American Superconductor - Earnings Call - Q3 2021

Transcript

Speaker 0

Good day, and welcome to the American Superconductor Third Quarter Fiscal twenty twenty Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Heilshorn of LHA. Please go ahead, sir.

Speaker 1

Thank you, Lanish. Good morning, everyone, and welcome to American Superconductor Corporation's Third quarter fiscal twenty twenty earnings conference call. I am John Hiles, Head of LHA Investor Relations, AMC's Investor Relations Agency of record. With us on today's call are Daniel McGann, Chairman, President and Chief Executive Officer and John Kosiba, Kosiba, Vice President, Chief Financial Officer and Treasurer. American Superconductor issued its earnings release for the 2020 yesterday after the market closed.

For those of you who have not yet seen, the related copy is available in the Investors page of the company's website at www.amsc.com. Before start the call, I'd like to remind you that various remarks that management may make during today's call about American Superconductor'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 set forth in the Risk Factors section of American Superconductor's Annual Report on Form 10 ks for the year ended 03/31/2020, which the company filed with the Securities and Exchange Commission on June 2020, as updated in the company's Form 10 Q for the period ending 12/31/2020 and the company's other reports filed with the SEC. These forward looking statements represent management's expectations only as of today and should not be relied upon to represent any management's views as of any date of any subsequent date due today. While the company anticipates that subsequent events and developments may cause the company's views to change, the company specifically disclaims any obligation to update these forward looking statements.

Also, on today's call, management will refer to certain non GAAP financial measures, non GAAP net loss and non GAAP operating cash flow. Non GAAP net loss is defined by the company's net income loss before stock before stock based compensation, amortization of acquisition related intangibles, acquisition costs, change in fair value of contingent consideration and warrants, other noncash or unusual charges, and the tax effect of adjustments calculated at the relevant rate for the company's non GAAP metric. Non GAAP operating cash flow is defined by the company's operating cash flow before the China settlement, net of legal fees and expenses and other unusual cash flows or items. The reconciliation of the non GAAP measures to the most directly comparable GAAP measures can be found in the 2020 earnings press release that the company issued and furnished SEC last night on Form eight k. All American Superconductor's press releases and SEC filings can be accessed from the Investors page of the website at wwwamsc.com.

With that, I will now turn over the call to Chairman, President and Chief Executive Officer, Daniel McGannan. Daniel? Thanks, John, and good morning, everybody. I'll begin today by providing an update on our Grid and Wind business units. John Kosiba will then provide a detailed review of our financial results for the third fiscal quarter, which ended 12/31/2020, and provide guidance for the fourth fiscal quarter, which will end 03/31/2021.

Following our comments, we'll open up the line to questions from our analysts. AMSC delivered strong results during the third quarter of fiscal twenty twenty. Revenue for the quarter grew by more than 30% versus the year ago period, coming in at twenty three point six million dollars Our Grid segment revenue grew 12% versus the year ago period. Grid is driving revenue growth for the company, and all Grid product lines contributed to the quarter. We generated positive operating cash flow in the 2020 as forecasted.

This is a great milestone for the company to be. We met this objective for this one quarter, and we strive to be there on a sustainable basis. We believe that this demonstrates progress towards our goal of reaching operating cash flow breakeven on a consistent, sustainable basis. We ended the 2020 with more than $84,000,000 in cash. Let's take a moment to review our grid business.

In October, we announced the acquisition of Pepsi. Please realize that this transaction occurred during our third quarter, which is the period we're now reporting on today. The acquisition of Nepsey directly aligns with our strategic priorities to accelerate profitable growth independent of our wind business, broaden our product offerings and expand both market reach and market share. Further, the addition of steady state power correction extends our product offering in the industrial sector of our grid business, expanding our available market. Going forward, we will talk about the pieces that make up our Grid segment in terms of new energy power systems and ship protection systems.

New energy power systems include NEPSI, D VAR and VVO. We are integrating the front end of this part of the Grid business as one. And yes, REG is part of Grid as well. Grid is driving revenue growth for the company. We believe that our Grid segment is on track for another year of organic growth in FY 2020.

And if we achieve this objective, it will be our sixth sixth consecutive year for grid growth. In the third quarter, our new energy power systems revenues were driven by industrial sales principally to The United States, renewable projects in The United States as well as an international semiconductor fab. Going forward, we expect that the addition of steady state power correction products and harmonic filter products to our portfolio grid offerings should improve the long term quality of our revenues and earnings and further diversify our grid business by region, customer and product. Most importantly, we expect this addition to our Grid business to accelerate our ability to achieve our goal to reach operating cash flow breakeven on a consistent, sustainable basis. We believe that this quarter demonstrates progress towards this objective.

We believe we're well capitalized to execute our overall strategic plans for additional growth and further diversification. We continue to be focused on building a more predictable and diversified business. As we've discussed over the last three quarters, the pandemic has created both operational challenges and macroeconomic concerns for all businesses in The United States. AMSC has demonstrated that it can operate effectively during this crisis. I said this early on in the pandemic, and I'm saying it again.

We were early to implement physical separation protocols at our manufacturing sites, and we have not missed a beat in production. However, this continues to get harder each quarter. In The US, we may now just be seeing signs of the pandemic beginning to slow, but each day, there's news about new variants of the virus. So who knows what we're really gonna be up against in 2021. We have instituted cleaning protocols for our offices to help keep everyone safe and healthy, which is paramount.

We're focused on our people, quality production of our products, and strong customer service. AMSC is deemed to be an essential business for our manufacturing locations. Thus, our factories remain open and will continue to be operational throughout the pandemic. We are managing what we can control, and that is our internal operations. We've seen what we perceive to be new tailwinds in our business.

President Biden's new energy plan could positively impact the demand for our new energy power system solutions. The new energy plan intends to reform and extend the tax incentives that generate energy efficiency and clean energy jobs, as well as to develop financing mechanisms that leverage private sector dollars to maximize investment in the clean energy revolution. This is very good news for our company. As you know, our D VAR product is primarily focused on addressing renewable energy installations for project developers and wind turbine manufacturers. For the utility, our VVO system offers superior power quality, environmental benefits, and significant cost savings over traditional solutions.

Biden's administration plans to spur the installation of tens of thousands of wind turbines in its first term, including thousands of turbines off our coast. We are partnered with top tier wind turbine manufacturers to provide wind farm connectivity to The US power grid. The new administration also intends to spur the installation of millions of solar panels, including utility scale rooftop and community solar systems. Because solar power is dynamic and intermittently variable in nature, distribution grids must now enhance their network's capabilities to accommodate this new resource while maintaining efficiency and power quality for their customers. The President's energy policy also focuses on the next generation of electric grid transmission and distribution, which has been the heart of our long term growth strategy.

We believe our new energy power systems products are well suited to address this enormous challenge. The expansion of our new energy power systems offering comes at a great time. Now I'll turn the call over to John Kosiba, who will review our financial results for the 2020 and provide guidance for the fourth fiscal quarter of twenty twenty, which will end 03/31/2021. John? Thanks, Daniel, and good morning, everyone.

AMSC generated revenues of $23,600,000 for the 2020 compared to $17,900,000 in the year ago quarter. Our group position accounted for 72% of total revenues, while our wind business unit accounted for 28%. Preposition of revenues increased by 12% in the third quarter versus the year ago quarter due primarily to revenues generated from our recent acquisition of Northeast Power Systems or Netsy. In business unit revenues more than doubled in the third quarter versus the year ago quarter with a 144% increase in revenue as a result of increased ECS shipments to IMAX wind. Looking at the p and l in more detail, gross margin for the 2020 was 17%, up from 9% in the year ago quarter.

The higher gross margin was a result of a favorable product mix, which included ECS shipments. Included in cost of goods sold in the 2020 is approximately $1,300,000 in noncash adjustments related to the purchase accounting for the acquisition of Pepsi. These noncash related adjustments represent a negative five percentage point impact to our gross margin in the third quarter. R and D and SG and A expenses for the 2020 were $10,100,000 This is up from $8,100,000 for the same period a year ago. The increase in r and d and s g and a expenses in the 2020 was due primarily to the addition of fee operating expenses to AMSC's operation.

Approximately 13% of r and d and s g and a expenses in the 2020 were noncash. Our non GAAP net loss for the 2020 was $3,400,000 or $0.13 per share, down from $6,700,000 or $0.32 per share in the year ago quarter. Our net loss in the 2020 was $7,900,000 or $0.31 per share. This compares to $6,800,000 or $0.32 per share in the year ago quarter. Included in our third quarter fiscal twenty twenty net loss were several noncash adjusted items associated with the NetSuite acquisition.

I mentioned the first one of 1,300,000 which was a noncash expense into cost of goods sold. Additionally, within our operating expenses, we had a $2,700,000 noncash expense associated with the change in fair value of contingent consideration and a 300,000 noncash expense for the amortization of Nepc intangibles. Please see our press release issued last night for a reconciliation of GAAP to non GAAP results. We ended the 2020 with $84,400,000 in cash, cash equivalents, marketable securities, and restricted cash. This compares with $57,700,000 on September 3020.

We generated $1,700,000 in positive operating cash flow in the third quarter of fiscal twenty twenty. This was primarily the result of favor favorable working capital associated with cash collections from Hinox Wind for ECS shipments within the quarter. As a reminder, working capital fluctuates quarter to quarter depending on the timing of milestone payments and inventory positions. As I've mentioned in previous calls, if you look at our operating cash flow over a several quarter period, that will tend to smooth out any quarterly variations of working capital. Year to date, for the first three quarters of fiscal twenty twenty, our operating cash burn is $4,900,000 on $66,000,000 of revenue.

For reference, this compares to an operating cash burn of approximately 18,000,046 million of revenue for the first three quarters of fiscal two thousand nineteen. That's nearly a $13,000,000 year over year improvement in operating cash flow over the nine month period. Improvement in year over year operating cash burn was driven by the higher revenues and increased gross margins within both our Grid and Wind business units. Okay. Now I'd like to take a moment to summarize the financial impact Netsy had on our third quarter results.

Nepse accounted for $6,600,000 of group business unit revenues, and Nepse's operating margin was approximately breakeven in the quarter. As I mentioned earlier, were several noncash purchase accounting adjustments included in these results totaling approximately $1,600,000 When we normalize the business excluding these adjustments, NetEase financial results in the third quarter are in line with the historical three year average annual run rate of approximately 25,000,000 a year in revenue and operating margins approaching 20%. Now turning to our financial guidance for the fourth quarter of fiscal twenty twenty. We expect that our revenues will be in the range of 18,000,000 to $22,000,000 We are expecting most of our fourth quarter revenue to be generated from our grid business unit. We are not expecting any ECS shipments to Inox in the fourth quarter.

As Daniel has mentioned earlier, we stand ready to support our partner in India as they commission new turbines or need new stock of two megawatt ECS. Our net loss on that revenue is expected not to exceed 8,000,000 or 31¢ per share, and our non GAAP net loss is expected not to exceed 6,500,000.0 or 25¢ per share. The net loss and non GAAP net loss guidance includes expected revenues from DHS for our rent project in Chicago. As a reminder, this project with DHS is a cost share project and as such, has lower gross margins when compared to overall gross margins for our base business. We have not expected the right project to have a negative impact on operating cash flows in the fourth quarter as we have paid most of the cash expenses related to this project in previous periods.

As a result, the company expects operating cash flow to be a burn of $2,000,000 to $4,000,000 in the fourth quarter of fiscal twenty twenty. We expect to end the fourth quarter with no less than $80,000,000 in cash, cash equivalents, marketable securities, and restricted cash. With that, I'll turn the call back over to Daniel. Thanks, John. As I said at the outset, our new energy power part of our business is doing very well.

We're really excited about our growth prospects in this part of our business and want to continue executing on our strategy of growth and diversification. Let's touch on other areas of the business. Let's turn to SPS. As you know, our ship protection systems or SPS has become the baseline design for the San Antonio class amphibious warfare ship or LPD platform. We announced in January our fourth ship protection system contract for the San Antonio class.

This contract is for an SPS for LPD 29, also known as the USS Richard M. McCool junior. LPD 29 will be the thirteenth amphibious transport dock ship of the USF San Antonio class. The ship was named after US Navy officer and medal of honor recipient, Richard Miles Lacool, Jr. Our SPS for the San Antonio Class represents approximately $10,000,000 in value or revenue per vessel.

Our current backlog of SPS orders now include LPD 28, LPD 29, LPD 30, and LPD 31. Our team is very busy and focused on continuing to expand the business while we deliver our first systems. From a capacity perspective, we have been planning for the concurrent manufacturing of multiple FPS orders, and here we are. We're very happy we have this capability as we are full out in producing these systems. We have talked about the expected size of the opportunity several times in the past.

In total, there were 15 future San Antonio craft ships planned to be built after we had our design win. We have now won four of these 15 or $40,000,000 of the potential 150,000,000 for this class of ship. The San Antonio class is our first design win with the Navy. We are actively engaged with the Navy pursuing pursuing additional classes of vessels for deployment of our SPS. We have done some engineering for the potential deployment of our SPS in a next class of ship.

We're very excited about this opportunity and the work ahead to expand into more of the US Navy fleet. In each case, we have to do engineering work prior to procurement. We have to fit our common components that make up our ship protection system and show all the changes to the build of the ship. This is exciting work indeed. In addition, we're working hard to bring our degaussing systems to foreign fleets.

We see interest here, but again, there is an engineering phase that would foresee any procurement. Turning to REG, our resilient electric grid system. We announced previously that agreed to install its first resilient electric grid system as a permanent asset within Chicago's electric power grid. In July, we announced that ComEd broke ground and had begun construction for the REG system. We have now delivered all our hardware to the project and are providing technical assistance to ComEd during construction.

Things are progressing very, very well. We're on schedule and anticipate energization in 2021 per ComEd schedule. We are excited about our execution to date on this first project with ComEd. Many U. S.

Utilities are excited to watch our success. Turning to wins. During the third quarter of fiscal twenty twenty, we shipped two megawatt ECS to our onshore wind partner, Inox Wind. As we mentioned in October, Inox regained compliance with the two megawatt supply contract. This is a very encouraging development for sure.

We stand ready to support our partner in India as they commission new turbines or need new stock of two megawatt ECS. We are also encouraged by INAC's stated desire to lower the levelized cost of energy further by way of a new wind turbine. To that end, we have designed and Inox is now in the process of constructing a prototype of a new three megawatt class turbine for the Indian market. They expect to test and commission this turbine in 2021. Inox has indicated a new three megawatt class turbine is an integral part of its long term strategy to deploy wind power in India.

The three megawatt class platform appears to be a great fit for the competitive tariff environment in India. Inox is working towards completing construction and then commissioning the three megawatt class prototype turbine that we designed. Once commissioning is complete, Inox will then seek type certification for the operating turbine. We expect to work with Inox to build a three megawatt class production supply chain, put in place an ECS initial production order and support the already growing demand for their three megawatt class turbine. We believe we are well positioned to support Inox's anticipated requirements and look forward to doing so.

Overall, the market in India appears set to be in a better position in 2021 than in 2020. We will see. We service the offshore wind market through our partner, Doosan Heavy Industries in South Korea. We are the exclusive supplier of ECS units for Doosan's 5.5 megawatt offshore wind turbine. The South Korean wind market presents a long term opportunity for us as does the global offshore wind market.

We have completed the initial production order of 5.5 megawatt ECS for Doosan's offshore turbine. South Korea has mandated the development of renewable energy sources as part of its plan for long term electric power supply, and Doosan has publicly expressed its desire to secure a large share of this accelerating South Korean wind power market. Our team is working closely with Tucson, and we look forward to potentially penetrating the global offshore wind market with Tucson. In conclusion, as we move towards the end of our fiscal year 2020, which will end in March, our grid segment is driving revenue growth for our company. We are pleased to report $1,700,000 of positive operating cash flow in the third quarter.

We are integrating Nepc into the company and are now marketing and selling static power and correction systems into industrial markets. Our REG team has delivered the REG hardware to Chicago, and we are on schedule. We are manufacturing SPS for the San Antonio Class ship platform LPD, and the delivery of our SPS for our first ship is expected in 2021. We are supporting Inox with commissioning in the field and have provided more two megawatt ECS products as Inox has needed it. We have completed our first production order of 5.5 megawatt ECS produced on and look forward to announcing our next production order for the offshore wind market.

We expect to grow grid revenue again in fiscal year twenty twenty. I am very pleased with what our team here at AMSC was able to accomplish so far this year, especially in the middle of a global pandemic. If you listen to one of the comments that John made, last year, our revenues were about 64 for the entire year. Today, we stand nine months into the year at about 66. The burn is dramatically different on this 66,000,000 of revenue than last year's 64.

I think that was a key point that John made, and and people should should, focus on that. Going forward, we believe that our we are well capitalized to execute on our growth through grid strategy. I'd like to personally thank our employees for their hard work and dedication, I look forward to reporting to you again following the completion of our fourth fiscal quarter of twenty twenty. Manish, we'll now take questions from our analysts.

Speaker 0

Thank We'll take our first question from Philip Shen of ROTH Capital Partners.

Speaker 2

The first one is on Nepcie. Just was wondering if you could give some more color on how the combined offering now is playing with your customer base. So for the new energy product offering, how has your pipeline changed versus what it was pre NEPC? And what kind of momentum are you guys getting?

Speaker 1

Yeah. We feel really excited, Phil, about the integration of the teams. They're working tremendously well together. We kinda hit it at some leverage and some synergies between the team. That's working already extraordinarily well.

I think the depth of the pipeline, continues to show signs for growth. I think the diversification of that pipeline has been a key focus for, the team. We're really excited about the future together. You know you know, when I talk, Phil, I'm more focused on the next quarters than necessarily the next quarter. But in the long term, we think this is really a nice fit, but the teams are very comfortable already working together.

Speaker 2

Great. Thanks, Dan. And then as a follow-up there on VVO specifically, can you give us an update on what the utility activity is there? What kind of follow-up follow on orders you're getting? Or have you made it into kind of stand purchasing for a bunch of these utilities?

And if so, you know, how many? And and how many do you expect to secure going forward? Thanks.

Speaker 1

Yeah. I I remain tremendously excited about BBL. I think it has a perfect fit for something that's really a critical need today on the grid. We've been able to now show, with utilities, multiple projects already where we've been able to deliver very quickly the results that they were looking for. I think there's a lot of upside there.

The the type of selling that we're seeing with utilities, I think, is also gonna help us to sell larger systems for REG. Also, potentially, to be able to penetrate utilities with, the next few offerings as well as certainly reg. So VVO becomes, a very important piece of the strategy as we look on how to serve utilities demand. As you hear, a lot of them in new energy power systems part of the business, it's really grid connection for renewables, and we have diversified into industrial. You know, that's really where the business has been.

In the future, you know, we're looking to further to work more with utilities. The VVO definitely has been able to demonstrate that for us. So, you know, net net, we're really, really happy with the progress year to year with VVO. We do think there's tremendous opportunity. And as I mentioned in the outset, the tailwinds are really strong behind us here.

The grid needs to dramatically evolve to be able to support a lot of this distributed generation, and we think PVL is a is a key actor in making that happen.

Speaker 2

Great. We look forward to hearing on more progress there going forward. Thanks, Dan. I'll pass it on.

Speaker 0

Thank you. We'll now take our next question from Colin Rusch of Oppenheimer. Please go ahead.

Speaker 3

Thanks so much, guys. Could you talk a little bit about the major design process and how we might start seeing that begin to roll through the P and L? Seems meaningful that you've gone into another class of shares at this point.

Speaker 1

Sorry, Colin. The line is breaking up a little bit. I heard that you said something about meaningful profit, but I don't know which product, but that Yeah.

Speaker 3

Yeah. On on the navy ship. Right? So so the the navy design process, and and how quickly we might start to see some of that revenue start to flow towards you guys.

Speaker 1

Yeah. I think it's hard to predict. You know, we're trying yeah. You know where we are with San Antonio, and that that's about 10,000,000 per year per shift. We're obviously at elevated levels relative to that because we have four on order.

Right? So we're trying to deal with that demand and being able to deliver systems. So from a meaningful standpoint, you know, that part of the business, I think, is important, today, but becomes even more crucial as we look at the longer term, you know, multiyear horizon. To get the next platform, what I telegraphed in in in the call this time and I telegraphed last year is we know what we think will be the next platform. We're doing engineering work on it now.

I can't handicap on how long it's gonna take to get to a procurement. I think what the Navy's looking to do is to determine which specific whole number would we go and get them started on. You know, but typically, you're looking at stuff that they're gonna buy a year, year and a half in advance to kinda give you kind of, how to flow through with your revenue model. So we got an order for another platform. It might be a year year and a half before we have to deliver the revenue.

So we are very optimistic from what the Navy feedback has come to us on what we've been able to do to date. We're really excited about 2021 with the Navy because it's an important milestone in the delivery of the first system. And I think that will help us in selling additional systems, not just to the US Navy, but the foreign babies as well.

Speaker 3

Okay. That's that's incredibly helpful. And then on the rec side, you know, obviously, moving forward with this project is a meaningful benchmark for the industry, along with you guys. Can you speak to how conversations in other geographies are going and the pace at, which those folks are evaluating potentially move forward with pilot projects.

Speaker 1

Yeah. I'd say the number of utilities, particularly the ComEd, is being a great cheerleader for, you know, continues to increase. They're they're trying to hail this as a very important product for their future. They're they're trying to help market for upsell utilities. I think that's a tremendous guide to us.

They've been extremely supportive of our company. They really think that the the product is a a key part of their future, and they're literally out talking to other utilities about RAG for us because it really does again, it fits a compelling need in in the grid today. So what we hope happens is, you know, we deliver all this on time, get it energized, and then we're in a position to take orders from the from the broader market. So stay tuned. Thanks so much, guys.

Thank

Speaker 0

you. We'll now take our next question from Eric Stine of Craig Hallum. Please go ahead.

Speaker 3

Yes. Good morning, Daniel and John. It's Aaron Smahal on for Eric. Thanks for taking the questions.

Speaker 1

Thanks, Eric. Good morning.

Speaker 4

Maybe first on Inox. Now that the focus is on the three megawatt platform, you kind of talked a little bit about prototype design and commissioning. But can you just give a little bit more detail on how you're thinking that business can look here over over the coming quarters as we kind of progress through those, through those steps that are needed?

Speaker 1

Yeah. You know, I'm actually demonstrated with the two megawatt. They didn't need to get the type certification to start taking orders for the turbine or to start building supply chain. What we're telegraphing today is they're now actively working to build that supply chain, but we don't have an order yet for three megawatt even yet. So I think getting through the events that happened during the quarter were critical, to really set the table for the relationship going forward with the three megawatt.

So all I can say is stay tuned at some point. You know, we expect there to be an order for initial production for the three megawatt. We know they already have demand from what they said on their conference calls to their investors. And overall, the market seems to be improving here in 2021. So we're very optimistic about not only the two, but the three megawatt in 2021 for ION.

Speaker 4

All right. And then maybe my next question on the supply chain. I know that localizing that has been a big focus for you and has helped a lot. Can you just talk about if you're seeing any issues there given kind of what's been going on?

Speaker 1

Yes. We've seen issues with COVID in in our supply chain across our product lines. The team has done a tremendous job trying to overcome those challenges. We haven't missed a beat in production. We haven't missed a beat really with the financials due to COVID.

But I think the longer it goes, certainly, the harder it gets on our suppliers to be able to deliver to deliver timely at the volumes that we need. Specifically, we can win in the three megawatt. You're you're you're not creating a completely brand brand new supply chain. All the suppliers are known. But in some cases, you're talking about brand new parts, brand new fittings, brand new pieces that have to go into the cell.

So, you know, that has been challenging, I'll say, to be able to develop internationally during the pandemic because you can't really travel and and and be there at suppliers. But we're trying to manage through it and do the best we can. You know, at the end of the day, Inox drives us. If they build their order book and the demand, that was a timetable for the need for the suppliers like us.

Speaker 4

All right. And then maybe last, just on the balance sheet. Can you talk a little bit about the priorities given the strength there? I mean is it more acquisitions, preparing for that reg kind of pipeline as it moves

Speaker 0

to the next phase?

Speaker 4

Or or just anything else we we should be thinking there?

Speaker 1

We wanna continue to scale the company. We wanna grow and diversify. We think that the diversification, we think that the reduction of revenue volatility period to period are all things that are tremendously valuable for the company. I think the selection of going down the path with Pepsi was really sparked by the team, who presented the the idea really went by by John here, to to go after these guys and make them part of us. The integration's gone very well.

So we were very confident that we can buy and integrate companies. That may be one path, certainly, to scale. We also are looking internally at organic waste in parallel to be able to to grow and scale the company. We think we have a tremendous platform that we're serving markets with a critical need today for power management and that type of infrastructure within the grid, renewables, and and industrial. So we just wanna keep going in all the directions that that we're we have been successful so far.

Speaker 4

Understood. Thanks for taking the questions.

Speaker 0

Thank you. We'll now take our next question from Jed Dolzheimer of Canacao De Giniti. Please go ahead.

Speaker 5

Hi, thanks. Thanks for taking my question, Dan. I guess on reg reg, I should say, could you I understand the technology. I was just wondering if I could if you could articulate the value proposition to the utility beyond improvement of resiliency? Because utilities seem to be under pressure.

What's the pull for that?

Speaker 1

Yes. The pull is very strong, and it's very clear. So what we're really competing against is other capital spends to upgrade substations, build new substations, bring more transmission into the urban core that are all tremendously expensive. So what we've seen is at a substation, if they need to expand capability, REG in many ways is a much quicker, lower risk, and more economical way to do it than the traditional means of of just building more out of the grid out. It's a very elegant way to be able to share existing assets.

It's a it's a very simple way utilities get to understand how to add traffic to capacity within the system, and really focus on moving power to where it's needed when it's needed. So utilities kinda get it. It's sold very much as kinda how they would how they look at any kind of capital project. And it's, you know, what's the benefits of the rate payer, versus, like, the capital spend? And REG is, from a utility standpoint, is really a positive, positive product.

Speaker 5

Got it. I guess I'm still not fully understanding the value proposition. So if I'm a utility and I'm under a decent amount of pressure and I have a set budget, how do I reallocate budget to you for Reg versus allocation to, for example, you know, improving you know, adding to my wind and solar assets to kinda green up the business? I'm I'm just curious. How how should I think about that reallocation of resources to Rick.

Speaker 1

Yeah. The problems that that you you talked about are are are different in the spirit. So the problem we're trying to solve is on the grid itself, particularly in the urban system. So what you're doing is, let's say, I don't know, pick a big city, Chicago. For them to build a brand new substation downtown is highly cost of, prohibitive.

It's in the high hundreds of millions of dollars to could be as much as a billion when you look at permitting and land acquisition and all that. As they need to be able to evolve their grid, they see reg as a way to do exactly the same things at a much cheaper cost. So what we're trying to focus on, Jed, simply is where the grid needs to to grow or change be it through green, be it through distributed generation, be it through gentrification of neighborhoods, be it through natural upgrade of breakers and and and things, within substations. We're trying to leverage those types of projects to show a utility that REG is a more cost effective solution to provide the additional capacity and reliability that that they're after. Got it.

That's helpful, by

Speaker 5

the way, Dan. So just to, I guess, finish this point, I should look at that as if it's largely city based in terms of you know, if you have an existing city, you have an existing infrastructure, your solution is more cost effective when you look at having to add a substation versus tearing up streets and things of of that nature. Right?

Speaker 1

And we're exactly focused on urban because that's where the higher value is. And now you think about how the grid needs to evolve on the distribution side with more distributed generation in the city, more driving towards electric vehicles and such, changing the demands on the distribution grid means that the distribution grid grid is gonna have to be designed differently. And we think ready comes out of the backbone to build that new downtown grid around. At least that's what Chicago tells us. Got it.

That's helpful.

Speaker 5

Thank you. I guess just with respect to Nepsey, it looks like a great acquisition. But I'm just curious, if I look at the core business, is Nepse going to experience a steep decline in Q4? Or is it just that the, sort of the D VAR and and kind of that core business is, is, what has been declining?

Speaker 1

No. I think you I think you're missing it entirely, Joe. I'll be direct with you. Joe made a comment. We're not shipping any ECSI.

It's wind. Grid is growing. Grid is doing tremendously well. We look year to year, the organic business and adding FC both. So D VAR is growing.

SPS is growing from a revenue standpoint. GBO is growing. Everything's growing. And you're adding in Pepsi, which we hope to be able to grow. Really, the weakness in in the number that you're seeing that John had mentioned for q four is really wind is gonna be tremendously light.

We're in a unique position where we can allow for that and still not have the burn explode. You know? People that have been with us three, four years, if we didn't have a lot of ECS for those quarters, they were very difficult quarters financially. The good news, I think, is we look at March in the numbers, you know, the the revenue is right in line with where we've done in prior quarters. The burn is right in line with those prior quarters as well, even though wind is very light.

Speaker 5

Yeah. I mean, I I I hear you with that, but, I mean, maybe just help me with the math. Because if I look at q three, it looks like D VAR, was cut in half. So I guess when you say that I'm missing it, if, you know, you had Nepse at 6.6, Is and the SPS is is, you know, fairly stable. I guess I what am I missing?

Speaker 1

Because it does look as if for q four. SPS is growing. I think the second part you're missing is there is an acceleration of revenue in D VAR where you have q one, especially q two, to some extent, where you have additional revenue that was planned for q three and q four that were pulled forward. So when you look net now, you look at trailing 03/04 quarter averages, we still see growth,

Speaker 0

you

Speaker 1

know, fifteen, twenty, 25% for all the product lines, in some cases as much as 40%. Okay. I'll take it offline. Thank you. Sure.

Speaker 0

Thank you. There are no further questions. At this time, I would like to turn the call back over to Mr. Daniel Matane for any additional or closing remarks. Thank you.

Speaker 1

Thank you. We accomplished a lot and ended our 2020 really on a strong note. We delivered positive operating cash flow. We announced the acquisition of Nepsey. We concluded an equity offering for just over $50,000,000 in net proceeds through the issuance of 3,700,000.0 shares of common stock, which we priced at $15.

So those involved with that, I hope, you know, feel happy about the performance of the business. We published an eight k on October 5, which went through details on Inox's compliance with the default code. I think you get to understand kind of really by by looking at where we are with Inox. And most recently, we announced our fourth ship protection system contract with the US Navy for the Richard m McCool, which I just like saying McCool, I guess. We're in a great, great position as we look at trying to finish out strongly here in 2020.

I think the prospects as we look at 2021 if you listen to everything that I said, I don't know how many times I said 2021. But 2021, we're delivering red. 2021, we're delivering SPS. 2021 is a big year for the three megawatt. 2021 is a big year for these new energy power systems.

We are in a wonderful position as a business. Sometimes I have to to temper my enthusiasm because I do realize that we are in the middle of pandemic. But any day, supply chain things could change, and all our hopes and and and desires could be affected if we're trying to to to fix a problem that isn't necessarily, something that we created ourselves. So trying to balance my kind of exuberance overall of the business knowing how hard some days and some weeks can be just to be able to get parts. So we're really excited about 2020.

We'll be able to come back to you and report on the full year next time. Appreciate everybody's interest in the company, and we'll talk to you soon.

Speaker 0

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.