John Moore
Analyst · 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.
