Below is the Q3 2011 CC transcript plus a couple of passages relating to potential sales from the October 18th update call. (There was quite a bit of other interesting information in the October 18th call, such as an explanation of Regions 1, 2, and 3 in a wind farm, and information on turbine stress reduction.)
The link above has links to both the November 29th CC and to the presentation from the October 18th call. I don’t know if the October 18th webcast is still available.
Overall, it sounds like they are getting the contract manufacturing ready in a professional, skillful way. And it’s hard to believe they would be doing all this – and speaking the way they do in the CC – if they weren’t very sure that follow-on orders will be coming. But that’s the $64,000 question. I’m sure we’ve all seen too many examples of CEOs thinking that the big orders are just around the corner, but the orders never materialize. In the CC, Major does seem to have stepped back a bit from the October 18th call, where he said:
October 18th.
Q. OK. All right. Those two big orders that were _____ under contractual obligations, follow-on, the BP and enXco, are those still on track? And are – initially the impression from management was that we would hear about those by the end of this year. Can you give just us more color on where those ____ ?
A. Yeah, I think we should be on track to performing with those guys.
Q. All right. So, by the end of this year we should know something?
A. Yeah. Yes sir.
Below is another interesting exchange from the October 18th call concerning orders. This sounds like no large orders would have been likely until the reliability testing was complete, and that is something they are doing now.
October 18th.
Q. And in terms of just what you’ve seen in your negotiations with operators over the last year, the recent contracts you’ve signed and the ongoing negotiations you have with BP, enXco and others, are you seeing pressure on price? Like are you looking at lower prices for – in order to deliver larger orders? Or, what, like, you know, without saying what the price is, can you give us some color on where – what the negotiating tenor has been through the year?
A. Yeah, I’d say that the main negotiating point – and it’s not really a negotiating point – but the main _______ is everybody getting comfortable that this system DOES deliver more energy AND that this system is reliable. So it’s kind of interesting, if they get comfortable that the thing is a reliable product and they get comfortable that they are going to routinely see substantial increases in their output, they’re good to go. And I’m sure – I don’t want to be naïve about this – I’m sure that once we get past those comfort zones and have a good discussion, and they’re on board that this thing is really kicking up the output of their farms, then they’ll come and say, “Come on, guys, can you give us a little bit of love here or there on pricing?” But that’s not the main point here. The main point is, “Does it increase the electrical output and is it reliable?” And you know, honestly, my take on it is, once we have those firmly – once the mindset of the industry fully shifts over to accepting those, we’ll be capacity-constrained for a long time. And people will be more concerned about “when do I get my product?” than they will be about how much they have to pay for it. And you know, this is a fairly large industry that we have to ramp to so we could, once we’ve made that transition, we could be facing many quarters of capacity constraints.
Q. OK, and final question on that reliability, you know, sort of having several years under your belt on the wind farms, what do they need to see that will give them that level of comfort?
A. Well, you know that, one of the things that – of course if you’ve got 20 years of operation and you have a thousand units deployed so you know how many millions of ________ you have and your failure rate, that’s always well and good. But in the world of optical systems, or in the world of technology systems period, there’s a very well-established world of reliability engineering, how do you understand the reliability of a new system that has never performed before. So, you know, we understand the reliability performance of the components. We have good modeling tools that allow us to look at the reliability of modules as they’re completed. So we actually have a reliability budget that we can work up, essentially from first principles, where if these components and systems are manufactured cleaning, we have a good idea of what the failure rate will be in the field. And that kind of reliability review, that kind of data, is very standard in the semi-conductor industry, the optics industry, the telecom industry. You’re flying aerospace, those systems, really, their only test is when they actually fly, but they have a lot of testing they do up front before they put a system out there. So, there’s a lot of industries where reliability predictions are a standard part of life, and we’re off doing that now.
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Q3 2011 CC TRANSCRIPT
(I’ve bolded the parts of the transcript where potential orders, or expectations of orders, or steps being taken to attract those orders, are discussed.)
Jo Major, Chairman of the Board, Interim President & CEO John Green, CFO Claudia Jacques, General Counsel
CLAUDIA JACQUES [Comments re forward looking statements] Please bear in mind that all amounts discussed today are in U.S. dollars unless indicated otherwise.
JO MAJOR Thanks, Claudia. Good morning, everyone, and welcome.
I’m joined today by John Green, the company’s CFO. John will provide a summary of our financial performance after my introductory remarks.
The third quarter of 2011 was an important period of transition for the company. During the last quarter’s conference call, we discussed our focus upon three main goals. First, we launched an accelerated program into low-cost, high-volume manufacturing so that we were positioned to ramp up production for growth that we see coming in both bookings and sales. Second, to provide good transparency and clarity for shareholders so you all can understand the evolution of this company. And three, to focus on strong and lean business practices. Given our achievements over the past few months, we have executed well on those goals.
The company began this transition with the move of our corporate headquarters and assembly facility into a new facility in Chantilly, Virginia. The new site serves as our headquarters and the primary technology development center. We shipped a modest number of units from our old facility during the September quarter. Following our move into our new facility, we are now shipping at much higher rates. Specifically, shipments this quarter will be approximately 400% higher than the September quarter and we will ship approximately as many units in the December quarter as we have in the entire prior history of the company.
As we articulated in prior statements, we are planning for further substantial capacity expansion as we commence shipments from our contract manufacturing partner next quarter. We have executed very well in the first phase of our plan. Given our hiring, the strength of our technical achievements, and our shipment progress following our move into Chantilly, we are very confident that we now have the technical, manufacturing and supply chain assets in place to produce and ship products in real volume.
In this last quarter we signed a Letter of Intent to enter into a collaborative agreement with TechnoCentre for the installation of a unit on one of its REpower MM92 2.05 MW turbines located in Quebec. This provides us with an excellent opportunity to validate performance in cold and harsh weather conditions, expanding our market potential especially in Quebec, where over 3,000 megawatts of wind power is expected to be installed over the next three to four years.
We’ve already started booking orders for next quarter where the product will be shipping from our contract manufacturing partners and we are excited about sales growth going forward. We will be talking about follow-on orders to key customers in the near future, with those orders fueling strong growth for multiple quarters to come.
From a leadership standpoint, and subsequent to quarter-end, we added John Green as our Chief Financial Officer, and Fred Belen as Vice President of Technology and Product Line Management. John has had a great career in the management of tech companies, having served in key roles at Advanced Micro Devices or AMD, Cyprus, and Corsair Memory. Fred has had a really interesting career, a strong technologist with good people skills and a rich breadth of product management experiences across a wide variety of settings. They are mature, skilled managers, and will be key contributors as we build out our management team to enable smooth performance in our growth phase.
In other recent developments we announced last month that we had withdrawn our membership in Falcon Fifty LLC. Falcon Fifty was an entity created for the ownership and use of a corporate jet. Additionally, the company terminated the consulting agreements of approximately 30 consultants, primarily OADS employees, effective October 5th. The company has also made strategic decisions to no longer market the Racer’s Edge, Windseeker, and the Beta version of the Vindicator. The market size for the Racer’s Edge and Windseeker products is small relative to the wind industry, and we felt strongly that pursuing those markets was simply a distraction.
We also discontinued active marketing of the earlier Beta version of the Vindicator. This action was taken for a couple of reasons. First, we are not planning to transfer this unit into production. More importantly, our Chantilly team has resolved many technical issues associated with the beta unit, leading to a more robust and reliable product, and we added key new features to our production product. These technical features have already been debuted in a fantastic demonstration with Axys, where we mounted a unit on a floating platform and then achieved truly stunning correlations with multiple different wind measurement devices used in the wind resource assessment community. As a result of these decisions to discontinue product, the company incurred a number of non-cash impairment charges during the quarter, the specifics of which John will walk you through during the financial portion of the call. The decisions, however, have already made the company more cost effective and much more financially flexible going forward.
Finally, I really believe that companies perform best when the employees are well-aligned to shareholders, specifically by giving them a path to ownership in this company. At this point in time, I’m very proud to say that all of our employees now have stock options. Along this vein, I also feel that it is appropriate to note that in accepting this position as interim CEO I only requested equity for the service and no salary from the Board as I, like the Board and really, honestly, our employees, all clearly now see the value that we will be creating in this company in the future.
I would like to now turn the call over to John, who will review our financial performance in detail.
8:10 JOHN GREEN, CFO
Thank you, Jo, and good morning everyone.
Catch the Wind generates revenue from the sale and rental of its laser wind sensing products. The company recognized revenue of $348,000 for the quarter ended September 30, 2011 compared with $7,500 for the comparable period in 2010. On a nine-month basis, revenue generated was $738,000 in 2011 compared to the same $7,500 in 2010. Being that we operated as a development-stage company until June 15, 2010, revenue was not recognized prior to that time.
Cost of Sales for the third quarter totaled $527,000 compared to no cost incurred for the same period in 2010.
Operating Expenses for the third quarter of 2011 totaled $11.2 million, but after excluding $7.5 million in Property & Equipment and Intangible Assets impairment losses for the three month period ending September 30, 2011, the costs remained flat at $3.8 million as compared to Q3 2010.
The Property & Equipment impairment of $2.5 million was primarily for the Falcon Fifty aircraft, whose market value was below the carrying value on the books. The Intangible Asset impairment loss totaled $5 million, and was the product development cost for the Vindicator Beta product that was capitalized in June 2010. On a nine-month basis Cost of Sales totaled $1.6 million compared to no cost incurred for the same period in 2010.
Operating Expenses for the nine month period ended September 30, 2011 were $21.4 million, but after excluding $7.5 for impairment losses for the nine-month period ended September 30, 2011, the costs were $13.9 million, which was up 28.9% from $10.8 million for the same period in 2010. The increase in expenses was primarily due to an increase in $2.7 million in Research & Development costs and inventory that was written off totaling $1.4 million. It is important to note that expenditures for R&D efforts, while comparable on a period-to-period basis, are reflected differently in the comparative financial statements due to the company’s transition from a development-stage company to a commercial enterprise in June of 2010.
The inventory value adjustment totaled $1.4 million, was up from $.5 million in Q3 2010. Driving this was the write-off of Vindicator Beta, Racer’s Edge, and Windseeker units, which totaled $1.1 million.
The R&D and Inventory write-off costs were partially offset by a decrease of $2.4 million, combined consulting, professional, and professional engineering fees and a $600,000 reduction in a non-cash loss related to the change in fair value of the company’s warrant liability.
Net Loss for the period ended September 30, 2011 was $10.9 million or $.10 per share. This compares to a Net Loss of $3.7 million or $.07 per share for the same period of 2010. Net Loss before the Property & Equipment and Intangible Asset impairment losses, which totaled $7.5 million, was $3.4 million or $.03 per share. On a nine-month basis, Catch the Wind generated a Net Loss of $20.7 million or $.22 per share compared with a Net Loss of $10.8 or $.19 per share for the same period of 2010. Again, before the impairment losses for the Net Loss was $13.2 million, which was flat to the first nine months of 2010, which was equivalent to $.15 per share.
Net cash usage in the third quarter was approximately $10.8 million and as of September 30, 2011 we had a working capital balance of $8.4 million including Cash and Cash Equivalents of $9.3 million.
This concludes my review of our financial results, and I will now turn the call back over to Jo.
12:45 JO MAJOR
Thanks, John. We are very pleased with our progress to date and the opportunities that lie ahead of us in the coming quarters. We’ve taken very real and significant steps towards developing cost-effective technical and operational capabilities that will allow us to move into full manufacturing mode, supporting our growing business.
We are now self-sufficient in our technical and manufacturing capabilities and have identified and reduced unnecessary waste in our operations, both bringing down our cash burn and making us much more flexible financially. We look forward to discussing our continued progress and multiple sales contracts with you in coming quarters.
Thank you much – thank you very much now for listening. And at this point let’s open it up for questions.
13:35 Q&A RUPERT MERER– National Bank Financial
Q. Morning everyone. A. Hi, Rupert, how are you? Q. Very well. How are you? A. Good.
Q Can you give us a sense of what you expect your cash burn to be going forward?
A. I think we gave guidance on the last call, John, that we were thinking that cash burn would be something – before we talk about the profit off of revenues – so if you just look at our cost structure, cash burn would be about $.5 million a month or $1.5 million a quarter.
Q. OK.
A. So that’s kind of where we’re ball-parking that. Obviously, as sales start to ramp up there’s flow-through on the sales that starts to offset that. Basically, the break-even point for the company would be, you know, $4.5 million, $5 million a quarter or so.
Q. OK. And to get to break-even, what are your gross margin assumptions and how…?
A. Well, we gave - we haven’t given short-term guidance – we talked about this being a standard – it’s a relatively standard high-tech optical system, and those are typically carrying gross margins in the 40% range.
Q. Do you think that you’ll get to gross margin positive in the next couple of quarters?
A. Can you say that again please?
Q. Do you think you’ll have positive gross margins in the next couple of quarters?
A. Well see, some of our contracts have these funny revenue recognition things and that screws us up a little bit, but clearly we’re – if you look at what we’re selling these things for and our cost of construction, yeah, we’re already in gross margin territory. That’s right, right John?
A. (John Green) Um-hum. Yeah, coming quarters, especially once we’re into contract manufacturing, we will have positive gross margins.
Q. You suggested you’re going to have some announcements to make on follow-on sales soon. But what does your backlog look like today?
A. So, we already have part of our Q1 shipment schedule booked in. We haven’t commented directly on book to bill or percent order coverage for quarters. We are going to be – you know the real growth for us – our orders come in two pieces and we’re pursuing both. One is continually bringing new customers in so that they can buy two, three units at a time, you know, really small orders so that they can take a look at these things and understand how they perform. Where the real growth occurs is the follow-on orders when the customers that have already seen these things and know how they operate and where we’ve integrated them into the controls systems of their wind turbines.
If you look at our customer base now there’s already, you know, several thousand wind turbines that we can go out and put units upon, so there’s a really lovely revenue opportunity in getting the follow-on orders. So, although we’re not talking specifically about bookings, our quarter’s partially filled in Q1. What we’re looking for now, and where you’ll see announcements from us, is the follow-on orders which really give us a path to shipping hundreds, if not thousands, of units.
Q. OK. And you think there’s good potential to have those sorts of announcements prior to Q1…
A. (John Green) Can you speak up, please, a little bit?
Q. Do you think there’s a good potential to see those type of follow-on announcements in the coming quarters?
A. Yeah. And the exact timing of them is a little bit hard to call because they’re much larger economic orders, so I don’t want to – I don’ think we want to sit here and call a date for these things. But it’s clear that that’s where we’re aiming now. And those orders, when we start to look at the customer who we’ve already done business, you know we’re really working with those guys to tie up questions on the technology side, questions on the economic side and get those big orders placed. And yeah, that is where we believe the growth of the company’s going to come from.
Q. What do you think your production capacity will be in Q1, the outsourced production?
A. Um, we’re targeting production capacity that would take us close to, I guess it would be another 400% uptick in production capacity on a units basis from the contract manufacturer. So, you know, we don’t want to get into exactly how much capacity we have in place. We have enough capacity there that we won’t be capacity-limited. By Q2 if the orders start to come in, we could be in a capacity-constrained environment by Q2 already. And at that point it’s just a race to how much capacity could we put in to drive the revenue up.
19:15 Q. What would be the bottleneck for increasing production capacity?
A. Interesting question. I think t here’s a few. Pragmatically, what you’re doing – at this point in the production cycle for a product like this, we would be targeting something like 50 to, say, 150% growth per quarter. So we’d have to bring key assets online into the manufacturing – into the contract manufacturing environment. They’ll have plenty of people there that know how to do the assembly but there’ll be certain tools that’ll be needed to get them aligned [?], to get them up and running. So usually you’re constrained by a few pieces of equipment. Obviously, you know, we’re looking at the capacity that we want for coming quarters, ______ forecast ______ we need to get that going with the contract manufacturer, but generally those capacity ramps are limited by a few pieces of equipment here or there. Q. All right, great. Thank you.
20:35
KHURRAM MALIK - Jacob Securities
Q. Good morning. A. Hi, how are you? Q. Good. How are you/ A. Pretty good. Q. Fantastic. OK, just a – most of my questions have been answered, so just a couple left. In terms of moving to third party manufacturing in Q1, what is – if you just give us some insights – what are the logistical steps left to sort of you know switch on the lights and start producing Vindicators?
A. At this point probably the best way to think of an optical system like this is a whole bunch of sub-assemblies. And, you know, really what you’re – when you move into a manufacturing environment you move piece by piece. So each sub-assembly is – you find a place to manufacture it, test it, make sure that it goes through quality assurance and then you start moving up the food chain to higher level assemblies, higher-level testing. So the – kind of the last steps that you’ll see in a process like that is final assembly and final test. The lower level assemblies and the component purchases will all be sort of put in the supply chain and all of that will be work through. So if you were to look, if you will, at a family tree of this product, as we nestle down into contract manufacturing we’re going up to the top of the tree with final test and, excuse me, final assembly and test.
Q. OK. And assuming all that stays on track, you can get through all that, have your supply chain lined up and have production started at some point in Q1?
A. Yeah. This is – it’s a very interesting optical system, but it’s an optical system. I’ve transferred a lot of optical systems in my career. And, you know, we’re going to batten this thing down and ship a lot of these going forward.
Q. OK. Is there any - earlier we were talking about bottlenecks in the production capacity when you go to third party, are there any constraints on the supply chain upstream in your value chain at all or is it purely just on the actual ability to manufacturer the units?
A. Probably a little early to tell if we’re really honest with you guys. If we had a few quarters of growth where we were doubling or tripling each quarter, it would really start to test all the pieces of the supply chain. And until we’re there, until you really test a supply chain like that, you don’t know.
Q. Um.
A. So I guess the honest answer is if we’re really ramping hard there’s going to be some challenges in the supply chain. Every ramping business faces those and we’ll go out and work them really fast.
Q. Good.
A. One color comment there is, I think we’ve done a pretty good job in looking through the vendors, making good vendor selectors, finding good second sources, making sure that pieces that weren’t really suitable for a manufacturing environment, we got those redesigned or transferred over to a supplier that was capable of volume. So I think a lot of the groundwork has been done there and at this point, you know, the first time we get the ramping really going hot and heavy, you know, we’ll test the supply chain and we’ll see. But I think it’s going to go reasonably well.
Q. OK. OK. So the next question is so you didn’t [did?] mention in your MDA and I think on another call, on a previous release, that you are starting to book orders. Are those primarily, just seeking clarification, with new customers you haven’t been involved with before or do these relate to follow-on orders with existing guys you’ve sold units to or have commitments with?
A. They’re both. You know, the – as we said, we will have a continual stream of new customers that we are actively soliciting so that they can come in and look at these things. As we all understand, when you’re looking at a customer that has 1,000 units and they’ve bought three or four Vindicators and they know how they run, that’s a huge target for us. So the orders that we’ve gotten for Q1 are a mixture of old and new customers. Obviously, you know, we haven’t had a 500 unit or 100 unit order that’s been placed with us cause we’d talk to you about that. But those kinds of orders are where we’re looking to close-up right now.
Q. OK. So when you earlier talked about – OK, so you may be production constrained by Q2 next year and you’re looking at these large follow-on orders. When you balance those two considerations together, would it be safe to assume that the bulk of sales in 2012, and actually into 2013, will be with existing customers and follow-on orders, and then a smaller percentage with new customers placing orders for small units and then follow-on orders as well?
25:35 A. You know, that’s a fascinating question. When you have a, let’s just say we have a 3,000 unit market that’s our existing customers. You could look at that and say, “Well, you know, the company could be quite nicely busy for at least 18 months building out all that stuff,” I think if we really look at the market as a whole and we say, “OK, our initial ramps right now are just us getting our feet wet,” I think we need to recognize that we have to have enough capacity to go get to those 3,000 units, but we have to be able to expand beyond that and pretty quickly actually.
So, you know, if you look at the challenges that the company faces, we have a wonderful problem ahead of us, which is when this thing starts to really ramp, we need to ramp well beyond our current customer base because if we don’t, we won’t command the market share that the company really deserves. So one of the things that’s if you look not next month, but if you look six months, nine months ahead of us, strategically, we need to be getting our footprint into more farms, number 1, and then expanding into OEM sector. Both of those are going to require substantial capacity, so we need to be very aggressive in putting capacity into place, as we really want to be the large market share player here. We don’t just want to go get these 3,000 units.
Q. OK. Fair enough. Now with the BP and enXco orders, which a lot of the, I guess, the _______ community is sort of focused on with you in terms of large follow-on orders, are you at a stage with those two customers where it’s simply just negotiating terms or are there still some deliverables that have to be sort of done before you can get to that stage?
A. Those guys have received stuff. There are some minor logistical things we need to do, but with those guys we’re starting to get a good sense of our performance out in the field. And, you know, I don’t want to go into specifics about negotiations but we’re moving ahead with both of those guys in talking about what are the – what does bigger business opportunities look like – what do bigger business opportunities look like.
Q. OK. So when you were talking earlier about being capacity constrained in Q2, is that under the assumption that one or both of these have triggered the orders?
A. Yeah, I think, well, in general, if we’re going to be capacity constrained in Q2, we have gotten some big follow-on orders. So yeah, when we say that as early as Q2 we could be seriously capacity-constrained and ramping like mad, that is assuming that we close an order or two or three with big – on the big follow-on side, yeah.
Q. OK. Fair enough. And those, I’m assuming those would come at some point early next year, as opposed – is there any chance of this happening in the next few weeks before the end of the year, or are we looking toward – I believe the assumption previously was the end of 2011, early part of 2012. “Early part of 2012” is still a bit ambiguous, but It could mean a few weeks into 2012 or it could be at some point in Q2.
A. Um. That general timing, the rest of the year, early next year, is when we’d like to start to get our capacity for Q1 filled in.
Q. OK. But - likely that’s when – OK, so early part of next year is when we can expect some sort of announcements on any kind of decent-sized orders. I mean, is there any expectation of anything coming before that? _________.
A. We’d love to surprise you guys. But …
Q. OK, ____________.
A. [Laughter] You know, if we give you something for Christmas you all can be happy, but realistically, you know, it may be in December, it might be in January.
Q. OK. Fair enough. That’s the last _____.
A. Thank you.
[Operator: No further questions.]
We’d like to again thank you all for coming to listen to us. And we look forward to updating you about our progress in the coming months. Thank you very much and have a nice day.
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