Superconductor Technologies Inc.
Q3 2014 Earnings Call Transcript

Published: 12 Nov 2014

[Operator:]

Welcome to the Superconductor Technologies Third Quarter 2014 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Cathy Mattison. Please go ahead ma'am.

[Cathy Mattison:]

Thank you, Taylor. Good morning and thank you for joining us for STI's third quarter conference call. If anyone has not received the earnings press release it is now available at the company's website. If 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 2013 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 the company Conductus wire program and then turn the call over to Bill for 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. I'm excited to report that the RCE-1000 and the final piece of production equipment necessary to produce kilometer lengths of Conductus wire is operational and we are preparing ramp production. Before I go into detail on that, I would like to review the important industry and customer advances, we accomplished during the third quarter. In September STI entered into a strategic agreement with a valuable ally and partner, Robinson Institute of New Zealand, a recognized industry expert in the development of innovative superconducting applications. With this agreement, STI gains access to Robinson's significant channel of existing customer. Our plan is to jointly pursue those existing customers and together, we will focus on the energy and health industries. Our mutual goal is to assist leading suppliers as a commercialized superconducting products, rotating machines, transformers, scientific magnets and MRI systems. Utilizing the improved performance of Conductus wire. Jointly, we have already identified projects and engaged in customers. Additionally, Robinson and its partners have a strong focus on Asia and we believe that our agreement will help STI to expand our reach into that fast growing market. We also joined with our customers to advance the development of disruptive technologies using superconducting materials during the quarter. In August, STI along with highly regarded members of the superconductivity community including Nexans, Robinson Institute and the University of Cambridge presented the results of collaborative testing efforts of Conductus wire, that providing clear evidence of our position atop the industry and critical current and wire uniformity performance. The results represented to industrial manufacturers of superconducting devices along with end-users for a wide variety of application at the Applied Superconductivity Conference. The independent testing validated the critical current performance of up to 674 amps on a 12 millimeter wire at 77 degrees Kelvin. A respected researcher with the University of Cambridge commented that the RCE-CDR process utilize and STI's Conductus wire shows exceptional promise in providing extremely uniform wire tapes up to 10 centimeters by 10 centimeters for creating stacks as superconducting plates used for high field magnets and superconducting bearings. Also in August, at the CIGRE conference in Paris, the industry's leading event for power device experts developing the future super grids and smart grids. STI joined with Nexans, LS Cable and RWE Deutschland to showcase the value proposition of superconducting fault current limiters and high power superconducting cables. These applications enable infrastructure providers in the electricity transmission and distribution industry, to optimize existing power systems and improve the stability and reliability of the grid. In addition, we expanded our customer base with the addition of four new customers including industry leading global suppliers. These multinational companies broaden our global reach and increase the market visibility of emerging product. We are excited by the continuing demand; we are receiving from these customers and believe it provides strong validation of the industries ongoing focus on commercializing superconducting products around the world. In the third quarter, we shipped Conductus wire to ten customers

[Bill Buchanan:]

Thank you, Jeff. During the developmental stage of HTS wire program. We have continued to sell wireless product. In the third quarter, we again recorded revenue from our Conductus wire sales. However, the amount is not yet material and our revenue was primarily from our wireless products. Our third quarter revenue was $86,000 compared to $229,000 in a year ago quarter. The commercial gross margins from the sales of our wireless products were negative in the third quarter and the year ago quarter. Total R&D expenses amounted to $1.5 million for the quarter and $1.9 million in the third quarter of 2013. Our higher 2013 R&D expenses included a one-time capital equipment write-off. SG&A expenses were $1.3 million compared to $1.4 million in the year ago quarter. We've recognized a non-cash gain of $983,000 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 a loss of $0.19 per share compared to a net loss of $3.5 million, for a loss of $0.42 per share in the prior year's quarter. The total number of common shares outstanding in September 27, 2014 was $13.2 million. For the first nine months of 2014, total net revenue was $550,000 compared to $1.6 million in the same period last year. The net loss for the first nine months of 2014 was $5.4 million or $0.43 per share which includes a one-time gain of $3.1 million from the company's investment in Resonant recognized in the second quarter of 2014. This compares to a net loss of $8.3 million or $1.48 per share for the prior year's period. In September, we conducted a transaction that completed our goal to unlock the value of the intellectual property STI contributed at the formation of Resonant in 2012. Resonant subsequent initial public offering has allowed STI shareholders to recognize real value for this enabling technology, while our core strategy is to focus on the commercialization of our Conductus wire at the same time, we are also reviewing opportunities presented to monetize underutilized company assets. Onto the balance sheet, at September 2014, cash and cash equivalents totaled $1 million which included the receipt of $334,000 from the exercise of 130,000 outstanding warrants during the third quarter. Subsequent to the third quarter of 2014, STI received $3.56 million from the sale of our Resonant common stock. In the first nine months of 2014, $7.2 million was used to fund our operations and $100,000 was provided by changes in our working capital. We invested $3.5 million in capital expenditures for our HTS wire program, during the first nine months and expect to invest an additional $300,000 in the remainder of 2014. Working capital totaled $3.3 million. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations, well into the first quarter of 2015. At the end of the third quarter, 2014 accounts receivable was $32,000. Current and non-current liabilities totaled $7.3 million at September 27 and included $5.6 million for the fair value of our warrant. And now operator, please open the call for questions.

[Operator:]

[Operator Instructions] and we will take our first question from Jon Hickman with Ladenburg Thalmann

[Jon Hickman:]

Jeff, could you define operational for me? Does that mean, you're producing wire on the machines?

[Jeff Quiram:]

We are producing wire on the machines. So we're loading it with template and depositing all the layers and doing all the associated steps necessary to build superconducting wire. And really knowledge on, where we at it, every one of these. We've turned up a number of these machines and the normal process is, need you run through the steps and then you really have to look at the composition and see, it is the composition of the material matching, what the sensors on the machine are telling you, it's doing, and then you modify based on what the actual results are, you change some of settings to get the material exactly how you wanted, to get the performance you want. So that's the stage, we're in right now. It's not normally a long process, but it's really, I guess, what I would characterize it mostly as it's a dialing in the machine, so that we understand exactly, when we instruct it to do something, what exactly it's doing and that's just a normal course of turning these machines up.

[Jon Hickman:]

Yes, so you went through the same process with the 100 meter machine, right?

[Jeff Quiram:]

Well, we've done it with the 100 meter machine. We've done with all of our R&D machines, we did it with our wafer product []ph], so yes, it's a well-known process that we go through and you just, it's a little and until you have to run it a few times and do some adjusting and that's what we are doing.

[Jon Hickman:]

So could you give us some idea of the quantity of wire that you would need to produce to meet the current demand for your customers that are testing? I mean, are we talking about a couple only. A couple, a few hundred meters or we talking about, a few 1000 meters

[Jeff Quiram:]

We are probably talking, we are talking closer to a few thousand meter. So what that really means is, in order to give everybody to the wire, they want. A couple of successful runs, of a fully loaded chamber are what we need. Now, the other thing to understand is that, everybody's – all the applications at the individual customers are looking at are slightly different. So I guess, while we could do a couple thousand meters of wires in two runs, we may need do more than two runs, just to give everybody the sort of performance, they're looking for, but It's not, we're not going to have to run it for weeks to fulfill the demand.

[Jon Hickman:]

Yes, run takes quite a few, three days. Is that what it takes?

[Jeff Quiram:]

About two days, we can do three runs a week right now, on only one shift and but, we are not really pushing that heavily right now. It's two or three runs. Right now, the real focus is on dialing it in and making sure that you don't make a mistake with the machine that damages it. So you have to, there's a little bit a learning that goes on with our team as they're running it. And so, we're doing a couple runs a week so, again once you get it dialed in, then you can probably fulfill the demand pretty quickly, which is why I said in our prepared remarks that we expect to fulfill our demand shortly.

[Jon Hickman:]

Okay and then, could you give us. I know that you talked about some of these customers testing for like cable application and fault current limiters, but could you elaborate on what other product serving tested of MRI machines. What I mean, I know that there is a range of potential, but what else is actually being tested?

[Jeff Quiram:]

There is being work done with high field magnets and those have several applications, MRI machines being one of them. And so and again, the thing that the people are looking for in, in that sort of all the product is, they want high uniformity and they want very good performance at usually lower temperatures, but also in the presence of a very high magnetic field. So, the applications for the MRI machines as well as many of the industrial magnets and NMR machines, they have a similar sort of requirement for whatever performance. And so, but as far as what the applications are for all the magnets, there are number of people that are doing high field magnets and those applications range from something that's going on in a laboratory, at a university some place gone to some very large testing and devices that people like CERN and others do, that accelerators and things of that nature. So there are multiple applications for high field magnets. Many of them, research-related.

[Jon Hickman:]

Okay, so two more quick questions. Well maybe, they're not quick, I don't know. Robinson, I understand that they actually have the capacity through a third party, to make wire themselves and not just be a consultant, is that true and are they doing that?

[Jeff Quiram:]

What they do, is they make something that's called Roebel cable and Roebel cable is actually formed out of superconducting wires, but today they do not build the superconducting wire, that they use to put in a Roebel cable.

[Jon Hickman:]

Yes, they makes cables right?

[Jeff Quiram:]

They make cables, that's correct.

[Jon Hickman:]

And the point to be that – since you have an agreement with them, if they're going to make cables, they're going to use your wire? Is that logical conclusion?

[Jeff Quiram:]

I think that's a logical conclusion and it's again one of things that we talked about as far as the areas, where our wire is improving the performance in the industries and uniformity across the width and the length and for our people that are building cables like a Roebel cable, uniformity is, well that's the most important thing for their sort of application, which I think would press on why they would want to be working with the folks, that can build the most uniform wire. So yes, they're partners, they're an ally, they're potential customer. They're kind of all the above and they're very well known in the industry and they have a tremendous amount of expertise and we're just, we're overjoyed to be working with them.

[Jon Hickman:]

So what's an application, that where a Roebel cable would be used, instead of just a maybe something that Southwire would be used, a transmission cable?

[Jeff Quiram:]

Roebel cables, many times are used in coil. So in putting together large coil for superconducting motors for instance and they can also, there are also some application, where they're potentially used in the high field magnets. So it's a special way of kind of stacking, inner weaving individual strands of superconducting wire, that ends up getting a lot more performance out of a particular cross section of the material and so, but almost all the applications where Roebel cable really provides the banker, for the buck is in large coils that are using in motors or magnets, Jon.

[Jon Hickman:]

Okay, thanks and then one last question. Through the course of these [indiscernible] through the year, you've talked about delivering wire to potential customers or customers they're testing and you've mentioned different numbers on different calls, could you give us a total ball park total like how many different entities have tested your wire?

[Jeff Quiram:]

I don't have that number right – I should have that number, but I don't Jon. So I will give you a number [technical difficulty] it's in the 30's I think.

[Jon Hickman:]

And so the numbers you mentioned today are like active customers that you're shipping to right now.

[Jeff Quiram:]

Well, the numbers I mentioned today are new customers and they're not the only customers that are active, I guess is the way I would characterize it, but it's not just these 10 customers that are new this quarter, that are active. We have active customers from work that we did, we've been doing over the last several quarters, too.

[Jon Hickman:]

Okay, that's it from me. I'll let someone else ask question.

[Jeff Quiram:]

Thank you, Jon.

[Operator:]

[Operator Instructions] we will take our next question from Jim Collins with Van Clemens

[Jim Collins:]

Jeff, hi. How is everything going?

[Jeff Quiram:]

Very good, Jim.

[Jim Collins:]

The reason I'm calling is, that I'm curious about the competition I see in the latest American Superconductor quarterly review, they seem to reemphasize their superconductor product, their wire and I was wondering basically. How we are doing versus the competition or the kind of progress that, these other producers are having for example like SuperPower, where are they I guess, if we were to compare our product versus what they're actually selling. And any information as to the biggest orders or how fast the industry per se is moving along?

[Jeff Quiram:]

Well, all the American Superconductors has is they're clearly having product that they've been working with, whereas utilities and they do feel, that they have a very significant opportunity which doesn't surprise us at all and when you really look at what they believe they have has a potential market for that product, it's very significant. We'll consume many multiples of the current industry capacity of wire and so, I think that from our perspective it's all good. In that, as these applications continue to show up and as they expand it increases the demand for the entire industry and I'm always very encouraged by that. I can't really speak with any certainty on what a company like SuperPower is doing because of course, they are providing most of their wire to their own, to their parent company, which continues to do a lot of work in the space. And then there are other competitors in Asia, that in Europe that continue to talk about the amount of wire, that they're producing and the fact, that there is demand for it. We have meetings another meeting next week with a large customer that thinks, they have very significant coming up in the next several years. Well, I think that the position in the industry is that, is it something that is going to grow from here and we're very happy about how we're positioned in that. we are showing really some performance characteristics of our wire that others have not really been able to match and that additional performance provides advantages to some of these customers that, they say their team to take advantage of and so, I'm overjoyed. Any time I heard news from anybody about the expansion of the market in various area. I just think its additional validation that the market demand is going to be strong and that's great news for us, as we bring additional capacity to bear.

[Jim Collins:]

Okay, fine and also is there, any thought to well, obviously there is thought to additional machines. Do we have any milestone plan yet for additional machines and of course the kind of funding that it would take to get these additional machines?

[Jeff Quiram:]

Yes, I mean we have definitely looked at that very, very carefully. We have of course, having we just built this first machine. We have a very good sense of what the lead times are for various subsystems in that machine. We've looked at taking a few steps to potentially make the turn up of a second machine quicker by pre-purchasing some components that are potentially long lead time, but not necessarily high value and but, the relationship for us right now Jim, is we've got to get this first machine produced and having it pump out wire and then we need to secure the agreements and the demand to consume all that wire and then, then the decision making on adding the second, third, fourth machine becomes a lot more real, but until then, we're doing a little bit of pre-staging and trying to prepare ourselves a little, but job one really now is, to first machine operational and sell the capacity of it.

[Jim Collins:]

Okay and then and the last perennial question. How close are we to in order?

[Jeff Quiram:]

Well, you know that is – as I have started before, that definitely is job one for us. As I mentioned earlier, we have another meeting next week with a large potential customer a negotiating session and all I can say Jim is that, there is nobody that wants that order more than we do and so we're working hard on it and I won't give you a time, on when we think, we'll do it, but I can assure you that. Our goal is to do it as quickly as we can.

[Jim Collins:]

And then the world class demonstration that's supposed to take place. What's the status of that, you didn't mention that?

[Jeff Quiram:]

You mean that the demonstration cable?

[Jim Collins:]

Yes.

[Jeff Quiram:]

We're, that's one of those demands that's waiting for this machine to come up and we plan on basically fulfilling those requirements out of the, new RCE-1000. We think, we can do that in the near term and so that's the plan and then it will be working with our customer to get that project completed and the independent testing and bringing that information to the market. So it's on the top row list of things to do.

[Jim Collins:]

Okay, additional funding. I guess, that's my last question. What plan do we have for additional funding?

[Jeff Quiram:]

We continue to look for all the different opportunities that we have, always with an eye to making sure that whatever we do is in the best interest of our shareholders and I'm pretty much doing that every week. So we, there are several options available to us. We really keep looking at all of them and when we think there is an advantageous opportunity to bring in the funding we need, we'll do it, but I mean there is nothing, there is no active transaction going on at this time, Jim.

[Jim Collins:]

Good, thank you very much and continue the good work.

[Operator:]

[Operator Instructions] and we'll take Jon Hickman with Ladenburg Thalmann

[Jon Hickman:]

Hi, a follow-up question. Now that you've talked a little bit about the Pro-Cap or the final layer that you've kind of, I thought each customer might want a different cap layer, is that not true or have you settled on kind of an optimal design or you can go forward?

[Jeff Quiram:]

Usually what the variation is, in the individual customers. There are two things that change Jon, one can be the material and the other can be the basic, the thickness of that material. So there are, it isn't the one size fits all, but I guess the good news is the primary difficulties that you find to overcome when you're putting these cap layers on it, just to make sure that. Well that the wire performance remains the same and it is not negatively impacted by the cap layer and that a lot of the work around how you process that cap layer is really what determines, whether you had accomplish that? And the fact that we've accomplished is, I think the most important part and now if you want to go, somebody wants 20 micron instead of 10 micron or 30 micron, then that's just a little functional how much more plating do you do, at the end, but it doesn't really have any specs on the wire. So it's not one size fits all, but it's relatively, it's very similar I guess is the way I would characterize it.

[Jon Hickman:]

So, is that like the last hurdle as far as design or engineering and now it's the matter of you know producing of wire, to meet everybody's testing?

[Jeff Quiram:]

Well, it's definitely. Yes it's one of the last hurdles. I mean, in order for them to implement into their end device, they need that cap layer to be well to be available and to be consistent and to work and so, it's certainly one of those the last things, but the other thing we always said, we're always working on is trying to improve the performance of the wire at all turns. So I guess my point is, that I don't think it's – you never really stop moving forward, Jon, but if you're asking is this is, it's just one of things that, it is a final step to a lot of people to move beyond the testing to the procurement and I say the answer to that question is yes.

[Jon Hickman:]

So, you should be I mean, good stuff can happen any day, is what I'm saying that now that you've as far as an order goes.

[Jeff Quiram:]

Yes, I'm open, so I mean, we have meeting next week. So that's I doubt it will – for next week, but that's our goal as we continue to have these sessions and move them forward and turn one of them into or couple of them into a large order that we've been spend our time looking to fulfill, that's the goal.

[Jon Hickman:]

Okay and then, there is question for [indiscernible]. if you were to meet the demands, the couple thousand meters wire to meet all the testing requirements, then I would assume that, the revenues from wire would no longer be immaterial.

[Jeff Quiram:]

Yes, that's right.

[Jon Hickman:]

Okay, so I mean you're selling this wire, even if it's not like on, even if it's kind of piece meal [ph], right?

[Jeff Quiram:]

We are selling the wire that is correct.

[Jon Hickman:]

Okay, thank you.

[Operator:]

And that concludes the question-and-answer session and I would now like to turn the conference back over to Jeff Quiram for any additional or closing remarks

[Jeff Quiram:]

I'd like to thank you all very much for joining us today. we will be hosting our annual meeting on December 12, at our Advanced Manufacturing Center of Excellence in Austin, Texas and hope to see some of you there. We look forward to speaking with you in the next call. Thank you very much. Good day.

[Operator:]

And this concludes today's conference. Thank you for your participation.