Acorn Energy's (ACFN) CEO John Moore on Q1 2014 Results - Earnings Call Transcript

May.13.14 | About: Acorn Energy, (ACFN)

Acorn Energy, Inc. (OTCQB:ACFN) Q1 2014 Results Earnings Conference Call May 13, 2014 11:00 AM ET

Executives

Heather K. Mallard - VP, General Counsel and Corporate Secretary

John A. Moore - CEO

Michael Barth - CFO

Jim Andersen - President US Seismic Systems Inc.

Analysts

William D. Bremer - Maxim Group, LLC

Jim McIlree - Chardan Capital Markets

Operator

Good day and welcome to the Acorn Energy First Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Ms. Heather Mallard, General Counsel. Ms. Mallard the floor is yours ma’am.

Heather K. Mallard

Thank you very much and good morning everyone. Please take note that certain of the matters discussed in this presentation contains 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 can 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 facts in this presentation regarding Acorn Energy or any of its subsidiary's future performance, revenues, margins, market share and any future events or prospects are forward-looking statements. For more information regarding risks and uncertainties that can affect Acorn Energy or any of its subsidiary's results operations or financial conditions 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 will now turn the presentation over to John Moore, President and CEO of Acorn Energy.

John A. Moore

Good morning. As many of our investors are excited about the prospects of the U.S. Seismic, let me begin with it. We expect to complete the development stage for our first commercial product in 2014 and as a reminder we stated our goals for 2014 as follows: One, prove the system works, where are we on this? Customer feedback from shallow well trials to-date tell us our sensor performance is excellent and that we meet or exceed published specifications. We scheduled a series of customer paying jobs over the course of the next three quarters to optimize and prove our complete system works and works repeatedly in different environments.

We’ve had success in shallow wells. Specifically this quarter and participated in a pilot monitoring enhanced oil recovery of 1,800 feet and our system operated flawlessly for the entire five day operating period. We now have an opportunity to develop the market for permanently monitoring of shallow steam for reservoirs like the California [inaudible] fields and Canadian Sag D oil sands projects. For regulators our well producers are seeking real time monitoring to replace thermocouples and tiltmeters.

Other opportunities include enhanced oil recovery by carbon dioxide floods that are growing in the U.S. and Middle East as conventional fields are becoming depleted. These shallow opportunities are as large as our original target market and the hydro frac market. For example over $200 billion is expected to spend in next six years expanding the Canadian Oil Sand projects that currently provide 25% of all the oil imported by the U.S. from Canada. A major driver for monitoring these well is to prevent the steam chamber from causing the earth to cap off or collapsed into the SAGD developments.

We are now in the process of proving that we can deploy much deeper wells in higher temperature and pressure environment where 40% of the hydrofracking presently occurs without the benefit of a viable seismic monitoring solution. This requires refinement of the equipment to deploy our sensors. This could only be done by actual well bore tests.

Number two, confirm the economic viability of our solution. Our customers have told us that they need a better image of the sub surface so they can reduce the well cost and improve their productivity. We have proven our system works in a field trial against four competitors in a shallow well with a super major oil company. Based on our success this customer has given an order for two systems currently scheduled to be used later this year in a production frack job at 13,000 feet in high temperature and high pressure.

Number three, increase the opportunities to attract early adopters, primarily by building a rental fee. We built three systems, the six level system is part of a permanent deployment in a shallow field, a 12 level system and a 40 level system. We use systems in customer trials at different type of wells to improve the ancillary equipment and develop commercial demand in new oilfield applications.

And finally number four, ultimately want to reach a level of adoption where we can either operate profitably or attract a partner help us to scale the business to a sale or other strategic event.

Given the investment for the technical expertise required to get our product to market this fourth goal has increased in priority. U.S Seismic did $1.5 million in revenue in all of 2013 and has $2.5 million in backlog up from $1.1 million at the end of Q1, 2013 that we intend to ship in the second half of the year. We have three oilfield service companies we are channel partners and we have three oil companies and two independents working with us to complete the design of our system. For example, our design team is completely [intent] in fabrication of the world's first high temperature, high frequency clamp for micro seismic monitoring.

Our customer who is considered one of the smartest and largest producers of oil through hydrofracking sees a need for improved seismic system to help them figure out well spacing, well placement, completion of design and live field monitoring. Our sensors work, our customer wants the system to work as much as we do especially in deep harsh well conditions.

Our main challenge to date has been addressing the ancillary parts on the deployment improvements we have to custom design or modify to meet the customer requirements. This customer gave us an order for two systems in December totaling $1.8 million and we are focusing nearly all of our resources on complete redesign of our unique systems in time for the summer production plan. We believe that successful commercial demonstration could lead to sizeable production orders.

At the same time we are collaborating with several service company channel partners to prove our systems with our oil and gas production customers. In the process we are gaining critical insights in how to ruggedize our system in a demanding oilfield environment. We are collaborating with one of the largest micro seismic service companies in a head-to-head trial between our cemented arrays versus a conventional cemented array on a leading producer's field. The trial is designed to take 90 days and we expect to be able to update you next quarter.

To-date we have performed three projects using our 40 level demo system. The first project was an industry test borehole that helped us improve the handling of our system. The second was a pilot in a field production trial and the goal of creating a proposal for production permanent monitoring of a large shallow field in the west. We participated in a third project with our service company which is also our first deep depth commercial production hydro fracturing monitoring job. Problems with the component allowed us to only operate in the well for a short period of time. During this project we captured seismic data from an active source on the surface and confirmed our systems excellent quality data.

Our system needs to be rugged and reliable for this more challenging application in order to gain the wide adoption in an oilfield that we believe our system merits. We are working with the supplier of this component and analyzing what other improvements we need to make to improve the reliability of our systems at deep depth.

On a positive note in this test we proved we have made progress on our two previously disclosed problems of reliability related to other components. The only way to get what we need to be is to conduct more deployments and apply what we need to learn to ensure our ultimate success with the super major this summer.

While U.S. Seismic required more investment that we originally anticipated we are confident about the potential for this business and we will continue to focus the bulk of the resources of their success. We have a unique technology and we have proven at shallow depths and given that there is tech race going on between the major service companies it seems like an obvious time for us to seek strategic partners who will provide technical support and help us fund the business going forward.

Moving to GridSense it's a great turnaround story. Since he took over management nine months ago Joe Musanti cut expenses almost in half, revenue is still lumpy. We ship $930,000 in the first quarter versus $1.5 last year but we offset $2.8 million in backlog. So you can tell we’re on track to have another year of growth at GridSense. We spend a lot of time and money supporting two major deployments of our GridSense enabled sensors for the utilities in New Zealand, a Southeast Asian nation and a utility in California and we expect follow-on orders this year from these projects.

We invested in GridSense because we believe that majority of power theft line losses and power quality issues occur in the local electric distribution system. We've long believed the highest rate of return for utilities and consumers is the distribution optimization we enable our customers to have through the use of our instruments. We see big opportunities both internationally in North America for GridSense to grow. When the Obama administration provided $1.8 billion to seed SmartGrid programs in the U.S. GridSense landed high profile projects with leading utilities.

Recently [inaudible] administrated a similar program called Power Africa with $7 billion in funding and we hope to land some big projects with new and existing customers in the continent. We are now actually going to be one of 25 companies accompanying Secretary of Commerce Penny Pritzker on a trade journey called Power Up Africa and we are traveling with GE and ABB.

Utilities in these emerging markets are maximizing usage of our system not only for power quality management but also for detecting theft that can run as high as 40% of the supply. So one of the countries that we will be visiting is Nigeria and they recently privatized their 11 distribution companies and we think that’s going to be another source of them wanting to -- those private companies wanting to eliminate the theft of electricity.

So one of our utility customers in Africa recently invited us to bid on $30 million project. The international opportunities are expanding in Southeast Asia India as well as sub-Saharan Africa. These new customers are using our products more intensively than any previous domestic customer. One Southeast Asian customer is using our TIQ and Line IQ products to manage the electric grid at one of their leading states.

We’re working closely with the local integrator that we consider among our smartest customers. It is monitoring every aspect of the utility distribution and aggressively identifying and eliminating power theft. We believe we’ll extend this successful program in the second half of 2014.

Domestically there is also growing opportunity. In the first quarter we were awarded a $1 million order from Line IQs to upgrade distribution switches at a Pennsylvania utility, largely because of a new ruling to encourage distribution upgrades. The Pennsylvania Utility Commission recently passed a rule called the Distribution Incentive System Credit, DISC that allows utilities to invest as much they want in distribution upgrades and earn a 7% guaranteed rate of return without the tedious and acrimonious process of filing for rate cases. This type of regulation has been highly effective in the water and gas utility industry there are only 12 other states that have implemented this rule.

This order has created a new application for our product and is estimated to cut outage time from four hours to four minutes on these switches. We estimate this will become a multiyear deployment for this customer, we think it will have applications with other utilities and we are eagerly awaiting the impact with other Pennsylvania utilities as well as other states begin to benefit from this new tariff.

We now have 60 pilot projects in various stages ongoing around the globe and expect our gross margins will return to normal for the balance of the year. To expand the business to make this happen, in January 2014 we hired Brett Sargent as GridSense's Chief Operating Officer and he quickly earned the promotion to President. We started plan to reduce cost at GridSense but Brett's major contribution is going to be building the business. He has 20 years' experience in engineering and sales of Electric Grid and he knows our business.

He previously worked with GE and LumaSense among other important players. Brett has a vision for the business and is pushing to position GridSense to win what he calls the race to the end of the driveway. Brett intends to complete the turnaround in GridSense by upgrading our sales representative network and expanding the focus of our sales effort beyond the 80 top investor owned utilities to the over 2000 municipalities and 1000 electric cooperatives

He didn’t arrive in time to impact sales in Q1 but is already launching innovative marketing plan to broad the appeal of our product to smaller utilities. He's identified one of the impediments to GridSense's growth as the big custom engineering effort each sale requires. The new 50 for 50 program offers 50 of our transformer IQs for $50,000. This includes the use of our gradient type software which is very valuable to small utilities and it doesn’t require in the upfront engineering cost.

Our newer customers are using the transformer IQ not just the transformer monitor but also for theft protection and propeller quality. The program is only few weeks old but has already generated a great deal of quotation activity. From a cash flow perspective we loaned GridSense $1.1 million in 2013 which they repaid $825,000 before year end and there are mainly 275,000 in February of this year.

Since February we loaned GridSense for the additional $620,000 to supporting inventory and receivables. We have an expect to loan the money from time to time we anticipate end of the year with little or no outstanding loan balances is due to GridSense. The DSIT has a solid pipeline consisting of a number of projects including several of interesting customers. They are very strategically positioned to benefit from the ongoing anti-submarine warfare build up that's happening in the South China city.

They recently landed the largest order in the history that had an $11.8 million impact. However they have a soft quarter and revenue was down about 14% below Q1, 2013 which increased margins. The reduced revenue was due to weather conditions that delayed the installation of our Diamond systemonics well rating. We expect the units to be installed in Q2 and we hope that will be an additional follow on orders from the customer one sided solution is complete.

In February we lent DSIT $10 million to bridge them past the short term cash squeeze in the first quarter that paid us back in full by the end of the quarter. OmniMetrix is now led by Walter Czarnecki who previously spearheaded the previously strategic in OmniMetrix follow to structuring last year. We made a substantial contribution to the plan and resulted in a 232% revenue growth in 2013.

Omni grew revenue year-on-year 20% Q1 from $641,000 from $532,000 and increased gross margins to 64% from 62%. We think that this eventually be a very valuable business unless our revenue is recurring monthly monitoring fees and at very high margins. Walther had a target of adding 3,000 connections this year and he and his team have already booked 1,700 units shipped or in backlog for the year and they are ahead of their plans for 2014.

Our growth has primarily been from the residential and commercial line, 900,000 commercial and industrial generators need to be monitored under the new federal air quality regulations. For developing a new compliance reporting product that will enable our customers to comply with these regulations. We have also observed the confluence of several macro trends that create the unique opportunity from the metrics, several large companies like Google, Comcast, ATD and AT&T and others providing wireless management of devices in the home and business. These devices include monitors and sensor for lighting HVAC security every component for residential and commercial infrastructure.

Generators are increasingly becoming part of this network, OmniMetrix has a strategic advantage as the preferred to partner for these large home technology integrators on generators because one, we monitor all brands of generators and two, our 16 year of history gives us a critical domain expertise stated by the large channel partners.

OmniMetrix is aggressively pursuing this new market opportunity and Walther and his team are already in active conversations with several large providers to explore strategic partnerships. We’ll keep you updated as this opportunity develops. We fulfilled our promise with the parent company level and significantly decreased administrative cost. Our administrative cost excluding non-cash stock compensation expenses decreased from $1.145 million in Q1 2013 to $733,000, a decrease of 36%.

On April 30th we had $10.8 million in cash. We believe there are three options for improving our liquidity to evolve access to capital markets, two potential divestiture of one or more of our assets the things we’ve been going to grow our other operations have an important impact on increasing their value and three finding the strategic partners. As we’ve indicated number three is becoming more important particularly with U.S. Seismic.

Thank you so much for your time. This concludes my prepared remarks. The management team and I are standing by to response your questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question we have comes from William Bremer of Maxim Group. Please go ahead.

William D. Bremer - Maxim Group, LLC

Good morning, gentlemen.

John A. Moore

Good morning, Bill.

William D. Bremer - Maxim Group, LLC

Can you provide a little more color on the 10,000 foot deployment of the depth there? What really occur there, I know we had some issues with a faulty connector but I was on the assumption that the connector really wouldn't be an issue in terms of the actual data coming back to you? What really occurred there and at this point how does it look going forward, have the corrections being made at this point or how much longer do we need to wait on this?

John A. Moore

So Jim would you like to respond to that question?

Jim Andersen

Sure, I would. So one of the problems that we have is that you know we are developing a special downhole high frequency clamp and until it's done we have to reply on other people downhole clamping system to deploy our systems when we go to deep debt. And you know when we have that sometimes to go out there and we have successes with this also deployment system but you know it sometimes due to incompatibility there have been some other issues.

I am not sure how where you heard about any kind of connector issue. You know we did have an issue downhole we are not exactly sure what it was it could be related likely to related to some kind of incompatibility with the deployment system we are using. We are investigating it's probably adjust the rate or write back at our facility this week end and probably have more information we suspect to have all the information figured out by only on Wednesday or Thursday of this week.

John A. Moore

But I think the important thing about this trial was you know the glass is you know half full in a sense you know our board specifically said to us you guys haven't participated in their production frack at deep depth we want you to go out and find an opportunity to do that prior to this deployment with this super major and where you can learn about what improvements we need to make in the ultimate design of that system. So the good news is we are going to learn something the bad news is that we have to report to you guys that we have some learnings that we have to absorb.

William D. Bremer - Maxim Group, LLC

Okay. And then give us an update if you don't mind on some of the shallow well and how things are proceeding there?

Jim Andersen

Let me take that John?

John A. Moore

Yes.

Jim Andersen

So we have we have done some recent shallow wells one is we are in permanent monitoring project in the Diatomite. It's in the middle of s three month trial and we are side-by-side with a conventional tool and we expect as that goes on that we'll end up looking very good with respect to the data provided by the conventional tool. We also went out and did a project with a steam flood project well array I think John was talking on, went down 1,800-1,900 feet very successful and as result the client felt that we are able to show them things they have never seen before in this reservoir. So as a result he's asked us for a quote to monitor this entire a 110 well project and we are in the process putting that together.

William D. Bremer - Maxim Group, LLC

Hey, Jim can you give us idea of perm well on these shallow wells. Let's just say these customer love your technology want to use it see the benefits of it the efficiency to yield. What type of dollar figure per well are we talking about in terms of revenue opportunity for Acorn at those level at that level in terms of shallow wells. We are not talking 10,000 feet but at the 1800 we have dollar figure comes back to the company?

Jim Andersen

It depends on number of levels. So, a number of levels typically run somewhere in the I'd say average number for a shallow one $20,000 levels, these systems would typically be somewhere in the order of 10 to 20 level. So it would be a couple of $100,000 to $0.5 million.

John A. Moore

So Bill just to hitchhike on what Jim is saying, if we look at the SAGD, there is steam-assisted gravity drainage systems in Canada, there is about 300 well pads that are all shallow depth anywhere between 1,800 feet to 450 meters and there is typically there would be typical configuration be like three sensor arrays at anywhere between 10 and 20 levels. And as Jim is saying somewhere price between $20,000 and $25,000.

So it's quite a large opportunity and what we found is that the industry is wanting to increase the amount of steam pressure in the sub surface and the regulators are not letting them do that because they are saying the current techniques which you are using which are thermocouples and tiltmeters are just able to tell you after when the steam has already escape it is already compromised it's called the cap rock and that's the rock that's over the steam chamber.

Once it's compromised then the challenges to collapse it and there is a breakthrough and as the case of the diatomite somebody dies or is the case of what happened in Canada you get ecological disaster with the surface collapse again and fortunately the well producer then loses the use of that field. So it's pretty bad consequences relatively. So we believe like in Canada like in California that there is going to be probably mandated micro seismic monitoring of all these fields.

William D. Bremer - Maxim Group, LLC

Hi John. Since we did have very good activity and recognition on the shallow well at what point did the company sort of take a step back and say there as you just an amazing opportunity in North America including Canada on shallow well. At what point does the company take a step back and say maybe we should allocate 75% or maybe 80% of our resources to shallow wells to succeed there and okay we are still using 20% of our resources for the home run of the 10,000 or even deeper in high pressure systems. At what point did the company make that decision?

John A. Moore

I think that we are number one, we are responding to this, it is the same customer order that we have for the high temperature high pressure system, but as far as us spending our resources I believe this is what we're discussing with Jim and at the Board level that it makes sense going for those two feet hurdles of the shallow wells. And then look we only had these successful trials in the last quarter so I think we are thinking that makes sense for us to go for some of these technically easier jobs that where there is existing pressing need for the technology.

William D. Bremer - Maxim Group, LLC

And do you feel -- I am sorry I am taking so much time, but I really want to get to the bottom line here. Do you really feel as though that it maybe a shorter sales cycle on the shallow wells?

John A. Moore

Jim you want to comment on that?

Jim Andersen

Yeah. I would say yes I would agree with that, getting the qualifications done for doing the deep wells has been a long and somewhat arduous process. I think we are getting close to the end of that which should have the sales starting to ramp up by the end of the year for the deeper project, but no question the shovel wells be a shorter lead time. The interesting thing is a lot of people are looking for successes and that's why we are going out and doing some of these shallow ones like the 90 day shovel project in the diatomite, that we being there permanently for three, four months with no issues.

Once we start having some track record like that on the shallow end, I think that will start ramping up also.

William D. Bremer - Maxim Group, LLC

All right gentlemen. That's all I have I will give some of my colleagues a chance.

John A. Moore

Thank you.

Operator

The next question we have comes from James McIlree of Chardan Capital.

Jim McIlree - Chardan Capital Markets

Good morning. Hi, John. Can you talk about what would happen if you can’t get the tool fixed in time for the super major test? Or if it cost too much money do you have to wait another year, do you reschedule for next year? But what’s the implication of not getting the tool fixed with for that test?

John A. Moore

Right. So what we are doing is the 40 level tool that we’ve made in the retesting that came back, that tool is our devil unit whether we are put in that out in the field for both shallow and deeper frac jobs after we fix the tool. But we are specifically making two new tools for 236 level systems for the super major. And I think your question is that what happens if we miss the window for this summer’s test with this company?

Jim McIlree - Chardan Capital Markets

Yes exactly.

John A. Moore

Jim, do you want to answer that question.

Jim Andersen

Sure. You know as a matter of fact I am sitting here in a meeting at the headquarter of super major with a group of 25 people from their company and all the contractors finding out this whole schedule. So it's ongoing it's big deal to everybody and we are counting on making it. And the good thing is that they want us to make it they are explaining the issues they are having with the conventional tools that in the field they are in that last no more than may be 24 hours to 48 hours and have to pulled out and they want to monitor for a long term.

So there is benefit is on all sides to get this in improvement. There is -- we are having some schedule risk associated with improving the clamping system. What would happen is if we end up having the slip to date there is always project tends to move out a little bit anyway so that it may be absorbed. But if we are not able to participate on this project we’ll probably sit on the side lines until we are ready again to go in on another project they may have. We already talked with them about other projects in Canada.

John A. Moore

And I think it’s also important to mention that we brought in a large service company in this project and they have applications for the tool and I think that will be -- I don’t think the tool is going to rest, I think it's going to be in active use.

Jim McIlree - Chardan Capital Markets

And that the strategic partnerships that you referred to earlier where are you in that process? You've taken the decision to initiate it and so you are now at the beginning stages or somewhat further down the road?

John A. Moore

We’ve been -- we don’t talk on any specifics obviously but since the last several months we’ve been having conversations with different companies and those conversations are ongoing we are adding new groups to the queue and I guess I will just say stay tuned.

Jim McIlree - Chardan Capital Markets

And then finally on as that bill was referring to if you decided to focus fully on the work primarily on the Shale Well monitoring market. What’s your channel to for that market? Does that differ then how you are approaching the deeper well markets?

John A. Moore

I think it's very similar in the sense that there are service companies that all they do is monitor those SAGD fields or this data – fields and those companies have visited also they’ve expressed their frustrations with the existing tool. So I think we’ve got very adequate pathway in the market.

Jim McIlree - Chardan Capital Markets

Great. All right thank you very much.

Operator

The next question we have comes from Robert Thinker, Investor.

Unidentified Analyst

Yes Mr. Moore.

John A. Moore

Yes go ahead Mr. Thinker.

Unidentified Analyst

Good morning how are you?

John A. Moore

Good morning.

Unidentified Analyst

Yeah I have only three specific questions. Mr. Moore you sound very optimistic the possibilities for Acorn this year. But let me preface those three questions by noting that Acorn stock is now at over a five year low with the 86% destruction of value in the last eight months alone, 48% of which has occurred in just the past month.

Acorn has experienced losses in four of the last five years with this quarter's loss continuing on the same downward path Acorn has bought and then divested unproductive businesses that do not seem to have been well ahead into the company indicating to me nature miss steps on leaderships partner.

All of this has happened on your and the incumbent Board's watch. So my three questions are the following and a lot of the discussion so far has been related to USSI but I want to cover all of Acorn subsidiaries. With USSI struggling due to continued deep well product demonstration performance issues that you have noted in the 2013 annual amount under Q1 2014 reviews ended in the face of continued shrinking revenues across all of Acorn’s business. Can you please share with us the specific goals you have to turn Acorn’s business around that’s question number one.

Number two, what specific measurable actions other than just cost cutting are you taking to resolve this dismal record and restore value to stock holders. Number three, what is your specific vision to expand Acorn’s revenue growth across all of these businesses and what near term measurable steps can we expect to be implemented to reach that vision of which you can held accountable.

John A. Moore

Okay. Thank you for those questions. The first thing is Acorn is a different kind of public company. We have built and sold very high valuations, two companies both lose money, [Converge and Cologics] but they’re extremely important strategic customers. So what are we doing to operate better. We’ve fired two CEOs replaced them with in the case of GridSense Brett Sargent who is an industry veteran and expert in this field and Walter Czarnecki who is the new CEO, new President of OmniMetrix who has got proven track record of business development.

So it’s a combination of both cost cutting and increasing revenues and look at the end of the day I’m 100% responsible, the Board is putting lot of pressure on me to improve the operating results of the business. We’ve stated that the plan is to reduce cash consumptions on the three businesses at GridSense and OmniMetrix and DSIT and we believe we’re accomplishing that.

We had one quarter of down revenue but our backlog has gone up from third quarter of last year from $7 million to almost $18.5 million right now and we believe that we’re going to have a -- this is going to be a growth year and we’re going to show dramatically reduced operating expenses and we’ve also stated that the business that we’re in is business that’s very non-linear we’ve stated that one of the options we have is potentially divestiture of assets.

So I think we’ve got a plan. We’re working that plan and we expect to reverse the half way of shareholder destruction, we’ve been in before, before we sold Cologics I cut my salary dramatically and six months later we sold Cologics at a huge valuation and I was under a lot heat at that time as well. So again I've my salary we’ve dramatically cut our operating cost and we’re very clearly focused on making strategic changes. So thank you for your question I appreciate it.

Unidentified Analyst

Thank you very much.

Operator

Next we have [Sam Citron of Citron Associates].

Unidentified Analyst

Good morning gentlemen or good afternoon on the East Coast almost. My question goes to I’m trying to understand the heart of the technology and that you have in these sensor array business. And you had some significant competition of course just in general from pretty smart companies like Halliburton and Schlumberger and you're of course quite capital constrained and so, I would ask what did you first of what did you spend on the R&D this past quarter, that is my first question? And how reliant -- my second question is about the licensing agreement with Northrop Grumman, how critical is that to your efforts? And if it is important what is the term of that agreement and what kind of exclusivity do you enjoy in that agreement? Thank you.

John A. Moore

So, Michael Barth you might want to respond to how much money do we spend on R&D but Jim in the meantime would you mind taking about Northrop Grumman license to the extent that you can.

Jim Andersen

Yeah, this was Yeah, yeah this was license and it's a non-exclusive license for special Fiber Optic sensor technology and the sensors and it was developed by team that was Northrop Grumman that is now USSI. And it enables us to have our own interrogator which is the thing that talks to the sensor that are down hole at the bottom of the ocean and those kind of thing. So it's going to be first PC based interrogator ever I'll call it commercialized and it's very, very important to our feature business from not only from the fact is the novelty of it would just PC base but as PCs improve, our systems improves along with it and allows us to enjoy much, much better gross margin and it basically makes us independent that we can field complete systems without having to rely on third-party making interrogative force.

Unidentified Analyst

Great, thank you Jim.

John A. Moore

Yeah. And Michael do you have any…

Michael Barth

Yeah. R&D expenses were for the first quarter this year was 163 million and that's down from $2 million in the first quarter of 2013.

Unidentified Analyst

Okay. The other part of my question was the, is the links of the term how many years is that is that non-exclusive license from Northrop Grumman?

John A. Moore

Correct me if have wrong one, but I believe it's 10 years.

Heather K. Mallard

Yes, yes, it's 10 years.

Unidentified Analyst

And how much is remaining at this point.

John A. Moore

Well in some there are four patterns and when we actually call that one of them hadn't issue the another was fairly recent so, probably a couple of them on the order of six-seven years old and the remainder are you know are pretty recent so, then one to two years.

Unidentified Analyst

Okay, thank you gentlemen.

John A. Moore

Thank you.

Operator

Well at this time we are showing no further questions. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

John A. Moore

Great, well we certainly appreciate the interest and the patience the investor have had at management level and Board have also felt the pain of the decreasing stock price. We do think that the value of the business is increasing as we are de-risking the business and as things are coming our way like some of the opportunities at the SIT related to instability and concern around the oil supply choke points regarding you know to improve the productivity and safety of unconventional oil production and the challenges of the electric grid. So thank you everybody for being on the call. I appreciate the candor of the questions and please be assured that the management of Acorn and our subsidiary companies are working very hard to improve value at the company. Thank you very much.

Operator

And we thank you, also sir, to the rest of the management team for your time. The conference has now concluded. Again we thank you for attending today's presentation. At this time you may disconnect your lines. Thank you and have a great day everyone.

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