American Superconductor Corporation
Q3 2017 Earnings Call Transcript

Published: 6 Feb 2018

[Operator:]

Good day, everyone, and welcome to AMSC’s Third Quarter of fiscal 2017 Results Call. All participants are in a listen-only mode until we reach the question-and-answer session. With us on the call this morning are AMSC’s President and CEO, Daniel McGahn; Senior Vice President and CFO, John Kosiba; and Manager of Investor Relations, Brion Tanous. For opening remarks, I would like to turn the call over to Brion Tanous. Please go ahead, sir.

[Brion Tanous:]

Thank you, Cody, and welcome to our call to discuss our third quarter fiscal 2017 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 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, 2017, which we furnished to the SEC on May 25, 2017, and subsequent reports that we have filed with the SEC. These forward-looking statements represent our expectations only as of today and should not be relied upon as representing our views as of any date subsequent to today. While AMSC anticipates that subsequent events and developments may cause the Company’s views to change, we specifically disclaim any obligation to update these forward-looking statements. I also would like to note that we will be referring on today’s call to non-GAAP net loss, or net loss before sale of minority investments, stock-based compensation, amortization of acquisition-related intangibles, consumption of zero cost basis inventory, changes in fair value of warrants and contingent consideration, non-cash interest expense, tax effective adjustments and other non-cash or unusual charges. 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 furnished to the SEC last night 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?

[Daniel McGahn:]

Thanks, Brion, and good morning, everyone. I will begin today by providing an overview of our financial results for the third quarter of fiscal 2017, which ended December 31, 2017. John Kosiba will then provide a review of our financial results for the third quarter and guidance for the fourth fiscal quarter, which will end March 31, 2018. Following John’s comments, we will open up the line for your questions. Third quarter revenues were in line with our expectations. Inox won nearly 30% or 300 megawatt of the first national auction and 30% or 300 megawatts of the second national auction in India. We anticipated our customer Inox would be commencing production in the third quarter for orders awarded during the first national auction in February 2017. However, Inox was working to execute contracts for the supply of turbines to its Wind Farm development partners. Inox had not put these contracts in place early enough for us to experience the ECS demand we expected during the third quarter. Our understanding is that these contracts are now in place and Inox is expected to be in position to ramp up production potentially in Q4 and into Q1. Inox’s backlog has returned to healthy levels and their expectation is for to grow from here. The third national auction or SECI-3 is planned to be taking place this quarter. SECI-3 is expected to be for a total of 2000 megawatts of wind power. The Indian government is anticipating a fourth auction of 2000 megawatts also this quarter during the month of March 2018. We are seeing signs of a recovery and continue to be optimistic about the Indian Wind market. The new policies are expected to enable the overall Indian Wind business to possibly reach higher levels than previously attained. Inox has also been winning auctions at a higher historical rate. We are also positioning ourselves to potentially diversify our Wind business. We entered into an agreement for our 5.5 megawatt offshore Wind turbine design with South Korea’s Doosan Heavy Industries. South Korea’s state-owned company, Korean Offshore Wind Power is developing the southwestern offshore Wind project, a 2500 megawatt development. Doosan is the engineering procurement contractor and Wind turbine supplier for this project’s first phase, a phase of 60 megawatts, which is expected to come online in 2019. This agreement expands Doosan’s offshore wind turbine product line of 3 megawatt turbine to include 5.5 megawatt turbines. AMSC is the exclusive supplier of electrical control systems to Doosan’s 5.5 megawatt offshore wind turbines. We received our first ECS order for 5.5 megawatt wind turbines from Doosan and announced it last month. This is an important milestone as it demonstrates their ability to jumpstart production for this product. We believe that this opens up another business opportunity for us in Korea, as well as the global offshore Wind market and is expected to allow for further potential diversification of future revenues within our Wind business. The third quarter saw record Grid revenues. Additionally, we anticipate strong fourth quarter revenues for our Grid business. We expect to achieve our fiscal 2017 objective of growing our Grid revenues year-over-year. We are diversifying our business by growth through Grid. And as you know, D-VAR is a large contributor to our Grid business. In the third quarter of fiscal 2017, our D-VAR business was supported by a strong base of projects in the renewable and industrial segments. During the third quarter, we supported a renewable turnkey project with wind turbine maker Vestas. The catalyst of our recent D-VAR industrial segment growth comes from mines, mills and semiconductor fabs, which require clean, reliable power. This has been a focus area for us and we are seeing the benefits of this focus. On the last conference call, we announced we had shipped our preproduction VVO units to utilities in the United States. We now have commissioned VVO units operating on multiple sites at utilities throughout the U.S. Our VVO pipeline is developing nicely. We expect additional commercial shipments beginning in early of the first quarter of fiscal 2018. Regarding our Resilient Electric Grid or REG product, we continue to make progress with utilities, while our negotiations with ComEd in Chicago are progressing, we are most excited about larger REG opportunities with other utilities that have a substantial, yet unique need for our REG system. There are issues facing utilities that simply cannot be solved using conventional power delivery systems. We believe our REG system can address those unique needs in a way that makes economic sense to utilities. We are working to help utilities understand that REG uniquely solves problems that are a priority today. We will report back to you just as soon as we can on this large market opportunity. Providing a brief update on our business with the U.S. Navy, we have begun shipping the long lead time items for USS Fort Lauderdale, also known as LPD-28. We anticipate our initial revenues from this order will be recorded in the fourth quarter of fiscal 2017. We anticipate shipping additional long lead time items during fiscal 2018. We continue to pursue additional ship platforms for our ship protection systems with the Navy. We believe the Navy understands that our superconductor-based systems are an enabling technology that will support their efforts to electrify the fleet. I’ll turn the call over to John Kosiba to review our financial results for the third quarter of fiscal 2017 and provide guidance for the fourth fiscal quarter which will end March 31, 2018. John?

[John Kosiba:]

Thanks, Dan, and good morning everyone. AMSC generated revenues of $14.9 million for the third quarter of fiscal 2017 compared to $27.1 million in the year-ago quarter. Our Grid business unit accounted for 82% of total revenues for the third quarter. The year-over-year reduction in revenue is driven by reduced ECS shipments to Inox from our Wind business segment partially offset by higher Grid segment revenues. Looking at the P&L in more detail, gross margin for the third quarter of fiscal 2017 was 33.6%, compared to 18.6% in the year ago quarter. The year-over-year increase in gross margin was driven by a favorable revenue mix which included 100% contribution margin revenue from our Wind business segment, as well as strong D-VAR revenues. R&D and SG&A expenses for the third quarter of fiscal 2017 were $8.5 million. This compares to $9.1 million in the year ago quarter. These statements are primarily driven by reduced expenses resulting from our April 2017 reduction in force. Approximately 17% of our R&D and SG&A expenses in the third quarter were non-cash. Our net loss in the third quarter of fiscal 2017 was $4.2 million or $0.21 per share. This compares to $2.8 million or $0.20 per share in the year-ago quarter. Please, see our press release issued last night for a reconciliation of GAAP to non-GAAP results. We ended the third quarter of fiscal 2017 with $22.3 million in cash, cash equivalents and restricted cash. This compares with $30.5 million as of September 30, 2017. Our cash burn in the third quarter was $8.2 million which is in line with our previous guidance. Turning to our financial guidance for the fourth quarter of fiscal 2017, we expect revenues will be in the range of $12 million to $18 million. We are maintaining a wide revenue guidance range due to the uncertain timing associated with Inox’s ramp up of their production facilities. Our net loss or net revenue is expected to be less than $7.5 million or $0.37 per share. We anticipate an operating cash burn in the fourth quarter in the range of $3 million to $5 million. To be clear, the operating cash burn forecast excludes any proceeds from the expected sale of our Jackson Road, facility in Devens, and excludes the Make Whole Payment associated with our September 2017 acquisition of ITC. At this point, I’d like to take a moment to update you all on the overall cost structure. As you all are well aware, we have substantially reduced both our physical and employee footprint over the past two years. In fact, after our expected sale of the Devens Mass facility, our total square footage will be about a third of what it was just two years ago. Additionally, our headcount is down over 25% in the same time period. So how does this translate to the P&L? Based on this anticipated new cost footprint, we expect revenue scenarios that will have us in an operating cash flow breakeven position with quarterly revenues of less than $25 million. With that, I’ll turn the call back over to Dan.

[Daniel McGahn:]

Thanks, John. Third quarter revenues grew over the second quarter. Based on our discussions with Inox, Inox intends to ramp up their production in the fourth quarter of fiscal 2017 and we expect to ship ECS to support their requirements. Inox anticipates a further increase in the ECS shipments in the first quarter of fiscal 2018. We are positioning ourselves to diversify our Wind business into the offshore wind turbine market with Doosan. We are focused on continuing to grow our Grid business. We had a record quarter for Grid. Our D-VAR business is strong. Our VVO pipeline is developing nicely. Our REG business is moving forward on a number of fronts, and we are delivering long lead time items for LPD-28. I’d like to cover two more items before we turn to questions from our analysts. On our last conference call, I mentioned that we had an ideal location identified for our headquarters and U.S. manufacturing operations, just a few miles away from our Devens Building. I am pleased to announce that we have successfully completed the transition of our administrative operations to our new building located in Ayer Massachusetts. We intend to transition our manufacturing operations from Devens to the new Ayer Building in the coming months. Our primary focus is on our customers and employees. We have seen an uptick in demand for D-VAR. We are timing the transition to avoid disruptions to our customers. We said that we believe the Jackson Road facility could be a form of additional liquidity to the business. Last week, AMSC signed a purchase and sale agreement for the sale of our Devens Building in the amount of $23 million. The sale transaction is expected to close at the end of the fourth quarter of fiscal 2017. As a result of our cost reduction efforts in fiscal 2017, we expect that we will have sufficient cash for our strategic initiatives in fiscal 2018. The expected sale of the Devens Building will give us additional cash. We have talked to many of you about managing our costs and continuing to hold the cash balance at necessary levels to run the business. I’ve been asked directly several times over the past few months, if we are going to raise additional capital, we had a shelf registration statement that expired in September 2017. This means that the company did have an effective registration statement from which it could issue additional shares. We felt that this was a clear signal that we would not be raising capital any time soon. However, several of you pointed out that even if we do not plan on raising additional capital, we should have a shelf up. We are heating that advise and as you can see we filed a shelf registration statement with the Securities and Exchange Commission last night. I’d like to close with a few comments about the United States versus Sinovel Criminal Trial. On January 24th, the Jury returned a verdict of guilty on all three counts against Sinovel. One, conspiracy. Two, theft of trade secrets and three, wire fraud. The Sentencing Officer planned to deliver his sentencing memo related to Sinovel’s conviction to the court before the end of April. Sentencing is currently scheduled for June 4. In a letter from the United States Attorney’s Office, dated January 29, the defense was reminded that and I quote “the United States has a statutory obligation to pursue restitution for American Superconductor”. And that I quote “the United States is exploring all avenues to collect restitution”. They further commented that I quote “it is in Sinovel’s interest to make a substantial effort toward restitution before sentencing”. So we have that going for us. This is a great victory for the United States and for the defense of intellectual property rights. The current administration seems to be focused on the consequences of IP theft. Last week during the State of the Union Address, U.S. President, Trump reiterated the importance of this issue for his administration. And I quote from his statement “the error of economic surrender is over. From now on, we expect trading relationships to be fair, and very importantly, reciprocal. We will protect American workers and American intellectual property through strong enforcement of our trade rules”. We plan to report back to you just as soon as we have more information on this important development. Operator, Cody, can we now open the line for any questions from our covering analysts?

[Operator:]

Absolutely. [Operator Instructions] And we’ll take our first question from Philip Shen with Roth Capital Partners. Please go ahead, sir.

[Philip Shen:]

Hey, Dan, thanks for the questions. First one is on Inox; you mentioned and discussed a few times that they are ramping up their facility and factories. Can you give us an update on whether or not you think to have adequate capacity to serve their existing backlog? So as they continue to win at an aggressive rate the auctions that SECI is conducting in India. Do you expect them to actually need to ramp up capacity – new capacity going forward? Or do you think they have enough existing capacity that you just have to ramp up the utilization?

[Daniel McGahn:]

Their stated capacity, if I remember from their public information, depending on the component of somewhere between 800 to 1200 megawatts. So I think that that means that they have ample capacity today to ramp with these new wins and then we’ll see what they do going forward. I think that their focus is, they want to make sure that they serve these customers with the change in policy they want to become one of the leaders in the market and if they are successful doing that, I think their prospects for growth certainly are higher than what we’ve seen in the past.

[Philip Shen:]

Great. Thanks, Dan. Shifting over to margins, obviously, a nice margins quarter. How do you expect margins to trend in 2018 overall?

[Daniel McGahn:]

We tend not to guide margins out in time. But I think you can see and John, if you want to comment some unique things about this quarter helping to amplify margins a bit, revenues at – had little cost associated with it. As you know, part of our model is we will do contracted technology work sometimes the cost of those and the revenue of those are in different periods and you’ll see higher or lower gross margins depending upon the timing of the events. Do you want to add to that, John?

[John Kosiba:]

Yes, I mean, just to highlight on what Dan said, our margin this quarter was surely enhanced by some of that 100% fall through revenue on the Wind side. But additionally to that, I mean, when you have a really strong Grid quarter, you’ll have strong margins assuming Wind can produce a reasonable level of revenue. So, we haven’t guided to revenue for 2018. So it won’t be appropriate for us to guide on margins, but on a strong Grid quarter like this, coupled with reasonable Wind to associate with that revenue, we should be able to expect some strong margins.

[Philip Shen:]

Good. That color is helpful. Thanks, John. Coming back to the Wind sector, and you had your Doosan 5.5 megawatt, ECS order announced last month. For that 60 megawatt project, can you talk about what the mix might be between the 5.5 and the 3 megawatt turbines? I think we’ve tried to address that in the past. I was wondering if you guys have some additional color on that now.

[Daniel McGahn:]

We don’t, and we haven’t seen anything publicly from Doosan out there. We know that with this order, the timing of the 5.5 potentially gives them the ability to deliver 5.5 megawatt turbines before the end of 2019, which is the projected timing of this first 60 megawatts, but do remember that they won these 60 megawatts before they had access to the 5.5 megawatts. But I don’t really frankly know definitively what they are going to do. We want to support them as best we can on both the 3 and the 5.5 as they need us.

[Philip Shen:]

Good, okay. And then, can you give us an update on the marketplace interest for the possibility of an HTS turbine and are there any new developments or partners on the horizon for the Wind sector in general?

[Daniel McGahn:]

I don’t want to get too premature. But one of the kinds of thesis is that, we invested in as turbines got bigger, can we help to deliver more unique enabling technology to those turbines. So, we’ll start to see that benefit, what the 3 and the 5.5 machines, I think it is commonly believed that to get the very large machines, you would need to change the drive to something significantly lighter and we believe that that may be a future potential for Superconductor. But at this time, I think the markets kind of lagged what industry projections had to get to larger turbines. There is a number of larger turbines that are in prototype and the beginning in production and we have in front of us the completed design for a very large wind turbine larger than anything we’ve seen out there. So, if we can find the right situation with the right partner, then there maybe that’s a potential future part of our business, but today, we want to focus on continuing to support Inox as they get through their production ramp and getting Doosan to have success with their local market with the hope that they can expand to the global market in the future.

[Philip Shen:]

Great, okay. One last question on Sinovel. You had the nice quotes there. Could you give us some additional detail as to how the restitution could happen? What are the possible avenues that the DOJ or the administration or both could take? And especially, what might be interesting is, how the outcomes of those cases or processes could be leveraged in your civil case in China?

[Daniel McGahn:]

A lot of pieces to that, Phil. It’s hard for me to guess what the government is going to do. We wanted to share what was a publicly available letter to highlight that the United States appears very committed to seeking restitution from us. We’ve been very consistent saying that we believe that there will need to be a government, the government interaction in order to resolve the issue. I think the fact that the United States government now has a criminal conviction rule we believe is the first time ever of a Chinese company that that should allow the discussion really to become again front and center for this administration. So, our hope is that, the administration is about action. You know the solar market very well. You see there is already been action and activity there. So we hope there will be action that will help us with our case as well. As for dealing with the Chinese cases, it’s hard to go into all the detail of all the evidence that came out. But there were a lot of specific details now about the case that will become public with the transcript. We’ve talked about how the facts that our evidence is overwhelming and that evidence now will become public information. So, as that’s out there, I think, that should affect the Chinese ability to come up with other arguments for why the events happened. We have a conviction in Austria. We now have a conviction with the U.S. case in the U.S. court. The evidence is now not only overwhelming, but will be public knowledge for the media, for the government to be able to utilize. Sinovel clearly admits in the transcript that they had obtained the IP. That I think should certainly help us in any jurisdiction that we have a case in specifically China.

[Philip Shen:]

Great. Thanks for the update, Dan and best of luck with that.

[Daniel McGahn:]

Thanks, Phil.

[Operator:]

Thank you. We’ll now take our next question from Colin Rusch with Oppenheimer & Company. Please go ahead.

[Colin Rusch:]

Thanks, so much guys. Could you talk a little bit about seasonality impacts on the Grid business? Obviously, you had a nice quarter and historically this has been a fairly strong quarter for the Grid business, but what can we kind of think about as we go through the first part of next year and obviously you’ve got it for the March quarter, but just on a year-over-year basis within that business?

[Daniel McGahn:]

I think it’s hard for us to go out and speculate at this point, because we build backlog on a 3 to 12 month basis. So we have some backlog within hand. But we build a lot of that backlog at the beginning of the year as new projects start. It’s hard for me to dissect a specific seasonality coming from the Grid business or specifically D-VAR. It’s really project-to-project basis on when in the quarter equipment gets shipped, when in the quarter collections happen and revenue recognition happens sometime as we have pushes and pulls between different quarters based upon customer needs. So, frankly, when we look at our quarter-to-quarter, we worry a lot less about the quarter-to-quarter variation and we are focused more on the annual growth which we think we’ll be able to deliver this year. As customers require product in one part of a quarter or another we let it fall to where the customer needs it and the revenue and the collections will follow that. So, it’s hard for us to give you a direct answer on seasonality.

[Colin Rusch:]

Okay, thanks. And then, I want to hear a little bit more about the sustainability of the gross margin level, obviously it’s was a nice quarter in that regard and partially supported by the mix shift here, but could you talk about that as you leave the Devens facility, how we can think about that into the March quarter and beyond?

[Daniel McGahn:]

Well, you are seeing the operating expense at kind of a new low. We can talk a bit about the cash portion of that to try to get you to operating cash flow making a margin assumption. But I think what John said pretty clearly as you start to see Grid at these kind of revenue levels, you have a lot more contribution margin coming from Grid. So, as long as we can couple these with reasonable Wind revenues, we should be at margin levels that are near some of our all-time highs that we’ve demonstrated with the business over the past few years. So I think, some of the things that aren’t fully appreciated in the market is, how strong gross margins can be if we have a relatively even mix of Wind and Grid. We don’t really guide for gross margin out in time, but we are trying to give you some color to help you understand that people that think the margins are going to be in the single-digits or something. As we get to these levels of revenue, particularly contributing from Grid, you are going to see stronger gross margins.

[Colin Rusch:]

Okay, thanks, so much guys. I’ll hop back into queue.

[Daniel McGahn:]

Thanks.

[Operator:]

Thank you. We will now take our next question from Carter Driscoll with B Riley FBR. Please go ahead.

[Carter Driscoll:]

Good morning gentlemen, thanks for taking my questions. First question is just, following up on the margins, the – historically, I think your Grid business before the kind of the makeover with the Navy and some of the new product introductions have been a lower contributing segment than Wind. Can you just talk about how that has changed and maybe not rank but talk about the different contributing factors in terms of how they impact Grid in particular? And I have a couple follow-ups. Thank you.

[Daniel McGahn:]

Yes, I think the single largest gross margin changing event is the move from Devens to Ayer that the fixed costs are fundamentally different. The square footage is fundamentally different and our ability to get absorption, specifically in the Superconductor projects should happen at a lower revenue level. So, we try to be as direct as we could putting out John, had commented on a new level for kind of breakeven on an operating cash flow basis to able to construct the margin profile, we talked about $4 million to $5 million of cost coming out with the move and the lion share of that was really coming from cost of goods sold. So that all should help margin. I think, one of the challenges that we have and I think that you all are going to have is, with the new footprint, the gross margin profile should be substantially better and we have to figure the best ways to help communicate that with you all without guiding and making promises for the future. But I think we’ve tried to give enough of the nuggets of the different components. I mean, typically our levels of cash operating expense are in the 70% to 80% of what we state for operating expense and that I think for this quarter holds true as well. You have a new steady state really coming into the April quarter that we think allows the company to be in position as John had stated at revenue levels less than $25 million depending upon the mix, we see different scenarios where we should be operating cash flow positive. And I think implicit in there is a certain gross margin.

[Carter Driscoll:]

Okay, that’s helpful. In terms of the move, the move with the manufacturing, particular after such a strong D-VAR quarter, have you contemplated or have you built any D-VAR inventory? I realize it’s not something you typically do just to minimize the potential disruption as you make the transition?

[Daniel McGahn:]

Well, we want to manage first and foremost is cash and second making sure that we can meet customer expectations. So, rather than answer kind of explicitly, what we’ve kind of went through in the prepared remarks is, we see an uptick in D-VAR demand and manufacturing, which means that we maybe a little slower than we thought on moving manufacturing D-VAR over, but not that much slower. What we want to be cognizant of is, if there is expense – if there is any expense related to the mood that shows up in Q1, that’s a possibility and that maybe different than what we had said the expectation before. We said the move would really be in the second half of the fiscal year and kind of what we are getting at is, there may be some expense that trickles into the first quarter really due to delaying the move to deal with demand. Anything you want to echo on that, John?

[John Kosiba:]

No, I think one thing to note is that there is a difference within the Grid, the D-VAR, manufacturing move and the HTS factory move are at different levels. So, with D-VAR, it’s light assembly. So the transition time to transition from Devens to Ayer for D-VAR will be much, much quicker. Remember, we did this three four years ago from Wisconsin to Ayer and we were able to do that within one quarter, obviously doing in a few miles away is going to be, we believe a lower degree of difficulty and therefore an easier project.

[Carter Driscoll:]

Okay. Just a couple other quick ones. So the – are there any triggers associated with the residual payments from the buyer of the facility, the $3 million, 12 to 24 and so, are there any hurdles? Or is it just a timing?

[Daniel McGahn:]

Just timing, it’s really kind of a payment plan on the debt back on the building – like a mortgage back on the building. We talked about the value of the building being in the 20-ish range. I think, explicitly we can say that they value of the building that we had in the books is $22.4 million and we are able to get $23 million and basically to get full value plus a little bit and we are able to work with the buyer to structure his payments in a way that we are clearly saying, we don’t need all that cash now. But having those residual payments come a year and two years from now, I think will be a good thing.

[Carter Driscoll:]

Certainly, I mean – certainly done an excellent job on the cash front. And just last question, back to Inox is, I recognize they had a long process to rebuild their backlog after the change in the way projects were allocated through the auction system. Have you had any follow-up discussions about designing a 3 megawatt turbine, as you – I realize it’s been slower to kind of pull up the average power rating over time globally. Any follow-ups that you can elaborate upon?

[John Kosiba:]

I don’t have anything new to say today. I mean to echo what's been said, Inox kind of announced that they were intending to do a 3 megawatt with us. When and if we get to the point where we actually pay for that, we certainly want to announce that, because that will show for the diversification of their product line, which we think will be good for them. But at this state I don’t have anything new to tell you.

[Carter Driscoll:]

Okay. Get back into queue. Thanks, John.

[Daniel McGahn:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] We’ll move on to Jeff Osborne with Cowen & Company. Please go ahead.

[Jeff Osborne:]

Hey, good morning. I might have missed this. But can you just – for the building sale in particular, I know your guidance doesn’t include any cash proceeds from that, but can you just remind us of what the timing of the cash coming in over the multiple years is? Is there a way to say how much will be upfront? How to phase that?

[Daniel McGahn:]

Yes, from the 8-K, the way the 8-K reads is that, we believe that we should see $17 million of that come in the March quarter. Three of it to come in the March of 2019 quarter and then the last three of it to come in the March of 2020 quarter.

[Jeff Osborne:]

Got it. That’s helpful. And then, I think you also had a caveat on the cash burn guidance about the Infinia acquisition and the Make Whole. Can you remind us of the $3.75 million purchase price, how much was Make Whole? And if those triggers were hit, that you would have to pay any additional cash?

[Daniel McGahn:]

Yes, we did have to pay to some and that approach is about $700,000. So that’s not included in the cash guidance, as well as any prepayments that will happen as part of the $17 million in the quarter, as well as the $17 million itself in totality.

[Jeff Osborne:]

Okay. I think, someone before tried to ask this, but, so on the gross margin front, going back to Grid tech, I understand a lot of moving pieces, but, I guess, we are on hung up is that there is two products that you are going to start selling over the coming months that we’ve never seen fall through the P&L. So I understand, your production locations moving and there is less unabsorbed overhead as an issue and that makes perfect sense. But just generically speaking, when you introduce new products like VVO and/or the Navy-related revenue coming in, do you think that would be consistent with where D-VAR is today? Or is there any higher warranty provisions because they are new products or any timing of cost versus revenue with the Navy that we just need to consider as we factor those new products into the revenue stream over the coming quarters?

[Daniel McGahn:]

I think to speak specifically about Grid and things like VVO was we design those products, we’d like to see margins that approach what we do with D-VAR. So we don’t want to be introducing products that are going to have a drag on gross margin. We want to improve and where possible take advantage of expanding gross margins. I think, specifically around Superconductors and REGs to let you know though, we are trying to get absorption of the wire factory which should be a positive to Grid margins as well as the overall margin. But the actual margins on REG given the size, and the level of pass-through content, probably will be less than what the rest of the Grid business would see. We’ve kind of hinted that in the past in the Navy. We are trying to design the business that has superior gross margins for the rest of the business. There is the ability to do that with the military, particularly when there is technology that’s proprietary and necessary for deployment and we think we have that in this case. I think the challenging part of the Navy will be, not really the margin or the cash collections that will be when revenue is recognized for exactly the reason that you said, because it’s a new product, we’ll probably as conservative. We’ll work with the auditors to make sure that we are conservative in our approach to how we recognize revenue. With new revenue rules, particularly involving new kinds of products that if you don’t have a demonstrated history of, the desire is to be more conservative with revenue recognition.

[Jeff Osborne:]

Okay. Makes sense, and then…

[Daniel McGahn:]

I mean, on the overall margin part, I mean, take the operating expense that you see coming out of this quarter. The cash part of that is between 70% and 80% of that. You are seeing margins here at, what we are trying to say in some ways is, don’t expect these margins at these revenue levels. But at the revenue levels that we want to, you probably want to get to, you probably can expect this level of gross margin.

[Jeff Osborne:]

Makes sense, no, that’s very helpful. Thank you. And I think the last one I had is, and I might have missed this or it might be buried in the 10-Q, which I am not sure is out yet. But, the Wind revenue that the $2.6 million, can you just articulate how much of that was the 100% gross margin-related?

[Daniel McGahn:]

We don’t really break that out, but you can probably surmise that, because that’s where the 100% comes from. Certainly, that was reflected in the revenue to Inox. But we don’t break it out between product types.

[Jeff Osborne:]

Yes, it’s unfortunate. So the revenue was attributed to Inox and run that by me again, why there is a mismatch on timing of cost relative to revenue for an established customer like that?

[John Kosiba:]

When we do engineering work for them, royalties, those kinds of things, the margin typically, when the revenue is recognized in those periods, typically is a 100% margin. So, obviously given what we are showing in the margin, a good significant part of that Inox revenue certainly is coming from those types of revenue events. But we don’t typically…

[Jeff Osborne:]

Over the coming quarters, do you expect any of those events to repeat themselves?

[Daniel McGahn:]

Historically, they have. There is always additional streams of royalty revenue and engineering revenue that comes from our customers. So I think if you go back and look over time, particularly in quarters where we have probably higher than, you are approximating for gross margin, we kind of continually have these kinds of revenues. It’s hard to predict them and it’s hard to guide to them. But they certainly help gross margins.

[Jeff Osborne:]

Definitely. Great, thank you.

[Operator:]

Thank you. That does conclude today’s question and answer session. I would like to turn the conference back over to Mr. McGahn for additional or closing remarks.

[Daniel McGahn:]

I just want to make a couple remarks. First, I want to thank everybody for participating today. I want to thank, John for the great job he is doing in helping to manage cost and getting this building transaction behind us. I hope that people were happy with what we are able to get from it. I think, having on the books for 22.4 and get 23, I think is good for the company. Having that money I think certainly extends our runway substantially. To be clear, just as we’ve said, we have no intention to raise money in order to meet our objectives. Having this additional money certainly helps to expand that revenue and I think should give people comfort for the balance sheet not only shareholders, but certainly customers as well. Going forward from here, I think we are in great position to have demonstrated Grid revenue growth year-to-year. I think that helps the business. I think a lot of the gross margin questions really revolve around that and we’ll try to give as best color as we can going forward on that. But we think we are in a very good position given this cost basis and the revenues that we’ve been able to demonstrate as Inox starts to grow back. The degree of difficulty today to get to revenues to get to positive operating cash flow is certainly a whole different arithmetic than it was even two years ago. So I thank everybody for their attention and we look forward to talking to you very soon.

[Operator:]

Thank you. And that does conclude today’s conference. Thank you all for your participation and you may now disconnect.