Description

 Thesis: Acorn Energy (not actually an energy company) is a tiny $8mm nanocap with $2mm in cash, $70mm in NOLs and a valuable niche business with almost $4mm of 84% gross margin 5+ year average life, high growth and very diversified recurring revenues. A good CEO with 27% ownership is poised to eventually sell the company at 300% upside, while the current balance sheet value provides a decent margin of safety at the current depressed stock price.

*this is obviously a PA investment that is too small for any institutional holders

**OsoNegro did a nice job writing this up a few years ago so my goal here is to do more of an update

Company Profile, via CapIQ: Acorn Energy, Inc., through its subsidiaries, develops and markets wireless remote monitoring and control systems for various markets in the United States and internationally. It operates through two segments, Power Generation (PG) Monitoring and Cathodic Protection (CP) Monitoring. The PG segment provides wireless remote monitoring and control systems, and services for critical assets, which include stand-by power generators, compressors, pumps, pumpjacks, light towers, turbines, and other industrial equipment; and Internet of Things applications. The CP segment offers remote monitoring of cathodic protection systems on gas pipelines for gas utilities and pipeline companies. The company was incorporated in 1986 and is based in Atlanta, Georgia.

Some Financials:

Price $0.20 -$0.23

Market Cap, with 39.7mm shares - $8.3mm

Balance Sheet/Margin of Safety analysis:

-        - $1.9mm of cash (as of 5/10)

-        - $1.2mm NWC (excluding deferred revenues)

-        - $70mm in NOLs

-        - $1mm of “other assets”

-        - 6 patent portfolio

Excluding the value of the recurring revenues, and without giving credit to NOLs (which can be a tricky thing) I estimate $6mm or $0.16 per share in value. From today’s price that represents about a 25% discount to today’s value. While I don’t anticipate liquidation I think this is a useful bare bones analysis of what this business is worth.

Business Model/IS/CF

Acorn Energy owns 99% of OmniMatrix (which was recently raised from 80% as the company did a rights offering, mostly bought by the CEO to clean up the subsidiary ownership. The most recent OmniMatrix CEO owns the other 1%).

OmniMatrix’s main business is selling back up hardware monitors for residential as well as industrial generators and compressors, which on average fail up to 10%. Additionally, it sells pipeline cathodic protection back up monitors, which is a decent business but clearly struggling right now. The company has a couple of new products that its released/releasing: AirGuard Monitor for the air compressor market.

These are low cost products, at a few hundred dollars a piece, with high ROICs with 10’s of thousands of customers. The hardware is deferred revenue for 3 years (which is why its important to monitor cash revenues). The hardware is sold through a dealer network which enjoys the independent relationship with OmniMatrix vs being dependent entirely on OEMs.  A typical transaction for a residential back up monitor is $180 (deferred over 3 years) with 1 year up front for $120 monitoring revenue (more on that in a bit). Over the last few years the hardware cash sales have averaged $400,000 to $800,000 per quarter with obvious fluctuations and I expect that 2020 would probably show a lower run rate.

Which brings us to what I consider to be the jewel of this investment, the $3.6mm ARR of 84% gross margin monitoring revenue. The average monthly charge can range from $10 to $30, with the average in low teens, implying 20,000 to 30,000 customers ranging from governments, banks, and 25 of Fortune 500 companies including Amazon and AT&T. The customers are sticky with over 90% retention rate with disconnects due to either customers moving and new residents not turning on the monitoring service or credit issues. Per the CEO, the average customer life is well in excess of 5 years as customer switching is unlikely given that the process of ripping out and installing new hardware would far outweigh any benefits from any savings. Additionally, the dealer network gets a small commission from the recurring revenues as well incentivizing them to upsell the service.

In other words for every $100 of hardware revenue the monitoring revenue base grows by $60.00+ and stays with the company for over 5 years. Another good way to think about this (my estimate) is that OmniMatrix needs a $100,000 in hardware revenues per quarter to maintain its  monitoring revenue and every additional $100k in hardware revenues adds approximately 2% to its ARR base off the current $3.6mm.

So on a quarterly basis OmniMatrix:

-        Monitoring revenue $900,000 = $750,000 in gross profit at 84% gross profit margins.

-        Hardware $400,000 to $800,000 at $150,000 to $350,000 gross profit at 35-40% gross profit margins

Consolidated: $1.3mm to $1.7mm in revenues or about $7mm annual cash sales run rate at 69-70% gross margins or $4.0mm to $4.5mm in gross profit.

This supports a $4mm OmniMatrix SG&A infrastructure (note, not Acorn).

Now for some bad news, since Acorn is a public company it costs $800,000 to $900,000 a year to run it, meaning right now this is still a negative carry investment that is burning $500,000 to $700,000 a year in revenues. That this company should not be public is obvious to everyone, including the CEO.

Valuation Cases:

So looking at this 3 years out to 2022+

If things continue to be going pretty bad and hardware revenue average sub $2mm a year for next 3 years, with a 2.5% quarterly disconnect rate, the company gets to breakeven cash flow by mid 2022 with OmniMatrix generating $1mm in EBIT, $5.4mm in recurring revenues, and down to $1mm in cash. I am sure there are more dire scenarios out there but in terms bad cases I’d say this one is at least probable. While the higher ARR would be nice, given the continues cash burn and lack of any real growth probably puts this in the $6mm to $8mm range (balance sheet or 8x EBIT for Omni) and your downside is -30% to 0%.

My base case assumes hardware revenues stay sub $2mm, barely over $2mm next 8 quarters and improve to $3mm+ by 2022, getting you $7mm ARR, $2mm annualized Acorn cash flow and ~$3mm in OmniMatrix EBIT with over $3mm in cash. In this scenario a 10x for Omni plus cash gets you over $33mm or $0.84 per share or 300% return from here. I actually don’t view this is a high hurdle given the new products and an eventual economic recovery as well as a fully staffed SG&A today. In this scenario Acorn burns $500,000 in FCF in next 6 quarters before starting to grow the cash balance. Given the recent PPM $450,000 loan I guess we can say the govt is subsidizing the negative carry for the next year or so.  

Best case is $3.5mm in annual hardware revenues getting you to $8mm ARR by 2022 for monitoring revenues, $4.5mm+ Omni EBIT, ~$4mm Acorn FCF with $8mm in cash. The Acorn FCF with a 15x multiple plus cash gets you to $70mm in revenues gets to $1.80 per share. This one is probably more of a pipe dream but also has some probability.

Management:

The company is run by Jan Loeb who I’ve found to be a very competent manager. Jan owns 27% or over $2mm and has a clear incentive to 2-4x his money here which he put in a year ago at similar valuations. He’s very shareholder friendly, will answer any of your questions and usually calls all the shareholders he knows off voluntarily after each call. He would like to see the company but obviously in a tax advantageous way so that Acorn may retain the cash and the NOLs. Too long to discuss here but if youre going to do research on this I’d point to seeing how much value Jan has added since he came in, including cutting the massive salaries of the old board, selling money losing subsidiaries and growing the monitoring revenues.

Most recently the CEO of OmniMatrix left for another job (this isn’t as nefarious as it sounds, Walter was a 40 year old guy that was making sub $200,000 in a tiny nano cap that was trying to cut costs to stop the bleed and just had a better job offer. Jan, who lives in Baltimore, decided to take over the CEO job and fly (until the Covid shut down economy) to Atlanta on a weekly basis. This signaled to me he’s more interested in selling the asset than bringing someone else who would need a change of control parachute.

Final notes/thoughts:

This is clearly a PA investment, and you have to be comfortable with daily 10-15% bid ask spread moves. Its an OTC nanocap, but it has a lot of fans and a pretty smart shareholder base with many holders owning 2%-4.9% (not helping the float any obviously).  Mostly as I probably shown here, the ARR base is the jewel here with very diversified, high ROIC product/service with very sticky lives and high margins. The bet here is that over next couple of years the monitoring revenue business grows high enough to a) cover Acorns PubCo costs and b) start generating real FCF. We are at an operating leverage inflection point which while will be slowed due to Covid economic challenges should continue thrive.

Catalyst

- Growth in Monitoring Revenues

- Getting to Acorn breakeven

- Sale of company