Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Quantum Fuel Systems Technologies Worldwide (NASDAQ:QTWW)

Q4 2013 Earnings Call

March 06, 2014 4:30 pm ET

Executives

Casey Stegman

William Brian Olson - Chief Executive Officer, President and Director

Bradley J. Timon - Chief Financial Officer and Treasurer

Analysts

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

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

Dan Trang - Stonegate Securities Inc., Research Division

Robert Mark Sussman - Bentley Capital Management Inc

David Zelman - Zelman Partners, LLC

Operator

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quantum Reports Fourth Quarter 2013 Financial Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Casey Stegman, Investor Relations.

Casey Stegman

Thank you, and good afternoon. Welcome to the Quantum Fuel Systems Technologies Earnings Call for the Fourth Quarter of 2013. We appreciate you joining us today. With me on the call is Brian Olson, Chief Executive Officer; and Brad Timon, Chief Financial Officer. The purpose of today's call is to review the company's financial results for the fourth quarter. Following the company's opening remarks, there'll be an opportunity to ask questions. The operator will provide instructions regarding Q&A portion of the call.

Certain statements may be made during this call may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current market conditions and management's reasonable expectations and assumptions as of the date of this call. Examples of forward-looking statements include our expectations regarding future revenues, gross margins, production capacity and the growth of the CNG market. Various risks and other factors could cause our actual results to differ materially and adversely from those contemplated by the forward-looking statements.

For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as those contained in our periodic filings with the Securities and Exchange Commission. The company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements made during this conference call to reflect any change in management's assumptions, beliefs or expectations or any change in events, conditions or circumstances upon which any forward-looking statements are based.

With that, I'll turn the call over to Quantum's CEO, Brian Olson, Brian?

William Brian Olson

Thank you, Casey. All those in attendance today, thank you for joining the call. In a brief moment, I'm going to have Brad review the fourth quarter and full year results, as well as highlight the continued improvements in our financial operating performance and strengthening balance sheet. And after that, I'm going to provide a year end review for 2013 and a general outlook for 2014, in which I will explain how we plan to fully leverage our successes to date. Let's begin with the financial results. Brad?

Bradley J. Timon

Okay. Thanks, Brian, and good afternoon, everyone. For the fourth quarter of 2013, we recognized $12.7 million of total revenues and earned positive operating income of $0.5 million from our continuing operations. The revenues reported for the fourth quarter represent an increase of 126% above the total revenues reported for the same period in the prior year.

Revenue from product shipments amounted to $8.0 million and was substantially all related to CNG fuel storage tanks and systems. After factoring in manufacturing overheads, we realized an overall gross margin of 31% on product sales for the quarter. Our backlog and customer orders for CNG tanks and systems was approximately $13 million as of December 31.

Revenues from contract engineering services for the fourth quarter amounted to $4.7 million overall, of which $4.3 million was related to the development of CNG fuel storage packaged systems. Activities under engineering, development contracts increased by 141% in the fourth quarter as compared to the third quarter of 2013, mainly as a result of increased activities under our previously announced program we have with ZHRO Solutions for the development of an aftermarket CNG storage systems for medium- and heavy-duty trucks.

Our revenues and profits also benefited from a December 2013 contract amendment with General Motors related to the CNG Impala passenger vehicle program. As a result of the amendment that removed certain gain contingencies, we immediately recognized revenue in the amount of $1.7 million for services provided through the date of the amendment under the long-term program. We also immediately recognized $0.8 million of engineering costs associated with the Impala program.

Looking at our development contracts on a combined basis, we realized an overall gross margin of 44% on contract engineering services for the fourth quarter.

Okay. Moving on to operating expenses. Our operating expenses include costs associated with our internally funded development programs and primarily consist of efforts to advance our CNG storage technologies. These expenses reported, as research and development, amounted to $1.5 million in the fourth quarter of 2013. Our operating costs also include selling, general and administrative expenses of our fuel storage and vehicle system segment and our corporate segment.

We recognized a total of $2.6 million of SG&A expenses in the fourth quarter, which represented a slight increase over the level of SG&A expenses recognized in our third quarter. The higher expense in the fourth quarter mainly consists of increased legal and professional fees related to ongoing litigation associated with a holder of certain warrants.

Next, I'll provide some comments on interest expense that is reflected below the line as part of non-reporting segment results. As I mentioned on our last call, we expected net interest expense would decline in the fourth quarter, which did occur. The net interest expense declined to $0.6 million in the fourth quarter as compared to $1.2 million recognized in the third quarter. This expense represents both cash payments based on stated contractual rates and noncash imputed rates, associated with equity-linked characteristics and other contractual provisions at the debt securities. Approximately half of the expense reported for the fourth quarter of 2013 was related to noncash imputed interest cost and was primarily associated with the convertible notes issued to investors in September 2013.

Next, I want to comment on the fair value adjustments of derivative instruments. During the fourth quarter, we recognized a net charge of $5.8 million, related to the increase in fair value of certain derivative warrants. The share price of our common stock represents the primary underlying variable that impacts the value of the derivative instruments. The net charge recognized during the fourth quarter was primarily due to the increase in our closing share price from $3.18 at September 30 to $7.80 at December 31. A significant number of the warrants that are accounted for as derivatives have now either been exercised or will expire in the first half of 2014. Thus, we expect a level of unrealized gains or losses on derivative instruments to become less significant in the future.

Moving on to the results of our discontinued operations. As we have disclosed on previous calls and releases, we are actively looking for buyers of the remaining wind assets of Schneider Power. As a result of our intent to sell the business, we classified the activities and balances of Schneider Power as discontinued operations held for sale.

During the fourth quarter, we did close on the sale of 3 early-stage renewable energy projects that brought in $75,000 in cash at the closing. However, we can generate up to an additional $750,000 in proceeds if those projects are all placed into commercial operation at some point in the future.

The most significant remaining asset of Schneider Power is the 10-megawatt Zephyr operating wind farm. Although we expect to find a buyer for the wind farm within the next several months, we have the flexibility to be patient and wait for a fair offer on the project.

Now I'll briefly cover the operating results of Schneider Power for the fourth quarter. Revenues of the segment amounted to $0.8 million, which was all related to the operations of the Zephyr wind farm. This is a significant improvement over the third quarter revenues and mainly resulted from the higher wind speeds that generally prevailed during the winter months.

Schneider Power incurred $0.7 million of operating expenses during the fourth quarter, which included $0.2 million of charges for separation arrangements associated with former officers of Schneider Power, a charge of $0.1 million recognized on the sale of the 3 development projects and $0.2 million recognized for a goodwill impairment charge.

Interest expense related to the Zephyr project debt amounted to $0.3 million for the quarter. The overall results of operations for Schneider Power amounted to a net loss after-tax of $0.2 million for the fourth quarter.

The overall impact of the results of our continuing operations and discontinued operations, which included the $5.8 million noncash charge related to the derivative warrants that I mentioned earlier, resulted in a consolidated net loss of $6.0 million that we have reported for the fourth quarter of 2013.

Next, I want to provide some comments on our balance sheet and improved liquidity position. Our cash balance as of December 31, 2013, was $6.3 million for continuing operations, which was lifted in part from the receipt of $5.8 million of proceeds from the exercise of warrants during the fourth quarter. Subsequent to the balance sheet date, our cash position has improved further. We received $15.3 million of net proceeds from the public offering that we closed in February 20, and we have also received an additional $3.7 million of proceeds from exercises of warrants during the first quarter of 2014 through yesterday. We used a portion of those proceeds in February to pay down our revolving line of credit to 0 that previously had a balance of $3.8 million.

As a result, our cash balance is now approximately $18 million. As such, our liquidity position is very strong and we have more than sufficient cash on hand to fund our business operations and sufficient funds available to complete our manufacturing capacity expansion plans for calendar 2014 that I'll cover further in a moment.

Because of our improved liquidity position and business outlook, we will be receiving a clean opinion from our independent auditors in connection with the filing of our 10-K, which we expect to file sometime over the next week.

I also want to provide an update on the number of shares outstanding. As of December 31, 2013, total shares of common stock issued and outstanding amounted to 18.9 million. As a result of the activity in 2014 to date, the issued shares have increased and now stand at 22.5 million outstanding as of yesterday.

Finally, I want to provide some comments on the status of our tank expansion plans. Over the past 12 months, we nearly tripled our tank production capacity and continue to this day to add capacity. Based on current estimates, we anticipate that our annualized capacity will reach approximately 20,000 units by September 30, 2014. We anticipate that we will require approximately $7 million in additional equipment and infrastructure cost in 2014 to increase our annualized tank manufacturing capacity up to approximately 20,000 units and to relocate certain tank testing operations from our facility in Irvine, California that we vacated at the end of January over to our Lake Forest, California campus. We expect to complete the relocation of our test and validation facility by April 30, 2014. Our existing liquidity is more than sufficient to fund our planned expansion plans in 2014.

And with that, I will turn it back over to Brian.

William Brian Olson

Okay. Thank you, Brad. When we set course in 2013, we had an abundance of opportunities right in front of us, high ambitions about our future, a sureness about ourselves, confidence in what we could accomplish and a defined plan to reach our business goals, a plan that in turn would define us. Heading into last year, I spoke often of 2013 being a defining year for Quantum, and it was. We defined ourselves in many ways.

We said Quantum's 2013 would be defined by a strong focus on natural gas, and it was. Nearly 100% of our business activities and revenues were based on CNG products, CNG tanks and CNG systems and CNG programs. We said Quantum's 2013 would be defined by a growing revenue base, and it was. Quantum CNG tank unit shipments more than doubled and our overall CNG revenues increased 153% in 2013.

We said Quantum's 2013 would be defined by innovation, continued product and system development and commercialization, and it was. We introduced advancement to our Q-Lite storage tank and innovated system solutions around it that we brought to market in 2013.

We said Quantum's 2013 would be defined by production capacity expansion, and it was. During 2013, we nearly tripled our production capacity. It has required hard work, financial resources and a creative level of ingenuity to make it all work, and it has. Our capacity is growing.

Finally, we said Quantum's 2013 would be defined by a march toward profitability, and it was. We made continued sequential quarterly improvements in 2013, and ultimately recorded positive operating income in the fourth quarter.

For all these reasons and then some, we are pleased with our 2013 performance. We are as pleased with the results as we are in how we went about achieving these results. Our employees worked hard and didn't look back. It required transition, flexibility and commitment, yet our employees pushed forward and weren't willing to be stopped. They were challenged, yet motivated; busy, yet energized; flexible, yet unwavering; successful, yet hungry for more. And perhaps, the most successful aspect of 2013 is the continued building of a foundation inside this company that will serve it well for many years to come, which leads me to 2014 and beyond.

We're excited about our future. Quantum is geared up and ready to go. Quantum will carry forward into 2014 its focus on natural gas storage products and technologies and our overall systems and integration capability for natural gas vehicles.

In summary, our plan in 2014 is to stay the course, leverage our successes to date and find our next gear. We made great strides during 2013 and build up a great deal of momentum in our business.

In addition to expanding our tank sales, we secured several complete natural gas storage and fuel system programs. All of this sets us up well in 2014 to leverage these 2013 accomplishments and accelerate our growth, continue developing our markets and reach sustained profitability.

Profitability is the transcending objective in 2014, and we are confident we can obtain a full year of operating income and establish sustainability. The broad-based underlying goals in 2014 to meet this business objectives are as follows: Expand our production capacity to somewhere around 20,000 to 25,000 units in 2014; double our tank sales in 2014; expand our sales of CNG fuel systems and storage technologies, such that approximately 15% to 20% of our tank sales are accompanied by a system module; reduce the cost of our tanks by nearly 15% in 2014 through innovation, manufacturing efficiencies and reduced cycle times; and develop next-generation CNG storage tanks and systems, including innovative design characteristics.

We recognize that achieving profitability and reaching these business goals will not be easy, but they clearly define our direction and pathway forward. It will require us to continue to advance our systems, expand our capabilities and enhance our resources. But we are confident in the attainment of these goals and reaching profitability, as the plan is firmly based on existing customer relationships, pathways to new ones and real identifiable positive trends in the industry.

At the core of our continued advancement is our expanding tank production facility. Overall, our tank production build-out to date has progressed to plan. During the last 12-month period, we nearly tripled our production capacity, and the plan in 2014 is to approximately double it to somewhere between 20,000 and 25,000 units. This is doable, and we'll leverage the infrastructure implemented and equipment installed during 2013, in addition to the other CapEx we plan in 2014.

As part of our production build-out in 2014, we have identified specific targets for improving the efficiency of our manufacturing processes and have tapped into world-class expertise in composites, high-volume manufacturing and material handling. We made progress in 2013 by achieving improved cycle times and cost reductions due to improvements we made in processes, material handling and utilizing alternative materials.

We made impressive progress. But in order to maintain a cost competitive and technology leadership position in the market, we need to get more aggressive and disciplined in our thinking, planning and execution.

Fiscal 2014 will bring forth continued improvements in our tank manufacturing processes that will begin to set the course for broader base automation, as well as outside-the-box thinking on production methodologies and cycle time enhancements.

At the same time, we will be building out storage module assembly capacity, both internally and through outside tier-2 contractors. Due to the expansion of our module and systems business and in order to meet our longer-term business plan, additional assembly capacity will be added during the first 6 months of 2014 and may include other tier-2 suppliers. This capacity will service the APG, the ZHRO or AGI, GM, a second car manufacturer and GreenKraft programs. Similar to the tank production requirements, these specific module assembly build plan is being developed in order to meet the volume targets in the latter half of 2014 and into 2015. This capacity build-out will be in accordance with ISO/TS 16949 requirements, just like all of our other production facilities and programs.

In conjunction with the manufacturing assembly side, we have outlined a specific 3-year technology pathway for our Type IV tank cylinder. Our pathway is aggressive, yet realistic and well grounded. We are known in the industry as a leader in Type IV tank technology, and we expect to maintain that leadership.

Additionally, we are advancing several of our existing CNG storage modules that were developed in 2013. A second-generation of saddle-mounted storage systems will be developed in 2014, building on the current design and adding features to address the voice of the customer to reduce cost, reduce weight, reduce assembly time, increase durability and, at the same time, enhance safety. These technologies can service industry for years to come and enhance our reputation as the innovative leader for complete CNG storage systems.

Strategically and from a customer marketing standpoint, we will be making a concerted effort in 2014 to work alongside the distribution and integration partners we established in 2013 to squarely place our CNG solutions in front of the decision makers and drivers of these CNG vehicles.

Within the heavy-duty aftermarket, we are excited about the opportunities emerging with our customers and partners. We have unlimited ability to expand our relationship with industry leaders and capitalize in the emerging heavy-duty and medium-duty markets.

We are also excited about our passenger vehicle programs, and we are targeting initial sales in the next 12 months and also the continued ramp with certain medium-duty programs and other emerging opportunities directly with fleets, other OEMs and system integrators.

2014 will be exciting, and we remain energized by the developments occurring right before us. We can assure you, we will stay the course fully defined by focus, discipline and execution. Our successes to date are important, but what we do with them and how we leverage them going forward is even more important. The Quantum team is committed. We believe in our abilities, our technologies, our products, our opportunities and our plan. We believe in our future, and this future is just beginning to unfold. We are just at the beginning of natural gas vehicle adoption. We are just at the beginning of full-scale production. We are just at the beginning of commercializing innovative solutions. We are just at the beginning of international expansion. We are just at the beginning of broad-based market opportunities. Maybe the most important statement I made during the course of 2013 was that this industry, along with Quantum, is just getting started.

2013 was exciting and successful for both Quantum and an emerging industry. But I would be remiss if I didn't continue to highlight the relevance of where we are today, and that is we are just getting started.

With that, I'd like to open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Eric Stine with Craig-Hallum.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

I'm just curious if you could start with just what you're seeing in terms of tank per truck. I know these early volumes have been some trucks that have lower-range requirements. Where you see that going as the year progresses into 2015?

William Brian Olson

Yes. We do see the opportunity, I think, commensurate with the introduction of the 11.9-liter engine that's now being delivered into the market. And it seems like it's being delivered very handsomely into the market. That does open up the opportunity on a per truck or per vehicle basis. For us to start to recognize higher number of tanks per vehicle, potentially including back-of-cab systems and collar-mount tanks, which in the last several months, we've put out a certain news release that says we are providing collar-mount and back-of-cab tanks at this stage, which plays very well into providing a complete system that could be back-of-cab combined with rail-mounted tanks. So theoretically, you could potentially have 5 tanks per vehicle, which could provide significant range up to the 800 to 1,000 mile range. We could potentially have a 2- or 3-tank system, but I think the relevance of the larger engine, really the need for the trucking industry and the fleet operators to make sure they can get as much fuel on board as they kind of desire, and that does open up the opportunity for us to deliver more tanks per vehicle than maybe traditionally we've had.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Got it. And can you just talk a little bit about the traction you've been getting with that collar mount tank? I know your strength has historically been saddle mount, but that collar mount is a big opportunity.

William Brian Olson

Yes. We're just in the first -- kind of the first stages of getting that into the market. And there's potentially 2 different sizes that we'd focus on, the 21 inch, the 25 inch. We have seen very strong interest. It does require kind of a different sophisticated installed bases compared to maybe a traditional rail-mount. So we have seen orders. We have seen strong interest, and we hope to move that forward as aggressively as possible during this 2014. But it is a new tank, it's a new system, new integration aspects, and those things do sometimes take time. But we're confident that could be a big part of our 2014-2015[indiscernible].

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Got it. And then in terms of volumes tied to the 12 liter, I mean, I guess, this was -- and this has been a theme of your call. But I mean, is there a number we can think about in terms of percentage of your volumes this quarter that were tied to it? I mean, is it still a pretty small number, I would imagine?

William Brian Olson

Yes, specific to the collar mount?

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

No, I'm talking about just the 12 liter -- tied to the 12 liter?

William Brian Olson

Yes. We -- yes, I think we saw -- I mean, I think -- and it's hard for us to really have specificity around the exact number of 11.9s versus 8.9s, quite honestly. I have some visibility and perception and maybe it's no greater than other folks, but we -- I think we saw some nice traction as it relates to the introduction of the 11.9 in Q4. I don't know -- I really don't know the percent. I hate to throw out a number, but I think it was a nice piece of our business in Q4.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Okay, fair enough. Last one for me. Just more clarity. You talked about an expansion with some tier-2 suppliers. Just some more color there. Is that additive to the -- should we think about that as additive to the 20,000 to 25,000 that you're doing internally? And what does that entail for you operationally?

William Brian Olson

Yes. Some of the comments related to tier 2 would be more on certain assembly operations related to a complete system module that we've leveraged. We'd have both -- some internal capacity to take our, say, our core tank and provide it into a system module. An example would be the heavy-duty aftermarket and that would -- or medium-duty program like we have with GreenKraft. And in order to -- as those programs begin to ramp, we have to assess how much of that assembly capability do we want to build inside this company versus leveraging certain tier 2s. And I think our strategy will be to call upon a certain percent of that assembly at the tier-2 level and really leverage that out. So we're not overwhelming ourselves with trying to set up an assembly operations for everyone in these programs, it's coming into fruition. So it's just an opportunity for us to leverage tier 2s and really create capacity to keep up with what we see in the next several years an opportunity to really grow our system module business.

Operator

Your next question comes from the line of a Carter Driscoll with Ascendiant Capital.

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

Just first to call out, congratulations on reaching EBITDA profitability. Obviously, it's an excellent job, considering especially where you were 12 months earlier. First question I had was if you look out over 2014 and if you -- kind of the way investors typically think of the different buckets, light duty, medium duty, heavy duty, how do you expect that to change? Or how do you foresee that changing the composition of your tank sales by those classifications changing, if -- not dramatically necessarily, but the shift from one of those buckets to another, how do you see that playing out? And then maybe over time, how it plays out beyond 2014?

William Brian Olson

Yes. I mean, I guess, really speaking to, maybe even a 2- to 3-year window, kind of, where we are today with heavy duty could be 60%, 65%, I guess, maybe even 70% of our revenue composition, I think. In that 3-year -- 2- to 3-year window, I think we see it holding pretty well. We could see maybe a slight uptick on heavy duty. I think over a longer period of time, I think the medium-duty program that we have in place today and other opportunities around the medium-duty truck, which is just a lot of medium-duty trucks in this country and worldwide that are perfect opportunity for natural gas, just like heavy-duty trucks are. But by and large, I really think of our business in 2014 and even into 2015, it would be dominated by the heavy-duty truck. Just a great opportunity. Our technology fits very well into the heavy-duty marketplace. A lot of trucks out there can really benefit from the economics of natural gas, and we see that just being a big part of our business here going forward.

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

Okay. In terms of the brackets you put around your capacity expansion. You're hoping somewhere between 20,000 and 25,000. What types of lead times, if you find demands accelerating behind your initial projections to go from 20,000 to 25,000 -- how much lead time do you need to build that out? And was that $7 million you talked about targeting 20,000 capacity expansion? Or was that incorporating up the...

Bradley J. Timon

Yes. So the $7 million that we talked about was to get up to 20,000. It also includes the costs to relocate some of our testing facility from the Irvine facility we just closed out. So yes, to get to the 25,000, it would costs maybe an extra $1 million or so. So -- but yes, so that's not in there. But right now that $7 million is just to get to the 20,000. And some of that stuff is long-term lead items. Some of the equipment that we ordered takes about 5 months to come in, and we're still receiving some of that equipment today. But we're confident that we'll be able to get to the 20,000 capacity level by the end of September.

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

Got it, okay. Can you give me -- I know you guys have been hesitant in the past. Can you give a run rate on what you actually shipped in the quarter in terms of number of tanks?

Bradley J. Timon

Yes. I think we're going to -- we're a little hesitant to actually get that specific going forward. I think that number is going to become less relevant as we go forward because a greater percentage of our revenues is not going to be just the tanks, but also the systems around the tanks. And also, really, for competitive reasons, we think we're just not going to report specific numbers on our actual tank units going forward. I can say that -- for 2013, as a whole, we were north of 5,000, as a whole.

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

Great, okay. No, I understand why you wouldn't want to continue to provide that. But if you look at total number of customers -- obviously, we know one of your larger customers. But total number of customers that you're selling tanks into now, could you kind of put brackets around that?

William Brian Olson

Yes. I think on -- I mean, generally, and there's customers that are just taking -- small customers and larger customers. I may generally think of it, I guess, it's in 20 -- there's 20, maybe slightly higher range. There's some lumpiness between customers depending they -- from quarter-to-quarter. But I mean, generally, 20 -- in that 20 to 30 kind of the core -- kind of our current core tank customer base right now.

Bradley J. Timon

Agility obviously is our largest customer for the tanks.

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

Yes. If you -- just a housekeeping item, Brad, maybe. The total number of warrants left outstanding as of yesterday, today, before the K comes out.

Bradley J. Timon

Yes, it's roughly about 9.5 million of warrants and there's probably about 1 million of those warrants that are significantly out of the money, so we never see those turn probably. But yes, it's about 9.5 million, and there'll be a chart that we'd present in the 10-K that will kind of show an up to dated -- even a subsequent event note that will talk about the warrants that have been exercised in 2014.

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

Okay. And my final question on the second OEM on the light-duty side, is that something you're hoping -- I'm sure it's something you're waiting on the OEM to announce, but do you anticipate it will be a first half or second half announcement?

William Brian Olson

Yes. Carter, it's just really hard to say. It's just hard to say. I think we -- I guess, as I sit here today, I really don't know what their official plans will be at this point to announce that. We just -- we really don't. We're really focused on the integration efforts and the development of the technology going into that system. We think it has an opportunity to be a very successful vehicle. I'm very excited about it. So we do not have a real clear understanding of when that announcement may come.

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

All right. I'm sorry, one last one. In terms of the attach rates for the systems of the tanks, can you talk about maybe where you kind of started 2013 and ended? And where you expect or hope it to get to as 2014 unfolds? I know you mentioned 15 to 20, but maybe just like a time frame of how you've improved and what expectations you have for the growth as 2014 unfolds?

William Brian Olson

Yes. I mean, I think January 1, 2013, I think -- I mean it had to be very close to 0 or very nominal at the beginning part of 2013. And probably, it could have hit a level of 5% or 7%, maybe coming out of the year. And like we've said, it's something we think could grow. And no contingent on the volumes coming out of these programs that we're providing modules for to the aftermarket, like I said, the heavy duty, these passenger vehicles. But the -- we want to frame it in that 15% to 20% range and -- when we come out of 2014. So -- but we did see progress, nice progress in 2013, but we are still even doing some of the development work on a lot of those. And we really think as we start rolling through 2014, the payoff will continue to mount and especially 2015, 2016, with some of the systems stuff gone out the door, without leading technology Type IV tank as part of it. It creates a second level of excitement here.

Bradley J. Timon

Yes. I mean, we're really excited about the aftermarket opportunities. We're still working. We have a lot of activity going on with our program with ZHRO Solutions out of Arizona, and that is supposed to kick in sometime in the second half of this year. And the ramp rate on that, it's hard to say exactly what the ramp rate would be, but that could be very significant as we move into 2015.

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

Okay. I'm sorry, one last follow-up. I think last quarter, you talked about you're hoping to grow 100% based on that run rate on the top line. Is that a similar type of number you're hoping to achieve in 2014?

William Brian Olson

Yes. Yes, I think we tried to provide as much guidance around that, but we are expecting to approximately grow our revenue base and double it in 2014. And that's -- without framing it too much, I mean, just general top-level guidances. We think we can continue to double this business going forward.

Operator

[Operator Instructions] Your next question comes from the line of Dan Trang with Stonegate Securities.

Dan Trang - Stonegate Securities Inc., Research Division

Regarding the expansion of your manufacturing facility, could you provide a little bit of color on that? And when is that to be expected?

Bradley J. Timon

Dan, just you're talking about the tank expansion facilities? What's your specific question?

Dan Trang - Stonegate Securities Inc., Research Division

Yes. When exactly is that to be expected as far as you expanding your facility?

Bradley J. Timon

Yes. So it's one of those things where we've actually been adding incremental capacity over the past year plus. And like Brian mentioned on his comments, we started -- we tripled effectively over the last 11 -- 10 or 11 months. And so we're really looking to hit that, somewhere near the 12,000 range by the end of our first quarter and then up to about 20,000 sometime by the end of September.

Dan Trang - Stonegate Securities Inc., Research Division

Okay. Regarding your efficiency measures, what kind of result can you expect from shortening work in progress?

Bradley J. Timon

Well, are you talking about just our time and just like it takes to build the tanks?

Dan Trang - Stonegate Securities Inc., Research Division

Yes, yes, yes.

Bradley J. Timon

Yes. Well, I think -- I mean, I think there are a lot of room for improvement there as we go forward, as we automate more of our systems going forward. I don't think you're going to see a lot of improvement in our WIP times at least over the next several months here. But that will be something that we'll start to see some benefits probably in the 2015 time frame.

Operator

Your next question is a follow-up from Eric Stine with Craig-Hallum.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Just 2 quick ones for me. So last call, you talked about this is looking beyond 2014, but you're investigating some additional sites and different locations, so just an update on that. And then something that interested me from your commentary on international expansion, just thoughts on how that might look whether it's with a partner or it's a greenfield expansion.

William Brian Olson

Yes. I think the opportunity here just in the U.S. for us to build out additional tank manufacturing capacity is -- it's in the forefront. And we recognize there's an opportunity to kind of build a second site. It would probably be an existing facility. But we would -- effectively, our target would be to replicate what we've done here in Lake Forest, with a 25,000 unit facility and replicate that in another state here in the United States to service capacity, especially for heavy-duty truck programs. So that is something, as we move through 2014, we can provide updates on. But it's still kind of is in the front stages of us, kind of identifying the right state and being able to really identify the -- all the efficiencies that we're baking into our process here in Lake Forest to be able to really, truly replicate that at another site, which we have a high degree of confidence we can do that. So we will provide some more information as we roll through 2014. We're starting to see some expansion outside the United States through certification programs we've been receiving up in Canada. We just received United Nations certification on some of our tanks. There's opportunities in Europe that we're involved with right now. We see a tremendous opportunity in Asia, certain specific countries. I'm not going to name them. But there's -- so there's an abundance of opportunities that we have to kind of prioritize and then really target in addition to what we plan to do here in the States. But with what we see rolling forward here in the next several years in the States -- I mean, that's still going to be our true focus, and we will complement that with certain really targeted areas internationally to leverage our current technology product portfolio into some other markets.

Operator

Your next question comes from the line of Robert Sussman with Bentley Capital.

Robert Mark Sussman - Bentley Capital Management Inc

Can you give us an idea, the 8.5 million warrants that's still or kind of in the money or having a price that might well be exercised, can you give us an average exercise price on those? And also I thought I heard you say that by midyear, you thought it'd either be exercised or expired. Did I mishear that? And when will these 8.5 million warrants be resolved, one way or the other?

Bradley J. Timon

Yes. So Robert, yes, so what I was referring to on my comments were the derivative warrants. A lot of the derivative warrants relate to the warrants that we issued back in 2006, those expire in April of 2014. We have some other derivative warrants, but they're very minor and there's not very many shares left on those. So that's why we'd expect the amount of derivatives to be declining, probably over the next 6 months and then it would be pretty nominal after that. And as far as 8.5 million, yes, so it's about 9.5 million total warrants outstanding and there's quite a few warrants that are priced -- exercise price is below $5. So I'd say a bulk of the warrants of the 8 million or so warrants are probably about under the $5 level.

Robert Mark Sussman - Bentley Capital Management Inc

They're either at -- they're under $5 or around $5?

Bradley J. Timon

They're under $5. So yes, a lot of room [ph] for us.

Robert Mark Sussman - Bentley Capital Management Inc

And when do they -- is there a way you can generalize when their expiration is?

Bradley J. Timon

Yes. A lot of them are, they're probably 2 or 3 years from now, around 2017, roughly. I mean, a lot of the warrants outstanding actually relate to some public offerings that we did back in December 2011 and March of 2012, and those...

Robert Mark Sussman - Bentley Capital Management Inc

So there's no reason -- so those may drag out for quite a while, people could just sit on those, rather than exercise?

Bradley J. Timon

I mean, we're seeing activity on those. But yes, obviously some of them could drag out as well.

Robert Mark Sussman - Bentley Capital Management Inc

So theoretically, these -- if they're all exercised, they can bring out -- let's say the average were $4 a share, they could bring in around $30 million then?

Bradley J. Timon

Yes. I did a calculation that said -- for myself that I think it's roughly around $24 million, $25 million that could be brought on in warrants that are effectively in the money now.

Operator

Your next question comes from the line of David Zelman with Zelman Capital.

David Zelman - Zelman Partners, LLC

Not often you see a company double their sales, go through a capital cycle extension and yet reach breakeven cash flow. So that's yeoman job. I'm trying to wrestle with your capacity expansion and your guidance for doubling your revenue. And you mentioned you sold 5,000 tanks last year and you're going to be at 20,000 capacity. Are you running all-out? Is all of your capacity sold? You have orders to take up all this incremental capacity as you're able to manufacture?

William Brian Olson

Yes. I mean, clearly, we don't have a book that would support a full-blown 12-month -- we do have an existing book. We've been adding to that book in the first quarter. We'll probably put out some news related to some recent awards and wins. All of that helps and contributes to just our general understanding of what's available in this market. I think -- I mean, we do have a really good sense of where demand is coming from, where there certain communications related to expectations in this market over the next 12 to 24 months. We've seen adoption rates maybe in that 1.5% to 1.7% adoption of heavy-duty trucks to natural gas in 2013. Depending on who you ask, it can range anywhere from, say, 3.5% up to 5.5% or 6%. Adoption rates in 2014, I think, those are well grounded based on real insight into trucks that are coming off the lines and being integrated with natural gas fueling system. So -- and we are a market leader, especially large diameter 25-inch tanks. We are a market leader with a very strong market share. We have a lot of good information to support where we think production and sales can go. Having said that, we are in business. There are certain levels of uncertainty. There's shifting things. Like we talked about introducing new tank sizes and getting them validated, integrated in the new packaging. There's CapEx spending levels by the user of these systems. So there is a certain level of uncertainty in any business model, but we do expect this industry to continue to ramp. If you look at 2014 compared to 2013 and in 2015 compared to 2014, independent industry analysts will project by 2017 we could have up to 20% adoption rates of heavy-duty trucks in this country using nat gas, and that's a real need for us to be planning forward in building out our capacity.

David Zelman - Zelman Partners, LLC

So when you think about the guidance doubling -- and don't get me wrong, doubling would be a fantastic outcome. But when you look at your ability to deliver product versus the 5,000 tanks last year and I think you said you're now at maybe 15,000, on your way to 20,000, that, to me, it sounds like that could prove potentially to be a very conservative forward guidance in the next 12 months, no?

William Brian Olson

Well, I think we definitely want to -- we found some pinch points. Quite honestly, we found some pinch points in 2013, where we were running at capacity levels above and beyond what you -- you don't want to run at 100% capacity either. We did hit some pinch points. I think we are in a position of really trying to build out capacity to make sure we stay in front of the curve. We're also going to build out capacity that is well founded and well based on what we are seeing happening in the industry. But we want to be able to add capacity. Could we -- after we add a second facility, that's another 25,000 units, could we have another potential issue in 2016 or 2017 that we just don't have enough capacity? That's -- and we will -- every month, we're monitoring and trying to understand our expansion plans. But yes, we could eventually be tripping up with where this industry can go in the next 3 to 5 years. That 50,000 tanks will seem like nothing. And that's -- I mean, that's a bold thing to say. But if we're talking 20% adoption rates by 2017 in the heavy-duty market, that is a lot of cylinders, especially -- earlier in this call when we're talking about it could be anywhere from 3 to 5 cylinders per truck. It's a lot of cylinders in the next 5 years that potentially this industry needs.

Operator

At this time, we have reached the allotted time for questions. I'd like to turn it back over to management for closing remarks.

William Brian Olson

Okay. Well, thank you for joining us this afternoon and especially thank you for your continued interest in Quantum, and we look forward to the next earnings call. Thank you.

Operator

Thank you. This concludes today's conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Quantum Fuel Systems Technologies Worldwide Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts