Superconductor Technologies Inc.
Q4 2016 Earnings Call Transcript

Published: 28 Mar 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the Superconductor Technologies Fourth 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, Keith. Good morning and thank you for joining us for STI's 2016 fourth quarter and year end 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.

[Jeff Quiram:]

Thank you, Cathy, and good morning, everyone. We’re excited to speak with you today to deliver our yearend report. Our Conductus HTS wire program has made significant progress since our last call. Specifically late February our internal testing produced results that met the technical specifications for several customers. We subsequently shipped wire to those customers for qualification approval. I’d like to begin with a review of our progress in 2016 and then discuss next steps. During 2016, we designed and implemented significant performance improvements through our Conductus HTS wire. These enhancements consisted of dramatically increasing the mechanical strength of our wire earlier in the year and then delivering the required superconducting performance on the enhanced template. On our Q3 call in November we reported attaining approximately 80% of our critical current carrying capacity goal while maintaining our target properties for improved mechanical strength. Early this year, we attained the key 20% increase on the new wire architecture we were looking for. Our customers are now conducting test to validate our results in their applications and approve these samples. Once this critical objective has been achieved we hope to quickly ship all existing qualification orders including three new orders received in the fourth quarter. As we have discussed in the past our near term focus is to attain final customer approval for one or more application after which our efforts will transition to ramping wire production to fulfill commercial scale orders. Next, I would like to provide some more information on STI’s recent selection for a new U.S. department of energy program. In November, STI in collaboration with our industry partner TECO Westinghouse Motor Company or TWMC was selected by the DOE for its next generation electric machines program. STI is the prime recipient of this $4.5 million award. Programs intent is to bring about the rapid development of enabled technology used to manufacture superconducting industrial motors. Our award is the part of the DOE's stated goal of advancing American manufacturing competitiveness by improving industrial motor efficiency and significantly reducing energy usage and the cost of operation. Title of our project is process innovation for HTS wire manufacture. The specific objectives are to improve the current carrying performance of our conducting wire to 1440 amps at 65 Kelvin when operating in a magnetic field of 1.5 Tesla and to reduce manufacturing cost. To accomplish this goal, we provided a detailed plan that would result in the fabrication of a demonstration coil designed by TWMC. We expect this proof of concept will be utilized to design a commercial scale HTS motor assembly for a future product offering. We are excited to be working with our highly regarded collaborators on this project. TWMC is an industry leader and end user and a device maker of over 100 years of experience in motor design and application. TWMC is committed to developing the transformation technology needed to achieve commercial viability for high power superconducting next generation electric machines. Our respected academic partners Massachusetts Institute of Technology and the University of North Texas will provide expertise related to cryogenics, coil design, performance measurement and characterization testing. Combined with STI's proprietary manufacturing process for superconducting materials our team is dedicated to achieving the wide scale commercialization of superconducting materials. We are confident that the complementary capabilities brought together in this team will result in the successful completion of this project. The wire development activities in this project will directly support our market penetration strategy for superconducting turbines, generators and other large rotating machines. These applications are expected to generate the largest demand for superconducting wire in the future. We believe the industry and the government support to HTS wire manufacturing initiatives confirm the importance of this key enabling technology to surpass the performance limitations of conventional materials and designs. Now, I will report on two key patent awards of the last month that enhanced the protection of our unique HTS wire manufacturing capabilities. First, for the protection of the process that improves conduct as well as performance in the presence of a strong magnetic field. The ability to carry higher electrical current in the presence of a strong mechanical field is a key enabler for the superconducting applications of the future. Using a technical called panning superconducting wire performance is dramatically improved in high field application. The traditional panning approach is to utilize additional elements when manufacturing the superconducting layer, thereby increasing the complexity of an already challenging process. STI has demonstrated the ability to incorporate training into our superconductor with all using additional elements. This technique enables STI to meet the needs of our customers without the cost and difficulty of increasingly complex manufacturing process. We believe that this will allow us to deliver the highest performing wire with high manufacturing yields positioning us to be the cost leader in this base. Our proprietary RCE CDR makes conduct these wire ideal for applications that require high end field performance such as motors, generators, MRI and NMR machines. The second path protects the system design developed by STI to improve monitoring efficiency whenever operating materials in vacuum and reinforces the sustainable production and manages of our conducted wire. We design our system to simplify the manufacturing process which allows us to increase efficiency and reduce cycle time. One of the key advantages of our method is to use removable monitoring tools. This capability permits us to evaluate material evaporation status without disrupting the production process. The condition to saving time is designed to reduce maintenance and cleaning requirements. Flexibility provided by our proprietary manufacturing process enables STI to build super connecting wires in very unique ways. Our team continues to develop a secrete that improve our economics of our conductor wire and our commercial skill capacity. We remain excited about the growing demand for more alternatives to commercial materials and designs as well as our positioning in the industry. Now I will turn the call over to Bill for review of financial. Bill?

[Bill Buchanan:]

Thank you, Jeff. In our fourth quarter revenue was $9,000 compared to $27,000 in the year ago quarter and was primarily from our wireless product for both periods. Total R&D expenses amounted to $691,000 and were $879,000 in the prior year quarter. Our fourth quarter and full-year 2016 cost were lower principally as a result of our conductive wire efforts moving from R&D to manufacturing. SG&A expenses were $1.3 million compared to $1.6 million in the year ago quarter. Net loss for the fourth quarter was $2.5 million for loss of $.61 per share compared to a net loss of $2.4 million for loss of a $1.23 per share in the prior year quarter. Please note that our per share data is adjusted for the 1

[Operator:]

Thank you. [Operator Instruction] We will take our first question from Sameer Joshi with Rodman & Renshaw, please go ahead.

[Sameer Joshi:]

Good morning Jeff and Bill and congratulations on the progress you are making on improving performance.

[Jeff Quiram:]

Good morning Sameer, thank you.

[Sameer Joshi:]

So, I will just paraphrase what I understood about your process, in the third quarter call you had said that you had achieved 80% of the performance and then the 20% increase on this, in the press release makes it to your – it has reached your goal. Is that how we look at it or was this 20% improvement over the old process?

[Jeff Quiram:]

No. We have achieved the goal that we set out and the goal is basically, has been established by what our customers are looking for. So yes the 20% improvement over where we were has gotten us all the way to where our customers wants us to be and actually beyond to be honest.

[Sameer Joshi:]

Okay. How many customers have actually been like, how many customers have you sent this wire in addition to the pre-orders that are pending?

[Jeff Quiram:]

I think we sent in that same time and I think it was three customers. Is that correct? It was three or four. One of which being [indiscernible] limited customer which is the one that we been working with for an extensive period of time here and is really the one that we think is the cause as to riding us to the commercial agreement to move forward.

[Sameer Joshi:]

Right. So that was going to be my next question. What are the other applications or customers that are ordering in addition to the STI’s customer?

[Jeff Quiram:]

Well, there are more applications which are, I won't say the same but they are similar to the sort of work we are doing with the department of energy grant. So there are people that are building industrial scales, superconducting motors and so there are opportunities there and then there are other larger devices some of them are MRI machines that are using specialty coils in them, so they are not replacing the entire coil but they are doing something unique in some aspect, they build the coil where they use HTS wire other than the low temperature wire. And then there are other big devices that are focused on doing things like fusion energy and things of that nature that will consume a tremendous amount of high temperature wire in the years to come. So all of those activities are, those are all kind of high field activities as we have discussed. The [indiscernible] but those others all need to perform and high field so the work we are doing in DOE is very applicable to kind of all those other applications.

[Sameer Joshi:]

Right. That's great. That DOE is sort of funding this process. Coming back to the FCL customer, are you sending tons of meters of wires or it hundreds of meters of wire that you are sending for testing?

[Jeff Quiram:]

We are not sending hundreds of meters of wire because that's really the next step once the wire is completely accepted for use in their device. So it's tens of meters.

[Sameer Joshi:]

And is it 12 mm size width?

[Jeff Quiram:]

I am sorry. I missed that?

[Sameer Joshi:]

Is the width 12 mm for this or is it some other size wire?

[Jeff Quiram:]

12 mm is where they want to go. I am not exactly sure if the wire we just sent them as 12 mm. That's why I am hesitating. But ultimately they would prefer a 12 mm piece of wire but I am sorry I can't, Bill do you know it was 12 or was it 4?

[Bill Buchanan:]

I am not exactly sure on the sample size. I am a little weak there off.

[Jeff Quiram:]

I am sorry Sameer, I don't know the answer to that question.

[Sameer Joshi:]

It's okay. Yes. The reason why I asked is in light of your process improvements, I think previously your annual capacity for 12 mm wire was around 250 kilometers and correct me if I am wrong.

[Jeff Quiram:]

That's correct.

[Sameer Joshi:]

Okay. So is there any change in the capacity based on these performance improvements or process improvements that you have implemented?

[Jeff Quiram:]

Well, I mean really the majority of the calculation that goes into what the capacity of the machine is primarily, how quickly you can turn it around and how often you can run it and so I would say these process improvements help make the plan that we already have to be more doable. It's a run that's sort of capacity to that machine you need rapid turnaround. You need to have very consistent operation. Many of these process improvements are focused on that. So I would say Sameer that I don't think it gives us dramatically greater capacity then what we stated the machine has.

[Sameer Joshi:]

Okay. Understood and that brings to my last two questions basically the SG&A and R&D expenses. There has been over the last year SG&A has been between 1.2 and 1.4 million per quarter and R&D has been in the 700,000 to 800,000 range. As you ramp up sales and as you start receiving commercial orders, how should we see these numbers changing?

[Jeff Quiram:]

Well, I don't anticipate you’ll see dramatic change in the SG&A numbers as we ramp up production most of the increase that will occur in our operations will be of course for manufacturing personnel and it will show up in cost goods sold that of SG&A. I would say the same thing holds true to some extent in R&D’s phase. The only thing that would potentially change there is, if we would decide to move forward with another machine you would start to see some CapEx that would show up initially in the R&D area. But again, that sort of ways away from making that decision, but the only other cost in the R&D are basically head count. We do probably look to add a couple people as we go through the year, but it won't be a dramatic increase in R&D dollars in the near term. Would you agree with that Bill?

[Bill Buchanan:]

I would agree, Jeff.

[Sameer Joshi:]

Okay. I just have one more if you would like. Well, how quickly do you expect to see commercial orders from the FCL and the other larger devices like MRI and NRM customers?

[Jeff Quiram:]

Well, for the [indiscernible] especially I think we get the final approval and meet their needs of that customer you can see that order in relatively near term so hopefully receiving orders in the second quarter where you’re fulfilling them in the third quarter. Some of the large – some of those other large applications like the NMR and the fusion devices many of them they are looking at what I would call, I guess modest demand this year but still demand in the kilometers but the plan is really in the 2018 and beyond time frame to have hundreds of kilometers to be bought in those applications so I think there is a chance that there is some meaningful opportunity there in 2017 but it's really kind of 2018 and beyond where those will have the bigger numbers.

[Sameer Joshi:]

Great, thanks a lot Jeff and Bill and congratulations once again.

[Jeff Quiram:]

Thank you, Sameer.

[Operator:]

We will go next to William Lap, Private Investor. Please go ahead.

[William Lap:]

Good morning Jeff and Bill.

[Jeff Quiram:]

Good morning Bill.

[William Lap:]

I got a little late on the call so I wasn't clear. When did you ship the [indiscernible] people leader in the samples was that the last week, last two weeks or and then what do you expect the turnaround time within the tested and confirm your results?

[Jeff Quiram:]

I believe we shifted them it was late February. Right in the February, right in the first week of March, I can't remember exactly which day Bill but it was a little while ago.

[William Lap:]

Oh that's good. So what is their estimate for their testing to meet their qualification, is it 45 days or how much time you think it's going to take to confirm that you need those specifications from the time?

[Jeff Quiram:]

You’re in the range we talked about in the past it's four to six weeks sort of turnaround so we did meet with that customer at an industry event not long ago and they reiterated to us their interest in the wire and their commitment to testing it as promptly as they could, but yes the four to six weeks time frame is consistent with what we have seen in the past.

[William Lap:]

So, we remain in the middle of April, right?

[Jeff Quiram:]

That would be our expectations.

[William Lap:]

So if they confirm that it meets the specification are you going to have a press release on that or would you wait until you get an order?

[Jeff Quiram:]

I would say we would probably wait until we are officially approved and have an agreement to move forward with them commercially. So again, I think passing the test is great. But actually receiving the approval checkmark and then putting that business relationship in place is, I think is a more relevance milestone for our investors to be made aware of.

[William Lap:]

Okay. And I wasn't clear so the capacity that the analyst just asked you about for the machine that would look 260,000 the number of kilometers you talked that was not using the entire machine then, would it?

[Jeff Quiram:]

Yes, it would because we have always talked about capacity of 750 kilometers at 4 mm wide. So it would calculate into 250 kilometers at 12 mm wide.

[William Lap:]

Okay. Thank you for clarification. So there are orders that maybe coming down the path and the bigger in the latter part of the year, you spoke about where you may not have capacity for that if they take up your full capacity for customer, we don't know what kind of quantity they are going to want at this point. So there wouldn't be much room if they picked up the whole machine correct or incorrect?

[Jeff Quiram:]

Well, our hope is that we will certainly have that machine pretty much focused on meeting the needs of the first customer that we focused on and yes, I think that for us it's actually good when I talk about the large orders from those other applications coming in the 2018 and beyond time frame that's actually from a timing perspective works better for us because if we need to increase capacity and put in new machines it takes us from the moment we make the decision to add a new machine it will take us 9 to 12 months to have that machine operational. So if we end up with our current machine at capacity it will be several quarters before we can add another chunk of capacity.

[William Lap:]

So, if they came in with order like in April, you’ve got the business relation to finance, could you start producing like in May, the wire? What would be the lead time for once you solidify the business relationship...

[Jeff Quiram:]

Well, yes I mean the real issue is and we are already – we have already started adding. We have some people on staff that are well positioned to run two shifts, ultimately when it gets to capacity we are – that's really when we would probably go to a three-shift schedule but to answer your question we get a large order we will be starting to ramp up and try to get our production going immediately. So I mean it really doesn't take us. If there is not going to be much of a delay between getting the order and beginning the efforts to fulfill that order. We really we got the machinery we got the people, Bill and – key people will have to start working to – start bringing more of the raw materials and things of that nature but we are in position to start right away.

[William Lap:]

That is really good news. And I am hopeful that the acceptance and I got the feeling the way you tested the wire before you signed the [indiscernible]. Thank you. Bill, did any warrants get exercised during the last quarter or lately I don't know if you mentioned that during the call?

[Bill Buchanan:]

We didn't mention it. No.

[William Lap:]

Is there anything you want to comment on that or you can't?

[Bill Buchanan:]

I would rather not comment right now.

[Jeff Quiram:]

I guess the point is Bill if – once it had been exercised that had – capital had come in we would have a non-stop.

[William Lap:]

Okay, fine. Well thank you very much and congratulations.

[Jeff Quiram:]

Thank you, Bill.

[Operator:]

[Operator Instruction] We will go next to James Collins, HTF Investments. Please go ahead.

[James Collins:]

Yes. Bill you mentioned did I hear you right about 1,400 amps somewhere in the presentation?

[Bill Buchanan:]

Yes. James it's 1,440 amps but the other thing to notice is it's at 65 Kelvin. So most…

[James Collins:]

Okay. Yes right. Now at [707] right now.

[Bill Buchanan:]

Right. So just for those on the call that aren't really familiar with that relationship between temperature and performance, the lower you cool the wire the higher the performance you get, so if you are doing 700 amps at 77 Kelvin if you cool it to 65 you do a lot more than 700 amps. So there is progress that needs to be made James but it's not like we need to double the performance or anything like that.

[James Collins:]

I see. And as I recall the problem that you had with the earlier fault current limiter wire, was that after several iterations of trying to send in fault currents that the -- somehow the wire deteriorated, is that testing done now in your in-house lab for the deterioration thing?

[Jeff Quiram:]

We do the majority of the testing Jim, the thing that we really focused on was the mechanical stresses that are in the wire. The fault current limiter uses relatively short pieces of wire but they – it depends on the design but many of them produce, they use short pieces and then make a lot of small coils and those small coils are wrapped relatively tightly. The challenge we were having is one that coil was wrapped when the wire was wrapped as tightly as they wanted to wrap it just wasn't – the performance of that wire was reduced. So something was happening in the wire when you were wrapping it that tight. So that's where we needed to go back and make the stack stronger to deal with those mechanical stresses and that's what we did.

[James Collins:]

You tested that in your own lab is added for this tightness.

[Jeff Quiram:]

We have all the testing – necessary to do all that mechanical testing now the final cycle testing and there are things that our customers are new to the wire that we can't always replicate, but we believe we have identified the things that needed to be fixed and we believe we fixed it and now we just need to wait and get that validation from them.

[James Collins:]

Thank you very much. That clears that up and congratulations on the progress.

[Jeff Quiram:]

Thank you, Jim.

[Operator:]

[Operator Instruction] At this time there are no further questions in the queue. For closing remarks I would like to turn the conference back over to Mr. Jeff Quiram. Please go ahead sir.

[Jeff Quiram:]

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

[Operator:]

Ladies and gentlemen this concludes today's conference. We appreciate your participation.