ACFN - Acorn Energy

[knight933]

Hi again - Just wanted to see if anyone else out there has done any work on Acorn Energy (OTC: ACFN)?

 

After doing some work on this name, it feels like one of those micro-cap turnarounds that “looks” like a disaster on paper, but in fact the company has a net cash balance, organically growing high-teens / low-20%’s YoY, and with the most recent asset sale in Feb 2018, has been substantially de-risked.

 

We are ~2 weeks away from when the company files it’s 10K, which will give us the first look at Q4, which if revenue growth remains elevated, should be the next big catalyst on the stock.

 

High-Level Investment Thesis: After selling off a bunch of non-core assets/divisions, ACFN owns ~80% of a low-capex, high recurring-revenue, wireless remote monitoring business (OmniMetrix) which has been growing ~20% YoY and will turn cash-flow positive in 2018. What the financials will not show until the 10Q is filed this May, is that the Enterprise Value is currently ~$6.4M, with a market cap of $8.3M, and net cash of about $2M.

 

Net cash + strong organic growth AND about $60M in NOL’s that could be used to do accretive tuck-in acquisitions = It seems very hard to lose money here.

 

The current CEO, Jan Loeb, was a former securities analyst and is very shareholder-friendly and not promotional. ACFN is truly an ‘orphan stock’ that I think the market will ‘wake up’ over the next few months as the 2017 10K and the Q1 2018 earnings are filed.

 

Price Target: I can easily see the stock getting to $0.70 in a few years without any M&A. I get to that amount by taking about 12.5x 2020 cash EPS (minus the 20% of OmniMetrix they do not own, plus a $1M intercompany loan from OmniMetrix to Acorn). All of this ignores the fact they won’t be a tax payer for the foreseeable future; that was fully taxed. This ignores corp overhead at the Acorn level, but that was $1.2M in 2017, down $2.4M in only 2 years (since 2015), and falling more. Acorn should be break-even on consolidated basis incl. corp overhead by 2019-2020, but there should be a tuck-in acquisition by then, so likely much sooner.

 

Business Metrics: What makes this interesting is that you can only see the true financials if you manually strip away the businesses they dumped so this will not come up on any “value screen”.

 

Revenue: 2017 Revenue is about $4.4M, but mgmt. said on a February investor call they were over $5M, on cash basis. This year (’18) should be about $6M in sales. At 20% YoY, they can get to $8.6M in 2020, with 50/50 split between hardware and monitoring revenue with is recurring (e.g., high-margin, almost no CapEx)

 

Gross Profit: Due to Monitoring being annuity-like, it has very high incremental margins (+70%) so gross profit has been growing faster than revenue. My guess is that GP at OmniMetrix was $2.8M in 2017, and growing to $3.5M (’18), $4.35M (’19), and $5.5M (’20).

 

EBIT:  With total OmniMetrix Operating Expenses at ~$3.2M, this has room to come down based on talks with the company. That’s split about $500K for R&D vs. $2.7M for SG&A which is coming down.

 

Again, this company is a network of sensors, so CapE is minimal. If you put the above together, back of the envelope math shows OmniMetrix getting to earnings breakeven in 2018, and probably have enough profit to cover the Acorn overhead in 2019, absent any M&A.

 

Bottom line – I expect this spring to be a catalyst as folks figure out that they can get a net cash, organically growing forgotten company about to inflect from losses to profits, with huge optionality from the NOL balance as a free call option.

 

Anyways, just wanted to bring this to everyone’s attention. I know most do not care about microcaps. Any other perspectives would be appreciated.

 

Here's a link to a recent investor call from February that I would suggest reading the transcript here:

 

http://www.acornenergy.com/calls_transcripts.php

 

02-19-18-transcript.pdf

[atbed]

Interesting...seems to compete with ORBC.

 

https://www.orbcomm.com/en/industries/natural-resources/oil-and-gas-equipment-and-pipeline-monitoring

 

 

Hi again - Just wanted to see if anyone else out there has done any work on Acorn Energy (OTC: ACFN)?

 

After doing some work on this name, it feels like one of those micro-cap turnarounds that “looks” like a disaster on paper, but in fact the company has a net cash balance, organically growing high-teens / low-20%’s YoY, and with the most recent asset sale in Feb 2018, has been substantially de-risked.

 

We are ~2 weeks away from when the company files it’s 10K, which will give us the first look at Q4, which if revenue growth remains elevated, should be the next big catalyst on the stock.

 

High-Level Investment Thesis: After selling off a bunch of non-core assets/divisions, ACFN owns ~80% of a low-capex, high recurring-revenue, wireless remote monitoring business (OmniMetrix) which has been growing ~20% YoY and will turn cash-flow positive in 2018. What the financials will not show until the 10Q is filed this May, is that the Enterprise Value is currently ~$6.4M, with a market cap of $8.3M, and net cash of about $2M.

 

Net cash + strong organic growth AND about $60M in NOL’s that could be used to do accretive tuck-in acquisitions = It seems very hard to lose money here.

 

The current CEO, Jan Loeb, was a former securities analyst and is very shareholder-friendly and not promotional. ACFN is truly an ‘orphan stock’ that I think the market will ‘wake up’ over the next few months as the 2017 10K and the Q1 2018 earnings are filed.

 

Price Target: I can easily see the stock getting to $0.70 in a few years without any M&A. I get to that amount by taking about 12.5x 2020 cash EPS (minus the 20% of OmniMetrix they do not own, plus a $1M intercompany loan from OmniMetrix to Acorn). All of this ignores the fact they won’t be a tax payer for the foreseeable future; that was fully taxed. This ignores corp overhead at the Acorn level, but that was $1.2M in 2017, down $2.4M in only 2 years (since 2015), and falling more. Acorn should be break-even on consolidated basis incl. corp overhead by 2019-2020, but there should be a tuck-in acquisition by then, so likely much sooner.

 

Business Metrics: What makes this interesting is that you can only see the true financials if you manually strip away the businesses they dumped so this will not come up on any “value screen”.

 

Revenue: 2017 Revenue is about $4.4M, but mgmt. said on a February investor call they were over $5M, on cash basis. This year (’18) should be about $6M in sales. At 20% YoY, they can get to $8.6M in 2020, with 50/50 split between hardware and monitoring revenue with is recurring (e.g., high-margin, almost no CapEx)

 

Gross Profit: Due to Monitoring being annuity-like, it has very high incremental margins (+70%) so gross profit has been growing faster than revenue. My guess is that GP at OmniMetrix was $2.8M in 2017, and growing to $3.5M (’18), $4.35M (’19), and $5.5M (’20).

 

EBIT:  With total OmniMetrix Operating Expenses at ~$3.2M, this has room to come down based on talks with the company. That’s split about $500K for R&D vs. $2.7M for SG&A which is coming down.

 

Again, this company is a network of sensors, so CapE is minimal. If you put the above together, back of the envelope math shows OmniMetrix getting to earnings breakeven in 2018, and probably have enough profit to cover the Acorn overhead in 2019, absent any M&A.

 

Bottom line – I expect this spring to be a catalyst as folks figure out that they can get a net cash, organically growing forgotten company about to inflect from losses to profits, with huge optionality from the NOL balance as a free call option.

 

Anyways, just wanted to bring this to everyone’s attention. I know most do not care about microcaps. Any other perspectives would be appreciated.

 

Here's a link to a recent investor call from February that I would suggest reading the transcript here:

 

http://www.acornenergy.com/calls_transcripts.php

[knight933]

Thanks for the input! I am still looking into competitors, so this is helpful, thank you. Although since Orbcomm has a market cap over $700 Million, its fair to say it is really in a whole separate league than Acorn!

 

But that is ok; with micro-caps I don't need Acorn to set the world on fire to earn a very attractive return. With a revenue base around $5 Million (2017), Acorn has a lot of room to grow off of such a small base.

[atbed]

ACFN sells at quite a discount to ORBC on price-to-sales, despite no debt and positive cash balance.

 

Thanks for the input! I am still looking into competitors, so this is helpful, thank you. Although since Orbcomm has a market cap over $700 Million, its fair to say it is really in a whole separate league than Acorn!

 

But that is ok; with micro-caps I don't need Acorn to set the world on fire to earn a very attractive return. With a revenue base around $5 Million (2017), Acorn has a lot of room to grow off of such a small base.

 

 

[knight933]

So I think it is reasonable for a micro-cap stock to trade at a discount to a company over $700 Million.

 

HOWEVER – I agree that ACFN is far, far too cheap, even when you look at it in terms of Price / Sales.

 

Based on feedback from bankers and other analysts, high-recurring revenue companies in the so-called “internet of things” (IoT) space, change hands at 3x to 6x revenue.

 

In context, ACFN trades at a little over ~1x forward sales. So yes, I agree that is an excessive discount for something that has net cash, growing high-double digits organically, about to inflect from money-losing to profitability (at the OpCo level), and gives zero credit for a massive NOL balance.

 

I suspect that others will eventually see the progress as ACFN's financials get better.

 

 

[atbed]

Agree, a discount is very reasonable. Q is how much? ORBC has significantly greater resources, and I believe its diversified product portfolio has less risk. I am just not familiar enough with ACFN and their technology.

 

So I think it is reasonable for a micro-cap stock to trade at a discount to a company over $700 Million.

 

HOWEVER – I agree that ACFN is far, far too cheap, even when you look at it in terms of Price / Sales.

 

Based on feedback from bankers and other analysts, high-recurring revenue companies in the so-called “internet of things” (IoT) space, change hands at 3x to 6x revenue.

 

In context, ACFN trades at a little over ~1x forward sales. So yes, I agree that is an excessive discount for something that has net cash, growing high-double digits organically, about to inflect from money-losing to profitability (at the OpCo level), and gives zero credit for a massive NOL balance.

 

I suspect that others will eventually see the progress as ACFN's financials get better.

[knight933]

For what it’s worth, I think the Price to Sales ratio is more of a starting point than something I think can be actually predicted/analyzed with any reasonable accuracy. If anyone has any thoughts on how they think about Price/Sales ratios, I would be curious to hear them, but I personally do not put much weight on them outside of ‘screening’ for ideas on which I will/should do more work. 

 

Once ACFN’s OmniMetrix unit starts producing profits, which I again what to highlight the inflection is coming this year, then gradually over time the P/S discount will narrow as the market slowly transitions to valuing it based on earnings.

 

But we will have a better look at this company once they file the 10K by March 31st, which is soon, so hence why I think the idea is very actionable right now.

 

[knight933]

A few thoughts on the recently filed 10K for 2017 and comments on Q4: In summary, my thesis is unchanged as FY 2017 ended the year with sales up ~21%, and the company stuck to its $6M in cash sales projection for 2018. The balance sheet has been de-risked with net cash around ~$2M as of March. More corporate overhead cuts are coming, which will only highlight the improving OmniMetrix profits even sooner.

 

http://www.acornenergy.com/rsc/articles/ACFN-Q417-3-26-18.pdf

 

The transcript will come, but in my notes I had the CEO saying:

 

"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.” (FYI - Overhead at Acorn went from $3.6M (’15), to $2M (16) to $1.1M (17))

 

I can only assume "significant" cuts means they will get this well below $1M in 2018, which is great for the equity. 

 

Again, what matters most is that revenue growth is still on track:

 

CEO: “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.”

 

Next Q1 report will be here in May, which will come soon enough.

[atbed]

Thanks for sharing.

 

A few thoughts on the recently filed 10K for 2017 and comments on Q4: In summary, my thesis is unchanged as FY 2017 ended the year with sales up ~21%, and the company stuck to its $6M in cash sales projection for 2018. The balance sheet has been de-risked with net cash around ~$2M as of March. More corporate overhead cuts are coming, which will only highlight the improving OmniMetrix profits even sooner.

 

http://www.acornenergy.com/rsc/articles/ACFN-Q417-3-26-18.pdf

 

The transcript will come, but in my notes I had the CEO saying:

 

"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.” (FYI - Overhead at Acorn went from $3.6M (’15), to $2M (16) to $1.1M (17))

 

I can only assume "significant" cuts means they will get this well below $1M in 2018, which is great for the equity. 

 

Again, what matters most is that revenue growth is still on track:

 

CEO: “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.”

 

Next Q1 report will be here in May, which will come soon enough.

[knight933]

Wow - Big insider buying today, immediately following Q4 earnings is a strong sign. On March 28th, the Jan Loeb (CEO) purchased ~127,000 shares at $0.2999, raising his stake from 3.6% of the company to ~4%. I take this as a strong vote of confidence - love to see mgmt put their money on the line. Hopefully this brings more buyers as they see the filing.

 

Here it is here: https://www.sec.gov/Archives/edgar/data/880984/000088098418000005/xslF345X03/primary_doc.xml

[knight933]

CEO purchased another 105,000 shares on the open market on 3/29 at $0.30/share. Combined with the prior ~127,000, 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.

 

[knight933]

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"

 

Full details here: https://www.sec.gov/Archives/edgar/data/880984/000149315218005081/form8-k.htm

[knight933]

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. 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 been 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.

 

[spartansaver]

I find it rather annoying that a CEO gets awarded to make any acquisition. Seems like one of the easiest bonus checks a CEO could make.

[knight933]

If we were talking about a large company, I would be inclined to agree; those CEOs can just sit back and collect pitch books from investment bankers.

 

BUT here we are talking about a nano-cap company with a market cap of only $10 million, which most folks do not know exists. Size alone limits what Acorn can buy. Their depressed share price prevents them form using much (if any) equity as a currency.

 

What Acorn is looking for is not easy to find. If you speak with the CEO (which I highly recommend), you can tell they are really serious about buying something synergistic. There are not many assets in the IoT or connected device space they can buy that fit the above criteria. Acorn knows they cannot win a banker auction, or go out and acquire their industry neighbor like Disney is hunting FOX.

 

It will take some time and some creativity to find a good fit. They are looking at not only whole companies but also portions of larger businesses. And besides, I much rather they pay the CEO in cash rather than shares. So for those reasons I am fine with this; Jan has his work cut out for him. But thus far, he has delivered as promised.

[knight933]

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.

 

https://www.sec.gov/Archives/edgar/data/880984/000149315218008211/ex99-1.htm

 

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

 

Cash ($2M)

 

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]

[spartansaver]

Not to beat a dead horse, the business has grown on me, but I can't get past the compensation. Jan Loeb will pay himself nearly $450k if he completes an acquisition this year. $450k on a microcap with $5mm in revenues. $450k on a business not yet generating any cash (including corp. overhead). $450k to be CEO of a holding company that has another CEO getting paid $200k to run the only business Acorn owns. In total $650k between two executives. Seems like a nice way for Mr. Loeb to derisk his $450k investment in shares. 

[knight933]

FYI - Artko Capital expects ACFN to be sold, with upside to ~$1/share. I have to say that I'm increasingly thinking that the CEO is in fact cleaning up the company for sale process sometime in 2019.

 

In the recently released Q4 investor letter from this small-cap/special-situation focused fund, they lay out their case for how Acorn is positioning itself to be sold to a strategic buyer with big upside to approx. $1 per share possible. (Almost missed this at first because the author misspelled ticker; no judgement as I have made this mistake before as well!) Full text below (emphasis mine): https://www.hvst.com/organization/art-capital-lp/posts/artko-capital-4q-2018-partner-letter-EvrTn8eb

 

“Acorn Energy (AFCN) - We added a 2% position in an $8mm market cap company. The company has $1.7mm in cash and an additional $2mm in Net Working Capital as well as over $60mm in Net Operating Losses carryforwards (NOLs). However, its main asset is its 80% ownership in Omnimetrix, a company that specializes in monitoring and control for standby generators, air compressors and gas pipelines.

 

Omnimetrix has a $6mm revenue base with over 60% gross margins, split between hardware and higher margin recurring revenue monitoring services. Both have been growing by double digits. The company has a solid market position in the standby generators and air compressors market, however, what really excites us is the potential for the pipeline business. Physically monitoring pipelines for malfunctions is an expensive proposition, and Omnimetrix’s high ROIC product proposition is an excellent solution to extend the life of the aging global oil and gas pipeline network.

 

The company CEO, Jan Loeb, with 5% ownership, has cut over $2.5mm in costs and turned around operations to pay down the company’s debt and become cash positive. While the company is currently running breakeven, its high growing revenues should provide significant marginal contribution going forward. The company has a high, $1mm, corporate expense base which would be eliminated in any acquisition scenario with a number of potential strategic acquirers. The company is trading at a tiny fraction of its close Internet of Things (IoT) competitors at less than 1X revenues, and we think its true value is somewhere closer to $1.00 per share from $0.28 today, while its current cash, NOLs and low Omnimetrix valuation provide a nice margin of safety at today’s prices.”

[Tim Eriksen]

FYI - Artko Capital expects ACFN to be sold, with upside to ~$1/share. I have to say that I'm increasingly thinking that the CEO is in fact cleaning up the company for sale process sometime in 2019.

 

In the recently released Q4 investor letter from this small-cap/special-situation focused fund, they lay out their case for how Acorn is positioning itself to be sold to a strategic buyer with big upside to approx. $1 per share possible. (Almost missed this at first because the author misspelled ticker; no judgement as I have made this mistake before as well!) Full text below (emphasis mine): https://www.hvst.com/organization/art-capital-lp/posts/artko-capital-4q-2018-partner-letter-EvrTn8eb

 

“Acorn Energy (AFCN) - We added a 2% position in an $8mm market cap company. The company has $1.7mm in cash and an additional $2mm in Net Working Capital as well as over $60mm in Net Operating Losses carryforwards (NOLs). However, its main asset is its 80% ownership in Omnimetrix, a company that specializes in monitoring and control for standby generators, air compressors and gas pipelines.

 

Omnimetrix has a $6mm revenue base with over 60% gross margins, split between hardware and higher margin recurring revenue monitoring services. Both have been growing by double digits. The company has a solid market position in the standby generators and air compressors market, however, what really excites us is the potential for the pipeline business. Physically monitoring pipelines for malfunctions is an expensive proposition, and Omnimetrix’s high ROIC product proposition is an excellent solution to extend the life of the aging global oil and gas pipeline network.

 

The company CEO, Jan Loeb, with 5% ownership, has cut over $2.5mm in costs and turned around operations to pay down the company’s debt and become cash positive. While the company is currently running breakeven, its high growing revenues should provide significant marginal contribution going forward. The company has a high, $1mm, corporate expense base which would be eliminated in any acquisition scenario with a number of potential strategic acquirers. The company is trading at a tiny fraction of its close Internet of Things (IoT) competitors at less than 1X revenues, and we think its true value is somewhere closer to $1.00 per share from $0.28 today, while its current cash, NOLs and low Omnimetrix valuation provide a nice margin of safety at today’s prices.”

 

I don't think that is a fair way to characterize their letter. They do not say they expect it to be sold.  If they really thought it was potentially going to be sold in the near future at 3-4x the current price you would have to think they would make it larger than a 2% position.

 

I wonder where they came up with the company is currently running breakeven.  Sure they made money in the last quarter but that was due to discontinued operations.

TTM Operating loss was $1.7 million on $4.9 million of sales.  9 month operating cash flow was a negative $2.3 million.  Even the cash positive comment is a bit of a stretch due to deferred revenue of $3.8 million far exceeding cash of $1.4 million.  I don't understand how this is worth $1 per share or $30 million (6x revenues) unless the SG&A can be slashed by more than $1 million annually. 

[knight933]

Hi – Thanks for the comment. With all due respect, I think you misunderstood my post. Let me clarify for other readers....

 

A) First of all, what else could the phrase “potential strategic acquirer” mean if not “if they sell the company”? I honestly don’t know how that is up for debate. Said another way….if the author of the letter thought Acorn was going to continue operations (e.g, not be sold), I assume he/she would have given a valuation where they put a multiple on projected future earnings. No?

 

B) Second of all, since you want to be specific, I did not say Artko was calling for a 2019 sale TOMORROW. While I personally believe that a 2019 transaction is going to happen, I think most investors realize that speculating on M&A is just an educated guess. Having followed this company for almost 2 years now, and attended their annual meeting back in 2018 the company replaced several board members and cut a lot of costs out of corporate overhead. In December, the CEO raised his stake to over 5% for the first time. I think these steps are moves you take if you are trying to take the company in a different direction; e.g., sell the company.

 

C) Third, when they said the company was running breakeven, they were referring to Omnimetrix NOT Acorn as a whole. (Omnimetrix is the subsidiary, Acorn the parent) I suggest you a take a look at the latest 10Q at the segment level. For Q3-2018, EBIT (at the Omnimetrix level) finally turned positive +$21K, after long being negative. If you speak to management, they believe that this trend will continue for 2019.

 

D) Your question you posted in your last sentence literally makes clear the entire point I raised above. The way “SG&A can be slashed by more than $1 million annually” is through a sale to a strategic acquirer. That was the entire point of the letter. (see bullet A)

 

[Tim Eriksen]

Hi – Thanks for the comment. With all due respect, I think you misunderstood my post. Let me clarify for other readers....

 

A) First of all, what else could the phrase “potential strategic acquirer” mean if not “if they sell the company”? I honestly don’t know how that is up for debate. Said another way….if the author of the letter thought Acorn was going to continue operations (e.g, not be sold), I assume he/she would have given a valuation where they put a multiple on projected future earnings. No?

 

B) Second of all, since you want to be specific, I did not say Artko was calling for a 2019 sale TOMORROW. While I personally believe that a 2019 transaction is going to happen, I think most investors realize that speculating on M&A is just an educated guess. Having followed this company for almost 2 years now, and attended their annual meeting back in 2018 the company replaced several board members and cut a lot of costs out of corporate overhead. In December, the CEO raised his stake to over 5% for the first time. I think these steps are moves you take if you are trying to take the company in a different direction; e.g., sell the company.

 

C) Third, when they said the company was running breakeven, they were referring to Omnimetrix NOT Acorn as a whole. (Omnimetrix is the subsidiary, Acorn the parent) I suggest you a take a look at the latest 10Q at the segment level. For Q3-2018, EBIT (at the Omnimetrix level) finally turned positive +$21K, after long being negative. If you speak to management, they believe that this trend will continue for 2019.

 

D) Your question you posted in your last sentence literally makes clear the entire point I raised above. The way “SG&A can be slashed by more than $1 million annually” is through a sale to a strategic acquirer. That was the entire point of the letter. (see bullet A)

 

With all due respect, you have changed from "Artko expects ACFN to be sold" to "if they sell the company."  There is a huge difference between the two. 

 

A. Some investors use potential sale as a reference point for margin of safety.  To answer your question - not necessarily. 

 

B. I never said TOMORROW either.  Insider buying doesn't necessarily mean up for sale, it is done because you expect the return to be better than other options.  That is not to say they don't want to sell.  They may.

 

C. You are correct that the sub is now profitable, and Artko was referring to the sub.  Company is still losing money and has a small cash cushion.

 

D. Well buyers don't normally give the majority of the benefit of synergies to the seller.  Is a growing but barely profitable business doing $5 million of revenues worth $30 million???

 

I have looked at this company many times over the last six months and personally don't find it attractive.  I don't expect them to be profitable until 2020.  Any buyer loses most of the NOLs.  You should be happy I am throwing cold water on it.  If you are right it gives you more time to buy more for the coming buyout at more than 3x. 

[valuedontlie]

It's an interesting business... Would like to own something like this privately...

 

I doubt they are thinking of a sale... Incentives are geared toward making an acquisition and I'm guessing they'll try to do that first and justify some of the corporate costs and attempt to make use of the NOL...

 

The holding company structure doesn't make much sense after divesting everything but omnimetrix... i don't know if they will / can eliminate much of that quickly, but they should... for such a small company, i'd love to see them take the same approach as Stephan Co (SPCO) which is essentially run at the board level (no true CEO or CFO)... they should also go dark and save whatever reporting / compliance costs they can.

 

Also, I hate that they only own 80% of the operating sub... given how they tout the business as being so valuable, i'm sure it would (will?) cost them a fortune when they ultimately want to own 100%...

 

Interesting company, plenty of moving parts...

[Tim Eriksen]

The 80% ownership is big deal. 

 

1. In any sale obviously shareholders only get 80%.  So in the above $1 per share or $30 million reference actually means they think the business is worth 25% more, or $37.5 million.  If I don't see $30 million I definitely don't see $37.5 million.

 

2. In any sale the buyer may be only getting 80% unless the minority owner wants to sell too.

 

3. On an continuing concern basis it is also relevant in that as OmniMetrix presumably gets more profitable, Acorn only gets 80% of the earnings.  NCI which had been reducing the losses will become a drag on earnings.   

[teejbink13]

On 1/29/2019 at 4:31 PM, Tim Eriksen said:

The 80% ownership is big deal. 

 

1. In any sale obviously shareholders only get 80%.  So in the above $1 per share or $30 million reference actually means they think the business is worth 25% more, or $37.5 million.  If I don't see $30 million I definitely don't see $37.5 million.

 

2. In any sale the buyer may be only getting 80% unless the minority owner wants to sell too.

 

3. On an continuing concern basis it is also relevant in that as OmniMetrix presumably gets more profitable, Acorn only gets 80% of the earnings.  NCI which had been reducing the losses will become a drag on earnings.   

Tim I know you're busy absolutely mashing it at $SODI, but have you revisited this? I think a lot of the issues that were raised in this thread have been addressed & though Artko capital was very early on the $1 upside valuation, I think from today's nums that valuation holds up pretty strongly.  Fair value for the company is likely near the price of $0.60 with the company finally showing potential of reaching their targets of 20% annual growth with 27% growth in Q1 (Loeb has guided to this for years & it's one of my few knocks against his execution).  ACFN could generate anywhere from $5m to $25m (10%-20% growth) over the next 5 years in earnings (of which very little would be taxed) through OmniMetrix alone.  The operating leverage is holding strong and I have a hard time not being impressed by the improvement of gross margins from 40.7% to 70.3% from 2016 until now. 
Base case IRR would be somewhere in the mid-teens with any bolt-on inorganically assisting the bull case (somewhere above 40%+ IRR) by generating its market cap in cash over the next 5 years & entering FY26 with $.20 in EPS and a $3 valuation at a 15 PE

[Tim Eriksen]

I periodically do revisit it.  My thoughts have not changed.  I still see tiny operating margins.  Modest sales growth.  High valuation.  I can't even use PE multiple since there are no earnings (until March quarter).  It is almost 4x sales.  They have taken longer to be profitable than I originally thought.   I have them at 20x 2024 earnings.  That is not exciting in my book.  Hardware sales are flat.  Monitoring is growing nicely.