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 commercial/industrial and residential power generation equipment. In 2025, we launched the Omni family of products—the OmniPro commercial monitor and the Omni residential monitor—built on a new proprietary common communications core called the OCOM. These products are replacing our legacy TrueGuard product lines, offering enhanced flexibility, expandability, and improved connectivity with easier installation. OmniMetrix also offers the Smart Annunciator product for commercial customers who require a visual representation of generator status via a touchscreen display. ● 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. In 2025, we launched the RADex, an OCOM-based expansion of our RAD™ (Remote AC Mitigation Disconnect) that adds cathodic protection measurements while retaining the ability to remotely disconnect/connect AC mitigation tools on solid-state decouplers, reducing expense and 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 grid outages, natural disasters, cybersecurity threats and terrorist attacks. Commercial, industrial and residential 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. 14 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 has provided monitoring devices and related remote monitoring and control services for between 5,000 and 10,000 cell tower backup generators in the U.S. Shipping of hardware commenced in the third quarter of 2024 and installation and monitoring services commenced in the fourth quarter of 2024. During the year ended December 31, 2025, we recognized $2,293,000 in hardware revenue and $452,000 in first-year monitoring revenue from this contract. During the year ended December 31, 2024, we recognized $1,637,000 in hardware revenue and $21,000 in first-year monitoring revenue from this contract. We have shipped all hardware that has been ordered under this contract to date. We will continue to have annual renewal monitoring revenue on these units each year for all connected units. 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 valuation allowance. 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’s projections and beliefs are based upon a variety of estimates and numerous assumptions made by our management with respect to, among other things, interest rates, forecasted revenue of the hardware sales and monitoring revenue or revenue streams that could generate sufficient income. 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. The Company currently has a three-year cumulative income position which is positive evidence that it is more likely than not the deferred tax assets will be realized. As of December 31, 2025, we believe, based on our projections, that a partial valuation allowance of $10,326,000, continues to be 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. 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. Future changes in the Company’s stock ownership, which may be outside of the Company’s control or future equity offerings or acquisitions that have equity as a component of the purchase price consideration may trigger an “ownership change” and the utilization of the Company’s federal and state net operating losses may be subject to a limitation under 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. 15 Results of Operations The selected consolidated statement of operations data for the years ended December 31, 2025 and 2024 and consolidated balance sheet data as of December 31, 2025 and 2024 has been derived from our audited consolidated financial statements included in this Annual Report. 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, 2025 2024 (in thousands, except per share data) Revenue $ 11,478 $ 10,986 COGS 2,663 2,987 Gross profit 8,815 7,999 R&D expense 1,094 1,012 SG&A expense 5,732 5,050 Operating income 1,989 1,937 Interest income, net 121 73 Income before income taxes 2,110 2,010 Current state tax expense (30 ) (123 ) Deferred income tax benefit 464 4,435 Net income after income taxes 2,544 6,322 Non-controlling interest share of income (34 ) (28 ) Net income attributable to Acorn Energy, Inc. stockholders $ 2,510 $ 6,294 Basic and diluted net income per share attributable to Acorn Energy, Inc. stockholders: Net income per share attributable to Acorn Energy, Inc. stockholders – basic $ 1.01 $ 2.53 Net income per share attributable to Acorn Energy, Inc. stockholders – diluted $ .99 $ 2.51 Weighted average number of shares outstanding attributable to Acorn Energy, Inc. stockholders – basic 2,496 2,487 Weighted average number of shares outstanding attributable to Acorn Energy, Inc. stockholders – diluted 2,538 2,512 The following table sets forth certain information with respect to revenues and profits of our reportable business segments for the years ended December 31, 2025 and 2024 (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, 2025: Revenues from customers $ 10,741 $ 737 $ 11,478 Percentage of total revenues by segment 94 % 6 % 100 % Segment gross profit $ 8,344 $ 471 $ 8,815 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 16 2025 Compared to 2024 Revenue. In 2025, OmniMetrix recorded total revenue of $11,478,000, as compared to total revenue of $10,986,000 in 2024, for an increase of $492,000 (5%). 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 2025, revenue of $10,741,000 was attributed to the PG segment and revenue of $737,000 was attributed to the CP segment, as compared to the 2024 revenue of $9,882,000 that was attributed to the PG segment and $1,104,000 that was attributed to the CP segment. Hardware revenue decreased $515,000 (8%) from $6,433,000 during the year ended December 31, 2024 to $5,918,000 during the year ended December 31, 2025. The decrease in total hardware revenue during the year ended December 31, 2025 is further detailed in the table below: Reconciliation of Hardware Revenue 2025 2024 Amortization of deferred revenue $ 956 $ 1,841 Sales of custom designed units and related accessories 183 26 Hardware sales under the Material Contract 2,293 1,637 Hardware sales 1,944 2,378 Other accessories, services, shipping and miscellaneous charges 542 551 Total hardware revenue $ 5,918 $ 6,433 PG hardware revenue decreased $155,000 (3%) during the year ended December 31, 2025 to $5,424,000 compared to $5,579,000 during the year ended December 31, 2024. We also had a decrease in CP hardware revenue of $360,000 (42%) to $494,000 during the year ended December 31, 2025 from $854,000 during the year ended December 31, 2024. Monitoring revenue increased $1,007,000 (22%) from $4,553,000 in the year ended December 31, 2024 to $5,560,000 in the year ended December 31, 2025. The increase in monitoring revenue was due to an increase in the number of connections being monitored and growth in our customer base. Gross profit . Gross profit was $8,815,000, reflecting a 77% gross margin on revenue in 2025, compared with a gross profit of $7,999,000, reflecting a 73% gross margin on revenue in 2024. The gross margin increased to 77% in 2025 due to sales of the new Omni and OmniPro products which have a higher gross margin than the older model hardware products and due to higher monitoring revenue, which has a 95% gross margin, as a result of more connections. Gross margin on hardware revenue for the year ended December 31, 2025 was 60% compared to 57% for the year ended December 31, 2024. Gross margin on monitoring revenue was 94% for the year ended December 31, 2025 compared to 94% for the year ended December 31, 2024. R&D expense. During 2025, OmniMetrix recorded $1,094,000 of R&D expense as compared to $1,012,000 in 2024, an increase of $82,000 (8%). The increase in R&D expense in 2025 is related to increases in wages and bonuses paid to our engineering personnel in 2025 as well as an addition to our engineering team in the fourth quarter of 2024. This increase was offset by the reduction of third-party consultant expenses due to the completion of the recent launch of the Omni and OmniPro, which had been a significant development project, and an addition to our in-house senior engineering staff. We expect a moderate increase in R&D expense for 2026 due to engineering salary increases granted effective January 1, 2026, and for continued investment in work on certain initiatives to continue to redesign certain older products and expand product lines to increase our level of innovation ahead of our competitors. SG&A expense. Consolidated SG&A expense increased $682,000 from 2024 to 2025. Corporate overhead increased by $360,000 (35%), from $1,020,000 in 2024 to $1,380,000 in 2025. The increase in corporate overhead was due to an increase of (i) $128,000 in tax professional fees from the preparation of the 2024 and the quarterly 2025 income tax provision, the calculations related to the release of the income tax valuation allowance, and the preparation of an updated 382 Study, (ii) $115,000 in expenses related to uplisting to NASDAQ which includes the NASDAQ application fee, the prorated listing fee and the legal fees associated with the uplisting process, (iii) $75,000 in stock compensation expense, (iv) $19,000 in audit fees primarily related to the work on the release of the income tax valuation allowance at December 31, 2024, and (v) a net increase of $23,000, in the aggregate, of other public company expenses. OmniMetrix’s SG&A expense increased $322,000 (8%), from $4,030,000 in 2024 to $4,352,000 in 2025. This increase was primarily due to increases of (i) $215,000 in personnel expenses, (ii) $66,000 in IT consulting and staff augmentation fees, (iii) $58,000 in facilities expense due to the lease amendment for our office space, and (iv) $57,000 in net aggregate expenses in other categories offset by decreases in (i) commission expenses of $61,000 and (ii) $13,000 in travel and trade show expenses. We anticipate that our annual SG&A costs in 2026 will increase by approximately 9% primarily due to the increase in our facility lease expense pursuant to the lease amendment executed in June 2025 to extend the lease to November 2030 and also to increasing wage and benefit expenses as a result of merit increases effective in January 2026. 17 Interest income, net. Interest income in the year ended December 31, 2025 was $121,000 compared to $73,000 in the year ended December 31, 2024. The increase was due to higher average cash balances during the year on which interest was earned. Income taxes. For the year ended December 31, 2025, the Company recorded an income tax benefit of $464,000, offset by current state income tax expense of $30,000, compared to an income tax benefit of $4,435,000, offset by current state income tax expense of $123,000, for the year ended December 31, 2024. The change in the income tax benefit was due to changes in the Company’s valuation allowance. The recorded income tax benefit contributed $0.19 to our basic earnings per share of $1.01, and $0.18 of our diluted earnings per share of $0.99, at December 31, 2025. At December 31, 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. Net income attributable to Acorn Energy. We had net income attributable to Acorn of $2,510,000 in 2025 compared to $6,294,000 in 2024. Our net income in 2025 is comprised of net income at OmniMetrix of $3,488,000, corporate expense of $1,378,000, current state income tax expense of $30,000, the non-controlling interest share of our net income in OmniMetrix of $34,000 offset by deferred income tax benefit as a result of the release of our valuation allowance of $464,000. Our 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. Net operating income increased by $100,000 but net income decreased by $3,784,000 primarily due to the decrease in the positive impact of the valuation allowance. Liquidity and Capital Resources At December 31, 2025, we had working capital of $3,157,000. Our working capital includes $4,454,000 of cash and deferred revenue of $3,097,000. Such deferred revenue does not require a significant cash outlay for the revenue to be recognized. Total deferred revenue decreased by $824,000, from $4,233,000 at December 31, 2024 to $3,409,000 at December 31, 2025, 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 hardware revenue balance in the foreseeable future. Net cash increased during the year ended December 31, 2025 by $2,128,000, of which $2,090,000 was provided by operating activities, $33,000 was used in investing activities, and $71,000 was provided by financing activities. During the year ended December 31, 2025, our operating activities provided $2,090,000 of net cash. Our OmniMetrix subsidiary provided $3,513,000 from its operations while our corporate headquarters used $1,423,000 in its operating activities during the period. OmniMetrix’s inventory balance increased by $818,000 at December 31, 2025 as compared to December 31, 2024 primarily related to purchases made for production of our recently launched redesigned product versions, Omni and OmniPro. 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. During the year ended December 31, 2025, net cash of $33,000 was used in investing activities, primarily related to computer equipment purchases for technology upgrades. During the year ended December 31, 2024, net cash of $56,000 was used in investing activities. Net cash of $71,000 and $28,000 was provided by financing activities during the years ended December 31, 2025 and 2024, respectively, which represents proceeds from the exercise of stock options, net of $16,000 used for stock repurchases in the year ended December 31,2025. Other Liquidity Matters We had $4,454,000 of cash on December 31, 2025, and $4,131,000 on March 3, 2026. 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. 18 Contractual Obligations and Commitments The table below provides information concerning obligations under certain categories of our contractual obligations as of December 31, 2025. Cash Payments Due to Contractual Obligations Years Ending December 31, (in thousands) Total 2026 2027-2028 2029-2030 Operating leases* $ 1,208 $ 216 $ 488 $ 504 Contractual services 217 202 15 — Purchase obligations** 434 434 — — Total contractual cash obligations $ 1,859 $ 852 $ 503 $ 504 *Reflects the gross amount of the operating lease liabilities. Imputed interest is $166,000 resulting in $158,000 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.