American Superconductor Corp (AMSC) 2014 Q3 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 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, Erica, and welcome to our call to discuss our third-quarter fiscal 2015 results.

Before we begin, I would like to note that various remarks management may make on this conference call about AMSC's future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors including those discussed in the risk factors section of our annual report on Form 10-K for the year ended March 31, 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 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, arbitration award expense, amortization of acquisition related intangibles, restructuring and impairment charges, Sinovel litigation, consumption of zero cost basis 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 net loss is a non-GAAP financial metric. A reconciliation of our non-GAAP to GAAP net loss can be found in the press release we issued and filed with the SEC this morning on Form 8-K. All of our press releases and SEC filings can be accessed from the investors page of our website at www.AMSC.com.

Now I will turn the call over to our CEO, Dan McGahn. Dan?

Thanks, Kerry, and good morning, everyone. I will begin today by providing an overview of our financial results for the third quarter of fiscal 2014 which ended December 31, 2014. Dave will then provide a detailed review of our financial results and guidance for the fourth fiscal quarter which will end March 31, 2015. Following Dave's comments, we will discuss the work we have done to build the business and explain why we believe that our product lines are positioned for growth. After that, we will open up the line to your questions.

During our last conference call, we told you that we expected a stronger second half. I am pleased to be reporting to you today 70% sequential revenue growth for the third fiscal quarter and providing guidance that supports an even stronger fourth quarter.

Today we also announced that we put the Ghodowat arbitration behind us. Looking forward, we continue to believe that we will get an order from the U.S. Navy by the end of this fiscal year. We remain focused on the successful completion of the first phase of our REG project in Chicago and moving on to the second phase.

We typically don't discuss the stock on our conference calls but I would like to address our recently proposed reverse stock split. If approved, we believe that this will be sufficient to permit us to regain compliance with the NASDAQ minimum bid requirement while we continue to focus on improving the business fundamentals.

We have worked hard to build the business to drive growth and improve financial performance. We believe that organic growth in revenues and improved financial performance will result in stockholder value. We believe that our product lines are positioned for growth.

Why do we believe this? Today we are focused on two established products that are driving revenue and two disruptive solutions well positioned for broad proliferation. The established products are our electrical control systems for wind turbines and our D-VAR reactive compensation solution for the electricity grid.

Our wind business is focused on some of the largest markets in the world, India and China. Our D-VAR product is used by renewable plant owners, industrial facilities and electric utilities to provide continuous voltage regulation and to provide dynamic grid support where it is needed. Our ship protection systems provide the Navy surface fleet with more powerful and more efficient protection than traditional solutions. Our resilient electric grid systems, or REG, are applications that utilize compact power dense cables to increase the reliability and load serving capacity of urban electric grids.

Both of these products are based on our high temperature superconductors or HTS wire.

There are several manufacturers of HTS wire globally and our second generation manufacturing process leads in supplying volume, quality and performance to the marketplace. But our wire manufacturing expertise is not the reason our solutions are disruptive or the reason why AMSC is the industry leader. Here at AMSC, we understand that people don't buy technology, they buy what it does. Our ship protection and resilient electric grid system solutions provide benefits to the customer beyond what traditional solutions can provide. We have spent the past few years focused on developing these full system solutions that we expect to sell directly to customers.

This business model which leverages our applications expertise drives value beyond the wire and enables us to recognize revenue and take ownership over the marketing and sales of the full systems.

I will talk more about how we are providing benefits beyond traditional systems following Dave's review of our financial results for the third fiscal quarter. Dave?

Thanks, Dan, and good morning, everyone. AMSC generated $21.3 million in revenues for the third fiscal quarter, exceeding the high end of our Q3 guidance compared to $20.6 million in the year-ago quarter. Wind revenue increased by 12% year-over-year driven primarily by increasing sales to our licensee in India, Inox Wind.

Our grid revenue decreased by 13% year-over-year as a result of lower D-VAR shipments in the period. 12 month backlog as of December 31, 2014 was approximately $53 million compared with $68 million as of September 30, 2014.

Looking at the P&L in more detail, gross margin for the third fiscal quarter was 14.9% which compares with 22.9% in the prior-year quarter. The year-over-year decrease in gross margin resulted from 100% margin revenue in the prior-year quarter due primarily to payment from a Chinese customer for past due receivables for which revenue had not previously recorded partially offset by higher usage of previously written off inventory in the current year quarter.

During the third fiscal quarter, more than 60% of our revenues and a sizable amount of our backlog were denominated in euro. Approximately 40% to 50% of the costs associated with those revenues were denominated in euro. As a result, the ongoing strengthening of the US dollar versus the euro had a negative impact on our revenue, gross margin and backlog during the third fiscal quarter.

R&D and SG&A expenses for the third fiscal quarter were $10.3 million. This was down from $11.2 million for the same period a year ago due primarily to the benefit realized from our earlier cost reduction actions and lower stock compensation, audit and legal costs. Approximately 20% of this R&D and SG&A spending in the third fiscal quarter was non-cash.

In the third fiscal quarter, we incurred approximately $500,000 in restructuring and impairment charges. With respect to these restructuring activities, we expect that remaining cash charges associated with this effort will be de minimis.

Below operating loss we recorded a gain of $2.3 million in the third fiscal quarter for the change in fair value of derivatives and warrants compared to a gain of approximately $500,000 in the prior-year quarter. The larger gain was primarily due to the decrease in our stock price in the third fiscal quarter and revaluation of new warrants issued in conjunction with our financings in the quarter which I will discuss in greater detail in a minute.

Included in other expense in the third fiscal quarter is a foreign currency gain of approximately $500,000. The gain primarily represents a translation gain from the remeasurement of net US dollar assets on the books of our Austrian subsidiary driven by the strengthening US dollar versus the euro. This gain combined with the negative gross margin impact from the strengthening dollar resulted in a near zero net P&L impact from exchange rate fluctuations in the third quarter.

Our net loss in the third quarter of fiscal 2014 was $6.4 million or $0.07 per share. This is a decrease from $8.4 million or $0.14 per share in the year-ago quarter. Excluding the restructuring charge, the mark to market gain, and other unusual and non-cash charges, our non-GAAP net loss for the third quarter of fiscal 2014 was $9.6 million or $0.11 per share compared with $5.7 million or $0.09 per share in the year-ago quarter.

Please see our press release issued this morning for a reconciliation of GAAP to non-GAAP results.

We ended the third fiscal quarter with $37.6 million in cash, cash equivalents and restricted cash. This compares with $38.2 million as of September 30, 2014.

In early September, we announced that the ICC, International Court of Arbitration in Singapore found AMSC's wholly-owned Austrian subsidiary liable for damages in our dispute with Ghodowat Energy. The tribunal awarded Ghodowat approximately EUR8.3 million plus interest at the statutory interest rate which is currently 5.33% and which accrues from the date of the award. This equated to approximately $10.6 million at the effective exchange rate at the time of the award and $10.3 million as of December 30, 2014 including accrued interest and the impact of exchange rate fluctuations.

This morning we announced that our wholly-owned Austrian subsidiary has reached an agreement with Ghodowat to fully settle their claim for EUR7.45 million which is approximately $8.5 million at the current euro US dollar exchange rate. This settlement combined with favorable exchange rates is expected to result in a substantial reduction of the arbitration award liability in US dollars as compared to the liability in US dollars on the award date. Payment is expected to be made during the fourth fiscal quarter.

Earlier this month we announced that we have entered into a settlement agreement with Catlin, who was our insurer for the Ghodowat matter. Catlin had previously sought and received a court ruling in Massachusetts that AMSC was not entitled to coverage due to late notification of the Ghodowat claim. In the settlement agreement, we each agreed to not pursue further the matter in court. As a result, we will not have any insurance coverage for the Ghodowat claim but we will also not be responsible to repay Catlin for approximately $2 million of legal costs they previously paid to our counsel.

As a result of these settlements in the fourth quarter we will reduce the Ghodowat arbitration award liability down to the settlement amount and record a gain of approximately $1.3 million. Also in the fourth quarter, we will reverse a legal accrual to Catlin on our books and record a gain of approximately $2 million.

In total, these settlements are expected to result in gains in the fourth quarter of approximately $3.3 million for GAAP reporting purposes and $2 million for non-GAAP reporting purposes. These amounts are included in our GAAP and non-GAAP net loss forecasts for the fourth fiscal quarter which I will discuss momentarily.

Now I will address our financing activities during the quarter. During the third fiscal quarter, we generated net proceeds of approximately $1 million from the issuance of approximately 800,000 shares of common stock under our at market sales facility or ATM at an average sales price of $1.22 per share. Also during the third fiscal quarter, we completed an equity offering to a new investor under which we sold approximately 9.1 million units of our common stock at $1.10 per share. Each unit consisted of one share of common stock and 9/10 of a warrant to purchase one share of our common stock or approximately 8.2 million shares.

The warrants expire on November 13, 2019. Net proceeds from this offering were approximately $9.1 million. In conjunction with this offering, we terminated our ATM arrangement on November 5, 2014.

As of December 31, 2014, the principal balance of our debt arrangements excluding the debt discount was $9.2 million compared to $9.8 million as of September 30, 2014. During the third quarter of fiscal 2014, we repaid in full one of the term loans with Hercules. We now have two outstanding term loans. The first term loan has a remaining principal balance of $7.7 million and matures on November 1, 2016.

In December 2014, we entered into an amendment to our term loan facility with Hercules. This amendment provided for a new term loan of $1.5 million under which we will pay interest only on a monthly basis until maturity on March 1, 2017 when the entire outstanding amount will be repaid in full.

In addition, the amendment provided for a relaxed unrestricted cash covenant. In return, we canceled the previously outstanding warrants to purchase approximately 396,000 shares of common stock with a new warrant to purchase approximately 588,000 shares at a reduced exercise price of $1.10 per share.

As a result of the new financings completed during the third fiscal quarter, we believe we have sufficient available liquidity to fund our operations including the arbitration award liability, capital expenditures and scheduled cash payments under our debt obligations through December 31, 2015.

On January 21, 2015, we filed a preliminary proxy statement with the SEC which calls for a special meeting of shareholders to consider a reverse stock split. The proxy statement was filed in connection with receiving a letter from the NASDAQ stock market on January 14, 2015 warning of a potential delisting from the NASDAQ global select market due to noncompliance with the exchange listing rules $1.00 minimum bid price requirement for 30 consecutive business days.

We have six months from the date of receipt of the letter or until July 13, 2015 to regain compliance with this listing rule with the potential of receiving an additional six-month extension if needed. The proxy statement requests shareholders to approve a range of potential reverse stock splits from 1-to-8 to 1-to-12 which would be affected at the discretion of our Board. The special shareholders meeting is scheduled to be held on March 18, 2015.

Turning to our financial guidance, our expectation is for continued sequential revenue growth in the fourth fiscal quarter of 2014 ending March 31, 2015. For the fourth fiscal quarter of 2014, we expect that our revenues will be between $23 million and $25 million. We expect that our net loss for the fourth fiscal quarter will be less than $6 million or $0.06 a share.

Our non-GAAP net loss for the fourth fiscal quarter is expected to be less than $7 million or $0.07 per share. Our GAAP and non-GAAP net loss guidance includes the anticipated gains from the settlements with Catlin and Ghodowat which will be recorded in the fourth fiscal quarter. As a result of the anticipated sequential revenue growth in the fourth quarter, continued cost controls, and less cash required for working capital, we expect to moderate our cash burn in the fourth fiscal quarter compared to the third fiscal quarter when normalized for the expected payment to Ghodowat.

For the full fiscal year of 2014, we expect revenues to be in the range of $68 million to $70 million.

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

Thanks, Dave. I mentioned earlier that our full HTS systems are providing benefits beyond what the incumbent solutions can provide. How? Let's start by looking at our ship protection degaussing systems. Undersea mines can detect the magnetic signature of a naval ship. If detected as the ship sails over the mine, the mine will detonate. The degaussing systems act like a cloaking device to dramatically reduce the magnetic signature of a ship. The system will interfere with undersea mines' ability to detect and damage the ship. The incumbent technology is a system primarily made of copper cables. We have worked with the U.S. Navy to design, develop, qualify and deploy a lighter weight more power efficient HTS version that can be integrated into the Navy's existing degaussing system.

But even more important than the weight and power advantages are the performance advantages. We continue to believe that we will win an order for ship protection equipment from the Navy by the end of March.

Our REG systems are also providing benefits beyond what traditional solutions can provide. We are currently in discussions with a variety of utilities on the benefits of deploying a REG system. As we have deeper discussions with a greater number of utilities, we are finding additional applications where we can solve utility challenges today. Our current discussions are around two separate and distinct REG applications. One application is the interconnection of urban substations creating a ring like configuration. With the ring, we are solving a reliability challenge while also positioning the grid for future growth.

We have also identified how the REG solution can be used to solve urban load growth, a problem utilities are challenged with today. With traditional technologies to address urban load growth, many times utilities need to expand existing or build new and costly substations within the urban environment. This is an expensive proposition because of real estate, legal, construction and component costs not to mention frequent NIMB or not in my backyard opposition. We can offer utilities a more cost-effective and simplified solution to address urban load growth.

Whereas the earlier application can be described as a ring, this application can be described as a branch. For the second application, a REG cable would connect an existing large suburban substation with a new much smaller and more simplified substation within the city at a lower cost. The smaller urban substation does not need large power transformers and takes up much less space thereby significantly reducing real estate, construction and other related costs in the urban area. This is different than what we have been previously thinking.

Now we see REG having applicability in the suburbs which should mean there is a larger market we can serve.

The rig application is a systemwide upgrade for enhanced reliability and capacity. The branch application can solve specific problems that utilities are trying to solve right now. We are actively in conversations with a number of utilities on both applications. As we sign up utilities and complete deployment studies, we will make you aware of our progress.

Our project in Chicago is progressing. We have learned a lot about deployment constraints and we are pleased to be working with ComEd. We expect to complete our efforts for the first phase by the end of our first quarter which ends in June.

Moving on to our products that are driving revenue today, let's start with 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 and stability on the greater power network. D-VAR systems can mitigate these types of issues and ensure high power quality for both the industrial consumer 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 also can enhance transmission system performance and prevent widespread blackouts.

Finally, our largest customer base comes from the interconnection of renewable energy generation plants to the electricity grid. Today our D-VAR business is being driven by markets that have grid codes that require a D-VAR or a D-VAR like system to ensure the safe and reliable interconnection of renewables to the grid.

Our D-VAR solution has provided us with an opportunity to form relationships with utilities and gain a deeper understanding of the challenges utilities face.

Today we are also focused on utilizing this knowledge and these relationships to discuss both the utility application of our D-VAR system as well as our resilient electric grid system.

Let's move on to the wind segment. We have designed wind turbines and are currently providing electrical control systems to Inox Wind in India and JCNE in China.

Let's start with the wind industry in India. The current government is supportive of renewables which provides confidence in the stability of the market today and continued growth in the future. The Ministry of New and Renewable Energy has indicated that it plans to provide policy certainty and to renew the generation-based incentives over the next five years. The current Prime Minister has a strong track record of pursuing renewable projects. He has indicated that a strong national renewables strategy is a way to improve national infrastructure, attract more investments, spur economic growth and address chronic power shortages. In fact, during a recent visit with President Obama, the Prime Minister of India called clean and renewable energy a personal and national priority.

Our partner in India is Inox Wind. We provide Inox with electrical control systems for its 2 MW wind turbine. Inox is one of the country's most promising wind turbine manufacturers. It recently announced that it is setting up an integrated wind turbine manufacturing facility with 800 MW of capacity. Inox expects to emerge as one of the top three suppliers of turbines in India this fiscal year. Inox is also continuing preparations for what is expected to be an upcoming IPO of which the proceeds are expected to be used to support its planned growth.

Earlier this fiscal year Inox placed $55 million worth of new orders with AMSC. Over the past quarters, we have been delivering against these contracts and we expect to continue to deliver against these contracts during this calendar year.

Finally, let's provide you with an update on JCNE in China. Over the past few months, we have been working diligently with JCNE on the assembly, installation and commissioning of wind farms totaling approximately 180 MW. 32 MW have been commissioned and are producing power. The remaining are expected to be commissioned during the second fiscal quarter of 2015.

The successful commissioning of these windfarms means that JCNE is beginning to take a foothold within the industry in China. It also means that they are reducing inventory which could allow them to resume deliveries under our existing contract at some point in the near future.

AMSC's business is solid and we believe that our prospects for growth are strong. Our products for the wind, power and electric utility markets are supported by substantial tailwinds that are facilitating growth opportunities. The wind business in India and China is being driven by government incentives and the need for clean and independent sources of energy.

Our grid products, particularly REG, are being driven by the increasing need for security and redundancy at electric utilities principally in the United States.

I look forward to reporting to you at the completion of our fiscal year in the coming months and we will open up the line to questions.

(Operator Instructions). JinMing Liu, Ardour Capital.

Good morning. Thanks for taking my question. Regarding the potential Navy contract, you said it is going to be, it is very likely to be secured by the end of March. So I would like to know a little bit more if you secure this contract by March what will be the delivery date and also the nature of this contract whether it is just for a pilot or trial system or just a prototype for many more units to come?

So let me answer the second part first. Where we are with these systems is we have done a lot of the design, we have done deployments, we have done at sea trials. What we have attempted to do with the Navy is to configure the product in a way where they can purchase parts really for any ship in the surface fleet. That has been the main focus of our efforts with the Navy over the past several quarters.

As to details about the order or the announcement of such an order, I think I'm going to leave that to the time when we secure the order and I would assume we would let people know the details of that order. We see it is a big step in the commercialization of the technology. It is really the next logical step and it opens up the surface fleet as a market for our ship protection solutions.

Okay, got that. So just a couple of maintenance questions, how much zero cost inventory do you have?

We saw quite a bit, it is in the multiple millions of dollars and at this current rate of usage, we will be continuing to use and draw down this inventory through next fiscal year so through the end of fiscal 2015.

Okay, okay, got that. Regarding the Chinese market, do you have any other company -- I mean your customer's (inaudible) to show interest because the installation in 2014 was very strong, over 23 GW. And the 2015 supposedly we will see some pull forward effect by the reducing the 2015 tariff. So we are just trying to see whether you have any other interest from your (inaudible) like (inaudible) or other than JCNE?

I think to answer the question directly, they do continue with their business. There continues to be a relationship with our Company and as they need equipment there is always the possibility that they are going to order more equipment from us.

When you hear us talking about principally Inox and JCNE, it is because we are looking at how we are running the business, how we are planning to see results line up over the next quarters. The numbers that we described, the business that we are articulating, has really been desensitized from the Chinese market or if you want to look at it more positively, anything additional that we do in China we would see it as upside. That is how we have tried to design the business, that is how we are looking to go forward. After everything that we have been through, I am very pleased at what the team has been able to do to really turn the Company around not only figuratively but literally where we were once really driven by revenues from China, now we see China really as potential upside.

I think it is a healthier position for us to be in and I think you are right to ask the question but I think the way that we look at it is we consider any revenues coming from the other licensees as potential upside. That doesn't mean that we don't believe that they are going to happen, we are just running the business in a way that if they do not happen we can continue to go about building the nice business that we are trying to deliver here.

Okay. Switch to your D-VAR business, we see some trend in the energy storage devices are incorporating into the power grid either behind meter or not. Those energy storage systems will come with some energy management system carrying out some function for D-VAR, so do you see that as a threat or that really doesn't matter to you at this moment?

I see it as an opportunity in actuality. When we were back looking at utility scale solar, what we learned is we could think about developing new products but in actuality, D-VAR could be configured to support utility scale solar. We had a number of wins over a period of time in the solar market.

Today we see storage kind of similarly. It is a trend that appears to be emerging, it does not seem clear who is going to pay for storage beyond some of the programs that are being sponsored in California, specifically in the US. But we do have a platform in D-VAR that could be configured to take advantage of this emerging market opportunity. It is something that we watch, it is something that is there potential in the horizon for -- but again, we are trying to design the business in a way where what we need to do is deliver D-VAR into the applications that we support today. We are focusing more and more on utility applications because we are seeing a great bit of the demand coming from those. But if energy storage emerges as a market I think we have today a platform that could be expanded to take advantage of those potential opportunities.

Okay, got that. Thanks a lot.

Carter Driscoll, MLV,

Good morning, guys. Getting back to REG for a second, I am assuming that as you have gone through the first phase and the learning process included therein that the expansion of the applications to suburban substations includes the same customer base. I guess what I'm trying to get at is trying to get a sense of you are not engaging two different sets of customers necessarily as it is crossing territories and that you are just expanding potentially the market size and the opportunity with the same set you have been talking with over a period of this first phase?

Yes, I think you nailed it with what you just said in the second part and don't confuse my remarks today with Chicago. Chicago what we're trying to do is bring systemwide reliability. I think the blessing that our Company has is I think we have a great partner in ComEd. The openness that they have had with us, the ability to work together as a team, the desire to see this product come out and be part of their grid I think is tremendously high. We have garnered I think a great deal of respect for their team I think as well as they have developed some respect for our technical capabilities and our understanding of how the grid works. And that was part of some of the themes we were getting at today. When you think about our Company and the way customers think about our Company, they don't just think about the technology, they think about the systems and the expertise that we have and I'm really proud of our team that has been working with the utility in Chicago to really understand the constraints in the system to turn this concept hopefully here relatively soon into a reality.

If I remember correctly, there was a portion of the contract you signed that had an obligation for you to deploy it to other utilities. Can you talk about the form of what that encompasses and any timeframe of which you might have to meet to satisfy that aspect?

As part of the first stage, the way it reads is we have to have at least two other utilities come forth and want to do the analysis of a deployment in their grid. I think frankly speaking, that is not the hard part, I think the part that you all want to hear is them going out publicly saying that they have done this work. And that is something that we have to continue to work on and hopefully we are able to generate some news here in the coming months or quarters here where we can name names and talk specifics about other utilities other than New York and Chicago that want to go forward and really explore REG.

So the hope here is part of this first phase is we expand our team to include some additional utilities in the US. What we see really is a national interest. I think the good thing is with the number of conversations that we are having, with the depth of those conversations that we are getting to is that we are ferreting out that there may be a broader market for REG than we initially had thought. I think that is a blessing.

I think it is also good for us in that if we are able to identify specific problems that a utility is spending money today to solve, that means that the proliferation of REG could potentially happen sooner and to a greater degree. And that I think would be great news for our Company if we are able to deliver that.

A little bit off-base but is there any aspect of the deployment that includes the actual monitoring of the systems themselves from specific either physical or web based attacks? Is there any component there in with the (multiple speakers)?

There is a piece to the DHS mantra is they have some sensitivities around that. What we need to do is to make sure that we show up in the grid as a piece of hardware unlike any other piece of hardware that they would monitor. I mean some of the good things about REG is there really isn't any software there. What it is is the features that provide the current limiting control are inherent to the material. So there is no additional exposure to cyber attack but a lot of the utilities as they look at reliability, they like this fact that we are not expanding the potential threats from a cyber attack. It makes the solution more elegant and I think a stronger appetite for the product here in the near term.

Very helpful. Thank you. Maybe just shifting gears a little bit. I know it is not something you have wanted to focus on given the direction you have taken the business, the progress you have made on the cost side. Anything you can share with us on the litigation with Sinovel? Obviously them potentially posting a profit at least means that the risk of them going away might be limited. Anything you could share there?

You could come up with your own opinions based upon the public information. What we said and what we continue to believe is at this point in time it is really a government to government conversation. Those conversations continue. The litigation in the Chinese courts has taken longer than probably even the government of China has wanted to take.

At some point in time, do we believe there will be a resolution? I think if Sinovel wants to continue to operate as a company and be positioned to grow, they are going to need to find a way to reconcile with us. But as you know and you hear every time we talk, we bring it up less and less. It is not because we have lost interest or focus on it but we have principally paced our focus on running the day-to-day business. How do we deliver revenue? How do we focus really on generating positive cash from the business and how do we make sure as we build this business today we do it in a very diversified way. And I think that is the part that our employees here get excited about and I think will continue to get excited about is the product line is quite broad still and that the depth of the conversations with many specifically utility customers really only brings to light the fact that we have a unique position with our grid tech part of our business.

Just to clarify, we continue to monitor the situation. Our counsel continues to keep tabs on what is going on particularly as Sinovel has been going through their financial restructuring. But according to the terms of our arrangements with our counsel, we are not spending any money to do this. If there is any settlement or if there is any judgment in our favor the remaining amounts owed to them will be paid out of the proceeds.

Got it. Last question if I may, came back to the wind side of the business. I think last quarter you talked about Hyundai looking for UL certification for the 5.5 MW turbine. Any update there and then maybe you could at least talk about where the progress is for those large offshore projects that have been in the works for a while?

I think it was GL. Similar, don't blame you for thinking that way.

I think I just want to focus on really where we are with India and where the potential upside rests with China. I think everything we have been through, what everybody wants to see is us focus the business, get this business into a healthy position. I think the fact again we don't bring up Korea, it is not because we don't believe there is an opportunity there, it doesn't necessarily mean that we are not spending some effort there. But I think when we get at the overall story what we are trying to get people to understand about the business is we are really focused on these four product lines. And for the electrical control systems, we really see the lion's share of that coming in the near term from India with some upside in China.

I don't know what is going to happen in the Korean market. Signs there have been positive but slow and I think your guess with public information is not much different than what our guess would be on what the market there is going to do.

Appreciate your time. I will get back into queue.

Jeff Osborne, Cowen and Company.

Good morning, guys. I just had a couple of questions. One on the -- you alluded to in your prepared comments about understanding deployment challenges with the ComEd process here and I understand your timing for Phase 1 per your comments. But maybe just flesh out what exactly are you talking about in terms of deployment challenges and wouldn't that have any ramifications for the additional rollout of that more of the Phase 2 and Phase 3 in the next fiscal year?

To be clear, I don't think we are setting any expectations today when the second phase will start. Why we had this first phase is just like in anything that is a large project, there is always a difference between concept and reality and I think the thing that we have learned as we brought concept to reality with ComEd is we have a very strong partner, they are very supportive. There have been technical challenges. Those were expected but I am very proud of what our team has been able to do to figure out how to solve those.

The saying is the devil is in the details and I think the good thing is as we have learned the details we have been able to think about the product maybe more broadly but we have been able to progress on a timetable that we've set out. We are following that timetable. I think after we get to a point with the first phase, we will have some discussions publicly hopefully about kind of where we are when we get there.

Then as we have said before, it is really a three-way discussion with DHS, the utility and ourselves on where we bring construction, how all of this works, what it is going to finally cost, get it down to a detail of a funded project. And that we are hoping to do as quickly as we can. But we need to have our focus be on really completing this first phase and making sure everybody is happy with the work that has been delivered to date and will be delivered here in the March quarter and the June quarter.

Great, thanks. And then the degaussing, I understand getting the order here before March but can you just talk about what the timing of any revenue that would be associated with that project, would there similar to the REG process, kind of a Phase 1 more of a design phase where that would come in in the upcoming fiscal year and then you would do a percentage of completion as the ship is built? I'm just trying to get a sense of perspective in terms of modeling as that award would be announced in the coming months?

I don't think that is necessarily a bad way to think about it. Until I have the contract in front of me and it is all signed up, I don't really want to talk about our set expectations on how the revenue is going to roll out.

I think the thing that might be a little different if you compare and contrast the ship protection system with resilient electric grid is with the ship protection system, we have done a lot of that qualification work, we have done actual deployments at sea to date. So there probably will be continued work to further refine the technology. Where we are being pushed by the Navy is to work on refinements that allow for broader proliferation within the fleet. That seems to be a clear signal that we are getting.

I think that is good for us, I think it is good news for us where we are not just focusing on a ship, we are focusing on the Navy. But I am going to again leave it kind of as I said to JinMing, the details we will kind of get to when we announce a contract here in the near term.

The last question I had and maybe you can get a little bit more granular on this one is just for the upcoming quarter, can you just talk about what your expectations are from a sequential perspective for both wind and the D-VAR business? You alluded to the continued strength in India with wind but I wasn't exactly sure.

The main driver -- I will let Dave answer but I think a lot of it we are looking at coming on wind on things that are in backlog but Dave?

I would expect the growth that we will see in the fourth quarter will be primarily driven by wind. The grid side will be flat, flattish could even be down a little bit.

But the real growth in grid is going to come from REG and from SPS. You will see incremental changes depending upon how these facts part of the business, the D-VAR is doing but real big growth will come from REG and SPS and that is really the message today. And what we're trying to get at is we have kind of aligned everything in the right direction here and now we've just got to go forward, deliver with some of these contracts, make more progress with Chicago, get more utilities involved and then we are going to have the business that I think that a lot of people have dreamed about for this Company for a very long time.

Excellent. Thank you for all of the detail on the REG product line in particular and good luck.

At this time we have no further questions. I would like to turn it back over to our speakers for any closing remarks.

Great. Thank you. I think one of the key points I want to make to everybody today not just shareholders but our employees also listen to these calls, the success of our business is really derived from our supporting our customers and partners. That is the mindset we have to take, that is the mindset that we are taking. We need to be responsive to their needs and markets change, situations change, one of the things we have been able to demonstrate is that we have been adaptive in how we work with our partners.

As Inox is ramping up, we want to make sure that we are a good partner and we position our business to support their growth. That growth appears almost inevitable from the rhetoric coming out of Inox. We need to make sure that we are there to support that.

Additionally with JCNE, we are going to continue to make sure that we provide the technical assistance to expand their product line getting the bigger wind turbines and we want to make sure that we successfully commission these important windfarms this coming spring.

With our REG solution, we really want to expand the additional cities to come and be part of the program. The interest is national and now that we see these two main applications for the product, the ring and the branch as we described, we see the potential opportunity as possibly expanding.

With the Navy, the order that we expect to receive by the end of March really will be the next step in the commercialization of the technology and the ship protection systems.

I think lastly, the part I want everybody to hear is how pleased I am in how our employees have handled our fiscal year so far. We are showing a stronger second half and it certainly is good to get the Ghodowat situation behind us and onto hopefully an even better fourth quarter.

We look forward to talking to you here in the coming months and we appreciate the questions and we appreciate everybody's time and support. Thank you.

We would like to thank everybody for their participation on today's conference call. Please feel free to disconnect at any time.