American Superconductor Corp (AMSC) 2014 Q2 法說會逐字稿

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 the call this morning are AMSC President and CEO Daniel McGahn, Senior 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 second quarter fiscal 2014 results.

Before we begin, I'd like to note that various remarks management may make on this conference call about AMSC's future expectations, plans and prospects constitute forward-looking statements for 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 we filed 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 would also like to note that we will be referring on today's call to non-GAAP net loss, or net loss before stock-based compensation, arbitration award expense, amortization of acquisition-related intangibles, restructuring and impairment charges, Sinovel litigation costs, consumption of zero cost based inventory, change in fair value of derivatives and warrants, non-cash interest expense and other unusual charges, net of any tax effects related to these items.

Non-GAAP net loss is a non-GAAP financial metric. A reconciliation of our non-GAAP to GAAP net loss can be found in the press release we issued and filed with the SEC this morning on Form 8-K. All of our press releases and SEC filings can be accessed from the Investors Page of our Web site 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 our financial results for the second quarter of fiscal 2014, Dave will then provide a detailed review of our financial results and guidance for the third fiscal quarter. Following Dave's comments we will discuss operational highlights for the quarter and after that we'll open up the line to your questions.

Revenue for the second fiscal quarter improved sequentially and was in line with our expectations. We believe that the second half of fiscal 2014 will be stronger than the first half of the fiscal year. Looking at the grid business, during the second quarter we announced three new D-VAR contracts in Canada, the United Kingdom and the United States.

These systems will be deployed in two of our three primary end markets; renewable energy and industrial. The D-VAR systems in the United Kingdom and the United States will be used to meet grid interconnection standards and safely and efficiently connect renewable energy generation plants to the power grid.

The system in Canada is being used in the industrial market; a market that we believe represents potential growth for AMSC. For this installation the D-VAR system will be used to reduce flicker caused by the starting of a motor at a port and rail facility.

These three D-VAR systems are expected to be delivered in fiscal year 2014 and are included in our current backlog. In October we announced the energizing of a high-voltage direct current high-temperature superconductor or HTS cable in Korea. We believe this is the world's first high-voltage direct current or HVDC HTS cable in the grid.

In regard to our wind business Inox Wind in India continues to be a consistent and growing customer as evidenced by the $55 million in orders within the past six months.

As expected, our revenue was down by 48% from the year ago quarter which was a quarter during which we had meaningful shipments to both Inox and JCNE. We mitigated the lower revenues in part during the second fiscal quarter through our cost reduction actions; our R&D and SG&A expenses were down by 5% as compared with the year ago quarter.

In March we announced a set of strategic initiatives. I'm pleased to announce in the past weeks we've shipped our first sets of ECS from Romania and in the coming weeks we are shipping our first D-VAR system from Massachusetts. We anticipate closing our Middleton, Wisconsin facility on schedule at the end of the calendar year.

These initiatives are on time and producing product on budget. The expected overall cost for these initiatives are equal to or lower than we predicted. Early in the second fiscal quarter we announced our contract with the Department of Homeland Security or DHS and the partnership with ComEd, Chicago's electric utility.

I will provide an update on this project later in my remarks. As a reminder, while we believe that there are several paths to achieving sustainable positive cash flows we believe the most likely path is as follows; grow the D-VAR business to historical levels, have two wind customers in consistent volume production, deploy a ship protection system and execute on a REG project.

Dave will now provide an overview of our financial results, Dave?

Thanks Dan and good morning everyone. AMSC generated $12.5 million in revenues for the second fiscal quarter in line with our Q2 guidance compared to $24.2 million in the year ago quarter. Wind revenue declined by 49% year-over-year driven primarily by lower revenue from customers in China.

Our grid revenue declined by 47% year-over-year as a result of lower superconductor project revenues and lower D-VAR shipments. 12-month backlog as of September 30, 2014 was approximately $68 million compared with $62 million as of June 30, 2014.

Looking at the P&L in more detail, gross margin for the second fiscal quarter was a negative 10.6% which compares with 6.5% in the prior year quarter. The year-over-year decrease in gross margin was driven primarily by lower fixed cost absorption due to lower revenues.

R&D and SG&A expenses for the second fiscal quarter were $11.1 million. This was down from $11.8 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 19% of this R&D and SG&A spending in the second fiscal quarter was non-cash. In early September we announced that the ICC International Court of Arbitration in Singapore found AMSC's holly owned Austrian subsidiary liable for damages in our dispute with Ghodawat Energy. The tribunal awarded Ghodawat approximately 8.3 million Euro plus interest at the statutory interest rate which is currently 5.33% and accrues from the date of the award. This equates to approximately $10.6 million at current exchange rates.

As a result of the award we've recorded the charge of $10.2 million in the second fiscal quarter which was the difference between the award amount and the contingent liability we recorded in the prior period. We are exploring our legal and financial options with respect to this award and intend to defend vigorously against its enforcement. I will discuss the impact of this award on our liquidity in a few minutes. In the second fiscal quarter we incurred approximately $3.7 million in restructuring and impairment charges. Of this amount we recorded a non-cash impairment charge of approximately $3.5 million to fully impair our remaining investment in Blade Dynamics.

Blade Dynamics recently had an operational setback which caused them to seek and complete the financing which raised capital at a substantial discount to the previous valuation and resulted in the erosion of our shareholder rights due to continued operational risks and the likelihood of an additional diluted financing in the future, we believe that our investment is no longer recoverable.

We're continuing our effort to market our investment in [Tres Amigas]. Our ability to realize value from the sale of that investment is dependent upon the successful completion of their current financing activity in order to fund the construction of the first phase of the project.

In addition to the non-cash impairment charge we recorded approximately $300,000 of cash restructuring charges for severance and other benefits resulting from the consolidation of our Middleton, Wisconsin operations into our facility in Devens. With respect to these restructuring activities we expect that remaining cash charges associated with this effort will be less than $1 million. The majority of this amount is expected to be incurred during the third quarter of fiscal year 2014.

Our net loss in the second quarter of fiscal 2014 was $25.4 million or $0.31 per share. This is an increase from $14.6 million or $0.24 per share in the year ago quarter. The increase is primarily due to the arbitration award and the impairment charge that I just discussed. Additionally, there was a foreign exchange gain in the second fiscal quarter of approximately $900,000 due primarily to the strengthening of the U.S. dollar versus the Euro. We are not forecasting this foreign exchange gain to recur in the third quarter.

Excluding the charge for the arbitration award, restructuring and impairment charges and other unusual and non-cash charges our non-GAAP net loss for the second quarter of fiscal 2014 was $11.8 million or $0.14 per share compared with $10.8 million or $0.18 per share in the year-ago quarter. Please see our press release issued this morning for a reconciliation of our GAAP to non-GAAP results. We ended the second fiscal quarter with $38.2 million in cash, cash equivalence and restricted cash. This compared with $42.8 million as of June 30, 2014.

During the second fiscal quarter we generated net proceeds of $3.7 million from the issuance of approximately $2.1 million shares of common stock under our ETM at an average sales price of $1.75 per share. Operating cash flow in the second fiscal quarter was a negative $5.9 million. As of September 30, 2014 the principal balance of our debt arrangements, excluding the debt discount, was $9.8 million compared to $12 million as of June 30, 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.

Turning to our financial guidance our expectation is for stronger revenues in the second half of the year. For the third fiscal quarter of 2014 we expect that our revenues will be between $18 and $20 million driven by higher revenues in the wind business as Inox ramps its production. We expect that our net loss in the third fiscal quarter will be less than $12.5 million or $0.15 per share. Our non-GAAP net loss for the second fiscal quarter is expected to be less than $11.5 million or $0.13 per share.

For full fiscal year 2014 we expect revenues to be in the range of $65 to $75 million. With respect to our liquidity, we do not know when the arbitration award liability will be paid or how much we will ultimately pay but as we discussed earlier, we intend to defend vigorously against the enforcement of this award. As a result of our continued cash burn and the possibility that the arbitration award liability could be paid in the near-term, we expect that the company will require additional capital to fund its operations including the arbitration award liability, capital expenditures and scheduled cash payments under its debt obligations through September 30, 2015.

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

Thanks Dave. In July we announced that we signed a multi-phased cost-sharing arrangement with DHS to deploy AMSC's Resilient Electric Grid or REG system and this would be 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. We've made good progress in the cable routing and substation assessments for the sighting of the cables and support equipment.

Engineering work for the overall cable system design and operating strategy is also moving along nicely. Also as part of the DHS contract, AMSC will initiate an evaluation with at least two other utilities in the United States. We are actively in conversations with more than a dozen cities that have expressed interest in the REG system.

In short, activities are moving forward and we are pleased with the progress. The program is on plan and we believe we're in a position to finish the first phase of the project during either our fourth quarter of fiscal year 2014 or the first quarter of fiscal 2015.

Let me take a step back for those of you not familiar with our REG system. The inherent challenge with the widespread deployment of superconductors has been that the technology is fundamentally more expensive than copper. Superconductor-based systems need to offer value beyond copper. We believe that REG is such a solution. Today's urban utilities are facing a variety of challenges from increasingly intense weather events and cyber and terrorist threats to aging infrastructure and a growing population.

As a result, urban utilities are under pressure to increase the reliability and capacity of the electricity infrastructure. Adding facilities and equipment is more expensive in the urban environment because of the higher cost of land and difficulties and limitations associated with construction in such environments.

Additionally, in the urban environment reliability requirements are more strict and operating requirements such as noise, safety, footprint and access are more difficult. While increasing reliability and capacity is a priority at many utilities traditional solutions have significant drawbacks. They often require substantial land or right-of-way acquisition, significantly increased volt current levels, increased system vulnerability during construction and they can be very expensive.

REG enables new ways to achieve higher reliability and load-serving capacity. For example, REG can enable the interconnection of substations as we plan to do in Chicago. Also, REG can allow for simplified, smaller and lower cost new urban substations that don?t require transmission feeds or power transformers. As we interact with many utility engineers and show them this new solution, they are finding that it provides additional benefits beyond load-serving and reliability. Since the announcement in July we've had the opportunity to speak with a variety of utilities.

As a result of those conversations we are seeing new applications for REG and we now believe that our early market projections were low. As we explore these applications with utilities furthers we will come back to give you a feel for what the market opportunities truly are.

We want to give you an update on our progress in Korea. In October we announced that Korea Electric Power Corporation, or KEPCO and LS Cable energized the world's first high-voltage direct current or HVDC HTS cable. The cable is at a smart grid demonstration site on South Korea's [Jeju] Island. KEPCO, Korea's largest electric utility has been and continues to be committed to superconductor deployment. In fact, its stated objective is to be the foremost utility in superconductor enabled solutions.

Finally, on the grid segment we continue to work with the navy on the deployment of ship protection systems on navy service ships. We continue to believe that we receive an order by the end of fiscal year 2014. Moving on to AMSC's wind tech solutions we license advanced wind turbine designs and provide electrical control systems to wind turbine manufacturers. Our products, which we call electrical control systems provide the brains for the wind turbine allowing manufacturers to maximize power output and lower the cost of wind energy.

Our highest volume customers currently are Inox Wind in India and JCNE in China. Inox is planning to grow and we believe the company is on its way to being a major player in the Indian wind market. In fact, Inox has nearly a gigawatt of orders in its backlog.

The Indian wind market, driven by support from the current government, supports this level of growth. The recent change in the government of India is already demonstrating positive changes for the renewable industry. The new government reinitiated the accelerated depreciation incentive for wind, drastically increased its solar targets and announced plans to build the nations first off-shore wind power project.

Industry analysts expect new wind installations to grow steadily over the next years leveraging these government initiatives and support. Similarly, the Chinese wind industry has reason for optimism. Analysts are predicting a record year for China's wind industry believing that the country will install more than 18 gigawatts of new wind by the end of the year. Over the long-term, analysts expect total new installations will exceed 230 gigawatts between 2014 and 2023.

This optimism has begun to translate into JCNE's business. JCNE is making progress in its wind turbine installations. The company is currently working on three wind farms total 230 megawatts. Of these 80 megawatts are installed and we expect 100 megawatts to be installed by the end of the calendar year and the remainder to be installed during our first fiscal quarter.

These installations mean that JCNE is reducing its inventory. Once the inventory is reduced we expect that they will be in a position to accept additional contracted shipments.

Moving on to the Korean wind market, we believe that the offshore market in Korea is promising for AMSC and our licensees. We believe that Hyundai Heavy Industries and Doosan Heavy Industries are in a position to take market share in the offshore market as it emerges.

During the second fiscal quarter we continued to make progress towards our goals. We received a $15 million follow-up on order from Inox which extended our existing backlog and provided greater visibility into FY 2015 revenues. JCNE has progressed on the installation of more than 200 megawatts of wind turbines. We won three new D-VAR projects in our core markets and we won a contract with DHS for REG and have been working to execute on milestones within that contract.

This contract is the first step towards a permanent in-grid installation of the Resilient Electric Grid system and from a revenue perspective we believe that the second half of the year will be stronger than the first. We look forward to updating you following the completion of the third fiscal quarter.

And with that I'd like to open up the line to questions.

(Operator instructions). And we'll pause just a moment to allow questions to enter the queue. And we can take our first question from Carter Driscoll with MLV, please go ahead, your line is open.

Good morning guys.

Hey Carter, good morning.

Can you maybe ? first question, maybe talk to the annual guidance figure that you provided for this fiscal year and which, if any, of the, you know, kind of the growth initiatives that you've laid out you are expecting? You've talked about a couple of them with the navy contract and you helped frame out the progress on the DHS and ComEd deal. How much of that maybe includes, if any, JCNE working off the inventory? It sounds like that probably isn't a big portion of it but maybe you could just kind of lay out which of those four kind of big buckets you talked about?

Yeah, I think that the new programs as you think of them, and as we introduced these ideas as some catalyst in the business that would happen this year, we presented those as really providing a platform for growth in 2015 and beyond.

Got it.

So the focus, I think, and we tried to highlight this in the prepared remarks, is we're hoping to see, we anticipate seeing, Inox is telling us directly that they're going to grow here in the second half of our fiscal year and we see that as a major piece of the growth that we're anticipating here in the back half.

Okay, okay. So it's kind of like the recent -- I'm assuming some of it's a little bit of the recent D-VAR being implemented and then Inox kind of ramping up production, that's really the bulk of -- at least from the revenue perspective, correct?

That's correct.

Okay. Maybe just help me understand just kind of the recent comments about JCNE, so you're -- they've got a pipeline of which they're fulfilling some of it obviously coming out of inventory, I think you laid out 230 megawatts worth of projects spread over three farms. If I heard you correctly about half or so of that will be completed by calendar year end and then you think the bulk will be completed by the end of your fiscal year or was that the first quarter of next year and then they'll be in a position to potentially reorder, say, in the back half of calendar 2015?

I think what we've said is exactly what you said with the exception that we believe that the 200 or so megawatts that are being installed we anticipate them to be completed by the end of March or our fourth fiscal quarter.

Okay.

What we're trying to do is remind you that we had a large blanket order for JCNE, they've taken product against that contract, we've tried to work with them hand-in-glove to make sure that we're able to meet their demands, almost independent of the contract. So when they went to market initially they were principally of the mindset of developing wind power projects. That got them their foothold into the market, got them to learn to build and erect and commission wind turbines and then as we got into the summer months of this year we started to mention that they won a large order from one of the five large power companies and what we're seeing here is the installation now of these turbines and as they deplete their inventory they're clearly going to need new product. You know, could that be in the fourth quarter, certainly. Could it be in the first quarter of next year? Certainly. And then going forward from there we really need to understand better what are the true prospects for JCNE?

We're trying our best to make sure that we're supporting them in a way that they can be widely successful in this key customers eyes and logic, you know, would make us feel that if we're able to do that, that may mean that the market becomes more open for JCNE to take additional market share.

All right, thank you for that. And I'm assuming that's mostly two megawatt product as --

Yeah, projects are all for two megawatt.

Okay. Just shifting gears a little bit, if you talk about the ability to port the DHS and ComEd REG product over to new utilities, in fact it's a requirement, you talk about a dozen new cities, is that kind of represented by these two other utilities or is there a potential to expand beyond that? Maybe you could just help frame that and then, you know, where geographically as well.

When we looked at this initially we had a dialogue with many utilities as we were in the conversation with DHS. DHS made it clear that this is deployment-ready technology, they want to help make sure that this does get deployed and we're able to secure a contract from them that will help enable that to happen.

Additionally, ComEd stepped up wanting to be the first and they joined the program and have been a very good partner over the past months in really getting to work on the detailed deployment and construction plan that has made tremendous progress over the past months.

At that same time we had discussions with a number of utilities and now we're trying to quantify kind of where those discussions are at about a dozen and this is nationally so we've talked about the fact that ComEd is part of Exelon, Exelon has other utilities in other cities like Philadelphia, Baltimore, Washington D.C. We've had other conversations independent of Exelon in a variety of cities across the country and I think when we were initially looking at this we were trying to look at areas in the country with a lot of urban development, think of vertical cities or areas of the city in the downtown area where commerce happens where you have a lot of high rises which means that you have a lot of demand that needs to be served by specific points on the network.

And those were really our initial targets and as we did some market estimation that said, you know, this could be in the billions of dollars in the U.S. for REG, I think as we've expanded our reach into many of the metropolitan areas in the U.S. we've learned kind of thankfully that there are active projects today that look like REG could replace them and that doesn?t necessarily mean it has to be a city with the size and scope of Chicago. I think that's pleasant news for us but I think the devil is in the detail. We want to be able to bring these new cities into the program, we're contracted to at least to -- what we really want to do is to set the company up for a pipeline of cities to adopt this product over the coming years. We really think that we have something that's unique and we have something that fits what utilities need today and we're very happy with the progress we've made together with DHS and with Chicago.

Thank you for that. Two final questions and I'll get back in the queue, given the midterm election just occurred, maybe give me your view on whether in the lame-duck session you might see the PTC squeezed in with some other renewable initiatives?

The things that we've read and we've looked at kind of hint at that, that, you know, one of the issues that both sides of the isle seem to be ready to be focused on and try to deliver legislation around are trade and tax. And both trade and tax are near and dear to our hearts. Trade when we think about as a global company and our international reach and a lot of the countries that we deal in day-to-day from a tax standpoint what we've read and what we've seen is it may mean that the PTC gets extended for one to two years, this may be part of a broader tax package that's put together between republicans and democrats. I think we'll watch it just as you will in the markets will but I think its good news for wind that there is some renewed hope for PTC.

We think going forward though, once the market normalizes in a world without the PTC, it won't mean that much or our business. I think they'll be some shaking out period but connecting to the grid is something that wind farms are going to continue to have to do, there will be continued demand for wind and there still are sites in the U.S. that you can get to a levelized cost of electricity that makes sense.

Okay, just my final question. There's been, I guess, some not so secret speculation that maybe Sinovel gets delisted, would that have any impact on your legal action against them do you think?

No, it doesn?t change, it's not necessarily a surprise. I guess, you know, thankfully we're very happy that those rules they have in China about delisting aren't present in the U.S. It would mean a very different market for a lot of technology companies and basically my understanding of the rule is that if you show losses for a period of time that's two years I think, you're now subject to their SEC imposing a delisting event on the company.

So the public markets in China are different than the U.S. I think Sinovel does have ownership from the Chinese government through state-owned entities, they do have business, they do have a very large fleet of wind turbines that are in the field and the Chinese government has to figure that all out with the backdrop of the IP issues that obviously we've become the poster child for abuse of in China.

Okay, that's all I have for now, I'll go back in queue, thank you very much for your time.

Thanks Carter.

And we'll take our next question from JinMing Liu with Ardour Capital, please go ahead your line is open.

Good morning, thanks for taking my question.

Hi JinMing, morning.

Hi, first I have a follow-up with the Sinovel situation, my understanding is some of [the] customers and the state-owned enterprise that you just mentioned are currently in the lawsuits against the Sinovel and some of these liquid assets actually are frozen by courts.

So, what ? I mean, my question is, what is your assessment of the chance to recur annually, you know, financial -- [how] do you think (inaudible) any financial, you know, it will come from your litigation against Sinovel given its current --

You know, I think that the company in some ways will have to go forward just simply based upon the fleet that they have installed. You know, we're reading the same thing that you're seeing JinMing, that there's additional litigation against the company particularly from one of its big customers. You know, as an American looking at it, it's a bit challenging because you have one arm of the Chinese government basically suing another arm and this all revolves around policies that have been established by the central government.

So I don?t know how it's going to shake out. I don?t know. Ultimately it's going to be up to the Chinese government to figure out what the future for Sinovel will be for -- as a wind company in China. They have a host of problems, you know, we're one of the biggest one of them. I think, you know, if there were changes at Sinovel to try to really turn it into a company that could increase shareholder value there's a lot of things that need to be fixed but I think first and foremost it starts with cleaning up their IP problems with us.

You know, hopefully in all of this there may be changes coming in the company; one would hope, and that may mean a different or a new opportunity for us to find some path either in the court or out of the court to find resolution.

Oh, okay. Just some [attendance] question, how much is your backlog and out of that backlog how much are for the next 12 months?

Sorry, the total backlog -- the report is 12-month backlog and that backlog is $68 million compared to $62 million at the end of last quarter so it grew by $6 million or so due primarily to the second Inox order that we received and then also the D-VAR orders in the quarter and then backlog was obviously reduced by the revenue in the quarter.

Okay, based on your third quarter and the full-year guidance, it seems like you are projecting a very strong fourth fiscal quarter. Given the construction cycle for the wind industry in general, the calendar [for this] quarter is going to be, you know, slow, generally speaking. So what are we missing here?

So, the March quarter is the end of the Indian fiscal year and that's important for Inox, it's important for us, it's the end of our fiscal year so a lot of things in India actually happen during that March quarter.

Okay, so it's different from U.S. and China, that's --

Correct. U.S. and China, we're focused on the third quarter the December quarter.

Okay, good. For -- regarding your [demonstration project] in Korea, how long -- I mean, I'm trying to [guess] at what milestone that the (inaudible) may move forward with more similar projects?

Sure, so if we go back in time and think about when we entered into strategic cooperation with KEPCO and we signed the order for a large quantity of wire with LS Cable, the intent at that time was really to develop and deploy three products. The first one was a distribution cable not far from Seoul. We announced that in the fall of -- a couple of years ago, successful [inertization] of that cable. The second project was to deploy an HVDC cable.

As we think about long-haul transmission there may be a unique play for HTS to deliver DC power in the grid. So LS Cable went off to develop a product of an HVDC cable and we're pleased to announce that that cable has now been energized in the grid in Korea.

Next up there's a project, I think it's as long as any projects that have been completed to date in the world to do an AC transmission cable. The thinking in KEPCO, at least in the beginning and through our conversations with them at least in the beginning and through our conversations with them, they continue to reaffirm this as they wanted to demonstrate and deploy a distribution cable; a transmission AC cable and a transmission DC cable. Then they have the three product tools in the toolbox to look at broader deployment in the Korean grid. I think the things that we are always comforted about when KEPCO speaks about new technology, they focus in many ways on green energy which is obviously near and dear to our business but even more specifically superconductors. They really want to be on the forefront here of deployment and we look forward to being able to continue to work with them and LS Cable and hopefully announcing additional deployments like this transmission cable AC that's planned in the future here.

Okay, lastly, regarding your liquidity situation, what -- just say, what is the cash level that your debt covenants requires you to have, the minimal payment you have to have?

Yeah the -- we're required to maintain what's called a minimum cash threshold and that minimum cash threshold is, for us, right now the lower of ten million or the principal balance of the debt. The principal balance of the debt is $9.8 million as of the end of Q2 so that is the required amount of cash on hand and that that amount will reduce to a minimum threshold of the lower of $7.5 million or the principal balance of the debt going forward.

So the way to probably think about it is as we move forward we would just be maintaining a covenant that is equal to the -- the restricted cash covenant will decrease as the principal balance of the debt decreases.

Okay, got that. Thanks a lot.

And it appears we have no further questions at this time. I'll turn the program back over to our presenters for any additional or closing remarks.

Thank you everybody for your attention. I think, you know, some of the key things coming out of today of note are we've made really nice progress with REG. I'm very proud of the team, I'm very proud of how ComEd has stepped up and worked as a really good partner in this program, I'm very pleased with the progress I mentioned kind of anecdotally that we have a little bit of a positive surprise that there may be a broader market for REG. We need to make sure here in the second half that we do what we just said which is to deliver on strong revenues here over the third quarter and certainly into the fourth quarter and that's predicated principally around making sure that we're a good partner to not only all of our customers but specifically Inox.

And hopefully we can come back here and talk to you all after the third quarter, demonstrate some revenue growth, some progress in the business and we're very optimistic about our future here over the next quarters and over the next several years.

So with that I'll say thank you and say good day and we will talk soon.

This concludes today's program and we thank you for your participation. You may now disconnect your lines.