American Superconductor Corp (AMSC) 2014 Q1 法說會逐字稿

PRESENTATION

Good day, everyone, and welcome to the AMSC 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 this call this morning are AMSC President and CEO Daniel McGahn, Executive Vice President and CFO David Henry, and Senior Manager of Corporate Communications Kerry Farrell. For opening remarks, I would like to turn the call over to Kerry Farrell. Please go ahead, ma'am.

Thank you, Steve, and welcome to our call to discuss our first quarter fiscal 2014 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 provision 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 and Form 10-K for the year ended MARCH 31, 2014, which we will file with the SEC on June 5, 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: our net loss before stock-based compensation, amortization of acquisition-related intangibles, restructuring and impairment charges, settlement of the litigation costs, consumption of zero cost-based inventory, non-cash interest expense, change in fair value of derivatives and warrants, and other unusual charges, net of any tax effects related to these items. Non-GAAP 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 www.amsc.com.

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

Thanks, Kerry, and good morning, everyone. I will begin today by providing an overview of our financial results for the first fiscal quarter of fiscal 2014. Dave will then provide a detailed review of our financial results and guidance for the second fiscal quarter. Following Dave's comments, we will use today's call as an opportunity to focus on the recent Resilient Electric Grid, or REG announcement. After that, we will open up the line to your questions.

Revenue for the first fiscal quarter was in line with our expectations. Looking at the grid business, the D-VAR product continues to be impacted by macro factors. I will talk more about that later in the call.

In our wind business, Inox Wind in India continues to be a consistent customer. We are also working with our other licensees with the goal of getting at least one into consistent volume production. We believe that this is a requirement for us to be able to achieve sustainable positive cash flows.

As expected, our revenue was down by 49% from the year ago quarter, which was a quarter during which we had meaningful shipments to both Inox and JC&E. We believe this represents the low point in our revenues for the fiscal year. We mitigated the lower revenues in part in the first fiscal quarter through our cost reduction actions. As a result of these actions, our R&D and SG&A expenses were down by more than 20% as compared with the year ago quarter.

We kicked off the second fiscal quarter with an announcement of a contract with the Department of Homeland Security, or DHS, and a partnership with ComEd, Chicago's electric utility. Before I get into detail on this achievement, Dave will provide detailed review of our financial results. Dave?

Thanks, Dan, and good morning everyone. AMSC generated $11.7 million in revenues for the first fiscal quarter, in line with our first quarter guidance compared to $23.1 million in the year ago quarter. Wind revenue declined by 48% year-over-year, driven primarily by lower revenues from customers in China, partially offset by higher year-over-year revenues from Inox -- was the only customer generating more than 10% of revenues in the first fiscal quarter. Our grid revenue declined by 52% year-over-year as a result of lower D-VAR shipments.

12-month backlog as of June 30, 2014, was approximately $62 million compared with $35 million as of March 31, 2014. The growth in the backlog is primarily due to the new $40 million contract with Inox that we announced in June.

We announced in July a $60 million cost-sharing arrangement with DHS to help fund the installation of our Resilient Electric Grid system and to Chicago's electric grid in partnership with ComEd. Our backlog does not include the $1.5 million for the first phase of our Resilient Electric Grid contract with DHS. That will be reported in our second-quarter backlog. We expect that the remainder of the contract be put in the backlog once all of the other parties agreed to move forward.

We currently expect the follow-on basis to take approximately 42 months after the date that all parties agree to proceed. This timeline is subject to change following the successful completion of the detailed deployment plan. Revenues would be recognized over the life of the project on a percentage of completion basis. The funding to be provided by DHS for the project is expected to cover all of the Company's direct incremental costs associated with the project as well as a portion of our fixed costs.

Looking at the P&L in more detail, gross margin for the first fiscal quarter was a negative 3%, which compares with 22% in the prior year quarter. A lower gross margin was primarily driven by lower revenue and an unfavorable mix as approximately $3 million of 100% margin revenue was recognized in the year ago quarter.

R&D and SG&A expenses for the first fiscal quarter were $11.1 million. This was down from $13.9 million for the same period a year ago, due primarily to the benefit realized from our earlier cost reduction actions as well as lower audit and legal costs. Approximately 20% of this R&D and SG&A spending in the first fiscal quarter was noncash.

Plant temporary inefficiencies resulting from the implementation of our strategic manufacturing initiatives are expected to drive slightly higher OPEX in the second quarter compared to the first quarter. In the first fiscal quarter, we occurred approximately $1.2 million in cash restructuring charges relating to severance and other benefits for employees impacted by our strategic manufacturing initiatives, including the consolidation of our Middleton, Wisconsin operations into our facility in Devens, and the rationalization of our headcount in China, in line with expected demand from our Chinese customers.

We expect these restructuring activities -- with respect to these restructuring activities, we continue to expect that cash charges associated with this effort during fiscal year 2014 will be in the range of $3 million to $5 million, including the charges incurred in the first quarter.

Our net loss in the first quarter of fiscal 2014 was $13.5 million or $0.17 per share. This is an increase from $10.5 million or $0.18 per share in the year ago quarter. Excluding the restructuring and impairment charges I previously mentioned and other unusual and noncash charges, our non-GAAP loss net for the first quarter of fiscal 2014 was $11.9 million or $0.15 per share compared with $8.1 million or $0.14 per share in the year ago quarter. Please see our press release issued this morning for our reconciliation of GAAP to non-GAAP results.

We ended the first fiscal quarter with $42.8 million in cash, cash equivalents, and restricted cash. This compares with $49.4 million as of March 31, 2014. During the first fiscal quarter, we generated net proceeds of $1.2 million from the issuance of approximately 800,000 shares of common stock under the ATM at an average sales price of $1.63 per share.

As of June 30, 2014, the principal balance of our debt arrangements, excluding the debt discount, was $12 million compared to $13.5 million as of March 31, 2014. 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.

We continue to believe that we have sufficient available liquidity to fund our operations, capital expenditure requirements, and debt service for at least the next 12 months.

Turning to our financial guidance, for the second fiscal quarter of 2014 we expect that our revenues will be flat to slightly higher sequentially, driven by flat to slightly higher revenue in both business units. We expect that our net loss for the second fiscal quarter to be less than $15.5 million or $0.19 per share. Our non-GAAP net loss for the second fiscal quarter is expected to be less than $13 million or $0.16 per share.

A less favorable product mix and slightly higher OPEX as discussed earlier are expected to result in a higher sequential net loss on both a GAAP and non-GAAP BASIS. For full fiscal year 2014, we reiterate our guidance that we expect revenue to be slightly lower as compared to fiscal 2013.

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

Thanks, Dave. In June, we announced that we signed a multi-phased, cost-sharing arrangement with DHS to deploy AMSC's Resilient Electric Grid system into an urban electric grid in the United States. ComEd, Chicago's electric utility and one of the nation's largest electric utilities, has agreed to be the lead utility in the program. As part of the DHS contract, AMSC will also initiate a deployment plan with at least two other utilities in the United States.

The Resilient Electric Grid contract represents a milestone for AMSC. For more than a quarter century, AMSC employees have been committed to developing the quality and capacity of our high temperature superconductor wire and manufacturing operations. We have also been focused on working with utilities to understand the challenges that they face, so that we could determine how high temperature superconductor or HTS technology could help them to overcome those challenges.

Today, we are able to make wire in significant quantities. And we believe we have a solution that can enhance the reliability and capacity of urban electricity grids.

Before I get into the application and benefits of the Resilient Electric Grid system, let me back up and tell you about how the product came to be and our relationship with Department of Homeland Security. DHS recognizes the vulnerabilities of the electricity grid and the significant impact to our safety, security, and economy if the grid is compromised. The Science and Technology Directorate, a division of DHS, outlined an initiative that included ensuring that electric utilities in the country have the tools they require to self heal from power disturbance events, and operate resiliently against physical and cyber threats.

In 2012, 8 million utility customers were without power when Hurricane Sandy swept ashore. Some were without power for weeks and fuel distribution networks were paralyzed. The White House has estimated that power outages caused by severe weather between 2003 and 2012 cost the United States economy somewhere between $18 billion and $33 billion.

In March 2012, an event at a substation in Boston caused a fire and a two-day blackout in one of the city's busiest residential and commercial neighborhoods. Equipment failure caused similar outages at the same substation, again in May 2012, and in June 2013.

In April 2013, snipers opened fire on a substation in Silicon Valley. The former chairman of the Federal Energy Regulatory Commission, or for, FERC, called the attack the most significant incident of domestic terrorism involving the grid that has ever occurred. The former chairman believes that if a surprisingly small number of substations were knocked out at once, the entire system could be destabilized enough to cause a blackout that could encompass most of the United States.

Beyond physical attacks, hackers could take down the grid by disabling Internet communications and important pieces of equipment. According to a Wall Street Journal analysis of emergency reports that utilities file with the federal government, 13 cyber incidents have occurred in the past three years.

This problem isn't unique to the United States. According to the Electric Power Research Institute, terrorist organizations were linked to 2500 attacks on transmission lines or towers, and at least 500 substations from 1996 to 2006. Look, I could go on and on.

It is clear that the electricity grid is essential to our safety, security, and economy. But it is also clear that there is a problem. The electric grid is vulnerable to terrorism, weather, and the failure of aging equipment.

From a consumer's perspective, these problems may lead to a less reliable grid. This is why we believe the REG system is a transformational product for AMSC. We have worked extensively with a variety of partners to develop the REG system. We have developed a high temperature superconductor wire and refined the manufacturing process. We have successfully proven the fault current limiting capabilities of the system.

We have also worked extensively with ConEd, New York City's electricity utility, to develop the system operating protocols and design as well as the overall protection and control. We believe that we know how to integrate, operate, and maintain the REG system in a real-time utility operating environment. In short, we believe the system is ready for a permanent in-grid installation.

The intention of DHS is to get the REG system past the goal line so that it is commercially available for utilities across the nation. Why would a utility want to invest in the system? We believe that the REG system has two primary applications. It provides protection against calamitous events and it increases the capacity of the system, or some combination of these two factors.

A utility may install the system today to increase reliability, but it will receive the ancillary benefit of future-proofing its system for tomorrow's capacity needs. The REG solution interconnects nearby substations. Electric utilities measure reliability by establishing criteria such as N minus 1. N minus 1 reliability means that the transmission system can lose one critical piece of equipment and still provide power.

Many times, substations in large urban areas will have enhanced reliability criteria such as N minus 2. This means that they can lose two pieces of critical equipment and still provide power. As a result of this design, we expect that utilities will have redundant capacity, but that capacity is not accessible by the rest of the network.

By interconnecting substations, utilities are able to utilize the redundant capacity that is already built into the system. This provides added reliability in the event that one substation is rendered unusable. It can also increase load serving capability during normal conditions.

ComEd believes that linking its critical infrastructure to this superconductor cable system will provide added reliability, resiliency, and security to Chicago's central business district. We have worked with the utility over the past months to determine if the REG system is right for Chicago's electric grid. Over the next 6 to 9 months, we will work with ComEd to deliver develop a detailed deployment plan for installing the system into Chicago's downtown loop.

During this timeframe, AMSC expects to identify at least two other utilities that may be interested in the REG system and develop installation plans for them as well. We believe that this will allow us to develop a pipeline for future projects.

Let's next talk about the utilities' alternatives to the REG system. If a utility wants to increase capacity, then the traditional option is to create a new substation or expand an existing substation. Building or expanding a substation often requires the acquisition of land, which is an expensive proposition in the urban environment.

New substations also require a new transmission line into the substation, new transformers, and all the associated protection and switchgear. Depending on the city, expanding an existing substation or building a new substation can cost anywhere from tens of millions of dollars to hundreds of millions of dollars. Recently, it was reported that building a new substation in New York City would cost Con Edison in excess of $1 billion.

If a utility wants to increase reliability, there are two traditional options. The first is to build new substations. This will break the city up into more smaller pieces from a service standpoint. If one substation goes down, then a smaller section of the city is impacted. This marginally minimizes the risk at a high cost.

The second option is to add more transmission circuits and distribution transformers, meaning utilities' reliability will go from N minus 1 to N minus 2, or N minus 2 to N minus 3 and so on. However, this will result in increased fault current levels on the system. To protect against fault, the utility will have to replace breakers or rebuild large sections of the grid to a higher voltage. Both of these options can cost into the billions of dollars.

The Resilient Electric Grid system is unique because it is expected to benefit both reliability and capacity without the high cost of land acquisition and challenges such as higher fault current risk that come with the traditional solutions.

You may ask why can't substations be connected with copper. Copper does not have the power density or the fault current limiting features required to interconnect substations. The REG solution is enabled by AMSC's second-generation, or 2G, superconductor wire. Our superconductor wire is made up of HTS material, which is sandwiched between two metal layers.

When the wire is running in its normal state, the power flows through the superconductor element of the wire. A superconductor wire has extremely high levels of power density, which means that it can carry extremely large amounts of power within a very small cross-section of material. It is also inherently fault current limiting.

Faults happen when a piece of equipment such as a transformer or copper cable fails. It can also happen any time there is a short circuit on the system, such as a tree branch touching an overhead line, or lightning striking a line. During faults, extremely high levels of current, called fault current, flow to the grid. If not properly managed, fault currents can damage expensive pieces of equipment and cause power outages.

AMSC's superconductor wire has a benefit over copper wire in that it is inherently fault current limiting. When fault current passes through a superconductor wire, the current moves from the superconductor material to the outer metal layer. This causes the wire to instantaneously become resistant, which limits the fault current. Once the fault is cleared, the wire returns to a normal superconducting state. As a result, our unique superconductor wire is an inherently smart material.

AMSC is uniquely able to provide an HTS cable system with inherently fault current limiting capabilities. We have designed and patented the HTS fault current limiting cable design. We also have a portfolio of fundamental 2G HTS patents.

Beyond the patent protection, our experience is unparalleled. We have completed nearly a dozen HTS projects around the world, most recently our transmission voltage installation with Long Island Power Authority, and distribution level voltage installation into Korea Electric Power Corporation's system.

Let's move on next to our D-VAR business. The D-VAR business addresses three primary end markets: industrial, electric utilities, and renewable energy. Industrial applications such as mining operations employ massive induction motors that can cause voltage instability on the greater power network. D-VAR systems can mitigate these types of issues and ensure high power quality for both the industrial customer and the grid operator.

For electric utilities, the D-VAR solution can help utilities carry more power through their existing transmission and distribution assets. It can also enhance transmission system performance and prevent widespread blackouts. And, finally, our largest customer base comes from the interconnection of renewable energy generation plants to the electricity grid.

We are successful in markets that have grid codes that require a D-VAR or D-VAR-like system to ensure the safe and reliable interconnection of renewables to the grid. D-VAR shipments were light during the first fiscal quarter. We anticipated the lower volume of shipment, and so we timed the transition of our D-VAR manufacturing operation from our Wisconsin facility to our manufacturing facility here in Massachusetts, with the lower volume of shipments. This transition is well underway and we continue to expect it to be completed by the end of this calendar year.

As I mentioned earlier, the D-VAR business has been impacted by macro factors in our core markets of Australia, the United Kingdom, and the United States. In Australia, the government is reviewing the renewable energy target. Until the decision is made, many of the renewable projects are on hold. We are continuing to track the projects in the region and maintain relationships with potential customers.

In the United States and United Kingdom, we are seeing early positive signs as well. But, similarly, these positive signs need to turn into industry movement and, ultimately, D-VAR orders.

Moving on to the wind business, through our Windtec solutions, we provide both products and services to wind turbine manufacturers. Our services allow manufacturers to rapidly introduce new wind turbines or upgrade existing turbine platforms to gain competitive advantage and market share.

Our products, which we call electrical control systems, provide the brains for the wind turbine, allowing manufacturers to maximize their power output and lower the cost of wind energy. In July, we announced the availability of our newest wind turbine design. It is a two-megawatt wind turbine with a rotor diameter of 113 meters, which is larger than that rotor diameter of our previous designs.

The larger diameter makes the turbine ideal for low wind speed regions. Turbines designed for such regions are expected to open up new markets in regions that are already saturated with wind farms. India has a large number of sites with low wind resources.

In China, we believe that low wind speed turbines near urban centers can reduce the bottlenecks on the transmission system that can be caused by the long-distance transmission of electricity. Our wind turbine manufacturing partners that are in volume production are located in India and China.

We kicked off the first quarter of fiscal 2014 with a $40 million order from Inox Wind, our wind turbine manufacturing customer in India. In July, Inox got approval for floating its IPO from India's securities regulator. The company is looking to raise about $160 million. Inox has also said that it aims to execute 500 megawatts worth of orders by March 31, 2015.

According to Bloomberg New Energy Finance, Inox has installed or is in the process of installing more than 400 megawatts to date. In addition, Inox announced in June that it has secured a 170 megawatt order from a subsidiary of Morgan Stanley.

In China, wind market growth have has resumed for the first half of 2014. With our partner, JC&E, we remain focused on working with them to successfully execute on a project that it recently won with one of the country's five major power producers. Success in this project may open up the market for their wind turbine products. This in turn is expected to enable JC&E to reduce existing inventory and take on additional contracted shipments. We are also working with JC&E on the development of a 3 megawatt and 5 megawatt full conversion wind turbine.

We spent a lot of time today talk talking about the REG contract. This is because we believe that this announcement represents an important transition for the Company. Since our inception, we have been committed to the development, demonstration, and deployment of HTS-based grid system solution. Now, we are taking the first steps towards a permanent in-grid installation into one of the nation's largest metropolitan areas.

As we embark on this project, I would like to reflect on how we have gotten here. Our employees have taken a material from its discovery to the creation of a system level commercial grid solution that is capable of solving some of the most challenging issues facing the urban infrastructure today.

Sure, AMSC has been through its shares of ups and downs, but through these our employees have remained committed, focused, and driven. I couldn't ask for a more hard-working, intelligent group of people to work with. And I look forward to working with them to make AMSC's next chapter successful.

With that, Steve, I would like to open up the line to questions.

(Operator Instructions) Carter Driscoll, MLV.

Want to just make sure I understand the factors that give you confidence that your year-over-year growth, while it might not reach fiscal 2013 might approximate that, because it implies a fairly strong second half of fiscal year 2014. Could you just maybe outline -- I am assuming it is wind first, layering a little bit of REG, having D-VAR come back. But if you could help us with the competence confidence, obviously the backlog increased nicely with Inox, but the REG product will take a couple of quarters to begin to kick into the majority of contracts. So maybe you could just high-level outline your confidence on getting you to such a strong back half.

Obviously, when we look at our backlog, we know how it ages. Inox, we have a delivery schedule that they have requested. As you heard from Dan's comments, they are in fundraising mode as well. As you know, companies who go out and fundraise will typically want to do -- will want to have good results coming on the back end of that. And so that is from the Inox standpoint.

JC&E in China, they have had their fits and starts, but they do have a large -- one of the major power customers in China that they are working with, to -- in terms of installing turbines with them. So the whole business is and the expectation is that we might see some orders or might see some shipments from them, hopefully, in the second half of the year.

On the D-VAR side, we talked about some of the macro factors that are effecting affecting each of the geographies. We see some positive signs there. But, of course, those do have to turn into orders.

But, just overall, looking at the -- looking at how our backlog is aging, we have given the guidance of slightly lower revenue. So, yes, we are not anticipating full year-over-year growth, but we do expect that this is a trough quarter for revenue and that we are expecting a better second half of the year.

That's helpful. Maybe, Dan, you could elaborate a little bit. I know you said a lot of time on the REG discussion and it has been quite a bit of detail. Thank you for that.

You talked about the ability to sell the system as you are kind of specking out and going through the logistics and developing the architecture. And at what point do you think it is ready to be showcased to other utilities or maybe even within ComEd's territory, maybe some of the other subsidiaries? Can you talk to us about that timeline and how you expect that next to utilities, I think, which were required as part of that agreement to unfold, maybe your idea of timeline, maybe idealistic and what might not be idealistic, just to kind of frame it?

Sure. I think that the phase that we are in now, we have a product that we believe is really ready to install. And that could be in Chicago, it could be anywhere. What we have is the help of DHS to identify cities that are in critical need of this infrastructure upgrade. And we know Chicago has raised its hand that it believes it can do this installation. I think what we have to do now with them is this detailed deployment plan -- cross the Ts, dot the Is, make sure that the schedule is appropriate, make sure that we understand every detail of the construction schedule and so on and so forth.

In parallel, we have been working with additional utilities to try to identify specific needs within their systems. And what we anticipate here, as part of this contract, this first phase here, is to identify at least two others. What we are getting in the feedback in the market is that this is a system that is considered necessary.

I think the challenge is getting to the point where our ultimate competition in the near-term are the things that the utility needs to buy anyway. We come in at a price point at a value proposition that we believe is compelling, but also typical on the size that utilities buy equipment. So I think it is going to depend upon the cities that line up on how fast we can get to the next installation, which I think is what you are really after.

Could that occur within parallel with Chicago? Sure, there is the potential for that. We want to make sure that our infrastructure is ready to execute on that, if that unfolds. But I think, really, what we are planning to do is to get going with ComEd to really get this detailed implementation plan, get multiple cities lined up, at least two, and then, hopefully, over the next quarters and years you will start to see the building of a pipeline of orders for this product.

We were in discussion in parallel with other cities other than Chicago so those discussions are mature. They are not just beginning. And we have a team here in the Company that is dedicated solely to look at expanding that opportunity pipeline.

What are the big factors? I mean, is it the cost-sharing arrangement that -- obviously, you have identified the need; I think the utilities recognize the need for this type of system. Clearly, it is becoming an issue that is gaining more mainstream press. What are some of the big issues that --- why a deployment might take longer or why the discussions may take longer than you might hope? What are the limiting factors?

I think at the fundamental level it is the inherent risk profile of a utility. What DHS is doing with the funding is fostering an environment where ComEd will go forward and do an implementation. The desire is, after this implementation, we can go forward and sell a commercial article of commerce.

I think the challenge that we are going to have from a timing standpoint is, as the project with Chicago gets more mature, the more utilities are going to want to see that operating in the environment. I think we have enough data today -- we have enough experience today, based upon all the work that DHS has helped us to do and specifically the work in New York, that we can go into another utility.

So now it is really about timing. It is about needs. It is about availability of funding. And it is about identifying that funding path to procure this equipment under normal terms and conditions in a normal budget. And that would mean that this need would have to outweigh, in the short-term, other needs that the utility has already identified. And, in many cases, that may be true.

I think we also have this challenge with utilities that they tend to plan not on a year-to-year basis, but really looking at five years at a time. So we have been intimate in these discussions with utilities. Many of the discussions are rather mature. And we are going to do everything we can to go from the first installation to multiple installations in the future.

But, we need to make sure we execute properly on the current program with DHS and with Chicago. That has to work really well because that is going to be a showcase for the product globally, not just within the US and certainly not just with the Exelon system of companies or Chicago itself.

Understood. A couple more, if I may. The new 2 megawatt design that you just announced, is that any part of the $40 million order? Or could that be potentially additional use by Inox? I know you said it might be more for China or some Europe centers, but it sounded like India is also a good region for that.

Yes. Think of this announcement as a potential extension of our existing partner's product line or potentially make it more appetizing in some of these emerging markets to go forward with this design, because it has some unique competitive advantages in the market. In order to get to volume production of ECS, that is not going to happen immediately. And I would see it as being additive to whatever we have on the books today.

Got it. Okay. And then maybe just a little bit of follow up with JC&E. If you get them to reorder, clear some of their inventory hopefully in the latter part of this fiscal year, you're still talking about the 2 megawatt product. You are not ready to begin shipment for 3, correct?

They are out marketing the 3. Your guess and my guess and their guess are as good as any. They have to go get orders for that. They are getting the 5 and the prototype here sometime in the next quarters and they will begin marketing that.

But I think the focus from our revenue standpoint for the next quarters is really going to come from the 2 megawatt platform. And it hinges in many ways upon this project with one of the five power companies. If that project goes well, our understanding is there will be follow-on orders with that customer, but it will also be a showcase for the other power companies as well.

To date, most of what JC&E has installed has been through their wind farm development arm. They are now reaching outside that arm directly to the power companies to be able to sell turbine products. So they have got enough experience basis in their own hands. Now they want to translate that to additional sales and growth throughout China. And if we are able to support them well, and they are able to do their job and handle their responsibilities in this, then we believe that bodes well for future demand for the JC&E product.

Makes something of a nice evolution for JC&E to finally get over that hurdle and market externally. Just lastly, could you frame kind of dollar content for ECS between, say, 2, 3, and 5 megawatt just roughly?

Roughly, we talked about 10% to 20% of the total content. They are all within that range. We haven't guided as turbines get bigger, does our value increase or not or is it linear? I think whatever assumption that you make when you look at your aggregate model, it is going to be close enough.

JinMing Liu, Ardour Capital.

First, a simple question; I'm trying to understand your REG system of products. Is that just a rebranding of your old fault current limiter products or is it something is the whole system?

Well, let me describe the legacy of it. So it is not a fault current limiter. It is a cable. And this is really the end result of the work that we have had over the last several years with DHS.

So we talked for a bit of time about Project Hydra. We also talked about secure super grids, which was the concept, and really what Resilient Electric Grid is the product that comes out of that program.

I think the news with having Chicago looking to deploy means that there is a variety of cities that are ready to embark on purchasing this product. I think, as we articulated it back in the days when we announced Project Hydra, it really was a concept. It was a possibility that was not proven, not tested, and not worked with in conjunction with the utility. What we have today is the end of that process and the beginning of a new business for AMSC.

Okay. So I'm just trying to understand what the kind of revenue per project you will work at. I understand there is [$60 million], but I'm trying to understand the cable content in that [$60 million], and also while your current production capacity (multiple speakers).

Sure. So let's talk about the content in revenue. The way we are positioning Resilient Electric Grid is we are the full system provider. So, all of the revenue for the hardware would come to us. We would then work with our supply-chain to manufacture cable and then work on all the cryogenic and cooling equipment and it would use our wire.

So we stand at the position as a supplier to the utility. So, any and all revenue for the hardware would come to us. It would be on the utility to handle and manage the civil engineering and construction phase of the project. So they are buying and procuring hardware from us to be able to be installed in the grid.

That is different, fundamentally, than the models we have talked about in the past where we just sell wire and what the wire content is and so on and so forth. We are delivering REG as a product. The wire is an enabler. It is something that is built on our unique architecture and our unique manufacturing process that we can offer something to the market that we believe no other company in the world can.

So I think you have got to think now about more content. Just as we had moved the wind business from components to full systems, we have moved superconductors from wire to full systems as well.

Okay. And the more details -- or more questions about the current collaboration with ComEd in Chicago. It just looks like -- first of all, what is the milestone that will trigger the next phase of the $60 million contract? And, for me, it looks like ComEd is in the driver's seat in determining whether they will move forward or not.

Sure. They are the end customer, so the end customer is always in the driver's seat. Nothing unique about that. What we need to do is we need to develop in conjunction with ComEd, with assistance from DHS, a detailed deployment plan.

And if you want to think of it this way, as we would have a subcontract between AMSC and ComEd for ComEd to handle the civil and the construction. That is a requirement of the initial phase of the program, and that is something we are going to work on here over the next 6 to 9 months.

At the end of the day, what we have seen from ComEd, from their lips, from their press is that they are a believer in the product. They believe they have a compelling need to install, that they have been able to convince not only us, but DHS, that they want to go forward and do this. So at the end of the day, I think what we have is the beginning of adoption of Resilient Electric Grid.

Okay. And if you move to other opportunities with similar projects, how would the future revenue be determined? Whether it's well determined by the size of the power grid off that utility, or basically your system is kind of one thing fix all kind of thing?

I would see it as configured to the system that we are going to go into. We are talking about a multi-mile, multipoint installation in Chicago. And you can see the DHS contract as reflective of the price, the value of the product for this implementation.

What we tried to get to in the call is that most of the alternatives are in the billions of dollars. So the value proposition for REG should be in the tens of millions to potentially in excess of $100 million, depending upon the scope of the problem it solves within the utility. What we really need to do from a price standpoint is compete with other capital purchases that a utility would traditionally make.

If they are going to go build a new substation or they are going to go build a new transmission line, the value of REG is substantial. If they are looking to increase reliability, the value of REG is significant. And if they are willing to have reliability, but also capacity management, now really what your alternatives are, do I go build a -- whatever the value of a substation is in my urban network or do I purchase REG.

So our costs, our competition no longer is copper. It really is how much does a substation cost or how much does a substation enhancement program across a system cost, and can we provide REG at that value point. We believe we can. Part of what we are going to learn with Chicago is that we can. Part of what we are going to learn with these multiple other utilities are that they have interest at a certain price point.

So before, when we were talking about this in general construction, we said that the revenue of a REG system would approximate the annual revenue of the Company. That still holds true, based upon what we have put out so far to date. So this is a transformative product, not just because it uses our core technology, the technology that was -- the Company was founded on. It is really because it moves the needle significant from a revenue growth standpoint.

That is what I fully appreciate about REG. The fact that we see demand in the market at this kind of price point, it seems to make sense. Now what we have to do is go off and deliver on that with Chicago.

Okay. Switch to your wind business; two questions there. First of all, do we know what kind of inventory level do you see in your hands right now? Secondly, is there any update for your litigation against the Sinovel?

The simple answer for the JC&E answer is yes. But we don't feel it is in our ability to share that. On the litigation standpoint, things continue to proceed in China. Things continue to proceed with the Department of Justice case.

These are legal things. These are slow -- slower than we had anticipated, for certain. I think the thing that makes me not be frustrated about the legal cases is the fact that we have resized the business. The fact that we are in good position to get to growth and we have insulated the business from the legal activities here in the US, in the EU, and in China as well.

Okay. Lastly, just a couple of housekeeping questions. Your accounts receivable level increased significantly in the first quarter. What has happened there? And also, there was about over $600,000 [in the red]. What happened there?

First, to your question on the receivables, it was -- we have -- on some of our contracts we bill on milestones. But sometimes those milestones do not coincide with the recording of revenue. That revenue will get deferred. So that is the primary reason why you saw the accounts receivable increase.

On the inventory, you mentioned a $600,000 write-off. We are always -- part of our accounting policies and procedures are to look at our inventory, whether it is aged; whether it is potentially excess or obsolete. And those are just -- the $600,000 was a result of just the ongoing review of our overall inventory and its continued ability to potentially generate value going forward. So in that particular case, we found that we should take some small write-offs of that particular inventory.

Okay, thanks a lot.

Theodore O'Neill, Ascendiant Capital.

Just a quick question about -- another follow-on on the inventory. If there is going to be a big ramp in the second half, what I expect to see inventory levels go up rather than down sequentially from March?

Well, right now, we are tightly managing our working capital, obviously. And a lot of what we trigger our purchases of inventory from are the actions by our customers to make their prepayments, as they are called for under the contract. And so, as those prepayments are made, we will then use that -- help use that cash to help make sure that our supply chain is ready.

So obviously, the revenue in the first quarter, we anticipated -- we guided to lower. We didn't have much production activity like, for instance, on the grid side of the business because we consolidated -- we are in the process of consolidating the manufacturing operations. So I don't think it is unusual that the inventory declined in the first quarter. But if we are to see growth in revenue in the second half, as our guidance implies, that you should start to see a buildup of inventory starting in the second quarter in preparation for that.

Okay. Thanks very much.

And we have no further questions at this time.

Great. Thanks, Steve, and thanks, everyone. In the fourth fiscal quarter of 2013, we generated positive operating cash flow. Last month, we announced an order for the Resilient Electric Grid system. The rhetoric is turning into reality. We remain focused on execution with the goal of growing revenues in 2015 and beyond. Look forward to talking to everybody next quarter, and take care.

This does conclude today's program. You may now disconnect and have a wonderful day.