Acorn Energy, Inc.: Form 10-Q for the period ended Mar 31, 2024

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, 2023 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 tables and discussion below are rounded to the nearest thousand, except per share data, and, thus, are approximate.

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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BACKLOG

As of March 31, 2024, OmniMetrix had a backlog of $5,028,000, primarily comprised of deferred revenue, of which $3,823,000 is expected to be recognized as revenue in the next twelve months. This compares to a backlog of $6,216,000 at March 31, 2023. Now that we are selling hardware units that are capable of being distinct, the hardware backlog will no longer continue to grow and will be fully amortized by August 31, 2026, while the monitoring backlog will continue to be deferred and amortized over the period of service.

RECENT DEVELOPMENTS

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 expense 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 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. Following deployment, our customers had 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 20, 2024 when we officially terminated 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.

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 touchscreen 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 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.

OmniMetrix sells monitoring hardware devices and data monitoring services. 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. The modification to the circuit boards and embedded firmware of hardware enclosures in stock as of August 31, 2023 were made such that only the new version of these products was sold subsequent to this date. Prior to such product modification, revenue (and related costs) associated with sale of equipment was recorded to deferred revenue (and deferred charges) upon shipment for PG and CP monitoring units. This deferred revenue and the deferred cost of the hardware with respect to the sale of new equipment was recognized over the life of the units, which was estimated to be three years. Revenue from hardware sales subsequent to August 31, 2023 is recognized upon shipment, instead of being deferred. 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 three-month periods ended March 31, 2024 and March 31, 2023, 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%

Revenue. Revenue in the first quarter of 2024 was $2,132,000 compared to $1,749,000 in the first quarter of 2023, which is an increase of $383,000, or 21.9%. As discussed above, OmniMetrix has two reportable segments, PG and CP. Of the $2,132,000 in revenue recognized in the three-month period ended March 31, 2024, $1,794,000 was generated by PG activities and $338,000 was generated by CP activities. As compared to the three-month period ended March 31, 2023, revenue from PG activities increased $287,000, or 19%, and revenue from CP activities increased $96,000, or 39.7%. As compared to the three-month period ended March 31, 2023, hardware revenue increased $305,000, or 42.1%, while monitoring revenue increased $78,000, or 7.6%.

Hardware revenue during the three-month periods ended March 31, 2024 and 2023 is further detailed in the table below (in thousands):

The increase in PG revenue was due to an increase in the sales of TG Pro and TG2 products. The increase in CP revenue was due to an increase in the sale of Hero2 units. We sold 23% more Hero2 units in the three-month period ended March 31, 2024 compared to the number of units sold in the three-month period ended March 31, 2023. In addition, the new version of the hardware was sold in the first quarter of 2024; thus, the revenue was recognized when the units were shipped instead of being deferred and amortized over three years. The increase in monitoring revenue is due to an increase in the number of connections being monitored.

Gross Profit. Gross profit during the three-month period ended March 31, 2024 was $1,591,000, reflecting a gross margin of 75% on revenue, compared with a gross profit during the three-month period ended March 31, 2023 of $1,316,000, also reflecting a gross margin of 75%.

R&D expense. During the three-month periods ended March 31, 2024 and 2023, R&D expense was $238,000 and $214,000, respectively. The increase in R&D expense in the three-month period ended March 31, 2024 of approximately $24,000 is related to salary increases of our engineering team effective October 1, 2023, the continued development of next-generation PG and CP products, and exploration into new possible product lines. We expect a moderate increase in R&D expense in 2024 as we continue to work on certain initiatives to redesign products and expand product lines to increase the level of innovation.

Selling, general and administrative expense. SG&A expense of the consolidated entities in the first three months of 2024 reflected an increase of $78,000, or 6.5%, as compared to the first three months of 2023. OmniMetrix’s SG&A expense increased $7,000, or less than 1%, from $963,000 in the first three months of 2023 to $970,000 in the first three months of 2024. This increase was primarily due to an increase of (i) $36,000 in personnel expenses due to compensation increases and staff additions, (ii) $13,000 in technology expenses, primarily consulting fees, (iii) $3,000 in amortization of sales commissions, offset by decreases of (iv) $10,000 in depreciation expense, (v) $10,000 in travel and trade show expenses, (vi) $9,000 in bad debt expense, (vii) $5,000 in facility expenses and (viii) $11,000 in other expenses. Corporate SG&A expense increased $71,000, or 30.3%, from $234,000 in the first three months of 2023 to $305,000 in the first three months of 2024. This increase was due to an increase of (i) $25,000 in audit fees due to an increase in engagement fees year over year of 14% and also to the timing of when the services were performed (i.e., during the first quarter of 2024 instead of during the fourth quarter of 2023), (ii) $16,000 in tax fees from the preparation of the 2023 tax provision, (iii) $12,000 in stock compensation expense, (iv) $6,000 in legal fees and (v) $12,000 in other public company expenses.

Net income (loss) attributable to Acorn Energy. We recognized net income attributable to Acorn stockholders of $65,000 in the first three months of 2024 compared to a net loss attributable to Acorn stockholders of $85,000 in the first three months of 2023. Our net income during the three-month period ended March 31, 2024 is comprised of pre-tax net income at OmniMetrix of $364,000 less state taxes of $25,000 on OmniMetrix income, corporate expenses of $271,000, and $3,000 representing the non-controlling interest share of our income from OmniMetrix. Our loss in the three-month period ended March 31, 2023 is comprised of net income at OmniMetrix of $151,000, less corporate expense of $235,000, offset by $1,000 representing the non-controlling interest share of our income in OmniMetrix.

Liquidity and Capital Resources

At March 31, 2024, we had a negative working capital of $620,000. Our working capital includes $1,417,000 of cash and deferred revenue of $3,823,000. Such deferred revenue does not require a significant cash outlay for the revenue to be recognized.

During the three-month period ended March 31, 2024, our OmniMetrix subsidiary provided cash flow from operations of $268,000, while our corporate headquarters used $311,000 for operations during the same period.

During the three-month period ended March 31, 2024, we invested $2,000 in technology and received proceeds of $13,000 from financing activities related to the exercise of stock options.

Other Liquidity Matters

Intercompany

OmniMetrix owes Acorn $2,660,000 for amounts loaned, accrued interest and expenses paid by Acorn on OmniMetrix’s behalf as of March 31, 2024 as compared to $2,657,000 as of December 31, 2023. During the three-month period ended March 31, 2024, the intercompany amount due to Acorn from OmniMetrix increased by $3,000. This included repayments of $84,000 offset by interest of $34,000, dividends of $19,000 due to Acorn and $34,000 in shared expenses paid by Acorn. These intercompany balances and amounts are eliminated in consolidation.

Liquidity

As of May 7, 2024, we had cash of $1,455,000. We believe that such cash, plus the cash expected to be generated from operations, will provide sufficient liquidity to finance our activities at their current level of operations for at least the twelve-month period 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. 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 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 March 31, 2024.

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.

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 quarterly report on Form 10-Q. Based on this evaluation, our CEO and CFO concluded that, due to the material weaknesses in our internal control over financial reporting as described in our Annual Report on Form 10-K for the year ended December 31, 2023, our disclosure controls and procedures were not effective as of March 31, 2024.

As noted in our Annual Report on Form 10-K for the year ended December 31, 2023, we employ a decentralized internal control methodology, coupled with management’s oversight, whereby our 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 given the constraints within which it operates.

The material weaknesses management identified were caused by an insufficient complement of resources at our 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 material 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 our 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.

Changes in Internal Control Over Financial Reporting

During the three-month period ended March 31, 2024, we have implemented the following (i) a process pursuant to which System and Organization Controls (SOC) reports are obtained from third-party vendors on a recurring schedule and such reports are evaluated for any issues, (ii) provisioning/termination controls with signed and authenticated authorizations, and (iii) change controls for development processes that require authorizations, peer review, quality assurance documentation, ticket matching of changes to work authorizations and overall change controls. It is our belief that these added controls and related actions will effectively remediate the existing material weaknesses. The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of these material weaknesses will be completed prior to the end of fiscal 2024.

Other than the remediation actions above, there were no other changes 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.