Superconductor Technologies Inc.
Q1 2017 Earnings Call Transcript

Published: 11 May 2017

[Operator:]

Good day, everyone, and welcome to the Superconductor Technologies' First Quarter 2017 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Cathy Mattison of LHA. Please go ahead, ma'am.

[Cathy Mattison:]

Thank you, Denise. Good morning, and thank you for joining us for STI's 2017 first quarter conference call. If anyone has not yet received the earnings press release, it is now available at the company's website. If you would like to be added to our distribution list or if you would like additional information about STI, you may call LHA at [phone]. With us from management today are Jeff Quiram, President and Chief Executive Officer; and Bill Buchanan, Chief Financial Officer. I will review the Safe Harbor provisions of this conference call and then I will turn the call over to Jeff. Various comments regarding management's beliefs, expectations and plans for the future are forward-looking statements and are made in reliance upon the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and are subject to various risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ from those expressed in the forward-looking statements and those differences could be material. Forward-looking statements can be affected by many other factors, including those described in the Risk Factors and the MD&A sections of STI's 2016 Annual Report on Form 10-K. These documents are available online at STI's website, www.suptech.com, or through the SEC's website, www.sec.gov. Forward-looking statements are based on information presently available to senior management and STI has not assumed any duty to update any forward-looking statements. Jeff will begin with an update on STI's Conductus wire program, and then turn the call over to Bill for a review of the financials. And now, I would like to turn the call over to Jeff.

[Jeff Quiram:]

Thank you, Cathy, and good morning, everyone. During the first quarter, our Conductus HTS wire aim the performance for which we have been striving. As we discussed on our last call, in March we began shipments of Conductus wire to key customers that incorporated the combined improvements in both mechanical strength and critical current performance. We continue to engage with our customers' complete qualification of our wires for their applications. Currently, our efforts are focused on preparing our manufacturing systems and personnel for commercial production of Conductus wire in the coming months. With the expected increase in output of Conductus wire, our plan is to accelerate wire shipments for the remainder of 2017 and beyond. We continue to prioritize customer delivers based on the market potential and timing of the opportunity. The demand from our Tier 1 customers for high performance HTS wire remains strong with new applications emerging as many market participants designed HTS wire into their next generation systems. We continue to move our project with the U.S. Department of Energy's next generation electric machines program forward. Programs goals to bring about the rapid development of enabling HTS wire technology to improve the design of superconducting industrial motors allowing next generation motors to be highly efficient and have a much smaller footprint. We are implementing plans to meet the proposal milestones and finalizing the contract negotiations. We anticipate the project been kicked off in the third quarter. Under the program, we will thoroughly evaluate the production techniques that we believe will greatly improve the performance while reducing the manufacturing cost of Conductus wire. Including the current carrying performance of our Conductus wire in a high magnetic field is the key objective of this project. This allowing with the needs of the designer and manufacturers of superconducting turbines, generators and other large rotating machines. As work on this project and our commercialization efforts proceed, new applications continue to emerge in the electrical power industry with the potential to use disruptive second generation HTS wire. In general, these emerging applications intend to create large scale low carbon energy that create value primarily by lowering the cost of energy generation. Improved power density is critical for these and other new applications as it allow to reduction of weight and overall size while greatly improving power efficiency. We are excited about these progress as many industry experts now believe that 2G HTS materials utilizing where Rare Earth, Barium-Copper-Oxide compounds will play a critical role, allowing magnetic field performance to more than double that of the conventional superconductor wire use today, such as Niobium Ti and Niobium Tin. 2G HTS materials are recognized as superior superconductor, that offers better performance in high magnetic field. Our conventional superconducting wire available in high volume at low cost with that performance limitations in the presence of that high magnetic field. STI's proprietary RCE CDR fabrication processes produces wire superior in-field magnetic performance and it is ideal for many of these applications and offers capabilities not matched by many of STI's competitors. Now, I'll turn the call over to Bill for a review of financials. Bill?

[Bill Buchanan:]

Thank you, Jeff. In our first quarter, revenue was $1,000 compared to $89,000 in a year ago quarter and was primarily from our wireless product from both period. Total R&D expenses amounted to $650,000 and we're $716,000 in the prior year quarter. The lower cost reflect our conducted prior efforts moving from R&D to manufacturing process improvements. SG&A expense were $1.1 million compared to $1.2 million in a year ago quarter. Net loss for the quarter was $2.6 million for loss of $0.26 per share compared to a net loss of $2.6 million for loss of a $1 per share in the prior year quarter. Please note that the per share data is adjusted for the 1

[Jeff Quiram:]

Thank you, Bill. 2G HTS whether offers a new parading for clean our energy sources end market energy use. We continue to believe that we are well-positioned to meet the demand in technical performance necessary to address the near and longer-term market opportunities. Over the coming months, we've plan to provide updates at the appropriate time as we move forward in the commercialization in our Conductus wire. And now operator, please open the call for questions.

[Operator:]

Thank you. [Operator Instruction] And our first question today comes from Amit Dayal with Rodman & Renshaw.

[Amit Dayal:]

Thank you and good morning, everyone.

[Jeff Quiram:]

Good morning.

[Amit Dayal:]

So, Jeff, congratulations on the progress in terms of meeting all the technical requirements that you trying to accomplish. Among those lines what kind of quantities, we shift to customers in March? Did you recognize any revenues from those shipments?

[Jeff Quiram:]

We didn't recognize any meaningful revenues Amit, many of the shipments you're talking tens of meters in totality probably. Some of them are the second or third order that we've sent to a particular customer for qualification, so we are not charging, we're not charging them and we're sending them the second or third part. So, very, very modest revenue, because we are shipping very small quantities of wire, which is really what they need this obligation they don't want anything longer at the moment.

[Amit Dayal:]

That's understandable. But just some clarification, this second or third batch is like after the March initial shipments or this is just follow through from prior shipments?

[Jeff Quiram:]

No, from prior shipments, so footprints - customer has tested a couple rounds of testing and again that testing wasn't recent it was book or we decided to strengthen the water stack so well so anyway that's why you're not really seeing any revenue from those shipments. They're modest in length and we're targeting for some room but not targeting through others.

[Amit Dayal:]

Understood. And then follow up on maybe the front current limited customer. If you could provide any update on what the next step with them are any timeframe within which you could hear back what they want to do next in terms of orders et cetera. And also, how many potential customers are currently qualifying the product right now?

[Jeff Quiram:]

Just in totality, I'll say we've got the wire in the hands of four or five customers right now that are doing qualification testing. The one that has the largest near term financial demand is the kind of limited customer that the status of that is we're really just we're in the slot to get in the lab and get access to all of the testing what's been necessary to go through the qualification. I think that takes a little longer this time than either of us would prefer. But we're in the slot and now we just need to get that equipment freed up so they can move us into the lab into the testing and once they begin that it's a two to three-week period during which they'll do their expensive battery of test. So, we're hopeful that we'll get in there in the next several weeks and then while get the results and then move forward.

[Amit Dayal:]

So, we could hear something on this by the end of this quarter, second quarter?

[Jeff Quiram:]

I'm hopeful that we'll get something done here by the end of the second quarter again that's what we've got about six, seven weeks until the end of June so yes, the goal. I hope we know what's going on in that particular testing activity by that.

[Amit Dayal:]

So, have you since the March timeframe when all of these technicalities were resolved. Have you started maybe getting a little bit more aggressive on the business development side going after more than these four or five people who are testing this stuff right now?

[Jeff Quiram:]

Well, we're a little cautious with that Amit for the reason that we've talked about, the primary, the considerations are several. Number one, everybody is looking for a slightly different version of wire so we're hesitant to start trying to go after multiple recipes, just because that makes it more challenging to run the machine and run machine regular, get regularly and get the machine out. the bigger issue is that we probably don't have the capacity to meet the demands of more than probably one and perhaps two customers for the remainder of this year and that's kind of only be two of the wire demands that they're looking for are very similar. So, we continue to do work with bunch of different customers spending them wire, for them to evaluate again many of those were also talking to our they are at the point in their development of their device that they see demand for wire coming down the road, but it may not necessarily be in the next couple of quarters it may primarily be in the 2018 or 2019 timeframe so we certainly want to be interact with those customers and we certainly want to be on their radar of the same time we don't want to go. We don't want to spend time going after a wire technology or wire configuration for them that causes problems with the customers that we think is more near term as part of being ready to go when they say go. So, it's a balancing act, I hope that answered the question I think we're…

[Amit Dayal:]

No, I understand in terms of how you're situated makes sense. Could you remind us what the dollar value of the total available capacity is? My understanding is it ranges between $3 million to $15 million but I don't know if I'm right on that front.

[Jeff Quiram:]

So, it's between $35 million and $36 million as the capacity that exists in our facility today. So, you can add equipment in the facility that close to many multiples of that, but installed capacity of production equipment today it has a capacity of about $35 million at today's market prices on an annual basis.

[Amit Dayal:]

Understood. That's all I have. I'll get back in queue. Thank you so much guys.

[Jeff Quiram:]

Thank you, Amit.

[Operator:]

[Operator Instructions] Our next question comes from William Lap [ph]. Sir, please go ahead

[Unidentified Analyst:]

Good morning, Jeff.

[Jeff Quiram:]

Good morning, Bill.

[Unidentified Analyst:]

So, basically, we thought when you ship this wire to the fault meter customer number one, we have that turned around in four weeks. I guess it shipped at the end of March and they haven't guided in their laboratory after test, is that what we understand today from your, it's kind of disappointing. I thought they needed it so quickly.

[Jeff Quiram:]

Well, they do, they do need additional wire supply. The real issue for them is --and again part of this is our fault as well. You have to reserve the slot in their testing laboratory and until we got the wire back with the copper plating on and tested to ourselves, we didn't know it was ready. So, it's not like we were able to give them a month or six week notice at all by the way it's ready and get our slot reserve. So, we happen to be just kind of entering their lab at a time where they have a tremendous amount of activity going on and we just have to getting queued. And so, I am just disappointed about that as anybody. But it's we'll just have to deal with it.

[Unidentified Analyst:]

Okay. I mean you got fixed, what you got, but this is our key person and this is what we're focused on. So basically, you said in the last calls you've mentioned it, you would not announce that we met the qualification until you had a shipment from that. Are you going to still - business deal where they're going to buy or not, are you still holding for that, I mean so long, the real question is, do we qualify with this customer, where they order or not?

[Jeff Quiram:]

Yeah, and I agree Bill and now is really the comment I kind of made in the prepared remarks which is we'll announce our progress at the appropriate time. I did really think about those - my answer to your question last time on what we would announce and when and I do believe that you're correct that there probably are some actions that will occur prior to that that we'll merit sharing with the shareholders and the public and so, what we will do that but at the beginning, I'll just say we'll do it at the appropriate time. I guess I'm not going to exactly say what will be the event that will have us put out in announcement, but I will say that our intention now is to keep you and address the shareholders informed on the progress that we're making and we won't wait until that endpoint that I talked about last month.

[Unidentified Analyst:]

But now withstanding that I presume you are having business discussions with these people, so you're assuming that the wire works, the meter qualifications. Are you talking at all about ordering and scheduling and what they would need? I mean we're talking about maybe four weeks, six weeks before don't know, but I mean there is why can't we be talking to them now and saying hey I presume yeah if this works what do you anticipate what are we going to do, let's talk about that?

[Jeff Quiram:]

Well, we know exactly what the next steps are. We know exactly how much wire we're going to ship after the first qualification, we know what process they go through with that. And then we know when the large volume comes in. So, all of those milestones have been discussed and we're very aware of that. So again, I'm not really going to share them of

[Unidentified Analyst:]

No, no you don't have to. So, let me ask you this, is it presumptuous for me to think that once you meet that acceptance that you have very high confidence level that there will be an order in going forward?

[Jeff Quiram:]

Well yes, so I mean to be honest we already have an order for the next step.

[Unidentified Analyst:]

Okay.

[Jeff Quiram:]

And then it's when you successfully satisfy that order, that's when you move to the next step so yes, the answer to that question is yes.

[Unidentified Analyst:]

Okay. And how long would the first step take to prove itself out when you meet. So, in other words, my understanding of the timing is, you meet the qualifications, you go to the next step which is the first order, how long would it take to figure out if that works and then get the big order?

[Jeff Quiram:]

Well, we have 90 days to ship the next order. And so, we don't anticipate that being a problem since we're already working on the wire that we would ship to fulfill that order so…

[Unidentified Analyst:]

Okay. So, you're stockpiling some of that wire on the thinking that we'll get it and we'll be ready to go?

[Jeff Quiram:]

That's correct.

[Unidentified Analyst:]

Okay. And of course, you can't share how much that initial order is, is that correct or incorrect?

[Jeff Quiram:]

I'm not going to share how much it is I will just say that I mean it's not going to change the world from a revenue perspective, it's not kilometer that…

[Unidentified Analyst:]

Okay. So, you anticipate based upon the fact that you're storing some of this wire that it may not even take 90 days, right?

[Jeff Quiram:]

We don't believe it will take 90 days, I mean 90 days is really the customer drop that date.

[Unidentified Analyst:]

Okay.

[Jeff Quiram:]

Drop the ship within 90 days or they consider the failure. We'll take that as soon as you can send it to them and so what our goal would be to be ready and ship it to them this is what we count.

[Unidentified Analyst:]

Okay, then could you just refresh my memory when do they expect to have the lab test done now that you're in queue?

[Jeff Quiram:]

I don't have a particular date, I can't tell you but there need to be a certainty we expect it will be Amit asked a question on whether I thought it would be done by the end of the second quarter I answered yes, that's one clarification I can provide on it.

[Unidentified Analyst:]

All right. Thanks for the insight, Jeff. I appreciate your candidness.

[Jeff Quiram:]

Okay, Bill. Thank you.

[Operator:]

Our next question comes from Orin [ph] with AIGH Investment Partners.

[Unidentified Analyst:]

Hi, how are you?

[Jeff Quiram:]

Hi. Good morning.

[Unidentified Analyst:]

I just want to go again with you, you'd mentioned what the capacity was, is that capacity that can you just repeat that number and is that capacity based on the type of wires specifically because of put forward on the customer? And then I have one follow up.

[Jeff Quiram:]

It's really based on selling when we figure out what's the capacity is, we talk about 750 kilometers of wire at 4 millimeters, 500 dam performance, that's and today is market price. So, the wire that we make ship to our customer may end up being wider, it may slightly have a different performance basis but we still think from a revenue perspective that capacity of that machine is the same. So, I know it's a little confusing but it…

[Unidentified Analyst:]

Could you just repeat in the dollar number that you've mentioned before?

[Jeff Quiram:]

The capacity of that machine is $35 million annually.

[Unidentified Analyst:]

Okay. And gross margins on that type of business what kind of range?

[Jeff Quiram:]

We expect the margins to be in the high 50s to low 60s. And again, margins are driven almost exclusively by yield so the bond cost of the wire are pretty fixed and it's just a matter of you get high enough yield or not. We expect that we'll start whether or not with the particular yield and our expectations that will certainly improve that but we also think to some degree that that any improvements in the yield will to some degree be offset by market prices which we believe will pull out long term obviously go down. So, but our goal is to keep those margins in the high 50s to low 60s.

[Unidentified Analyst:]

Okay, great. Okay, thanks so much.

[Jeff Quiram:]

Okay, Orin. Thank you.

[Operator:]

And we'll take a follow up question from Amit Dayal with Rodman & Renshaw. Please go ahead.

[Amit Dayal:]

Hey, Jeff. Just a follow up on your expectations that are what the distinct procedure et cetera going be. Do you think this time internally, what you've tested before shipping the wire out, we'll meet sort of out of the criteria's that we miss last time, I mean do you expect any surprises on the testing front or will it be run through similar parameters that maybe it was run through last time?

[Jeff Quiram:]

It will be run through the same parameters, we don't expect any surprises. The only caveat that I'll place on that is that we don't have the test scripts to do all their testing. So, we've done the majority of everything we can do for mechanical strength for upstream, everything we can do on putting current through and testing the response of the wire in that way. A lot of what they test is along those lines, so we've done all of that. But again, many of these customers will do some extensive testing on I guess what I call this as accelerated hedging for other things in there, in their particular device. So, however they want to cycle that wire multiple times, thousands of times that's what they'll do and we can't duplicate that to us. So, the only thing I can say is we believe all the mechanical parameters that we were trying to fix have been fixed, all the wire performance parameters that we wanted are there and so we don't expect any surprises and this just a small caveat that we can't completely duplicate their test, so that the results, there is a small degree of unknown item.

[Amit Dayal:]

Understood. Thank you so much for that. Thank you.

[Jeff Quiram:]

All right, Amit. Thank you.

[Operator:]

And there appear to be no further questions I would like to turn the conference back over to Jeff for any additional or closing remarks.

[Jeff Quiram:]

I would like to thank all you very much for joining us today and we look forward to updating you on our progress in the future and speaking with you again on our next call. Thank you very much and good day.

[Operator:]

Ladies and gentlemen that does conclude today's presentation. Thank you for your participation. You may now disconnect.