Acorn Energy, Inc. (ACFN) Q2 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the Acorn Energy Second Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Heather Mallard. Please go ahead, ma'am.

Yes, thank you, and good morning. 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 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 their 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, Heather. By nature, developing truly new and innovative products is fraught with delays and challenges, and the second quarter at Acorn Energy illustrates the ups and downs that are the hallmarks of creating the industries of tomorrow. The big news at US Seismic was the handing of the baton of US -- of CEO of US Seismic from founder Jim Andersen to seismic industry veteran Mark Bashforth. We're grateful for Jim's contributions in founding the company and assembling a world-class scientific team. However, delays in commercialization caused us to miss a delivery date for the previously mentioned supermajor project. While the customer is disappointed, they remain committed to us and to the order and we expect to make delivery before year end. We have confirmation that the customer is scheduled to present the results of last year's seismic shootout at the Annual Society of Seismic Exploration Geologists (sic) [Geophysicists] Conference in October. We've also experienced a lot of interest in evaluating our tools from smaller but entrepreneurial independent oil producers who need integrated solutions. We chose Mark Bashforth because we're so optimistic about the prospects of the business, and we needed someone who had 3 core competencies: one, project management expertise to complete the final commercial development of the product; two, a track record of seismic sales and marketing management success, as well as the ability to be able to recruit sales and marketing people to the team; and three, a deep understanding of how to combine our product, our sensors, with the software and data processing to provide actionable insights on how to improve the productivity of unconventional wells and expand our total solution to be appealing to independent producers, as well as to the larger oil companies. Gary Morris has advanced partnership discussions with several service companies, and I have to say, it's such a delight to be able to have somebody of Gary's talent and expertise and network. It's really -- you recognize why somebody was -- why he was made CFO of Halliburton at age 42, so we're really lucky to be working with Gary and he's bringing a lot to our effort. But we're encouraged that all the potential partners that we're talking to understand, number one, that there's a market need for our solution, and that's being driven by the more rigorous demands of being able to listen for microseismic events in the subsurface. And all these potential partners seem to recognize that, while not yet commercial, that US Seismic is leading the effort in moving the seismic industry from the electronic world to the photonic world. So we believe we have a commanding lead and we believe that commanding lead is extremely valuable. So we're very excited to add Mark's talents to those of Gary's in developing our commercial plan. And I know Mark wants to share his excitement with you on the US Seismic opportunity, so Mark, I'd like to hand the call over to you.

Great. Thank you, John. Good morning. Very excited to be here and very excited about the opportunity here at US Seismic. It's not often that you get a chance to be part of a technology revolution, and I think that's exactly what's happening with US Seismic right now. Not really too different from the technology shift we've seen over the years in the telecom industry, the demand from voice to data, copper to fiber optic. I think the seismic and processing business is sort of reaching a similar crossroads. They really maxed out the potential in terms of the limits of electromechanical and technology. Customer investments in microseismic technology is really searching for better understanding of the subsurface, and I think that US Seismic is uniquely placed to deliver solutions that will provide them with valuable and essential information. So I think it's a very exciting time for the company. I am very, very excited myself to be a part of the opportunity that's there and be working with some really great minds and some great people, and not least of which, some very significant technology. You know what? My passion and my past successes have really been involved with developing and implementing strategies to help commercialize and market seismic solutions. My experience is predominantly international, selling reservoir character solutions to, among others, oil field asset managers. And if you know anything about the oil field, particularly the shale gas opportunities in the United States, you know that the asset team managers are the ones that really control the financial decisions, they really hold the purse strings for the oil companies and they're feeling a lot of pain right now. There's a huge amount of capital spending that's been engaged in their frac programs which is yielding relatively low recovery rates from the unconventional fields [ph], in some cases, as low as 10% and even lower. So I'm very confident that our technology is not only timely, but also very, very appropriate in terms of helping them become -- us become, rather, the standard for subsurface mapping. I think we have a huge value proposition, a unique one that we can help the customer solve their problems with, and I'm very excited about being a part of delivering that in the commercial offerings to clients. I know there's a lot of customers that are not happy with the current solutions they have available for microseismic monitoring. They've invested millions and millions of dollars to acquire data, but to date, that data really hasn't been converted into, what I would call, intelligent information, information that could be used for improved decision-making, reduced cost and risks associated with their ability to maximize their revenue, their reservoir recovery rates. And I think that's where US Seismic can make a huge, huge difference. From my experience in selling and marketing geoscience solutions over the last 20 years, that this very large opportunity that I see out there for US Seismic can be realized once we're able to demonstrate that the product and the technology can be reliably deployed, both in and out of the wellbore. And I think that's one of the great challenges we face right now and John alluded to that in his introduction. In general, clients feel very, very positive about our technology and our sensor systems. However, one of the challenges we face right now is how do we replicate the results in deep wells based on the success that we've had in shallow wells? So that's one of our problems to date and we have to work that out. I like some of the changes and the progress the company have been making, particularly in the form of a new clamping system that will be deployed over the next few months. I'm not sure yet if some additional enhancements or improvements will need to be made. But if that is the case, I feel very comfortable that I've got a large network of industry experts that we can team with to complement the existing team at US Seismic to solve some of those deployment challenges. And I think that one of the values that I bring, having worked in the oil patch, is associations and knowledge and relationships to help us get around some of those difficult corners we've faced in terms of commercializing the technology. I think once we've finalized and validated the commercial design of the system, I think the next step really is for us to position the company for growth and sales. I don't think we're far from the commercial release. It's not far at all. I would actually say that I think one of the rouge [ph] of breaking through that barrier of what we really have been up to press, and I think that's an R&D company and to become a fully fledged commercial operation offering integrated solutions for our customers. I know the investors are wondering why we have not made more progress in the market for shallow wells, and I want to let you know that during the second quarter, we received an order for a shallow permanent seismic array from one of the world's largest national oil companies. We've had a lot of dialogue with the client and we have decided to accept this order on the basis that the customer will agree to our delivery terms. We feel comfortable with this because it's very similar to our ongoing BIRD project with DSIT. And so on that basis and on the basis the customer will agree to our delivery terms, we're going to go ahead and proceed with that order. That being said, and I think this is very important, one of the things I am going to be very vigilant about is to guard against US Seismic becoming a custom engineering house for our customers. I think up to press, the [indiscernible] technology is kind of evaded us. We've had different designs and haven't finalized or standardized on design because we've wanted to appeal to many different customers and their interests. And going forward, we need to standardize on the design, a design that can be scaled into manufacturing and that we can deliver into market share and drive revenue. And you can't do that as a custom engineering house or an R&D center. Those projects aren't profitable. They distract us from our goal of running a profitable business, and I'm going to make sure in my role to be relentless to sell a standard solution for common problems for the unconventional oil business, and that's what US Seismic will be known and recognized for and will be successful at. So at this point, I guess you're probably wondering why did I accept the position and how do I intend to make the company a success? And I'd like to tell you well, first of all, I think it's a great challenge and career move for myself. I think I can make a huge difference for the organization and the shareholder value that will be created as a result of the success that I look forward to bringing to the company. It's a great team of people and I think that with some commercial leadership and some project management focus and some in-depth knowledge of the oil industry, I think we can be hugely successful. The key objectives going forward, particularly in the next 100 days, are going to be to complete the downhole tests that we currently have in place. We have a number of tests that are occurring, in fact, already this week and then next few weeks following with several customers that we've been working with and validating the technology based on the feedback from those tests. The next key objective will be to finalize the design of our technology and commercialize the technology. Those 2 elements are the foundations of the house, the success that we need to build. Without those done, there's no way we can drive and scale a successful business. And that will be the third step, is recalibrating the business model for USSI to maximize shareholder value by driving customer demand through an integrated hardware, software and service offering. I realize that these objectives will take both time and money, but my strong focus on project management, as well as my experience in raising capital, growing and expanding this, I will be particularly valuable to the company. So I'm very excited, in conclusion, I am very thankful for the opportunity, and I look forward to working with the board and speaking with the shareholders and working with a great team there at US Seismic. So thank you for the opportunity, John.

Great. Thank you, Mark. I'm sure our shareholders will have a lot of questions for you at the end of the call, and we're very impressed by the focus that you've brought to our upcoming production frac monitoring jobs and we're looking forward to your participation in our ongoing partnership discussions that Gary Morris is leading with oilfield service companies. Next, I'd like to recognize our friends and coworkers in Israel at DSIT. Since early July, they've been living and working under difficult conditions facing rockets, infiltration from tunnel systems, with frogman from the sea without a hiccup in their operations. They're an incredibly resilient people. International interest in our diver detection systems spiked as a result of a TIMES OF ISRAEL article on the ability to use technologies such as DSIT's in a conflict. There's both a growing installed base of our systems and increasing awareness of the vulnerability of water-based assets as a result of the recent activity both in Gaza, as well as the South China Sea. Backlog at DSIT remained strong at $12 million at June 30. Since then, we have had booked or are expecting to book another $2.2 million of new orders, including some orders for our Diver Detection Sonar systems. Some of these orders are for installations at new types of energy facilities and this demonstrate the growth potential of the business. Our operating results continue to be impacted as a significant majority of our costs are denominated in the strong Israeli shekel, while our revenue is denominated in the weak U.S. dollar. We expect gross margins to increase as a result of receipt of certain new orders, but we expect them to remain below historic margins due to our current mix of projects. Now turning to GridSense. It's on track to have a record revenue year, but shipping our backlog didn't fall perfectly within the quarter. We shipped $1.2 million of product in the quarter and ended the quarter with $2.4 million in backlog. We shipped nearly $1 million of product in July alone. So if all goes according to plan, our revenue at the end of the Q3 will be nearly that of the full year of 2013. Our orders midyear are tracking to our forecast. 2014 was one of continued cost cutting from 2013. We closed our Australian operations in July, thereby reducing our operating costs by $700,000 per year. Many of our employees were hired by our former country manager who started a business to distribute one of our product lines in Australia and Asia. We expect this region will continue to be an important source of revenue, but now our costs will be variable based on our sales activity. We moved our production of the PowerMonic and the Line IQ product lines from Australia to Sacramento, California. The manufacturing transition resulted in substantial delays in shipments and we have ramped up production in the U.S. The delays in shipment resulted in revenue down 11% in the first half of 2014 versus the first half of 2013. We continue to support over 60 pilots worldwide. Many of these pilots are proving the value of our technology for theft detection. In developing nations, the theft of electricity can amount to up to 40% of supply. Eliminating this theft is the key to funding the expansion of these developing countries' electric grids and establishing a more reliable supply. It's fundamental to the development. These pilots last 12 to 24 months and involve a high degree of custom engineering interaction with the enabling grid communication companies. Utilities are looking for integrated solutions. Today, we announced a partnership with Cyan Technologies of the U.K. They've developed a very low-cost radio technology that's ideally suited to emerging markets like India and Brazil. In the first half of 2014, we announced partnerships and compatibility with Silver Spring networks, which serves about 25% of the U.S. market and is growing substantially overseas; and Landis+Gyr, another major international player owned by Toshiba. By far, the most promising and challenging project was our deployment of over 700 Line IQ and Transformer IQs in a Southeast Asian nation. This project was the first of many that we anticipate in this country and is directed primarily to eliminating theft. We have a great partner who has a terrific vision, but the projects have been plagued by problems primarily related to the primitive electric grid infrastructure and the challenges related to the rainy season. This pilot is resulting in GridSense making investments to improve the quality and deployability of our hardware in these challenging environments, as well as to upgrade our Grid InSite software. We also supplied free-of-charge units to demonstrate the expansion phase of this project that should happen in the fourth quarter. We expect revenue and gross margins will rebound and will benefit in the coming period from the reduction in overhead expense and improved product design. We revitalized our sales rep network replacing 70% of the relationships, and we're investing in sales rep training that we expect will help drive more market penetration. We also received 2 large follow-on orders from key U.S. customers as they expand on existing projects in the field. This is an important point because each initial pilot takes a lot of effort and costs, but the follow-on orders, when they come, tend to be very profitable and result in valuable customer references. This will be the key to GridSense achieving profitability and shows how our customers see value in our offerings and continue to expand on initial deployments. Turning to OmniMetrix. Walter Czarnecki is the new President of our M2M Remote Monitoring and Control business. He succeeded in increasing both revenue and gross profit by 25% in the first half of 2014. SG&A fell by 43% versus the first half of last year as a result of our restructuring effort. We're now up to over 7,000 connections as of the end of June and had a record shipment month in July as we signed up more dealers in our newly launched market leader programs. Walter and his team reduced our inventory by more than 1/3 from year end 2013 to approximately $800,000 at the end of June. The company is in the process of field testing a new version of a monitor that will result in improved margins that will be able to be used in 80% of the installations of our products -- projects. Within its power generation division, OmniMetrix sells into 3 market segments: residential, commercial and industrial. The majority of the sales are through residential generator dealers who are using our devices to improve their service department's profitability. Walter and his team are in discussions with several nationwide commercial and home security businesses that are expanding their mission to encompass all aspects of property monitoring. As they expand from security to include energy monitoring, including generators is a natural. Last month's issue of TIME Magazine was titled The Smart Home. We believe that generators are critical assets to be monitored, both for the smart home and for the business continuity and commercial and industrial markets. Walter is also spearheading the company's expansion into the oilfield service business. This is a whole new market that we're reaching through oilfield service companies and it means that we get to use the proven capability of our products to not only just monitor, but actually control the assets. Control is a higher value activity than just monitoring. As an example of this, the pump jack is -- after an oil well is drilled, eventually the natural gas that helps the oil flow is exhausted and a pump jack is installed to keep the well producing. Oil companies manage these pump jacks and run them based on the pressure in the well. Management of pump jack is a constant effort by the field managers. They monitor the pressure of the well, allow it to replenish, then they run the pump jack to push the oil from the reservoir into storage. This has always been done manually. Running a truck to check on 25 wells' pump jacks in a 10,000-acre parcel has traditionally been very feasible. With the frac-ing revolution, that same conventional field with 25 producing wells may now be on track to have as many as 1,000 pump jacks on that same 10,000 acres, so the oilfield managers need a better approach. OmniMetrix is a scalable solution for this emerging opportunity as the pump jacks can be remotely controlled from a central office. In 2014, OmniMetrix signed 3 new customers in the oilfield services market and we're looking forward to seeing how effectively Walter and his team can exploit this opportunity. We believe OmniMetrix has a unique product offering in the end-to-end market. OmniMetrix has many characteristics that could make it an outstanding business. Currently, 65% of our revenue is recurring monthly fees and from a cash perspective, many of our customers pay a year in advance. A new market leader program with -- for residential dealers started in January, and a new program for commercial and industrial dealers started in July and it's already achieved over half of the budgeted revenue each month under long-term agreements. In other words, each month that OmniMetrix starts over with over half of the sales goal already met. I want to acknowledge Joe Musanti's important work at reorganizing OmniMetrix and GridSense and positioning those companies for success. Joe has reduced the cash burn by $6 million in these 2 businesses. He's also helping Mark at USSI in his role as CFO. Over the coming months, he is looking at improving the cash burn and working capital at US Seismic. We've cut our total SG&A by nearly 20% and our corporate G&A by 28% -- it's actually 35% with respect to our cash, and have focused on improving the management of each of our other businesses. We had $6.2 million in cash at the end of July. We've discussed our plans to increase our financial flexibility through the following options: asset sales, entering partnerships and raising additional capital. We're examining all of our options. The coming months should offer many opportunities to see the impact of our investments to date. Our CEOs and I are standing by to answer your questions.

[Operator Instructions] We have a question from Jill McRed (sic) [James McIlree] from Chardan Capital.

Well, I think that's Jim McIlree. John, I think you've said that GridSense in Q3 can generate as much revenue at it did in all of 2013, did I hear you right?

So what I was saying was that we believe that the 9 months of 2013 -- excuse me, the 9 months of 2014 that will generate nearly as much revenue as we did in all of 2013.

Okay. That makes much more sense, great. And Mark, on the product development, the commercialization and all of that, thank you for your summary, but can you go into a little bit more detail about what your immediate tasks are with US Seismic, either in terms of products or marketing or personnel?

I'm sorry, Jim, the call broke up a little bit. Could you just please repeat that question for me?

Yes, I was hoping that you would go into more detail about the immediate tasks that you face at US Seismic. And if it helps, I'm looking for something in terms of either product changes, or development, or marketing, or channel changes or personnel changes. But what are the things that needs to be done immediately?

Okay. Great question. So keep in mind, I've been there approximately 2 weeks, but used time prior to that to understand the dynamics of the business. The team consists of a very good group of professionals and domain experts. I think there's been a commercial leadership vacuum there, which I think we're addressing very, very quickly now. I think the first thing is focus. Project management is being realigned to be more systematic. The biggest issue is that they've tried to be all things to all people. You can't do that. You can't scale a business doing that. And so what we're trying to do is focus on one thing right now and that is one single final commercial design. And if the task is not related to that, it's going to get put on the back burner, which is why the tasks that we're doing this week in Texas and with the Department of Energy coming up in a few weeks' time are so essential. We need to validate that our current design works, make any adjustments necessary and then finalize that design, and then we can move to commercialization. Now one of those aspects involves the clamping system. And so we have had several different approaches to that and we've refined that down now to just having a multi-shot approach to the clamping system instead of having also a single shot, which would require to be recharged each time it was redeployed. By doing that, we've simplified manufacturing, we're focusing on one standard design and we don't have too many variables or choices. Once we have that, it makes it much easier then to look at potentially outsourcing the manufacturing because I think our business model needs to be more concise. We need to understand are we going to be manufacturing tools, or are we going to be having them manufactured for us and then, once that is decided, with a validated design, then we can determine, okay, what's our business model? Are we going to, for example, lease the technology? Are we going to work with service providers? Are we going to have our own consulting and deployment team and so on? And these are things that we're studying right now as we speak to determine which is the best approach and which one will yield the greatest shareholder value. But in the immediate time right now, it's get that design validated, cut the costs on unnecessary tests and manufacturing and stay focused on delivering a qualitative delivery as soon as you possibly can and then get out there and sell it.

[Operator Instructions] [Technical Difficulty] This is William Bremer from Maxim Group.

Mark, love to have you aboard, and just wanted to get your sense on one of the issues with US Seismic that really has halted its commercialization has been the clamp and lead cable failures. That's really outside of the company's expertise. And I know you sort of voiced that you had some relationships there. How quickly do you think that can be solved? Is that a major issue? Or is that something that you feel -- and I realize you've only been there a couple of weeks, is that something that you feel as though that you could wrap that up in a quarter?

I don't like to say things that I can't guarantee. So what I will tell you is this, I'm very aware of the problem and I do think that the lack of oil field expertise in the business has been an Achilles heel for US Seismic without a doubt. I am already in dialogue with technical experts in borehole seismic monitoring and have worked many, many years in deployment, as well as our other partners that we've had long-term relationships with to study and understand what can be done to resolve those issues. And in fact, the current deployment that we're doing this week is using a different cable design than the one we typically will use for that very reason. So we're moving at lightning speed in terms of how we identify and move past these problems. I think the clamping system, my expectation is it's going to be easier to resolve. I think the cable system is a little bit more complicated, and one of the issues there is there aren't a lot of vendors that can produce the type of cable we need. We have actually identified a new specification and we're in the process of finalizing that specification. We're waiting for feedback from the current tests we're running. Once we get that test feedback, we'll put together a final spec, put it out for quotation and find out what the cost and delivery time will be. One of the things that I think we need to do is look for other manufacturers that can shorten the time. A typical lead time right now could be 3 or 4 months for a cable, not to mention the cost, of course, to produce it. So getting this right, as you indicated, is essential, and that's what we've got on the top of the list right now because we can't have a full-fledged commercial design without having made sure that, that cable system and the clamping system are state-of-the-art and without any technical glitches.

I couldn't agree with you more. At this point, we just need to validate, as you said. And maybe can you give us, say, a little look at, we've gone after a supermajor, we've gone after some different shale work, we've had success in the shallow wells. Can you give us a sense of what is on the plate right now in the next year that we feel as though we're really going to target, which pilots, and which ones are more longer term?

Yes, that's a good question. So I'm going to answer 2 ways. On the technology side, we're going to be looking at continuous improvement off the standard designs. So once we've stabilized the commercial delivery, then we can look at expanding the frequency range, we can look at improving the heat tolerances and certainly the range on the pressure capabilities. [indiscernible] providing customers are willing to pay for that, and that's -- there's no point in having something that people aren't willing to pay for. Now the concern I have is that there's a lot of people that like what we're doing, but not necessarily all that interest is germaine to a commercial release. So customers that -- we've segmented the market into 3 or 4 key categories, and for right now, we're really looking at the shale gas as the primary play. I think that by having a standard delivery focusing on shale gas opportunity in the United States, there is more than enough opportunity there. And I think by working with service partners, there's a number of very large companies, can't mention a specific name right now, that we're in dialogue with, that are interested in looking at our technology to potentially either OEM it from us and repackage it or brand it as their own solution, or work with us to enhance their current seismic and processing offerings to give them a leapfrog in the market. So I think there's probably 2 or 3 ways to market, William. I think one is, by working with these service providers to get to those localized customers, which is predominantly the U.S. independents, but also having technology partnerships with the larger international oil companies and supermajors, as you've indicated, and we are doing that and we're on track for that. Now we've had some delays but we know what we need to do to get there and we're in dialogue with the client to do that. And then I do believe that there's a very strong value-add to be had by putting a consultative solution in place, where either through partnership with someone like SR2020, who's been a deployment and consulting partner of ours, or by perhaps organically putting our own consulting and processing function together with our tool to offer a complete end-to-end solution. I think that's something that -- yes, is something we need to look at and perhaps also a leasing option for the tool as well for some of those clients and providers that make up the balance of the market opportunity that's out there. I know that sounds like something for everyone. I think you can do that if you have a standard delivery. I don't think you can do that if you chase 3 or 4 opportunities that are just too dissimilar. And I think if we can get the U.S. market right with the standard delivery, then we can look at, beyond that 1 year or more from now, to entertain other ideas. My philosophy is simply this, if a customer wants us to do spoke development and be a custom house, they're going to have want to pay for it. What we provide for is unique value-add, and that's priced into the technology. But if they want us to do something other than that, we're really going to have to look seriously if that's the opportunity we want to pursue.

Agreed. And my final question is, John, you referenced that the supermajor delivery will occur before year end. What type of revenue are you anticipated for that?

That's about $1,850,000.

$1,850,000?

That's right. And then...

Do you believe that's going to hit in the fourth quarter?

That's correct.

And that's already in backlog, John?

That's correct. And so I think that hitchhiking on the question that you asked Mark is that we're seeing a lot of these independents, like the supermajor has their own seismic processing capability. What a lot of these independents that we've -- that have expressed interests in using our tool once we have a successful deep-well trial, they're going to need seismic processing, and that's one of the areas of Mark's strengths is assembling a package of the seismic processing plus the acquisition, and that could be a whole new product line for us, going out and selling to these independents.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

That concludes our prepared remarks. Thank you, everybody, for your patience. I think the new leadership of our new CEOs and as we complete the product development and the market development, that we'll see improved revenue and operating performance at US Seismic and Acorn Energy. Thank you so much, everybody, for your time and energy and we look forward to giving you future updates.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.