Acorn Energy, Inc.: Form 10-Q for the period ended Jun 30, 2023

This Form 10-Q contains “forward-looking statements” relating to the Company which represent the Company’s current expectations or beliefs including, but not limited to, statements concerning the Company’s operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “anticipate”, “intend”, “could”, “estimate” or “continue” or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of the Company to continue its growth strategy and the Company’s competition, certain of which are beyond the Company’s control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, or any of the other risks set out under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 occur, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

All dollar amounts in the discussion below are rounded to the nearest thousand and, thus, are approximate.

FINANCIAL RESULTS BY COMPANY

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

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BACKLOG

As of June 30, 2023, OmniMetrix had a backlog of $6,367,000, primarily comprised of deferred revenue, of which $4,154,000 is expected to be recognized as revenue in the next twelve months. This compares to a backlog of $5,635,000 at June 30, 2022.

RECENT DEVELOPMENTS

On March 2, 2023, 35,000 warrants that were set to expire on March 16, 2023 were exercised at an exercise price of $0.13 per share by our Chief Executive Officer.

OVERVIEW AND TREND INFORMATION

Acorn Energy, Inc. (“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 OmniMetrixTM, LLC (“OmniMetrix”) subsidiary:

• Power Generation (“PG”). OmniMetrix’s PG services provide wireless remote monitoring and control systems and IoT 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 to commercial customers that require a visual representation of the generator’s status and has a touch-screen display that indicates the current state of that generator.
• Cathodic Protection (“CP”). OmniMetrix’s CP services provide remote monitoring and control products for cathodic protection systems on oil and 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. OmniMetrix also offers the industry’s first RADTM (Remote AC Mitigation Disconnect) that mounts onto existing Solid-state Decouplers in the field and can remotely disconnect/connect these AC mitigation tools which can drastically reduce a company’s expense while increasing employee safety.

Each of our PG and CP activities represents a reportable segment. The following analysis should be read together with the segment and revenue information provided in Notes 9 and 10 to the unaudited condensed consolidated financial statements included in this quarterly report.

OmniMetrix

OmniMetrix is a Georgia limited liability company based in Buford, Georgia that develops and markets wireless remote monitoring and control systems and services for multiple markets in the Internet of Things (“IoT”) ecosystem: critical assets (including stand-by power generators, pumps, pumpjacks, light towers, turbines, compressors, and other industrial equipment) as well as cathodic protection for the pipeline industry (gas utilities and pipeline companies). Acorn owns 99% of OmniMetrix with 1% owned by the former CEO of 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 new economic ecosystem. In addition, OmniMetrix sees 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, cybersecurity threats, and other issues related to the reliability of the electric power grid. 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, OmniMetrix believes it is well-positioned as a competitive participant in this market.

Sales of OmniMetrix monitoring systems include the sale of equipment and of monitoring services. 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 new equipment are recognized over the life of the units which is currently estimated to be three years. Revenues from the prepayment of monitoring fees (generally paid 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 (typically twelve-month, renewable periods).

Results of Operations

The following table sets forth certain information with respect to the unaudited condensed consolidated results of operations of the Company for the six-month periods ended June 30, 2023 and 2022, including the percentage of total revenues during each period attributable to selected components of the Statements of Operations data and for the period-to-period percentage changes in such components. For segment data, see Notes 9 and 10 to the unaudited condensed consolidated financial statements included in this quarterly report.

*result is less than 1%.

(1) parentheses indicate unfavorable change from prior period.

The following table sets forth certain information with respect to the unaudited consolidated results of operations of the Company for the three-month periods ended June 30, 2023 and 2022, including the percentage of total revenues during each period attributable to selected components of the operations statement data and for the period-to-period percentage changes in such components. For segment data, see Notes 9 and 10 to the unaudited condensed consolidated financial statements included in this quarterly report.

*result is less than 1%.

**less than $1

(1) parentheses indicate unfavorable change from prior period.

Revenue for the six and three months ended June 30, 2023 and 2022

In the six months ended June 30, 2023, revenue increased by $350,000, or 10%, from $3,372,000 in the six months ended June 30, 2022 to $3,722,000 in the six months ended June 30, 2023. Hardware revenue increased by $217,000 from $1,416,000 in the six months ended June 30, 2022 to $1,633,000 in the six months ended June 30, 2023. During the six months ended June 30, 2023, we recorded $92,000 in revenue from the sale of custom TG Pro units that are designed to large customer specifications and monitored by the customer and thus the revenue was not deferred. We did not have any custom unit orders in the first six months ended June 30, 2022. The hardware revenue during the six months ended June 30, 2023, excluding the revenue from the sale of the custom units, was $1,541,000; thus, the increase in hardware revenue excluding the custom units was 9%. This increase was attributed to TG Pro and TG2 revenue increases as well as from installation income realized offset by a decrease in revenue from Hero products as sales of CP products were down period over period. Monitoring revenue increased by $133,000, or 7%, from $1,956,000 in the six months ended June 30, 2022 to $2,089,000 in the six months ended June 30, 2023. The increase in monitoring revenue was due to an increase in the number of connections being monitored.

As discussed above, OmniMetrix has two reportable segments, PG and CP. Of the $3,722,000 in revenue recognized in the six months ended June 30, 2023, $3,196,000 was generated by PG activities and $526,000 was generated by CP activities. This represents an increase in revenue from PG activities of $371,000, or 13%, from $2,825,000 in the six months ended June 30, 2022, and a decrease in revenue from CP activities of $21,000, or 4%, from $547,000 in the six months ended June 30, 2022. As noted above, the increase in PG revenue was due to the sale of custom units for which revenue is immediately recognized instead of deferred, an increase in the sale of other PG products and an increase in the number of PG units being monitored.

Revenue increased by $352,000, or 22%, from $1,621,000 in the three months ended June 30, 2022 to $1,973,000 in the three months ended June 30, 2023. The increase is due to the same drivers in the six-month period as previously discussed.

Of the $1,973,000 in revenue recognized in the three months ended June 30, 2023, $1,689,000 was generated by PG activities and $284,000 was generated by CP activities. As compared to the three months ended June 30, 2022, revenue from PG activities increased $309,000, or 22%, and revenue from CP activities increased $43,000, or 18%.

Gross profit for the six and three months ended June 30, 2023 and 2022

Gross profit for the six months ended June 30, 2023 was $2,806,000, reflecting a gross margin of 75%, compared with a gross profit of $2,504,000, reflecting a gross margin of 74%, for the six months ended June 30, 2022.

Gross margin on hardware revenue for the six months ended June 30, 2023 was 53% compared to 50% for the six months ended June 30, 2022. Gross margin on monitoring revenue for the six months ended June 30, 2023 was 93% compared to 92% for the six months ended June 30, 2022.

Gross profit for the three months ended June 30, 2023 was $1,490,000, reflecting a gross margin of 76%, compared with a gross profit for the three months ended June 30, 2022 of $1,246,000, reflecting a gross margin of 77%. Gross margin on hardware revenue for the three months ended June 30, 2023 and 2022 was 55%. Gross margin on monitoring revenue for the three months ended June 30, 2023 was 93% compared to 92% for the three months ended June 30, 2022.

Operating expenses for the six and three months ended June 30, 2023 and 2022

OmniMetrix R&D expense. During the six months ended June 30, 2023 and 2022, R&D expense was $402,000 and $410,000, respectively. During the three months ended June 30, 2023, OmniMetrix recorded $188,000 of R&D expense as compared to $212,000 in the three months ended June 30, 2022. The decrease in R&D expense in the three months ended June 30, 2023 of $24,000 is due to a reduction of R&D hours related to the phased retirement of one of our engineers.

OmniMetrix SG&A expense. During the six months ended June 30, 2023, OmniMetrix recorded SG&A expense of $1,942,000, compared to SG&A expense of $1,877,000 in the six months ended June 30, 2022, an increase of $65,000, or 3%. During the three months ended June 30, 2022, OmniMetrix recorded SG&A expense of $979,000, compared to SG&A expense of $985,000 in the three months ended June 30, 2022, a decrease of $6,000, or less than 1%. The increase in the six-month period was primarily due to an increase of (i) $30,000 in sales commission amortization, (ii) $27,000 in amortization primarily related to IT assets, (iii) $11,000 in personnel costs, (iv) $9,000 in travel and trade show expenses, offset by a decrease of (v) $9,000 in technology consulting and software license fees and (vi) $3,000 in net aggregate decreases in other expense categories.

During June 2022, we 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, we elected to terminate this project effective June 30, 2022 and recorded an impairment against the capitalized investment in this project of $51,000.

Corporate SG&A expense. Corporate SG&A expense was $474,000 in the six months ended June 30, 2023, a decrease of $36,000, or 7%, from the $510,000 of corporate SG&A expense reported in the six months ended June 30, 2022. This decrease was due to a decrease of (i) $18,000 in audit fees due to the timing of when the services were performed as some were performed in the fourth quarter of 2022, (ii) $19,000 in stock compensation expense, (iii) $9,000 in insurance expenses offset by a net increase of (iv) $10,000 in other public company expenses.

Corporate SG&A expense for the three months ended June 30, 2023 increased $20,000, or 9%, to $240,000 from $220,000 in the three months ended June 30, 2022 primarily due to the timing of tax professional fees along with increases in other public company costs. Second quarter 2023 corporate SG&A expense of $240,000 was higher by $6,000 than first quarter 2023 corporate SG&A expense of $234,000. We expect the quarterly corporate overhead to increase due to increased audit fees and board fees in addition to costs that may be required to support the growth of our OmniMetrix subsidiary.

Net income (loss) attributable to Acorn Energy. We recognized net income attributable to Acorn stockholders of $11,000 in the six months ended June 30, 2023, compared to net loss attributable to Acorn stockholders of $346,000 in the six months ended June 30, 2022. Our net income during the six months ended June 30, 2023 is comprised of net income at OmniMetrix of $490,000 offset by corporate expenses, net of interest income of $1,000, of $475,000 and the non-controlling interest share of our income from OmniMetrix of $4,000. Our net income during the six months ended June 30, 2022 is comprised of net income at OmniMetrix of $167,000 offset by corporate expenses, including net interest expense, of $512,000 and the non-controlling interest share of our income from OmniMetrix of $1,000.

For the three months ended June 30, 2023, we recognized net income attributable to Acorn stockholders of $96,000, compared to a net loss attributable to Acorn stockholders of $223,000 for the three months ended June 30, 2022. Our net income during the three months ended June 30, 2023 is comprised of net income at OmniMetrix of $339,000 offset by corporate expenses of $240,000 and the non-controlling interest share of our income from OmniMetrix of $3,000. Our net loss in the three months ended June 30, 2022 is comprised of net loss at OmniMetrix of $1,000 plus corporate expenses of $222,000. The non-controlling interest share of OmniMetrix during this period rounded to zero.

Liquidity and Capital Resources

At June 30, 2023, we had negative working capital of $389,000. Our working capital includes $1,573,000 of cash and deferred revenue of $4,154,000. The deferred revenue does not require a significant cash outlay for the revenue to be recognized.

During the six months ended June 30, 2023, our OmniMetrix subsidiary provided $708,000 from operations while our corporate headquarters used $553,000 during the same period.

During the six months ended June 30, 2023, we invested $37,000 in technology and received proceeds of $5,000 from financing activities related to the exercise of warrants.

Other Liquidity Matters

OmniMetrix owes Acorn $3,112,000 for loans, accrued interest and expenses advanced to it by Acorn. OmniMetrix made repayments to Acorn of $692,000 in the first half of 2023 offset by interest, dividends and other advances of $127,000 in the aggregate.

As of August 8, 2023, we had cash of $1,738,000. We believe that such cash, plus the cash generated from operations, will provide sufficient liquidity to finance the operating activities of Acorn and OmniMetrix at their current level of operations for the twelve months from the issuance of these unaudited condensed consolidated financial statements. 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 June 30, 2023.

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.

Concentrations of Credit Risk

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 $1,573,000 at June 30, 2023. The Company does not believe there is a significant risk of non-performance by its counterparties. For the three- and six-month periods ended June 30, 2023, there was one customer (the same customer in both periods) that represented 21% and 15% of the Company’s total invoiced sales, respectively. At June 30, 2023, the Company had two customers that represented greater than 10% of our accounts receivable with balances representing 25% and 14% of the Company’s total accounts receivable. As of August 8, 2023, we have collected 64% of the outstanding amount of $277,000, in the aggregate due from these two customers as of June 30, 2023. This represents 100% from one of the two customers which had $177,000 outstanding. Approximately 12% of the accounts receivable at December 31, 2022 was due from one customer which was subsequently collected in full. 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.

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.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses noted in our Annual Report on Form 10-K for the year ended December 31, 2022, to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management (including our Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

As noted in our Annual Report on Form 10-K for the year ended December 31, 2022, we employ a decentralized internal control methodology, coupled with management’s oversight, whereby our OmniMetrix 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 our external financial statements. In addition, as our operating subsidiary is not large enough to effectively mitigate certain risks by segregating incompatible duties, management must employ compensating mechanisms throughout our company in a manner that is feasible within the constraints in which it operates.

The material weaknesses management identified were caused by an insufficient complement of resources at our OmniMetrix subsidiary and limited ERP system capabilities, such that individual control policies and procedures at the subsidiary could not be implemented, maintained, or remediated when and where necessary. As a result, a majority of the significant process areas management identified for our 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 the Committee of Sponsoring Organizations of the Treadway Commission’s document entitled “Internal Control - Integrated Framework (2013)” were present and functioning.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.