Michael Barth - CFO John Moore - CEO Walter Czarnecki - CEO, OmniMetrix

Welcome to the Acorn Energy Second Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Michael Barth, CFO. Please go ahead, sir.

Thank you. 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, the performance of our operating companies in 2015 and future years is subject to various risks and uncertainties including, risks associated with meeting performance milestones; political risks associated with conducting business with government customers and risks of possible costs overruns associated with fixed price projects. There is no assurance that Acorn or its operating companies will be able to achieve its goals for growth in 2015 and future years. Our ability to execute on our plans for 2015 and beyond is in large part dependent on DSIT generating the anticipated cash flow from operations of which there can be no assurance. A complete discussion of the risks and uncertainties which may affect Acorn Energy and the businesses of its operating subsidiaries is included in the risk factors and the company's Form 10-K filed by the company with the Securities and Exchange Commission. Please note this event is being recorded. Thank you.

Thank you, Michael. This is John Moore, CEO of Acorn Energy. It's been a treacherous time to be investing in the energy business. Commodity prices have collapsed with it our sales pipelines have suffered delays but we’re determined to survive and eventually thrive. When you last heard from us we told you we were expecting to be self-funding from excess cash flow at DSIT, that hasn't happened. Some of the receivables and progress payments we're expecting move to the latter part of the year. We've tied partners, was excited by our prospects and agreed to bridge the company until we could arrange a strategic event. The loan has a one year term and there's a 10% coupon that is an equity kicker that accrues monthly over the period. But we can pay it back earlier without penalty. Jan Loeb, the principal tied [ph] three into successful micro-cap investor, has a lot of experience in the Israeli defense world in the [indiscernible] on the board of an Israeli defense contractor and is a very experienced business person. DSIT continues to build its brand and awareness in the naval sonar technology market. We launched a new website that better presents our naval solutions and as a resulted in an increased number and quality of opportunities which we expect to convert to sales and new relationships with navies in the near future. We're happy to report that our work with our new South East Asian client is proceeding well and we expect to ship the anti-submarine weapons simulator in the first quarter of 2016 as planned. Our bank received a $6.2 million cash advance on this record order and we're in discussions with them to collect a substantial portion of the advance to fund work on the project. Another critical delivery on the an anti-submarine warfare product to another important customer and scheduled for the fourth quarter. We now enjoy $26.6 million in backlog at DSIT which is amongst the highest level in the company's history. We're led to believe by our customers in the second half of the year that could result in additional meaningful orders. Low oil prices are extending our sales cycle to our existing and future oil industry customers. But we are excited by our progress in creating a world class provider of reliable underwater acoustic solutions for our naval and energy infrastructure customers. The DSIT has return to profitability in the second quarter and growth and now the pressures is on OmniMetrix and good sense to produce profitable growth as well. We have the right products in OmniMetrix and GridSense now we need to improve our sales and marketing. We're taking advantage of the U.S. shift in energy supply to a renewables and natural gas. We've added experienced sales and application engineers at both companies who are able to help us create business case support in the dual emerging markets of making the electric grid ready for increased renewable penetration and gas pipeline safety. At both GridSense and OmniMetrix we’re focused on growth and improve margins through application sales rather than simply hardware sales. The challenge we have has been to create new markets for devices that provide operating insights into the low voltage distribution grid. This market is being created by the operating challenges that utilities are facing due the rise in penetration of electric vehicles and renewables. For the first time ever,. utilities are realizing that there are severe consequences to being blind to their operations beyond distribution substations. First we had to put in place the right team to execute our turnaround plan and [Indiscernible] recruited our Vice President Of Business Development, Jon Rappaport, Co-Founder and Chief Marketing Officer of 4Home, a Smart Grid business that was sold to Motorola Mobility which is now Google. Jon in turn has hired a new team of sales people and application engineers to get our ongoing pilots back on track so we can prove our customers' business cases and realize the large orders that are possible as a consequence of successful trials. Some of our projects are the highest profile projects in the country supporting the spread of electric vehicles specifically in California and Canada. We have been working on the California project for two years, that's with Sandia Gas & Electric and we finally got the customer satisfied with our product. We have learned a lot from this project and it means that when Jon Rappaport brought in a major Canadian electric vehicle charging station opportunity through a large integrator we've been able to execute flawlessly. And that's meaningful because you know there is potential for thousands of units across Canada. A recent installation at Xcel Energy demonstrates need for our product as renewable energy penetration grows. Utilities like Xcel Energy which is a one of the largest utilities in the United States are responsible for integrating solar farms into the grid, the power is now flowing two ways on the grid and that poses operating, [indiscernible] and safety challenges. Xcel installed our LineIQ systems on the lines and in an out of the new solar farm to monitor the flow of power. Now they know when they shut the power down to this area that the repairmen are safe because they'll know which way the power is truly off and it's also very important for determining the quality of the power which oftentimes can be problematic with solar farms. So we believe that all solar farms are going to require devices like ours on them and that's going to be a big driver for demand for our products. The other application we pioneered involves remote controlled motor operated switches, using our LineIQ product to identify faults and restore power. One application in Pennsylvania has reduced outage times on 100s of switches from four hours to four minutes. We're expanding this to other utilities very, very large utilities like Southern Companies another big growth opportunity for GridSense. In addition [indiscernible] is working to integrate GridSense and OmniMetrix and to generate $500,000 in annual savings. Walter Czarnecki, our CEO of OmniMetrix has identified two major growth opportunities. The first is our pipeline monitoring business, over the past 13 years OmniMetrix has been developing and taking orders for remotely monitoring corrosion protection systems for pipeline, we have been very reliable supplier to six gas utilities. To give it myself and our Board of directors the corrosion monitoring merited more resources. Walter had to help us answer several questions. First one is, is there a market? Pipeline operators required to put devices called rectifiers on their stale pipelines, these devices run electric current through the pipeline to prevent it from rusting. Pipeline operators need to regularly check the readings on the rectifiers and provide regulators with compliance records. There is compelling business case and this can be done best by remotely monitoring devices rather than sending out a crew that's particularly true in the northern clims where during the winter time it can be hard to get access to the pipelines and it's also difficult in the summertime in certain places like Arizona, other places where it's just hard to get people to get out there during difficult weather conditions. We estimate the hardware market is conservatively $500 million in the U.S. and less than 1/3rd of the rectifiers are currently monitored and half of those that are currently monitored need replacing because use outdated 2G radios that are in danger of being turned off by the system providers and they need to be upgrade. So we believe that we have an opportunity to grab market share from our competitors. Walter's team has found that there are four distinct segments of the market, large transmission pipeline owners where we have several demo scheduled, these are potentially very, very large orders but they take a long time to land, refineries and tank farms where we just landed our first new customer, investor owned gas utilities like our largest customer, Pacific Gas Electric and small municipal gas utilities where we also see lots of growth one example is that there's about 200 municipal gas utilities in Georgia alone. And each one of these opportunities could be a $100,000 or $300,000 opportunity and they all have the same issue of regulations. Each market segment has different sales cycles but all of them are facing growing regulations which will benefit the demand for our products. The third question Walter had to help us answer was can OmniMetrix compete? There are five key competitors for monitoring of rectifiers. We think they're doing a poor job of servicing the market and we've displaced several so we have reason to believe that we have the best product. The last question is can we sell? Is there a pain point? Potential customers are telling us that our timing couldn't be better. The industry has experienced increased enforcement by the federal and state regulators, the State of Michigan recently brought criminal charges against a shell employee for providing inaccurate manual recordings of corrosion tests. The pipeline industry is quickly recognizing that monitoring improves their safety record and reduces operating costs. They've only recently begun to proactively contact new potential customers who are seeing our business grow substantially versus last year. We've heard from existing a prospective customers that new regulations are on the way and it will just increase the pain point we're solving for. So Walter, [indiscernible] who spent 25 years in gas safety at the Pennsylvania and North Carolina public service commissions. He serves on several important national corrosion committees with our target customers. His domain expertise and experience as a regulator means we’re very credible for our existing and future customers. Steve is working with Josh Jovard [ph] a superbly generator, we're now spending our list of customers and expect to be regularly announce new deployments. Lastly in our traditional power generation market, OmniMetrix has joined a partnership with multiple large defense contractors to support a major backup communication project for the U.S. military. The project has been approved by senior military officers at the Pentagon. The partnership and OmniMetrix role has been reviewed and accepted at the highest level Pentagon and success in the initial stages can result in predictable profitable growth of this business over the next five years. Our traditional power generation business continues to grow, we recently completed a regional deployment for national grocery chain. Overall OmniMetrix has surpassed 9000 active connections all of which represent recurring revenue to the company. Now the distraction of the problems of U.S. seismic has passed for more folks than ever, are confident we can restore shareholder value and confidence. That concludes my prepared remarks.

[Operator Instructions]. Our first question will come from Michael Zuck [ph] of Oppenheimer & Company.

Couple of questions, regarding the LeakTide [ph] capital investment. Was that advance made was, it done at the end of the second quarter or was it done in July for the start of the third quarter? It's just a timing question.

We closed it at like 4 o'clock last night, 4 o'clock in the afternoon yesterday.

So the twelve months then effectively starts today?

That's correct.

And then -- the one year period then runs through next year?

That's right.

Is it a presumptive of me to infer that as we get farther down the road with DSIT say into the first quarter of 2016 that we might have the ability to pay down on this loan?

That is our hope and aspiration. We've been we've got some interesting companies that have approached us about partnerships with the DSIT and it's a terrific company and that's -- you know it's an art. And another question regarding Southeast Asia I sent you some information yesterday regarding the proposals that the Chinese are undertaking to greatly increase their naval presence not only in the South China Sea but in the Pacific Rim. What kind of opportunities is that presenting to us with regard to signing contracts with the neighboring countries in that area.

Yes indeed we know that this [indiscernible] fee is going to be a hectic place, the plan is that in a relatively small areas there will be many, many tens of submarines and all the countries involved in the navies though and taking measurements and we all know there will [indiscernible] and working with them and proposing a different solution. As a matter of fact one of the last biggest order that we received is for one of the countries in that area.

From an opportunistic standpoint would we attempt to display our capabilities to these various countries? Is this a decision that has been made from military or strategic standpoint or is it a political decision made in these countries?

I would say it might be both, it will depend on the countries but we are talking to the military and the Ministry of Defense who are the customers for these type of systems. We of course have many commercial and engineering related customers that trying to protect the physical infrastructure and then we would be talking to the main oil companies, oil and energy companies.

Is our technology being used in the Gulf of Mexico for oil rig monitoring?

Not yet, but Mexico is one of our potential customers. We have been a number of times. We have an agent that worked with us there this is one of our targets. Sometimes it takes longer especially now with the situation in the energy world but for sure the Gulf of Mexico is one of the potential markets.

Well I appreciate the efforts that has been made and look forward to lending subcontracts particularly with the threat if you will of the Chinese navy in the South China Sea and beyond.

Thank you so much.

Our next question comes from [indiscernible]. Please go ahead.

There was on 20 minutes, 60 minutes rather there was a segment on danger of China wiping out our satellites and they talked a lot about a potential backup plan is that what you're talking with some of your new contracts?

Yes That is correct. The Pentagon is working on several different measures as a backup and we saw that story as well and the partnership that OmniMetrix has acted and working on is one of those alternatives.

Okay. How close are you to getting something in that area would you guess?

Yes we have been receiving regular updates from the partnership over the past three months and what they are telling us is that they have been in regular contact with Pentagon as John mentioned in his remarks and they are expecting the first work on that to take place in 2015.

2015, so probably the fourth quarter?

We’re not sure of when exactly that will happen, but everything we're told is that the initial work will be done in 2015 with a larger work to be done over the next five years.

And that contract will be for the Air Force right?

We're in discussions with several parts of the military but that doesn't to be for Air Force.

Yes. So if that came to fruition then there would be a good chance if it was working that it would expand to a lot more bases and also other divisions of the military?

That is our understanding at this point.

And of the good guys as well and our allies as well. Les, because this is this is something that you take we take modern communications for granted but you know this would be devastating to the to our defense and our ability to project power if the U.S. doesn't have the ability to be able to communicate.

Right and then on the running the electricity through the gas pipelines to eliminate or curtail corrosion, where does that stand? Do you actually have any contracts or are you getting close? What would seem to me that the accidents that have occurred over the last two or three years would provide a significant impetus to these companies to get moving in this area.

That's correct. So we have been actively working with gas utilities since 2002 and over the past six months on the metrics is placed much more of a stronger sales focus on that market and that division. We've seen new orders come in. I know I had lunch with a local regulator just two days ago and he echoed your comments that much of the regulations started with the San Bruno incident [indiscernible] Gas and Electric. They have seen a much higher rate of change in terms of increased roles and they expect to see even more rules to come in the coming months and years.

Okay, the problem is that utilities are notoriously slow in making changes that they're not required to but it is there also a market with the gas pipelines which have a lot more money and would probably be interoperable as the utilities?

I would agree with you that utilities are historically slow to change. What we've seen is that these rules that have occurred over the past few years are the main driver for them to adopt from a monitoring.

What about the second part of the question that pipeline companies should also be a good market where there would be you know they're not usually is resistant to change particularly with the liabilities that they'd be facing?

Yes they are another large part of the market and we’re at active discussions with several of them today.

[Operator Instructions] Next we have a follow-up question from Michael Zuck [ph] of Oppenheimer & Company. Please go ahead.

John, a follow-up on pipeline monitoring, is there a difference in the monitoring systems for underground on-shore pipelines and underwater pipelines and are they distinct market or can you use the same type of technology to monitor both those types of pipelines.

That’s a good question, Mike particularly in view of that recent Santa Barbara pipeline accident I will hand that one over again to Walter.

It's all the similar technology. OmniMetrix's current technology has multiple applications for various types of pipeline, what we have doing after first is gas because that is has most of your pinpoint in terms of damage and risk of [indiscernible] but there are several other applications that we’re pursing as well, water among them yes but there are many others.

I think Walter is asking under pipelines, is that area that we go after?

It is part of what we've looked at. I would say that that's where we're on the priority list. But it's certainly you know among the markets that we can we can pursue and the technology is the same relevance.

Another sort of thing is there's internal corrosion and there's extra chores and so the internal corrosion is checked by things like [indiscernible] that they $10 million systems that they put down the pipe down the pipeline for internal corrosion and then what we're doing is monitoring for external corrosion so typically like a [indiscernible] will hit a pipeline and scratch the coating that'll open up a surface that can that can rust and you know this it's a huge problem for the pipeline owners and Walter's first convincing them that they just need to build up the regulatory records in-line but there's also a substantial operating benefit to them.

Well that reminds me from a liability standpoint for pipelines it would seem to me that there would be pressure on the pipeline companies to increase their monitoring given the accidents that have happened over the past three or four years and it seemed to me the pressure would come from the insurance industry from the standpoint that I'm sure that some of these pipelines have some sort of a liability insurance policy in place and I would think that the insurance companies would be actively requiring that there be stepped up inspection to prevent future accidents because if there's a pipeline explosion that results in the loss of human life the potential liability is staggering.

Walter, have you had any interaction with you know it's like [indiscernible] obviously a big backer of insurance for transformers and things like that, have you seen any efforts on the part of the insurance companies on the pipelines?

We have seen some of that, we have had a couple of conversations with some of the larger insurance companies and that we see that as you do is the growing opportunity as these regulations and risks increase.

Well the bottom line is guys go for all of these opportunities because I can see that there are there now it's a matter of delivering on the potential opportunities and I have a great deal of confidence that over the next three or four quarters we will see subtenant progress.

Thank you so much, Mike. Appreciate your comments.

This ends our question and answer session. I would like to turn the conference back over to Mr. John Moore for any closing remarks.

I would just like to conclude by saying thank you so much for you sticking with us and supporting us and believing us. Obviously there is not much we can do about energy prices, there are things that we can do about our cost structures and we're doing that and there are things that we can do about spending more time in for the customers and being better at listening to them and solving their problems and we believe we're going to get through this tight spot and thanks to Jan Loeb and the investors and [indiscernible] three which includes the some of the members of the senior management of DSIT and we're grateful for everybody's assistance we get a little help from our friends. Thank you very much.

Thank you, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a fantastic day.