of which accrue interest at 3.15% per annum. Such balances were due the earlier of April 30, 2018 or the sale of Acorn’s remaining shares in DSIT. In addition to the above balances, the Due from Acorn balance also included $285 with respect to provisions for severance and vacation for the Company’s CFO who is an employee of DSIT. The loan from DSIT to Acorn is secured by the Company’s shares of DSIT.

	December 31, 2017
	(unaudited)
Current assets:
Cash and cash equivalents	$	112
Restricted deposits		353
Accounts receivable		7,601
Unbilled revenue		3,433
Inventory		755
Due from Acorn		1,624
Other current assets		1,051
Total current assets		14,929
Property and equipment, net		563
Severance assets		4,168
Restricted deposits		2
Other assets		348
Total assets	$	20,010

Current liabilities:
Short-term bank credit and current maturities of long-term bank debt	$	339
Accounts payable		730
Accrued payroll, payroll taxes and social benefits		1,627
Deferred revenue		682
Other current liabilities		3,088
Total current liabilities		6,466
Accrued severance		5,383
Other long-term liabilities		106
Total liabilities	$	11,955

On February 14, 2018, (the “Closing Date”), the Company closed on the sale of our remaining interest in DSIT to a group of Israeli investors for $5.8 million before transaction costs and withholding taxes. Accordingly, we adjusted our equity investment balance in DSIT to be equal to the gross proceeds received from the sale and recorded an impairment charge in 2017 of $308,000. In 2018, we recorded our 41.2% share of DSIT’s income or loss through the closing of the 2018 DSIT Transaction as well as our estimated transaction costs and withholding taxes on the transaction ($441,000 and $388,000, respectively) offset by $222,000, net of professional fees less interest income, refunded by the Israel Tax Authorities related to our 2016 Israeli tax return. From the proceeds, the Company also repaid $1,600 of amounts due to DSIT and $1,428 of loan principal and interest due to directors.

The Company’s share of DSIT’s net income for the period from January 1, 2018 to the Closing Date and the year-ended December 31, 2017 is shown below:

	Period from January 1, 2018 to the Closing Date		Year ended December 31, 2017

Revenue	$	4,481	$	17,245
Cost of sales		2,842		10,644
Gross profit		1,639		6,601

Net income	$	160	$	1,093

Acorn’s share of net income in DSIT	$	33	$	450

The activity of the Company’s Investment in DSIT for the period from January 1, 2018 to December 31, 2018 can be seen below:

	Equity Investment balance in DSIT
Balance at December 31, 2016	$	5,658
Acorn’s share of net income in DSIT for the year ended December 31, 2017		450
Impairment		(308	)
Balance at December 31, 2017		5,800
Acorn’s share of net income in DSIT for the period from January 1, 2018 to the Closing Date		33
Impairment		(33	)
Sale of Investment in DSIT		(5,800	)
Balance at December 31, 2018	$	—

In the Company’s sale of its shares of DSIT Solutions Ltd. (“DSIT”), the Israel Tax Authorities (“ITA”) withheld tax of NIS 1,008, NIS 146 and NIS 1,359 in 2016, 2017 and 2018, respectively. Such amounts were recorded as expense ($266, $41 and $388) in each of those years. In August 2018, the Company received back from the ITA NIS 1,087 ($293 at the then exchange rate) consisting of $266 of tax, $21 of interest income and $6 of exchange gain.

The Company received the refund following the filing of its 2016 Israeli tax return in which the Company claimed that it was due a refund of the withheld taxes in full as it believes that each of the sale transactions is exempt from tax under Israeli tax law. The ITA did not timely respond to the Company’s refund claim for the 2016 tax withheld and under Israeli tax law was required to return the tax withheld in the 2016 transaction with interest. However, the Company had to provide a letter to the ITA stating that it understands that the return of the tax withheld resulting from its 2016 Israeli tax filing does not constitute the consent of the ITA to the method of reporting and the tax refund deriving from it and another letter whereby the Company committed not to transfer those funds received out of Israel until the end of the ITA’s review. The ITA has requested documentation of the transaction to begin its review of Acorn’s position.

The Company has recorded the $222, net of fees of $65 offset by interest income of $21, as part of the gain (loss) on sale of interest of DSIT in the third quarter of 2018 relating to the 2016 DSIT transaction withholding. This offsets the loss on the 2018 DSIT transaction which reduced the loss recorded in 2018 to $607. The Company does not believe it will have to return such funds to the ITA at the end of the ITA’s review. However, as the Company committed not to transfer those funds out of Israel until the completion of the ITA’s review, such funds are deemed to be restricted and are reflected as such on the Company’s balance sheet as of September 30, 2018. By statute, the funds will no longer be restricted the earlier of December 31, 2022 or the completion of the ITA’s review of the Company’s tax position. The Company believes that the ITA will complete its review of the Company’s tax position by the end of 2019. The amount received is reflected as restricted cash as of December 31, 2018.

The Company has filed its Israeli return for 2017 and requested a refund of the NIS 146 tax withheld (currently valued at $40 before interest) and plans to file its 2018 return and request a refund of the NIS 1,358 tax withheld (currently valued at $375 before interest). The Company will record a tax benefit on the tax withheld in 2017 and 2018 if and when those monies are remitted back to the Company by the ITA.