Superconductor Technologies Inc.
Q2 2016 Earnings Call Transcript

Published: 11 Aug 2016

[Operator:]

Good day and welcome to the STI second quarter 2016 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 Rachel. Good morning and thank you for joining us for STI's 2016 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 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 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. First I would like to review the significant progress we have made improving our Conductus wire's mechanical strength as we discussed on the first quarter call in May. Then I will now provide additional information on our Department of Energy proposal and other company updates. We identified where improvements needed to be made to strengthen our wire and have engineered a solution to implement those changes. We have achieved the required wire strength in testing and are now focused on reestablishing our standard critical current utilizing the new template architecture. Once we meet all of the technical specifications for our key customers, we will ship wire samples to them for validation. Our plan is to implement these architecture enhancements on our existing production equipment utilizing our design that prioritizes the ability to scale quickly and economically. We expect to have the system modifications operational early in the fourth quarter of 2016 and ship wire to key customers shortly thereafter to complete existing qualification orders. The market demand for STI's wire remains strong and we continue to receive orders for qualification testing. In the near-term, our wire production is focused on validation orders for key customers that we believe are successfully selling disruptive HTS products on a commercial scale. In summary, our efforts to improve our Conductus wire strength has yielded a strategy that positions us to complete the customer approval process. Now I would like to update you on our proposal for the U.S. Department of Energy's or DOE's next generation electric machines program. In June, in partnership with an industry leading manufacturer of motors and generators along with renowned academic partners, STI submitted the completed proposal for the funding opportunity entitled Enabling Technologies for Next Generation Machines. We are excited to be working with our commercial partner on the project that addresses the topic of superconducting wire manufacturing. We believe our proposal fully addresses the DOE's initiative to maximize energy efficiency and increase power density for a wide variety of next generation power applications. In addition, these significant wire improvements will also meet customer requirements for increased infield magnetic performance and low cost high performance wire for many applications such as motors, generators, magnets, power cables and MRI machines. The DOE's Office of Energy Efficiency and Renewable Energy has stated, it plans to announce the winning proposals next month. The program is structured to provide matching funds to the selected companies with the DOE proportion of funding expected to be between $4 million and $6.5 million per project. While this is a longer term opportunity, we believe it indicates the growing importance of superconducting technology to the electrical device industry and governments worldwide. Also in the second quarter, we further enhanced our intellectual property portfolio. The U.S. Patent & Trademark Office awarded STI a new patent that recognizes the company's unique capabilities to maximize current carrying performance in a high magnetic field. Our unique and patented HTS architecture makes Conductus wire ideal for applications such as motors, generators, MRI and NMR machines that requires superior infield performance. In September, STI will attend the 2016 Applied Superconductivity Conference in Denver. We will present a technical paper and continue our collaboration with global customers focused on applied superconductivity. We will also provide company updates at this premier industry venue. In summary, we are excited about the industry's adoption of superconducting technology and the related market opportunities for superconducting wire and Conductus in particular. Now I would like to turn the call over to Bill for a review of financials. Bill?

[Bill Buchanan:]

Thank you Jeff. In our second quarter, revenue was $11,000 compared to $71,000 in the year ago quarter and was primarily from our wireless products for both periods. The commercial gross margins were negative in the second quarter and we expect gross losses to continue in the third quarter. As we bring our wire production equipment up to capacity, we expect significant gross margin improvements. Total R&D expenses amounted to $701,000 and were $1 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 $1.4 million compared to $1.3 million in the year ago quarter. In the second quarter, there were no changes to the fair value of our warrants issued in August 2013. Our Q2 2015 non-cash gain from this adjustment was $752,000. This amount will fluctuate quarterly based on several factors including our stock price. Net loss for the second quarter was $3.1 million or a loss of $1.14 per share compared to a net loss of $2.4 million or loss of $2.11 per share in the prior year quarter. Please note, the per share data is adjusted for the 1-for-15 reverse stock split effective on July 18, 2016. The total number of common shares outstanding at August 5, 2016 was 3.3 million shares. On to the balance sheet. On July 2, 2016, cash and cash equivalents totaled $3.4 million. In the first six months of 2016, $4 million was used to fund our operations and $100,000 was used by changes in our working capital. We have no investing activities and no financing activities in the first six months of 2016. Subsequent to the quarter end, on August 2, we closed a registered direct offering with gross proceeds of $2.2 million and net proceeds of $1.9 million to the company. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations into the first quarter of 2017. Current and non-current liabilities totaled $1.3 million at July 2. And now operator, please open the call for questions.

[Operator:]

[Operator Instructions]. We will take our first question from Sameer Joshi with ‎Rodman & Renshaw.

[Sameer Joshi:]

Good morning guys. My first question is the related to the DOE application. Was that application made by you directly? I know there were other parties involved, but were you a separate applicant in that?

[Jeff Quiram:]

It's a joint proposal and we are the lead on the proposal, Sameer.

[Sameer Joshi:]

Okay. And is the $4 million to $6.5 million project, is it one projects? I know there are two to three projects but is the proposal for one or more projects that you aim in?

[Jeff Quiram:]

We made a proposal for one project.

[Sameer Joshi:]

Okay. And next month you would know, as you said. Okay.

[Jeff Quiram:]

Yes. They said, exactly one in September they will notify us, but they do expect to do it next month.

[Sameer Joshi:]

And have they come back with any queries indicating interest or do you know how many other parties are also in the mix competing with you?

[Jeff Quiram:]

We did responds to an inquiry, some clarification on several elements of the proposal and so we work with our partners to respond to those inquiries. Frankly, we believe those inquiries are a positive indicator, to speak of. They were for information that was very useful for them in evaluating how to move forward. And so the questions were good and I think our responses met their needs and so I guess we will find out next month. As far as number, Sameer, I guess I don't know exactly how many. But for this particular project, it's for superconducting wire manufacturing and it's for American companies or companies that have offices in America.

[Sameer Joshi:]

Great.

[Jeff Quiram:]

So it's a limited number of responses.

[Sameer Joshi:]

Great. Got it. Yes. Sure. Coming back to the technical -- sorry. Did someone say something? No. Coming back to the technical issues, how confident are you that you would be able to scale that solution up in the fourth quarter and how quickly after that do you expect to receive orders based on your demonstration of success?

[Jeff Quiram:]

We do expect to be able to ramp up the production in a pretty rapid timeframe. Again, the thing that we are doing now is, we are building this wire that we have improved the strength on and now we are just trying to get the IC performance back to the level that we need it at. So we are confident that we can do that and once that's done and we ship the wire to the people that go the validation testing, they tend to turn that around in 30, 45 days, depending on what they find. So our goal, of course, is make sure that whatever wire we ship to them, it has already passed all the testing from our perspective. We now know a lot more about exactly what they are doing, so we can do pretty exhaustive testing on the wire and we will know that it is going pass before we send it. And so then once they get it, it's a 30 to 45 day response time from them. And if we meet all the requirements, we expect that we will move on to the larger order shortly thereafter.

[Sameer Joshi:]

Okay. Just a small clarification on that. To meet the IC requirements, you know what is to be done. Like you know what the solution is and you are just implementing it, right? Or is there some other nuance there?

[Jeff Quiram:]

Well, the only real nuance, Sameer, is that you are changing, we are just mixing up the materials a little bit different to try to get the performance. Again, think about the wire as a multi-story building. And so you fix something on the third floor and it affects what happens on the fourth, fifth and sixth floor. And so we need to tune the HTS layer to take into account these changes that are occurring underneath it to get back to where we need to be, from an IT perspective. And so we are not worried about that at all. That's something that has been done before. It's a little bit of an iterative process. So we need to do it. Make sure we get it to the performance level that we need. And so that's really what we are working on now.

[Sameer Joshi:]

Okay. I think that is all I have. Thanks.

[Jeff Quiram:]

Okay. Thank you Sameer.

[Operator:]

[Operator Instructions]. We will take our next question from William Latt, a private investor.

[William Latt:]

Can you hear me okay?

[Jeff Quiram:]

Yes. We can hear you, Bill.

[Bill Buchanan:]

Yes.

[William Latt:]

Okay. Thank you. I just want to, first of all, on the project that you are getting the grant from. Is that the total amount? Or did you say in the last call it would be $1.5 million? Or is there a different number? What would be applicable to your testing? How much money are we talking about?

[Jeff Quiram:]

The full grant is $4.5 million to $6 million, depending on what they want to fund. We will be the largest recipients in the pool. So I guess I don't want to talk about an exact number, Bill, because I don't know what they will approve to fund it for duration, but we will get the majority of what's granted in the proposal.

[William Latt:]

So will that help with your operating expenses that you are incurring right now at STI? Or does that have to be separate? In other words, your nut is so much a month, will that money help reduce your nut from a standpoint of funding the research?

[Jeff Quiram:]

Well, it helps us in that we would get matching funds for investment that we are already making in trying to improve the performance of the wire. And so I will note that, it would actually be in operating expense category, probably more in an R&D category. What do you say, Bill, though? You are the one that -- you know exactly what category that would hit.

[Bill Buchanan:]

Yes. Most of the money is going to be specific to the grant. I don't think it will reduce my cash burn but it will allow me to accelerate progress with the wire.

[William Latt:]

Okay. That's the issue. The question is, does the fund reduce your cash burn and you seem to think, no. But it gives you more manufacturing capability for more research. Is that a correct statement?

[Bill Buchanan:]

Yes.

[Jeff Quiram:]

It gives us a little bit more. It gives us the ability to potentially more aggressively go after a particular thing that we may not have done if we were paying for all of it ourselves.

[William Latt:]

Okay. Now with respect to the, Bill -- just I have got another question for you, Jeff, but Bill, after the offering, what is the total number of shares outstanding now? Is it about four million?

[Bill Buchanan:]

The total number of shares right now is 3.2 million, as I indicated just a couple of --

[William Latt:]

That's 3.2 million after the offering.

[Bill Buchanan:]

Correct.

[William Latt:]

Okay. So basically the company right now and a market cap is pretty cheap at $6 million or $9 million. The next question, Jeff, I just want to get a little further clarification. So is your best case and what's your worst case that you would be shipping the wire to the potential customers? Is it December 1? Or can you give us some -- I mean I am not going to hold you to that, but what dates do you look for that wire going, earliest and the latest, based on your progress to-date?

[Jeff Quiram:]

Well, we expect it will be in the fourth quarter and our goal, of course, is to do it early in the fourth quarter.

[William Latt:]

So it could be in October, theoretically, right?

[Jeff Quiram:]

Yes. It could be theoretically in October. I would say, it's probably more likely that will be towards the middle of the quarter. And it's all a function, Bill, of getting the wire to perform to meet all the tests. And so that takes us two iterations, three iterations, what it takes us on running the machine on the new staff, the new architecture, that's what we don't know, but we expect it will be a handful of runs to get the wire to perform to where we need it to perform and then we will ship it.

[William Latt:]

Okay. But the good news now is that when you ship the wire now and you have tested it, it should work from there because you are going to be doing some of the same tests they were doing, right?

[Jeff Quiram:]

Yes. That's correct.

[William Latt:]

And I think you have iterated before that you wouldn't ship the wire unless you were pretty confident that it works. Okay. So what is the cash -- okay, let me say the next thing. So let's assume, let's just go out a little further, because I don't think people thought about this, so if you get the wire in the order and then you start production, when would you start production? Would you start production in January, February? When would you start shipping the wire to them if you got an order?

[Jeff Quiram:]

I believe that the requirement will be, we will need to ship, we will get an initial order and I think will have 30 or 45 days to ship that order from the time we get it. So it will be a function of when we get the order and that is, well, I mean that's a relatively modest order that will then turn into a bigger one. So the way that particular, the one customer we are talking, that will provide, Bill, for as long as once they get validation of the wire they will place an order for, let's just say, less than a kilometer of wire that is to be shipped quickly and they are looking for consistency and the repeatability of the process and then once you do that, they will follow that up with a larger order after you have met that hurdle. That's the way they are structuring.

[William Latt:]

Okay. So then if the order comes in, would that order and the future orders be enough, the full capacity of one machine? Or would there still be capacity to produce other wire? In other words, would it eat up our whole production of the current machine?

[Jeff Quiram:]

I don't know that I would say that it would eat it all up, but in the short term, it will certainly be consuming. When we get first wire order from them, that's all we will be working on. Now whether that is something that is all we are working on for a month or two months or three months is to be determined. And then is there a follow-on order that comes in or is there capacity freed up. So I can't answer that question exactly, Bill. We will have to see how it plays out.

[William Latt:]

Okay.

[Jeff Quiram:]

We would love to be able to get a very significant portion of this business from this customer that their business is growing and it would be great if we could just take that machine and dedicate it to them. But I am not in a position to say that that's definitely what's going to happen yet.

[William Latt:]

Okay. But based on running that machine full time, I think you and I discussed based on an analysis before, that that could bring in a 12 month period about $35 million in revenue. Am I correct?

[Jeff Quiram:]

That is what the design capacity of that machine is, correct.

[William Latt:]

Okay. All right. And then the cash flow, the financing, Bill, could you be a little more explicit? You said, it will take us to the first quarter of next year. Is that, February, March? Or based on your projections, what do you think this new raise will do?

[Bill Buchanan:]

I don't think I want to get more specific than -- you are certainly into the quarter. I would say, a midpoint, plus or minus, is a good place to be. I don't want to get anymore specific than that.

[William Latt:]

All right. Well, that's good. All right. Well, thank you. I don't think I have any other questions. Keep up the good work. I think, Jeff, wouldn't you say that the place you are now, it's now just tuning things and you should be able to produce the wire based on getting over the hurdle now?

[Jeff Quiram:]

That's what we believe, Bill.

[William Latt:]

Okay. Thank you very much.

[Jeff Quiram:]

Thank you Bill.

[Operator:]

Mr. Quiram, I would like to turn the conference back to you for any additional or closing remarks.

[Jeff Quiram:]

Very good. Thank you all very much for joining us today. STI will be presenting at ‎Rodman & Renshaw 18th Annual Global Investment Conference on Tuesday, September 13 in New York City. We hope to see some of you there. We look forward to speaking with you again on our next call. Good day.

[Operator:]

This concludes today's conference. Thank you for your participation. You may now disconnect.