John Moore - President, CEO Benny Sela - President, CEO DSIT Solutions Ltd

Ted Lou - Valley Financial Group

Good morning, and welcome to the Acorn Energy Year-End Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Many of the statements made today in the presentation and our responses to your questions are forward-looking. These statements are subject to various risks and uncertainties. In particular, DSIT's performance in 2015 and future years is subject to various risks and uncertainties including, one, risk associated with meeting performance milestones; two, political risks associated with its government customers; and three, of risk of possible costs overruns associated with fixed price projects. There is no assurance that DSIT will complete the projects described or generate the anticipated cash flow from operations. A complete discussion of the risks and uncertainties which may affect Acorn Energy business general and the businesses of DSIT and its other subsidiaries is included in the risk factors and the company's Form 10-K filed with the company with the Securities and Exchange Commission. Please note this event is being recorded. I would now like to turn the conference over to John Moore. Please go ahead sir.

Thank you. Welcome to the Acorn Energy year-end call. I'm joined on the call today by Joe Musanti, our Chief Operating Officer; Michael Barth, our CFO; Benny Sela, the CEO of DSIT; and Walter Czarnecki, the President of OmniMetrix. They will be available to answer your questions at the end of my prepared remarks. On our last quarterly call, I told shareholders we are going to sell one asset, which most people correctly surmised was DSIT and to find a partner for our U.S. seismic asset. Our plans changed dramatically because of two intertwined events. Collapsing oil prices and growing awareness of the vulnerability of underwater infrastructure that changed our direction. The first led to a collapse in the value of U.S. seismic and the second is leading to a major inflection point for DSIT. Given the relative swiftness and significant to these changes, I want to address the viability of Acorn. In the past, we made it very big on U.S. seismic in anticipation that a major service provider would give us a lucrative exit. That didn't happen. And we acted decisively to cut our cash burn. We have a plan that will allow Acorn to self-fund by organically growing our remaining three businesses. The success of this plan hinges on DSIT. We did not enter into this plan lightly and did so after intensive discussions with management of DSIT and our Board. Let me share with you the facts that spurt our decision to commit to DSIT's focused turnaround plan. After three years of relatively flat revenue and operating performance, we believe that DSIT is growing and maturing sales funnel driven by the previously mentioned global events plus the expected cash from the collection of accounts receivable and milestone payments from existing orders will be sufficient to fund the operations of Acorn, DSIT and our two grid reliability assets. Our cash projections indicate that if DSIT doesn't receive a single new order for the rest of the year, we certainly don't believe this is going to be case that they are expected to swing from utilizing $2.4 million from the line of credit in 2014 is having as much as $6.5 million of unrestricted cash and no line of credit utilization by the end of 2015. This would represent nearly $9 million shift in cash. The ultimate amount of unrestricted cash that DSIT will have at year-end is dependent upon a large number of factors including the amount of cash that will be needed to restrict to guarantee as recently received $15.4 million order as well as the timely bidding of their milestone deliverables. However, we are confident that DSIT will deliver. DSIT's cash is available to the entire group and we expect to be able to utilize up to $5 million in 2015 and up to $2 million in 2016 to fund our companies to the extent that those funds are available. We believe this liquidity will provide us with capital to build GridSense and OmniMetrix to a point that they will not require cash infusion in 2016. While we always knew the world is becoming a more dangerous place, the market has only recently began to percolate as a result of the growing awareness and need for anti-submarine and threat detection for energy infrastructures. There are three major hot spots for Western Line states need help and DSIT is at the forefront. We have customers and substantial sales funnel of opportunities in the Middle East, the rise of ISIS and Boko Haram and the flair up in hostilities between Iran and Saudi Arabia are increasing demand for our products. Our largest installation and prospects are in the former Soviet States where Iran is seeking to destabilize U.S. and European friendly states. Europe and NATO are threatened by the presence of ISIS in Tunisia, Libya and Egypt. The Arab world is facing upheaval not seen since the collapse of the Ottoman Empire. In December, NATO held a conference in Brussels on Harbor Security where each member is pledged to invest an underwater surveillance of infrastructure in their major ports by the end of 2016. One single vendor, DSIT was invited to present and that was based on our extensive experience, installed base and case histories. In the South China Sea, India, Singapore, Myanmar, Vietnam, Philippines, Indonesia and Brunei are all threatened by China's search for status in control of resources. There is actually an article in the Wall Street Journal today about this same issue with building a second Chinese Wall in the South China Sea. Jane's Defence Weekly, the Bible of defense industry has stated there will be over 200 subs in the South China Sea by 2020. And this space is only slightly larger than Mediterranean Ocean. They will be more crowded than any other ocean on a per square mile with submarines. The budgets of customers and potential customers for Diver Detection Systems and Anti-Sub Warfare are growing rapidly. In addition, in late 2014, DSIT sold Diver Detection Systems to guard two nuclear facilities in Europe and we're successful in a diver detection competition head-to-head competition with our main competitor hosted by one of the world's largest owners of nuclear plants in Europe. Energy infrastructure is in our enemies' crosiers, early warning systems like ours reduced the risk and attack. DSIT has a leadership position in this growing market. At September 2014, Frost & Sullivan released a report on the diver detection market and stated there are only two competitors with mature solutions and DSIT was the leader in protecting energy infrastructure. Dramatically growing opportunities among other reasons let our Board to decide that the true value of DSIT is not being correctly reflected in the value we are being offered. We ended 2014 with $12 million in backlog. This is not just a gut feel in part of our Board and management, but driven home by the receipt of $15.4 million order in the first quarter, the largest in our history. Our backlog grew to approximately $27 million to $28 million at the time and our pipeline of near-term opportunities has grown to over $75 million in value. At the same time, as we are excited about our existing products, DSIT is developing a new line of drone-related products, which I will discuss in further detail later on the call. We firmly believe that DSIT has reached an inflection point to allow us to fund its activities and those of our other two operating companies to the point where it and other two businesses can grow and self-fund and become cash flow positive. DSIT enters Q2 of 2015 with this backlog that I previously mentioned $27 million, an amount which is not include possible options for add-ons from existing contracts and those are quite substantial larger than the initial contracts. We anticipate significant revenue growth for 2015, for which majority is in backlog at the end of the first quarter. On the R&D side, increased third-party participation cut our costs, a major focus has been on fiber optic development for structural health monitoring, for droning air craft. Israel is a major exporter of drones and we believe by developing the first real-time structural health monitor for drones, we can help reduce catastrophic loses and reduce operating costs. If successful, our fiber optic interrogator will be the first for the Israeli Defense Ministry. At GridSense, we spent $1.1 million in 2014 on R&D to develop two new products and continue to improve grid insight. The LineIQ is being used to automate motor controlled switches and we have a big deployment with TPL in Pennsylvania and another getting started with Alabama Power, a division of Southern Company. There is an opportunity to upgrade thousands of these switches throughout the United States. The value proposition is that we reduce outage times on these switches from 4 hours to 4 minutes, which greatly improves customer service, which is a key metric for utilities because it directly impacts their ability to obtain rate increases from the Public Service Commission. We also just developed [indiscernible] next week, an underground fault detector for low voltages. This is a unique product in the marketplace and we developed it over the past two years in response to orders from Xcel Energy in Minnesota and Encore in Texas. This project is important because it's expensive and time consuming for the utilities to manually locate faults underground. So we know the market is growing for SmartGrid sensors like those we produce a GridSense. GridSense, it hasn't been participating and I think one of the big questions our shareholders ask is how come GridSense hasn't been growing? And Joe Musanti's team that our challenge is that we just haven't had the right sales team and that we have also been trying to custom design our solutions to fit individual customer needs instead of targeting our products as plug and play solutions. We also need to invest our money in sales and marketing for these solutions rather than just constantly investing in custom engineering. So to that end, Jon Rappaport, proven technology entrepreneur with multiple stats to his credit officially joined the GridSense team today. One of the company's Jon Co-Founded 4Home and was bought by Motorola Mobility which is now part of Google. Jon brings a rich history of innovating and delivering integrated hardware and software solutions to the utility, service provider and professional interrogator markets. He is a very strong public speaker. He serves on the Board of Global Privacy and Internet-of-Things SmartCity Initiatives and he led a worldwide energy communication standard which is called the Anti2045 from its inception. So he knows the SmartGrid, our customers, our channel partners and Jon is well known in the industry. So Jon has accepted the challenge of turning around GridSense and will serve as the VP of Sales and Marketing focused on revenue generation, strategic partnerships and delivering a customer centric product roadmap. So after Joe made cost reductions at OmniMetrix where SG&A has been reduced by 43%, he promoted Walter Czarnecki from VP of Business Development to President, where he served for the past year. OmniMetrix grew its revenue by 25% in 2014 as compared with 2013 and we see a lot of opportunity to expand this. So DSIT and OmniMetrix have both been consistently selling and marketing and those results are now showing up. In February, Walter was named one of Wharton Business School's inaugural 40under40 alumni along with Ivanka Trump and the Founders of Warby Parker. So we have great faith in Walter and we believe that he is going to continue to grow and dramatically expand the opportunity at OmniMetrix. So OmniMetrix has two divisions, the smallest revenue, but highest margin division is our corrosion protection products for gas pipelines. It has 60% cash margin on hardware and recurring revenue for each installation. In the past OmniMetrix has focused all of its sales resources on the power generation market. Walter is determined that this product line is a hidden gem and that the market is beginning to tip. He has been making a major push in the corrosion protection division which has resulted in three new trials of gas utilities as well as follow-on orders in the last 90 days alone. So to understand the size and scope of the problem, we help to solve consider that North America has the world's largest network of gas and oil pipelines. There is over 3000 miles of gas pipeline and 100,000 miles of oil pipeline. The enemy of this infrastructure is rust or its scientific name corrosion. The U.S. government estimates there is $400 billion of losses due to corrosion to owners of pipeline and other infrastructure annually in North America. Just to put that into context that's more than all the national disasters in North America combined. So why does rust matter? Beside the catastrophic pipeline explosions, owners have to de-rate or reduce the flow every year through the pipeline based on the amount of corrosion. At 2% de-rating and at least not unusual, this is equivalent of eliminating 8000 miles per year capacity. Anyone following the Keystone pipeline controversy, those have valuable existing pipeline has become and how expensive and challenging is to build new pipeline. Fortunately, the prevention of corrosion using technologies like OmniMetrix, corrosion technology is relatively inexpense. So to protect against rust in the 1970s, the NTSB mandated all pipelines use corrosion protection or rectifiers to run a small electric current through the pipelines. This slows the expansion of rust. Changes in the soil around the pipeline like wetness or cold can change the electric current of the rectifier and reduce the protection. Our devices are used to monitor the performance of the rectifiers. Today 90% of all rectifiers are manually inspected. That means 10% have been automated with solutions like ours. California is down to often manual measurements are not taken or incorrectly input they have mandated remote monitoring. Sadly, a Shell pipeline corrosion engineer recently was sentenced on three five-year counts for falsifying rectifier readings. This is a wake up call for the industry that will create a greater need for remote monitoring. We have four great gas utilities in pipeline reference customers with a total of over 2000 installed pipeline units. On more than one occasion, we have displaced a competitor. Based on more recent regulatory changes, the mandating of remote monitoring and our own product development breakthroughs there is a dramatically altered outlook for this product line. Thanks to the teams' effort in the first quarter, we now have three pilots underway with new customers and over $8 million in quotations outstanding, the largest in OmniMetrix's history. We have added to the effort in recruiting – by recruiting Steve Hurbanek, a 25-year veteran of the gas safety division of Pennsylvania Public Service Commission. Today is his first day of work. He is a subject matter expert in pipeline integrity and as a nationwide network of contacts and relationships. Steve serves on one national corrosion technology committee and recently have been nominated to another along with other leading pipeline experts. We have great hopes for the growth of this business both on automating existing pipelines and new. Our power generation monitoring business had $2.2 million of revenue and grew 30%. This division monitored both residential and large commercial industrial generators and we just added a major supermarket chain as a customer. After an initial trial with this customer, the experienced weather event, our monitoring service enabled them to better understand the health of their generators. The customer immediately saw the value of our service and mandated the deployment of our solution across a large U.S. geographic region. Lastly, we have developed a thriving but modest margin residential generator business. We worked with dealers around the country and they have committed these different dealers who have committed to buy a set volume from us each month, so it's relatively predicable revenue stream. Walter and his team have been able to improve volumes by adding over 600 units this year, overall, in 2014, margins improved from 56% to 58%. We invested $616,000 in OmniMetrix R&D to accomplish three goals. One, upgrading our radio from 3G to 4G; we have also invested in lower cost hardware solutions for the residential market, which we believe will positively impact 2015 margins; and three, lastly we believe most importantly we have developed an industry leading product for corrosion protection of pipeline, the ability to not only remotely monitor but also to control the rectifier. And this is very important because it's a very labor intensive part of the pipeline maintenance to change the settings on the rectifiers after the control units are in remote locations and by automating this we think that this is going to give us a substantial competitive advantage over our other companies and we announce this feature two weeks ago with the National Association of Corrosion Engineers convention and we got a lot of leads for Steve to follow up on. So at corporate reduced SG&A cost by 30% by cutting Investor Relations salaries and eliminating positions. So thank you, the management team and I are now ready to take your questions.

We will now begin the question-and-answer session. [Operator Instructions] We have a question from [Harvey Poppel from Potac IP] [ph]. Please go ahead.

Welcome, Harvey.

Welcome, John. And a very congratulations on the moves that you made in this recent success of DSIT, it certainly sounds like you have repositioned Acorn overall for some sustained growth going forward. Question I have is, with the suspension of USSI, you got some Board members I think that were brought on Board specifically for their experience in that industry. There will be some further SG&A cuts including Board changes as a result of all this discontinuing of the USSI?

I believe there will be at least one person on the Board that will change.

How about SG&A overall?

We are under a lot of pressure to reduce SG&A at the corporate level and we are adding selling functions at the operating company, and I'm going to be spending a lot of my time on the road as well. But, we have recently downsized our corporate offices and that saves us a lot of money and we are constantly looking for ways to cut costs. We are very, very mindful of the fact that we really have an obligation to the shareholders to fund the company out of its cash flow.

Okay. If we looked at SG&A in the fourth quarter of 2014, would that be the kind if baseline for 2015 or do you expect it to be lower rate than the final quarter of 2014?

Lower.

Okay. Also as it relates to the disposition of assets for USSI, is there a potential to recover anything out of that or are you still going to be laying out money for closing the operating down. How does that look like it will net-out?

While, we just – Mark Bashforth on the call right now, I failed to mention that he was on the line. But, we terminated all employees yesterday and we are in process of soliciting bids to sell the remaining assets. And we think that our financial exposure is extremely limited less than probably $100,000.

Okay, good. Thank you very much.

Thank you, Harvey.

[Operator Instructions] Showing no further questions – my apologies, we do have a question from [indiscernible]. Please go ahead.

Yes. My question is regarding USSI as far as paying vendors, is there any possibility that vendors will be paid what is reserved to them?

So right now, Mark is leading the effort to sell the assets at US seismic and the goal is to pay-off our $1.5 million bank debt and approximately $1 million of accounts payable. Those are all due at the US seismic level and we hope that our vendors will be relatively paid back out of the proceeds of the US seismic assets.

Okay. Is there any timeframe for that?

It's happening now.

Okay. Is there anyone that we would be able to get in contact with that sub point to see where things stand or?

Yes. I got your number on the dialing that list and we will call after the call.

Okay, great. Thank you so much.

Thank you.

And our next question is from [Jeff Gilbert from IKShaw] [ph]. Please go ahead.

Hello, Jeff.

Congratulations on the other city areas, just on USSI follow-up to the previous callers question. With approximate $2.5 million outstanding in receivables or accounts payables and bank debt. Can you just comment on Board's deliberation on the alternative of using the cash flow that you enumerated from other subsidiaries for the corporate to pay that down and then just mothball USSI and the cost benefit analysis of the Board looked at during the sale which could be constituted as fire sales?

So Jeff that's an excellent question. And that's something that our Board really urged us was, how could we use – how do we sell some of the assets or we have to do something to try to preserve the value of US seismic. And the conclusion that we came to was – we had tried very hard to market the asset. We have tried very hard to partner with companies, some of the biggest oil field service companies. And nobody was forthcoming with any cash or debt to the bank $2.5 million of payables. We think that there are interested parties in buying these assets at what you described as a fire sale price. The hard part for the Board to assess was how long would, if we paid off that debt, number one, where did that cash come from, we have to do raise additional funds which our shareholders clearly don't want us to do. And second of all, how long is the cycle and how long do we have to mothball the assets for. And I think probably we are on the previous call where one of the world's largest oilfield service company's initially told us that they were going to buy the asset and then they subject to of course to due diligence. And then, further due diligence and then they called us back couple of weeks later and said sorry that world market had a complete free fall. We think we are in early days of a complete of a down cycle in the oil and gas and we can't predict when it's going to come around. So maybe – we need to put this in the fridge is what they told us. And so our Board just came to the conclusion that we don't have the resources to mothball the assets and we have an obligation to our bank and our vendors. And on the other side we have what we think are very promising growing businesses that will be flowing off cash flow. So we just thought that was more prudent use of our resources.

Fair enough. Appreciate at least the deliberation of what the Board [has done since] [ph] the previous call.

It was – I heard the word mothball one more time. It is the word – the word of the last 30 days because that's 60 days has been – when everybody has been talking about on the Board and how can we do it. We just couldn't find a constructive way to accomplish it.

Fair enough. Thanks.

Thank you, Jeff.

And our next question comes from Ted Lou from Valley Financial Group.

Good morning, John.

Good morning, Ted.

I just wondered if DSIT is using some fiber optic technology whether any of that came from USSI?

Benny Sela is on the line. And Benny, do you want to answer that question?

Interestingly, hydro optic sensing technologies started by our sister company USSI, we are also had joint projects under built, which is by National Israeli and U.S. fund. But, what we are doing now – we are developing new interrogators is really – and not based on USSI. And this is a co-development between us an industry and some universities – part of big universities, with the support of the Chief Scientist --. And we are – they help us to fund it and use some of the knowledge and technology and patents that we jointly developed with the universities. And we are really –– worst case we are dependent on USSI then the answer is no.

Well, thank you very much good answer.

Thank you, Ted.

We have a follow-up question from [Harvey Poppel] [ph]. Please go ahead sir.

Yes. I just wanted to clarify John, when you talked about the debt that USSI has, I think you said $1.5 million, that debt is not something that the parent as to face up to in its liabilities from this point, is that correct?

That is correct. It's non-recourse debt to Acorn. Of course, we take all of our debt seriously and we are going to do everything we can to try to in the course of liquidating the assets to get everybody paid back, but no, it's non-recourse to Acorn.

Okay. Thank you.

[Operator Instructions] Showing no further questions, I will conclude the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thank you everybody. We have had about 75 people on the call today and really appreciate our shareholder interest and what's happening at Acorn, it's been a fast developing situation. And we are dealing with things on a day-to-day basis. We have great confidence in our management team. We have added two what we think are incredible sales resources to drive OmniMetrix and GridSense and we hope that we will be getting returning to a situation where our revenue is growing from where we can achieve profitability and get back on track of creating shareholder value. So thank you everyone, so much for your patience and be assured that we are all working very hard to create shareholder value for the managers and for the shareholders. Thank you very much.

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