Superconductor Technologies Inc.
Q4 2017 Earnings Call Transcript

Published: 22 Mar 2018

[Operator:]

Good day, and welcome to the Superconductor Technologies, STI, Fourth Quarter and Full Year 2017 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Moriah Shilton of LHA. Please go ahead.

[Moriah Shilton:]

Thank you, Glen. Good morning, and thank you all for joining us for STI's 2017 fourth quarter and full year 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 415-433-3777. 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, after which he will open up the call for Q&A. And now, I would like to turn the call over to Jeff.

[Jeffrey Quiram:]

Thank you, Moriah, and good morning, everyone. To begin, I would like to highlight several STI accomplishments for 2017. We began work on the U.S. Department of Energy the DOE project in the second quarter of 2017, resulting in full year net revenues more than tripling 2016 net revenues. 2017 was also a year of first including the first successful application of our conductors 2G HTS wire at low temperatures in the presence of a magnetic field. This success was independently confirmed by the Robinson Research Institute, an internationally recognized expert in the development of innovative superconducting products. We believe this capability opens the door for STI to many future HTS commercialization opportunities. The advance superconducting manufacturing institute estimates the total addressable market for superconducting devices to be almost $40 billion by 2030. A dramatic increase from what it is today. Also in early 2017, we were granted two patents that protect our unique HTS wire manufacturing capabilities, one is for STI’s intrinsic pinning method and the other is for STI’s automated machine architecture. We ended the year with Dave Vellequette rejoining our Board of Directors. Dave’s strong background in innovative technology companies will be a significant asset as we implement our strategy to commercialize Conductus wires unique HTS technology. Turning to recent developments, as we announced earlier this month, we have aligned our future Conductus wire development efforts to multiple applications for next generation electric machines that I’ll refer to as NGEMs going forward. We made this decision based partially on our early success with our current NGEMs project, plus the reality of accelerating market trends and the standardization of wire specifications for electric machines. We expect these applications and others that use the same wire specification to generate the largest demand for our superconducting wire in the future. We believe that our 2G HTS wire performance and our unique lower costs HTS manufacturing process positions STI to capitalize on several accelerating energy mega trends, decentralize renewable energy, high energy efficiency and sustainable transportation. You may be asking yourselves, how do NGEMs benefit from these trends. Looking at renewable energy for example, their main challenge with all renewable generation sources today is that they are effective when conditions are right, the sun is shining or the wind is blowing, but not at other times, such as during the night and when it is calm. Having the ability to use NGEMs for two way power flows is a key ingredient to address these issues. For example, you could have an NGEM as an energy storage device at a solar plant, which could be activated at night to provide accumulated power to the grid. According to Navigant Consulting an increasing number of customers are choosing to install decentralize energy resources. On a five year basis from 2015 to 2019, distributed energy resources in the United States is growing almost three times faster than traditional centralized generation. Our future focus on NGEMs is synergistic with our development work with industry partners and our three year program with the Department of Energy for the development of superconducting wire for use in NGEMs. The DOE has stated that advancing enabling technologies such as NGEMs has the potential to boost the competitiveness of American manufacturers and help companies who use industrial motors for manufacturing to save energy and money over the long-term. As many of you know, we are working on the NGEM project in conjunction with TECO Westinghouse Motor Company, the Massachusetts Institute of Technology, and the University of North Texas. In the year one ending Q2 2018, our objective is to improve critical current capacity at 65k in the presence of an operating magnetic field of 1.5 Tesla. In 2017, we demonstrated a 40% improvement in our critical current carrying capacity above the base line, set at the beginning of the DOE project. In year two our plan is to focus on optimizing the design and fabrication of best-in-class wire in quantity. Finally in year three, we plan on building and validating an NGEM component that includes cryogenic testing. Previously each superconducting application required 2G HTS wire with unique dissimilar specifications resulting in a significant variability of demand by wire type. Recently the DOE and other industry leaders have refined the requirement for superconducting wire utilize in NGEMs. The result of the wire specification that is expected to address a broad spectrum of applications, STI is now concentrating its 2G HTS wire development roadmap on meeting these newly consistent specifications and industry cost targets. Consistent specifications contrast with the individual grid device market, which requires 2G HTS wire with unique specifications targeting only a specific application. This dynamic has resulted in a lengthy time to production for wire for each of the various specific requirements as demonstrated by the progress we have made to-date commercializing Conductus wire. Until recently we have been pursuing the FCL market as our core initiative at the expense of other opportunities. We did this to keep our key focus -- to more efficiently utilize our available resources. Although the market opportunity remains large with FCLs, FCL specifications today are outside the norm of where the majority of the industry including NGEMs is converging. Our recent success with NGEMs and customer pull from the market leaders has convinced us to position our resource to meet the demands of this expanding opportunity. Unfortunately we did not have the luxury to pursue both the opportunities in the near-term. We believe that with our 2G HTS wire performance and unique HTS manufacturing process aligning with the majority of the industry players is the best strategy to position STI for long-term growth. Before I turn the call over to Bill, I wanted to offer quick congratulations to one of our DOE project partners MIT on their announced plans to carry out rapid stage research leading to the new generation of fusion machines. And in the fusion efforts around the globe are based on recent advances in high temperature super-inducting wire performance. It is expected that fusion machines will utilize the HTS wire, which requires low temperature and high magnetic field. We look forward to working with MIT and other fusion developers as they work to select HTS suppliers that can meet their need and ramp to desired volumes. Now Bill will provide a review of the financials. Bill?

[William Buchanan:]

Thank you, Jeff. In our fourth quarter revenue was $305,000, which consisted entirely of government contract revenue, compared to $9,000 in the year ago quarter. Total R&D expenses amounted to $550,000 and were $691,000 in the prior year quarter. SG&A expenses were $766,000, compared to $1.3 million in the year ago quarter. Net loss for the quarter was $1.9 million or a loss of $0.17 per share compared to a net loss of $2.5 million or a loss of $0.61 per share in the prior year quarter. The total number of common shares outstanding at December 31, 2017 was 10.7 million shares. For the full year revenue was $446,000, which consisted principally of government contract revenue, compared to $131,000 in 2016. Total R&D expenses amounted to $2.6 million, compared to $2.8 million in 2016. SG&A expenses were $4 million, compared to $5.1 million in the prior year. Net loss for the full year 2017 was $9.5 million or a loss of $0.91 per share, compared to a net loss of $11.1 million or a loss of $3.53 per share in the prior year. Under the balance sheet in 2017 $7.4 million was used to fund our operations, current and non-current liabilities totaled $884,000 at December 31st. Cash and cash equivalents totaled $3.1 million at year-end. In March 2018 we raised approximately $1.7 million in net proceeds from an offering in connection with the offering we issued a total of 1.6 million shares of common stock and common stock equivalents. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations well in to the third quarter of 2018. And now, operator, please open the call for questions.

[Operator:]

Thank you. [Operator Instructions] And we will take our first question from Amit Dayal with H.C. Wainwright.

[Amit Dayal:]

Thank you. Good morning, Jeff.

[Jeffrey Quiram:]

Good morning.

[Amit Dayal:]

Just wanted to clarify your commentary around the commercialization options that you considered. So, you not pursuing this previous FCL opportunity and maybe the HTS related opportunities and now focusing more on the NGEMs. I didn't catch your commentary clearly, so if could just provide any granularity on that I would appreciate it?

[Jeffrey Quiram:]

Well, the real issue Amit is when we're looking at again going forward and doing the final approval work with various customers, usually what you are doing is, you are doing the superconducting wire and then you are finishing it in a way that that folks want. So, in most of the NGEM activity and other related sort of technologies the -- what they are looking for is very consistent as far as the final plating and what you are using as a [indiscernible] layers. And that's different than -- well it’s different than what was in the past, in the past many of those different application would all -- they would all want something a little bit different too, different thicknesses, different materials, whereas now it's all kind of converged around a relatively thick layer of copper on both sides of the wire and that's what they do. Versus the other approach that we were doing with the fault current limiter application was is they really just wanted thin layers of a finishing layer, which is not necessary the standard way that most of the electroplating supply chain operates. And so it was all as -- so really the decision that we have to make is when we have a length of wire so we've done some good runs, we've got high performing wire, what do we wanted to do with it? And up till now, what we've done is we've sent all that high performing wire off to get the specialty layers on it that really only adjusting for one or two customers and everybody else has had to wait. And what we really -- the decision we made is as the demand from all kind of these other various customers is really converged on a particular standard. We really just said, can we afford to make those four or five or six customers continue to wait, while we go off on the specialty route and we made the decision not to do that this time. And now we're going to start providing wire to these five or six folks that has very synergistic demand as far as the specifications go. And we think our chance of getting a near-term approval and the ability to move forward is better with that approach. And that's really why we changed directions.

[Amit Dayal:]

So in that context, I mean, how is the time line or how should we look at the time line for commercialization with these five or six customers? Do they already have the product and are they testing, where are these guys with the process towards giving you some meaningful orders?

[Jeffrey Quiram:]

It's a little bit of a mix bag, when I talk about six customers they are all in slightly different spots. So that's the part that's -- it's a little bit more challenging to be able to coordinate the various approaches. However they all are looking for multiple kilometers of wire in the relative near-term. And I would say one or two of them are in a position where they have very high wire demands over the course of the next year or so. So, if we were to get the approval with a proper one of those multiple participants that we are going after, I guess I'm not thinking that the demand is going to be delayed a lot more than really where we've been with the efforts we've done on fault current limiters. But that's to be determined. I guess the reality is and I think we all know this we've been focusing our energies on a particular application thinking that that was the nearest path to revenue and it hasn't ended up being as quick as we wanted it to or as sizable. And so I'm not saying that it wouldn't be if we would have continued on, but I actually now believe that our chances of moving to meaningful revenue are actually higher by spreading the [bench] [ph] across the group of customers that all have pretty consistent requirements. And I think that's the big thing that's changed Amit. If you'd have gone and if we would have looked at it two years or 18 months ago, those five or six participants would have all been looking for wire that had significantly different characteristics. And so when you compare those various opportunities with the fault current limiter you've [looked][ph] at all of them kind of individually. And so those five or six opportunities were left, five or six kind of individual opportunities. Whereas now because things have really kind of come together and harmonized as far as the requirements are, we can take out -- we can one large shipment of wire and send it out and get it finished in a way that can meet the needs of all of those participants. And that's a change and I think that is at least gives us a better chance of being able to get multiple people moving forward with the approval process with us rather than just being single threaded.

[Amit Dayal:]

Great. So in terms of further product development for these customers, do we need any more sort of resources put into that effort or are we ready to sort of deliver if those guys approve on their end, et cetera. So basically, I mean, is the product ready to basically get into the design of these end customers?

[Jeffrey Quiram:]

Well we believe so. And that's the real -- we've been hoping for a while to change our challenge from just getting the wire approved to figure out how to ramp up production. I mean that has been -- we've been trying to get to that spot for a while here. And so that is really where the rubber will meet the road when it's time to ramp up production and start shipping larger orders. I do think several of those customers in this kind of this new set are ready to take on meaningful amount of wire. And so we just need to get approved by the proper ones and then we need to get our production ramped up and once we've determined who's going to be receiving them, who's going to be placing the orders for the larger quantities.

[Amit Dayal:]

Just last question on this topic. So can you provide any color on who these customers are or where they sit in the value chain in terms of where your product will eventually show up?

[Jeffrey Quiram:]

Well they're all in general folks that build a device that they sell whether it’d be a motor or a medical or scientific device or some sort of power generation device. So the folks that we're talking with are the -- they are the consumers of the wire and the builders of the final product. So if you think about the value chain that's where they sit.

[Amit Dayal:]

Okay, perfect. And from an operating costs point of view, just one last one question for me. Is there room to bring operating costs lower in the context of the available cash in hand? How are you dealing with that side of the story?

[Jeffrey Quiram:]

Our view on this has been pretty consistent over the last couple of the years on this, Amit. Yes if I had my druthers I'd rather be spending more money on these efforts. So I think we're single threaded in a lot of ways. It's a lot of resources. I don't believe that there is any significant opportunity on this development side to take it out. Where we think we've got a benefit is when we start ramping up and we have a production methodology that is more machine controlled and not very labor intensive. That's where the efficiencies come to bear. But as far as the number of engineers with the number of areas of expertise we need to bring the product to completion, we think we’re about as lean as we can be on that side of the equation and have been for some time.

[Amit Dayal:]

Got it. That’s all I have Jeff, I’ll follow-up with you after the call. Thank you so much.

[Jeffrey Quiram:]

Okay, thank you Amit.

[Operator:]

Thank you. [Operator instructions] And that concludes our question-and-answer session. I’d like to turn things back to our speakers for any closing remarks.

[Jeffrey Quiram:]

I would like to thank all of you very much for joining us today. And we look forward to speaking with you again on our next call. Please have a good day.

[Operator:]

Thank you everyone. That does conclude today's conference. We thank you for your participation. You may now disconnect.