(Editor's Note: This article has been corrected to reflect the company's offshore capital situation more accurately.)
I last wrote-up Acorn Energy (ACFN) here if you are new to the story and need a background. In light of Acorn missing consensus estimates for EPS loss by 36%, this article is an update to the company's valuation and liquidity problems. Continuing its strong conference attendance track record, in the first 68 days of 2013, Acorn management announced they are presenting at 8 conferences vs. only 3 over the same period last year.
An investor using a screen tool or glancing at the balance sheet would see Acorn's 12/31/13 cash account of $26.1MM and believe the company is well capitalized. Such a belief would be the result of a failure to read the rest of the 10-K. As of 2/28/13 (p61 of 10K), Acorn's parent level had $18.9MM.
Additionally, according to Enercom’s “Notes from the Road,” Acorn management indicates it had no debt as of year-end. Year end was more than 3 months ago so that data is stale. According to the 10-K (pp. 60-61), subsequent to year end, both USSI and Gridsense drew down on credit lines in February 2013 so it is my opinion that it is more likely than not that Acorn will report having debt when the company reports first quarter results.
Of this $18.9MM, $8.9MM of parent cash is held at banks outside the U.S. which "due to Israeli tax and company law constraints and DSIT's own cash and finance needs" (p61 of 10K), Acorn management will not access. The following is based on the assumption that management can repatriate this $8.9MM tax free for the sake of being conservative; however, the 10-K states that some of this would be subject to taxation. Cash domiciled domestically at the parent level as of February 2013 was $11.8MM.
"We have the cash" - Acorn CEO 4Q12 Earnings Announcement
Acorn's CEO declared in the 4Q12 earnings release that ACFN has enough cash for "projected needs in 2013." Of course, he must say so because no CEO wants to advertise an upcoming secondary to existing shareholders. On the call management gave preliminary estimates for the 2013 cash contribution plans which include $12MM of which $3MM was contributed by 2/28/13, leaving $9MM of additional capital contributions for the rest of 2013.
Planned contributions for DSIT are $2.2MM which will come out of Acorn's parent owned cash held outside the U.S., reducing the remaining outside-the-U.S. held parent cash from $8.9MM to $6.7MM. The remaining subsidiaries have planned cash contributions of $6.8MM ($9MM-$2.2MM) which will come out of the domestic parent cash. After deducting this amount from the $11.8MM domestic corporate cash as of 2/28/13, Acorn has only $5MM (11.8 - 6.8 = 5) of cash with which to fund corporate costs and dividends. $3.2MM in cash was paid out as dividends in 2012. Holding this figure flat to assume management does not discontinue the dividend, Acorn now has only $1.8MM of cash in domestic bank accounts to fund corporate costs. Per the press release, corporate operating costs for 2012 were $5.3MM. As a result, the company will need to repatriate most if not all of the foreign held cash before the end of the year. Assuming 100% of the foreign held cash (as of February 2013) were brought back to the U.S. tax-free, acorn would have $3.2MM in cash on 12/31/13. The math is $1.8MM of domestic cash + $6.7MM foreign domiciled cash less $5.3MM in corporate costs.
These corporate costs are not going down with the raises given to the rest of management including a $50k raise to the CEO. As a side-note, Acorn announced on 1/15/13, that OmniMetrix had appointed a new CIO. The 10K quietly elaborated on the fact that the new CIO is in fact the brother-in-law of the CEO.
$3MM is a slim margin for error for a company that has faced repeated delays and setbacks.
Track Record of Delays
This analysis is using figures provided by management and doesn't include any unforeseen costs arising out of additional delays from any of the subsidiaries. Regarding USSI, the CEO of USSI said USSI is "looking to ramp up second half of the year with the production orders." Unfortunately, this quote is from March 16, 2012 on the company's 4Q 2011 results call. Clearly, a dose of skepticism is warranted when hearing Acorn's plans for 2013.
Valuation - Sum of the Parts
This valuation is similar to the one done in the last write-up. To Value ACFN, we have chosen an approach popular with the company as well as its "research" coverage, sum-of-the-parts (SotP). We have broken down the company into 3 parts based on company segment disclosures. The company calls its segments: Energy & Security Sonar Solutions, Gridsense, Power Generation Monitoring, and USSI. We have grouped Gridsense and Power Generation Monitoring into the broader category of 'Smart Grid' in the analysis below. USSI falls under 'Seismic Equipment'; Energy & Security Sonar Solutions falls under 'Defense'. The analysis considers EV/EBITDA, EV/Revenue and P/E and uses the highest implied valuation for each segment to arrive at a price which represents best case scenario. Comparable companies with negative ratios or ratios equal to zero were ignored in the valuation furthering the goal of keeping this a best case scenario valuation. Cash of $18.8MM is based on holding company level cash as of 2/28/13 less the $630k cash distributed for the 4Q12 dividend.
Acorn's implied valuation using public comps has continued to slide as the company's results and cash levels deteriorate. The company appears to need to raise capital, cut the dividend, or some combination of both before the end of 2013.
Disclaimer: Use of the opinion produced by the author is at your own risk. This is a short-biased report and you should assume the author of this report holds a short position and/or derivatives tied to the security of Acorn Energy that will benefit from a decline in the price of the common stock. Following publication of the report, the author (including members, partners, affiliates, employees, and/or consultants) may transact in the securities of the companies covered herein. The author of this report has obtained all information used to form opinions and draw conclusions contained herein from sources believed to be accurate and reliable and has included references where available and practical. However, such information is presented "as is," without warranty of any kind- whether express or implied. The author of this report makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. Forward looking statement and projections are inherently susceptible to uncertainty and involve many risks (known and unknown) that could cause actual results to differ materially from expected results. All expressions of opinion are subject to change without notice, and the author does not undertake to update or supplement this report or any of the information contained herein. The author is not a broker/dealer or financial advisor and nothing contained herein should be construed as an offer or solicitation to buy or sell any investment or security mentioned in this report. You should do your own research and due diligence before making any investment decision with respect to securities covered herein.