American Superconductor Corp (AMSC) 2013 Q4 法說會逐字稿

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 Manager Corporate Communications Kerry Farrell. For opening remarks, I would like to turn the call over to Ms. Kerry Farrell. Please go ahead, ma'am.

Thank you, Lori, and welcome to our call to discuss our fourth-quarter fiscal 2013 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, 2014, which was filed with the SEC today. These forward-looking statements represent our expectations only as of today and should not be relied upon as representing our views as 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've will be referring on today's call to non-GAAP net loss, our net loss before adverse purchase commitments, recoveries, losses, net stock-based compensation, amortization of acquisition-related intangibles, restructuring and impairment charges, [funds about] litigation costs, loss contingency for shareholder litigation, consumption of zero-cost-basis inventory, prepaid VAT reserve, non-cash interest expense, change in fair value of derivatives and warrants, and loss of extinguishment of debt net of any tax effects related to these items. Non-GAAP net loss is a non-GAAP financial metric. The 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. All of our press releases and SEC filings can be accessed from the investors page of our website at www.AMSC.com.

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

Thanks, Kerry, and good morning, everyone. I'll begin today by providing an overview of results, actions, and accomplishments during fiscal-year 2013, as well as our objectives for 2014 and beyond. Dave will then review our financial results in detail and provide guidance for the first fiscal quarter as well as full fiscal-year 2014. Following Dave's comments, I'll provide an update to our business outlook, and after that we'll open up the line to your questions.

Revenues remain relatively flat in fiscal-year 2013 compared with fiscal-year 2012. Looking at the business units, the wind business grew by 26% in fiscal 2013. The higher wind revenue was offset by lower grid revenue. Grid sales were impacted by macro factors in our primary D-VAR markets, with the largest impact coming from Australia. I will talk more about that later.

In fiscal 2013, we reduced our operating expenses and net loss and decreased our cash burn, even on flat revenue. Year-over-year, our cash balance, including restricted cash, decreased by less than $1 million. We stabilized our cash position, reducing our burn from operations by 71% in fiscal 2013 as compared with fiscal 2012. Additionally, in the fourth quarter of fiscal 2013 we generated positive operating cash flows, mostly from working capital, the first time since fiscal year 2010. We grew our cash balance sequentially quarter to quarter, even after backing out cash received from financing activities. As a result, we are focused on positioning the Company for future growth. We expect fiscal 2014 to be an inflection year as we position ourselves for revenue growth in 2015 and beyond.

We have identified three discrete business events that we expect to occur in fiscal-year 2014 that we feel are key catalysts to position the Company towards our objective of driving future revenue growth to a level which would sustain positive cash flows. These events are as follows.

One, win an order for the Resilient Electric Grid, or REG, system. Two, secure a contract for the ship protection degaussing system from the U.S. Navy. These orders are expected to be the building blocks to further diversify our Gridtec Solutions product line. Additionally, we believe these two new product introductions are key to generating sustainable, positive cash flows from one of our core technologies, namely superconductors. And third, obtain a new ECS order from Inox Wind in India. Today, we announced that we achieved this objective with our $40 million electrical control system order from Inox. I am very pleased that we are able to deliver on one of our objectives for the year so early in the year.

Please be aware that for the wind business to be contributing towards our objective of sustainable, positive cash flows, we require two wind customers in meaningful production simultaneously. We believe the most likely customers to do so would be Inox and JCNE. This is part of our diversification efforts that have been ongoing for the past several years.

To reach our objective of sustainable, positive cash flows, we need to drive growth in our D-VAR product line as well. We are beginning to see order traction and momentum. In fact, we kicked off the year by announcing new D-VAR installations in the United States, a core market as well as an installation in South Africa, an emerging market. We also announced four new D-VAR contracts in Australia, North America, and South Africa.

Following Dave's comments, I'll talk to you more about these recent accomplishments. I will also describe what a REG order would look like, as well as further describe our recent operational initiatives. Finally, I will discuss our strategy and expectations for fiscal 2014 following Dave's review of the financials. Dave?

Thanks, Dan, and good morning, everyone. AMSC generated $16.3 million in revenues for the fourth fiscal quarter compared to $20.4 million in the year-ago quarter. In the fourth fiscal quarter, wind revenue grew by 42% year over year due primarily to higher shipments to Inox. This growth was offset by a decline in revenue in our grid business, due primarily to lower D-VAR revenue. For the full fiscal year, we generated revenues of $84.1 million compared to $87.4 million in fiscal-year 2012. Wind revenues increased 26% year over year while grid revenues decreased 34%, due primarily to the factors I just mentioned.

The 12-month backlog as of March 31, 2014 was approximately $35 million compared with $43 million as of December 31, 2013. The 12-month backlog number I just mentioned does not include the Inox order that we announced this morning.

In the wind business, we continued to ship off backlog under longer-term contracts. We have nearly completed deliveries to Inox under the current contracts, and we expect to begin shipments under the order that we announced today during the second quarter of fiscal 2014. We expect to complete shipments during calendar year 2015.

In the grid business, D-VAR bookings continued to be soft, but we are seeing some positive signs of a potential recovery. As in wind, in superconductors our revenues are primarily derived from longer-term contracts. We expect that near-term opportunities for new orders are for our REG product and our degaussing system for the U.S. Navy. Dan will talk more about those opportunities.

Looking at the P&L in more detail, gross margins for the fourth fiscal quarter was a negative 1%, which compares with 11.4% in the fourth quarter of fiscal 2012 and 22.9% in the previous quarter. The sequential decrease in gross margin is primarily due to 100% margin CSR revenue we discussed in the prior quarter and a $1.4 million charge against cost of goods sold in the fourth quarter for our reserve against prepaid VAT in China, which is recorded in conjunction with the transfer of certain wind manufacturing activities to Romania. Normalized for this charge, gross margin in the fourth quarter was 8%.

R&D and SG&A expenses in the fourth quarter were $12.6 million. This was down from $17.2 million for the same period a year ago, due primarily to the benefit realized from our earlier cost reduction actions. Approximately 30% of this R&D and SG&A spending in the fourth fiscal quarter was non-cash.

In the fourth fiscal quarter, we incurred approximately $2.1 million in restructuring and impairment charges. This amount includes cash severance charges of approximately $900,000 related to the strategic manufacturing initiatives we announced in March and a $1.2 million non-cash impairment charge recorded against our investment in Blade Dynamics in conjunction with activities being undertaken to sell our minority interest.

With respect to the restructuring activities associated with our recently announced strategic manufacturing initiatives, we expect that remaining cash charges associated with this effort will be in the range of $3 million to $5 million, which are expected to be incurred fairly linearly through the third quarter of fiscal 2014.

Net interest expense was $2.4 million in the fourth fiscal quarter, of which $1.8 million was non-cash interest expense. During the fourth quarter, we entered into an agreement with Heights Capital Management whereby they converted the remaining outstanding balance on the convertible note in exchange for approximately 6.6 million shares of common stock. In conjunction with this transaction, we recorded in the fourth quarter a $5.2 million non-cash charge for a loss on the extinguishment of this debt. On a go-forward basis, interest expense in total is expected to be approximately $500,000 per quarter in fiscal 2014, with roughly 35% of that non-cash.

Our net loss in the fourth quarter of fiscal 2013 was $22.7 million, or $0.33 per share. This is an increase from $19.8 million, or $0.35 per share, in the year-ago quarter. In fiscal-year 2013, we reduced our net loss 15% to $56.3 million, or $0.90 per share, from $66.1 million, or $1.25 per share, in fiscal-year 2012.

Excluding the restructuring and impairment charges, the loss on extinguishment of debt, and the reserve for prepaid VAT I previously mentioned, and other unusual and non-cash charges, our non-GAAP net loss for the fourth quarter of fiscal 2013 improved by 21% to $9.4 million, or $0.14 per share, compared to $11.8 million, or $0.21 per share, in the year-ago quarter. For the full fiscal year, we narrowed our non-GAAP net loss by 35% to $34.1 million, or $0.54 per share, from $52.3 million, or $0.98 per share, in fiscal 2012. Please see our press release issued this morning for a reconciliation of GAAP to non-GAAP results.

We ended the fiscal year with $49.4 million in cash, cash equivalents, and restricted cash. This compares with $41.7 million as of December 31, 2013. We generated $7.7 million in cash during the fourth fiscal quarter. During the fourth fiscal quarter, we generated net proceeds of $4.1 million from the issuance of approximately 2.5 million shares of common stock under the ATM at an average sale price of $1.74 per share. Excluding financing proceeds, we generated positive net cash flows of $3.6 million in the fourth quarter, driven by positive operating cash flows of $5.1 million. This was the first quarter since the second quarter of fiscal 2010 that we generated positive operating cash flows. We achieved this primarily by converting working capital into cash, including reducing inventories and monetizing VAT assets. Our stated objective had been to generate a quarter of positive net cash flows before the end of fiscal 2014. So we were able to achieve that objective a year early. While we were pleased to have reached this milestone, we believe that we require higher revenues in order to achieve positive net cash flows on a more recurring basis. This is our focus as we enter into fiscal 2014.

As of March 31, 2014, the principal balance of our debt arrangements, excluding the debt discount, was $13.5 million compared to $25 million as of December 31, 2013. As I mentioned earlier, the convertible note with Heights Capital Management was extinguished in the fourth quarter. This accounts for the majority of the debt reduction. The remaining debt on the books represents two term loans with Hercules Technology Growth Capital. Principal and interest are paid monthly in cash on both loans. One of the loans matures on December 1, 2014, and the other matures on November 1, 2016.

In the Form 10-K filed a year ago for fiscal 2012, we received a going-concern opinion from our independent auditors. The audited financial statements included on our Form 10-K that we filed today for fiscal 2013 do not include a going-concern opinion. We believe that this is in recognition of the progress the Company has made in improving its liquidity. This underscores our belief that we will have -- we have sufficient available liquidity to fund our operations, capital expenditure requirements, and debt service beyond the end of fiscal 2014.

Turning to our financial guidance, for the first fiscal quarter of 2014 we expect that our revenues will be in the range of $11 million to $13 million. The lower sequential revenues are due primarily to a temporary manufacturing constraint at Inox, which is expected to result in lower sequential wind revenues in the first quarter. grid revenues are expected to increase slightly on a sequential basis. We expect that our net loss in the first fiscal quarter will be less than $16 million, or $0.20 per share. Our non-GAAP net loss for the first fiscal quarter is expected to be less than $13.5 million, or $0.17 per share. For full fiscal year 2014, we expect revenues to be slightly lower as compared to fiscal 2013. As Dan said, we believe fiscal 2014 will be an inflection year during which we will position ourselves for revenue growth in fiscal 2015 and beyond. We intend to regularly update you on the progress we are making on our identified growth catalysts.

So in summary, in fiscal 2013 we were able to improve our liquidity position. We generated positive operating and net cash flows in the fourth quarter. The convertible note with Heights has been paid off, and the going-concern opinion from last fiscal year was lifted. We intend to use our improved liquidity position to focus intensely on our revenue growth catalysts in order to realize those benefits in fiscal 2015 and beyond.

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

Thanks Dave. Let's start first by talking about the REG system, its benefits, competitive advantages, and why we believe it's representative of the future potential of AMSC. REG represents what AMSC will be in the coming years. The REG system solution demonstrates a fundamental shift to our strategy around superconductors. Previously, we've been focused on increasing wire sales and using volume to decrease costs. With the REG system, we will be selling a full system solution, providing revenues in multiples of the wire value. This means that we need to sell less wire for our superconductor-based product line to contribute to profitability.

Let me back up and talk to you about the REG system and its benefits to a utility. The REG system enhances capacity, reliability, or some combination of the two in the urban electricity grid, and it will ultimately make the grid more resilient. There is a compelling need for such solution in the market today.

To understand the benefits of the REG system, it is helpful to have an understanding of how the electric power grid works. In a typical urban electricity grid infrastructure, power is produced at power plants that are located outside of the city limits. Power from those plants travel through high-voltage transmission lines and transmission substations until it reaches a distribution substation where the power is stepped down to distribution voltages. This enables safe voltages to be brought to homes and businesses. Because power must pass through these substations before being delivered to homes and businesses within the city, they play a critical role in the urban electrical infrastructure. These are the key nodes on the network that are the electrical lifeline to power business and our activities in our home.

Each substation supplies power to an entire section of the city. In many large urban environments, the distribution substations are not connected. In order to provide reliable service, redundant components are often included in the substation, representing significant investment that is only partially utilized. That said, interconnection of substations would benefit an urban utility because it would enable substations to support one another, providing much more reliable and resilient service by more efficient utilization of capital infrastructure already in place.

This inability of substations to support each other leaves neighborhoods and businesses vulnerable to physical and cyber threats, weather-related disasters, and failure of aging equipment. Furthermore, each substation can handle only a limited amount of capacity. Serving additional load beyond this capacity requires either substation expansion or, if not possible, the construction of costly new substations. Connecting the substations allows them to share the redundant components, maintaining the same reliability while utilizing additional existing assets.

In many cases, this type of connection cannot be done by traditional copper-based solutions. To move the large amounts of power between substations, a huge number of copper cables would be required. Typical urban environments simply do not have the space under the city streets to accommodate this amount of power. Furthermore, the copper cables could not manage the fault currents that will often arise.

The resilient electric grid system offers a solution. A single high-density superconductor cable can handle the power requirements that would otherwise require many copper cables. Further, HDS cable can address the issue of high-fault currents, something that a traditional cable simply cannot do. Simply put, REG can enhance either capacity or reliability or some combination of both in the urban distribution system. From what we have seen in our discussions with US utilities, both features have value and fill compelling needs that exist today.

The development of the REG system is being funded partially by the Department of Homeland Security, or DHS, as part of its smart grid initiatives. DHS recognizes the critical nature of our nature's electricity grid and has demonstrated its commitment to strengthening this vital asset. This is a product that is highly proprietary and something that we can uniquely offer. A resilient electric grid order will require a phased approach and a significant amount of planning from the utility to ensure a smooth deployment of the system. Meaningful revenue would be expected to occur 12 to 18 months after an order is received. It is possible that a project of sufficient size could result in total revenue roughly equal to our current annual revenue. However, let me be clear, deployment would occur over multiple years. We believe that we will receive an order for the REG system during the fiscal year. This truly would be a transformative event for our Company.

To continue with the theme of positioning the Company for future growth, let's move on to the consolidation that we announced in March. During the fourth fiscal quarter, we announced that we'll be consolidating the Middleton, Wisconsin, facility into our Devens, Massachusetts, facility. We believe we can best leverage our Gridtec Solutions employee base and realize important synergies in new product development by having our Gridtec Solutions employees in one geographic location. Given our improved liquidity position, we believe that now is the time to reposition the Company towards growth and new product development. This action will consolidate all of our Gridtec Solutions manufacturing into one location, enabling better utilization of our existing assets. Furthermore, the consolidation puts us in a better position to expand and diversify the Gridtec Solutions product line, starting with REG.

Now let me turn to our degaussing ship protection systems for the U.S. Navy, another one of our anticipated growth catalysts. We are engaged with the U.S. Navy with the intention of receiving an order to deploy a ship protection system on a Navy platform. We believe that we will receive an order for an initial system from the Navy by the end of the fiscal year 2014. We have developed and qualified systems with support from the Navy and believe that we can uniquely solve challenges in the fleet today. As we have stated, we look to expand the Gridtec Solutions product line beyond D-VAR to include REG as well as our ship protection system.

The D-VAR product has consistently been the revenue driver for our Gridtec Solutions. The D-VAR system controls power flow and voltage on the transmission network. By using the D-VAR system, utilities can increase the controllability and power transferability of a transmission network. This allows more effective utilization of existing assets and reduces the need for new transmission lines and facilitates the -- to increase electricity availability. We do not publicly provide the value of our customer wins for competitive reasons, but we want our investor base to understand the importance of the D-VAR system to our business.

The ASP, or average selling price, of a D-VAR system ranges from between $750,000 to $2 million, depending on the size of the system and the amount of integration services we provide. We can also act as the turnkey supplier and provide the entire system solution, including civil engineering, in which case incremental amounts of integration revenue would be recognized. Typically, we provide just the D-VAR system, which usually includes a transformer and/or capacitor banks, and the customer works with a system integrator directly.

Our D-VAR business currently operates in three core markets: the United States, Australia, and the United Kingdom. And we are actively seeking to expand into emerging markets such as Southern Africa, Eastern Europe, and South America. In the United States and Australia, the majority of our D-VAR business has been safely and efficiently connecting wind farms to the electric grid. In both countries, inconsistent policy regimes have caused uncertainty in the industry over the past year. In Australia, the government's review of its renewable energy target will determine future demand for wind and solar. The new leadership is less favorable to the renewables market. While there are signs of positive movement, we do not expect D-VAR demand from renewable applications in Australia in fiscal 2014. Our near-term focus will be toward marketing our D-VAR solution to utility and industrial customers in that geography.

In the United States, policy uncertainty negatively impacted the wind industry in 2013 and dampened demand for D-VAR for renewable applications. In 2013, only one gigawatt of wind power was installed. That represents a 92% drop in new wind generating capacity. We believe that the market may be improving. In fact, there are over 13 gigawatts of wind power currently under construction. This uptick has begun to translate into our business as well. We announced two new D-VAR projects in North America, both of which will be connecting wind farms to the electricity grid.

We are also seeing increased quoting activity. In fiscal-year 2013, we also demonstrated traction in new markets by successfully installing our first D-VAR system in South Africa and winning a follow-on project in that country.

In fiscal-year 2014, we continue to remain focused on penetrating emerging markets and capitalizing on opportunities in all three D-VAR applications: renewables, utility, and industrial.

Let's move on to AMSC's Windtec Solutions. We license advanced wind turbine designs and provide electrical control systems to wind turbine manufacturers. Our Windtec Solutions lower the cost of energy and enable wind power to compete more effectively with conventional power sources. Our highest-volume customers currently are Inox Wind in India and JCNE in China.

We currently manufacture electrical control systems in China. In March, we announced that we were opening a manufacturing facility in Romania. At this facility, we expect to manufacture electrical control systems for our customers located outside of China. We expect that our facility in China will continue to manufacture systems for the Chinese market. This action is not expected to increase overall wind manufacturing costs. The proximity to our Windtec Solutions design center in Austria, the cost of labor, and the fact that Romania is an EU member state all influence the selection of this location. In addition, Eastern Europe represents a target market for our wind and grid products, and expansion into this region is anticipated to be beneficial to those efforts. In aggregate, this market, when combined with the nearby addressable regions of Northern Africa and Turkey, is predicted to be about the same size as India.

Turning to the wind markets in India in fiscal 2013, the Indian wind industry faced uncertainty as a result of delaying putting into place the regulatory framework intended to stimulate the industry. India commissioned 1.7 gigawatts of projects in 2013 compared with 2.3 gigawatts in 2012. The regulatory framework has since been sorted out. Industry experts forecast a recovery in wind installations to 2.3 gigawatts in 2014, rising steadily to 3.2 gigawatts in 2017. The recent election in India is also expected to be positive for the wind industry. The new prime minister has publicly stated his desire to provide 24 x 7 power to every Indian. To meet this ambition, experts predict that the power supply will have to at least triple by 2030. And a major shift to India's power mix will be required if this ambition is to be achieved.

The planning commission of India recognizes the importance of renewable sources of energy in meeting electricity demand in the future. It forecasts the share of renewable capacity to grow from 12% in 2012 to 44% in 2030. Bloomberg New Energy Finance concurs and expects renewable shares to rise to 45% of power capacity by 2030. More importantly Bloomberg also believes that renewables will benefit most from economies of scale, making it the cheapest and most abundant source of electricity by the end of the next decade.

The positive momentum in the wind industry has been reflected in Inox business as well. Today, we announced that Inox placed a $40 million order for electrical control systems. We will begin to deliver on this contract during the second quarter of fiscal 2014 and expect to complete shipments during calendar year 2015.

Moving on to China, growth in the wind market has slowed over the past years. Annual installations did grow slightly in 2013 but not at the historical growth rates of a few years ago. For us, that means this means that our partner JCNE has inventory that it needs to reduce before it is in a position to take on additional contracted shipments to meet new demand. Despite market challenges, JCNE has made progress over the past year.

As a reminder, JCNE is one of the customers that we believe has the greatest potential to be in near-term meaningful production along with Inox Wind. In fact, we already have an order from JCNE; they simply need to reduce existing inventory to take on the additional contracted shipments. Recently, JCNE completed the low-voltage ride-through certification for its 3-megawatt full-conversion wind turbine. JCNE has also won a project with one of the country's five major power producers. This is a big deal for JCNE, and it further opens up the market for their wind turbine products.

In fiscal year 2014, we are focused on putting the Company into a position for top-line growth in 2015 and beyond. Product development is required to diversify revenue and reduce the impact of governmental policy that we cannot control. We believe that our consolidation will help with product development. We are also focused on helping JCNE to get to its business off the ground and helping Inox to grow its business.

We are continuing to work with the Navy and invest time and resources into our products in anticipation of a contract this fiscal year. We are looking forward to having our Gridtec employees all under one roof. We see the expansion and diversification of our Gridtec product line as essential to continued growth for the Company. And finally, we are continuing to invest in the relationships that we believe will produce an order for the resilient electric grid system. We believe the REG system has the potential to be transformative for our business.

For more than a quarter-century, we've been committed to developing long-length, high-quality, high-temperature superconductor wire that could be deployed in the electricity grid. We are able to make such a wire in significant quantities. We have developed a complete solution beyond the wire with the support of committed partners like DHS and Con Edison in New York. We have been focused on working with utilities to understand the challenges that they face and determine how superconductor technology could help them to overcome those challenges. We believe that today we have that application in REG.

In the near-term, our goal is not to replace copper but instead to add value to the urban electrical infrastructure by providing protection against the calamitous effects that follow the loss of critical substation facilities in urban areas.

Our future competition isn't copper; it is the iron and steel in substations and the rising cost of urban real estate. We believe we have a solution that can enhance reliability and increase capacity for urban utilities. without requiring them to build expensive new substations. We believe that REG provides us the ability to provide a system-level solution to the utility industry that can be priced to serve a multi-billion dollar market in the US alone.

To recap, over the past years we've improved our cash burn. As I mentioned earlier in today's remarks, our cash balance decreased by less than $1 million in fiscal 2013. Now we turn our attention squarely on growth.

We expect fiscal year 2014 to be an inflection year for AMSC. We have identified three business events that we expect will occur in fiscal year 2014. These events are key building blocks to achieving our objective of sustainable, positive cash flows. These events are as follows. One, win a contract for a resilient electric grid system. Two, realize an order for a ship protection system for a U.S. Navy ship. Three, get a new contract with Inox Wind in India. As I mentioned earlier, today we announced that we achieve the objective with Inox through the $40 million order for electrical control systems that we announced today. These events are the building blocks that we need to ensure we are on the path to revenue growth and sustainable positive cash flows in 2015 and beyond.

With that, I'll open up the line to your questions. Lori?

Carter Driscoll, MLB and Company.

First question. Dan, you spent a lot of time talking about the REG product and your expectations for potentially receiving an order in the next fiscal year. Can you talk about what component -- how this product is different than your standalone fault current limiter that you have out in the market today? Is it built upon that, which is what I'm assuming? And just talk about what other component from maybe a dollar content perspective and compare and contrast that with the standalone product?

Okay. So the standalone product is different. This is a product that we've worked in collaboration with Nexans on. And they are actively marketing it in Europe; we are actively marketing it here in the United States. And what that is is basically a box that sits inside a substation. And what it will do is it will manage locally the ability for that substation to deal with fault currents that it would see. So it solves a specific problem on a specific part of the grid.

REG in many ways is fundamentally different. What we're trying to do is to link the nodes in the network that already exist to allow them to be able to move not only capacity but also improve reliability and thus resiliency. The way that resilient electric grid works is it gets down to the construction of the wire. This is something that's very unique to AMSC in how we make our wire. We are the only company in the world that makes it this way because of our significant patent position.

So we see REG from a dollar standpoint as being potentially transformative. So you're talking about projects that are in the order of tens of millions of dollars as opposed to selling boxes that are on the order of millions of dollars, just to give you a sense. But the value of that the market is going to see is demonstrably different. You're talking about substation upgrade deferral. You're talking about new substation build elimination.

So the economics aren't just about fault current management like a standalone fault current limiter would be, but it's really bringing more to the existing system. And where we are going to compete is with other major capital purchases a utility would make. How do we think about the system from a capacity and from a reliability standpoint and what on an annual basis is the utility going to invest in? And what we believe in REG is they have a choice now to basically network the nodes within the distribution system in a way that enhances both capacity and reliability.

Okay. So if I -- no, that's excellent. Thank you for that. So just let me drill down a little bit more deeply. If I heard you correctly, you said that you're hoping to get an order that you would fulfill over some 12 to 18 months time frame after receiving the order that might equal the current value of your revenues you just booked, ending in the March quarter. And if that is correct, first of all, then how many substations with that encompass? And you talked about the elimination of a new build. But kind of give us an idea of like maybe the geographic size of what a deployment might look like.

Sure. So to give you a sense, can we look at the value proposition. And, again, I think the way you framed it was interesting that a standalone -- and you think about a standalone fault current is to -- a standalone fault current limiter is to current almost what a D-VAR is to voltage. It's going to solve a specific problem in a specific location on the grid. Both necessary; both interesting markets; both potentially nice businesses for us.

When you look at resilient electric grid, it's really about connecting those substations. So, if I imagine two or three substations, and they have 50% -- or really it's 100% redundancy -- so, 50% of the capital is deployed, it's really not active in normal state. You're now able to make a decision. Do I build another substation? Do I upgrade these existing substations? And you're talking about cost benefit, it's on that larger order of tens of millions of revenue.

So when you think about a market and you think about projects -- did I say quarterly? So let me correct. I'm saying annual revenue not quarterly revenue in the numbers that I'm stating. When you think about a deployment, you'll probably do a project in a city. It won't complete everything that city needs to do, so it could be a first step in improving reliability or capacity in that city. And it would be connecting really two or more substations together. Ideally, the more that the distribution network gets networked, meaning the more substations that are included in a deployment, the more un-trapped -- the more getting at that trapped capacity happens for more parts of the city, but also you substantially increase reliability. And in today's climate with the storms that we've seen, the bombings that we've seen, the events that we saw out in California with somebody shooting up a substation, this is really top of mind at utilities. It's top of mind with NERC and FERC and the ISO's and everybody involved that there needs to be a way to think about enhancing reliability of critical infrastructure. And that's really why DHS is so supportive of this is that's right in the crosshairs of their objective and their mandate and what they are about.

Okay. And given your customer target base, it seems more likely two or maybe three of these substations will be linked at first, and they are not going to do a whole citywide swap-out, but I think that makes a lot of sense. How about regulated (multiple speakers) --

(multiple speakers) could have as many as 20, 50 substations. So you wouldn't go and you wouldn't do all of that at once. But once you get that first order, what I'm trying to get at is there the potential for follow-on orders even within that city.

Yes, that makes sense. Is there more receptance from the regulated versus the unregulated utilities? Does it make a difference?

I don't think it necessarily makes a difference. Really it's about size and it's about what their current issues are. If they currently have a reliability concern or they currently have a capacity need, then they are right in the near-term as an opportunity for us for REG.

Okay. Fair enough. Switching gears a little bit. Inox -- could you maybe talk about what glitch they have in terms of -- is it a capacity constraint? Is it some other issue as to why there is kind of the near-term at least for the next quarter?

Carter, this is Dave. They had a -- this was in the press. A little bit ago, they had a fire at one of their blade manufacturing facilities. And so they've had to deal with that, and that's constrained their overall production a bit and their (multiple speakers) --

It's a tough time of the year to come at for this to happen to them because, as we were kind of talking about in the macro environment, their year really got shortened to six months. So the first half of the year, because the policy wasn't established they couldn't do a whole lot in the market. So they were going gangbusters as best as they could in the second half of the year, which ends the end of March. And to have this issue with capacity on the blade side, we're going to see an impact. And that's why, in what Dave was saying, we see that impact coming to us here in the next time period.

Okay. But do you expect any revenue from them in the June quarter, or is it just kind of a reduced figure and maybe they'll get up and running in the latter part?

We do expect revenue from them in the first quarter.

Okay. And the follow-on offering -- excuse me, the follow-on order, did I hear you correctly that is not included in the 12-month backlog?

It's not included in the backlog number that we reported. That backlog was as of March 31.

Right, okay. Great. Can you talk about, Dan or Dave, maybe the approval process for the Navy contract, like the different types of departments you have to go through? And I'm assuming it's a multiple-stage process. And you guys have been talking about this order for a while, and it certainly has quite a bit of potential upside. It can move into different platforms. But maybe just talk specifically about some of the departments you have to get approval from to get across the finish line.

Sure. So I think what we've been talking really about is the product development. We've talked about the successful sea trials. This is something that the Navy really wants. Where we're at today is a stage where what we are anticipating at some point in the near-term here is for the Navy to direct the shipbuilder to make an engineering change. So we are focused today on ships that are already scheduled to be built but have not yet been built. And what we would be is an engineering change in the system.

So they would go from the traditional way that they do degaussing to what the Navy calls advance degaussing, which includes us. In order for that to happen, it really happens platform by platform. So ship by ship where, say, it's a destroyer or say it's one of the faster ships -- that program makes a decision we're going to do a cut-over in what the timetable is. What we're awaiting now really is that instruction directly to the shipbuilder on here is what we want you to do and when we want to you to do it. And around that would then come out an order to us to procure the equipment.

Okay. Thank you for that. Back to maybe the JCNE. They -- you said they got certification for the 3-megawatt turbine for LVRT and that they continue to work down, I'm assuming, really the inventory issues on the 2-megawatt side. Could you talk about the contract that they did win with one of the power producers if you can't name them and talk about how that might filter through to your particular business?

Sure. So let me talk first about the product line. So where we've been and what we've shipped to date are really around the 2-megawatt. When we originally signed the technology transfer part of the relationship, there is a 2-megawatt, a 3-megawatt, and a 5.5 coming. We have announced previously with the three, we've gotten the prototype. That started to get into production, had to get through testing, and really this testing with LVRT now opens up the ability for JCNE to expand their product line not only to do 2 but also 3. We also continue to work with them on a 5.5-megawatt, and we hope for that to go into production here sometime in the near-term.

When we think about their business, we've talked a lot about them having these two divisions. So they have a division that makes the wind turbine, and then they have a division that develops the wind farm. And what we are seeing now is the ability to generate business outside that model and really sell to the large power producers. So in the state grid system, there's five major power producers. And one of them, which is one of the bigger ones, has elected to do really a significant size -- and I don't want to get into numbers because we're sensitive with JCNE and with the information -- but a significant-sized wind farm. And what that means now is they can sell outside of their traditional model of developing the full asset but also have this parallel business on selling to the large power companies.

It's not much different than how Inox started. So Inox developed their business the same way. They had these two divisions: one making the wind turbine, and then another making the wind farm. And as they started to get experience basis with that, they were then able to sell to the overall market, and that's why you see the growth of Inox going from 2% to 12%, 13%, 15% whatever it was that they delivered this year -- is because now they are selling to the overall market. The fact that they are selling the full wind farm means that they have to fully understand all of their customers' issues. Inox has gone through that learning. This means that JCNE will be going through that learning, and it really opens up the larger market in China to JCNE.

Okay. Maybe two last questions if I may. Could you talk about -- there been any changes in the Korean market? Obviously partner with Hyundai and Doosan. And maybe talk about where the offshore project stands in terms of your expectations, and then I'll have one last follow-up.

Yes, I think Korea, their sights have really turned domestically on offshore. There is projects there that are kind of in the beginning of underway stages. There is a utility scale launch of offshore wind, really is now expected to be after 2015. They are going through a demonstration phase now which is on the order of, call it, about a 100-megawatt wind farm. There's four major suppliers; we have two. And we see our products as being uniquely competitive in that market.

So, we've had to -- I guess we benefited from the speed of China in our past. And I think we going to benefit from the slowness of Korea in that these guys are going to get it right. They're going to have products that aren't just going to work in Korea but they are going to work globally. And they do have a strong partnership with their government, but it means it's going to move at governmental speed in Korea. And in the short-term, you can say maybe we've suffered from that. But in the long-term, we believe there's a market for offshore for our partners in Korea but also globally. We think that the products that they deploy in Korea will be immediately transferable to the global market and probably will be in a very unique competitive way. There is a rich tradition in the Maritimes in South Korea in building ships and offshore structures that we believe will help the overall offshore wind market.

And that demonstration project, is it -- what is the turbine rating being used?

Anywhere from 3 to really 5, and I think that Samsung announced at one point they're trying to do a 7. I don't know the progress with that, if they've really been able to make it. But we have a 3 with Doosan; we have a 5.5 with Hyundai. And they are really the furthest along and the most mature at those size ratings.

And then just my last question maybe from a regulatory perspective. Obviously, the expiration of the PTC in the US maybe has a different impact from you; it's more indirectly than direct. But can you give me your view and your expectations of whether that has a chance of being either retroactively applied or even getting reinstated maybe say mid-year and just given your viewpoint?

Yes, I think what we -- to kind of link it directly to our business, for the US wind market, really, it's about D-VAR for us. Some of our partners have done projects in the US, but they are not substantial for them and they are not substantial for us. Really what we see is kind of a push-out in the market. We've talked about in the remarks I think about a gigawatt was done last year. There is about 13 that's in construction this year. So there is some pent-up demand.

I think going forward beyond the expiration of the PTC -- I mean, they've looked at renewing it a number of times in the past. They've gotten to the point where they did this renewal back a year or so ago. What we're trying to focus on now are really the utility and the industrial demand. And we see utility demand in North America in the US. We see industrial demand in North America, particularly in Canada. So what we're trying to do is to further insulate the business -- I don't want to stay away from wind because we support wind. But particularly, we look at the D-VAR markets: North America, the UK, and Australia. We are trying to spend a lot of our efforts in selling utility and industrial solutions as opposed to only renewable.

That's an excellent change in strategy. Okay, that's all I had for today, guys. I'll get back in the queue. Thank you for your time.

That does conclude our question-and-answer session. I'd like to turn the call back to Dan McGahn, CEO, for any additional or closing remarks.

Thanks, Lori. I appreciate it. And I appreciate everybody's time today. So we are through another year. In fiscal-year 2013, we were able to stabilize the cash burn. We see 2014 really as a time of change for the Company. We are introducing two new products: Resilient Electric Grid, and the ship protection degaussing system. We have a lot of excitement in Romania with our new operation, our employees, and our plant there. In the United States, we are pleased with the our progress we made so far on the consolidation. This has been an extraordinary effort by our employees who are assisting with the manufacturing move as well as those who have agreed to relocate and those who are transitioning their responsibilities. It's truly been an example of outstanding professionalism and teamwork, and I look forward to speaking with you following completion of our first fiscal quarter of 2014. Thank you, and talk to you soon.

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