Acorn Energy, Inc. (ACFN) Q2 2013 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Acorn Energy Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Heather Mallard, General Counsel. Please go ahead.

Thank you, and good morning, everyone. Please take note that certain of the matters discussed in this presentation contain statements that are forward-looking, such as statements relating to results of operations, financial condition, business development activities and market dynamics. Such forward-looking information involves important risks and uncertainties that could significantly affect the anticipated results in the future, and accordingly, such results may differ materially from those expressed in any forward-looking statements made by or on behalf of Acorn Energy or its subsidiaries. All statements other than statements of historical fact in this presentation regarding Acorn Energy's or any of its subsidiaries' future performance, revenues, margins, market share and any future events or prospects are forward-looking statements. For more information regarding risks and uncertainties that could affect Acorn Energy's or any of its subsidiaries' results of operations or financial condition, review Acorn Energy's filings with the Securities and Exchange Commission, in particular, its most recently filed Form 10-K and Form 10-Q. Acorn Energy's forward-looking statements are not guarantees of future performance, and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements. As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainties of estimates, forecasts and projections and may be better or worse than projected, and such differences could be material. Acorn Energy undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I will now turn the presentation over to John Moore, President and CEO of Acorn Energy.

Thank you, and welcome. Before I dive into the specific details of each company's performance, I think it's worthwhile to talk briefly about 2 things: What we do and what makes your investment in Acorn so special. The first thing we start with is problems that are worth solving. At Comverge, we created the demand response industry to solve the peaking problem with electric grid, this is called the killer app of the Smart Grid. At CoaLogix, we anticipated the clean air issues related to coal-fired power plants, would change from state to federal, and eventually become a worldwide problem, particularly for countries like China. In our current portfolio, US Seismic is solving a problem not only for the unconventional industry that Bloomberg estimates wasted over $31 billion last year on suboptimal frac stages, but also for national oil companies that control over 80% of the world's oil reserves. For example, Pemex drives 30% of the Mexican governments' revenues. They're facing a crisis due to the rapidly depleting oilfields. The problem is so great in Mexico that they're changing the Constitution to stimulate investment innovation for the first time since they nationalized the industry in 1940. Whether it's companies like Pemex or Saudi Aramco pursuing the tertiary recovery of oil from the super giant warfield, our technology, for the first time, offers the opportunity for transformational sub-surface monitoring. To be the first-est with the most- est, in a global multi-billion opportunity like this, is truly unique and exciting, and we can't afford to be penny wise and pound foolish in how we fund this project. This brings me to the second thing that we do once we've found a company like US Seismic or GridSense. We first do things that don't scale, this sounds very countering to it. In other words, we spend the money and the time to get the product right with the early adopter for customers regardless of the initial unit economics. Paul Graham, the founder of start-up incubator, Y Combinator, which has funded over 450 young companies, including Dropbox, Airbnb and Reddit, recently wrote a blog post on the subject. He stated, "A lot of would-be founders believe that start-ups either take off or don't. You build something, you make it available, and if you've made a better mousetrap, people beat a path to your door as promised. Or they don't, in which case the market must not exist. Actually, start-ups take off because their founders make them take off. " Graham goes on to note that it nearly always takes a laborious process to get a start-up's engine going. This is particularly true in the energy technology business because of long sale cycles. Graham concludes that, "the unscalable things that you do -- you have to do to get started, are not merely a necessarily evil, but change the company permanently for the better." From a short-term investor's point of view, exponential returns for the hard work I'm talking about sometimes seem always over the next hill. But the progress that we've made in the past year can't be measured in numbers alone, at least not yet. There is no question that we're getting traction, that we are building a foundation that will allow our companies to achieve warp speed growth with great margins. For example, in March, we announced our US Seismic division had been selected to participate in the competitive full-scale seismic shootout against several other companies in a trial led by supermajor oil company. The stated goal for this pioneering customer was to select a technology provider to monitor all of their future unconventional wells. If you want a sense of the scale that we're talking about, you consider the fact that they drill approximately 40 of these wells per month. This represents a total market opportunity from just one customer of nearly 500 monitoring devices per year. And our prices, according to the size and system that they would choose, could cost between $1 million and $2.5 million a piece. The trial was conducted over 2 weeks in June. It was the most thorough geophysical trial of its kind conducted in recent memory. On Monday, the supermajor informed us that US Seismic had been selected to move on to the next phase of the project. While this is not yet the event that can be described as a direct sale of our monitoring devices, we're deep into a process that we believe will ultimately lead to that eventuality. Our customer has cautioned us that further details with testing are subject to a nondisclosure agreement, and therefore, I have to be necessarily vague on the technological specifics. But it is abundantly clear that this is a very positive development for this young company. Of course, the timing of commercialization is completely out of our hands, so I can't venture predictions about exactly when sales milestones will be met. But we feel strongly that we remain at the forefront of creating what will likely be a multi-billion dollar new industry. In order to meet the coming challenges of the ramp-up to full production, we plan to carefully manage customer acquisition at these early stages. We've announced that we have added an additional 8,600 square feet of manufacturing and that we began ordering parts for 2 additional production lines. We are laying the groundwork for a big future for this company. With that said, it's important for investors to recognize US Seismic for what it is now; a venture stage investment. This is a rare and incredibly valuable opportunity. The way forward is not necessarily linear nor predictable, but we are moving towards great things. In the next 6 months, we'll judge progress based on how we improve engineering and mature the field [indiscernible] design, as well as the manufacturing ability of our system. Note that our product is not yet perfected and indeed, the history of 10 logical innovation is that development never stops. At this time, we need more experience working downhole with our tool. We need to create a new generation of high-temperature clamps. We are fortunate to have experienced, early customers like Bill Burkland [ph] of the geophysical services company, SR2020, who has his own proprietary clamp and will begin testing our optical array in mid-August to help us continuing to perfect our product. We have the world's largest and most experienced team of fiber-optic sensor engineers designing a permanent borehole tool. The parent company is here to provide the resources and the patience these bright people require to achieve complete success. DSIT. DSIT, when I first took over the company, I didn't buy DSIT, it was part of the parent company. It was doing $4.5 million in sales and it was losing money. And up until recently, we never invested a dime. They grew the company to $13.5 million of revenue, EBITDA positive, and Benny and the team came to us and said, "Imagine if you invested a couple million dollars in this, what we could achieve? We could really expand this." They presented us with a business plan and the business plan said that they'd become lots [ph] -making because they'll be investing additional money in R&D. But we've half invested the money, we invested about half of the money we committed to invest, and DSIT continues to remain profitable in the first half of 2013 while significantly ramping their R&D costs. They've added a product with extended detection range for faster moving, swimmer delivery vehicles, these are called SDVs, and just as drones have changed warfare above ground, the development of these SDVs and autonomous underwater vehicles, UAVs, have changed the nature of security in the subsea. DSIT is committed to expanding its position as the leader in securing energy terminals and other sensitive facilities near open water against growing terrorist threats. The company has a robust pipeline of opportunities versus just a handful several years ago. To date, DSIT has sold nearly $30 million worth of diver detection systems and this represents a great group of reference customers. These markets include facilities in every nation of the world where this critical infrastructure is exposed to potential threats from open water. And as awareness grows in these vulnerabilities, so too will DSIT's market. In many ways, the oldest and most established company in our portfolio is just getting started. Many of you know that I'm being mentored in my role as CEO by Ed Woolard, former CEO of DuPont and Conoco; and his friend, our Chairman, Chris Clouser. Steve Jobs called Ed the wisest man we'd ever met. Like you, Ed and Chris are shareholders, and they've urged me to spend more of my time on US Seismic. So to allow me to narrow my focus, we appointed Rich Rimer, Executive Vice President of Acorn and Chairman of GridSense and OmniMetrix. Joe Musanti has been appointed CEO of both companies. Joe is an experienced manager with the where-with-all to shift these companies from research and development-focused to one of sales development and finished product delivery. He's homing in like a laser on opportunities we have now, with the products we have now. In the few short months, he's already improved product quality and on-time shipments at GridSense. By removing unnecessary organizational levels and developing efficient processes, the team has become productive at converting pilots to commercial orders. One of the team members commented to me recently, "Even though there are fewer employees, we're getting more done." Joe's work over the past several months has been to position the company to achieve cash flow-neutral position by the end of second half of 2013 and beyond. This is doubly exciting because if we can eliminate the need for Acorn to fund the business and they can convert on 1 or 2 of this huge pipeline of breakthrough, $10 million, $20 million, $30 million, $40 million projects, we have a very valuable asset on our hands. In particular, I'm excited about our progress on the potential 55,000 pull top Distribution IQ project I discussed on our last call. Joe just assumed the role of CEO at OmniMetrix and he's looking for ways to share resources with GridSense because of the business similarities and complimentary strengths. Both OmniMetrix and GridSense manufacture M2M sensors connected via cellular radios to critical power infrastructure in order to enhance both grid reliability and power assurance. Similarly, their administrative, IT and engineering talent that could be unified for more efficient exploitation. In addition, OmniMetrix has a strong customer support and GridSense has excellent user software, Grid InSite. As CEO of both companies, we believe Joe will be able to synergize and leverage these assets for the benefit of both companies. I should just comment on when we acquired OmniMetrix in February of 2012 in accordance with GAAP, a portion of the purchase price was attributed to intangible assets, one of them being the existing customer relationships at the time of the acquisition. As a result of the customer's decision to decommission their units over a period of time, OmniMetrix recorded a noncash impairment charge of approximately $1.1 million in the second quarter. Under Joe's leadership, our company continues to replace these units and add more. We expect GridSense to have a strong finish this year based on additional pilots, both domestic and international, converting into bigger deployments. As regards to the OmniMetrix product line, where the company may have lacked focus in the past, top of Joe's list of priorities is to get the large sales force pulling in the same direction. One of the areas where the company intends to place its focus is around new environmental regulations affecting generators and boilers called RICE NESHAP. Owners -- this is similar to the care loss that we had under CoaLogix. Owners of the generators have faced the choice, either dispatch valuable employees to monitor the assets or deploy remote monitoring solutions like our OmniMetrix product that automatically collect and record the data. OmniMetrix may well benefit from another macro trend as in CoaLogix in the federalization of clean air rules. We are confident in our overall cash position. As of the end of July, we had $9.7 million in corporate cash and a federal income tax receivable of $1.7 million, which we expect to receive in the fourth quarter. For the past several years, I've been spending a lot of time on the road speaking with investors and strategics on that technique I call percolation by circulation. This means that when we're ready to bring on additional capital that we have many options to do it and we can do it from a position of strength. Also I always like to point out the fact that we only raised $15 million to date, net of dividends, and -- to create $130 million market cap. So we're extremely efficient users of shareholder capital. We're excited about the large and growing pipeline of business opportunities in each company and we're working to switch the use of our capital from technology investments to sales and marketing of resulting new products. While there's always a lag between investment and sales outcomes, we strongly believe that we're laying the foundation of enterprises that will be profitable for many years to come. This concludes my prepared remarks. My team and I are standing by for your questions.

[Operator Instructions] And our first question comes from James McIlree from Chardan Capital.

John, on the US Seismic test, are you aware if there are other participants in the second -- in the phase that you're now engaged, in the second phase of testing?

I was in the meeting with Jim when we had the conversation with the customer, and to our knowledge, we were the only company that was selected.

Okay. And is there any indication as to how long this second phase will last? Or what they're looking for in this phase that they weren't looking for in the first phase?

So the customer pointed out to us some improvements that we need to make in the product, and we're going to do that. And I think their time line is essentially the same, that they're looking to place an order for 5 systems, 4 or 5 systems for delivery by February to go into a permanent production well, but we're being careful because one of the things that we've noticed is that, the customer can change their plans. They haven't yet changed their plans, I think they're still planning on doing what's called a cook test in October that sets up the deployment in February, but the customer has said their plans are subject to the confidentiality agreement and they've asked us, they've warned us not to telegraph those. So I've probably gone as far as I can go.

That's fair enough, fair enough. So maybe, just to play devil's advocate, I mean, there might be a third phase, there might be a fourth phase, but right now, your best understanding is second phase and then...

Yes. I think one of the things that I would like to highlight here is the fact that what's the real value of this customer. It's not only the fact that they're huge potential deployers for technology or the fact that they could write great articles on our collaboration, but it's the fact that you've got a dance partner in developing this technology that has specific needs and can challenge us. So we're not drinking our own wine, they're actually saying, look, the product has to do X, it has to do Y, and yes, this is good enough, but you need to move in this direction. And they also provide the infrastructure, like the cook test well is a $7 million well that only major oil companies have access to those types of infrastructure. So the value is beyond the customer relationship, and it's essential to US Seismic continuing to develop its product. I think that you've got as much as and maybe more than my general counsel would allow me to say, Jim, but thanks for that question.

Two more, if you don't mind, is it possible that the customer would release the results of the first test or the second test?

They seem very anxious to publish the data, so the key is getting data that we'd all be proud of publishing.

Okay, great. And then finally, can you explain the disconnect of the significant customer for OmniMetrix? I think the 10-Q mentioned that there were 1,000 units when you purchased OmniMetrix. How many does that customer -- how many units does that customer have now and are they going to 0 or are they stopping before they get to 0?

So they disconnected 250 units. And I think the way that Joe put it to me is that -- or maybe, Joe, I'll allow you to answer that question.

Yes. John, it's correct. They disconnected 252 units, and the disconnects will continue over time. So what our goal is, is to replace at a faster rate what they're disconnecting with other customers.

And their goal is to disconnect all of their units?

John, I'll let you to sort of answer that because I haven't gotten the exact details in my short time here.

So I would say that, the way that Joe has explained it to me is that it's a developing situation. They've dis-contacted their units from one state only and we're continuing to work as if we're -- we're trying to do everything we can to maintain the relationship and preserve the relationship.

And again, that's one of the things we are, in my short time here, is focusing on that particular customer and making sure we can find all the answers and trying to stop them from disconnecting. But like John says, it's currently just in one state that, that is happening. So from my point of view, they are an ongoing customer right now and we're going to look to try to reverse the trend.

Our next question comes from Michael Berseck [ph] from Oppenheimer & Co.

Actually, I got a couple of little ones upfront and then go a little bit deep. You mentioned your cash was $9.7 million, I think. And on your balance sheet, it says $13.3 million?

That's because we consolidated the cash from the operating companies.

Got it. Okay, second little one is, once again on the balance sheet, accrued severance, what's that about?

Michael Barth, do you want to take that question?

Sure. Under Israeli law, employees accrue severance, 1 month of salary for each year that they're employed with the company. So we're required by GAAP, Generally Accepted Accounting Principles, to record this on our books. This is funded in part by an asset on our book, which is called severance assets.

Okay. So this is, in case you do have to let people go down the road? This is not for people you've already let go or anything like that. Okay.

That's true, that's correct.

Okay, good, good, good. All right. Now I have one on OmniMetrix, I may have missed something. But why is this customer disconnecting those units? What was the reason they gave you?

They wanted to -- they actually build their own knock because they want to have to control over their system. And they just wanted a different direction at least in the State of Texas and we're working hard to help them understand why this can be an and, not an or.

Okay. Now going back to GridSense. As part of this deal you're doing with this company, is there any exclusivity that they have with the products you're developing with them?

So you say with GridSense?

Yes. Sorry, not GridSense, US Seismic, on this oil company deal that you're working on. That they're on Stage 2, and they're making improvements?

No, no, no. It's interesting. And I'd just like to comment on that. I met with the head of one of the -- the head of the Game Changer division of Shell oil and they were talking if they're really the pioneers of 3D seismic. And they said that what the oil companies have come to realize is that there is no advantage for them to prevent other oil companies from adopting the technology and as a matter of fact, that there's big reasons for them because the more people adopted the technology, the costs go down for everybody. And similarly, their own strategy instead of asking for exclusivity on technology is that once they find something that works, to go as hard and as fast at implementing those technologies as they can. So I think that's very promising, it just sort of raises the stakes for us to make certain we get this execution of US Seismic products done quickly and thoroughly.

Right. Now Stage 2, you're basically working on these improvements, then I assume you can call it Stage 3, is where they're going to put 4 or 5 systems in and test those for a while, I guess? Is that -- what's going to be going on? You mentioned 4 or 5 systems by February.

And that was on one observation pad. That's correct. They want to have them deployed by that time.

And then do you have an idea of how long that stage will go before they decide to make some big orders?

I think that their plan is -- and once again, I'm going way farther than I should, but what they had originally told us and this seems to be consistent is that they were immediately going to launch into adding the additional production lines.

That's fine. Don't go too far. Let me ask you one other thing though, just regarding this and we can let it go. You said that the shale gas said that it's in the interest for people, for everybody to adopt, it makes the price cheaper and all that sort of thing. How does that square with all this confidentiality then? You would think that they wouldn't care about it being confidential, that they would be happy to say things and move in very quickly and make everybody jump on board?

That is an important question and it basically goes all the way across from our utility customers all the way to the oil and gas companies is these guys are just incredibly camera shy, right, and people are knocking on their doors every day with new solutions and new technologies and they want to avoid the liability of being seen as telling investors how to invest their money. And so we just have to respect that request for confidentiality. And the thing I always try to remind myself is the long-term benefit of keeping the customer, not pissing them off, is worth much more than the short-term benefit of exciting my investors.

Okay. Actually, I lied, I have one more question. These 4 or 5 systems, is that -- are they going to pay full price for that? Or is that like part of a test deal and they're paying cost? Or how is it going work?

Yes. I think it's too early to say, but they haven't been very price-sensitive on anything that we've talked about.

Our next question comes from Bill Bremmer from Maxim Group.

All right, let's get a sense on this USSI. How long do you anticipate the second phase to last?

The second phase specifically referring to the trial at the supermajor?

Correct.

Well, we think that -- I guess, the first answer is it'll take as long as the customer wants it to take. But by looking at the shadows of the wall and what they're saying right now is that it should be done, that they should buy the first commercial systems in February. But we have to do a lot of things right to get to February, and we just want to make certain we spend that money, invest that effort -- the intensity of effort to solve it.

All right. What improvements did this customer asked for? How material are they? How difficult is it for your team to achieve it?

I'm going to hand that one over to Jim Andersen, and ask him to do a better job than I've done of keeping customers' perspective confidential. Go ahead, Jim. Do your best for Bill, here.

Sure, sure. At one point, I think John hit it, but it's really, really a big deal for us to be selected by the supermajor. And before I answer your question, I just want to make one point that really, really impressed them. This was, as John said, one of the most extensive tests that anybody can ever recall for qualifying equipment for certain -- application. And one other test they did, just an example, they took a very small explosive charge, and I'm talking about, they started with 6 grams and went down to less than 0.5 grams, this tactic because they're trying to see small micro seismic events. And far and away, we were able to detect these things and they were going to stop the testing after they did a couple of shots when nobody was detecting it until they saw that we were, so then they just kept going all the way down to about 0.3333 gram and we were still detecting that at 1,000 feet so it was shocking. So, you ask why they are continuing this, our sensitivity is just unbelievable. And compared to a DAS system for 1,000 grams, this is one of these distributed acoustic fiber-optic sensor technology that Shell and all of these people are talking about. Where we are able to detect event at 0.3333 gram at 1,000 feet, they're excited about the fact that they detect 2,000 grams at 1,000 feet, so it's really, really shocking. So on the good side is they're really excited about we're able to detect the events we're looking for. But one of the things we found is that, we go out there and we make these superb sensors, but then you have to take a clamp that clamps it to the wellbore. And we've been using clamp design that's -- typically that's used in the industry. And on previous test, we've gone out and tested it and they tried to see how good it pinpoints the events and it's been as good, at pinpointing events, as any other clamp system out there. But on this test, they compared us to a cemented in system versus our clamp, and by doing that, they saw, wow, when you get into the higher frequencies, which nobody has ever done before because they did a really, really extensive test with high frequencies, they said, "You know what, we could see that the clamp at the higher frequencies kind of walks off this accuracy of pinpointing events." So we sat down with them and explained, "Well, we use the clamp that's kind of almost in line with industry standards, but you guys see that you want to go higher frequencies, we have to make them a little stiffer." So that's really kind of what John is talking about they said, we'd like you to make it stiffer because you have a sensor that could pick up such wider bandwidth signals, but we want to keep that accuracy of detecting the events at a higher bandwidth. And in order to do that, we all agreed that the meeting, based on the data they had and we had, we have to make it stiffer. And we even showed them a prototype that we made that really read it much, much stiffer and got rid of this high-frequency problem they we're seeing. So now they said, "Okay, that's fine, just build several of these. Let's put it in a well and make sure it works in the well as good as you're seeing in the lab."

And the timing on that?

We're going to go in the well to test this clamp in the order of maybe a month or so.

Okay. All right. And refresh my memory. I remember that the first system, if it was going to be deployed, would be approximately $2.5 million per. And if I heard John correctly today, I think he was talking about $1 million to $2.5 million. So really, what is this Phase 2 worth?

So okay, sorry.

Well, I'll just say that I don't think that we know because the customer is sort of developing the situation through action and sort of -- originally, they wanted to be -- this is the biggest challenge we have is the customer originally wanted to cement all the tools and they changed their minds, they wanted to do clamps and we had to change at the last minute. So it's really hard for us to project or to maintain credibility with our investors if the customer keeps changing what it is that they're planning on doing. And that can be positive and negative, and so I think we've just made the decision to sort of not give -- not to sort of whips [ph] our investors by giving them that level of granularity. But it's -- the 500 installations, the 480 installations per year times, whether it's $1 million or $2.5 million, it's still transformational for a small company like ours.

There's a possibility that this could go into a third phase and possibly fourth phase as well at this point? Do you think that the customer's going to continually, after you make these revisions, continue to push this ongoing? Or do you finally feel as though that you made these revisions and you guys are ready to go?

I guess, I would refer that one to Jim.

Yes. And John, I hope you don't mind if I step back, to kind of support your position a bit. Because one of the things that happened is, originally, what the supermajor said, let's go out, we need you to be in the well in April. And then they delayed it because they told -- the permits got delayed, there was rain, we had to drill the well. So that test, which they originally told us, and we have all the equipment ready at the end of March, didn't happen until June. So that's why when John talks about a little of this stuff is a little out of our control. But they're still moving ahead as fast as they believe they can. So what the next step is -- this was to say, okay, we're going to put the first test was to say, we're going to put all these wells, do all these competitors in wells and look at their performance in a kind of like, I'm going to call it, benign environment, not a high temperature. Because most of the other guys can't do high temperature. So, they say, okay, we're going to determine [ph] -- and the next phase of the test is who they pick, they're going to put them in a high temperature application. Now, if they were to pick somebody else that didn't have high temperature capability, I'm not sure what they would have done. But it works out, they picked us. And so this next step, they're going to do a test where they're going to put it in a well, high temperature well, and monitor for a period of time and make sure everything stays -- the performance stays like it's supposed over that period of time.

Yes, they call it a cook test. I think Heather is asking us to stop going into the details. But, a quick answer to your question, Bill, is the customer has not indicated to us that there will be any additional phases.

Right. And then Jim, how long would it take to build the 4 or 5 systems?

We're setting up production capability that we could do 2 -- with the capital equipment in place, 2 100-level systems a month. So, with that mind, if it becomes 4 100 level systems, we could put those out over a 2-month period. And then we're also, as John was saying, we're building up production lines that go beyond that. But we will have that production...

Just to fulfill this order and validate it, that's my question.

Okay.

And our next question comes from Phil Dodge [ph] from Noble Financial Capital Markets.

One more on USSI. In the 10-Q, you say that you're increasing manufacturing capacity by $50 million, and just want to understand what period of time that covers. Is it annual capacity or some other interval.

Annual capacity. So what we've done is -- Jim is building automatic production equipment, and that equipment is being refined and now we're satisfied enough with the current state that we've commenced production on 2 additional lines that will take us up to about $150 million of throughput.

Okay. But, annually...

Annual basis, on an annual basis. Well, once the additional 2 lines are built, it'll be $150 million on an annual basis.

Okay. So it's going above what you have at the moment, obviously?

That is correct.

On GridSense, interested in how much you save by retrenching in Australia or I guess eliminating production there completely.

Joe, would you like to answer that question?

Yes, surely. So, from a savings point of view, there was some production over there, but it was mainly a consolidation of engineering, and we took it from approximately 20 FTEs down to 9 in Australia, replaced some of the resources in Sacramento.

So how does that come out financially, would you say? As far as...

Financially, it came out where we reduced expenses on an annualized business, about $1 million, $1.2 million.

I think we took like a $500,000 or $600,000 charge for that.

Yes, which was severance and -- we've also gone to a smaller facility in Australia.

And our next question comes from Gavin Ritchie from Rockwood Capital Partners.

Just two quick questions. The regional smart grid company or partnership you have that was part of the GridSense sales. Is there any exclusivity with that or...

This is the one that we announced the $1 million sale?

Yes.

It's exclusive in 1 country and nonexclusive in a couple other markets that they're intending on getting into.

Okay. And do you have any ongoing sales support? Do they kind of run that themselves?

Well, Joe, I think you're doing a lot of support for that customer.

Yes, there's a lot of support, and some of that is coming out of Australia and out of the U.S.

Okay. And you talked, earlier, about making the investments you need for USSI to get over the hump, with the testing and whatnot. What kind of capital investment's going to be needed for USSI and the other 3 companies for the last half?

Well, I think that we'll probably be investing another $2.5 million in US Seismic through the end of the year. But that's subject to change.

And the other companies, are they in good shape or...

Well, I think the way the Joe is running GridSense is that it's, hopefully, not going to require any additional cash from the company. I think OmniMetrix, we're investing about $250,000 a month in that company. But, DSIT, of course, we have $1.5 million of additional commitment that we've agreed to make in that company over a period of the next 12 months, and that's it.

Okay. And then as far as Richard Reimers' new position, will he be doing retros and investor presentations, that kind of thing or will you still be handling that as far as your focus on USSI going forward?

So the way that Richard and I divided up is, he is primarily cultivating the international investor group, particularly in Europe, and I'm handling the U.S.

Our next question comes from Rudy Hokanson from Barrington Research.

I was just wondering -- there are 2 questions. In terms of USSI and your pricing of the product, have you done a payback period type of analysis or -- where what it will mean to the oil company for the information that you're able to get them in terms of the reservoir, how much value that will bring to their future production over what period of time, so that you can justify whatever price you start negotiating on?

So the way that our seismic service companies tell us that they sell the use of our tools is twofold. One is through a service called 3D VSP, and there, the promise is that they can -- by spending $500,000 on a 3D VSP, they can eliminate up to $3 million of wasted frac stages. So that's a very high return on investment and reduces the capital cost of the wells. And as far as the use of the tool -- and this has to be proven, right? But they use the tool for microseismic wall frac-ing -- is that it costs $300,000 per well, per lateral basically, and there can be 4 or 5 of those laterals per well pad. And they believe that they'll be able to realize, over the life of the field, like a $3 million improvement in yield from the well. But this is, I think, a critical place where Acorn has to invest in US Seismic right now and what we'll be getting out of our interactions with our customers is proving that out, creating the data, and those are obviously incredible returns for the customers if, in fact, it holds to be true, and that will have a big impact on the speed of adoption of the technology. This is a show-me-don't-tell-me-industry that we're competing in.

So, right now, John, these are estimates. They haven't been done on -- I mean, you're not out there in enough wells right now to do a real sample study yet. But that would be the next stage where somebody could say, okay, given whatever variables would be between the wells that you'd be measured against, getting enough samples to say, okay, in these X number of wells we noticed this kind of improvement when we followed whatever guidance this information gave our geophysicists or our petroleum engineers compared to the wells that didn't have this information. But that's going to be a step going forward and that's going to require, then, investment on the part of Acorn?

Yes. Investment or involvement with our customers. I mean, our -- there's one service company in particular, who we sold the system to, that's actively out marketing the use of our tool to their customers, and they're getting customers and these are sort of the promises that they've made to them. So they're on the line and we're on the line.

Okay. And then the second question is that you talked about that you'll be -- as you're able to move on into the second half of the year, looking for opportunities to increase the marketing effort, the sales efforts, and does that mean that the SG&A, across the board, is going to be going up as a percent of revenue in place of the cash investment, the infusions you've been doing? Or I guess if you could maybe you could talk a little bit more about what it means to be investing in marketing? I mean, DSIT, we've talked about the fact that they have 2 salespeople, but it's difficult to find people who are qualified to do that kind of sale. What would it mean to be improving marketing there and with GridSense and OmniMetrix, it sounds like you're in a number of places already, with the pilots and also with the trade shows for the distributors. What does it mean to be increasing the sales and marketing efforts right now?

So I think what -- I'll talk to generalities, then I'll ask Joe Lisanti to cover a little bit in the specifics. I think what I mean is that the emphasis of our investment in our companies is going to switch at -- I would say that specifically at OmniMetrix and GridSense from what had been a very engineering-heavy investment to sales and marketing. Joe, you might want to just give some specifics around that. In US Seismic is going to stay in the completion of the technology and the engineering side. But, specifically, at US Seismic -- I'm sorry, at GridSense and OmniMetrix, Joe's been not as focused -- he's been deemphasizing new product development and focusing on getting the products completed and sold. So Joe, could you give a little color on that?

Yes, yes, I could. Related to your SG&A as a percentage of sales, I think by saying we're focusing on sales and marketing doesn't mean that the sales and marketing or the SG&A expense is going to go up. It's a matter of allocating the resources in the proper places so that we can focus on sales and marketing. And that's what it's all about, from my point of view, with these 2 businesses is focusing and getting the resources in the right spots.

So an example would be that -- in the past, we had focused across -- at GridSense, across, let's say, 20 pilots. Joe's focused people on -- let's just work on the 3 that have the nearest term opportunity where the customer is the most engaged and let's get him 100% across the goal line and turn that into revenue as opposed to be partially satisfying the need of 10 or 20 different companies. So, hopefully, sales and marketing expenses, as a percentage of revenue, will be going down and we'll actually be getting more results.

Right, with the sales going up it would go down. In absolute dollar amount, I don't expect it to go up. But as a percentage of sales, that the goal would be for it to go down because sales are going up.

Okay. And I may have missed this. But, right now, what's the status -- you still have around 45, 44 pilots going on at GridSense?

There would be 40 -- I think 43 pilots going on, but that -- again, those are customers that have pilots running. But the focus is on a much, much smaller number that we're tracking and keeping our resources on. And when I say keeping our resources on, I mean that we're -- and again, this may have not have been done in the past -- is making customer visits to those customers ensuring that whether it's our software person or engineer or customer service person, is continually in contact with those customers and moving the pilots forward. And I would say, there's probably 10 that we have that massive focus on right now.

Okay. And can I -- and, again, just trying to get a sense of the velocity of this activity. One, on the pilot that just has been converted to $1 million order, could you give us an idea how long that was at the pilot phase? And would that be what you would consider a typical period of time for a pilot to go before it becomes a straight order or are there no rules to this and pilots could go on indefinitely?

Well, I think historically, pilots could go on indefinitely, and that's what we're trying to avoid. I don't know how long the pilot was going on, the one we converted. I think it was at least probably 1.5 years that it was going on that they had product and they were testing. And from my experience, that's sort of typical and maybe actually even a little short based on the historical data I have. And what we're trying to do with this resource concentration is shorten that window. That is the goal. By giving the customers the resources and analyzing the data to try to get that period as short as possible.

And Grid InSite has been incredibly helpful in making those interest [indiscernible]. So that has been a very good investment.

Yes, yes. GridSense has been incredibly helpful. And that is something that historically we never used as an acceleration technology to speed up the pilots, but we found that doing that with the software and getting the customer data and managing them through that data has sped up some of the velocity.

Our next question comes from Rick Solomon from Barrington Fund.

Jim, can you talk, in general terms, about -- I mean, we're all very interested product and its applications. Are there any other applications you can talk about, in general terms, that the product might be useful for? And also, without going into specific companies, are there other oil service companies that are interested in your product?

So that's a question for Jim Anderson, I think. Right, Ricky?

Yes, sorry. I missed the first part of it, but I'll start with the second about other companies' interest, right? So we're selected by the supermajor oil company, that's the first one. And we're in final negotiations, the oilfield service company for a big multi-well project in Australia, and we're working with several national oil companies for trials and projects associated with them. So, yes, there's a lot of activity going on. I sense some of your frustration on how sometimes it takes longer and I feel that myself, but we are making good progress. We have a lot of interest and many, many irons in the fire with multiple oil companies and oilfield service companies. And I forget, what was the first part?

Yes. The first question was, are there any other applications that you're working on other than just downhole seismic or other types of fields you can get -- anything else that might be useful for that we haven't discussed on the call?

Well, we're primarily focused on microseismic monitoring of hydro frac-ing. We're seeing this as not only being pushed to improve efficiency, but regulation starting to call for it. We see a larger downstream opportunity for 4D seismic for marine, there's many companies that come to talk to us about these activities. We've kind of put them on hold for a while until they get good enough traction on the microseismic side. And then once that's done, we'll start looking at these marine seismic type opportunities, which require this similar technology. Just the systems right now are too large for us to consider. Where a typical system for microseismic monitoring might be 20 levels, a marine seismic monitoring would be 20,000 to 25,000 levels. And we just feel we're not quite ready for that activity yet. So we're sort of holding them at bay, having conversations and meeting with them. And eventually, we'll go after those.

Yes, Ricky, I would say our biggest thing is the borehole seismic industry is large enough we just really have to focus on satisfying these couple of customers and we're talking about months here, not years, and so it's focusing on this -- on getting across the goal line on this borehole seismic projects, is our biggest effort.

That's all shale you're talking about?

It's shale, it's also enhanced oil recovery for this one national oil company. I mean, as one of our largest shareholders -- and Ricky I know you're 1 of our 2 or 3 largest shareholders -- said to me, you don't have to convince me that there's huge market for this opportunity. You have to convince me that you guys have what it takes to technically solve this problem. And I think it's incredibly positive and incredibly strong for our company that we were selected for this supermajor trial, and I think we should be celebrating this instead of feeling any other way about it, it's incredibly positive.

[Operator Instructions] And we have a follow-up question from Bill Bremer from Maxim Group.

So with the 40 systems per month to the supermajor, what type of investment is needed there? And how long would that take your facility to get up and running to fulfill that?

So the -- I the think opportunity with the supermajor, you said 40 systems, but I think we're talking about something like 480 systems. That's one of the incredibly compelling things about US Seismic is that we have these very inexpensive automated production lines that are being -- the development of those are being completed. Jim, do you want to answer that question?

Sure, yes. The first production line is coming online at the end of the quarter. The second one should be some time around the end of the year, and then the following one -- because we have authorization to 3, it'd be sometime in Q1 of next year. And each production line has a capacity of about $50 million per year.

So you can see that it doesn't take long to scale up and I think we would have enough notice that we'd be able to add additional production lines. So extremely low cost of capital expenditure and you're talking about less than $1 million of investment to get to the $415 million sort of on the low-end of what that production system would cost.

Great. I think that takes us up to the 12:00. So the call has been an hour-long, we have had 105 attendees on the call. I'd like to just maybe make my closing remarks that we really appreciate our investor base. We want our investors to be long-term investors, understand the importance of what we're doing, and as we break through, as we did at Comverge and as we did it at CoaLogix, that there will be somewhere great returns and we want our investors to be aware of the risks and the technical challenges that remain going forward, but we think that we've created an incredibly special company and we're looking forward to profiting with our investors. So thank you very much. Appreciate everybody's time, and looks like there's 2 more additional questions in the queue. Go ahead.

We do have a question from Chris [indiscernible] from Maxim Group.

Guys, my question is more of a concern. I think we've heard the big thing coming, big things coming story for 6 quarters now. And now I'm hearing it's a matter of months, not years. I think you guys are having a credibility issue with the Street because the longer this call has gone on, the worst your stock price has gotten. And I want to know your thoughts on that?

Well, first of all, we're grateful for the people that are investors in the company. We don't want investors who don't -- can't equate the loopholes on this topic [indiscernible] that are in our stocks. So [indiscernible]. We do want to be -- I mean from a credibility point of view, I mean based on our track record [indiscernible] I always said that the energy technology business is about the transfer of wealth from the inpatient to the patient. And I really do really think there's very few companies that have as much credibility as we have in identifying these macro trends. And I sympathize with our investors to be like it's taking a long time, but one thing, I've got 2 responsibilities: One is to our operating companies, and one is to our shareholders. And the responsibility I have to our operating companies is to say, it's going to take as long as it takes, we're going to do a great job of managing the cash, we're going to do a great job investing, but we will not -- it just doesn't work to short-circuit the investments and get the technology right. So you got to take the time, you got to work with the customers, you got to engage, and it just takes times. In these industries -- we're talking about the biggest industry in the world, the energy industry, these giants don't, number one, easily enter into development arrangements like what we have and number two, they'll take as long as they're going to take to adopt the technology. We believe that we're moving at light speed for the oil industry, we're not moving at light speed for the stock market and it's natural. Look, there's a disconnect. I mean, there's a reason that most venture capital companies are private limited partnerships instead of public companies. And so, we think...

You keep referencing the venture capital portion or the words start-up I heard I won't point, the longest call point. Why pay a dividend of your guys are burning cash and you're calling yourself a start-up? Are you guys stopping that? I didn't catch that?

Yes, we stopped that. We announced that stopped last quarter.

Okay. Just out of -- I don't know if this is addressed earlier as well, and I appreciate just some clarification. Can you comment on how many competitors made it to this next step with...

As far as we know, no other competitors made it to the next step.

Do you guys currently have a window open to buy stock should you elect to?

I'd ask my general counsel.

We don't address that publicly.

But I would just say, my track record, definitely, Chris, you and I have talked about this before in the past. My track record stands that when there are open windows, I take advantage of those open windows, as does our Chairman, Chris Closer and other Directors.

And our next question and final caution comes from Michael Osterer from UE SYSTEMS.

With regards to US Seismic and the technology, I'm of the opinion that, or correct me if I'm wrong, that with the acceptance of the technology, it will create the equivalent of a paradigm shift as far as drilling for oil and applying the technology, would that be a correct observation?

Yes. Yes, we think that this is going to be take basically take the $2 billion electromagnetic coil GF [ph] tool market and turn into a much larger like, I don't know, $10 billion Photonic tool market, sort of what happened to telecom when they switched from copper to Photonics. Yes, we think it is transformational.

Well, that being the case and as I think you pointed out earlier in the call that the major oil companies tend to cooperate and if there's a new technology, they look to get it out to everyone, there isn't a sense of proprietary shift from their point of view. I guess, what I'm asking, I you are currently actively pursuing other major oil companies while you do this test?

Oh, sure, sure. We're talking to them and, yes, we're talking to other major oil companies all the time.

So would it be safe to say -- I guess, I'm saying it, not you, that with acceptance of this technology, it would open up the floodgates of purchases from, I guess, once one does it, others would follow suit, given the numbers, it would be a dynamic shift, a paradigm shift for the company?

Yes, yes, I like that word, floodgates. One of our board members, Rob McKee is a former head of Exploration and Production of Conoco, and he tells us that the nature of this industry is everybody's skeptics until they're lemmings and that's the nature of the risk of the business that we're in here. We have to invest to make the technology perfect or continue to perfect it to the point where the industry switches from being skeptics to being lemmings . That being said, anybody that's read any recent articles about the fiber-optic industry and oil and gas is that the industry is incredibly bullish on the potential of this industry, of the change of the fiber optics. So there's a high level of anticipation, but before people start putting their budgets to work, we're going to have to produce data from these trials.

Well, it's obviously, to me at least, apparent that this is an investment, not a trade. And I believe the management team I'm looking forward to success because if what you say is correct, then I've certainly done my own due diligence with regards to the articles that have been written. I'm just wishing the company the best of luck with it, and I believe you're going to be very successful.

Thank you, Michael. Michael is one of our largest and longest investors in the company. Thank you, Michael. Thanks for your patience.

And gentlemen, that is our final question.

There you go. Since I've done my closing remarks, I'll just say thank you for your time and patience. And I think we've got a remarkable level of interest in the company and our progress and we're looking forward to updating you with customer orders and breakthroughs. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.