Acorn Energy, Inc.: Form 10-K for the period ended Dec 31, 2023

OVERVIEW

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

• Power Generation (“PG”) monitoring. OmniMetrix offers PG wireless monitoring and control IoT solutions encompassing wireless remote monitoring devices and applications for both residential and commercial/industrial power generation equipment. This suite includes our suite of TrueGuard products as well as our AIRGuard product, designed for remote monitoring and control of industrial air compressors, as well as a Smart Annunciator product. This Smart Annunciator product, tailored for commercial clients, provides a visual representation of a generator’s status through a touch-screen display, offering real-time updates on its current state.
• Cathodic Protection (“CP”) monitoring. OmniMetrix specializes in CP monitoring, offering remote monitoring and control products specifically tailored for cathodic protection systems utilized in gas pipelines, serving gas utilities market and pipeline operators. Our CP product lineup, which features solutions for remote monitoring and control of rectifiers, test stations and bonds, is our Hero and Patriot lines of products. Additionally, we offer the RADTM (Remote AC Mitigation Disconnect), an industry-first innovation designed to mount onto existing Solid-state Decouplers in the field. This device enables remote disconnection/connection of AC mitigation tools, significantly reducing a customer's expenses while enhancing employee safety.

During 2023, each of our PG and CP activities represented a reportable segment.

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

FINANCIAL RESULTS BY COMPANY

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

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

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

Following the emergence of IoT applications whereby companies aggregate multiple sensors and monitors into a simplified dashboard for customers, OmniMetrix believes it plays a key role in this economic ecosystem within the sectors in which it operates. OmniMetrix continues to see a rapidly growing need for backup power infrastructure to secure critical military, government, and private sector assets against emergency events including terrorist attacks, natural disasters, demand response and cybersecurity threats. Residential and industrial standby generators, turbines, compressors, pumps, pumpjacks, light towers and other industrial equipment are part of the critical infrastructure increasingly being monitored in IoT applications. OmniMetrix solutions monitor critical equipment used by cell towers, manufacturing plants, medical facilities, data centers, retail stores, public transportation systems, energy distribution and federal, state and municipal government facilities, in addition to residential back-up generators. Given that OmniMetrix monitors all major brands of critical equipment and continues to invest in research and development in response to customer and potential customer feedback, OmniMetrix is well-positioned to grow its customer base and expand its product offerings in this market.

Products & Services

In the PG segment, OmniMetrix sells a line of devices and services built on our baseline TrueGuard wireless remote monitor. These devices are broadly applicable across all brands and models of emergency power generators and industrial engine applications. The TrueGuard product family connects directly to the engine’s control panel and captures all data flowing through the control panel. As a result, the product provides the ability to identify whether an emergency generator is capable of operating as expected. OmniMetrix also sells 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 large touch-screen display.

In the CP segment, OmniMetrix offers three primary product lines: the Hero 2 Rectifier Monitor, the Patriot Plus Test Station Monitor, and the RADTM (Remote AC Mitigation Disconnect). All of these products are used to monitor cathodic protection systems, a process which reduces rust and corrosion on pipelines used to transport natural gas. As the name suggests, the Hero 2 Rectifier Monitor product monitors and controls the operation of the rectifiers, which are a critical component in the effort to prevent corrosion and are also the most common point of failure in the pipeline system. The Patriot Plus Test Station Monitor is also used to provide data points along the pipeline segment powered by the rectifier including AC current density. Additionally, the industry’s first and patented RAD mounts onto existing Solid-state Decouplers in the field and can remotely disconnect/connect these AC mitigation tools which drastically reduces company expense while increasing employee safety.

Customers and Markets

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

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

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

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

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

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

Competition

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

There are two types of competitors in the PG marketplace:

(1) Independent monitoring organizations produce the monitoring systems, but not the equipment being monitored. Aside from OmniMetrix, such companies include Ayantra, FleetZOOM, Gen-Tracker, and PowerTelematics in the high-performance power generation monitoring segment. Other competitors operate in the reactive “failure notification” mode described in the early stages of the OmniMetrix business model. These competitors position themselves in a lower-performance, lower-price quadrant of the market typically due to the lesser amount of data their products can collect from the generator’s control panel compared to OmniMetrix.

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

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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 resumed an aggressive sales effort, including pursuit of the market segment requiring less technology and lower price (the extremely large residential generator market) as well as developing more sophisticated, diagnostic products and custom solutions for commercial and industrial clientele.

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

Intellectual Property

OmniMetrix has always focused on being the technology leader in its markets, and as a result has created many “industry firsts” and “trade secrets”. Initially, the Company only pursued patents on the most valuable processes and systems and otherwise made public disclosure of many processes to prevent others from making later patent claims on those items. Nonetheless, OmniMetrix has four issued valid 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 21,000 square feet of office and production space in the Hamilton Mill Business Park located in Buford, Georgia, under a lease that expires September 30, 2025. On July 6, 2021, the Company entered into an agreement with King Industrial Realty, Inc., to sublease from the Company 1,900 square feet of unused office space. The sublease commenced on October 1, 2021 and will run through September 30, 2025, which is the end of the Company’s lease term with its landlord.

BACKLOG

As of December 31, 2023, OmniMetrix had a backlog of $5.6 million, primarily comprised of deferred revenue, of which $4.0 million is expected to be recognized as revenue in 2024. This compares to a backlog of $6.2 million at December 31, 2022.

RESEARCH AND DEVELOPMENT EXPENSE, NET

Research and development expense recorded for the years ended December 31, 2023 and 2022 for our OmniMetrix subsidiary is as follows (amounts in thousands of U.S. dollars):

EMPLOYEES

At December 31, 2023, we had a total of 25 employees (all of whom were employed in the United States by OmniMetrix), of whom 24 were full-time and 1 was part-time. Our CEO, who also serves as acting CEO of OmniMetrix, and our CFO, who also serves as COO of OmniMetrix, are hired as consultants to Acorn. OmniMetrix also has consultants that supplement our employed staff and provide monthly recurring services in engineering, human resources, accounting and information technology.

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

ADDITIONAL FINANCIAL INFORMATION

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

AVAILABLE INFORMATION

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

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

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

GENERAL FACTORS

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

Although we have had several consecutive quarters of profitability at our OmniMetrix subsidiary, we have had a history of losses from our OmniMetrix subsidiary plus corporate overhead and have used significant amounts of cash to fund our operating activities over the years.

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

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

Our success is largely dependent on the skills, experience and efforts of our senior management team, including Jan Loeb, CEO of Acorn and Acting CEO of OmniMetrix, who beneficially owns approximately 21.02% of the Company’s stock, and Tracy Clifford, CFO of Acorn and COO of OmniMetrix. The loss of the services of either of these key managers could materially harm our business, financial condition, future results and cash flow. We do not maintain “key person” life insurance policies on any members of senior management. We may also not be able to locate or employ on acceptable terms qualified replacements for our senior management if their services were no longer available.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We have reported material weaknesses in internal controls over financial reporting as of December 31, 2023 and we cannot assure you that additional material weaknesses will not be identified in the future or that we can effectively remediate our reported weaknesses. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our consolidated financial statements that could require a restatement of our consolidated financial statements, or our filings may not be timely, and investors may lose confidence in our reported financial information.

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

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

Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our consolidated financial statements that could result in a restatement of our consolidated financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information.

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

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

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

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

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

We may in the future be involved in product liability and product warranty claims relating to the products we manufacture and distribute that, if adversely determined, could adversely affect our financial condition, results of operations, and cash flows. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our products and our company. While insurance can mitigate some of this risk, due to our current size and operating history, we have been unable to obtain product liability insurance with significant coverage. Our customers may no longer accept the terms we have been able to procure and seek to terminate our existing contracts or cease to do business with us.

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

Our financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and trade accounts receivable. Our cash was deposited with a U.S. bank and amounted to $1,449,000 at December 31, 2023. We had one customer that represented 25% of the accounts receivable at December 31, 2023. Credit risk with respect to the balance of trade receivables is generally diversified due to the number of entities comprising our customer base. Although we do not believe there is significant risk of non-performance by these counterparties, any failures or defaults on their part could negatively impact the value of our financial instruments and could have a material adverse effect on our business, operations or financial condition.

We are dependent on information technology and our systems and infrastructure face certain risks, including from cybersecurity breaches and data leakage.

We rely extensively on information technology systems, networks and services, including internet sites, data hosting and processing facilities and tools, physical security systems and other hardware, software and technical applications and platforms, some of which are managed, hosted, provided and/or used for third-parties or their vendors, to assist in conducting our business. A significant breakdown, invasion, corruption, destruction or interruption of critical information technology systems or infrastructure, by our workforce, others with authorized access to our systems or unauthorized persons could negatively impact operations. The ever-increasing use and evolution of technology, including cloud-based computing, creates opportunities for the unintentional dissemination or intentional destruction or modification of confidential information stored in our, or our third-party providers’ systems, portable media or storage devices. We could also experience a business interruption, theft of confidential information or reputational damage from industrial espionage attacks, malware or other cyber-attacks, which may compromise our system infrastructure or lead to data leakage, either internally or at our third-party providers. There has been an increase in cybersecurity incidents across all industries, predominantly ransomware and social engineering attacks. Further, government entities have also been the subject of cyberattacks. As the cyber-threat landscape evolves, these attacks are growing in frequency, sophistication and intensity, and due to the nature of some of these attacks, there is also a risk that they may remain undetected for a period of time. We have invested in industry-appropriate protections and monitoring practices of our data and IT and have established a Cybersecurity Steering Committee to reduce these risks and continue to monitor our systems on an ongoing basis for any current or potential threats. While we have purchased cybersecurity insurance, there are no assurances that the coverage would be adequate in relation to any incurred losses. Moreover, as cyber-attacks increase in frequency and magnitude, we may be unable to obtain cybersecurity insurance in amounts and on terms we view as appropriate for our operations. There can be no assurance that our continuing efforts will prevent breakdowns or breaches of our and/or our third-party providers’ databases or systems that could adversely affect our business.

RISKS RELATED TO OMNIMETRIX

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

Although OmniMetrix realized an operating profit of $1,131,000 in 2023 and $330,000 in 2022, OmniMetrix has a history of incurring operating losses since it was acquired by Acorn in 2012. While OmniMetrix has significantly reduced its losses and its cash needs from us and we expect positive cash flow from its operations in 2024, we can provide no assurance that OmniMetrix will be able to generate sufficient revenues to allow it to sustain profitability and to have sustained positive cash flows.

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

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

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

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

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

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

Although OmniMetrix is not expected to need funding from us in 2024 to support its growth and working capital needs, OmniMetrix has historically been dependent on Acorn’s ability and willingness to provide funding to support its business and growth strategy. As of December 31, 2023, OmniMetrix owes Acorn $2,657,000 from such funding support which includes accrued dividends of $342,000, a loan with an outstanding principal amount of $2,304,000 and accrued interest and other advances of $11,000. 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.

While we believe we have sufficient cash to finance our operations for at least twelve months from the issuance of the audited consolidated financial statements contained in this Annual Report, we may need to seek additional sources of funding for long-term corporate costs or if OmniMetrix were not to grow at the rate anticipated and needed additional funds for their operations. Additional financing for OmniMetrix may be in the form of a bank line, a new loan or investment by others, an equity raise by Acorn which could then facilitate a loan by Acorn to OmniMetrix, or any combination thereof. The availability and amount of any additional loans from us to OmniMetrix may be limited by the working capital needs of our corporate activities. Whether Acorn will have the resources necessary to provide funding, or whether alternative funds, such as third-party loans or investments, will be available at the time and on terms acceptable to Acorn and OmniMetrix cannot be determined at this time.

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

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

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

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

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

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

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

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

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

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

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

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

RISKS RELATED TO OUR SECURITIES

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

The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. During 2023, on an as-adjusted basis to take into account the September 2023 1-for-16 reverse stock split, our common stock traded at prices as low as $4.00 and as high as $8.50 per share. Fluctuations in our stock price may continue to occur in response to various factors, many of which we cannot control, including:

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

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

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

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

As of March 5, 2024, 2,487,307 shares of our common stock were issued and outstanding. As of that date we had 79,168 options outstanding and exercisable with a weighted average exercise price of $6.41 per share, which if exercised would result in the issuance of additional shares of our common stock. In addition to the options noted above, at March 5, 2024, there were 13,703 options outstanding that have not yet vested and are not yet exercisable.

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

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

As of March 5, 2024, we had consolidated cash of $1,236,000 which we believe is sufficient for at least the next twelve months. Despite this, we may ultimately not have sufficient cash to allow us to execute our plans, and the occurrence of one or more unanticipated events may require us to make significant expenditures. Accordingly, we may need to raise additional amounts to finance our operations. If we were to do so by selling shares of our common stock and/or other securities convertible into shares of our common stock, current investors may incur dilution in the value of their shares.

Risk Management and Strategy

Securing our business information, intellectual property, customer and employee data and technology systems is essential for the continuity of our business, meeting applicable regulatory requirements and maintaining the trust of our stockholders. Cybersecurity is an important and integrated part of our enterprise risk management function that identifies, monitors and mitigates business, operational and legal risks.

To help protect us from a major cybersecurity incident that could have a material impact on operations or our financial results, we have implemented policies, programs and controls, including technology investments that focus on cybersecurity incident prevention, identification and mitigation. The steps we take to reduce our vulnerability to cyberattacks and to mitigate impacts from cybersecurity incidents include, but are not limited to: annual penetration testing by a third party vendor, cloud and agent based security scanning that runs continuously, establishing information security policies and standards, implementing information protection processes and technologies, monitoring our information technology systems for cybersecurity threats, assessing cybersecurity risk profiles of key third-parties, and implementing cybersecurity training. In addition, we annually purchase a cybersecurity risk insurance policy that would help defray the costs associated with a covered cybersecurity incident if it occurred.

Governance

Our Board of Directors is actively engaged in overseeing and reviewing our strategic direction and objectives, taking into account, among other considerations, our risk profile and related exposures, including oversight of risks from cybersecurity threats. As part of this oversight, the Company established a Cybersecurity Steering Committee consisting of certain members of our senior management team and a Board representative, that meets quarterly and updates the Board periodically, and at least annually, on our cybersecurity program, including with respect to particular cybersecurity threats, cybersecurity incidents, new developments in our risk profile, the status of projects to strengthen our cybersecurity systems, assessments of our cybersecurity program, and the emerging threat landscape.

Management has the responsibility to manage risk and bring to the Board’s attention any material near-term and long-term risks to the Company, including risks from cybersecurity threats. We actively engage with key vendors and industry participants and monitor new developments in global cybersecurity concerns as part of our continuing efforts to evaluate and enhance the effectiveness of our cybersecurity policies and procedures. Our Cybersecurity Steering Committee has developed a standard operating procedure that outlines specific steps to identify, mitigate and report on any cybersecurity-related incidents that may be discovered.

Although we did not experience a material cybersecurity incident during the year ended December 31, 2023, the scope and impact of any future incident cannot be predicted. See “Item 1A. Risk Factors” for more information on our cybersecurity-related risks.

OmniMetrix’s activities are currently conducted in approximately 21,000 square feet of office and production space in the Hamilton Mill Business Park located in Buford, Georgia, under a lease that expires on September 30, 2025. The annual total rent payment was $128,000 in 2023 and $124,000 in 2022. For 2024, the annual total rent payment will be $129,000. OmniMetrix is currently utilizing only a portion of these leased facilities and expects to grow into a portion of the currently unused space.

On July 6, 2021, the Company entered into an agreement with King Industrial Realty, Inc. to sublease from the Company 1,900 square feet of the unused office space for a monthly sublease payment of $2,375 plus annual escalators (the average monthly sublease payment in 2023 was $2,465), 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 owes its landlord $6,500 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 we expect to remit to our landlord):

OVERVIEW AND TREND INFORMATION

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

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

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

• The PG segment provides 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; and
• The CP segment provides remote monitoring and control products for cathodic protection systems on gas pipelines serving the gas utilities market and pipeline operators. The CP product lineup includes solutions to remotely monitor and control rectifiers, test stations and bonds. 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.

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

OmniMetrix

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

Intercompany

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. We believe that OmniMetrix will not need working capital support in 2024. However, we have no assurance that this will be the case. Additional financing for OmniMetrix may be in the form of a bank line, a new loan or investment by others, an equity raise by Acorn which could then facilitate a loan by Acorn to OmniMetrix, or any combination thereof. The availability and amount of any additional loans from Acorn to OmniMetrix may be limited by the working capital needs of our corporate activities. Whether Acorn will have the resources necessary to provide funding, or whether alternative funds, such as third-party loans or investments, will be available at the time and on terms acceptable to Acorn and OmniMetrix cannot be determined at this time.

As of March 5, 2024, Acorn’s corporate operations (excluding cash at our OmniMetrix subsidiary) held a total of $1,236,000 in cash.

Other Matters

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.

On December 22, 2023, we entered into an agreement with a new Azure cloud hosting provider to move to their Cloud Reliability Platform and utilize their premium cloud operations services. The initial term of this agreement is twenty-four months with automatic renewal of successive one-year terms unless ninety days written notice is given prior to the expiration of the initial term. Through this relationship, we will have unparalleled cloud management that provides a central location to access cloud operations metrics, configure services, set up proactive monitoring, create backup policies and request access to certified cloud experts to ensure that our operating infrastructure is healthy, resilient and operating efficiently. We will also have 24 x 7 x 365 monitoring and resolution support to timely resolve any issues that may arise and reduce or potentially eliminate unplanned downtime for our customers on our data monitoring platform, OmniView. We will pay monthly recurring fees of $4,000 plus 115% of actual Azure usage costs. There may also be additional hourly fees from time to time for projects or problem resolution outside the scope of the premium cloud operations services platform. This agreement will replace our current cloud hosting service provider to whom we pay monthly recurring fees of approximately $6,000 plus 100% of actual Azure usage costs.

On November 7, 2023, we entered into a non-exclusive reseller agreement with one of the nation’s largest commercial generator dealers with regional dealerships throughout the United States. We believe this agreement could yield 2,500 to 3,000 new monitoring connections per year for OmniMetrix, which could represent hardware sales, start-up fees and monitoring revenue of $1 million to $2 million per year in the aggregate. Importantly, endpoints added from this relationship are expected to make a meaningful contribution to the growth of our base of recurring monitoring revenue. We expect initial revenue from this relationship to start in the first quarter of 2024 and to build as the program is rolled out across their dealer network.

On October 1, 2023, we deployed our new user interface to our customer data portal and made it available to customers. On March 17, 2021, we entered into a master services agreement for the development of a new user interface for our customer data portal. Prior to deployment on October 1, 2023, we had invested $194,000 in design, development and quality assurance services of the new user interface. Since deployment, our customers have the option to continue to use the “classic view” of our user interface, which is our original user interface, or our new user interface known as “OV2” until March 4, 2024 when we will officially terminate our original user interface. The cost of this project was capitalized, and amortization began as of October 1, 2023. We have continued to implement bug fixes and enhancements to OV2, for which any related IT costs have been expensed as incurred.

On September 5, 2023, the Board of Directors of Acorn approved a Certificate of Amendment to Acorn’s Restated Certificate of Incorporation (the “Certificate of Amendment”) that provided for a 1-for-16 reverse stock split of Acorn’s Common Stock (the “Reverse Stock Split”). Acorn filed the Certificate of Amendment with the Secretary of State of the State of Delaware on September 6, 2023, and the Reverse Stock Split became effective at 5:00 p.m. EDT on September 7, 2023. The Reverse Stock Split increased the market price of Acorn’s Common Stock and makes Acorn’s shares accessible to a broader range of investors, including institutions and those unable to purchase or recommend low-priced stocks. At the effective time of the Reverse Stock Split, every sixteen issued and outstanding shares of Acorn’s Common Stock were automatically combined into one issued and outstanding share of Common Stock, without any change in the par value per share. Stockholders who would have otherwise been entitled to fractional shares of Common Stock as a result of the Reverse Stock Split received a cash payment in lieu of receiving fractional shares. The value of the fractional shares repurchased was $347 and equated to fifty-eight shares. All share and per-share amounts of common stock, options and warrants contained in this Management’s Discussion and Analysis have been restated for all periods to give retroactive effect to the Reverse Stock Split and the related fractional share repurchase for all prior periods presented.

On September 1, 2023, we launched an updated version of our products that includes new functionality in our TrueGuard, AIRGuard, Patriot and Hero products that allows our customers to have options as it relates to obtaining and utilizing the data that is provided by our hardware devices. This new functionality allows for SIM card options, configuration options regarding IP address endpoints and DNS routes, and access to our over-the-air data protocol. This product update allows customers to have the option to purchase our monitoring service, monitor the products themselves if they have the ability in-house, or choose another monitoring provider if they so desire, whereas, historically, our standard products only functioned with our monitoring services. Modifications were made to the circuit boards and embedded firmware of hardware enclosures in stock as of August 31, 2023 such that only the new versions of these products were sold subsequent to this date.

In July 2022, we announced a partnership between OmniMetrix, CPower Energy Management (“CPower”), and Power Solutions Specialists TX (“PSS”) designed to help homeowners that install next-generation standby generators to earn compensation for offering grid relief, known as “demand response,” to the Electric Reliability Council of Texas (“ERCOT”). CPower’s demand response solutions, combined with OmniMetrix’s remote control capabilities, allow the shifting of electricity production to PSS’s best-in-class residential standby generators for a few hours each year when the grid is stressed or ERCOT energy pricing is high, without the homeowner needing to take any action. Homeowners are compensated for signing up and possibly supplying grid offload by running their generators for up to 12 hours per year. We are currently assisting PSS to market the demand response program to generator owners and will incentivize existing generator owners who sign up and satisfy certain terms and conditions by offering a one-time rebate of $200 to anyone who signs up before March 31, 2024.

Critical Accounting Estimates

In preparing the financial statements, management is required to make estimates and assumptions that have an impact on the asset, liability, revenue and expense amounts reported. These estimates can also affect our supplemental information disclosures, including information about contingencies, risk and financial condition. We believe, given current facts and circumstances, that our estimates and assumptions are reasonable, adhere to U.S. GAAP, and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. We make routine estimates and judgments in determining net realizable value of accounts receivable, inventories, property and equipment, prepaid expenses, product warranties and other reserves as well as the amortization period for deferred commissions payable. Management believes our most critical accounting estimates and assumptions are in the area of revenue recognition.

Revenue Recognition

Our revenue recognition policy is consistent with applicable revenue recognition guidance and interpretations. The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this core principle, which includes: (1) identifying contracts with customers, (2) identifying performance obligations within those contracts, (3) determining the transaction price, (4) allocating the transaction price to the performance obligation in the contract, which may include an estimate of variable consideration, and (5) recognizing revenue when or as each performance obligation is satisfied. We assess whether payment terms are customary or extended in accordance with normal practice relative to the market in which the sale is occurring. Our sales arrangements generally include standard payment terms. These terms effectively relate to all customers, products, and arrangements regardless of customer type, product mix or arrangement size. A critical estimate is the estimated life of our units in determining the period over which the hardware revenue was amortized for the units sold prior to September 1, 2023.

RESULTS OF OPERATIONS

The selected consolidated statement of operations data for the years ended December 31, 2023 and 2022 and consolidated balance sheet data as of December 31, 2023 and 2022 has been derived from our audited consolidated financial statements included in this Annual Report.

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. Monitoring revenue continues to be deferred and amortized over the period that the monitoring services are rendered. The remaining balance of deferred revenue from the prior version of these products will continue to be amortized each period until it is fully amortized. Modifications were made to the circuit boards and embedded firmware of hardware enclosures in stock as of August 31, 2023, such that only the new versions of these products were sold subsequent to this date.

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

Selected Consolidated Statement of Operations Data:

(in thousands, except per share data)

* As adjusted to account for the September 2023 1-for-16 reverse stock split.

The following table sets forth certain information with respect to revenues and profits of our reportable business segments for the years ended December 31, 2023 and 2022 (dollars in thousands), including the percentages of revenues attributable to such segments. (See Note 12 to our consolidated financial statements for the definitions of our reporting segments).

2023 COMPARED TO 2022

(in thousands, except per share data)

20

Revenue. In 2023, OmniMetrix recorded total revenue of $8,059,000, as compared to total revenue of $7,000,000 in 2022, for an increase of $1,059,000 (15%). As previously stated, OmniMetrix has two divisions: PG and CP. The PG segment includes our monitoring device for generators, industrial air compressors and our annunciator products. The CP segment includes our monitoring device for cathodic protection systems on gas pipelines serving the gas utilities market and pipeline operators. In 2023, revenue of $7,000,000 was attributed to the PG segment and revenue of $1,059,000 was attributed to the CP segment, as compared to the 2022 revenue of $5,894,000 that was attributed to the PG segment and $1,106,000 that was attributed to the CP segment. Hardware revenue increased $709,000 from $3,088,000 during the year ended December 31, 2022 to $3,797,000 during the year ended December 31, 2023. During the year ended December 31, 2023, we recorded $259,000 in revenue from the sale of custom TG Pro units that were designed to large customer specifications and monitored by the customer; thus, the revenue was not deferred. We did not have any custom unit orders in the year ended December 31, 2022. The hardware revenue during the years ended December 31, 2023 and 2022 is further detailed in the table below:

The PG hardware revenue during the year ended December 31, 2022 was $2,234,000 compared to $2,735,000, excluding the sale of custom units, during the year ended December 31, 2023; thus, the increase in PG hardware revenue excluding the custom units was 22%. We also had a decrease in CP hardware revenue of $51,000 (6%) to $803,000 during the year ended December 31, 2023 from $854,000 during the year ended December 31, 2022. The increase in total hardware revenue was due to the sale of custom PG units (as noted above) and increased sales of other PG products as well as from installation income realized, offset by a decrease in revenue from Hero products in the CP segment. Monitoring revenue increased $350,000 (9%) from $3,912,000 in the year ended December 31, 2022 to $4,262,000 in the year ended December 31, 2023. The increase in monitoring revenue was due to an increase in the number of connections being monitored and growth in our customer base.

Gross profit. Gross profit was $6,004,000, reflecting a gross margin of 74% on revenue, in 2023 compared with a gross profit of $5,071,000, reflecting a 72% gross margin on revenue, in 2022. Gross margin on hardware revenue for the year ended December 31, 2023 was 54% compared to 48% for the year ended December 31, 2022. The increase in gross margin was due to a higher gross margin realized in 2023 on a large volume of sales to two large commercial customers to whom there were no sales in 2022. Gross margin on monitoring revenue was 93% for the year ended December 31, 2023 compared to 92% for year ended December 31, 2022.

Research and development (“R&D”) expense. During 2023, OmniMetrix recorded $875,000 of R&D expense as compared to $845,000 in 2022, an increase of $30,000 (4%). The increase in R&D expense in 2023 is related to increases in wages and bonuses paid to our engineering personnel in 2023 and the expenses and materials paid to third-party consultants in the continued development of next-generation PG and CP products and exploration into potential new product lines. We expect a moderate increase in R&D expense for 2024 due to engineering salary increases granted effective October 1, 2023 and for continued investment in work on certain initiatives to redesign products and expand product lines to increase our level of innovation ahead of our competitors.

Selling, general and administrative (“SG&A”) expense. Consolidated SG&A expense in 2023 increased by $251,000 (5%), from $4,804,000 in 2022 to $5,055,000 in 2023. Corporate overhead increased by $98,000 (10%), from $959,000 in 2022 to $1,057,000 in 2023, primarily due to $102,000 in expenses related to the execution of the reverse stock split in 2023.

OmniMetrix’s SG&A expense increased $153,000 (4%), from $3,845,000 in 2022 to $3,998,000 in 2023. This increase was primarily due to increases of (i) $102,000 in personnel expenses related to staff additions, promotions, bonuses and cost of living wage increases, (ii) $101,000 in commission expenses, (iii) $42,000 in depreciation and amortization primarily related to IT assets, (iv) $16,000 in travel and trade show expenses, and offset by a decrease of $107,000 in technology expenses primarily in technology consulting and $1,000 in net aggregate decreases in other expense categories. We anticipate that our annual SG&A costs in 2024 will increase by approximately 15% due to increasing wage and benefit expenses as a result of merit increases, promotions and hiring a higher level skill set in certain roles in 2023 as well as other inflationary increases in other operational costs.

Finance income/expense, net. Interest income in the year ended December 31, 2023 was $67,000 due to high interest rates on cash balances offset by interest expense of $3,000, compared to interest expense of $2,000 in 2022. The interest expense is primarily related to insurance financing arrangements.

Income tax expense. State income tax expense was $9,000 for the year ended December 31, 2023 reflecting estimates for certain state taxes. There was no state income tax estimated/accrued for the year ended December 31, 2022.

Net income (loss) attributable to Acorn Energy. We had net income attributable to Acorn of $119,000 in 2023 compared to net loss attributable to Acorn of $633,000 in 2022. Our income in 2023 is comprised of net income at OmniMetrix of $1,185,000, corporate expense of $1,056,000, offset by $10,000 representing the non-controlling interest share of our income in OmniMetrix. Our loss in 2022 is comprised of net income at OmniMetrix of $331,000, corporate expense of $962,000, offset by $2,000 representing the non-controlling interest share of our income in OmniMetrix. The positive change in net income (loss) was due to the increase in gross margin as described above.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2023, we had a negative working capital of $571,000. Our 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. Net cash decreased during the year ended December 31, 2023 by $1,000, of which $72,000 was provided by operating activities, $78,000 was used in investing activities, and $5,000 was provided by financing activities.

During the year ended December 31, 2023, our operating activities provided $72,000 of net cash. Our OmniMetrix subsidiary provided $1,147,000 from its operations while our corporate headquarters used $1,075,000 in its operating activities during the period. OmniMetrix’s inventory balance increased by $173,000 at December 31, 2023 as compared to December 31, 2022, due to purchase orders placed to have sufficient safety stock on hand for anticipated growth in 2024. We expect to sell through the excess inventory in 2024. During the year ended December 31, 2022, our operating activities provided $31,000 of net cash. Our OmniMetrix subsidiary provided $916,000 from its operations while our corporate headquarters used $885,000 in its operating activities during the period.

During the year ended December 31, 2023, net cash of $78,000 was used in investing activities, primarily related to the continued development of our new user interface for our customer monitoring data portal (OmniView 2.0). During the year ended December 31, 2022, net cash of $308,000 was used in investing activities, primarily in our technology infrastructure. These investments were primarily related to the design of our new Azure cloud server environment, as well as investments in the development of OmniView 2.0 and hardware and software upgrades.

Net cash of $5,000 was provided by financing activities during the years ended December 31, 2023 and 2022 which represents proceeds from the exercise of warrants and proceeds from the exercise of stock options, respectively.

Other Liquidity Matters

OmniMetrix owes Acorn $2,657,000 for loans, accrued interest, dividends and expenses advanced to it by Acorn. OmniMetrix has made monthly payments to Acorn of varying amounts since the second quarter of 2019. In 2023, OmniMetrix made payments to Acorn 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. OmniMetrix will continue to make payments to Acorn against this balance as long as OmniMetrix is generating sufficient cash to allow such repayments. This intercompany balance is eliminated in consolidation.

We had $1,449,000 of cash on December 31, 2023, and $1,236,000 on March 5, 2024 . We believe that such cash, plus the cash expected to be generated from operations, will provide sufficient liquidity to finance the corporate activities of Acorn and the operating activities of OmniMetrix at their current level of operations for at least the twelve-month period from the issuance of the audited consolidated financial statements contained in this Annual Report. 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. If we decide 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 required and on terms acceptable to Acorn and OmniMetrix cannot be determined at this time.

Contractual Obligations and Commitments

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

General

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

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

Fair Value of Financial Instruments

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

Concentrations of Credit Risk

The Company’s financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade accounts receivable. The Company’s cash was deposited with a U.S. bank and amounted to $1,449,000 at December 31, 2023. The Company had one customer that represented 25% of its accounts receivable at December 31, 2023. This is a large corporate customer with 90-day payment terms. Credit risk with respect to the balance of trade receivables is generally diversified due to the number of entities comprising the Company’s customer base. The Company does not believe the risk of non-performance by these counterparties is significant.

Interest Rate Risk

OmniMetrix has no interest rate risk related to debt since the Company paid off our credit line in February 2021.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our CEO and CFO concluded that, due to the material weaknesses in our internal control over financial reporting as described below, our disclosure controls and procedures were not effective as of December 31, 2023.

Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, based upon the document “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon this assessment and those criteria, management concluded that due to the material weaknesses described below, our internal control over financial reporting was not effective as of December 31, 2023.

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

The material weaknesses management identified were caused by an insufficient complement of resources at the Company’s OmniMetrix subsidiary and limited IT system capabilities, such that individual control policies and procedures could not be implemented, maintained, or remediated when and where necessary. More specifically, there were weaknesses identified in our internal control over financial reporting related to ineffective design and implementation of information technology general controls (“ITGCs”) in the areas of user access, program change management and vendor management controls.

As a result, a majority of the significant process areas management identified for the Company’s OmniMetrix subsidiary had three material weaknesses present. This condition was further exacerbated as the Company could not demonstrate that each of the principles described within COSO’s document “Internal Control - Integrated Framework (2013)” were present and functioning.

A material weakness is defined as a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses identified and the related risks are not uncommon in a company of our size because of the limitations in the location, size and number of our staff. The material weaknesses identified, however, did not result in any material misstatements of the Company’s consolidated financial statements and disclosures for any interim periods during, or for, the annual period ended December 31, 2023.

Remediation Actions

Management intends to continue to focus on strengthening the Company’s internal controls. Management expects to make progress towards reducing the risk that the material weakness could result in a material misstatement of the Company’s annual or interim consolidated financial statements. As business conditions allow and resources permit, management will continue to systematically build the necessary capabilities and infrastructure to implement corrective action. Our remediation actions include but are not limited to implementing change controls to document approval of changes along with required peer review and tagging of changes to an approved help desk ticket, requesting SOC reports from our vendors on a set schedule to review and address prior to year-end, and continue focused review of the COSO Framework to identify areas where we can implement manual controls or multi-level reviews of additional staff members to more effectively address segregation of duties.

Changes in Internal Control Over Financial Reporting

Other than the material weaknesses and remediation actions noted above there were no material changes in our internal control over financial reporting during our fourth quarter ended December 31, 2023, that could significantly affect, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.