Acorn Energy, Inc.: Form 10-Q for the period ended Jun 30, 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, 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 discussion below are rounded to the nearest thousand, except per share data, and, thus, are approximate.

FINANCIAL RESULTS BY COMPANY

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

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BACKLOG

As of June 30, 2024, OmniMetrix had a backlog of $4,580,000, primarily comprised of deferred revenue, of which $3,590,000 is expected to be recognized as revenue in the next twelve months. This compares to a backlog of $6,367,000 at June 30, 2023. Now that we are selling hardware units that are capable of operating distinctly from our monitoring and control software, 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 June 1, 2024, we entered into a contract with one of the nation’s largest cell phone providers to provide monitoring hardware and services. Under the contract, OmniMetrix will provide monitoring devices and related remote monitoring and control services for between 5,000 to 10,000 cell tower backup generators in the U.S. The monitoring hardware and monitoring services, which will be deployed over a two-year period, are expected to begin generating revenue in the third quarter, and are expected to generate total revenue over the life of the contract of approximately $5 million.

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 are also 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 agreement allows us to migrate our customers to higher tier data plans for nominal additional cost.

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. In addition to our TrueGuard line of power generator monitors, 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 six-month periods ended June 30, 2024 and 2023, including the percentage of total revenues during each period attributable to selected components of the operations statements 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% or not meaningful.

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 June 30, 2024 and 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 for the six and three months ended June 30, 2024 and 2023

Revenue increased by $685,000, or 18.4%, from $3,722,000 in the six-month period ended June 30, 2023 to $4,407,000 in the six-month period ended June 30, 2024. Hardware revenue increased by $562,000 from $1,633,000 in the six-month period ended June 30, 2023 to $2,195,000 in the six-month period ended June 30, 2024. During the six-month period ended June 30, 2023, we recorded $92,000 in revenue from the sale of custom TG Pro units that are designed to large customer specifications and monitored by the customer and thus the revenue was not deferred. We did not have any custom unit orders in the six-month period ended June 30, 2024. See the reconciliation of hardware revenue below. Monitoring revenue increased by $123,000, or 5.9%, from $2,089,000 in the six-month period ended June 30, 2023 to $2,212,000 in the six-month period ended June 30, 2024. The increase in monitoring revenue was due to an increase in the number of connections being monitored.

As discussed above, OmniMetrix has two reportable segments, PG and CP. Of the $4,407,000 in revenue recognized in the six-month period ended June 30, 2024, $3,855,000 was generated by PG activities and $552,000 was generated by CP activities. This represents an increase in revenue from PG activities of $659,000, or 20.6%, from $3,196,000 in the six-month period ended June 30, 2023, and an increase in revenue from CP activities of $26,000, or 4.9%, from $526,000 in the six-month period ended June 30, 2023.

The increase in PG revenue was due to an increase in the revenue recognized from TG Pro and TG2 products. The increase in CP revenue was due to an increase in the revenue recognized from Hero2 units in the first three months of 2024. 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 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.

Revenue increased by $302,000, or 15.3%, from $1,973,000 in the three-month period ended June 30, 2023 to $2,275,000 in the three-month period ended June 30, 2024. Of the $2,275,000 in revenue recognized in the three-month period ended June 30, 2024, $2,061,000 was generated by PG activities and $214,000 was generated by CP activities. In the three-month period ended June 30, 2024, as compared to the three-month period ended June 30, 2023, revenue from PG activities increased $372,000, or 22.0%, from $1,689,000, and revenue from CP activities decreased $70,000, or 24.6%, from $284,000.

Hardware revenue during the six- and three-month periods ended June 30, 2024 and 2023 is further detailed in the table below (in thousands):

Gross profit for the six- and three-month periods ended June 30, 2024 and 2023

Gross profit for the six-month period ended June 30, 2024 was $3,256,000, reflecting a gross margin of 73.9%, compared with a gross profit of $2,806,000, reflecting a gross margin of 75.4%, for the six-month period ended June 30, 2023.

Gross margin on hardware revenue for the six-month period ended June 30, 2024 was 53.2% compared to 53.0% for the six-month period ended June 30, 2023. Gross margin on monitoring revenue for the six-month period ended June 30, 2024 was 94.4% compared to 92.9% for the six-month period ended June 30, 2023.

Gross profit for the three-month period ended June 30, 2024 was $1,665,000, reflecting a gross margin of 73.2%, compared with a gross profit for the three-month period ended June 30, 2023 of $1,490,000, reflecting a gross margin of 75.5%. Gross margin on hardware revenue for the three-month period ended June 30, 2024 was 52.9% compared to 54.8% for the three-month period ended June 30, 2023. Gross margin on monitoring revenue for the three-month period ended June 30, 2024 was 94.5% compared to 93.2% for the three-month period ended June 30, 2023.

Operating expenses for the six- and three-month periods ended June 30, 2024 and 2023

R&D expense. During the six-month periods ended June 30, 2024 and 2023, R&D expense was $464,000 and $402,000, respectively. During the three-month period ended June 30, 2024, OmniMetrix recorded $226,000 of R&D expense as compared to $188,000 in the three-month period ended June 30, 2023. The increase in R&D expense is primarily related to increased salaries of our engineering staff that were effective October 1, 2023 and the continued investment to redesign and expand our product line to continue to increase our level of innovation ahead of our competitors.

Selling, general and administrative expense. SG&A expense of the consolidated entities in the six-month period ended June 30, 2024 reflected an increase of $40,000, or 1.6%, as compared to the six-month period ended June 30, 2023. OmniMetrix’s SG&A expense decreased $20,000, or 1.1%, from $1,942,000 in the six-month period ended June 30, 2023 to $1,922,000 in the six-month period ended June 30, 2024. This decrease was primarily due to a decrease of (i) $18,000 in depreciation expense, (ii) $17,000 in sales tax and other business tax related expenses, (iii) $10,000 in travel and trade show expenses, and (iv) $9,000 in net decreases in the aggregate across other expense categories offset by increases of $23,000 in technology expenses for software and IT professional fees and $11,000 in personnel expenses due primarily to compensation increases. Corporate SG&A expense increased $60,000, or 12.7%, from $474,000 in the six-month period ended June 30, 2023 to $534,000 in the six-month period ended June 30, 2024. This increase was due to an increase of (i) $13,000 in tax fees primarily from the preparation of the 2023 tax provision, (ii) $12,000 in legal fees due to an increase in our monthly retainer effective January 1, 2024, (iii) $10,000 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, (iv) $10,000 in stock compensation expense, (v) $8,000 in officer fees due to a 3% increase effective January 1, 2024 and (vi) $7,000 in other public company expenses.

SG&A expense of the consolidated entities in the three-month period ended June 30, 2024 reflected a decrease of $38,000, or 3.1%, as compared to the three-month period ended June 30, 2023. OmniMetrix’s SG&A expense decreased $27,000, or 2.8%, from $979,000 in the three-month period ended June 30, 2023 to $952,000 in the three-month period ended June 30, 2024. This decrease was primarily due to a decrease of (i) $25,000 in personnel expenses due to two sales roles that were unfilled in the second quarter of 2024 offset by annual salary increases that were effective October 1, 2023, (ii) $9,000 in depreciation expense, (iii) $6,000 in sales tax and other business tax related expenses and (iv) $5,000 in net decreases, in the aggregate, across other expense categories. These decreases were offset by increases of $10,000 in technology expenses for software and IT professional fees and $8,000 in facility expenses. Corporate SG&A expense decreased $11,000, or 4.6%, from $240,000 in the three-month period ended June 30, 2023 to $229,000 in the three-month period ended June 30, 2024. This decrease was due to $18,000 in audit and tax fees related to additional services rendered in the second quarter of 2023 that were not applicable in the second quarter of 2024 and a net decrease of $3,000 in other public company expenses offset by increases in legal fees of $6,000 and officer fees of $4,000 both resulting from an increase in monthly retainer fees effective January 1, 2024.

Net income (loss) attributable to Acorn Energy. We recognized net income attributable to Acorn stockholders of $336,000 in the six-month period ended June 30, 2024, compared to net income attributable to Acorn stockholders of $11,000 in the six-month period ended June 30, 2023. Our net income during the six-month period ended June 30, 2024 is comprised of net income at OmniMetrix of $878,000 offset by corporate expenses of $534,000 and the non-controlling interest share of our income from OmniMetrix of $8,000. Our net income during the six-month period ended June 30, 2023 is comprised of net income at OmniMetrix of $490,000 offset by corporate expenses of $475,000, including net interest expense of $1,000 and the non-controlling interest share of our income from OmniMetrix of $4,000.

For the three-month period ended June 30, 2024, we recognized net income attributable to Acorn stockholders of $271,000, compared to a net income attributable to Acorn stockholders of $96,000 for the three- month period ended June 30, 2023. Our net income during the three-month period ended June 30, 2024 is comprised of net income at OmniMetrix of $539,000 offset by corporate expenses of $263,000 and the non-controlling interest share of our income from OmniMetrix of $5,000. Our net income during the three-month period ended June 30, 2023 is comprised of net income at OmniMetrix of $339,000 offset by corporate expenses of $240,000 and the non-controlling interest share of income from OmniMetrix of $3,000.

Liquidity and Capital Resources

At June 30, 2024, we had a negative working capital of $423,000 which includes $1,463,000 of cash and deferred revenue of $3,590,000. Such deferred revenue does not require a significant cash outlay for the revenue to be recognized.

During the six-month period ended June 30, 2024, our OmniMetrix subsidiary provided cash flow from operations of $693,000, while our corporate headquarters used $652,000 for operations during the same period.

During the six-month period ended June 30, 2024, we invested $40,000 in technology and equipment and received proceeds of $13,000 from financing activities related to the exercise of stock options.

Other Liquidity Matters

Intercompany

OmniMetrix owes Acorn $2,362,000 for amounts loaned, accrued interest and expenses paid by Acorn on OmniMetrix’s behalf as of June 30, 2024 as compared to $2,657,000 as of December 31, 2023. During the six-month period ended June 30, 2024, the intercompany amount due to Acorn from OmniMetrix decreased by $295,000. This included repayments of $484,000 offset by interest of $68,000, dividends of $38,000 due to Acorn and $83,000 in shared expenses paid by Acorn. These intercompany balances and amounts are eliminated in consolidation.

Liquidity

As of August 6, 2024, we had cash of $1,546,000. 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 the unaudited condensed consolidated financial statements contained in this quarterly report. We may, at some point, elect to obtain 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 June 30, 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 June 30, 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 (the Committee of Sponsoring Organization’s) document “Internal Control - Integrated Framework (2013)” were present and functioning.

Changes in Internal Control Over Financial Reporting

During the six-month period ended June 30, 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 by 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.