ACORN ENERGY, INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 RAD TM (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. 16 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. 17 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. 18 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. 19 Selected Consolidated Statement of Operations Data: For the Years Ended December 31, 2023 2022 (in thousands, except per share data) Revenue $ 8,059 $ 7,000 Cost of sales 2,055 1,929 Gross profit 6,004 5,071 Research and development expenses 875 845 Selling, general and administrative expenses 5,055 4,804 Impairment of software — 51 Operating income (loss) 74 (629 ) Finance income (expense), net 64 (2 ) Income (loss) before income taxes 138 (631 ) Income tax expense 9 — Net income (loss) after income taxes 129 (631 ) Non-controlling interest share of income (10 ) (2 ) Net income (loss) attributable to Acorn Energy, Inc. stockholders $ 119 $ (633 ) Basic and diluted net income (loss) per share attributable to Acorn Energy, Inc. stockholders: Net income (loss) per share attributable to Acorn Energy, Inc. stockholders – basic and diluted* $ 0.05 $ (0.25 ) Weighted average number of shares outstanding attributable to Acorn Energy, Inc. stockholders – basic* 2,484 2,481 Weighted average number of shares outstanding attributable to Acorn Energy, Inc. stockholders – diluted* 2,503 2,481 * 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). PG CP Total Year ended December 31, 2023: Revenues from customers $ 7,000 $ 1,059 $ 8,059 Percentage of total revenues by segment 87 % 13 % 100 % Segment gross profit 5,373 631 6,004 Year ended December 31, 2022: Revenues from customers $ 5,894 $ 1,106 $ 7,000 Percentage of total revenues by segment 84 % 16 % 100 % Segment gross profit 4,426 645 5,071 2023 COMPARED TO 2022 For the Years Ended December 31, 2023 2022 (in thousands, except per share data) Revenue $ 8,059 $ 7,000 Cost of sales 2,055 1,929 Gross profit 6,004 5,071 Research and development expenses 875 845 Selling, general and administrative expenses 5,055 4,804 Impairment of software — 51 Operating income (loss) $ 74 $ (629 ) 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: Reconciliation of Hardware Revenue 2023 2022 Amortization of deferred revenue $ 2,381 $ 2,293 Sales of custom designed units and related accessories 259 — Hardware sales (new product versions) 475 — Other accessories, services, shipping and miscellaneous charges 682 795 Total hardware revenue $ 3,797 $ 3,088 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 c ustomer 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. 21 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. 22 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 Years Ending December 31, (in thousands) Total 2024 2025-2026 2027-2028 Software agreements $ 2 $ 2 $ — $ — Operating leases* 229 130 99 — Contractual services 117 65 52 — Purchase obligations** 374 374 — — Total contractual cash obligations $ 722 $ 571 $ 151 $ — *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.