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: ● 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 OmniMetrix’s TrueGuard power generator monitors and AIRGuard product, which remotely monitors and controls industrial air compressors, and its 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. 15 ● 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 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. Other Matters On June 1, 2024, we entered into a contract (the “Material 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. Shipping of hardware commenced in the third quarter of 2024 and installation and monitoring services commenced in the fourth quarter of 2024. We have recognized $1,637,000 in hardware revenue and $24,000 in monitoring revenue from this contract as of year-end 2024. Our current expectation of total revenue over the life of the contract is approximately $5.4 million, which encompasses the revenue from the sales of the hardware and the first year of monitoring. We have not included in this estimate monitoring after the first year. On January 12, 2024, we entered into a new service contract with our current primary data provider for Internet of Things (IoT) wireless services over a 36-month 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 was $10,000 for the first 6 months and is $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 a 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 will allow us to migrate our customers to higher tier data plans for nominal additional cost. 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 and valuation allowance. 16 Valuation Allowance We regularly review our deferred tax assets for recoverability considering historically profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. The net carrying amount of the Company’s deferred tax assets is based on the Company’s belief that it is more likely than not that the Company will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. The ultimate realization of the deferred tax assets depends upon our ability to generate sufficient taxable income in the future. In forecasting future taxable income, management uses estimates and makes assumptions regarding significant future events, including the timing and number of new hardware sales contracts and associated monitoring revenue. In evaluating our ability to recover our deferred tax assets, we consider and weigh all available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made. If our estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, resulting in additional income tax expense in the Company’s Consolidated Statements of Operations, or conversely to reduce the existing valuation allowance resulting in less income tax expense. In light of the Company’s generation of three-year cumulative positive income through December 31, 2024, the Company believes that it is more-likely-than-not that a portion of the deferred tax assets will be utilized. Therefore, the Company has released valuation allowance on its deferred tax assets (other than as stated above) in the amount of $4,686,000 for the year ended December 31, 2024. As of December 31, 2024, we believe, based on our projections, that a partial valuation allowance of $11,400,000 is necessary against our deferred tax assets. Uncertainty exists related to the generation of future hardware and monitoring revenue, nonetheless the Company believes sufficient positive evidence exists which supports the partial reversal of the valuation allowance. In recent years, the Company executed new contracts, growing hardware and monitoring revenue which resulted in cumulative pre-tax earnings of $1,476,000 over the prior three years which we believe is significant positive evidence to support the reversal of valuation allowance during 2024. At this time, however, we cannot assure you that we will be successful in doing so. Accordingly, our management will continue to assess the need for this valuation allowance and will make adjustments when appropriate. As of December 31, 2024, the Company has completed a 382 analysis and concluded that none of the unreserved net operating losses were subject to 382 limitations. The utilization of the Company’s federal and state net operating losses may be subject to a limitation due to the “change in ownership provisions” under Section 382 of the Internal Revenue Code, as well as similar state provisions. Such limitations may result in the expiration of net operating loss (NOL) carryforwards before their utilization. The Company has not completed a study to assess whether an “ownership change” as defined in Section 382 has occurred or whether there have been multiple ownership changes since the Company’s inception. Future changes in the Company’s stock ownership, which may be outside of the Company’s control, may trigger an “ownership change.” In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could result in an “ownership change.” The Company will complete a full analysis of the tax attribute carryforwards prior to any utilization of tax attributes which may be subject to limitation. 17 Results of Operations The selected consolidated statement of operations data for the years ended December 31, 2024 and 2023 and consolidated balance sheet data as of December 31, 2024 and 2023 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 independent 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, therefore, recognizes revenue, COGS and commissions from the sale of the new version of its hardware products 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 that date. This data should be read in conjunction with our consolidated financial statements and related notes included herein. Selected Consolidated Statement of Operations Data: For the Years Ended December 31, 2024 2023 (in thousands, except per share data) Revenue $ 10,986 $ 8,059 COGS 2,987 2,055 Gross profit 7,999 6,004 R&D expense 1,012 875 SG&A expense 5,050 5,055 Operating income 1,937 74 Interest income, net 73 64 Income before income taxes 2,010 138 Current state tax expense (123 ) (9 ) Deferred income tax benefit 4,435 — Net income after income taxes 6,322 129 Non-controlling interest share of income (28 ) (10 ) Net income attributable to Acorn Energy, Inc. stockholders $ 6,294 $ 119 Basic and diluted net income per share attributable to Acorn Energy, Inc. stockholders: Net income per share attributable to Acorn Energy, Inc. stockholders – basic $ 2.53 $ 0.05 Net income per share attributable to Acorn Energy, Inc. stockholders – diluted $ 2.51 $ 0.05 Weighted average number of shares outstanding attributable to Acorn Energy, Inc. stockholders – basic 2,487 2,484 Weighted average number of shares outstanding attributable to Acorn Energy, Inc. stockholders – diluted 2,512 2,503 18 The following table sets forth certain information with respect to revenues and profits of our reportable business segments for the years ended December 31, 2024 and 2023 (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, 2024: Revenues from customers $ 9,882 $ 1,104 $ 10,986 Percentage of total revenues by segment 90 % 10 % 100 % Segment gross profit $ 7,334 $ 665 $ 7,999 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 2024 Compared to 2023 Revenue. In 2024, OmniMetrix recorded total revenue of $10,986,000, as compared to total revenue of $8,059,000 in 2023, for an increase of $2,927,000 (36%). 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 2024, revenue of $9,882,000 was attributed to the PG segment and revenue of $1,104,000 was attributed to the CP segment, as compared to the 2023 revenue of $7,000,000 that was attributed to the PG segment and $1,059,000 that was attributed to the CP segment. Hardware revenue increased $2,636,000 (69%) from $3,797,000 during the year ended December 31, 2023 to $6,433,000 during the year ended December 31, 2024. The hardware revenue during the years ended December 31, 2024 and 2023 is further detailed in the table below: Reconciliation of Hardware Revenue 2024 2023 Amortization of deferred revenue $ 1,841 $ 2,381 Sales of custom designed units and related accessories 26 259 Hardware sales under the Material Contract 1,637 — Hardware sales (new product versions) 2,378 475 Other accessories, services, shipping and miscellaneous charges 551 682 Total hardware revenue $ 6,433 $ 3,797 PG hardware revenue increased $2,585,000 (86%) during the year ended December 31, 2024 to $5,579,000 compared to $2,994,000 during the year ended December 31, 2023. Hardware sales under the Material Contract represented 63% of the 86% increase. We also had an increase in CP hardware revenue of $51,000 (6%) to $854,000 during the year ended December 31, 2024 from $803,000 during the year ended December 31, 2023. The increase in total hardware revenue was due to recognition of sales revenue from the Material Contract as well as increased sales of other PG products, offset by a decrease in service revenue and custom designed units. Monitoring revenue increased $291,000 (7%) from $4,262,000 in the year ended December 31, 2023 to $4,553,000 in the year ended December 31, 2024. 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 $7,999,000, reflecting a 73% gross margin on revenue, in 2024 compared with a gross profit of $6,004,000, reflecting a 74% gross margin on revenue, in 2023. The gross margin was a percentage point lower in 2024 due to a greater volume of hardware sales which have a lower gross margin than monitoring. Gross margin on hardware revenue for the year ended December 31, 2024 was 57% compared to 54% for the year ended December 31, 2023. Gross margin on monitoring revenue was 94% for the year ended December 31, 2024 compared to 93% for the year ended December 31, 2023. 19 R&D expense. During 2024, OmniMetrix recorded $1,012,000 of R&D expense as compared to $875,000 in 2023, an increase of $137,000 (16%). The increase in R&D expense in 2024 is related to increases in wages and bonuses paid to our engineering personnel in 2024 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 2025 due to the hiring of another senior level engineer, as well as engineering salary increases granted effective October 1, 2024, 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. SG&A expense. Consolidated SG&A expense was essentially flat from 2023 to 2024, decreasing only $5,000. Corporate overhead decreased by $37,000 (3%), from $1,057,000 in 2023 to $1,020,000 in 2024, primarily due to the non-recurring expenses of $102,000 related to the execution of the reverse stock split in 2023 and a net decrease in other expense categories of $2,000 in the aggregate offset by an increases in (i) legal fees of $24,000, (ii) tax professional fees of $28,000, and (iii) audit fees of $15,000. OmniMetrix’s SG&A expense increased $32,000 (0.8%), from $3,998,000 in 2023 to $4,030,000 in 2024. This increase was primarily due to increases of $251,000 in commission expenses and $100,000 in IT consulting and staff augmentation fees offset by decreases in (i) personnel expenses of $153,000, which was due to the elimination of the vice president of sales position offset by increases related to staff additions, promotions, bonuses and cost of living wage increases, (ii) $69,000 in travel and trade show expenses, (iii) $46,000 in other consulting and contract labor expenses, (iv) $39,000 in depreciation and amortization primarily related to IT assets and (v) $12,000 in net aggregate decreases in other expense categories. We anticipate that our annual SG&A costs in 2025 will increase by approximately 6% 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 2024. Interest income, net. Interest income in the year ended December 31, 2024 was $74,000 due to high interest rates on cash balances offset by interest expense of $1,000, compared to interest income in the year ended December 31, 2023 of $67,000 offset by interest expense of $3,000. Income taxes. For the year ended December 31, 2024, the Company recorded an income tax benefit of $4,435,000, offset by current state income tax expense of $123,000 compared to state income tax expense for the year ended December 31, 2023 of $9,000. The change in the tax expense was primarily due to the partial release of the Company’s valuation allowance in 2024. The recorded income tax benefit contributed $1.78 to our basic earnings per share of $2.53 and $1.77 of our diluted earnings per share of $2.51 at December 31, 2024. Net income attributable to Acorn Energy. We had net income attributable to Acorn of $6,294,000 in 2024 compared to $119,000 in 2023. Our net income in 2024 is comprised of net income at OmniMetrix of $3,027,000, corporate expense of $1,017,000, current state income tax expense of $123,000, the non-controlling interest share of our net income in OmniMetrix of $28,000 offset by deferred income tax benefit as a result of the release of our valuation allowance of $4,435,000. 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. The positive change in net income was due to the increase in gross profit as a result of the Material Contract while managing SG&A expenses as described above. Liquidity and Capital Resources At December 31, 2024, we had working capital of $1,115,000. Our working capital includes $2,326,000 of cash and deferred revenue of $3,521,000. Such deferred revenue does not require a significant cash outlay for the revenue to be recognized. Total deferred revenue decreased by $1,351,000, from $5,584,000 at December 31, 2023 to $4,233,000 at December 31, 2024, 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 increased during the year ended December 31, 2024 by $877,000, of which $905,000 was provided by operating activities, $56,000 was used in investing activities, and $28,000 was provided by financing activities. During the year ended December 31, 2024, our operating activities provided $905,000 of net cash. Our OmniMetrix subsidiary provided $1,991,000 from its operations while our corporate headquarters used $1,086,000 in its operating activities during the period. OmniMetrix’s inventory balance decreased by $514,000 at December 31, 2024 as compared to December 31, 2023 due to inventory shipped under the Material Contract and selling through safety stock to return to pre-COVID par inventory levels. 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 spent $1,075,000 in its operating activities during the period. 20 During the year ended December 31, 2024, net cash of $56,000 was used in investing activities, primarily related to the continued investment in our technology infrastructure. During the year ended December 31, 2023, net cash of $78,000 was used in investing activities. Net cash of $28,000 and $5,000 was provided by financing activities during the years ended December 31, 2024 and 2023, respectively, which represents proceeds from the exercise of stock options and warrants. Other Liquidity Matters We had $2,326,000 of cash on December 31, 2024, and $2,800,000 on March 4, 2025. 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, 2024. Cash Payments Due to Contractual Obligations Years Ending December 31, (in thousands) Total 2025 2026-2027 2028-2029 Software agreements $ 20 $ 20 $ — $ — Operating leases* 99 99 — — Contractual services 443 233 210 — Purchase obligations** 603 603 — — Total contractual cash obligations $ 1,165 $ 955 $ 210 $ — *Reflects the gross amount of the operating lease liabilities. Imputed interest is $1,000 resulting in $98,000 included in current 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK As a smaller reporting company, we are not required to provide information required by this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Furnished at the end of this report commencing on page F-1. 21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.