Superconductor Technologies Inc.
Q3 2016 Earnings Call Transcript

Published: 10 Nov 2016

[Operator:]

Good day, ladies and gentlemen. Welcome to the Superconductor Technologies, STI Third Quarter 2016 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, ma'am.

[Cathy Mattison:]

Thank you, Katherine. Good morning and thank you for joining us for STI's 2016 third 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 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. Please go ahead.

[Jeff Quiram:]

Thank you, Cathy, and good morning, everyone. In the third quarter, the primary focus of our Conductus wire development program was to demonstrate our market-leading critical current performance, utilizing the strengthened wire template that we completed in the second quarter. We made significant progress during the quarter, obtaining approximately 80% of our target performance. As many of you know, we have demonstrated the ability to achieve very high critical current performance that meets our customer requirements in the past. While disappointed that we have not met our customer expectations to-date, we remain confident along with our customers that we will accomplish this task again in the near-term. Since switching to our enhanced template, we have continued to redefine our manufacturing techniques and improve volumes with the goal of matching our production to near-term order requirements. We believe that once qualification is completed, we will experience strong demand for Conductus wire in 2017. Now I'll provide updates on ongoing company activities. STI continues to be actively involved in industry events and industry shows. As we have discussed previously, an industry-leading manufacturer of generators and motors and two renowned academic institutions have joined with STI in submitting a proposal for the U.S. Department of Energy’s Next Generation Electric Machines program. Our joint proposal is entitled Process Innovations for HTS Wire Manufacturing. All proposal for which the DOE requested full submissions are under review with an announcement of the winning proposals expected shortly. We decided to pursue this funding opportunity since it is synergistic with our existing product roadmap and directly addresses our customers’ requests for increased infield magnetic performance and improved pricing for Superconducting Wire, which is a key enabling technology for many next-generation solutions. We welcome the opportunity to work closely with our commercial partner, who desires significant wire improvements that apply to many applications including, magnets, motors and generators. That DOE project is funding which greatly improve the time to market of Conductus wire for the motor and generator applications. As this application is very dependent on wire costs and unique performance requirements, we believe that it will come to fruition after our initial target market initiatives are underway. The good news is that all the enhancements we are making today for our current market of early adopters for fault current limiters, magnets and NMR will also benefit the motor and generator application. Next we are encouraged by the interest shown in the Advanced Superconductor Manufacturing Institute, where STI continues to play an active role. The mission of this industry-driven institute is to address the opportunity to revolutionize HTS manufacturing through collaboration of industry, academia and government. The target goal of ASMI is to enable U.S. industry to catapult ahead in the global marketplace, securing U.S. competitiveness. ASMI is focused on attaining the HTS wire manufacturing performance and requirements that are being established by the industry leaders. These achievements are necessary to accelerate commercialization of a wide variety of next generation power application, as well as to address the growing demand by device manufacturers through a dramatic increase in a stable supply of HTS wire. To overcome the wire scarcity that exists today, one key area our focus is to achieve 10-fold increase in US-based HTS wire manufacturing throughput. Recently several Fortune 500 enterprises have joined these efforts increasing the involvement of recognize industry leaders. This validation highlights the importance of HTS wire manufacturing as a key enabling technology for superconducting devices that do not simply provide slight improvements over conventional technologies. These unique solutions address challenges that cannot be achieved otherwise. Finally in September, STI participated in the Applied Superconductivity Conference and the 2016 IEEE Coated Conductors for Applications event. STI collaborated with our customers that are building new disruptive machines for commercial deployments in the near-term and joined with industry participants and researchers from all over the world who are focused on the development of coated conductors for the large market segments we are targeting. Major emphasis was on system designs stressing reliable long-term use that can compete economically with other technologies, while providing advantages unavailable today. In summary, we believe that the increasing industry and government support for HTS wire manufacturing initiatives, provides independent validation of long-term attractiveness for the market for HTS wire. We continue to be approached by customers developing new market applications, many of which require a quantity of wire that will exceed our initial annual manufacturing capacity. This ongoing activity, along with new orders for qualification and demonstration projects, gives us confidence that the market opportunity remains attractive. Now I'll turn the call over to Bill for a review of the financials. Bill?

[Bill Buchanan:]

Thank you, Jeff. In our third quarter, revenue was $22,000 compared to $91,000 in the year-ago quarter, and was primarily from our wireless products for both periods. The commercial gross margins were negative in the third quarter and we expect gross losses to continue in the fourth quarter. As we bring our wire production equipment up to capacity, we expect significant gross margin improvements. Total third quarter R&D expenses amounted to $676,000, and were $772,000 in the prior year quarter. Our 2016 efforts were lower principally as a result of our Conductus wire efforts moving from R&D to manufacturing. SG&A expenses were $1.2 million compared to $1.4 million in the year-ago quarter. Net loss for the third quarter was $2.9 million, or a loss of $0.93 per share, compared to a net loss of $2.4 million, or a loss of $2.08 per share, in the prior-year quarter. Please note that the per share data is adjusted for the 1

[Operator:]

Thank you. [Operator Instructions]. And we’ll pause for just a moment to give everyone the opportunity to signal. And our first question will come from William Latt [ph].

[Unidentified Analyst:]

Good morning, Jeff and Bill. Bill, I have some questions for you. First on the cash flow. Does it look like it’s about a burn rate of $700,000 a month, so that that would get you through February 1 based on your current cash? February or March.

[Bill Buchanan:]

Well, you could see in the first three quarters of this year, we burned about $6 million, which is about $2 million a quarter, which is a little bit less than $700,000. I expect my cash will last well into the quarter, which is beyond February 1.

[Unidentified Analyst:]

Yes, I mean, March 1. I was thinking towards the end of the month, five months from the - yes, maybe you're right. And the offering you just filed, you are registering $10 million worth of stock, is that correct, or that's what the total on the face of the offering is, right? I’m not saying you’re going to do that, but is that - am I correct that you have a $10 million financing registration statement you filed on November 4 or whenever it was?

[Bill Buchanan:]

Yes, we’re potentially up to that amount. Yes.

[Unidentified Analyst:]

And would that - and then you have - does that include the warrant? Does the $10 million include any warrant costs or is that just common stock for the $10 million?

[Bill Buchanan:]

Bill [ph], you’re certainly hitting the kind of specifics on a deal that has not yet been put together, so I really can't comment.

[Unidentified Analyst:]

Okay. I just wanted - so my question then to Jeff. Jeff, we've been waiting for this testing of the material, so that you could ship it to the supplier. And are you saying you're still only 80% there as of this time? Hello?

[Operator:]

And one moment sir, your line is still open.

[Unidentified Analyst:]

Okay.

[Jeff Quiram:]

I guess, Bill [ph], the point is that the - you say only 80% but that is over 500 amps, so we are delivering very high performance wire, it’s just not quite meeting the specifications that we need for this application. So it's not like we’re not getting the wire to work. It is working. It's just we are not quite at the effort we need. So I just wanted to highlight that it's not necessarily a bad thing that - it’s a bad thing that we're not done yet but it's not like we are not making great progress as we are.

[Unidentified Analyst:]

Okay. No, and I appreciate the efforts you're making and everybody is very happy that you're almost there. But so what do you need? You need 90%? I'm not sure how - to ship it, what do you need for the performance? I mean, this - the 80% would work for me to another application but not for the fault meter application. Is that correct?

[Jeff Quiram:]

Well, that’s right. We said it's - we’re at 80% of the - approximately 80% of what the application needs. So, I mean, in order to meet their spec, we need to be at 100%.

[Unidentified Analyst:]

Okay.

[Bill Buchanan:]

That percentage was derived off of what their specification is.

[Jeff Quiram:]

And again just - we've delivered performance way over that 100% in the past.

[Unidentified Analyst:]

Right.

[Jeff Quiram:]

We're not breaking new ground necessarily and delivering a particular amount of current. What we are breaking ground is doing it on our strength of template. And so I guess the things to understand, Bill [ph], is we have done this in the past. It’s always a refinement of that superconducting layer to get the performance where you want it and those refinements are driven to some degree by what happens underneath it. Again it’s a stack of materials, right. So when you change the stuff under it, you have to tweak the superconducting layer to get it to work the way you want it to, and that's what we're doing. I guess the challenge with it is - and we've talked about this in the past and it is a bit of an iterative process because you have to - you make a change. You have to run it. You have to test it. You have to understand what effect that change had on the wire, and then you have to develop a strategy on what to change next. And so I'd say we could do a run tomorrow that meets the spec with the change we make, or it could take another two or three or four runs and you just don't ever really quite know, and that's frustrating part about it, but it is what - it is how the process works unfortunately.

[Unidentified Analyst:]

Okay. So let's go back because I think this is important. You may have made a run that had met the specs but it wasn't consistent, so you have to redo it. I mean, have you done a run where it worked but you didn’t - it didn’t work enough times to satisfy? I mean, have you met the spec but it doesn't work enough times so you have to keep doing it to make sure it works? You don't want to ship anything that doesn't work. Would that be a fair question, or am I not stating it correctly? In other words, have you run something, a new template that met the spec but it didn't do it enough, so you're not confident enough until you run it or tweak it more?

[Jeff Quiram:]

Well, I'll just say that we did not - we have not received enough wire that met the spec where you could ship it to them to be tested. And since you haven't done that, I mean, if you did two inches of it but you didn't do two meters of it, it doesn't matter. Not really.

[Unidentified Analyst:]

Okay. My whole point was that you prepared [ph], it just isn't enough of it yet, right? In other words, you could meet the two inches, but you don’t have the two meters so it doesn’t help. But I mean it’s not like it isn't within the realm, is what I’m trying to say.

[Jeff Quiram:]

Well, we know it's not within the realm, Bill [ph], because on a historical basis we've delivered performance far exceeding that specification. And so we don't believe that there is anything that is in this template that will prevent us from making the superconducting layer deliver that current and far above that current. We just haven't that done that yet.

[Unidentified Analyst:]

Okay, all right. So it's just a matter of getting there, like you've been doing for the last couple of months?

[Jeff Quiram:]

Right.

[Unidentified Analyst:]

So given that - I mean, and I know - all I'm saying is we are running up a lot of dilution in the stack if you look at this. You have to run more money. It seems to me - and I'm not telling you what to do because you're smart enough to know that. To the extent you can delay these offering until you really do produce this, you'll be able to sell the offering at upgraded price. So I don't know what - you have to file because you don't know when the SEC is going to come at back and when you would be ready to go, you can't run out of money. So I certainly appreciate what you're up against and you have to anticipate that. So I don't know. I presume that’s in your thinking before you finalize any offering.

[Jeff Quiram:]

I think you pretty much laid out the way to think about it, Bill [ph].

[Unidentified Analyst:]

Okay. Well, we only wish you the best. And we've been patient, and we are hoping that you can go across the go line. Thank you for your time.

[Jeff Quiram:]

Thank you, Bill [ph].

[Bill Buchanan:]

Thank you.

[Operator:]

[Operator Instructions]. And that will conclude today's question-and-answer session. I will now turn it back over to the speakers for any additional or closing remarks.

[Jeff Quiram:]

I would like to thank all of you very much for joining us today, and we look forward to speaking to you again on our next call. Thank you very much. Good day.

[Operator:]

And that does conclude today's conference. Thank you again for your participation.