Acorn Energy, Inc. (ACFN) Q3 2013 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Acorn Energy's Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. And at this time, I'd like to turn the conference call over to Ms. Heather Mallard. Ms. Mallard, 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 conditions, 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, please 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 am now pleased to turn the presentation over to John Moore, President and CEO of Acorn Energy. John?

Good morning, friends and fellow Acorn shareholders. As we previously announced, the third quarter was challenging from a revenue and expense perspective, but the numbers do not reflect the substantial strides in customer acquisitions and product development that we continue to make. As I mentioned in our shareholder meeting, I've been cautioned by our customers not to share details of their plans and by our shareholders not to be overly optimistic. And yet, my enthusiasm continues to grow for the opportunities that lie ahead for the Acorn family of companies. We strengthened our balance sheet. In October, we completed a financing and, just yesterday, received our $1.7 million tax refund from the IRS. We effectively started the fourth quarter with close to $17 million in cash and no corporate debt. Based on our current projections, we have cash sufficient to last us through 2015. This assumes funding for USSI and their hitting their milestones on a timely basis. We raised capital in October to ensure US Seismic has the resources it needs to be successful with its highly differentiated fiber optic seismic sensors designed for the oilfield. I'm very encouraged by the field results from our ongoing trial with an oil supermajor. I reported at the shareholder meeting that we've been selected as the winner of a seismic shootout. But I also reported that time that there were speed bumps, including a technical hurdle our customer wanted us to resolve called vector fidelity, or how well our sensor could pinpoint where the microseismic event from frac-ing occurred. Since the shareholder meeting, Jim Andersen and his team executed brilliantly and delivered a new high-fidelity clamp, the first time in the industry, that, according to our customer, performed better than even our specifications. The customer told us, based on our 1,300-foot deep test, that our sensors were a game changer, and we believe they will publish data at future seismic and oil industry conferences on this huge trial they undertook. Unbiased reporting from this kind of respected source could accelerate the rate of industry adoption of our tool at a pace far beyond what our own marketing dollars could ever accomplish. Our next test is a previously described cook test, where our sensors will be evaluated based on how we are able to maintain performance at 13,000 feet and 320 degrees F. This test, initially scheduled for the month of October and to take 30 days and conclude in November, has experienced an oilfield site delay. Our team and the customer are working closely to reschedule the test, and we feel confident they'll be conducted in the near term. US Seismic's Australian field trial, involving a service company, was delayed to a since-corrected technical, call it, design flaw issue on our part. The customer plans to conduct additional tests in the near term once the repair's been made. We also signed our third Master Services Agreement with an aggressive independent oil producer that's backed by one of the world's largest international oil companies. This frac monitoring job should happen in the first quarter. We remain confident in Jim and his team, who've chosen to pioneer and invest in a red-hot field in a technically challenging area. So I'd like the shareholders to stay tuned for further updates about our progress through these trials. I believe we also have a solid plan for our other 3 companies to grow and not to require any additional investment in 2014. DSIT is in the running to win one of the biggest orders in its history. They have a strong pipeline of business, and they're building a category of marine security. This management team is extremely competent, and despite an approximate $360,000 increase in R&D expense in the quarter and a one-time $159,000 stock compensation expense, they managed to have only a very slight operating loss of $27,000 in the first 9 months of 2013. OmniMetrix was able to grow its revenue and margins, but not enough, fast enough or large enough to support the large sales and marketing expenses the previous management team had incurred. The prior business model proved to be a disappointment, but we're readjusting our plan, and instead of a high-expense plan of targeting dealers, we're focused on large end-users, including those who are concerned about compliance related to newly-created environmental rules called RICE NESHAP. And these rules carry big fines for owners and generators that operate on what are called bad air quality days. Among the many chores a facility manager needs to accomplish, knowing what is a bad air quality day is better left off to automatic monitoring like OmniMetrix. And that's our bet, and we're going to pioneer that space. GridSense has matured its products to the point where it can win pilot projects and is now poised to begin capturing the follow-on deployments critical for the company to become profitable and valuable to larger industry players. This morning, we announced another pilot project for the Transformer IQ through our Australian business. Both our U.S. and our Australian offices have been supporting a rollout of hundreds of our sensors with a major Asian national utility. We've never been so closely involved in a rollout deployment of our products or required to help generate a return of investment for our customers. As we work closely with this local integrator to successfully adapt our products to the customers' challenging field environment, we're learning a lot, and this is going to help us grow the business. Joe and his team have lowered the breakeven point at GridSense from $13 million to $7.5 million. Business is picking up and GridSense ended the quarter with approximately $1 million in backlog. We believe we are well-positioned for 2014 to be a year of robust growth for GridSense. As part of these efforts, we're committed to a leaner and meaner subsidiary operations and corporate overhead. So effective October 16, I've reduced my personal compensation, as I've done in the past, in support of our business. Our Chairman, Chris Clouser, has also agreed to reduce his compensation. Our Board has not only reduced their cash compensation, but also plan to elect to take an equity in 2014 in lieu of their annual retainer. Other members of our management team have accepted lower cash compensation. In particular, I want to thank Richard Rimer, who volunteered to step down from our board and reduce his contract term and the consulting fees we owe him to support our cost-saving effort. Richard was instrumental in helping Joe Musanti refocus GridSense and restructure OmniMetrix, as well as making key contributions to important business developments at USSI. I know we can count on him for his continued support as a shareholder, friend and advisor. This concludes my prepared remarks, and I'm now happy to address your questions.

[Operator Instructions] Our first question comes from William Bremer from Maxim Group.

And I'm assuming Jim's on the line, as well?

Yes.

Yes, I am.

Okay, All right. Let's first start out with USSI, okay? Can you give us a sense regarding -- first, let's touch base on the high-fidelity clamp that performed much better at 1,300 feet. Congrats on that. And then, can you give us a little more color on really what occurred on the cook delay, as well as the technical issue that hit in Australia?

You want me to go ahead, John?

Please.

Okay. So yes, just real quickly. Since we had the shareholder meeting like about 6, 7 weeks ago, we did have that very good test for the clamps. And really, what was -- that was the first follow-on test after we were selected the winner of that shootout. And it really was -- I mean, they came by and, essentially, told us that the data they received based on the new clamp was game-changing. And then we were scheduled for this cook test that was supposed to take place in October, and we had some issues with the wellsite. So jointly determined to find a different well, they're in the process of looking for it now. My assumption is that probably that cook test will probably happen sometime in the December time frame. But a well has not been selected yet.

The cook test, Jim, what pilot is that for?

That's -- we won that shootout with the supermajor. Then we did that clamp test, and the follow-on final kind of qualification test was a 30-day high-temperature cook test, where you leave it in a high-temperature well for 30 days.

Okay. Got you. Got you. Okay, and then just the update in Australia?

Yes. We're getting ready to do the test with the large oilfield service company in Australia. But I think, as John pointed out in his remarks, we had a minor technical issue and mutually decided between our 2 companies, it would make more sense to do the first initial testing here in the U.S. rather than going out of the country in a very remote site for the first testing. So we're now looking for some test sites in the U.S. Again, those will probably happen sometime in the December, early January time frame. And then, based on good results there, it'll be sent to Australia for the high-temperature Australia projects.

Okay, good. All right. Moving along to DSIT. Backlog, sequentially down again. Is there more than one -- I know that you mentioned in your commentary about a potential, very large-scale order. Can you give us a little more color on that? Who is it potentially with, number one? And what's the magnitude of this order? I mean, their sort of revenue recognition is quite different than your other segments. Can you give us a little more granularity there?

I would just say that, yes, that DSIT's business, because it tends to have large contracts, tends to be lumpy. So I wouldn't read too much into the sequentially lower backlog. But we've -- to -- this is, this will be -- if we win it, which we are cautiously optimistic that we're going to do, that this will be an order larger than any other order that we've ever received. So if you sort of think back on the ones we've received, this is going to be in excess of $14 million. And how it gets delivered and over what period, time periods, will be subject to -- we'll probably get more clarity on that when we cross the goal line and the customer signed the contract.

And John, do you believe that is possible to be announced in the upcoming fourth quarter, before the end of the calendar year?

I believe so.

Okay. And I guess, finally, an update on the other 2. At this point, wouldn't it make a little more sense just to pretty much maybe bring the 2 of them together, OmniMetrix and GridSense, at this point? Or what's the long-term strategy there?

So I'd like to hand the question over to Joe Musanti.

Good morning, everybody. Yes, I would agree with that, and that's what we are endeavoring to do. We've already began sharing resources for the 2 companies, which is how we've executed on the expense reductions, both at GridSense and at OmniMetrix. And the plan going forward, is to continue to do that as much as possible, with the potential and ultimate plan of putting them together.

Okay. Now, John, my final question. You voiced -- I guess, with the tax rebate, you're over $18 million cash on hand, and you have sufficient until about 2015?

Yes, nearly $17 million. That's correct.

Okay. That's including the tax rebate?

That's correct.

Okay. What's your forecast in terms of a burn just for this next fourth quarter?

I don't think we've -- we don't really give guidance. So maybe we can have some -- we don't give guidance. Bill, I'm sorry about that. I know it's frustrating as an analyst to follow up.

Our next question comes from Jim McIlree from Chardan.

Can you tell us what corporate expenses will be, post the restructuring and cost reduction actions?

Yes. Michael Barth, I'd like you to answer that question.

Yes, no problem. I mean, this year, we've been running corporate expense-wise -- and I'm talking cash corporate expense. I'm not talking flat compensation, which is obviously a noncash item -- in the neighborhood of about $1.1 million a quarter. So as we indicated in our Q, that we expect this to go down by about 35%, so we'd be in the neighborhood of about $650,000, $700,000 a quarter after everything is implemented. So that's going to, most likely, take place in the fourth -- first quarter of 2014. You're not going to see so much of a dip in the fourth quarter, but you'll see it mostly in the first quarter of 2014.

I think I heard almost none of that. So I'll just ask you after the call, John.

So what he said was that the current burn rate is running around $1.1 million per quarter. And you can essentially expect that, because there'll be a 35% reduction, all the cuts will kick in at the beginning of 2014, and so that burn rate will be -- at the corporate level, will be around $700,000. Michael, did I say that correctly?

Yes, yes. I'm sorry you didn't hear me.

And Michael, what would be -- what do you think our cash will be, our cash balance will be at the end of 2014?

This is something that, again, we don't generally give indication. It's very hard to say because, with the amount of money that we're putting into the other companies, we...

Then maybe you shouldn't respond to that. But basically, we believe that we're going to have, based on our current projections, a very comfortable cash balance at the end of 2015, based upon the companies making their numbers. And I really want to tell our shareholders that this process in the last couple of months has been sort of a rebirth for us, as far as wanting to be -- we have early-stage companies, and things take longer than you think they're going to take. But we're really taking a hard line on having much more of a meeting-your-numbers culture than we've had in the past. And obviously, this financing was hard on everybody that was a shareholder in the company, and it's certainly sharpened our mind and sharpened our pencils. So I think you'll hopefully see a different culture going forward.

The Q has some comments regarding the US Seismic product, and it talks about water blocking, noise cancellation and clamping mechanisms. And it looks like there's something new in there, too, reliable seals and connections between array segments. Jim's talked about the progress on the clamping mechanisms. Can you talk about the progress or the issues on the water blocking, noise cancellation and the reliable seals and connections?

Okay. I'll start with the reliable seals and connections. Our equipment has to go down-hole and operate at 10,000 psi and, at the high-end, 200 degrees C. And there's only certain specific materials that you could use to seal at those temperatures and pressures. And we have found that when we're going through some of the qualification testing, periodically, we'd see that if the seal was clamped down too tightly, that it could lead to premature failure. So we modified the design, made the base a little, it's getting a little technical, a little more solid, so we can crank down on the seals to the maximum pressure and have a large safety margin to make sure that there isn't any problem in the field. And we've done a lot of testing. And I think that problem is probably about to be solved if it hasn't already, just in a few days. We're doing some final testing. Water blocking is something that has plagued fiber optic cable systems since the inception. Fiber optic cables that are used for undersea telecommunications, go across the ocean, in order to make sure there's very low loss in the optical fiber, is typically placed inside a stainless steel tube at the center of, say, an armored cable. Same design as used for undersea telecommunications cable, such that the fiber doesn't see any stress because it's called a loose tube construction, where the fiber is just in this stainless steel tube. One of the problems that's always been the case for all fiber optic cable that have this construction is if you somehow breached the cable at a location, and it was under a high pressure, water, say, for example, can wick down the cable for miles. And this has been a problem in the undersea telecommunications cables for telecom. And also, we use the same kind of cables down-hole. They -- one of the big problems they have with undersea telecommunications cables, which they haven't solved, is that if there's a break, they have to pull up 10 miles or more cable and replace it because the water wicks through the cable. So we decided -- everybody kind of understood this to be an issue with optical fiber, but we decided that we think it's really not suitable. So we came up with a couple of approaches and we're in the final stages. And I'd say in the next 30 days or so, we'll have this fully tested. But to put what are called -- a little water block along the fiber optic cable, such that if, for some reason -- and we don't expect it to get damaged. But if for some reason it got damaged, the water would get stopped along the cable and it won't transit through the entire system. So this is an upgrade that we are doing to ours. And the specifics of the approach, we're kind of keeping to ourselves because we believe it may be -- we may have some intellectual property associated with it. Does that answer the questions?

I think the noise cancellation question, I think.

Noise cancellation. One of the -- and here, it's always been an issue with very, very high-performance fiber optic systems that the optical fiber itself is sensitive. And if you don't package the cable correctly that leads from the array that's in the well to the equipment on the surface, movement in that cable could inject noise into the system. And we have -- what we have been doing, previously, is making sure when that cable comes up out of the well, we run it through, I'll call it, different structures that keep it from being moved, say, in the wind or something driving over it. And it pretty much keeps the noise out. But we thought we'd take -- go a step further and see if we could figure out a way to optically make that noise in the cable -- make the cable, essentially, dead to noise with a unique technical -- optical solution. So we spent probably 6 months working this, had a team of 2 or 3 people working on it almost around the -- full-time. And we believe we've done that. We've demonstrated it with a few of our clients where we show where we have the system, say, in a field, on a bench, somewhere. Then, when we shake the lead cable, you could see there's noise gets injected into it. And when we turn on the system, they shake the cable and you see nothing. So this is another, sort of like breakthrough that we've come up with that none of the other optical fiber sensor companies have been able to resolve. And this is another one that we're going to get some intellectual property on. But, yes, our problems are behind us. We're feeling very good about the solution. And it makes it much easier in a field where you don't have to make sure that the cable doesn't get jostled coming out of the well because we can blank out that noise optically.

Okay. And just finally, are there more details on the Master Services Agreement, John, that you could share?

I think that we'll be sharing those after we complete the contract for this next deployment, and so that will be forthcoming. But it's both an opportunity for a relationship with this new independent oil producer, as well as with this major multinational oil company, which has basically made investments with this independent company to learn about how to do frac-ing. And then they're planning on using these advanced techniques to improve their relationships and technical credibility with the national oil companies they work with around the world, developing their shale resources. So they sort of see this as being critical to them staying on the cutting edge of what's next in frac-ing.

John, can I throw in one other comment on that?

Please.

The important thing is they're looking for a technology discriminator, and they believe that we provide that to them. So that's kind of their motivation for trying to perfect that with it, so they could apply it on other locations.

Our next question comes from Rudy Hokanson from Barrington Research.

It's a bit of a follow-up on that. You mentioned in the press release about doing or giving companies an opportunity to rent the tool upfront, sort of as an enticement, I think, to get them to start looking at it or to use it. But do you have -- aside from the specifics of the Master Service Agreement, what is going to be the business model, the revenue model, for the tool as you see it right now?

John, I'll to go ahead.

Yes. I would just say that we're being opportunistic in how we try to get people to adopt and use our product. And what we see from industry leaders in this space, what they'll typically do when they develop a new product, what they'll do is they'll have a rental fleet and we're going to have a limited rental fleet. And those can consist of short-term or long-term leases. And typically, you get your money back within 18 months of the lease, and -- but the long-term business model is to sell tools and to make margin on selling those tools. To the extent that we're creating a market, we're sort of taking it on a case-by-case basis. Our first preference would be, of course, to sell the tool to the customers because we want to be very careful with our capital. But if it's a case of either getting the customer or not getting the customer, then we're going to be willing to lease them a unit, as long as we've got 1 in stock to lease.

So is it -- connecting this to the earlier discussion, USSI, probably through 2014, unless something -- I mean, without knowing what might happen or the terms of the Master Service Agreement, is going to be in a position where it'll be working on these rentals, and so it will probably continue to need investment in order to get to that sort of critical stage where the market is more receptive to actually buying the tool, right now, as you do these rentals? That would be fair to say about USSI?

This is -- well, I think we're going to have -- I'll let Jim answer that question. I mean, I think we're going to have a combination of leases and sales. But one of the advantages is, right now, that we sort of anticipated this, with our previous capital in US Seismic has about $4 million of inventory in stock, which we're using to build out either the rental fleet or product for sale and quick delivery. But Jim, please go ahead and answer.

Sure. It sort of goes -- we're trying to solve a dilemma we have. We have these big players, oil companies, that try out our equipment. They really like it, but then, when we ask them if we could show other people the data, they go, "No." And this has hurt us because now we've had so many successful tests, but to move on to another client, we try to get data we can show them from previous tests, and the companies we deal with kind of are holding it close to their chest. So our thought was we know that if somebody tries our equipment, they're going to love it because you get in the field, you put it down the well, the data is outstanding. So we thought this might be an easier way to allow some of the people that might be sitting on the fence to try out our equipment and then, eventually, lead to increased sales.

[Operator Instructions] At this time, I'm showing no additional questions. I'll turn the conference back over for any closing remarks.

Well, thank you, everyone, for your patience. It's been a difficult quarter, but we're glad to have it behind it -- behind us and looking to the fourth quarter. Operationally, you're going to see a much more disciplined company, particularly at the -- DSIT is going to continue to execute, it's going to continue to land new contracts. GridSense is going to likewise continue to turn over their pilots into larger deployments. And that's going to lead to new product development opportunities, but funded out of the existing company's cash flow. OmniMetrix is going to be making its important change from selling to dealers and we're going to continue to sell to dealers, but we're also going to be expanding into selling directly to large end-users like some of the existing customers that we have, which are telecom companies and amusement parks. And US Seismic has got some specific milestones they have to accomplish in the next 90 days, and we're funding the company at a level which is required to achieve those technical accomplishments, and we're highly confident in Jim and the team. So thank you, everyone, for your time and attention, and for your patience in our company. Thank you. That concludes my remarks.

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