|Shares Out. (in M):||30||P/E||0||0|
|Market Cap (in $M):||7||P/FCF||0||0|
|Net Debt (in $M):||-2||EBIT||0||0|
Acorn Energy is a severely undervalued orphaned micro-cap which is debt-free, has an 80% stake in a wireless remote monitoring business growing ~20% per year and about to inflect to cash-flow positive in 2018-2019, $60M in unused NOLs, and a former securities analyst for CEO whom I believe will unlock value in the next 2 years from both organic growth and M&A.
[Note to reader – This is an illiquid micro-cap and thus only suitable for PA’s and/or the more adventurous VIC members. Caveat emptor!]
Stock Price (2/22/18): $0.24
Market Cap: $7.1M (29.5M shares outstanding)
Enterprise Value: $5.2M (~$1.9M of net cash, post 2/14/18 deal close)
Price Target (18-24 months): $0.72 (12.5x 2020 EPS, less 20% director stake, plus $1.1M intercompany loan from OmniMetrix to Acorn)
Illustrative PF OmniMetrix Model
Acorn’s only operating business right now is OmniMetrix, of which they have an 80% stake. Here is my high-level model for what I believe OmniMetrix can earn over the next few years. For the sake of discussion I have: 1) stripped away the corporate overhead that sits at Acorn, 2) ignored the $60M in NOL’s and made ACFN a full tax payer at 25% and 3) assumed no upside from potential M&A over next 2-3 years. (All points to be addressed later on)
NOTE: The right hand side of my model *attempts* to adjust for the discrepancy between reported revenues and sales on a cash basis, which are higher. (Principal difference being both the monitoring services and hardware sales are contracted and paid for upfront, yet recorded on a pro rata basis over the term of the contract making GAAP results lag cash results) While 2017 sales were $4.4M, management said they were over $5M on a cash basis. Management also guided for ~$6M in 2018 revenue.
What is the business?
After selling off several divisions for the past few years, Acorn Energy is just 80% of OmniMerix. Here’s a good summary from the 10K:
OmniMetrix, LLC develops and markets wireless remote monitoring and control systems and services for multiple markets in the Internet of Things ecosystem: critical assets (including stand-by power generators, pumps, pumpjacks, light towers, turbines, compressors, as well as other industrial equipment) as well as corrosion protection for the pipeline industry (gas utilities and pipeline companies).
In plain English, OmniMetrix develops/manages a network of sensors that allow users to monitor their equipment remotely, cutting down the need to send people out into the field. Of the ~$5M in revenue for 2017, there’s about a 50/50 split between equipment and remote monitoring services.
The business is growing ~20% YoY, which I believe can continue given the small revenue base. Their products mostly compete with OEM’s who sell monitoring equipment for their own machines (and who are much larger than Acorn). I am not going to pound the table and say these guys are going to take over the big players. However, there is a demand for a non-OEM provider of these services because some dealers are afraid that if they sell the OEM’s monitoring equipment they will be disintermediated and lose their customer relationships.
Today, gross margins are ~57%, with hardware at 25%-30% GM, and monitoring at ~85%. The monitoring business is a high-margin annuity stream I believe is very undervalued today. In isolation OmniMetrix is a very good business that needs almost no capex.
Now let me explain why the timing/setup makes this stock truly compelling at $0.24/share.
Why should you invest now?
On Feb 14, 2018, Acorn announced it had completed the sale of its remaining 41% interest in DSIT solutions for $5.8M. This is a big deal for 2 reasons:
1) It immediately fixes Acorn’s balance sheet. The company will have about $2M net cash, no debt, which materially de-risks this investment for new investors, and is more enough money to fund OmniMetrix until it breaks even.
2) ACFN is now a pure-play. OmniMetrix is asset-light, high recurring revenue, and will finally inflect to cash-flow breakeven in 2018-2019.
This final asset disposal was a major capstone in what has been a 2 year clean-up effort by Acorn’s CEO Jan Loeb, who has to his credit delivered on his main 3 goals since taking the job in Jan-2016. He has 1) triaged ACFN’s financial position, 2) rationalized/ disposed of disparate operations, and 3) focused on OmniMetrix which I would argue is a very good business. He is also the type of CEO who can create value through M&A by utilizing ACFN’s ~$60M NOL balance (which is 8.5x the current market cap / 11.5x PF enterprise value).
(Note: DSIT Solutions is a business that specializes in the field of underwater security systems, sonar and acoustics, designed for the energy, defense and homeland security markets. For the sake of brevity, this write-up will not focus on the disposed assets, other than to say Acorn was correct in slimming down.)
Why does this opportunity exist?
ACFN checks of almost all the “special situations” boxes; almost nothing about this business is quite what it seems a first glance:
Wrong name: “Acorn Energy” is deceiving after several years of shedding ancillary businesses, all that’s left is 80% of OmniMetrix (an Acorn director owns the other 20%). On the Feb 15th update call the CEO (Jan Loeb) said the name will eventually change to “OmniMetrix”.
Ugly chart: After falling -97% over the past 5 years from $7.30 to $0.24, chart looks like a bankruptcy, when in fact OmniMetrix is the opposite – it’s now virtually debt-free, has an asset-light business model with high incremental margins, recurring revenue and growing.
Consolidated historical financials not relevant due to all the moving parts: I think this situation is simple to analyze, but first you have to pro-forma and remove the disposed businesses and corporate overate. For example, beginning in Q2-16, Acorn stopped consolidating DSIT’s results after selling their first half of the business. So you cannot just look at 2017 vs. 2016 comparisons on the 10Q / 10K.
Illiquid/OTC/Low Investor Visibility: Sub $10M micro-cap stocks that trade OTC are at a discount for a reason. Up until now, management has been unable to really market this opportunity because for 2 years they were in triage mode trying to fix numerous problems. With a clean balance sheet they are ready to go on offense. It will take time, but ACFN will eventually uplist to the NASDAQ. Long-term investors would be wise to get in now.
I would strongly recommend reading the transcript from the Feb 15th update call:
Why do you think the CEO Jan Loeb is core to the investment thesis?
CEO was previously a Special Situations analyst: Jan Loeb joined the board in Aug 2015, at the behest of a friend, to help a company that was running out of cash and in trouble. I am summarizing a lot here – but he eventually replaced the CEO about 5 months later and has been cleaning up ever since.
The previous CEO was the prototypical salesman. Loeb is the opposite. He had worked previously in various buyside/sellside roles with a focus on “special situations” stocks. He’s the #1 shareholder with ~3.85% of shares, and thinks very much like the investors on this message board. (I would suggest reaching out to speak with him; he is very accessible)
Management successfully downsized corporate overhead with more to come: ACFN will keep its holding company structure in order to preserve the value of its $60M in NOL’s. However, I do not expect them to go back to being a mini-conglomerate.
For 2017, non-OmniMetrix corporate overhead was about $1.2M at Acorn. This is already down -67% from 2 years ago. I expect management to cut further. If OmniMetrix is breakeven by 2018 (as I fully expect), then Acorn should be cash-flow positive on a consolidated basis by ~2019, even with no M&A.
Notice how Acorn overhead has declined the past few years:
CEO will make good use of NOLs: Let me be clear – at $0.24, ACFN is cheap, even ignoring the NOL.
Loeb is actively looking for M&A opportunities to put the NOL to work, but I trust he will be thoughtful about it. Everyone is aware that IoT (Internet of things) type companies are hot now, with M&A comps trading at 3x – 6x revenue. (ACFN trades at about ~1x 2018 cash revenue) Acorn most likely will not be the high bidder in a big competition auction. Management has no intention of issuing shares anywhere near the current stock price, and they are in no hurry to do a reverse stock-split. (That will likely happen only after they found a deal)
However, since the $60M NOL balance is so large relative to the current enterprise value (11.5x) and material to this company’s future, there is tremendous upside from having a competent, shareholder-friendly management. I would consider this as a “free call option” since the NOL is definitely not in the stock price today.
For all of the above reasons, at $0.24, I believe there is compelling upside at Acorn that should result in a much higher stock price in 18-24 months as investors figure out what is going on.
-OmniMetrix will be cash-flow breakeven on a run-rate basis before the end of 2018. Don’t be surprised if they are breakeven for the entire year on a reported basis.
-Acorn (including HoldCo corporate overhead) should be breakeven sometime in 2019. (With M&A this could happen sooner)
-Any M&A deal announcement would be most immediately accretive due to ~$60 million in NOL’s
|Subject||CY17 Rev +21% vs CY16; More overhead cuts to come|
|Entry||03/27/2018 02:35 PM|
Acorn announced Q4 / filed 2017 10K yesterday. Overall it was a solid end to 2017, and I stick with my overall thesis - the balance sheet is de-risked, revenue growth continues at high-teens/low 20's, and corp overhead cuts in 2018 mean inflection to profitability is not far away.
Here are some highlights from the Q4-17 Earnings Call this morning (transcript willl be on ACFN website)
- Debt Free: “The sale of DSIT leads Acorn Corporate debt free and with approximately $2 million in cash after all deal expenses are paid”
- OmniMetrix now can fund itself: “Also going back to 2015, Acorn had provided $930,000 to OmniMetrix in financial support in 2015 versus the $300,000 that OmniMetrix received from us in 2017. We do not expect the need to provide funding to OmniMetrix this year or going forward for their continued growth.”
- Will try to buy other 20% of OmniMetrix when they (eventually) do M&A: CEO: “And in terms of the 20%, it’s something that we look at. And if we can do it, it most probably would be in conjunction with a greater structural move maybe with an acquisition at the same time we do an acquisition we might require the 20%. So it’s something we certainly look at and at some point my guess is it will occur.”
- Expect more Corp Overhead cuts in 2018: On the CC, the CEO indicated the $1.2M in corporate overhead that sits at the Acorn level has a lot of room to still come down even more. As mentioned in the write-up, Corp OH went from $3.6M (’15), to $2M (16) to $1.1M (17). The further this falls, the sooner OmniMetrix’s improving profitability will be readily apparent (Quote below)
o CEO: “But in total, where I think one of the main things is we are looking to reduce costs and we think we will be able to reduce costs in 2018 from where we were in 2017 on the corporate level, as well somewhat significantly.”
- Growth still on track: “On our last call, we said we expected over $5 million of cash basis sales for OmniMetrix in 2017, and we actually did $5.1 million compared to $4.2 million in 2016, an increase of 22%.... Looking forward, we said we expected approximately 20% in growth and cash basis sales, which would be over $6 million in 2018 and we still feel confident in this level of sales.” (Note - Q2/Q3 busiest periods, with Q4/Q1 less so)
Hopefully this stock will no longer be an 'orphan' much longer as we progress thru 2018.
|Subject||CEO buys 127,000 shares on the open market - 3/28|
|Entry||03/29/2018 03:50 PM|
Looks like a fairly large insider buy from the CEO mentioned in the write-up.
I find it encouraging that as soon as the blackout period opened up post-Q4 earnings, the CEO Jan Loeb purchased ~127,000 shares on the open market at a price of $0.2999. You can see the filing here: https://www.sec.gov/Archives/edgar/data/880984/000088098418000005/xslF345X03/primary_doc.xml
This is the first open market buy in a long time buy execs. Loeb is raising his stake from 3.6% to 4.0% of shares outstanding; still top shareholder.
|Subject||CEO buys ~230,000 shares, raises stake +22%|
|Entry||04/02/2018 12:22 PM|
The CEO purchased another 105,000 shares on the open market on 3/29 at $0.30/share.
Combined with the prior ~127,000 (see comment below), the CEO has bought 231,694 since the earnings call last week, raising his stake +22% to about 1.3 million shares, or 4.4% of the company. Based on the elevated volume I am still seeing, looks like others are joining in to buy more.
|Subject||New CEO comp package means M&A by YE 2019|
|Entry||04/13/2018 11:08 AM|
New 8K filed that outlines the CEO’s new compensation agreement. The key change here is that Mr. Loeb will now receive a bonus if he completes an acquisition before Dec 31, 2019. Again, given Acorn's $60M NOL balance (more than 5x the current market cap), almost any deal would be immediately accretive and pure upside to the bull case. Key language below:
"He will be eligible for two additional bonuses during the term of the New Consulting Agreement:
-$150,000 upon consummation of a corporate acquisition transaction approved by the Registrant’s Board
-$150,000 upon consummation of a corporate financing/funding transaction approved by the Registrant’s Board"
|Subject||Strong Q1, Gross Margin expansion, '18 Rev +20% guidance|
|Entry||05/16/2018 03:06 PM|
ACFN reported a solid 1st quarter and CC. Company should post the transcript within 48 hours to their website, but until then, here are the highlights.
1-Strong Gross Margin expansion: To me the biggest surprise was the big expansion in Gross Margin YoY. In Q1-18 GM was 62% vs. only 56% last year. In my own model I did not project them to reach GM over 60% until 2019. I think this highlights the beauty of the high-margin, asset-light, recurring revenue Monitoring revenue. With Gross Margins over >80%, this business will be quite profitable as it scales. CEO said this new +60% threshold was sustainable due to high ~80% gross margins on monitoring revenue and 35%-40% gross margins on the hardware side. See the output from my model below:
You can tell from the improving margins and shrinking losses that OmniMetrix is on track to be at least breakeven this year which is a big deal.
2-Kept +20% Revenue YoY Growth Guidance: While revenue growth for the Q was about +10% YoY, ACFN feels very confident in their 20% revenue guidance for 2018. During the Q&A (but absent from the press release), the CEO said through the end last month (April 2018), revenue growth (on a cash basis) was up +22% YTD
3-Taking steps to improve current “orphan stock” status: During the Q&A the CEO stated Acorn will be presenting at the LD Micro Invitational (June 4 - 6, 2018). This conference is exclusively focused on highlighting microcap stocks. This will be Acorn’s first conference presentation in 3 YEARS. Hopefully this will bring more eyeballs to the stock.
4-Will rename the company this year: Optics matter, and changing the name from “Acorn Energy” to “OmniMetrix” will also help assuage investor confusion that this is an IoT name and not an energy pure-play
5-Management has pursuing accretive M&A: CEO stated that now the DSIT sale is complete, they have more time to scout acquisition targets. As a reminder, the CEO changed his compensation agreement this year to cut his base salary and to pay him a large incentive bonus of $300K if he can find a deal before YE 2019. Almost any deal would be an incremental positive since ACFN has ~$60M in NOL’s
Overall, no change to thesis. Still very long.
|Subject||ACFN gives first Investor Presentation in 3+ yrs|
|Entry||06/07/2018 11:58 AM|
It's positive that ACFN is resuming IR outreach now with their balance sheet fixed and the thesis more straightforward. Here is the deck from the LD Micro Invitational Conference in LA (6/6/18). This was ACFN’s first conference attendance of any kind in 3+ years.
FWIW...Acorn management gave their first public assessment of fair value, which they believed to be in the range of $0.53 - $1.10 (Pg. 16) Their math is as follows:
OmniMetrix ($14M - $22M): 1) Cash-basis sales expected >$6M in ’18 and >$7M in ’19, 2) Elecsys (a larger OmniMetrix comp) sold for $70M or 2.5x sales in 2017; today multiples for “IoT’ type companies range from 3x - 6x sales
NOL ($0 - $9M): $60M NOL could generate up to $12.6M in future tax savings at current Federal rate of 21%. Disc back by at least 25% would leave max PV of ~$9M.
Potential Value Range based on the above: $16M - $33M ($0.53 - $1.10)
[Suffice to say I agree with their assessment]