Superconductor Technologies Inc.
Q2 2017 Earnings Call Transcript

Published: 10 Aug 2017

[Operator:]

Please standby. Good day and welcome to the Superconductor Technologies' STI's Second Quarter 2017 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Cathy Mattison of LHA. Please go ahead.

[Cathy Mattison:]

Thank you, Ashley. Good morning and thank you for joining us for STI's 2017 second 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, wwwsuptech.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, after which we'll open the call for Q&A. And now, I would like to turn the call over to Jeff.

[Jeff Quiram:]

Thank you, Cathy, and good morning, everyone. In the second quarter, we remained focused on commercializing our Conductus wire and made progress on our U.S. Department of Energy project. We finalized negotiations on our $4.5 million government contract in June and have begun work on the process innovations for HTS Wire Manufacturing project. I'll talk more about this contract in a few minutes. As discussed on our last call we have successfully incorporated both the mechanical and critical current capacity performance improvements into our Conductus wire. In the second quarter, we shipped this enhanced wire to multiple customers in conjunction with our efforts to complete final product qualification. We remain engaged with these customers during these testing processes to improve our visibility going forward. During this period, we also conducted our own comprehensive evaluation and identified that the cap layer on this shipped wire was thinner than our specifications. Our customers provided consistent feedback from their recent testing activities that confirmed our findings. As the critical current in our wire increases the cap layer must be sized appropriately to protect the wire from damage when the higher current is applied. These design rules will continue to be important as we increase our electrical current performance from 600 amps to the 1,440 amps targeted in our DOE project. To ensure correct cap layer of thickness is being applied to Conductus wire going forward, we have implemented additional quality control enhancements in our manufacturing process. We continue to engage with industry leading customers to draw our plans for supplying Conductus wire to meet their future demands. For the coming years they've forecasted demand that far exceeds industry supply. Our efforts are focused on developing a supply plan and then executing against it with full support from these customers. We believe that we're on position to meet this challenge. Regarding STI's project for the DOE's Next Generation Electric Machines program, our team brings together expertise from product manufacturing to research and development. We're collaboration with TECO Westinghouse Motor Company, a large industrial motor manufacturer with more than 100 years of experience in motor design and application. Along with our academic partners Massachusetts Institute of Technology, and the University of North Texas. The goal is to increase power density by 300 times over conventional copper alternatives. STIs project plan is to improve performance over our Conductus wire by the increasing the amount of amps supported in the presence of a magnetic field and work to reduce the cost of 2G HTS wire. We will then optimize wire performance and fabricate best in class wire in small quantity. Target objective for the program is to develop wire with performance of 1440 amps at 65 kelvin in the field of 1.5 tesla. We are in collaboration with our partners, we will build and validate a 500 plus horsepower motor coil in a project in test fixture. The DOE objective is to also reduce the cost of wire to $50 per kiloamp meter for the wire. As previously stated our partners have recognized the immense value of Superconductor Technology for high power electric machines and they are committed to accelerating the development of enabling technologies that will ensure the commercial viability of these next generation machines. Along with our partners and the Department of Energy we believe our goal of high performance at low cost could be a game changer for a wide range of applications. Our initial target application such as superconducting fault current limiters and low field magnets are driving near term HTS wire demand. On past calls I have talked about new applications that continue to emerge in the electric power industry with the potential to use disruptive second generation HTS wire. These emerging applications are also expected to create the largest demand for superconducting wire in the future. Many of these applications require the type of machine that our DOE project addresses, including superconducting turbines, generators, motors and large-scale maintenance used in fusion reactors. More recently the electric aircraft industry has entered into the market to investigate HTS Solutions for innovation new products. Many industry leaders are developing plans for disruptive next generation machines for electric aircraft. Our DOE project goals also align closely with the needs of these initiatives. By utilizing HTS materials, electric aircraft are expected to reduce CO2 emissions by up to 80% and reduce fuel cost are currently run in the hundreds of billions of dollars per year. Superconducting materials provide a path to transform energy against these to 25 to 50 kilowatts per kilogram, far exceeding conventional materials which offers a long-term advantage by reducing space and weight on the aircraft. At this time, the industry is in its infancy, but growing aircraft demand and combined with the strategic goal to reduce CO2 emissions is expected to bring new novel parts to market. We are excited the part of the industry where major investment and innovative designs are being developed to utilize superconducting technology for greener, more energy efficient transport and increased power density to lower the cost of energy generation. Before I turn the call to Bill I'll mention we plan to participate in the 13th European conference on applied super connectivity or EUCAS 2017 in mid-September. This conference covers progress in the HTS industry. Programs will cover topics including coated conductors, electronics, power applications, fault current limiters, motors, generators and other rotating machines, HTS magnet used in reactors and cables just to name a few. Now Bill will provide our view on financials. Bill?

[Bill Buchanan:]

Thank you, Jeff. In our second quarter, revenue was $8,000 compared to $11,000 in a year ago quarter. Total R&D expenses amounted to $678,000 and were $701,000 in the prior year quarter. The lower costs reflect our Conductus wire efforts moving from R&D to manufacturing process improvements. SG&A expenses were $1.1 million compared to $1.4 million in the year ago quarter. Net loss for the second quarter was $2.5 million or a loss of $0.24 per share compared to a net loss of $3.1 million or a loss of a $1.14 per share in the prior year quarter. Please note that the per share data adjusted for the one-for-15 reverse stock split effective in July 2016. The total number of common shares outstanding at July 1, 2017 was 10.7 million shares. Under the balance sheet, on July 1, 2017, cash and cash equivalents totaled $6.5 million. Year-to-date $3.9 million was used to fund our operations and $300,000 was used by changes in our working capital. In April, we received $200,000 from the exercise of outstanding warrants. Based on a current forecast we expect our existing cash resources will be sufficient to fund our planned operations through the first quarter of 2018. Current and noncurrent liabilities totaled $896,000 at July 1st. And now operator, please open the call for questions.

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Sameer Joshi with Rodman and Renshaw. Please go ahead.

[Sameer Joshi:]

So, my first question relates to the DOE project. Who is in the driver seat, like who dictates what the next steps in the development plan ought to be and what is the cadence of revenues or rather funding from the DOE expected over the next few quarters?

[Jeff Quiram:]

Well we're the prime recipient of the agreement. So, we're the ones that do the majority of the interaction with the DOE and providing progress and things of that nature, so as far as calling the shots on where the development goes, there're targets that we're trying to meet on the technical side; we of course call our own shots on, on how we try to meet those requirements with our own development activities, but it's a constant interaction with the DOE, Sameer as we go forward.

[Sameer Joshi:]

And this is expected to be two or three-year project, right?

[Jeff Quiram:]

The target -- the project is slated to last three years, there's certainly flexibility there, it kind of depends on how quickly you make the technical advances, but at the time of the inception it is viewed as a three-year contract.

[Sameer Joshi:]

So, coming back to the Conductus, you mentioned the top layer, or sorry the cap layer issues that you had, were there any additional issues that were also identified, how is the QC process going to that end?

[Jeff Quiram:]

We are very happy that the rest of the requirements appear to continue to be well in hand, so all of the mechanical requirements and the amount of current that the superconducting layer can carry is all good. But again, the cap layer is really it's important because it's -- it determines and really protects that superconductor as you inject the current onto the wire, the cap layer is the thing that basically allows it to function and if it's not right then the wire fails. And that’s really the challenge that we are addressing now. But again, we are happy that from a mechanical strength and all those issues all those just continue to be pass with flying colors.

[Sameer Joshi:]

And so, the customers are basically happy with the mechanical and electrical performance, they are just waiting for you guys to adjust and modify this cap layer and we should expect something from them?

[Jeff Quiram:]

Well yes and guess I'll just put a caveat, when you say they are happy with the electrical performance I mean until they can actually carry the 700 amps from point A to point B they are not happy with the electrical performance. So that they are happy with the design of the layer and what its capacity appears to be but the reality is we have to be able to carry the current from point A to point B to make it valuable to them. And so that’s a function of getting that cap layers where we needed.

[Sameer Joshi:]

Yes, the cap layer will be coming [ph] the electrical performance I understand. My last question relates to costs and how are you managing cost internally right now and going forward once you have customers with orders? How much additional cost do you expect to incur?

[Jeff Quiram:]

Not very much Sameer, because when you look at -- when you talk about the cap layer I mean we are talking very thing, the amount of material on is very, very small, micron to 2 microns worth though of material. So as a cost element it's not really significant. Were the cost really coming into play is how many processes you need to go through and what are the yield of those processes. And I think as we have said all along, it really is a yield game at the end of the day, if your yield is good, costs are going to be well in line to where we want them to be. So that will be at a time to ramp and move into commercialization, the focus will be almost exclusively on yield. And then after you feel we have yield exactly where we need it to be that’s when you would worry about doing things like cost engineering and trying to take cost out of the wire going forward. But in the near term it's all about being able to produce the wire and being able to produce it consistently with high yield.

[Sameer Joshi:]

And do you expect to have these kind of commercial -- or high yield levels produced by end of year, or early next year, when do you think based on your resolution of the cap layer issue, when do you see those sales?

[Jeff Quiram:]

Well, the challenge is to get the cap layer done and then unfortunately every time we have one of these problems, it just sets us back and you kind of restart the clock on the testing, and so, we believe we're going to get some in-specification cap layer samples in the near future here, and then we'll ship them off to the customers and get through their testing process and then hopefully move as quickly as we can after that, so to get to providing some sort of volume. Is it possible that it could occur late this year? Yes. But everything has to go, everything has to go right, and we can't really have any more hiccups on some of these things, and so it's -- guess it's a little bit to be determined on that front Sameer.

[Operator:]

[Operator Instructions] We'll take our next question from William Lap. Please go ahead.

[William Lap:]

So, basically what I'm hearing is kind of this is setback to fault meter testing, so once you get the cap layer done then you have to start -- get in line again to your fault meter requirement for them to test everything again?

[Jeff Quiram:]

Yes, we've to send them another set of wire, to go through their testing process, so yes, that's a good way to characterize it Bill.

[William Lap:]

So, when did you -- let me be clear, did you learn about this before they were testing the wire you send them or how did you discover this?

[Jeff Quiram:]

We did discover it before our primary fault current limiter customer tested the wire that was really in there to get final approval. We came about the discovery because we were doing some detailed analysis of the wire under a microscope where we were looking at a bunch of different things, under an electron beam microscope. We were looking at a number of things, we were looking at the lattice structure, we were looking at some of the other elements of the stack, and while we were looking at we saw that -- well, wait a second, this wire does not appear to have the proper amount of copper on it. We then worked back to our supplier that does the cap layer and really trying to get to the bottom of well how much copper was on here consistently and how did that -- how that get into our hands when it didn't meet specifications, so done a lot of work on that, but I guess the reality is Bill as soon as we saw that the wire had copper that wasn't thick enough, we called our customers and said well, you don't need to test it because it's not going to pass. When you inject the current in it, it will fail. If it gets past everything else, it'll pass all of the mechanical strength issues and all those other tests that you want to do but it's not going to carry the current.

[William Lap:]

So, they never tested it for anything, but you said there's other test that they were able to perform that you couldn’t perform, right. In other words, once ship them this wire, and let's assume you got it fixed isn’t there other test that they perform that you can't perform?

[Jeff Quiram:]

The primary test that a lot of these guys do is they inject current and then they cycle it in the methodology that were in the manner that their device does it. So, you are manipulating the wire and putting in current taking out current in the manner that your device does it. And ultimately for them that’s what determines whether the wire meets their needs.

[William Lap:]

Okay but that’s a test you can't do in house, right?

[Jeff Quiram:]

Well yes, we don’t really know exactly how their devices work, they have given a specification and what the wire performance needs to be and we designed to that but we can't replicate that particular aspect of testing.

[William Lap:]

So, what does your -- if you are not making this improvement doesn’t this wire still -- what would it carry for an amp? Or wouldn’t it ever carry, in other words does it work for 500 or does it just not work for the 700?

[Jeff Quiram:]

It would carry less, you certainly could inject less current on it. I don’t have that exactly answer Bill I don’t know if it's 200, 400 I would [multiple speakers] probably not 500 though.

[William Lap:]

Okay you need 500 for the fault meter people, right.

[Jeff Quiram:]

Well we need about 600 actually for that and which isn’t really that big of a challenge for us actually we have got what we have been producing that can carry between 700 and 800, so we know we can do it on that but you need to have that cap layer right.

[William Lap:]

To protect that otherwise it will deteriorate, right?

[Jeff Quiram:]

Well yes, I mean it’s a protection of that superconducting layer so.

[William Lap:]

So, what is the solution, is the solution more cap? I mean what are you doing to fix it? You have the method…

[Jeff Quiram:]

We know what we wanted the thickness of the copper to be and we are pretty confident that at that thickness had been there, it would have worked. And I guess the problem is our supplier did not send us wire back that was just to our spec.

[William Lap:]

So, wait a minute, are you telling me if that supplier would have sent you the copper to your specs, that this problem wouldn’t have occurred?

[Jeff Quiram:]

That’s what we believe, we believe that if the copper had been the spec the wire would have worked.

[William Lap:]

So, you are going back to your supplier now and telling them to give you an increase, you are making sure it's correct is that the only plan we need as if your supplier can put the copper specifications it's supposed to that it should work?

[Jeff Quiram:]

That is our belief, yes.

[Unidentified Analyst:]

So how long it takes them to do that?

[Jeff Quiram:]

We are in the middle of working with them right now and we hope to get some wire back in our hands in the not too distant future. We have been working with them for several weeks on it. I think we are relatively close to getting some wire back in our hands but until we have and we can verify, I can assure you that we will be going through -- we will be doing all of our testing and going back to the microscope to make sure that the layers are exactly to spec, before we ship out any more. That’s for sure.

[William Lap:]

Okay, so really, it’s a nice plan, it was the plan that meet the specs.

[Jeff Quiram:]

Yes, but ultimately it is our problem, and…

[William Lap:]

It's your problem because you didn't find out the producer wire, you assumed that you had met the specs, and you didn't?

[Jeff Quiram:]

Well, yes and the problem was -- and I'm not trying to make excuses, but the real issue is we're talking very-very thin layer, so the only way really to see that is to do things like take it in and look at under an electron beam microscope and stuff like that. I mean you can't physically measure it, I mean a micron is...

[William Lap:]

So, let's assume you ship your wire that meet the specs, how you're going to make sure the next and the next shipments meet that. I mean in other words, what kind of control are you going to have from the south side vendor to make sure that all new wire coming in will meet that spec?

[Jeff Quiram:]

Well that's exactly what we said in our comments, that we have inserted some additional quality control and inspection activities that will be absolutely focused on making sure that those specs are met. So, we didn't look at every -- we didn't look at the wire under -- we do have visual inspection, we do some inspection where we do some testing on to make sure that you don't have any mechanical issues, but we haven't done the electron beam microscope inspection on every piece of wire that we've sent out. Well we will be for a while here, I can tell you that.

[William Lap:]

So, basically have you told the fault meter guy to hold the spot maybe in the next 30 days, last time we had to wait for his lab to get opened, I mean let's assume you get to solve in 45 days, can he hold that open to test it for you?

[Jeff Quiram:]

Well they certainly are -- they're interested in finishing this evaluation, and we had a talk with them and they're very supportive and they said that they'll do it as quickly as they can but I think it's a situational issue, it's one of those where if you -- the sooner we get it in the hands the better because if you're a week later and something else comes in, they start off on that task, we'll then be automatically behind them, no matter what they want to do. So, I mean speed is certainly of the essence here, getting it in their hands as quickly as possible is the thing that we're interested in doing but more than that we want to make sure that it's absolutely going to pass all the tests, because that's -- we don't want any more false starts on that front. So, as long as it takes to make sure it's the right stop is what will be happening right now.

[William Lap:]

So, when do you expect your next shipment with the specs, is that in hand now?

[Jeff Quiram:]

It's not in the hand. That's kind of what I was -- that's why I'm hesitant to give you a date Bill because I don't have it in my hands yet, so until I have it in my hands, I can't really say. So.

[William Lap:]

I guess it is what it is. But there's no other, I mean this wire -- this problem is for anything we're doing, it's just not for the fault meter, right?

[Jeff Quiram:]

Well you have specifications for those cap layers and they have to be right, no matter where you're going. So, even if you are doing lower performance wire that has thinner cap layers whatever comes in still has to be the spec. So, putting in the quality control and sort of inspection activities that we have done now are going to be useful to us going forward. But anyway, I know everybody is frustrated we are as well. We really feel we got what we need to get the approval and now we just need to get it in their hands.

[William Lap:]

So, you are optimistic.

[Jeff Quiram:]

I'm absolutely optimistic that it will meet their needs.

[William Lap:]

Are you getting money from the DOE now? As you are doing this, aren’t you getting cash flow now, aren’t you billing them and getting money for your research and work?

[Jeff Quiram:]

We are billing them now, yes.

[William Lap:]

So, you are getting cash flow from them?

[Jeff Quiram:]

We will over -- what do we bill them, Bill on a quarterly basis?

[Bill Buchanan:]

No, we are going actually start billing then Monday, that project has really just turned lose in late June so our first billing has just occurred.

[William Lap:]

Do you have any -- is that going to help Bill in your projection that will have enough cash through the end of the first quarter, will that even bring enough further once you see what their money is coming in?

[Bill Buchanan:]

Well there is certainly a possibility that it may give us a little bit of additional run way as we move into 2018. But in my projections, I am not counting on that.

[William Lap:]

So other than the fault meter, what do you see is immediate source other than the fault meter people, what do you see as another immediate source of wire demand that would go within the next six months to a year where they would actually buy the wire?

[Jeff Quiram:]

There is a lot of magnet activity Bill, lot of -- for various applications whether it be motors, seeing a lot of interest in wire from some people that are building fusion devices which is very interesting technology, but its big magnets and mostly motors.

[William Lap:]

These motors could be a big view [ph] for you, right.

[Jeff Quiram:]

Ultimately, we think that motors and other superconducting generators are probably the biggest consumers of the wire in the future. So yes, it's certainly an area that is a great interest and frankly is right in the wheel house with the DOE project, that’s the sort of wire that that DOE project is absolutely focused on.

[William Lap:]

How long would it be before they actually -- once you get it working, how long would it be before that would be a good market, would it be a year from now or longer, wire and motors?

[Jeff Quiram:]

It depends, I mean there are some -- there are basically have been some very large orders that people have been interested in filling over the course of the past six and nine months, and I think we could have probably participated in if we our wire was ready. So, can it have an impact in the near term yes, I think its primary impact is probably a couple of years out, in the [indiscernible]. but again, anybody that’s building some large motors is consuming a lot of wire, and we've talked about 10 megawatt motors with current designs they consume about 300 amps -- excuse me, they consume about 300 kilometers of wire, so is that big as far as we're concerned, well yes, I mean our capacity only has come 50 a year, so that's somebody -- so if somebody wants to go forward and build one of those motors, would it be a meaningful demand for wire, the answer is yes. So.

[Operator:]

And that does conclude today's question-and-answer session. I would like to turn the conference back over to Jeff for any additional or closing remarks.

[Jeff Quiram:]

Thank you. I would like to thank all of you very much for joining us today. In addition to EUCAS 2017, STI plans to present at the Rodman and Renshaw Annual Global Investment Conference in New York in early September and we hope to see some of you there. To schedule meeting there or a call please contact the conference organizers or LHA. We look forward to speak with you again on our next call. Good day.

[Operator:]

And once again that concludes today's presentation. We thank you all for your participation and you may now disconnect.