Superconductor Technologies Inc.
Q1 2018 Earnings Call Transcript

Published: 10 May 2018

[Operator:]

Good day, and welcome to the Superconductor Technologies’ First Quarter 2018 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, ma’am.

[Moriah Shilton:]

Thank you, Caroline. Good morning and thank you for joining us for STI’s first quarter 2018 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 2017 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. I’ll 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.

[Jeff Quiram:]

Thank you, Moriah, and good morning, everyone. In the first quarter, we generated $246,000 in revenue, all related to our next generation electric machine or NGEM project with the Department of Energy. With our partners in the NGEM project, TECO Westinghouse Motor Company, Massachusetts Institute of Technology and the University of North Texas. We continue to make progress for the project’s first year key objective of improving critical current capacity at 65K in the presence of an operating magnetic field of 1.5 Tesla. Each partner has its specific role and focus. TECO has focused on the motor components. MIT does the cryogenic packaging and assisting coil design. U&T runs the testing and STI, the lead is focused on developing the high-performance water. Our standard conductor’s high temperature superconducting wire utilizes three elemental metals for the superconducting layer. This technique uses a rare earth compound along with barium and copper as the three elements. Many wire manufacturers have added a fourth metal to their superconductors to improve performance in high-field, low-temperature applications. STI has been delivering industry-leading performance in the presence of a magnetic field without increasing the complexity of our superconducting wire. However, as we look for ways to further enhance our performance, we are investigating the benefits of adding another metal as well as some other approaches. One of the objectives of our DOE program is to improve wire performance to 1,440 amps in high-field, low-temperature by utilizing a known technique of adding that additional metals to the structure. We expect the process valuation for what we are currently performing, we’ll continue through the second quarter on this initiative. We will be providing an annual review of our NGEM project through the DOE in Washington in mid-July. The annual review will cover all aspects of our project, including partner updates and the status of each program objective. In the first quarter, we decided to concentrate our future conductor’s product development efforts to target wire optimized for the high-field, low-temperature requirements for NGEMs and other applications. Our product improvements in late 2017 and planned development in 2018 align our roadmap with market demand as our customers seek to secure wire supply for future projects. The wire being engineered today, will address a wide variety of applications from NGEMs to other devices, including magnets for energy storage, MRIs, NMRs and particle accelerators as well as telco max [ph] perfusion. We are currently engaged with multiple customers for our evaluating wire for these applications. That’s why we utilize the standard specifications for substrate size, copper thickness and width in lines of wires. We anticipate shipping conducting wire for all these applications to customers in third quarter. One important item to note is that we are doing our current wire optimization efforts, primarily on production equipment rather than on our R& D tools. With the goal being to advance from R&D to commercial production much quicker by not having to move processes from one tool to another. Before I turn the call over to Bill, I wanted to highlight two industry events we attended in April, The IEEE and the International Agency conferences; both conferences represented an ideal opportunity to meet with worldwide customers and industry leaders, who are focused on the commercialization on disruptive technology. A significant industry emphasis was on system design, technology introduction, and the status of global projects targeted for mainstream deployment. We engaged with our customers and other influential industry participants to explain how STI can help them capitalize on several accelerating energy megatrends, decentralized renewable energy, high energy efficiency, and sustainable transportation. Now. Bill will provide a review of the financials. Bill?

[Bill Buchanan:]

Thank you, Jeff. In our first quarter, revenue was $246,000, which consisted entirely of our government contract revenue, compared to $1,000 in commercial product revenues in the year ago quarter. Total R&D expenses amounted to $577,000 and were $650,000 in the prior year quarter. SG&A expenses were $1 million, compared to $1.1 million in the year ago quarter. Net loss for the quarter was $2.2 million or a loss of $0.20 per share compared to a net loss of $2.6 million or a loss of $0.26 per share in the prior year quarter. The total number of common shares outstanding at March 31, 2018 was 11.9 million shares. Under the balance sheet at March 31, 2018, cash and cash equivalents totaled $2.9 million. In the first quarter, $1.8 million was used to fund our operations and there were no net changes on our working capital. In March 2018, we raised approximately $1.7 million in net proceeds from the sale of 1.6 million shares of common stock, common stock equivalents and warrants. 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:]

[Operator Instructions] And we’ll go first to Sameer Joshi with H.C. Wainwright.

[Sameer Joshi:]

Good morning, Jeff. good morning, Bill.

[Jeff Quiram:]

Good morning.

[Sameer Joshi:]

Just a quick question on the logistics of how you’re working with your three partners. I know you just described that motors are being developed by TECO cryogenic packaging by MIT. But how do you interact with these? How many people from each organization are involved, just a little bit color on that would be helpful? [Technical Difficulty]

[Jeff Quiram:]

I’m sorry, Sameer, I had my – I’m here. I had my phone on mute when Bill was reading.

[Sameer Joshi:]

Okay.

[Jeff Quiram:]

So, I just went through a very nice explanation of what we did. But really what we’re doing, Sameer is, again, we work with the individual partners ourselves, and then we do have status meetings somewhat regularly as needed every month or two to everybody up to date. But it’s all based on TECO is trying to build a coil that’s based on the performance that we’re expecting of the wire, using whatever engineering packers they used, provide themselves margin. And then, again, a lot of the testing has done by North Texas. And then MIT will be working on helping the cryogenics. And so how we work with them is just, it’s more of a – it is a scheduled updates. And everybody’s got their own tasks. But we scheduled a call, that necessary. And then we have regular calls with the DOE. So I don’t know if that completely answers your question or there was some other thing you were trying to get at.

[Sameer Joshi:]

Yes. No, just wanted to understand. Because also in terms of timeline, I know that this originally was a two to three-year program, is it on track? And also you have this July 2018 milestone review. Are you going to be able to make that progress public?

[Jeff Quiram:]

We will make the progress public, as I think, we can do it relevant. I don’t know that we will share our direct update documents, for instance, with – that we use with the Department of Energy as our public document. But I do think we’ll provide status on where we’re at and whether we’ve met the objectives and we’re moving on. I think we all know that this project was initially awarded more than a year ago. But the efforts really didn’t start until early last summer when you’re buying this complete all the negotiations with the DOE and with the partners and all of that. So it’s – we are feeling that we’re going to be in a situation where we present in July that we’re meeting the objectives of year one. And all the work that we’re doing is focused on making curve in that case. So we’ve got a couple of months left to make that happen and that’s what we’re doing.

[Sameer Joshi:]

Okay, good. Thanks for that color. As far as your discussions with the NGEM company themselves, how are those going? I know you’ve attended these conferences, what kind of leads were generated and to what extent are you engaged to actually deliver product in 3Q?

[Jeff Quiram:]

Well, the good news is that we continue to see opportunities and demand for wire from the various participants, that is – it’s kind of an ever-growing list of projects. And they all need pretty significant amounts of wire. So just from the macro perspective, it’s very encouraging, but if they weren’t projects going on, I think with that nature, then there would be more cause for us to be concerned about where the demand comes from. But the reality is, there’s a lot more demand than pretty much anybody can meet. So for us, it’s – we’re trying to handicap the different opportunities where we’re looking at those that are more near-term than long-term, and prioritizing very much like we did in some other earlier activities. And then, really just looking to see what we think we can do, and make sure it matches what that potential customers looking for from a perspective of timing and things of that nature. So, I guess, the final thing I’ll say is that, we have more people that are looking for wire, then we’re probably going to be able to provide wire to in the third quarter. We’re going to have to manage those relationships and manage the wire, because the big issue is what you don’t – we want to get the wire in as many people hands as possible, but there’s a lot of work associated with when you’re just ready to move to the next step. And we want to make sure that we have enough support and bandwidth to do what we need to do, to take everything to the next level. So we want – as I said on the last call, we want to cast our net as wide as possible, but we also want to make sure that we don’t get in a situation where we got so much stuff and then that we cannot pull it in the ballot.

[Sameer Joshi:]

Understood.

[Jeff Quiram:]

So it’s a balancing act.

[Sameer Joshi:]

So, I’m guessing these initial shipments will be, sort of, their respective pilot programs or testing phases. Will you be able to recognize these revenues, whatever you ship in 3Q?

[Jeff Quiram:]

I think that will be – I don’t know that I can say with 100% certainty that all of them will be the outweighed, it’s – we’re really dependent on whatever agreement we come to with the customers at that time. As you said, there will all be relatively small amounts of wires. So even if we can recognize revenue from own, they will probably be – it won’t be millions of dollars of revenues, I guess. It’s my point.

[Sameer Joshi:]

Got it. Understood.

[Jeff Quiram:]

That’s…

[Sameer Joshi:]

Yeah, yeah. No, we are not expecting that in any case, but thanks for the color. Just one last question on the SG&A, it was – I see a small spike, is that related to your expenses for the financing? And should we see it go back down to the 700,000, 800,000 level going forward?

[Jeff Quiram:]

Bill?

[Bill Buchanan:]

Sameer, I think, whether you are comparing the third quarter to the fourth quarter or, because it’s certainly down from the first quarter of 2017.

[Sameer Joshi:]

Yeah. I’m looking at 4Q 2017 versus 1Q 2018?

[Bill Buchanan:]

Well, we certainly – there is a little bit of a spike in Q1 and Q2 just seasonally. We aren’t seeing generally an increase in any of our G&A right now, if that helps, yeah.

[Sameer Joshi:]

Right.

[Jeff Quiram:]

Yeah, I don’t anticipate. We’re not planning to ramp up G&A spending, Sameer.

[Sameer Joshi:]

Right, right. But did the 1Q amount of 1.04 include any other one-time expenses like financing costs or something like that?

[Bill Buchanan:]

There may have been some one-off on insurance expense et cetera.

[Sameer Joshi:]

Okay.

[Bill Buchanan:]

And some small amount related to the financing, there’s always a little…

[Jeff Quiram:]

Yeah. I think we’re dealing with insurance renewal rate. Bill?

[Bill Buchanan:]

Actually, that’s the first week of April, but there are just other little insurance things it come around that, happened early in the year, and other taxes and things like that that come around in the first part of the year.

[Sameer Joshi:]

Great, okay. Thanks for that clarification. And thanks, Bill and Jeff. Good luck.

[Jeff Quiram:]

Thanks, Sameer. Sorry for my silence at the beginning.

[Sameer Joshi:]

That’s fine. It’s okay.

[Operator:]

[Operator Instructions] And we’ll go to William Lap.

[Unidentified Analyst:]

Hi Jeff and Bill. How are you?

[Bill Buchanan:]

Good morning, Bill.

[Jeff Quiram:]

Doing good. Good morning.

[Unidentified Analyst:]

Good morning. I just wanted to follow-up on the last person’s discussion on the third quarter. So what I’m trying to understand is if these orders come in on the third quarter even though some of my just pilot studies or what – will that make you – you think you’ll be cash positive with the deal, money and everything coming in on the third quarter. If these orders come in, I mean may not be a big contract order, but would they be sufficient to cover cash flow on the third quarter?

[Jeff Quiram:]

No. They won’t be, Bill, and that’s really kind of why, I made the comment I did, which is it won’t be billions of dollars. So, I think if you recall, we are still at – we need $5.5 million to $6 million a quarter to be cash flow positive.

[Unidentified Analyst:]

For revenue?

[Jeff Quiram:]

Revenue. And so the revenue is from those – the wire sales in the third quarter will not be millions of dollars. So the answer is, it will not be cash flow neutral.

[Unidentified Analyst:]

Okay. All right. Are you pretty optimistic on going forward and getting an order even though it may not be in the third quarter at this point kind of come up with?

[Jeff Quiram:]

We’re getting the – again, we’re demonstrating the wire performance that they need and the high-field low-temperature space is one that a lot of people have a challenge with. And so as I said in my prepared remarks, we have always really been the industry leader in that sort of space. So we have a lot of people that are interested in what we’re doing, and I’m optimistic that we’ll get some wire. And then the real question is, while we need to complete the process and we need to get approved, and then we need to move forward with the larger orders, and that is – well, that’s been – that’s the common refrain that we’ve been talking about for a while here. So am I confident that we’re going to get them wire that meets their needs? Yes. And am I confident that there’s going to be opportunities move forward? Yes. Can I say with 100% certainty, that’s going to be in the third quarter? Well, no. I can’t. So that’s to be determined. And we’re – everything we can to – try to do that and bring in those opportunities as quickly as possible.

[Unidentified Analyst:]

Is there any chance to know before the end of the second quarter?

[Jeff Quiram:]

Well, I would say that if we’re able to ship them some wire, by the end of the second – in order to know by the end of the second quarter, we will have to ship them somewhere that they will have been able to evaluate. So that will mean, we’ll have done shipping and evaluation sometimes in the next six to seven weeks. I’m not saying that, that’s impossible, but I think, that, that will be – that will be a long shot at this point that we would know by the end of the second quarter.

[Unidentified Analyst:]

But I mean you anticipate – you do anticipate shipping some wire in the second quarter, the evaluation may be occurring in the third quarter. I mean what are you doing now, if you’re not actually shipping wire to different people…

[Jeff Quiram:]

We’re doing a lot of DOE work at the moment. So it’s a balance between running the machine enough with the DOE, with – and running it enough with some of the other applications in mind. So that’s – we’re working harder on our second ship to try to do more turns on the machine to meet everybody’s needs, but it’s – at the last two or three weeks, there’s been a lot of work on DOE projects – on the DOE project. And the thing is when you do things like add another metal into the process and, kind of, change the way you’re running the machine, you want to do that several times in a row, and you don’t want to – okay, now we’re adding the fourth metal, and then two, three days from now, I’ll do commercial run, and then three days after that, I’ll have the metal again, it actually impedes – impedes progress in both areas by jumping back and forth. So we’re trying to stick with – we’ve been trying to stick with the DOE of late, to get where we need to go and then once that’s done, we’ll take the machine and completely hand it over to the production guys for commercial and go with that. So probably…

[Unidentified Analyst:]

Okay. So getting the DOE somewhat perfected helps go into the next to the commercial side, right?

[Jeff Quiram:]

Yeah. Absolutely, because it improves the performance orf the wire. So…

[Unidentified Analyst:]

Okay.

[Jeff Quiram:]

Okay. It’s all synergistic, it’s all related, and we’ll benefit from the learning that we do with the DOE program will certainly benefit us as we go into the commercial side. So that is the reason why we sequenced it the way we did. But we can take what we learn and that we make some advances and make the wire performance a lot better doing our DOE projects. We then use that and move into the commercial, trying to take advantage of some of those learnings.

[Unidentified Analyst:]

Okay. But your knowledge is nobody else could do what you’re doing right now in this low-temperature – what you’re doing with the magnetic and everything, right? I mean, you are the – are you the only game in town?

[Jeff Quiram:]

We’re not the only game in town, but we have the best performance. So when I say that we’re the market leader, the problem with our high-field environment is that when you put a Superconductor in at the high-field has a dampening effect on the Superconductor’s ability to carry current. And so when you’re adding a fourth element, like many in the industry are doing. What you’re trying to do is, you’re trying to minimize that dampening effect of the high-field and we’ve enable to get very good performance just by doing the three metals, because of the way we deposit the materials. We think the fourth metal is going to, maybe, make us a little bit better, too. So I just – I don’t want you to think that nobody else can sell wire in the high-field, there are certainly others that can. But we have been the highest performing wire in that space, and we hope to maintain that at least…

[Unidentified Analyst:]

So, what do you mean the fourth metal, are you putting on the – could you explain that just from that, you’re putting on the fourth metal?

[Jeff Quiram:]

Well, fourth metal sometimes, there’s a lot – there’s different metals that can be used. So when you’re doing a Superconductor, as I’ve stated in my prepared remarks, you’re using barium, copper and rare earth, and that forms that superconducting layer, which is really – it’s in a crystal form. It’s in – it’s a lattice structure. When you add a fourth metal, and I’ll just throw out something you throw out in silver or tin or something else. You changed that lattice structure a little bit. And the goal is to try to make it more resilient in the presence of a magnetic field. So when I say, adding a fourth element, that’s what I mean. So instead of having rare barium and copper, you’ll have rare barium and copper and metal number 4, it still be a super metal – hope we will operate better when you put a field on it.

[Unidentified Analyst:]

Okay. Thank you for the technical explanation. That’s all I have, Jeff.

[Jeff Quiram:]

All right. Thank you, Bill.

[Operator:]

That will conclude today’s question-and-answer session. I’ll turn things over to our speakers for any additional or closing remarks.

[Jeff Quiram:]

Thank you all very much for joining us today. In June, STI will present at the mechanical and electromagnetic properties of composite Superconductor Workshop in South Korea. This technical workshop will focus on the mechanical, electric mechanical properties and characterization of practical composite Superconductors or electrical device applications including magnet and coils. Also in June, we will be hosting our Annual Shareholders Meeting on June 7. You may have noticed that the time between the last Annual Shareholder Meeting and this one is short, as we decided to get our Annual Meeting back to our historic schedule, and which we filed our 10-K and then have the Annual Meeting shortly thereafter. Included in the Annual Meeting proxy is a proposal to approve the authorization or reversed stock split of our common stock. The Board of Directors having the discretion as to whether or not, the reverse split is to be affected as some future date. Our Board recommends that you both, forward the authorization of this reversed stock split provide the company the necessary flexibility given current market conditions. Thank you, again. And we look forward to speaking with you on our next call. Good day.

[Operator:]

And that does conclude today’s conference call. Thank you everyone for your participation. You may now disconnect.