Superconductor Technologies Inc.
Q3 2015 Earnings Call Transcript

Published: 10 Nov 2015

[Operator:]

Good day and welcome to the STI Third Quarter 2015 Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Becky Herrick. Please go ahead.

[Becky Herrick:]

Thank you, Keith. Good morning and thank you for joining us for STI's 2015 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 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, 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 section of STI's 2014 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 STIs 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 Becky and good morning everyone. We're going through a qualification and go-to-market process as everybody knows. While it has taken longer than our initial expectations, I continue to be very excited about our Conductus wire program. We remain focused on achieving qualification for three product applications, fault current limiters, magnets, and power transmission cables. I’ll review the customer status starting with the fault current limiter market. On our call in August, we reported a significant progress in our customer evaluation activities. This quarter, we shipped Conductus wire for customers to perform rigorous qualification testing. While we did not fully pass the latest test, the testing process continues to the next round and we received useful feedback which we are incorporating into our product. We are making steady progress with each test cycle and we believe that we are close to meeting all of the performance parameters of one or more of fault current limiter customers. Since the inception of our HTS Wire program, our team has cleared a number of very challenging technical and production hurdles. While we cannot precisely predict the timing, we are confident that we will accomplish this latest milestone as well. Many of our customers have been increasing the personnel and resources assigned to their super conducting projects. Several customers continue to share their business plans and their desire for a reliable supply of high performance Conductus wire to help them commercialize their products. For the magnet application, we continue to experience strong interest in wire that can perform well in the presence of very high magnetic field. As we've discussed in the past, conductor wire – Conductus wire has delivered industry-leading results in this environment. NMR and particle accelerators are examples used in the health and science markets. We shipped wire to two new magnet customers in cooperation with our partner at the Robinson Research Institute. One shipment was for a magnet demonstration project that we shipped in the third quarter to fill an order we received in the second quarter, and the second customer received Conductus wire for evaluation in October. Our relationship with the Robinson Research Institute continues to expand as we jointly provide solutions that are unique in the industry. Together we have the ability to provide some components that reduce the complexity of the original equipment manufacturing and supply chain and shorten the lead time required to bring products to market. In addition to the shipments for the target applications just discussed, we also shipped hundreds of meters of wire against open orders for testing and qualification to other customers during the quarter. In power transmission cables, our potential customers are tier-1 manufacturers that are providing power grid operators around the world with solutions that optimize power distribution. Super conducting power cables are part of that product set because of the ability to carry 5 times more power than conventional copper solutions in the same duct space. We remain confident we will meet the technical and business requirements necessary to become an approved HTS wire supplier to this growing market. During the quarter, our power cable customer performed testing on our wire that resulted in the request for longer length wire that will be used to fabricate a cable using their standard manufacturing processes. We plan to ship wire meeting this request in Q4. We also continued to enhance our go-to-market capabilities. In October, we entered a distribution agreement with TING Corporation to supply the India market with Conductus wire. TING has been marketing HTS wire since 2013 and has a proven track record of selling 2G HTS wire in the Indian market to multiple customers. TING is targeting several existing applications that include power storage solutions, fault current limiters, magnets, and motors. We believe our partnership with TING will enable STI to effectively address the HTS wire market opportunities in India. In September, the 12th European Conference on Superconductivity better known as EUCAS, STI summarized the technical achievements of our 2G HTS wire production scale up efforts. The discussion highlights included, wire produced on our new production machine that demonstrated IC performance of 900 Amps on 12 millimeter’s width, process data on production runs are now regularly achieving 700 to 800 Amps on that 12 millimeter-wide wire substrate. Third party validations of these industry-leading ICA efforts, and proved that our process is inherently flexible and we're exploring widths beyond 12 millimeters with our customers. These ongoing technical achievements reinforce our confidence in the capabilities of our new production machine to deliver the performance and quantity of wire for which it was designed. Not only are we consistently producing wire with high current handling performance, we continue to increase the run lengths and uniformity. All wire being evaluated by our customers at this time for final approval is manufactured by that production RCE machine. In summary, we are pleased with the increasing market adoption of HTS technology to address problems unsolvable by conventional means. Our customers are leading global industrial OEMs that are advocates for HTS technologies and have established sales channels through utilities. Our customer relationships remain strong and demand for Conductus wire is increasing. We continue to focus our efforts on the customers that we believe are best positioned to aggressively deploy superconducting devices in the near-term. Our absolute priority is to become a qualified supplier followed by securing contracts and supply agreements. Now, to Bill for a review of the financials. Bill?

[Bill Buchanan:]

Thank you, Jeff. In our third quarter, revenue was $91,000 compared to $86,000 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. As we bring our wire production equipment up to capacity, we expect significant gross margin improvements. Total R&D expenses amounted to $772,000 and were $1.5 million for the prior year quarter. Our 2015 efforts are lower as we transition our 2G wire efforts to manufacturing. SG&A expenses were $1.4 million compared to $1.3 million in the year ago quarter. We recognized the non-cash gain of $503,000 from the fair value adjustment of our warrants issued in August 2013. This amount will fluctuate quarterly based on several factors including our stock price. Net loss for the third quarter was $2.4 million or loss of $0.14 per share compared to a net loss of $2.4 million or a loss of $0.19 per share in the prior year quarter. The total number of common shares outstanding at September 26, 2015 was 18.2 million shares. On September 26, 2015, cash and cash equivalents totalled $1.2 million. Subsequent to the quarter end, on August 14th, we completed a registered public offering with net proceeds of $8.6 million. The total number of common shares outstanding at the close of this offering was 31.7 million shares. Through the third quarter, $6.1 million was used to fund our operations and $100,000 was used by changes in our working capital. Capital expenditures for the first nine months of 2015 were $141,000. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations through 2016. Current and non-current liabilities totalled $2.3 million at September 26th and included $1 million for the fair market value of our awarded derivatives. Now operator, please open the call for questions.

[Operator:]

[Operator Instructions]. And we can take our first question from Jon Hickman with Ladenburg Thalmann. Please go ahead.

[Jon Hickman:]

Hi Jeff.

[Jeff Quiram:]

Hello Jon.

[Jon Hickman:]

Tell us how many with your fault current limiter guys like how many iterations have you -- are you into now of trying to meet the qualification?

[Jeff Quiram:]

I am not sure I have that number Jon, and it is different for each of them. I think that it is probably in the 5 to 6 range would be my guess.

[Jon Hickman:]

And are each of them evaluating wire right now?

[Jeff Quiram:]

Yes.

[Jon Hickman:]

Okay, and then can you just elaborate a little bit more on what you said about cable, so you shipped them the demonstration wire and now they want longer lengths so they can actually make a cable that would go into an application?

[Jeff Quiram:]

Well, what they want to do is -- so what they did with the wire that we shipped them first was really kind of hand building of a cable. So, what they want to do now is they want to -– they want to be able to mount the wire in the production machine that winds those cables in the normal process so that they can run their line and build the cable just using their manufacturing machine like they would in a normal instance. So in order to do that they need longer lengths, it needs to be in reels so that they can attach it to their production equipment and then run it. It’s still going to be a relatively short length of cable but they want to see how it works with their automated production equipment.

[Jon Hickman:]

So you’re talking about like a 100 meters or something or less than that?

[Jeff Quiram:]

It’s somewhere in that range, Jon.

[Jon Hickman:]

Okay. So, and you are going to ship that this quarter that we're in right now?

[Jeff Quiram:]

Our expectation is that we will be shipping it this quarter.

[Jon Hickman:]

So in your mind is fault current limiters still the number one potential for like commercial shipments?

[Jeff Quiram:]

Yes. I still believe that from a near term perspective and for commercial deployments that will be meaningful to STI that the fault current limiters are the approach that will be the closest path to revenue.

[Jon Hickman:]

And one more question, so since each of your fault current limiter guys or potential customers are shipping – are looking at wire now. Is there the potential that this iteration meets the qualification standards?

[Jeff Quiram:]

Well, I think we’ll know that relatively soon. We actually feel pretty good based on the last feedback we had. We have a pretty high level of confidence with at least one of these customers that we think we've cracked the code. Now it hasn’t – it’s not verified yet, so that is still to be determined but we do feel pretty good about the way that’s run and they have in their hands right now.

[Jon Hickman:]

So there is a potential. Okay.

[Jeff Quiram:]

Yes.

[Jon Hickman:]

Okay. Thank you. That’s it for me.

[Jeff Quiram:]

Good. Thank you, John.

[Operator:]

And we’ll take our next question from William Lap. Please go ahead, your line is open.

[Unidentified Analyst:]

Good morning, Jeff.

[Jeff Quiram:]

Good morning, Bill.

[Unidentified Analyst:]

In following up on that cracking the code, would you -– once you’re qualified, let’s say you cracked the code, would you announce that or would you wait until you actually had a contract?

[Jeff Quiram:]

I think it will depend Bill on the discussions with our customer. I would say that it is probably likely that you wouldn’t announce. If you’re –- if we're working on a supply agreement at the same time that we're approved, we may choose to wait, just to make it a more complete announcement. And in many instances, sometimes the customer has something to say about it too. So they can approve you. I think the other -– the thing that will probably make the decision for us Bill is whether the customer is interested in going public with our approval at that time or not. If they’re not willing to necessarily go public and them have us use their name, we may make an announcement that we've been approved by one but we won’t be able to disclose who it is. And you probably wouldn’t have that disclosure until the actual supply agreement was in place.

[Unidentified Analyst:]

You know the one…

[Jeff Quiram:]

No, go ahead Bill.

[Unidentified Analyst:]

Thank you. The one you say that you may have cracked the code with, your business discussions with that customer, would that take your full capacity of the machine at this point of time based on your business discussions with them?

[Jeff Quiram:]

Well, I mean, I think a lot has to do with their success in the marketplace and how rapidly their business grows. So I guess I wouldn’t say right out of the shoot that we would know with a 100% certainty that it would consume everything we would build. But based on what they’ve talked about and what their plans are for their business and the expansion of it, I would say we would have a very good chance of consuming a lot of our wire in the near-term for sure.

[Unidentified Analyst:]

Okay. The reason I –- and then that leads to the next question. In your press release, you said that you’re talking to these customers about working on some way to increase production. Can you comment, shed a little more light on what you’re referring to? I think I’ve asked you before is what plans are being undertaken at this time and maybe premature because of capital restraints to have a second machine to meet the demand if it comes forth?

[Jeff Quiram:]

Well, it is always interesting. We have conversations with customers all the time. And you get the -- you get some of the feedback where the conversation is around what is the capacity of your factory, what could you build or buy if I wanted to buy everything. The finding is always, I shouldn’t say always but it often goes to the wow, well that is not enough for us. And so, we aspire to have those problems Bill, figuring out how to supply more wire quicker. And we are looking at taking steps with and you are correct in that we are being very cautious with our capital. We want to be in position to meet our customer's needs if they end up being larger without committing a lot of capital and we are under -- we are thinking right now about what we would -- what [indiscernible] use for if we made the decision to go with the new machine, what would that machine look like and what would we -- how would we incorporate things we have learned from the first machine because we always do. So, that work is underway but we are not really very close to pushing the button to go and bring in another machine. I mean frankly until capacity is sold out on this machine I can't really think about that very much.

[Unidentified Analyst:]

What would you estimate the lead time for this segment, I mean is that six to nine months project to get another machine, just curious how the timing would be?

[Jeff Quiram:]

A lot depends on what we change, but it is at least six months.

[Unidentified Analyst:]

Alright, and maybe Bill could comment based on your current raise of how much capital, I mean the money you are sitting with now I think you have like about 9 million almost 10 million based on the cash in September maybe less, does he see that as at least 12 months without an order, what do you see that you have staying power now with this new raise?

[Jeff Quiram:]

Bill?

[Bill Buchanan:]

With the new raise as mentioned in the script right here, I think that is enough money to get me through 2016.

[Unidentified Analyst:]

Okay, that is good. Of course the warrants could be exercised too. Alright thank you.

[Bill Buchanan:]

Warrants could be in addition to that.

[Unidentified Analyst:]

Yes, thank you very much.

[Jeff Quiram:]

Thank you Bill.

[Operator:]

[Operator Instructions]. And it appears we have no further questions at this time. I will return the floor to the speakers for closing remarks.

[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. Good-day.

[Operator:]

This concludes today's program. Thanks for your participation. You may now disconnect. Have a great day.