American Superconductor Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: American Superconductor (AMSC)

American Superconductor (NASDAQ:AMSC)

Q4 2012 Earnings Call

June 14, 2013 10:00 am ET


Kerry Farrell

Daniel Patrick McGahn - Chief Executive Officer, President and Director

David A. Henry - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer


Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

JinMing Liu - Ardour Capital Investments, LLC, Research Division


Good day, everyone, and welcome to the AMSC conference call. This call is being recorded. [Operator Instructions] With us on the call this morning are AMSC President and CEO, Daniel McGahn; Senior Vice President and CFO, David Henry; and Senior Management of Corporate Communications, Kerry Farrell. For opening remarks, I would like to turn the conference over to Kerry Farrell. Please go ahead.

Kerry Farrell

Thank you, Jessica, and welcome to our call to discuss our fourth quarter and full year fiscal 2012 results.

Before we begin, I'd like to note that various remarks management may make on this conference call about AMSC's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our annual report on Form 10-K for the fiscal year ended March 31, 2013, which we filed with the SEC earlier today.

These forward-looking statements represent our expectations only as of today and should not be relied upon as representing our views as of any date subsequent to today.

While AMSC anticipates that subsequent events and developments may cause the company's views to change, we specifically disclaim any obligation to update these forward-looking statements.

I would also like to note that we will be referring on today's call to non-GAAP net loss or net loss before adverse purchase commitments; losses; net stock-based compensation; amortization of acquisition-related intangibles; restructuring and impairment charges; executive severance; Sinovel litigation costs; loss contingency for shareholder litigation; consumption of zero cost-basis inventory; noncash interest expense; change in fair value of derivatives and warrants; and other unusual charges net of any tax effects related to these items.

Net GAAP -- Non-GAAP net loss is a non-GAAP financial metric. A reconciliation of our non-GAAP to GAAP net loss can be found in the press release we issued and filed with the SEC this morning on Form 8-K. All of our press releases and SEC filings can be accessed from the Investors page of our website at

I will now turn the call over to CEO, Dan McGahn. Dan?

Daniel Patrick McGahn

Thanks, Kerry. I'll begin today by describing the results we have achieved over the past 2 years. I'll also provide an update on our litigation in China. Dave will then review our financial results and provide our guidance for our first fiscal quarter. I'll then share our longer-term business outlook, including our strategy to achieve positive net cash flow on a quarterly basis by the end of fiscal 2014. Then we'll open up the line to your questions.

Since I took the position of CEO 2 years ago, we have diversified our revenue stream and I believe that we've created a strong foundation for a healthy and stable business. Let me begin by describing the successes and results we've achieved over the past 2 years.

When we talk about our strategy going forward, we'll focus on the next 2 years. In our Grid segment, we've sold our D-VAR STATCOM to utilities, developers and industrial companies in Australia, China, Europe, North America and the United Kingdom. In fact, in FY '12, we announced the sale of our 100th STATCOM system.

We've also made significant accomplishments with our superconductor wire. We introduced distribution fault current limiters to the North American market and sold wire for a fault current limiter in Europe. We also successfully qualified a transmission fault current limiter with industry leaders, Nexans and Siemens.

We began shipping Amperium wire to LS Cable under our supply agreement, and Korea energized its first superconductor cable. We were chosen as the wire provider for a superconductor motor for POSEIDON, a project aimed at improving the efficiency of Europe's commercial shipping fleet.

In the United States, we secured exclusive rights to a fundamental superconductor patent. And finally, we doubled performance and reduced pricing on our HTS wire.

In our Wind segment, we signed a multiyear contract with JCNE in China, signed a new contract with Hyundai Heavy Industries in Korea and signed 3 new contracts with Inox in India, including the latest $30 million follow-on order.

From a financial perspective, we unwound nearly $40 million of adverse purchase commitments. And we have continued to fight for justice in China by bringing our intellectual property theft to the attention of the highest levels of the American, European and Chinese governments.

In fiscal 2012, we grew revenues by 14% year-over-year due to increased D-VAR sales in Australia and the United Kingdom. The Grid business itself grew by 35%. We reduced our net loss by over 50% as a result of improved gross margins and reduced operating expenses. And as a result of our cost-cutting measures and continued focus on cash management, in fiscal year 2012, we reduced our cash burn by more than 70% while at the same time, settling almost all of our adverse purchase commitment liabilities.

Before turning the call over to Dave to review our financials in detail, I will give you an update on our litigation.

Our differences with Sinovel began over 2 years ago when Sinovel refused nearly $70 million in contract achievements. We subsequently discovered the theft of our intellectual property. And 21 months ago, we filed 4 lawsuits against Sinovel in China in which we are seeking damages of $1.2 billion. Since then, we have gotten the attention of the highest levels of the American, European and Chinese governments. We believe our topic is on the agendas of President Barack Obama as well as Chinese President, Xi Jinping.

In addition, 5 cabinet-level secretaries, including Secretary of State Kerry as well as Vice President Biden, have supported our case.

In the EU, we have a similar level of support. Working on our behalf in Europe is Karel De Gucht, a Belgian national and EU Commissioner for Trade; Daniel Caspary, a German national and Majority Speaker in the European Parliament, and majority -- and Othmar Karas, an Austrian national and Vice President of the European Parliament. We are appreciative of the support of the United States and European Union governments. And with their continued support, we believe we will have a positive outcome in China.

We have also paid close attention to Sinovel's international shipments. We have opened a case in Brazil and have been involved in activities in Europe and the Middle East. And we will continue to work with authorities in all of the markets to which Sinovel shipped turbines.

Despite the tremendous support from our government, the progress of our cases in China's legal system has been exceedingly slow and frustrating. Our cases represent a signal to the West on the sanctity of IP in China. We await what we hope will be a final hearing on our commercial arbitration claim. We are also awaiting our first substantive hearing in our trade secrets case. And both of our software copyright infringement cases are now before China's Supreme People's Court to determine the appropriate jurisdiction. The court heard arguments from both sides in May. We are hopeful that a decision on the jurisdictional issues will be rendered within the coming months.

China's new leadership has spoken publicly about the importance of protecting the intellectual property rights of all companies, both foreign and domestic. While we believe the evidence of infringement against Sinovel is overwhelming, our growth strategy is not dependent upon the outcome of these cases. Rather, we are moving forward with the strategy focused on significantly increasing the top line in both our Grid and Wind businesses. This strategy is underpinned by AMSC's differentiated technology, key competitive advantages and favorable trends in both established and new markets.

I will discuss those opportunities following Dave's review of our fourth fiscal quarter and full year 2012 financial results. Dave?

David A. Henry

Thanks, Dan, and good morning, everyone. AMSC generated $20.4 million in revenues for the fourth quarter. While this is down from $28.6 million in the year-ago quarter, it is up from $17.4 million in the third quarter of fiscal year 2012.

For the full fiscal year, we generated revenues of $87.4 million, up 14% from $76.5 million in fiscal year 2011. The full year growth was driven by our Grid business, which grew 35% year-over-year.

Looking at the P&L in more detail, gross margin for the fourth quarter was 11.4%, which compares with 12.4% in the fourth quarter of fiscal 2011 and 5.1% in the third quarter of fiscal 2012.

Normalized for activity associated with our adverse purchase commitments, gross margin nearly doubled to 14.6% in the fourth quarter of fiscal 2012 compared to 7.6% in the fourth quarter of fiscal 2011.

R&D and SG&A expenses for the fourth quarter were $17.2 million. This was down nearly $6 million from $23.1 million for the same period a year earlier, reflecting our cost reduction initiatives, but it is up from $14.7 million in the third quarter.

Fourth quarter SG&A expense includes a nonrecurring charge of $1.8 million related to the class-action shareholder lawsuit. An agreement in principle has been reached between the company, our insurers and the plaintiffs to settle the lawsuit. The charge represents the amount the company expects to pay directly to the plaintiffs as part of the settlement. The plaintiffs have tentatively agreed to accept payment in stock. We believe that the settlement will be finalized and payment made before the end of the second quarter of fiscal 2013. Excluding this charge, operating expenses were roughly flat compared to the third quarter.

We continue to expect R&D and SG&A expenses to be less than $58 million on an annualized basis starting in the first quarter of fiscal 2013, with approximately 20% of this spending being noncash. In the fourth fiscal quarter, we incurred approximately $1.1 million in restructuring and impairment charges related to the cost reduction actions undertaken in the third quarter of fiscal 2012 as well as additional asset impairments recorded in the fourth quarter.

Net interest expense was $4.8 million in the fourth fiscal quarter, of which $4 million was noncash interest expense.

There are 2 sources of noncash interest expense. First is the result of amortizing the debt discount recorded at the inception of the debt arrangements. Secondly, it is a result of making installment payments on the convertible note in stock at a 15% discount to market.

We also recorded a $1.4 million noncash benefit in the fourth fiscal quarter for a change in the fair value of our derivative liability and warrants, which we are required to mark-to-market each quarter.

Our net loss in the fourth quarter of 2012 was $19.8 million or $0.35 per share, an improvement from a net loss of $21.2 million or $0.42 per share in the same quarter of 2011. This decrease was driven primarily by lower operating expenses, which more than offset the net effect of interest expense and mark-to-market gains related to our debt arrangements.

In fiscal year 2012, we reduced our net loss by more than 50% to $66.1 million from $136.8 million in fiscal year 2011.

On a non-GAAP basis, our net loss was $11.8 million or $0.21 per share for the fourth quarter of fiscal 2012. This is an improvement from a non-GAAP net loss of $15.1 million or $0.30 per share for the fourth quarter of fiscal 2011 and a non-GAAP net loss of $13.5 million or $0.26 per share in the prior quarter.

For the full fiscal year, we narrowed our non-GAAP net loss to $52.3 million or $0.98 per share from $85.5 million or $1.68 per share in the prior year. Please see our press release issued this morning for a reconciliation of GAAP to non-GAAP results.

We ended the fiscal year with $50.2 million in cash, cash equivalents and restricted cash. This compares with $56.4 million as of December 31, 2012.

As of March 31, 2013, our -- the principal balance of our debt arrangements excluding the debt discount was $23.5 million compared to $30.2 million as of December 31, 2012.

Of the $6.7 million reduction in our debt during the quarter, approximately $5.5 million was paid in stock as the holder of the convertible note was paid for principal and interest payments, which had been deferred as of December 31, 2012. And they converted additional amounts over and above the monthly amortization payments due during the fourth quarter. As a result of this payment acceleration, no further principal payments were due until June 1, 2013.

Included in our Form 10-K filed this morning with the SEC is a going-concern opinion from our independent accounting firm, PWC. The opinion notes substantial doubt about the ability to continue as a going concern. The opinion is based on the existence of recurring operating losses and the continuing cash burn combined with sensitivity analysis around our forecast.

The key factors involved in this determination include our ability to grow our revenues as forecasted and to continue to make scheduled amortization payments in shares of our common stock. With respect to revenue growth, we continue to execute on our plans and toward our target of becoming cash flow break-even on a quarterly basis by the end of fiscal 2014. Dan will discuss these plans in a few minutes.

Our ability to make scheduled payments in stock on our convertible note is subject to stock price and volume conditions, which are outside of our control. To date, the company has never had to pay the noteholder in cash. And we currently meet the share price and volume conditions to make these payments in stock.

However, the going-concern evaluation assumes that we will not meet these conditions and that we will make the monthly payments entirely in cash totaling more than $11 million in fiscal year 2013. So despite our payment history, that $11 million is not considered as cash payable to fund operations in the evaluation. Similarly, the going-concern evaluation gives little weight to other actions the company could take such as sales of noncore assets, which include our minority investments.

With respect to our noncore assets, we are actively seeking to sell our minority investments in Tres Amigas and Blade Dynamics and have entered into an engagement with a financial advisor to assist us in this effort.

Before I discuss our forward-looking guidance, I'd like to highlight a few things. First, our reported 12-month backlog as of March 31 of approximately $85 million is roughly equivalent to our full year fiscal 2012 revenue.

Second, we are reiterating our guidance for 25% revenue growth in fiscal 2013. This means we are entering fiscal 2013 with more than 75% of our forecasted fiscal 2013 revenue on backlog in line with previous years.

Third, our cash burn slowed to $6 million in the fourth quarter, and we expect a continuing reduction in our cash burn in fiscal 2013 compared to fiscal 2012. Proceeds from the potential sale of our minority investments are not contemplated in our cash forecast.

If we successfully execute to the guidance for fiscal year 2013 that I will discuss in a moment, then we believe there is sufficient liquidity to fund our operations as well as our financing and investing requirements over the next 12 months.

Turning to our financial guidance. For the first quarter of 2013, we expect that our revenues will be greater than $22 million. We expect that our net loss for the first fiscal quarter will be less than $15 million or $0.26 per share. This does not factor in any mark-to-market adjustments associated with our convertible note.

Our non-GAAP net loss for the first fiscal quarter, which excludes mark-to-market adjustments, noncash interest associated with our debt arrangements and other noncash and unusual items, is expected to be less than $11 million or $0.19 per share.

In terms of the balance sheet, we expect to exit the June quarter with more than $42 million in cash, cash equivalents and restricted cash. Cash burn is expected to be seasonably higher in the first quarter due in part to employee incentive payments.

As I mentioned earlier, we are reiterating our guidance for 25% revenue growth in fiscal year 2013, and we also expect our cash burn to be reduced in fiscal year 2013 compared to fiscal year 2012.

So in summary, in fiscal year 2012, we were impacted by adverse conditions in the wind market. Despite these conditions, we drove year-over-year revenue growth while also improving gross margin. We reacted to the challenging wind market by further reducing our costs, which enabled us to significantly reduce our cash burn in fiscal year 2012.

We believe we demonstrated over the past 2 years that we'll take proactive action to address any potential shortfall in our plans, and we will continue to do so.

With that, I'll turn the call back over to Dan.

Daniel Patrick McGahn

Thanks, Dave. Back in April, we announced that we expect to achieve positive net cash flows on a quarterly basis by the end of fiscal year 2014. This target is expected to require annualized revenues in the range of $190 million to -- sorry, $180 million to $190 million with roughly an equal split between our Wind and Grid businesses.

First, let me focus on the Grid market. This business consists of our D-VAR product for utilities, industrial companies and the renewable industry and high temperature superconductor or HTS products for utility and marine applications. We estimate the addressable market for this business at $2 billion as rising power usage in urban centers increases the demand for grid reliability and resiliency.

In North America, we are conducting more than 4 gigawatts of renewables with our D-VAR product. Over the past few months, we've seen increased quoting activity in this region. In the U.S., this is most likely a result of the production tax credit extension. And in Canada, much of the interest is for the renewable application as well. But there is also a fair amount of interest from the utility and industrial markets.

In addition, we are also pursuing D-VAR business in South Africa, South America, Romania, Spain and the Middle East, all regions in which we believe there are large opportunities. We believe we can quickly show progress in the expansion of our regional reach, and we look forward to showing new markets opening for D-VAR.

Moving to our superconductor products. Today's utilities are facing challenges far beyond increased load from air conditioning in the summer and trees damaging overhead lines during winter storms. Utilities are now being faced with massive destruction from megastorms like Superstorm Sandy. The National Research Council, a private independent agency operating under a congressional charter, presented its report, which was sponsored by the Department of Homeland Security and identified our electricity grid as being inherently vulnerable to terrorist attack.

The Boston bombing provided a stark reminder that terrorism is a real threat and tragedy can happen close to home. We need to better protect ourselves against these threats. We need a more reliable grid.

We would like to give an update on our work with the Department of Homeland Security and Con Ed in New York on Project HYDRA. This project will result in the interconnection of 2 substations through AMSC's fault current limiting cable, which will create a more resilient and redundant grid.

Today, many cities take an islanded approach to their network, which means that each substation is responsible for powering its own section of the city.

And so if, for example, a substation is damaged as a result of extreme weather or an act of terrorism, an entire section of the city will be without power until the utility can get the substation up and running. This could be days, weeks or months, depending upon the damage.

For example, last year in Boston, equipment caught fire knocking out the power of residents and business for days. And only this past weekend, a cable in that same neighborhood malfunctioned, leaving residents and businesses without power again. The lack of power created dangerous conditions in the Massachusetts Turnpike tunnels, so the tunnels through the city had to be closed, and traffic had to be rerouted.

And only last month, consumers in Northern California were asked to conserve energy after grid equipment was compromised. AMSC's fault current limiting cable solutions provide an answer. By interconnecting substations, a nearby substation can share reserve power capacity until the damaged substation can get up and running. This drastically reduces the impact of an act of terror, extreme weather or equipment failure. While these extreme events highlight the vulnerabilities of our grid, this system is not only for extreme events. Under normal circumstances, the system allows utilities to better utilize their existing assets.

For example, rather than building a new substation, an incredibly expensive endeavor, utilities that are experiencing load growth can install a fault current limiting cable system to share load. And during times of high demand, like those hot summer days, utilities can share power between substations, so that its customers do not suffer from brownouts or blackouts. Con Ed recognizes these benefits. Project HYDRA will allow 2 adjacent substations in New York to seamlessly share the power supply, increasing reliability and efficiency and making better use of its existing assets. Construction is expected to begin in 2013, and the system is planned to be operational in 2014.

Our fault current limiting cable system is generating interest from other utilities as well. In fact, we've identified a dozen or so utilities in the United States alone that would benefit from this system now. And we are in discussions with a handful of these utilities that may have a specific near-term need.

Another HTS solution that will be a driver for future growth is our ship protection product called an advanced degaussing system for the U.S. Navy. Degaussing systems, which are traditionally made of heavy copper wire, are required on all Navy combatant ships. The systems reduce the ship's magnetic signature, making it much more difficult for a mine to detect and damage a ship. As mine technology improves, so much the Navy's protection system, which is why the Navy is now looking to deploy advanced degaussing systems on ship platforms.

Although effective, alternative advanced degaussing systems require much more copper, which adds significant weight and installation challenges for many ship platforms. AMSC's HTS advanced degaussing system addresses that problem by replacing the copper with a lightweight compact HTS cable that outperforms its conventional copper counterpart. Successful product design and development as well as the Navy's rigorous product qualification process have been completed.

With ship trials behind us, we are now working with the Navy to ensure successful, full-scale implementation on a surface combatant. Although initial production plans focus on one ship platform, we believe we can quickly increase our revenue by implementing our technology on additional platforms. Those discussions are already in process with the respective shipbuilders.

To be very clear, in both of these examples, we are not talking about selling only wire. For both the cable order and the degaussing deployment, we would supply a full system solution. This means higher revenues and more technology protection.

In summary, to achieve our revenue targets in the Grid segment, we need to do 3 things: one, continue to grow D-VAR sales in existing markets and implement those sales with further penetration into emerging markets; two, secure a large HTS cable system order; and three, deploy our ship protection system on a U.S. Navy combatant.

The second part of our growth strategy centers on our Wind business. Several trends are shaping the wind industry. First, the industry is moving toward more grid-friendly turbines with larger rotors and higher power ratings. Efficiency, power quality and grid reliability are paramount. As a result, AMSC, which specializes in technology for wind turbines from 2 megawatts and above, is a key partner in Asia.

In India, for example, we are helping Inox meet its country's demand for clean, emission-free energy. Inox is becoming increasingly successful in the Indian market. In 2012, they were ranked among the top 5 in installations in India, with over 250 megawatts installed during the year. In the fourth fiscal quarter, we began shipping wind turbine electrical control systems to Inox under our recently announced $30 million follow-on order. This is the fifth and largest order received from Inox since our relationship began 4 years ago.

According to Inox's public statements, they plan to double shipments by selling 500 megawatts of wind power this year, with 300 megawatts of orders already on their books. India's government is supporting the wind industry through low-interest loans and other incentives that we believe create a bright future for the market in the long term.

Positive momentum is also taking place in China, where 19 gigawatts of grid-connected capacity is expected in 2013. This is up 20% from 2012. China is a good example of a market that is transitioning to turbines that are more grid-friendly, efficient, reliable and powerful. And now, our partners in China have the competitive advantage of AMSC's advanced technology.

Another important trend shaping the wind industry is the growth of the offshore wind market. Larger, more powerful offshore turbines benefit from higher wind speeds than land-based systems. For the emerging offshore market, we now have 2 wind turbine designs in the water: a 3-megawatt and a newly erected 5.5 megawatt. Dongfang, one of our licensees in China, recently erected its first 5.5 offshore wind turbine.

In 2014, a 8.5 gigawatt offshore project is expected to get underway in Korea. Our partners, Hyundai Heavy Industries and Doosan Heavy Industries, are both expected to contribute to this project. We are also working to get other partners qualified for projects planned around the world.

In addition to expanding our existing business, we are focused on broadening into new territories with large addressable market opportunities and local content requirements, such as Eastern Europe, Turkey and Brazil.

To achieve our revenue targets in the Wind segment, our 3 objectives are as follows: component sales to Inox, our partner that has publicly stated its plans to double shipments this year; this revenue from India will need to be supplemented by sales to our licensees in the Chinese market; and finally, all of this can be augmented by new demand from existing licensees.

Fiscal 2012 was a transition year. We have made significant progress, growing revenues 14% year-over-year and significantly reducing our cash burn. Of note in the Grid segment, we grew revenues by 35%.

For fiscal year 2013, we are reiterating our belief that we will be able to generate annual revenue growth of at least 25%, and we expect to further reduce our cash burn. Longer term, we are focused on achieving positive net cash flows on a quarterly basis by the end of fiscal year 2014.

Our revenue targets are ambitious but attainable. As Dave already mentioned, for fiscal year 2013, we already have 75% of our revenue in backlog. We need to continue to drive the revenue growth in our D-VAR product line while ramping up our HTS business through a cable project and a Navy deployment, and we need our wind customers to deliver on their existing sales pipelines. It's that straightforward.

We recognize the challenges that lay ahead. Two years ago, literally overnight, our business changed dramatically for the worst. I'm proud to say that since then, we've demonstrated resiliency. And in the past year, we've resumed growth with a more diversified revenue stream and more streamlined cost structure. We've raised $35 million in capital. We become a leaner and more nimble organization. In the past year, we've grown revenues and significantly reduced our net loss and cash burn. And we're looking towards 2013 and 2014 with optimism.

Before we open the line to questions, we'd like to take a few moments to address some questions that we've received over the past few months. We've received a number of inquiries about our hearing with the Supreme People's Court in China, and some folks have asked why we didn't issue a press release following the hearing.

The hearing went as we expected. Both sides presented their case, and we expect to have a decision within the coming months. We didn't issue a press release because there is no new news, and we did not release press releases after any of the activities in China before this.

On the last call, we talked for the first time in a while about our relationship with the U.S. Navy, so I'd like to provide a little bit more detail.

Our relationship began 15 years ago. And over the past 7, we've been working with the Navy on degaussing systems. This is an engagement that's mostly flown under the radar or floated under the sonar.

In 2006, we successfully demonstrated the world's first full-scale HTS-based degaussing system. In 2008, the Navy installed an HTS degaussing system onboard the USS Higgins where it underwent sea trials over the next few years.

Our main objective when working with the Navy is being designed into a ship platform. We have completed all of the qualifications, identified ship platforms that we believe will require HTS-based advanced degaussing systems, and we are working with shipbuilders on the deployment. The Navy is continuing to support this effort through its Navy Manufacturing Technology Program. Once designed in, we believe we can quickly increase our revenues by implementing our technology to additional ship platforms. We are very optimistic that within the next 8 quarters, we'll get an order for a full system to be deployed. We view work with the Navy as a potential, persistent, annuity-like revenue stream.

With that, Jessica, please open the line for questions.

Question-and-Answer Session


[Operator Instructions] We'll go first to Carter Driscoll with Ascendiant Capital Markets.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

First question, maybe you talked about the Chinese market offshore and onshore and some of their relationships that they currently have, maybe JCNE, Dongfang. I think that during the last call, you talked about China maybe having another weak year year-over-year, and now it looks like you're talking about maybe being up 20%. Can you talk about maybe what's changed in the past few months from your viewpoint?

Daniel Patrick McGahn

I think that the outlook over the -- if you go look back the past 2 years, people have assumed that there's going to be a lull. I think there's a debate as to how long that lull would occur. What we're seeing in the recent months, the market analysts that cover China and what we're seeing from the Chinese government itself is belief that they're going to get back to growth here in 2013 and sustain that growth through 2014 and beyond. With our partners in China, we've gotten to the point where they're ready to deploy. They have advanced technology for larger turbines, and we believe that they're in a position to go take market share. If we listen to our partners and look at their pipelines, they're well positioned for growth. What we now have to do jointly is demonstrate that growth with our partners.


We'll go next to JinMing Liu with Ardour Capital.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Is there any update you can provide us for the arbitration process against the Sinovel?

Daniel Patrick McGahn

In the remarks, we went through a little bit of this. We've gone through now what we believe are almost all or all of the hearings. We believe that we'll see movement in the case in the next coming months. I think one of the challenges with the arbitration case relates to the trade secret cases. So recall that the trade secret cases have now been brought to the People's Supreme Court in China over a jurisdictional matter. And the jurisdictional matter is simply, should the cases stand on their own or should they be attached to the commercial arbitration? So you might see or you might be convinced that the arbitration case may be waiting for the Supreme Court to make a decision on the jurisdictional matter. We don't have direct information from China that says that, but that's a logical conclusion one could draw.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay, got that. I may have missed that. What kind of revenue you make out from one Navy system?

Daniel Patrick McGahn

We haven't disclosed pricing, and that's a sensitive matter for the U.S. Navy.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay, got that. For your long-term guidance, meaning the fourth quarter '14 year guidance, in there, I mean, can you give us more color in terms of your potential geographic revenue stream from -- for your long-term targets? Because you mentioned you have been working on different areas like the South America and the Eastern Europe, so can you provide us with more details?

Daniel Patrick McGahn

Sure. So if you look at the Grid segment, there's really 3 pieces to it. So for D-VAR, we want to increase sales in the markets that we're active today, and then we're looking to supplement that growth with additional sales in some of these emerging markets. So the core markets that we've sold into D-VAR are the U.S., Canada, the United Kingdom and Australia. So we see the potential to be able to grow in those markets, as well as opening up new markets for the product in some of these additional emerging markets. So we see growth on both sides in the established markets and adding some additional revenue through the emerging markets. I think the key pieces of the Grid business growth mean securing orders on the HTS side for a cable system and for a degaussing system with the U.S. Navy. On the Wind side, which I think is where most of your thinking is focused, JinMing, we think again that there's 3 pieces to this, but principally it will be through component sales to Inox because they're publicly stating that they're going to double. And when we look at their pipeline, we're convinced that what they're saying publicly should come to fruition. That alone gets us most of the way there. And if we're able to simply supplement those sales in India through China, and maybe even we could consider a small amount of augmented sales through some of the other licensees. But the lion's share, we believe, to get back to profitability can come merely from Inox and supplemental revenue from China. So I've given you kind of a qualified -- a nonquantitative answer to what you're looking for, but I think you get the general sense of where we're headed.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Yes, I think that is consistent with what I got from other sources.


And at this time, we'll go back to Carter Driscoll.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

I apologize I got cut off there, guys, so I may have missed a bit or 2 there. Back to the Department of Homeland Security and Con Ed, could you kind of give us your framework of what the fault current limiter market opportunity could be in the near term and then long term and maybe bracket the size of your impact to revenue, and then maybe qualify that product within the Grid segment portfolio in terms of its margin contribution without giving specific parameters just to kind of...

Daniel Patrick McGahn

Yes, I'll try. I know one of the things that we're saying today is now we're talking about systems from the Navy and for fault current limiting. And you guys don't have a good sense of what the pricing or what the margin can be. But I think if you look at the model that you're using and you get to the $180 million or $190 million, you can see roughly the -- what you think the contribution could come from HTS. When we've talked in the past and we've talked about projects, we said that the HTS business itself could be profitable, or that product line could be profitable really with 1 large project or 2 normal-sized projects. In general, revenue for these types of projects are going to be in the tens of millions of dollars, which is a very different order size than what we see from D-VAR. To talk about margins and things like that, I think it's a bit premature. I think as we get an order, you will start to see more quantitative numbers around what the part of the business would look like. I don't know, Dave, if you want to...

David A. Henry

I don't have anything else to add on that, so...

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

How about just the ability to use the project in the context of other utilities interested in doing so? Maybe the engagement process about taking the successful demonstration and importing it to other geographic regions. I mean, what is the ability to do so of Con Ed? And then have they helped you market this project themselves?

Daniel Patrick McGahn

Yes, them and Homeland Security certainly are. And I think when you look at it and you look at the fact that Con Edison is involved and the complexity of their network, and you look at Homeland Security and their charter and the electricity grid is one of the main assets that they're looking to protect, that's helped us to try to build a network of -- and it's not just interested utilities. It's utilities with a specific site that they're looking to change the way the grid works in an urban environment. And what's good about the Con Ed experience is the technology has been proven out. We went through the deployment schedule, that it will be deployed this year in 2013 and operational in 2014, that we believe on the heels of that plus a lot of the macroclimate around protecting the grid in specific cities. You look at the Eastern Seaboard after the storms that we've gone through, and you look at specific assets in the U.S. that Homeland Security has identified. This nets out to about a dozen or so near-term projects that we believe would require the technology. And we've already moved forward with about 6 of them where we're getting into specifics around system design, what costs might look like and how a project would be rolled out, timetables and things like that. This is a very different rhetoric you've heard from the company this quarter than you've heard in past quarters. We're starting to see the movement now directly towards specific projects and projects that would not be one at a time, but potentially multiple projects coming here in the coming years.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

And then maybe just shifting gears a little bit back to the potential sale of your minority interest in Tres Amigas and Blade, can you sort of compare the need for cash and divestment assets versus your happiness or a dissatisfaction with the progress of what these investments have yielded so far?

David A. Henry

Well, actually they, I mean, from -- we're viewing these 2 investments as a source of potential liquidity, that's an alternative to going out to the equity markets or to the debt markets. We're actually happy with the investments, and we're not dissatisfied at all with them. I mean, in the case of Blade Dynamics, I mean, they are -- they're continuing to move forward with starting to commercialize their innovative blade technology. They have -- they just closed a deal with a Saudi Arabian company called SABIC to license their blade technology to them so that they can build blades in the Middle East. They also recently closed on a blade development arrangement with the Electricity Technologies Institute, and -- I'm sorry, Energy Technologies Institute in the U.K. Also for blade development, as part of that whole arrangement, ETI, for short, also made an equity investment themselves in Blade Dynamics. And so the whole thing, the development arrangement and the equity investment in total was over $24 million. So that's Blade Dynamics. For Tres Amigas, they're continuing to move forward with getting prepared to start the process of financing their Phase 1 construction. They're making good progress in that regard. There's been a lot -- there's a lot of interest. So there's a lot of buzz about what's going on out there in New Mexico and what that might mean to the grid. We bought -- we're into that investment because of superconductors. That -- the first phase is only for a back-to-back 750-megawatt line, so that's -- you don't need superconductors for that. But in later phases, when the station is moving towards its full vision capacity, maybe down the road, there's the opportunity for superconductors. But not right now. But bottom line, we're excited about the progress of both these companies. But if there's a -- if we can find a potential buyer at a price that we can find acceptable, then maybe we'll divest of one or both of them in order to enhance our liquidity. But to repeat, it's not required and it's not -- any proceeds from something like that are not part of the forecasts in terms of our cash burn that we provided to you today.


This does conclude today's question-and-answer session. At this time, I would like to turn the conference over back -- back over for closing remarks.

David A. Henry

Well, one thing, one other question that we typically get when we -- or we have been getting and also something that's relatively new is the shareholder lawsuit. So let me provide just a little bit more color on that. Today, we announced that we reached an agreement in principle among the company insurers and the plaintiffs to settle the class-action lawsuit. There's still procedural steps to overcome, though, to finalize a settlement. Specifically, the terms need to be documented in an agreement, which then needs to be filed and approved by the court. That process could still take a few months. But even though that process hasn't been completely closed down and finalized, for accounting purposes, though, we did cross the threshold to account for the potential settlement, and we did so during the fourth quarter. Again, that's -- that means a settlement of $1.8 million that we would pay to the plaintiffs as part of the overall settlement, which would be -- right now contemplated to be done in stock.

Daniel Patrick McGahn

Great. Thanks, Dave. So just to kind of summarize today's points, in the past year, we've reduced our net loss by more than 50%, and we've reduced our cash burn by more than 70%. We're now focused on the next 2 years. For fiscal year 2013, we are reiterating our belief that we'll be able to generate annual revenue, growing at least 25%. 75% of that forecasted revenue is already in backlog. And we believe that we can achieve positive net cash flow on an annualized basis by the end of fiscal year 2014. We want to thank everybody for joining today's call, and we look forward to reporting back to you in a few months on our first fiscal quarter for 2013. Thank you.


This does conclude today's conference. Thank you for your participation.

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