Acorn Energy's first quarter of 2026 reflected a tough year-over-year hardware comparison against its record 2025 alongside continued strength in the recurring, high-margin monitoring business. Total revenue fell 28.1% to $2,227,000 as hardware revenue dropped 55.7% ($1,019,000) — the large national cell phone contract contributed just $93,000 of hardware versus $876,000 a year earlier now that initial shipments are essentially complete. Monitoring revenue grew 11.7% at a 94% gross margin, pushing overall gross margin up 510 basis points to 80.2%, and the OmniMetrix operating subsidiary remained solidly profitable with $395,000 of operating income even in its seasonally weakest quarter and after absorbing about $50,000 of pre-revenue Infrastructure Solutions expense. On a consolidated basis the company reported a small net loss of $77,000 (-$0.03 per share) versus $464,000 of net income a year earlier, driven by the lower revenue and a $136,000 increase in non-cash stock compensation from option grants to management and directors made in lieu of cash; excluding non-cash comp, Acorn would have been profitable. The company stayed debt-free with $4,257,000 of cash and $3,269,000 of monitoring backlog. Strategically, Acorn created a new Infrastructure Solutions segment, stood up two live AIO-based cell tower demo sites near Atlanta, and outlined a go-to-market sequence of telecom first, then data centers and utility substations — with cell tower theft framed as the key pain point. Management reaffirmed its ~20% long-term growth target and guided to $350,000-$500,000 of incremental 2026 hardware revenue from the cell phone customer beginning in Q2.
Thank you, Regina, and thank you all for joining us today. First, I'd like to remind everyone that today's remarks, including responses to questions, contain forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those projected. Factors that may impact our future operating results and financial performance include general risks such as potential disruptions to business operations or changes in consumer or customer demand, as well as specific risks related to our ability to execute our operating plan, maintain strong customer renewal rates, and expand our customer base. Additional risks may arise from changes in technology, competition, or shifts in the macroeconomic or financial environment.
These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on management's current beliefs, assumptions, and information that is available as of today. There can be no assurances that the company will meet its growth targets or other strategic goals and objectives. The company undertakes no obligation to update or revise such forward-looking statements to reflect future events or specific circumstances that may occur after today. For a more detailed discussion of risks and uncertainties that may affect our business, please refer to the Risk Factors section of our most recent Form 10-K and our Form 10-Q for the first quarter of 2026, which are available online at www.sec.gov or on our own website. Now, I'll turn the call over to Jan Loeb, CEO of Acorn and OmniMetrix. Jan?
Thank you, Tracy, and to everyone for your interest in our company. Our Q1 2026 results reflect continued expansion of our base of monitoring endpoints, offset by an anticipated decrease in year-over-year hardware revenue related to our material cell phone provider contract. We recognized $93,000 of hardware revenue from this customer in Q1 2026 related to our original contract, and now hardware shipments for our initial contract are largely complete. This compares to $876,000 of hardware revenue from this customer in Q1 2025. Our Q1 2026 results also reflected $167,000 of monitoring revenue from this customer, compared to $69,000 in Q1 2025, related to first year monitoring revenues on the original contract.
Based on our ongoing dialogue with this customer, we are optimistic about securing further hardware deployments and related revenue that will build on our initial contract starting in Q2 2026. It has always been our goal to build on this customer opportunity, so this initial follow-on activity is a good indication of the strength of our relationship and the customer satisfaction with our solutions and the services we have been providing for over a year. We currently expect incremental hardware revenue from this customer in the range of $350,000-$500,000 in 2026. Tracy will... non-cash management and board compensation in Q1.
Based on our record financial performance in 2025, accomplishing our Nasdaq up-listing and the completion of the AIO partnership agreement on January first, the board approved an increase in our 2026 stock option awards to compensate management and the board in lieu of additional cash compensation or board fees. These options were issued at a market price of $19.02, so their potential value is tied directly to value creation for all shareholders. The 50,000 options issued to management vest over 12 quarters, so higher stock comp expense will have an impact on financial results through the third quarter of 2028.
If you exclude the impact of non-cash compensation, Acorn's consolidated results would have been profitable in Q1, and the company continues to generate cash, as reflected by $53,000 of cash provided by operating activities in the quarter and the stable cash balance of $4.3 million at quarter end. In past communications, including our year-end news announcements, we have reviewed our five complementary growth initiatives, one of which is our ongoing pursuit of accretive M&A opportunities to expand our monitoring product offerings, market reach, and revenue and customer base. Through this process, we identified the AIO opportunity, which we decided to pursue as an acquisition of commercialization and distribution rights through a technology partnership. We are now actively working to bring their industry-leading, multifaceted suite of products for cell towers, data centers, and utility substations to North America for the first time.
These Infrastructure Solutions protect against theft, power issues, environmental and other risks, and maximize energy utilization. We believe the acquisition of these rights is an ideal way to leverage our 20+ year reputation and established base of customers and substantially expand our capabilities and reach within the North American infrastructure market in a focused and highly capital-efficient way. We are currently working to finalize sales and marketing materials for the OmniMetrix branded solutions. We are initially targeting cell tower operations where we have a good base of existing customer relationships. Utilizing that experience, we will then pursue opportunities in fast-growing markets for data-driven and utility scale infrastructure management. Relative to our focus on backup generators at cell towers, this new suite of solutions provide remote oversight to the full cell tower campus.
Our solutions provide actionable insights through advanced analytics, machine learning, and comprehensive real-time monitoring that significantly reduce downtime, improve maintenance processes, and extend asset lives, lowering costs and delivering measurable ROI. Based on our initial assessments and customer discussions, we view theft as perhaps the most pressing issue facing cell tower operators today. Theft alone can potentially cost cell tower operators hundreds of millions of dollars annually and is a growing and largely unaddressed problem in the United States. As copper, fuel, and assets costs rise, it's widely expected that theft could become an even bigger risk management issue in North America, as it already is on other continents. To combat this risk, we are bringing to market the strongest available solution backed by years of proven performance.
We are still working through final hardware and services pricing models, but given the expanded scope of the AIO solutions, we currently expect our average AIO sale to be 5-6x the average sale of existing OmniMetrix products. Given expected pricing and the scale of the opportunity provides a very meaningful growth potential for our company. We currently have our first two AIO-based tower sites live and running for customer demonstrations. For those of you who may or may not be familiar, cell towers are typically managed by independent tower companies who own and operate the physical structure and lease space to multiple wireless carriers. The two sites we are running are both in the Atlanta area with an existing telecom customer, where we are monitoring their shelter or hut within the cell tower, as well as the front gate.
Our dashboard shows everything, including stats on power systems, fuel levels, battery voltage, operating equipment, temperature, humidity, HVAC runtime, flood detection, et cetera, along with live feeds from security cameras that monitor physical access. We have secure permission to take prospective customers to these sites and expect to begin these efforts in the coming weeks. As I mentioned, we're in the process of advancing our program to launch these products in the U.S., including fine-tuning features and alerts, the sales approach, installation protocols, customer materials, as well as sales and training collateral that our team will need to scale this offering. The AIO team has been to Atlanta for several weeks to train and work with our engineering, tech support, and sales and marketing teams to set up for success in this product launch.
In terms of our financial reporting, we have set up a separate reporting segment called Infrastructure Solutions or IS to track this line of business, which you will note in our Form 10-Q. We do not expect revenues from this segment in the first half of 2026. We continue to believe that attractive secular tailwinds should support our value propositions and growth potential for years to come. Companies are increasingly focused on ensuring reliable access to the energy infrastructure and the compliance support they need. At the same time, broader demand drivers such as AI, data centers, electrification, EV adoption, reshoring continue to strain an aging U.S. grid, compounded by severe weather trends, all of which underscore the importance of energy resilience. In March, we saw severe storms across the Midwest and Mid-Atlantic, leaving more than 1 million customers without power in the PJM and MISO territories.
Even with significant investment, it will take years, if not decades, to address these challenges, and we believe this positions us well both for the near term and longer term. Given substantial unmet needs in our current markets plus opportunities in adjacent addressable markets, we believe 20% average annual revenue growth over a three- to five-year period remains achievable. Further, our capital-light, cost-efficient, and scalable business model positions us to bring roughly 50% of each incremental revenue dollar from our existing businesses to operating income line. As a small company, large hardware shipments will make our quarterly results vary, but our high margin recurring revenue model, supported by strong secular trends, position us well to continue to deliver growth and value to our shareholders. With that, I'll turn the call over to Tracy for financial and operational insights. Tracy?
Thank you, Jan Loeb. The headline takeaway from our Q1 2026 results is the continued strength of our recurring monitoring revenue stream and the improved gross margin profile of the business set against a challenging year-over-year hardware comparison driven by the timing of our largest contract. I'll also point out that our OmniMetrix operating subsidiary remained solidly profitable in the quarter, delivering operating income of $395,000. We provided a fair amount of detail in today's news release and in our Form 10-Q, so I'll just touch on a few of the key highlights. Focusing on Q1 2026 versus Q1 2025. Total revenue was $2,227,000, down 28.1% from $3,098,000 in Q1 2025. The decrease was driven by a $1,019,000 or 55.7% decline in hardware revenue.
Partially offset by a $148,000 or 11.7% increase in monitoring revenue. Monitoring revenue grew $1,417,000, reflecting continued expansion of our installed base of monitored endpoints. Hardware revenue was $810,000, which included $556,000 of new hardware sales and $110,000 from the amortization of deferred hardware revenue. The latter compared to $315,000 in the prior year period as we approach the final recognition of the remaining deferred hardware balance later this year. Gross margin improved 510 basis points to 80.2% from 75.1% in Q1 2025, reflecting both the higher mix of monitoring revenue, which carried a 94% gross margin in the quarter, and a lower contribution from material contract hardware.
Operating expenses rose 11.2% to $1,914,000, driven by a $228,000 increase in SG&A, partially offset by a $36,000 reduction in R&D following completion of the new OMNI and OMNIPRO development programs. The SG&A increase was primarily due to a $136,000 increase in non-cash stock-based compensation expense related to stock option grants to officers and directors, +$111,000 in higher OmniMetrix SG&A, reflecting incremental personnel and technology investments, partially offset by lower commissions.
OmniMetrix segment operating income, the combined operating results of our PG, CP, and IS segments was $395,000, demonstrating the continued profitability of our core operating subsidiary, even in our seasonally lowest revenue quarter and even after absorbing approximately $50,000 of operating expense in our pre-revenue Infrastructure Solutions segment, which included the hiring of a new sales manager in February for the IS segment. On a consolidated basis, including unallocated corporate headquarters costs, we reported a net loss of $77,000 or $0.03 per basic and diluted share, compared to net income of $464,000 or $0.19 per basic and diluted share in Q1 2025. The Q1 2026 results include $197,000 of non-cash-based stock compensation expense versus $61,000 in the prior year period.
We recognized an income tax benefit of $25,000 in Q1 2026 compared to income tax expense of $154,000 in Q1 2025. We did not record any change to our deferred tax asset valuation allowance in the quarter. We continue to maintain a partial valuation allowance of $10.3 million, leaving a meaningful base of NOL and capital loss carryforwards to support future growth and potential M&A initiatives. Turning to the balance sheet and cash flow, we ended the quarter with cash of $4,257,000 compared to $4,454,000 at year-end 2025. Excluding deferred revenue and deferred cost of goods sold, net working capital was $6,024,000 at March 31, 2026 versus $6,184,000 at year-end. I remind you all, we remain debt-free.
Q1 cash flow from operations was $53,000. We also used $260,000 in investing activities, of which $250,000 represented the upfront payment for the acquisition of the exclusive commercialization and distribution rights under the AIO technology partnership agreement executed January 1st with the remainder of the other capital items. Stock option exercises generated $10,000 of financing cash inflow. OmniMetrix's deferred revenue, or what we refer to as our backlog, was $3,269,000 at quarter end, of which $2,934,000 is expected to be recognized as revenue in the next 12 months. Operationally, our next generation OMNI and OMNIPRO generator monitors and our RadEX cathodic protection product are all built on our new OCOM proprietary communications core now being deployed in the field.
These platforms reduce installation time, lower service costs, and enhance reliability, which strengthens our value proposition on our competitive position as we move further into 2026. Within the Infrastructure Solutions segment, as Jan mentioned, we now have two telecommunications tower sites live for customer demonstrations. We're really excited about this opportunity to bring AIO Systems solutions to North America under the OMNI brand and the broader set of growth opportunities ahead of us. I very much look forward to updating you as we progress in the coming quarters. Operator, at this time, please prepare the lines for questions. Thank you very much.