American Superconductor's (AMSC) CEO Daniel McGahn on Q3 2015 Results - Earnings Call Transcript

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American Superconductor Corporation (NASDAQ:AMSC) Q3 2015 Earnings Conference Call February 9, 2016 10:00 AM ET


Daniel McGahn - President and CEO

David Henry - Executive Vice President and CFO

Brion Tanous - Manager of Investor Relations


Amit Dayal - Rodman & Renshaw

Jeff Osborne - Cowen & Company


Good day, everyone and welcome to AMSC’s 3Q 15 Earnings Conference Call. This call is being recorded. All participants will be in a listen-only mode until we reach the question-and-answer session. With us on the call this morning are AMSC’s President and CEO, Daniel McGahn; Executive Vice President and CFO, David Henry; and Manager of AMSC’s Investor Relations, Brion Tanous.

For opening remarks, I would like to turn the call over to Ms. Brion Tanous. Please go ahead, sir.

Brion Tanous

Thank you, Tunisia and welcome to our call to discuss our third quarter of fiscal 2015 results. Before we begin, I would 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 the 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 year ended March 31, 2015, which we filed with the SEC on May 28, 2015 and subsequent reports that we have filed with the SEC.

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 also would like to note that we will be referring on today’s call to non-GAAP net loss, or net loss before stock-based compensation, amortization of acquisition-related intangibles, restructuring and impairment charges, consumption of zero cost basis inventory, change in fair value of derivatives and warrants, non-cash interest expense and other unusual charges net of any tax effects related to these items. 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

And now, I would like to turn the call over to CEO, Dan McGahn. Dan?

Daniel McGahn

Thanks, Brion and good morning, everyone. I will begin today by providing an overview of our accomplishments and financial results for the third quarter of fiscal 2015, which ended December 31, 2015. Dave will then provide a detailed review of our financial results and guidance for fourth quarter of fiscal 2015, which will end March 31, 2016. Following Dave’s comments, I will provide an overview of our activities and future expectations. After that, we will open up the line to your questions.

In the third fiscal quarter, we increased revenue more than 20% year-over-year as a result of strength in both our wind and grid business. We also delivered significantly improved gross margin versus the previous quarter and year ago results. In fact, in the third quarter we generated our highest gross margin in more than four years since the events of 2011.

In wind, we shipped a record number of sets of our electrical control systems, or ECS, to Inox in the third quarter. Additionally, we entered into a set of strategic agreements with Inox in December valued at approximately $210 million, which we expect to realize over the next 3 to 4 years. These agreements also include a provision for AMSC to be Inox’s preferred supplier for 2 MW ECS for the subsequent three years.

During this subsequent three year period we expect to provide a majority of Inox’s 2 MW ECS requirements. In total, these agreements are expected to provide well in excess of $210 million of value to AMSC over a six to seven year period, and a solid foundation to pursue our longer-term growth objectives particularly on the grid side of the business.

Speaking of our grid business, revenues from our D-VAR product were very strong in the third quarter of fiscal 2015 and represented our strongest quarter for D-VAR shipments in nearly 3 years. In addition, I'm pleased to report that AMSC generated cash during the third quarter of fiscal 2015.

With that, I will turn the call over to Dave Henry to discuss our financial results for the third quarter of fiscal 2015. Dave?

David Henry

Thanks, Dan and good morning everyone. AMSC increased its revenues by 21% to $25.8 million for the third fiscal quarter compared to $21.2 million in the year ago quarter. Wind revenue increased 14% year-over-year driven by record ECS shipments to Inox, while grid revenue grew almost 40% year-over-year due primarily to increased D-VAR revenues driven by our large shipment to an industrial customer in Asia.

12-month backlog as of December 31, 2015 was approximately $82 million compared with $62 million as of September 30, 2015. The sequential increase in backlog is primarily the result of the long-term supply agreement we completed with Inox during the third fiscal quarter.

Looking at the P&L in more detail, gross margin for the third fiscal quarter was 25.3%, which compares to 14.9% in the prior year quarter. As Dan mentioned, this was the highest gross margin quarter for the company since prior to the events of 2011. The year-over-year increase in gross margin was realized despite having a lower gross margin benefit as a result of using less previously written off inventory compared to the prior year.

The year-over-year increase in gross margin resulted from higher revenues, favorable product mix of our ECS and D-VAR shipments and improved factory utilization. Third-quarter gross margin was achieved despite a continuing negative gross margin associated with our Superconductor product line. To give you an idea of the opportunity if our Superconductor gross margin was zero in the third quarter, gross margin for the company would have been in excess of 30%. This is why we are so focused on achieving commercial success for our REG and Ship Protection System products.

R&D and SG&A expense for the third fiscal quarter was $9.8 million as compared with $10.3 million for the same period a year ago. The decrease was primarily due to lower stock compensation expense. Approximately 14% of this R&D and SG&A spending in the third fiscal quarter was non-cash. On a cash basis, operating expenses were slightly lower compared to the same period a year ago.

Below operating loss, we incurred a mark-to-market loss on our outstanding warrants of $1.1 million during the third quarter due primarily to an increase in stock price, which is a key valuation metric. Offsetting this as we mentioned last quarter, we recorded a $2.5 million gain in the third quarter from the sale of our minority investment in Blade Dynamics. This investment was fully written off in the prior period. There is the possibility of an additional $1.6 million in proceeds over the next three years if all escrow and earn-out conditions are satisfied. Finally we incurred approximately $800,000 in income tax expense in the third fiscal quarter driven primarily by income taxes and tax reserves in our foreign jurisdictions.

Our net loss in the third quarter of fiscal 2015 was $3.0 million or $0.22 per share. This is a decrease from $6.4 million or $0.72 per share in the year ago quarter. The company’s non-GAAP net loss for the third quarter of fiscal 2015 was $4.9 million or $0.36 per share compared with the non-GAAP net loss of $9.6 million or $1.09 per share in the same period of fiscal 2014. Please see our press release issued this morning for a reconciliation of our GAAP to non-GAAP results.

We ended the third fiscal quarter with $37.7 million in cash, cash equivalents and restricted cash. This compares with $36.6 million as of September 30, 2015. This was the first quarter of positive cash generation in nearly two years, which was aided by the Blade Dynamics sale proceeds. Excluding these proceeds, cash burn in the third fiscal quarter was $1.5 million with the cash burn coming primarily from debt service and Capex. Operating cash flow in the third quarter was neutral.

As of December 31, 2015 the principal balance of our debt arrangements excluding the debt discount was $5.2 million compared to $6.2 million as of September 30, 2015. We have two outstanding term loans. The first term loan has a remaining principal balance of $3.7 million and matures on November 1, 2016. The second term loan has a remaining principal balance of $1.5 million under which we will pay interest only on a monthly basis until maturity on June 1, 2017 when the entire outstanding amount will be required to be repaid in full.

I would like to take a moment to discuss revenue recognition associated with the strategic agreements we entered into with Inox in December. Revenues under the multiyear supply contract are expected to be recognized as they are today upon delivery of the ECS. The $12 million fee associated with the transfer of manufacturing technology is expected to be recognized as revenue in full once the technology transfer has been completed.

Note that we do not control the timing of when Inox will be ready for us to complete the technology transfer. As such, we do not expect at this time to report any revenue associated with the $12 million fee during fiscal 2016.

Turning to our financial guidance, for the fourth quarter, we expect sequentially lower revenues primarily in our grid segment as grid revenues in the fourth quarter are not expected to include revenue from a large D-VAR shipment as we had in the third quarter. For the fourth fiscal quarter of 2015 we expect that our total revenues will be between $18 million and $22 million.

We expect that the mix of revenues will be unfavorable compared to the third quarter and as a result we expect a lower gross margin in the fourth quarter compared to the third quarter. As a result, we expect that our net loss for the fourth fiscal quarter will be less than $8.5 million or $0.62 per share. Our net loss guidance assumes no change in the fair value of our outstanding warrants. Our non-GAAP net loss for the fourth fiscal quarter is expected to be less than $9.5 million or $0.70 per share.

Assuming Inox meets its contractual payment obligations under the new agreements we expect our cash flow for the fourth quarter of 2015 to approach neutral resulting in a balance of cash, cash equivalents and restricted cash at the end of the fourth fiscal quarter to be roughly equivalent to the balance at the end of the third fiscal quarter.

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

Daniel McGahn

Thanks Dave. I will start today with our Windtec business unit. As I mentioned earlier, during the quarter, we announced what we believe is a seminal business arrangement for the company. AMSC entered into long-term strategic agreements with Inox valued at approximately $210 million. These agreements include a multiyear supply contract. Under this supply contract, we will manufacture and deliver a specified number of 2 MW ECS to Inox about $200 million worth.

We expect to complete specified deliveries under this supply contract over the next 3 to 4 years. The pace of deliveries will be dependent on how Inox fares in the market, but there is more. Once the specified deliveries under this supply contract are completed further revenues are expected for at least an additional three-year period, during which AMSC will provide Inox with the majority of its 2 MW ECS requirements under a preferred supplier arrangement.

The value of those future deliveries is not included in the $210 million figure for the supply contract. What that means is that we will be supplying 2 MW ECS to Inox for what we expect to be the next six to seven years at least. This is a long-term partnership.

Because we still have backlog with Inox under the previous supply contract, we expect that delivered under this new supply contract will fully begin until the first quarter of fiscal 2016. We also entered into an agreement to allow Inox to manufacture on their own, as a second source, the 2 MW ECS we provide to them today. For the transfer of this technology Inox will pay us $12 million, $6 million upfront and the remaining $6 million is expected to be paid as milestones for completed during the succeeding 15 months.

Once Inox sets up its new manufacturing operation, they will be allowed to manufacture limited quantities of 2 MW ECS over the period of the specified deliveries under the supply contract. As I mentioned, we expect it will take 3 to 4 years to complete the specified deliveries. After that Inox will be allowed to manufacture a greater number, but still a minority of its 2 MW ECS requirements over the following three years.

To summarize, this means the overall value to AMSC from these strategic agreements is expected to be well in excess of $210 million over the next 6 to 7 years. To put the technology transfer of our 2 MW manufacturing capabilities to Inox in context, this capability is no different than what we have allowed third-party subcontractors to have in the past and what our operation in Romania does currently.

It is important to remind you that the technology transfer does not include the source code of our ECS controls. This also means that 100% of Inox’s product platform is based on our system and technology and that we expect our controls will continue to be 100% compatible with 100% of Inox’s turbines. This is critically important from a competitive standpoint both for Inox and for AMSC. We believe we are doing the right thing for our business by learning from our past and doing the right thing for our partner.

I am also gratified that Inox wants AMSC to collaborate with them on the design of their next generation product, which is currently anticipated to be a 3 MW wind turbine. We expect Inox to finalize its product development plans and to be able to complete a license agreement with them sometime during fiscal 2016.

We want to work with Inox to make sure that we develop what we develop will be a winner in the Indian market. We also anticipate being the sole supplier for the new 3 MW platform at least for a significant period of time. We want to repeat the success of the 2 MW platform with the 3 MW platform for Inox and for our shareholders as well. I am pleased with the evolution of our partnership with Inox. It has matured and evolved into a long-term arrangement for the supply of current generation ECS, as well as the expected development of Inox’s next generation wind turbine. We are and will continue to be well positioned to support Inox’s future growth plans.

Moving on to our Gridtec business. Our Gridtec business consists of our D-VAR product for renewable, utility and industrial customers as well as high temperature superconductor or HTS-based systems for electric grid and military applications. Revenues from our Gridtec products were strong in the third quarter of fiscal 2015, and as I mentioned earlier, included the company’s strongest quarter of D-VAR shipments in nearly three years.

Our D-VAR STATCOM product addresses three primary end markets; renewable energy interconnections, electric utilities and industrial installations such as semiconductor fabs.

To date this fiscal year, we have experienced D-VAR sales growth in the United States as well as in South Africa. The macro environment in the United States, one of our core target markets for the D-VAR product, became clearer in the third fiscal quarter. In December, Congress passed an omnibus spending bill that included a multiyear extension of the production tax credit or PTC and the investment tax credit or ITC through December 31, 2019.

Considered the US wind industry’s most important federal tax incentive the PTC provides wind developers with a tax credit for electricity generated for the power grid. The tax credits valued at about $25 billion over five years are expected to drive approximately $38 billion of investment in solar and $35 billion of investment in wind through 2021 according to Bloomberg new energy finance.

These investments are expected to result in approximately 20 gigawatts of solar and 19 gigawatts in wind installations in the United States over the next five years. As a result of continuing tax incentives in the United States and the climate change accord in Paris, we expect the renewable sector to remain healthy in our targeted geographies, while we focus our efforts on developing a strong utility and industrial pipeline for our D-VAR products. We believe that this all spells opportunity for AMSC.

Moving on to our HTS power products, before I became CEO, our focus was on selling HTS wire. When I took over, we shifted our focus to developing full HTS based system solutions to sell directly to end customers. This business model, which leverages our application expertise, is intended to realize the value beyond the wire, and enables us to take revenue for and take ownership over the marketing and sales of the full systems.

You have heard me talk about value beyond the wire often. We know that people don't buy technology, they buy what it does. It is maximizing this value that we are after. Our second-generation or 2G HTS manufacturing process leads the industry in supplying high volume HTS wire with competitive quality and performance.

We intend to maintain that competitive advantage through internal process development or even through partnership opportunities with others if the right opportunity arises. Let us discuss our HTS-based systems solutions. We believe our ship protection systems provide the Navy surface fleet with more powerful and more efficient protection than traditional solutions.

We are procuring ship protection system components against a $8.5 million contract that we announced in the first fiscal quarter. Additionally, we have begun design work for the next ship protection system application. As we have said, we expect revenues under this contract starting in fiscal 2016. We are continuing to work with the Navy and shipbuilders on our ship protection systems to understand their unique needs and how our technology can integrate into those vessels.

We are identifying specifications for certain planned ships in both the retrofit and forward fit markets. Our team is working diligently at communicating the clear benefit that we believe our ship protection systems can provide to the fleet in the way of enhanced performance and total cost of ownership via weight and energy reductions. The Navy has made it clear that superconductor systems will be deployed in the fleet.

We believe our HTS-based systems could play a significant role in future Navy vessels more broadly, supporting ship protection, shipboard power and eventually propulsion applications.

Let us turn to our REG product. Our Resilient Electric Grid system, or REG, is an application that utilizes [Compact] and PowerGen’s cable systems to increase the reliability and load serving capacity of urban electric grids. The REG system is a cost saving alternative to building substations or transmission lines in the urban environment. The other benefits from REG are simple. Our REG system can deliver more power, help to prevent power failures and take up less physical space. All much features in today’s dense and busy American cities. Simply, REG can enhance the capacity and reliability of the power grid. Our work with ComEd in Chicago continues in the third quarter. We completed several milestones including component qualification, refrigeration evaluation, wire specifications, and briefings to state and local authority.

Yesterday, we announced a selection of Nexans for the qualification of our HTS power cable for our REG product. This qualification represents an important step towards the construction phase of AMSC's REG program in Chicago. We're tracking activity for our REG products at about a dozen electric utilities in the U.S. and have expressed interest and better understanding the value of our REG solution on their grids. Pepco in Washington D.C. is performing a deployment study of our REG product. And we are currently working with them on a system design to substantially increase the reliability at several key substations in Washington D.C.

As we have deeper discussions with a greater number of utilities, we are finding additional application where we can solve utility challenges today. For these conversations, we believe that REG is a near-term solution for the complex challenges that our utilities are facing. Finally, you may have seen that AMSC was recently featured in a CBS 60 minute segment entitled "The Great Brain Robbery," which focused on continuing economic espionage by China. The U.S. government and the government of China are taking notice. Two years ago, the U.S. Department of Justice invited our former customer in China, two of its employees and a former employer of AMSC in a criminal action for stealing trade secrets in the United States.

On December 9th, 2015, the U.S. district court for the western district of Wisconsin held an arraignment hearing. At the arraignment, the court set December 5th, 2016, proceedings. According to the court, the parties predict a two to three week trial. As for a civil litigation in China, we have four legal actions against our former customer for the theft and use of our intellectual property and the other for the company's breach of its contractual obligations. Three of these cases are in the civil court system and the breach of contract case in arbitration. There has been progress to report.

Last June, we transferred our trade secrets case to a newly established court in Beijing that is dedicated to intellectual property cases. At $453 million, this is the largest of our civil cases in China. A few weeks ago, the court held its first hearing. We believe that the Beijing Intellectual Property Court has a much deeper understanding about intellectual property matters than the other lower courts that have heard of copyright cases in China today. That in and of itself is encouraging. We will keep you informed about the progress in this case. Our civil cases, the two top copyright cases received rulings last year and are currently under appeal with the Beijing and higher courts respectively.

Finally, we continue with our $720 million arbitration case, which is being heard by the Beijing Arbitration Commission, so that $720 million case does not include but would have additional $76 million of equipped -- that was shipped but not received. That case is still in the early technical review phase. As I made clear in the 60 minute segment, they attempted to kill the company. That strategy has clearly failed. As you can see, our company is only getting stronger. We can't give up on this issue. I personally will never give up. The damage is simply too great to ever let go. A crime was committed and we will continue to persevere until justice is served.

I like to thank CBS News and 60 minutes for telling our story. And you all know the next chapter of that story AMSC is growing, the balance sheet is solid, and we are launching new products. In summary, what I'd like to say, I like the position we put our business in. I am personally excited about our future. This has been one of our best quarters in quite some time. The team really is doing a great job. We are in the position we worked hard to get to. Our strong financial performance in the third quarter reflects the hard work and dedication of our team at AMSC.

We expect our agreements with Inox to provide a near term foundation for the business as we execute our longer term objectives, particularly generating meaningful revenues from our REG and ship protection system products. I look forward to reporting back to you at the completion of our fourth fiscal quarter. Operator, Tunisia [ph], we would like to open up the call to your questions.

Question-and-Answer Session


[Operator Instructions] And we'll go ahead and take our first question from Colin Rusch with Oppenheimer. Please go ahead, your line is open.

Unidentified Analyst

My name is Christine, actually in for Colin.

Daniel McGahn

Hi, Christine.

Unidentified Analyst

Hi, Dan. You touched a little bit on the Nexans. Can you walk us through the timeline for the design process of that and when you expect to be able to deploy that wire?

Daniel McGahn

Yes. Let's talk a little bit about what we are doing with Nexans, to give you some more background. So, we have a relationship with Nexans that goes back many years and you may recall we've done a series of projects globally with Nexans, mostly focused on transmission cables. We've worked with them and we've developed distribution cable products. The gap in their product portfolio today is they don't have an offering specifically for REG. So the news that we're making is that Nexans is investing in the development of that product and we are at a qualification stage.

That qualification stage will take several months, several quarters to go through. And at this point in time what we feel comfortable with is we have additional money for the program with DHS that take us through at least the remainder of the U.S. governmental year. So, we announced that back in a few months ago of about $3.7 million of additional funding that has been let against the $60 million contract. These activities are planned activities against some of those milestones. So, this is a key piece of the product development process and it will take up some of our time this year in 2016.

Unidentified Analyst

Thanks, great. Thank you, for that color. And then if you could also talk a little bit more about the Chicago project and what you are expecting in terms of what the other utilities you're looking at and are they decided to work on their projects, I mean, sort of an update or two on the Pepco and Eversource studies.

Daniel McGahn

Sure. So, what we've attempted to do with the program with DHS is to really broadly open up a pipeline of opportunities for the REG product. We've announced the program with Chicago being the first. I think we clearly have a program that's setup to get a lot of important things accomplished here in 2016, as I mentioned with that $3.7 million of spending let against the contract, we are going to start to procure long lead time elements for the project. It doesn't mean that we're ready to go into construction, but certainly DHS is pushing us to make sure that we have all of the risk reduced to be ready to go into construction as soon as possible. We have to continue to work with the utility and work on their timetable and how they allocate budget and how they ultimately get cost recovery for the project and for the hardware.

We mentioned in the remarks more than a dozen utilities in the U.S. we’ve had conversations with, some have done studies that we haven’t yet announced. The two that we have announced are Boston and Washington DC. To talk specifically about Boston we know there is a need, we know where there is a need and we know how to fix the problems that have existed in Boston for many, many years. Boston is changing. There has been a lot of investment in the sea port area in Boston and a very small company that we know and we like very well call General Electric is coming to Boston. So, we know that there are challenges on the grid today, we know that very large company like GE is coming to bring additional employment into areas of the city that are challenged by the electric grid. So, we think that spills all positive things for the REG product and for AMSC.

In Washington DC, we have continued to develop the study looking at specific substations and some specific challenges in the downtown grid in the district. When we have looked at these scopes of projects and we compare them to Chicago, in most cases it looks like a bigger project than Chicago. We see the value alternatives is all being very big ticket items, so what we feel is if Washington DC is going to solve these problems in the near term, they’re going to do it with REG. And what we want to do is to continue the education process, to continue the risk reduction process with the DHS program and hopefully put Pepco into the mode where they could potentially make a discussion about their own project.

When we look at that project specifically we are assuming that would be commercial meaning that there would not be federal funding to help subsidize or eliminate the risk. We are doing that in the program with Chicago. We have kind of hinted out or alluded to the fact that there is a number of cities, big and small looking at REG and when we look at the smaller cities we have talked about the second opportunity, not only the REG loop but also the REG branch. And the branch application is interesting because many utilities that we had discussions with having very near term problem where they are trying to solve it by spending usually in excess of $100 million. They are going to look at extending a transmission asset, extending or enhancing a substation or two and we think that REG uniquely provides value today that will enable them to better utilize the existing grid.

So, our argument is maybe for similar cost we can bring additional features, additional value to that utility in the way our reliability and capacity that they couldn't do by spending their money the traditional way. So we look forward with REG with great optimism. We see a lot of potential there. It's now incumbent upon the company to start to realize this potential moving Chicago along, moving Washington along, moving Boston along, getting more and more cities involved. What we want to do is create tremendous demand for this product and we are seeing the beginning of those pieces come together at this point.

So a bit of a longwinded answer, but I know that one of the main indicators that people are looking at for the company is how are we doing in progress and birthing this product called REG.

Unidentified Analyst

That's great and I really appreciate the color. Thank you so much.

Daniel McGahn



Thank you [Operator Instructions] we will go ahead and take our next question from Amit Dayal with Rodman & Renshaw, please go ahead. Your line is open.

Amit Dayal

Thank you. In regards to the business coming from Inox, will we need to move around resources to accommodate that demand and how should we expect the grid side of the business to fair in this environment?

Daniel McGahn

So specifically with Inox, we have moved a lot of the production capabilities from China to Romania. We set up the Romanian operation to be scalable to meet the near term demands of Inox, I think the good news would be Inox deal is, we don't then have to go set up; we do not have to go setup an operation in India, the manufacture. So, we are going to be manufacturing out of Romanian facility and exporting from there. We are able to expand that I will say relatively easily when you think about capital standpoint. The tested assembly operation that exists in Romania is very capital light when compared with our superconductor operation here in the United States; it's really test equipment and general assembly type operations. So we are in constant communication with Inox about their demand and we need to make sure that we can deliver all those sets that they need and we look forward to being able to do that in this quarter and the coming quarters.

What we feel is having stability in that Inox relationship knowing that we have backlog, knowing that we understand their growth plans that they are looking to really potentially double their output here over the next coming quarters or years. So as they are bring more manufacturing capability to bear they are in a market that's growing that we think we can build the rest of the company particularly the Gridtec piece around what we are doing with Inox. So we reported for this quarter, really the best quarter in D-VAR in a long, long time. The pipeline and the activity that we see in our sales team we’ve been able to expand the conversations that we’re having, the number of conversations, the number of people out selling the product and that is helping the business and to deliver growth on the Gridtec side.

But I think what everybody is ultimately waiting for is how do we show additional traction with the navy, so we have the $8.5 million contract that we are procuring against. We said in the remarks that we would start delivering revenue against that in 2016 and I just gave what I hope was a pretty thorough update on REG. So, the growth from Gridtec is going to come first from growing D-VAR adding the ship protection product and then really kind of blasting off with REG.

Amit Dayal

Understood. Just a follow-up on the backlog, you I think mentioned the backlog is around $82 million, can you comment on the timing for this $82 million and why we are not including the $210 from Inox in this?

David Henry

Hi Amit, it’s David Henry. The $82 million backlog covers 12 months we report a 12-month backlog. So the 82 is the amount that we expect that we will be shipping over the next 12 months and that does include a portion of the $200 million supply contract of Inox that will go out through the first nine months of the next fiscal year.

Daniel McGahn

And remember that $210 million is really over a 3 year period maybe a 4 year period depending upon how they fair in the market. So you are basically taking the first as Dave said, the first nine months of that contract and putting that into the 12 month backlog.

Amit Dayal

Understood that makes it really clear. Thank you.


Thank you [Operator Instructions] we will take our next question from Jeff Osborne with Cowen & Company. Please go ahead. Your line is open.

Jeff Osborne

Yes, thank you and congratulations on the strong quarter. So couple of questions on the REG side, you certainly have given all the detail on the call. But I just wanted to get a sense Dan in terms of the DHS preparations process can you just touch on how much of the $60 million has been utilized at this point, what’s your discussions are with them about additional funding. Do we need to wait for a new President to be elected or what’s the process there in terms of timing?

And then also you alluded to but didn't give much detail on rate base approval and kind of the process there, you mentioned you met with numerous politicians in the State of Illinois, can you just touch on how those meetings went and what the likelihood of PSC approval?

Daniel McGahn

Yes, let me try to back track all those things. So what’s been appropriate the first piece of it was 1.5, the second piece was 3.7 and that means you have got 5.2 in the 60 that's been released. What we then have to do is year-by-year go with DHS, it’s part of their budgetary process and allocate monies and milestones together. So every year we will do that and hopefully we can continue to report more monies being lent against the 60 million. Historically, we have been very successful in not only being able to make sure that the funding that's been ascribed meaning the $60 million, but as additional funding if it's necessary where if it seems important on the fact of the government side, in many of our programs we have needed additional money we have been able to secure those. No I am not saying that we are actively doing that now, but I am trying to give you some color and therefore some confidence that although all $60 million doesn't get let that's even if they are going to build a large ship all the dollars are let for that ship whatever is let, is whatever is in that fiscal year only then you have to go back and get re-appropriated each year. The thinking is once the government is started to appropriate funds towards a program their intent would be to continue appropriations through the duration of that program. And typically, and in our case I think without exception that's happened. So that was the first part. I think the second part was about the governmental meetings in Illinois?

Jeff Osborne

Exactly and the likelihood of a swift PSC approval process, someone with that need to be involved, is that one of the milestones that DHS is requiring? So any other…

Daniel McGahn

It’s really a ComEd milestone I think, in light everything is double-edged sword, you can see it that’s being very positive. You could also see it as being somewhat negative. The utility hasn't really blinked at how they are going to get recovery for this. And I think that's very positive. I think that there clearly, there is a strong desire at the top to make this program go forward. If you speak to specifically the meetings that they have had around the program that are public they are very supportive, they are very overwhelmingly supportive of this product. It's something that needs to be done, they are very happy that the federal money is involved to help reduce some of the risks.

So at the top, the utility is very much acting like this is definitely going to go forward. I think the challenge is, is in doing the work going from, hey we can get recovery through a variety of ways to actuality choosing a way and getting that done. We have had a series of different incarnations of design, we have settled on one that we know will work and we know what the cost of that will be. So, we think that's all positive. But, I can't tell you with any certainty when are they going to go to get recovery, will that be on the distribution side, will it be on the transmission side, will some assets be transmission, some assets be distribution, at the end of the day those are going to be ComEd issues, ComEd decisions, and we want to be able to support them as they make those decisions. We want to make sure that everything we do allows the program to go forward as quickly as possible.

But, we do have to be respectful to our partner in ComEd, they are trying to be the real first major implementation of this project in a grid for a real need, for a permanent placement of the product in the grid. So, we have to constantly be respectful of their process, their timetables and we do get feedback from them, we think this is going to happen, we think that's going to happen and what we have chosen to do with you all is to not talk about what we think but talk about what we know. What we know is we have the $3.7 million let against the $60 million contract we know the milestones, we need to go deliver over the next several quarters to realize those revenues and that's what we are focused on in addition to supporting ComEd with their needs and with their process.

Jeff Osborne

Got it, last one is just sort of relatively quick one. Can you just touch on the wind side is there any other discussions that’s efforts up beyond Inox?

Daniel McGahn

[Indiscernible] trying to license technology, we get increase about products that we don't have and we have to look at is there an opportunity to develop the product or solution that can meet the market need. We are trying to articulate to the market as we are focused on getting this company to grow to a size where we can habitually generate cash. The good news is that we said that we would do this for the December quarter and we are now reporting that we did it, in the remarks we talked about that as well for the March quarter and we will all check back in the spring to see if we have done that again.

So, we are in good position, we are focused on the things that are going to deliver the growth and get the company revenues to grow to the size is necessary to generate cash that does not mean that there aren't additional opportunities. We tend on these calls and we are out speaking in public to not talk about those because we don't want to confuse investors or make investors the lead that something dramatic is going to change in the next one to two quarters. The things that we work on for new product development for new partnerships, these things take year to years. And the good news is given the stability in the company, that becomes more and more of the focus of the team, is how we grow and how we get there.

Jeff Osborne

All right. Thanks, much, guys. I appreciate it.


Thank you. [Operator Instructions] And speakers, that does appear we have no further questions at this time. I will now hand it back over to you for any additional or closing remarks.

Daniel McGahn

Thanks, Tunisia. And thanks everybody for their attention. This was a great quarter. I don’t want to undersell it. I mean, we thought it was going to be good. It turned out to be great. A bunch of things happened that turned out to be very good for the company. I think the balance sheet is in a great position today. We're getting looking at the March quarter, we're saying that's going to continue to be in a great position. What the company is now focused on is supporting Inox with their growth. Making sure that we are doing our best job in selling and installing and commission D-VAR units across the globe. But really making sure that we berth properly these new offerings, this ship protection system product, which we do have a contract for and the resilient electric grid product, which we do have a contract for.

So, we're in a really good position. We're looking forward to come back to you in the spring time and report again. Hopefully, making more progress in the company. But things are really haven’t been in this position in a long time. I think and one could argue that this is probably the best position the company has ever been in terms of revenue diversity, globally, and a revenue diversity from business unit and product line standpoint. That's what we're trying to build. The basic pieces are in place. Now, we look forward to continuing to look to grow revenues over the coming years.

Thank you, everybody. We appreciate the time and attention, and we'll talk to you soon.


And that does conclude today's program. We like to thank you for your participation. Have a wonderful day. And you may disconnect at any time.

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