Superconductor Technologies Inc.
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Good day, everyone, and welcome to the STI First Quarter 2016 Conference Call. Today’s conference is being recorded. And at this time I’d like to turn the conference over to Cathy Mattison of LHA. Please go ahead, ma’am.

[Cathy Mattison:]

Thank you, operator. Good morning and thank you for joining us for STI’s 2016 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 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, our 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 section of STI’s 2015 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. STI’s objective is to supply our customers Conductus wire that improves performance and economics of superconducting solutions. Conductus wire has repeatedly achieved market leading current handling performance that meets or exceeds our customers’ specifications for superconducting fault current limiters, high field magnets and power transmission cables. Now we are focused on improving our mechanical stress specifications to meet customer requirements for our target applications. We are encouraged by the progress we have made to resolve these technical challenges since our last call seven weeks ago. While our efforts are not yet complete we believe that we are on the right path to gain customer approval. We remain excited about the industry trends and the attractive opportunity for Conductus wire. The advantage of superconducting devices over conventional technology for the power and electric grid is driving increasingly recognized by global utilities. In particular, the demand for fault current limiters has gained momentum as utilities seek more effective solutions for enhancing grid stability and efficiency. Need for fault current limiters is driven primarily by the increasing number of system faults caused by energy demand growth and the usage of more distributed generation and clean energy sources such as wind and solar that are being incorporated into an already overburdened system. As the grid is stressed faults and power blackouts increase in frequency and severity. Currently electrical utilities use oversized transformers and large fuses to prevent faults from damaging their equipment and protecting against surges. Once the fuse a suffered a catastrophic failure grid equipments such as passive transformers remain vulnerable to damage and reduced service life. As a result the industry is turning to one of the most proven options by adopting reliable fault current limiters. We believe that the growing adoption of fault current limiters will dramatically increase the worldwide demand for superconducting wire. In addition, the U.S. Department of Energy continues to recognize the importance of superconducting and the key technology that enables the implementations of solutions that reduce energy industry foot print and greenhouse gas emissions as well as supporting the economic competitors of clean energy products. The DOE’s Next Generation Electric Machines program has targeted the development of advanced manufacturing technologies is help to create a new generation of power electronics and electric motors. In March 2016, the DOE issued a funding opportunity announcement entitled Enabling Technologies for Next Generation Machines. Stated goals of the project are to maximize energy efficiency and increase power density for a wide variety of critical energy applications. We’re pursuing this funding opportunity as it is directly in line with our customers' needs for increased in field magnetic performance and lower cost high performance wire. STI with our partners, have submitted an initial proposal to the DOE for consideration. Since submitting our initial response the DOE has encouraged us to move forward with the full submittal next month. After we complete our final proposal, STI will provide more information about the proposal and our partner. The DOE’s office of Energy Efficiency and Renewable Energy has stated their plans to provide selection notification at September 2016. STI’s project addresses the DOE topic superconducting wire manufacturing. It is anticipated that two projects or three projects will be awarded. Program is structured to provide matching funds to participating companies with the DOE proportion of funding expected to be between $4 million to $6.5 million per project. In summary, we are excited by the industry’s growing adoption of superconducting technology and the related market opportunities for Conductus wire. We remain focused on resolving the technical challenges in wire performance. Our goal is to assist our customers in building new disruptive machines for commercial deployments in the near-term. Now I would like to turn call over to Bill for a review of the financials. Bill?

[Bill Buchanan:]

Thank you, Jeff. In our first quarter, revenue was $89,000 compared to $55,000 in the year-ago quarter and was primarily from our wireless products in both periods. The commercial gross margins were negative in the first quarter. And we expect gross losses to continue in the second quarter. As we bring our wire production equipment up to capacity we expect significant gross margin improvements. Total R&D expenses amounted to $716,000 and were $1.5 million in the prior year quarter. Our 2016 efforts were lower principally as a result of our 2G wire efforts moving from R&D to manufacturing. SG&A expenses were $1.2 million compared to $1.5 million in the year ago quarter. The decrease was principally the result of lower 2016 non-cash stock-award expenses. We recognized a non-cash gain of $21,000 from the fair value adjustments of our warrants issued in August 2013. Our Q1 2015 non-cash gain from this adjustment was $2.6 million. This amount will fluctuate quarterly based on several factors including our stock price. Net loss for the quarter was $2.6 million or a loss of $0.07 per share compared to a net loss of $1.4 million or loss of $0.10 per share in the prior year quarter. The total number of common shares outstanding at April 2, 2016 was 40.7 million shares. On to the balance sheet, on April 2, 2016 cash and cash equivalents totaled $5.6 million. In the first quarter of 2016, $1.8 million was used to fund our operations and $100,000 was used by changes in our working capital. We have no investing activates and no financing activities in the first quarter of 2016. Based on our current forecast we expect our existing cash resources will be sufficient to fund our planned operations into the fourth quarter of 2016. Current and non-current liabilities totaled $1.1 million at April 2. And now operator, please open the call for questions.

[Operator:]

Thank you. [Operator Instructions] We’ll go first to Sameer Joshi with Rodman & Renshaw.

[Sameer Joshi:]

Good morning guys. So the question of course relates to the mechanical stress issue. Can you give a little more guidance as to the timing of when this is expected to be resolved and if any additional CapEx requirements have risen?

[Jeff Quiram:]

Well right now we don’t anticipate any CapEx, incremental spending for additional equipment related to solving the issue although we are still at the point where we don’t have it completed. So I think any CapEx that we might spend Sameer in addition would be do something else that we want to bring in house that would be a make versus buy decision and we will make that at the time that we are ready to. The real challenge has been to improve the strength of the wire as we’ve said. We’ve made some very good progress on identifying really where the problem is occurring in the stack and now the work is primarily focused on fixing that deficiency and that point of weakness. And like I said we are making good progress on it. It's not completely solved. If it was we would talk about this in a little bit more specificity. But I feel very good that we are on the right track and I think we are very close to solving it.

[Sameer Joshi:]

Okay. Should we then expect like revenues this year or at least in the four quarter or should we expect revenues from these particular customers only in the next year?

[Jeff Quiram:]

I think that we’re at the point where we believe that we will solve this problem in weeks. So I do -- we are at the point now it is May and so we need to solve the problem. We need to get the wire to our customers who have taken and make the final testing and the approval. I would say if there is revenue opportunity it will be late in the year because by the time you get the approval and then get kind of planned into their supply chain it will definitely be fourth quarter at the earliest.

[Sameer Joshi:]

Okay. Just one question related to this, so the expenses in R&D will remain flat and I guess those are the resources that are being used because CapEx you don't expect much CapEx to solve this problem. So R&D is the only one that will continue to support this effort?

[Jeff Quiram:]

That is correct and so we have the staff we need to solve the problem, and they are assigned to it. There is a little bit of money that we are spending on testing in that arena that hopefully you won't be spending going forward. But I think it's a pretty good metric on where the spendings from those D&RD fall for the foreseeable, the next several quarter at least.

[Sameer Joshi:]

Okay. And Bill mentioned the SG&A will fluctuate from the current 1.1 to 1.2 levels. Is it mainly only because of the stock-based compensation or are there any other fundamental changes that are being made to lower cost or any such?

[Jeff Quiram:]

Go ahead, Bill, you know...

[Bill Buchanan:]

Yeah. These numbers should be pretty constant at the level it is right now. There are no other really -- yes there is obviously like you might have an insurance renewal in a particular period or something else like come up. But this is a pretty reliable number, pretty steady.

[Sameer Joshi:]

Okay. So moving on....

[Jeff Quiram:]

The only thing we are not sure is that as we approach to the end of the year we are finally reaching the end of our lease in Santa Barbara. So there will be an improvement there starting in the fourth quarter that will going to be available to us going forward. It's relatively modest right, Bill, it's in the less than $100,000.

[Sameer Joshi:]

Okay.

[Bill Buchanan:]

Correct. And it will be late in the fourth quarter.

[Sameer Joshi:]

Late in the fourth quarter. Okay. So moving on it's interesting the DOE program you mentioned, would you be going in this with partners or will you be submitting the proposal by yourself and if could just give a little bit more insight into that that would be great.

[Jeff Quiram:]

It is definitely a proposal that you go after with partners and it's a combination of industry and other research institutions. But the good news is that the program and project that we're looking at and the area that we are supplying to is absolutely focused on improving the manufacturing of superconducting wire. And so we of course are very -- a very sensible part of any project associated with that. But again you are bringing in industry -- a couple of other industry partners and also research constitutions that are -- I think as we are closer and as we do the final submission and get some sense of where we are at we will provide more color on who those partners are.

[Sameer Joshi:]

Okay and then the $4 million to $6.5 million per project will that be -- is that amount for the -- of course for the project there is what you would expect to receive for your part of the…?

[Jeff Quiram:]

Well, that's the stated value that the DOE is looking for fun. Those are kind of -- those are annual figures and so projects can be awarded for I think the metric was up to 3 years. But that would be the entire compensation for the project. So we would be sharing that of course with our partners. But I think the point to notice is that since the project is primarily associated with improving manufacturing we are a pretty significant portion of that project.

[Sameer Joshi:]

Great, great. Okay, I think that's all I have I think once you resolve the mechanical stress issues I think you will be good to go on this one. Good luck with that.

[Jeff Quiram:]

Thank you very much.

[Operator:]

[Operator Instructions] We'll go next to William Lamb, [ph] private investor.

[Unidentified Analyst:]

Hey good morning Jeff.

[Jeff Quiram:]

Good morning Bill.

[Unidentified Analyst:]

Jeff I was interested in your comment and your clarification just now that you're on the right path to get it solved. What leads you to say that? I mean what I mean you've identified the problem. Is it just now honing in on it, getting you fixed or what. I mean I'm just trying to understand why you're optimistic at this point?

[Jeff Quiram:]

Well again we've talked about the -- what you're really looking for is where in the stack the wire is failing mechanically. And so we have done pretty extensive testing for all of those areas of the wire belt [ph]. And I think we know where the problem is and we've implemented some changes that are showing better results. So the real issue is you have to do that multiple times and you've to be 100% sure that you have solved it. And so that's kind of where we're at. We think we know what needs to be done, we've demonstrated it a couple of times. We've demonstrated some more. And then make sure that we feel comfortable that we can implement that change into the way we build the wire going forward. And then once we’re able to do that then we're will be in a position to talk more about what the next steps are.

[Unidentified Analyst:]

So are you doing it on the small machines? I mean these steps you're taking is it on the big machine or the small machine, I mean just in the process of how you're doing it?

[Jeff Quiram:]

Well you do a bunch of different testing on different machines. But at the end I mean the actual wire that's coming off and being tested is coming off of our big machine.

[Unidentified Analyst:]

Okay. Was this problem, in the small machine or is it just the big machine.

[Jeff Quiram:]

I would say the problem is with the staff. So it's not necessarily which machine was putting down RCE. It's not necessarily what's causing the trouble. So we never thought in this small machine. But that's I think a function of really where the testing was going at that time, and all the things that we've really been focused on. And it was really only when we started doing some of these final, very specific test or any particular application that the problem start to drop off. And it became much more evident that there was an issue there. So I guess I would say that it probably was being was probably seen problem existing on that 100 meter machine. It's just that we never saw because that wasn't being tested.

[Unidentified Analyst:]

Okay alright. So now you mentioned that if you get this problem solved within the forth coming weeks, at least the good news is that you've solved it, now the question is have you solved it permanently. In other words you've run tests that now show that you're have that strength to meet the vendor's requirement -- I mean the customer's requirement. So you seem to indicate that if that's done you'll have revenues. So do you have commitment from any customer that says look if you get this done and we're going to buy from you that you make the statement that we should may have revenue to solve in the fourth quarter.

[Jeff Quiram:]

No, there is no firm commitment from anybody that says solve this and we will send your money. But we do recognize that if we solve that but the solving it is the adapting to getting the wire approved for deployment. I still believe from our conversations with several of those customers that they still need the wire. So we just we're not -- supplier to them until we get approved. And so that's we have to finish that part of it.

[Unidentified Analyst:]

Okay all right. Okay, that's all my questions. Thank you.

[Jeff Quiram:]

Thank you Bill.

[Operator:]

Thank you. And at this time, I'd like to turn the program back over to Mr. Jeff Quiram for any additional or closing remarks.

[Jeff Quiram:]

Well we like to thank all of you for joining us today. And we look forward to speaking with you again on our next call. Good day.

[Operator:]

That does conclude today's call. Thank you for your participation.