Superconductor Technologies Inc.
Q4 2014 Earnings Call Transcript

Published: 16 Mar 2015

[Operator:]

Good day and welcome to the Superconductor Technologies Fourth Quarter and Year-End 2014 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Kirsten Chapman from LHA. Please go ahead, ma'am.

[Kirsten Chapman:]

Thank you, Chanel. Good morning and thank you for joining us for STI 2014 fourth quarter and year-end conference call. If anyone has not yet received the earnings press release it's now available on the Company's Web site. 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 under 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 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 Web site, www.suptech.com or through the SEC's Web site www.sec.gov. Forward-looking statements are based on information presently available to the senior management and to STI, and STI has not assumed any duty to update any forward-looking statements. Today, Jeff will begin with an update of our Conductus wire program and then turn the call over to Bill for a review of the financials. And now, it's my pleasure to turn the call over to Jeff Quiram. Thank you very much.

[Jeff Quiram:]

Thank you, Kirsten, and good morning everyone. Before I provide an update on our Conductus wire program, I’ll detail several important accomplishments the STI team delivered in 2014. Our Conductus wire garnered a significant and increasing [Audio Gap] the year. Most notably, we secured multiple orders from large global electrical device companies for certification testing, while more than doubling our customer base from [indiscernible] garnered the year to 31 at year-end. In September 2014, we entered into a strategic agreement with the Robinson Institute, an expert in the development of innovative superconducting products, to utilize Conductus wire for rotating machines, transformers, scientific magnets, and MRI applications and to expand our reach into Asian markets. Our joint plan is to with Asian customers and partners in the building of superconducting products, utilizing Conductus high performance wire and the Robinson Institute superconducting device expertise. As conducted discussions with multiple customers currently presenting innovative [indiscernible] solutions that we believe will gain traction in the coming months. Additionally, we partnered with several highly regarded members of the superconductivity community such as LS Cable, Nexans and RWE to showcase the value propositions of superconducting fault current limiters and superconducting power cables at CIGRE 2014 and other industry events. The development of our wire technology continues at a rapid pace. The STI delivered and Conductus wire performance to 730Amps per centimetre at 77 degrees Kelvin in self field, the highest performance in the industry. We validated the equipment design of our full scale production suite by successfully completing of full pilot production ramp. We began 2015 with our new Conductus wire production system operational. This greatly increases the installed annual production capacity of Conductus wire from 4 kilometres to 750 kilometres in 2015 and beyond. In addition, in May 2014, we were awarded a key U.S. patent that significantly strengthens STI intellectual property portfolio targeted at producing high performing economical and commercially scalable Rare Earth barium copper oxide thin films. Lastly, we successfully executed our continuing strategy to monetize non-core intellectual property by completing the sale of STI's equity interest in Resonant Incorporated for $3.56 million. Our focus for [2013] is to quickly complete the in process Conductus wire qualification activities and we currently approve wire supplier to one of our key customers and to then ramp production to fulfil the forecasted wire demand. The overall market for superconducting wire remains attractive as wire industrial companies continue to release new devices. Just as fibre object transforms the telecom industry 25 years ago, superconducting wire promises to change the power industry. Grid reliability remains essential to the successful operation of the power grid. This reliability is especially important now as the grid becomes more complex from the addition of alternative energy generating sources and other advanced network technologies. Power outages have been increasing and cost billions of dollars. Superconducting fault current limiters are being aggressively introduced to the market by a number of global electrical device companies to address this need. Increasing deployments of superconducting fault current limiters emphasizes to all industry participants the need for a reliable commercial supply of high performance and cost effective HTS wire. Yet another indication of growing market opportunities is the increasing demand of Conductus wire [indiscernible] testing which continues to outpace our current production. During the fourth quarter STI kept Conductus wire to nine customers of these customers four were new and five were existing, six of the shipments were for Stage 1 evaluation which includes wire characterization and performance testing, and three were for Stage 2 qualification, which involves significantly more rigorous testing to simulate devices for commercial deployment. Our fourth quarter wire shipments focused on high power magnets, superconducting fault current limiters and power distribution cables. While our sales [indiscernible] continues to grow with an increasing order and customer account we have not yet received in land mark commercial order that requires large quantities in Conductus wire. We clearly understand that this is a major concern of our shareholders and I assure you that our focus on this remaining hurdle is intense. We have several large customers at the final stages of qualification once these valuations are completed a decision to improve Conductus wire by any of these customers would dramatically increase wire demand. We have discussed the product approval process many times in the past but I still received numerous enquiries about it. So I would like to take this opportunity to briefly address as many of those questions as possible. Our sales process begins when a customer chooses to use HTS wire for their product offering. Before proceeding with the customer request STI completes a review of the opportunity, application, specification and product match before we move to Stage 1 qualification. Stage 1 begins with an NDA which point both STI and the customer review detailed technical requirements included complete specifications, test methodologies and project schedules. Initial customer testing is focused on the specific aspects of wire performance critical for these applications. These initial tests usually include the curt and handling performance of the Conductus wire as the device operates temperature, the magnetic field and other environmental factors. In stage 1 we are usually engaged with the customers’ research and development organizations. This essential capacities test before moving on to Stage 2, Stage 2 qualification goes far beyond technical evaluation. Most customers are now investigating design optimization by application and device along with complete business operational review of all wire factors such as cost delivery requirements and customers specified packaging options. In Stage 2 we are often working with the customer business units with product management and procurement personnel involved. When we think about the qualification of two HTS [indiscernible] multiple applications we group them into three basic categories, power transmission cabling, superconducting current limiters and magnets which are used in science NMR and motor applications, our [indiscernible] progress in each of these categories. In the power transmission cable market we have met customer technical requirements for the current capacity as well as mechanical strength and resiliency. We are excited to report that we successfully shipped 500 Amp Conductus wire including the required finishing layers to begin assembly for the high power superconducting cable demonstration project that we have discussed in the past. This customer will now complete the fabrication and test of the demo cable. STI and the customer both expect this cable which utilizes many trends of Conductus wire in a live test environment will carry thousands of Amps in achieving new record in super conducting power cable performance. We look for to assets end customer in the timely completion of this project a successful completion will establish a terrific milestone for both of us. In the superconducting fault current limiter market thermal and electrical performance characteristics are key metrics in addition to our wires and current caring capacity annual cost. The thermal sight line of superconducting fault current limiter creates additional stress on the wire as the system limits the short inner circuit by creating heat which moves the device from a superconducting to a normal conducting state. We are adapting our standard wire to operate more effectively in this environment our customers are working closely with us as they are eager to see us complete qualification. In the magnet [indiscernible] and scientific equipment market there is a reversal rate of customer's expectations. We have been submitting our standard conduct wire for stage 1 and stage 2 qualification prior to embarking on any additional product development activities. Anywhere customization efforts that we may undertake will be determined by the size of the opportunity and the customers’ business case as well. For many of our prospect of customers along with the effective qualification STI must also demonstrate operational capabilities and successfully negotiate business agreements, operational capability is usually determined by STI’s ability to acquire a reliable supply of Conductus wire that means you agreed upon specification at the volume and schedule dictated by the customer. Our scaled production system is the key factor necessary for us to meet this requirement. Many of the business discussions occur in parallel to the operational and technical testing. Customers must see a path to the success with the product that they are launching into the market. Most customers are currently moving from an R&D mode to the commercial product launch at this time. Operationally we are experiencing significant improvement in the wire performance from our new production system. As we prepared to deliver these longer lengths of Conductus wire to meet the expected customer demand. Superconducting wire is being produced over the entire deposition area meeting design requirements for long life. Our pilot system remains active and is producing high quality Conductus wire that is being shipped to customer. We believe that the transition from our pilot system to full production will enable us to meet the industry challenges of price, performance and availability that make the HTS market today. Capital expenditures for our install capacity were completed in 2014. In addition we have taken steps to right size the business focusing on balancing the need to be prepared around while reducing our operating cost during the transition from our pilot system to full production. In 2014 we accomplished many key milestones during our Conductus wire program closer to the finish line. 2015 will be a pivotal year for STI as we work to ramp production, complete qualification activities and enter commercial supply agreements for Conductus wire with one or more our customers. We look forward to updating you on our progress throughout the year. Now to Bill for a review of the financials, Bill?

[Bill Buchanan:]

Thank you, Jeff. During the developmental stage of our HTS wire program we have continued to sell wireless products. In the fourth quarter we again recorded revenue from our Conductus wire sales, however our revenue was primarily from our wireless products. In our fourth quarter revenue was $82,000 compared to $150,000 in the year-ago quarter. The commercial gross margins were negative in the fourth quarter. As we bring our wire production equipment up to capacity we expect significant gross margin improvements. Total R&D expenses amounted to $1.5 million up slightly from the $1.3 million in the fourth quarter of 2013. SG&A expenses were $1.4 million up slightly from the $1.2 million in the year-ago quarter. We recognized the non-cash gain of $384,000 from 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 fourth quarter was $2.8 million or a loss of $0.22 per share. This compared to a net loss of $3.9 million or a loss of $0.34 per share in the prior year’s quarter. The total number of common shares outstanding at December 31, 2014 was 14.3 million shares. For the full year 2014 total net revenue was $632,000 versus $1.7 million in 2013. The net loss was $8.3 million or $0.64 per share, which includes the one-time gain of $3.1 million from our investment in Resonant Inc. recognized in the second quarter 2014. This compared with net loss of $12.2 million or $1.71 per share for all of 2013. Under the balance sheet, at December 31, 2014 cash and cash equivalents totalled $1.2 million subsequent to the fourth quarter of 2014 we have received gross proceeds of $1.8 million from warrant exercises. In 2014 $9.8 million was used to fund our operations and approximately $200,000 was used to fund changes in our working capital. We invested $3.7 million in capital expenditures for our HTS wire program during 2014. We expect our 2015 capital investments to be less than a $0.5 million. Based on our current forecast we expect our existing cash resources will be sufficient to fund our planned operations well into the second quarter of 2014. At the end of the fourth quarter 2014 account receivable was $86,000. Current and non-current liabilities totaled $6.8 million at December 31, and included $5.6 million for the fair value of our warrants. And now operator, please open the call for questions.

[Operator:]

[Operator Instructions] We will take our first question from Jon Hickman with Ladenburg.

[Jon Hickman:]

Couple of questions Jeff, the cable demonstration project, the cable you delivered or the wire you delivered for that, did you produce that on the pilot project or on your new commercial machine?

[Jeff Quiram:]

That 500 amp wire came off of the pilot production machine.

[Jon Hickman:]

And do you have some idea of what current capacity you're able to produce on the commercial machine?

[Jeff Quiram:]

On the commercial machine, we’ve gotten our performance up to around 300 amps. So, it's not sufficient for the 500 amp for the cable project. The good news of course is that many of the applications specifically on the fault current limiter market are lower power requirements in that 300 to 350 range and so we’re getting decent wire off that machine, we’re still trying to get it into that sweet spot to get it higher. But we have demonstrated some pretty significant improvement in the superconducting characteristics of the wire coming off of the new machine over the last several months and so we’re happy about that.

[Jon Hickman:]

So, can you give us some idea of the longest length you have produced on the commercial machine?

[Jeff Quiram:]

I think that I can’t I am not exactly sure Jon, but I think it's about 300 or 350 meters because this is what we’ve done. And again the way we do that as you were covering the entire deposition zone, so when you put the wire on -- when you put the wire in that zone you just spread it out a little bit more. And the reason we do that is because we just don’t -- we want to make sure that we -- the templates that we’re consuming when we do those runs is not insignificant from an availability perspective for the rest of our production. And so we really -- we’re going to wait until we’re getting exactly what we want of that machine before we fully loaded.

[Jon Hickman:]

And then is there any change in the competitive environment like people that are producing superconducting products right now, is there any change in where they are getting that wire from or any change in kind of the prices out there in the marketplace?

[Jeff Quiram:]

The primary supplier of HTS wire into market space has not really changed Jon, you continue to see different advances from different participants as far as a little bit better improvement in performance, some of the new entrants are participating, but primarily and some of those scientific markets and the true R&D aspects where you get universities that want wire that they are doing testing on. So from a competitive landscape perspective on the producer site it's pretty stable as far as who is providing the majority of the wire and really who the major competitors are there. The wire pricing has remained pretty stable at the current price it’s at and I think we’ve all have said that it's when the high, it's when the really high demand projects come around that you’ll start to see the wire price begin to go down. But as of now it has not.

[Jon Hickman:]

And then one last question, the -- what’s the kind of standard, the guys that are buying wire for fault current limiters et cetera. What kind of power demand are they or what kind of power carrying capacity are they demanding, is it about 300 or is that up or…?

[Jeff Quiram:]

They are mostly in the 300 to 350 amp range and the characteristics that are -- so again the solar power requirement and it requires shorter lengths of wire and the primary thing and what we’ve really been looking through is just the characteristics and the loads that these devices put on the wire has a cycle is different than what you’d see in a transmission cable for instance. And so making that wire so that it withstands that cycling is really the challenge and where that occurs is primarily in the finishing layers. And so that’s…

[Jon Hickman:]

So have you met that requirement yet or are you still working on that?

[Jeff Quiram:]

Well, we have met a bunch of their requirements, we haven’t met all requirements or I think we would be approved. So, we’re still working on meeting a couple of those last few requirements, but we met the vast majority of what we need to do and now we’re just working on making last couple of them work right. And so that’s where our efforts are on that side of the business right now.

[Jon Hickman:]

Has there been any change in your [indiscernible] can anybody else do 700 amps per centimetre square like you've been able to do on the pilot mission?

[Jeff Quiram:]

We believe the best 730 Amps it is the only that has been independently verify by somebody outside the company. So there has been participants in the space that have powered some performance that is higher but not at any third-party has verified.

[Operator:]

[Operator Instruction] We'll take our next question from Andrew Shapiro with Lawndale Capital Management.

[Andrew Shapiro:]

I wanted to get clarified if can. So are you running your pilot machine now concurrently with the commercial machine, or is the commercial machine the only thing you're running?

[Jeff Quiram:]

We're continued to run both machines Andrew.

[Andrew Shapiro:]

So the pilot one can run the higher Amp it's making wire a shorter links higher Amps and your commercial machine is only up to around 300 Amps right now, what is your I guess your operational ramp expectations now for that machine is it going to making greater links at 300 or are you working on with the current larger links that you're making getting that Amperage over five?

[Jeff Quiram:]

Right now we're continuing to do both. So we're continuing to work on the link we're continuing to work on the consistency within the entire chamber and with really I think ultimately what we'll determine where the final focus was on that production we're seeing Andrew will be what demand are we trying to fulfill. So if we constipate an agreement with the fault current limiter companies that really needs to self a bunch of 300 Amp wire will then of course we won't be spending any time on our big machine trying to push it to 500 Amps if we're trying to fulfill demand at 300. Because in most instances if they want 300 vessels they want, they can't live with 500 Amp wire if they only get 300.

[Andrew Shapiro:]

And when you sell the 300 Amp wire for that use, does that come at a lower revenue stream per meter then a 500 Amp wire would?

[Jeff Quiram:]

Yes the amount of revenue you get per meter is dictated by the current handling capacity of the wire. So the lower current you carry the lower price you charge.

[Andrew Shapiro:]

And in your modelling when you raised the money for the stock offering et cetera and your modeling for revenue stream and selling capacity out. What were you, we're you using 300 as a conservative kind of revenue per meter metric or where you assuming selling certain amounts of wire at the higher per meter price of a 500 plus Amp per inch wire.

[Jeff Quiram:]

Well we feel our models with a variety of difference mixes of product. I guess the real answer is that blended rate that is some at 300, some at 500 again with the push being -- the nice thing that you can do is that you can get higher performing wire. Like we have select state you can get your machine produce at 600 Amps what you can do is you take the same strand of wire and cut in half and now those narrower strand are each carrying 300. Now again the transition point to when the customers can then utilize that it does take time because they would need to redesign their device to use thinner wire right. The business model was a blended some of each.

[Andrew Shapiro:]

And you current production capacity of about how many meters or wire or kilometers of wire can you produces out of that commercial machine at a 300 Amp level here in the current quarter ended March. And do you have the demand for that is that being sold or is that being inventoried?

[Jeff Quiram:]

You have hit a very good point because today we don’t have that large commercial order to consume whatever we can build of that machine and so we are not building inventory. We're not lending that machine to build a bunch of inventory and also selling it. I mean we are trying to do a balanced approach where we run the machine enough to make the advances and make it work better only producing as much wire as we really need knowing that you guys get a large commercial order you got to ramp it. But we don’t want to run it and consume all of the cost associated with running it if there is not a home for the wire when we get it off the machine.

[Andrew Shapiro:]

Now up to this point Jeff us -- investors have been operating under the impression in your representations that we build that they shall come. And it sounds like we built it and we could produce wire today but we actually don’t have the demand yet for it. What are the steps and the timing necessary that you expected to take to get the order that -- right now this is March there is 31 days in March you could be making wire and selling it if you had a customer?

[Jeff Quiram:]

Well and that’s all goes back to the conversation in the presentation of the qualification efforts and that is key and until we get qualified and selected as the wire provider by one of those customers, the demand won’t be there. So it is job one to finish the qualification efforts become the selected vendor and start getting the orders. There are others also that are getting the orders and we are just not qualified yet we have to fix that.

[Andrew Shapiro:]

So other parties are qualified and getting orders?

[Jeff Quiram:]

That’s correct.

[Andrew Shapiro:]

Is there are a reason you can explain why they are getting and we are not? What’s the difference between our wire and theirs?

[Jeff Quiram:]

The primary difference is and I think a lot [indiscernible] those guys have been building wire for a long time, so they are the incumbent. They then improved and we need to supplant them. We need to the way to supplant them is we have to become improved as well as and then show that our wire gives the customer, the end customer something that they can’t get from their existing supplier in that and many and been a reliable supply in something that they can grow their business with. Because right now to some degree the amount of products that that customer can sell is dictated by how many they can build, and how many they can build is dictated by how much wire they can get. So we need to be improved and new need to get our wire essentially in the fault current limiter and we need to get our wire to the point where it performs everything that these customers want. And like I said we can said we are really close but we haven’t done it yet.

[Operator:]

[Operator Instructions] And we will take our follow-up question from Mr. Andrew Shapiro with Lawndale Capital Management.

[Andrew Shapiro:]

I want a then follow-up and my line of question here if you don’t mind. So we have this impression you led to believe again that there was more demand than there is capacity to make, but I am at a loss here to understand where the demand is? Are the current users and purchasers of other companies wire in need of more wire than those current qualified suppliers can make and it’s just a question of qualification for which you will then become a market share participant in a growing market?

[Jeff Quiram:]

The short answer to that is yes. That is what we are being told by the folks that are consuming the wire.

[Andrew Shapiro:]

They can’t get enough of it, yet they are not approving us yet?

[Jeff Quiram:]

Well yes, but again it’s all on us you can’t be a producer until we can pass all the requirements is there, so...

[Andrew Shapiro:]

What is the technological hurdles in the way what of the requirements you are trying to meet what technological issue is it that you are not yet convincing them of yet?

[Jeff Quiram:]

Well for the fault current limiters we very specifically talked about the cycling of the machine and how it goes from superconducting to non-superconducting the faster superconducting, so the cycling of that machine as they deal with the faults. And our wire as we are currently providing it to them isn’t meeting all their requirements when they cycle. It’s an additional it’s a stress that -- and frankly the stress is different where each fault current limiter product design. And so our wire is not adequately dealing with those stresses and that’s what we are trying to work on. I mean it’s not really a current handling capacity. It’s not necessarily a wire design characteristic it’s in many instances how you -- the finishing layers and how you complete that layers and how those layers interact with the other layers in the wire. I mean it’s a very technical problem. And one of the primary consumer to the wire as much as [indiscernible] that can be done all the hard stuff you just got to get this part of it done. So that’s where we are working on. It’s taking us longer than any of us would like but we’re making progress and I expect that it is a I agree with them, I mean we should be able to solve it and we will. But we haven’t yet and so that’s the unfortunate truth and we need to fix that.

[Andrew Shapiro:]

So in order to get there and I would like to just track here about the cash, so the cash burned in the -- and when I say the cash burn I am talking about the use of cash, not the cash you raised through the sale of Resonant or something else. The cash burned in the fourth quarter just completed was approximately what kind of rate?

[Jeff Quiram:]

Bill?

[Bill Buchanan:]

It was about 2.5 million for the quarter.

[Andrew Shapiro:]

For the quarter and in that 2.5 million was there any non-recurring uses of cash?

[Bill Buchanan:]

No, that was the operational piece there were some smaller amounts for capital, yes.

[Andrew Shapiro:]

So 2.5 million a quarter and then here we are in the quarter ended March and we are almost done with that, can you give us a little bit guidance about whether or not that use of cash burn rate has come down and to what range of level it's come down to?

[Bill Buchanan:]

It's come down into the area of 2 million a quarter.

[Andrew Shapiro:]

2 million a quarter it's not come down all that much because we’re not some of the product we could sell yet, right?

[Bill Buchanan:]

Right.

[Andrew Shapiro:]

And so you got an early exercise of warrants that raised some money 1.8 million, okay and was the offer to accelerate and to raise that money to get people to exercise early on their warrants, was that offer made to the entire warrant tranche of those I guess 2.70, 2.90 and/or was it made to all of your warrant tranches?

[Jeff Quiram:]

It was made to all warrant holders that held those warrants that have the exercise price of 2.57.

[Andrew Shapiro:]

2.57, just those and of those that held the 2.57 that exercised early what percentage of the total tranche was that and what remains of that total tranche that did not exercise early?

[Jeff Quiram:]

What would you say Bill it was 40% of it…

[Bill Buchanan:]

Yes, in other words the $2.57 shares which are now $2 that was a -- we had a Term A and Term B that I will say the Term B let's say is the shorter term those will expire this August, 900,000 shares of those were exercised there is a little over 1.4 million of those still available to be exercised. There is about 6 million of the $2 shares that have a five-year life, I guess like about 3.5 million or 3.5 year life continuing out on those.

[Andrew Shapiro:]

And those are $2 exercise price?

[Bill Buchanan:]

Correct.

[Andrew Shapiro:]

So in order to get them the exercise early you are going to have to offer a price below the $2?

[Bill Buchanan:]

Or have a stock value higher than $2.

[Andrew Shapiro:]

Of course, but if you have a stock value higher than $2 and they got three to five years left on it, what’s your motivation or incentive to exercise early and give you the cash that you apparently need now not three years from now?

[Bill Buchanan:]

Well, there is like I said, there is more than a 1 million shares, nearly 1.5 million shares that are -- that have only maybe a six-month life to them right now.

[Andrew Shapiro:]

Right and that’s the warrants that we’re going to need you to incentivize to get out of the way yet get their cash?

[Bill Buchanan:]

That’s one of our alternatives, yes.

[Andrew Shapiro:]

How much cash you had at the end of December?

[Bill Buchanan:]

1.2 million.

[Andrew Shapiro:]

And you raised what 1.8?

[Bill Buchanan:]

Correct.

[Andrew Shapiro:]

That’s 3 and you used -- you think around 2 for the quarter. So in the quarter ended June, it would seem we’re going to -- what’s your other alternatives and plans to raise cash can you borrow yet?

[Jeff Quiram:]

There are a number of alternatives that we continue to look at some more attractive than others and I think that as you're knowledgeable about the market the range of those alternatives is pretty much what it is. We continue to look at those alternatives and the path we choose is all was based on what we think in the best interest of the shareholders and the company and we’ll take the path that we think is in our nest interest as stakeholder group. And that’s how we continue to evaluate the opportunities.

[Andrew Shapiro:]

Well, I guess I hope you get over this hurdle and you can sign up and announce a nice commercial product to someone who will take up all of your commercial production before you have to exercise your alternatives and your alternatives will expand and be more valuable to us all.

[Jeff Quiram:]

Agreed.

[Operator:]

And we’ll go next to Mr. Bill Lass.

[Unidentified Analyst:]

First of all thank you very much for the overview on the three commercial aspects of the superconductive layer. Let me just start with the first question on the 500 Amps that you delivered to that one customer using the pilot machine. My recollection was that that customer said they would have that tested and done within 90 days are they still saying that they can do that?

[Jeff Quiram:]

The assembly as a quick test and the real building report was to be within 90 days. And yes we expect them to adhere to that and we're working with them we try to accelerate if possible.

[Unidentified Analyst:]

And when did you deliver that to them?

[Jeff Quiram:]

We had delivered it in the first quarter.

[Unidentified Analyst:]

Okay so how much time is elapsed since, I mean is it only 30 days since you delivered it to them?

[Jeff Quiram:]

We just delivered it in the third quarter excuse me in the first quarter. And I'm not going to really get into the [indiscernible] transpire Bill but...

[Unidentified Analyst:]

But the clock is ticking that’s good. Okay so based on and Mr. Shapiro has gone through a lot of questions but based on where you are sitting right now. Is it true to say that your most likely customer that we need will be the fault, the current fault meter customer?

[Jeff Quiram:]

The fault current limiters are probably the nearest term opportunity yes.

[Unidentified Analyst:]

And are there more than one I mean it sounds like there is one or two of them. Am I correct on that?

[Jeff Quiram:]

Yes there are multiple participants in the evaluation of layer for fault current limiters.

[Unidentified Analyst:]

No but I mean how many of the [indiscernible] along where if you solve the last little problem. The last technical problem that they see should be easy to do compared to what you did before. Do they all experience that or is it different ones they are all the fault your customers have that same problem with going from one to the other changes?

[Jeff Quiram:]

The fault current limiters customers all cycled the wire they cycle it in different ways and then there is design of the devices are different. So the stresses that are placed on the wire are somewhat unique based on which ever customer you're dealing with. So we're in different spots with different customers closer with some then other and some are more focused on the uppers and others as well, so, but yes...

[Unidentified Analyst:]

Focused on whatever?

[Jeff Quiram:]

Focused on two things, focused on not only they're of course looking at our wire but also they're focused on their business. So you've got these participants in the market they're not all winning all the projects. So we're more focused on the fault current limiter manufactures that are actually winning.

[Unidentified Analyst:]

But in answer to Mr. Shapiro question isn’t it true that if you can produce this wire they're going come to you rather than the other supplier. But they want to make sure that you can produce it and deliver before they would switch because they've got to deliver to their customers.

[Jeff Quiram:]

Well I believe that we're going get demand from them. But again that hurdle is there that we talked with Andrew about that we still need to get qualified for their requirements and that’s past one right now.

[Unidentified Analyst:]

So let's assume you meet that technical problem. Are they concerned about your ability to produce on that one machine?

[Jeff Quiram:]

No that has not been to us is a concern.

[Unidentified Analyst:]

Okay so one should meet the technical things subject to price and negotiation you're going have more of a smooth sailing that has kind of been the impediment to wrapping up a deal with them right?

[Jeff Quiram:]

Yes we need to get qualified, we need to get approved and then we need to negotiate a deal with them. And those are the final steps we need to finish him.

[Unidentified Analyst:]

And what about the magnetic is that’s more remote right?

[Jeff Quiram:]

Well the thing about magnets is that they are in many instance a special used other than the applications for MRI which are or NMR machines which is nuclear magnet residence those have significant scale in that there are a bunch of devices that are all the same or similar that are produced. But other than that most of the magnet business is single use or specialty use sort of magnets that people are going to bill one or two off and for a very particular reason and so it's a market that you have to look at carefully. Now what that being said some of those potential consumer in that market are monsters I mean yes they're only building one magnet but that magnet is going to cost $700 million for instance because they're doing some big government project. And you so you don’t want to discount those opportunities completely just because we're only building one because that one they build could consume a whole bunch of wire But you need to look at every of those opportunities and you need to decide which ones to go after and then you have to look at the timing of those. So if the big government program is going to build a $700 million magnet again I am just throwing out a number don’t quote me on it but they might not be building that magnet until 2018. So I mean that doesn’t solve our problem. It is not let you -- it’s not like we don’t want to talk with those potential customers and that we don’t want to provide them wire and so that we are in the running when they finally make the decision but we can’t be putting all of our efforts on things like that, because it’s just too far out in the future so we focused the majority of our efforts on the near-term opportunities.

[Unidentified Analyst:]

Could you speculate, because I think that the cable manufacture of course would use a lot of cable, but if this thing is done in 90 days they are still as excited about this opportunity, right? I mean they could step in on some basis even it is about getting another machine, correct?

[Jeff Quiram:]

Well it would be based on whether they have a project that they are looking to do. And, yes, I mean I would say we show them that where it works and if they have a project that they are ready release a wire order for we would definitely be again in a good position to compete and win for that business. But I can’t really -- I wouldn’t want to put any sort of a percentage of that. I don’t know what the odds of that happening are but the issue for us is we just need to get approved and once we are then you can compete for all of that so that’s why that’s our primary focus right now Bill.

[Unidentified Analyst:]

How about the Robinson, is that helping that deal with Robison? Are you selling them any wire or what’s their interest?

[Jeff Quiram:]

Robinson has deep and long relationships with a number of providers of devices mostly in Asia. I would say that there are some applications that we have been talking about with them, with some of these customers that have significant opportunity. And so ultimately the consumer of the wire if not Robinson the consumer of the wire is that device manufacturer which is not Robinson. The Robinson has so established relationships with a number of those providers and that’s the avenue that we are using that relationship win.

[Operator:]

And we will go next to Jim Collins.

[Jim Collins:]

I have a question, are any of our 31 customers in the prototype building or testing or prototype completed stage in any of the products that they are working at?

[Jeff Quiram:]

So is your question, what’s the next, how many of them are releasing?

[Jim Collins:]

Yes in other words, you have three stages, Stage 1, Stage 2 and I am saying one time Stage 3 was building the prototype and then testing that?

[Jeff Quiram:]

Everyone that’s in Stage 2 is taking the wire and someone getting a device to do what they haven’t operated the way it would operate in the field. And so if you are asking -- that’s what I would say anybody we have designated at Stage 2 is in that mode. Stage 1 is really just kind of what I call bench testing.

[Jim Collins:]

Well then the subsequent to Stage 2 would be you get qualified there with that particular customer?

[Jeff Quiram:]

Yes, I mean the successful completion of Stage 2 then puts you in a position where now you are qualified and you know that you can negotiate the agreement and move forward.

[Jim Collins:]

And how long I mean might once everything is competed and we are not there yet for anybody as I understand it. But once one of these customers you have completed the requirements, what’s the typical estimate they would get 30 days, 90 days or what to actually get a contract if they decided they wanted to get the wire?

[Jeff Quiram:]

I think that it is a hard question to answer because it would vary by participant, but just anecdotally I mean there is one of those customers that were in Stage 2 as I basically said they have products to deliver in the second half of this year that they would like to use our wiring if we get qualified and if so they would have to order it and get on it. And so from that perspective if they really are looking at putting it into product as they are going to be shipping to their customers late this year, then we can have them quickly, I mean others are -- others might have different timeframe. So, I believe that we have enough stage 2 qualification efforts with enough parties that if we can bring several of the completion there will be demand for our wire in the near-term.

[Jim Collins:]

And then I guess the other big picture question, how many fault current limiters do you believe have been deployed, I mean approximately, I mean ballpark in terms of what is it like 1% penetration or is it can you talk in terms of number there is 100 out there or 1,000 out there just to get some idea of…

[Jeff Quiram:]

I think there is probably 10 out there right now million the total market if you -- the last report I saw was that there is $250,000 in base stations worldwide -- not base stations, sub-stations worldwide. In each sub-station is a candidate for a fault current limiter so from a market kind of penetration perspective, the number of fault current limiters out there in relationship to the total opportunity is ministerial.

[Jim Collins:]

And then you make the statement we have completed full pilot production ramp, would you define what does that mean, you’ve done 100 meters on the machine and what does that mean by a full production ramp?

[Jeff Quiram:]

Well, what it really means is that, I am really talking Jim to the entire process, so again we have talked about the three stages of the wire, the STP the IBAD -- we’re ramping up the length on all of those stages. And so, we’ve successfully demonstrated the ability to do the STP at long lengths, we have done successfully demonstrated the ability to do the IBAD at long lengths and now we’re ramping up the RCE machine. And so, you're getting long lengths and we need to continue to work on the performance. But what we’ve shown is the ability to take across that was done on the small scale across the entire comp, the entire wire manufacturing process and we’ve demonstrated the ability to do at that volume and that’s good -- that’s what I am referring too there in my comment.

[Jim Collins:]

And then what you mentioned you showcased the fault limiters, what does that mean, a mathematical model or that you're showing people, showing the benefits or just -- what are you doing there?

[Jeff Quiram:]

At the CIGRE conference for instance we had a group that had jointly produced my story board I guess I’ll call it that showed the application, showed where an actual installation and went through all the costs associated with doing it. So, the cost of the mainly the construction for instance all the civil work, all f the maintenance are associated with doing that and laid out all the cost element associated with that particular project. And then compared that to the expected benefits of the project and did it all that in the net present value, I mean it was a very, it was a detailed financial model that again these big participants that actually are in the business of building the devices work with us on and there were actual projects where those costs were being used to demonstrate the economic value of these applications. And so it was very specific, it was based on real world experience and it was very powerful. So from a value proposition perspective I think that unless at CIGRE and the conference were mostly utilities. A lot of the equipment providers are there, but most of the attendees are utility. So people who would utilize these products in their network are the audience for that presentation.

[Jim Collins:]

And then my last question would be you were awarded a patterned to optimize a copper position of Rare Earth barium copper oxide material, I mean how did you get patent on molecule, you might say or just in what’s do you have the patent?

[Jeff Quiram:]

Well, the patent is not necessarily on the molecule it's on the design of the material and so in the way you assemble that material and the structure I guess I would say of that material. So you can get patent on -- a method patent on how you put stuff together and how you utilize a material is definitely patentable and that’s what we’ve got.

[Jim Collins:]

And in that particular composition is the big thing that allows us to get maybe 730 amps and so on and is that what is so special about that particular material?

[Jeff Quiram:]

Well it's not only current carrying performance Jim, but it's also the way we can get the wire t perform in the presence of high magnetic field and it has a lot of performance aspects to it, current handling is one of those.

[Jim Collins:]

And then well I guess one thing to add if you get certified for one fault limiter company. It doesn’t necessarily mean that the other fault limiter company is going to say okay now we'll order two you have to on each of the customers you have to come up with a specific recipe and get qualified with it right?

[Jeff Quiram:]

Each of them has their own requirements based on the design of their products. But yes it's not a necessarily one size it's all.

[Jim Collins:]

And is that normally when things are further along should this be not that difficult you just changed the recipe and you get it or is it some sort of a again that a development deal every time the customer wants something?

[Jeff Quiram:]

Well what you're really trying to figure out and again like I said most of it is in finishing layers. And so a lot of the work is associated with how do you finish the wire in a way that meets the requirements that the device has and doesn’t compete the performance of the wire. I mean it's still a balancing act lot of the process on how you put those things down and how you handle the material and all of those sorts of things. And so I guess the point is I think this is what I was trying to say before the science part of the actual comp position is the wire and performance of the wire I mean is the hard part and that’s the part that’s done. Because if you can't get a wire to carry at 500 Amps for instance it doesn’t matter what you do on from a finishing perspective and now we just need to get that part of it done and that’s what we're working on.

[Jim Collins:]

But that should be then you had to do it every time right for each customer and is that a well of a short term is it for what it take a month to do it or a couple of weeks or couple of days to when you're at the point that you are now?

[Jeff Quiram:]

Well to stop it is somewhat iterative and I thought some of the stuff would be done already but you change something you send it they tested they come back you looked at the results and if the results weren’t exactly what you want but of course up until now they have a been exactly what we want. And you guys do something different and so each of those innovative step doesn’t take a tremendous amount of time. But there is more than one of them I guess we think that at point with the couple of these guys are I think on the next iteration is the one when that’s done that time is rapidly approaching for us and that’s what we're focused on right now.

[Operator:]

And we have reached the hour we have one question we will take from Mr. [indiscernible].

[Unidentified Analyst:]

Jeff could you just quickly describe your competitors in the fault limiter area and also what's the size of the market for the wire in the fault limiter product?

[Jeff Quiram:]

Well the ultimate size of the market when you look at total addressable market Bill and again when you look at the reports they talk about a 250,000 substation substantial market opportunity. Those all of course aren’t done in one year but each of these fault current limiters is millions of dollar. So if you would take the 250,000 and multiply it times $5 million or $3 million to $5 million that gives you the total size of that market and...

[Unidentified Analyst:]

Well the question is for wire actually we don’t care about anything else what we care about is the wire what is the size of the wire?

[Jeff Quiram:]

So I was getting to that map the wire is one of the prime ingredients and one of the largest ingredients in that device. And so it depends on the design of the device as far as whether it's 50& of the cost of the device or 30% of the cost of the device. But it is in that area I guess my point is it's not an insignificant portion of that device. And so I really can't.

[Unidentified Analyst:]

Insignificant what is the number insignificant I don’t know what that means 100 million, 200 million, 50 million?

[Jeff Quiram:]

250,000 sub-stations times 3 million times 50%, so your math that in the total addressable market. Now I will be looking at that...

[Unidentified Analyst:]

When you have to get qualified on literally every single one of those things or will one wire is suffice for 250,000. And I assume there is more than one manufacturer. So from the way you are talking and the way you are answering the questions for the previous ones from the previous gentlemen it sounds that you are running a job shop in I have heard everybody is custom made. Every single question was a custom made job.

[Jeff Quiram:]

Well every one of the fault current limiter manufacturers has a device that is unique. And of course because if they weren’t unique they wouldn’t be in the business and when you have a unique device each of those devices has some differing requirements on how they operate. There is more similarities than differences as far as what they need for wire performance, but the way they cycle would be slightly different. So the stress on the wire would be potentially slightly different between Party A and Party B, which would mean that there would be different steps that would have to be taken.

[Unidentified Analyst:]

I think we all get that Jeff, what we don’t get is what are the economics are switching from customer A to customer B, is it a big deal? Or is it just a question of switching dollar or two and then you come out with the new wire, so that you are not reinventing the wheel every time or you have to do a huge plant changeover every time you get a new order for that particular wire or that particular category of wire.

[Jeff Quiram:]

I think the majority of the way do you address deal with those differences are in the way you finish the wire. So that doesn’t really have anything to do with our manufacturing technique other than the fact that we are tuning a layers to make them more restrictive to some of the finishing, but.

[Unidentified Analyst:]

So it’s not a big deal?

[Jeff Quiram:]

It’s not like we need a second piece of equipment for instance to do customer B. A separate piece of equipment for every customer, no we don’t anticipate that being the case. With the caveat being that with some of the business cases for these customers that are out there customer A may consume the majority of what you can get off of a particular machine so you may have to bring a different machine just for capacity but that’s another issue.

[Unidentified Analyst:]

So can you just quickly some of the competitors that are in that the fault -- so to me the market if I were you that I would be going after with a vengeance is the fault limiter because it sounds like there is longer lengths, your couple of years down the road on those things, where as the fault limiter if I understand you correctly is already in market right now, and it’s in the hundreds and millions of dollars. Am I currently wrong here? Am I making wrong assumptions?

[Jeff Quiram:]

There are fault current limiters that are being sold today, I don’t know the complete demand or the complete market for how many fault current limiters could be sold today if they could build as many of they can build. That’s something that the device manufacturer would have to discuss. But I would say that today market for fault current limiters with the supply constraints where they are is in the tens of millions of dollars, the high tens of millions of dollars a year in annual demand. And some of these customers that we have talked with and seeing their business cases their plan is to take that and ramp it dramatically. But I can’t but that is about all I can really say about that fault current limiter market Bill I mean it’s is not. We are providing wire, we are providing wire not to build this case the numbers that I am talking about are not numbers we have developed they are numbers that are coming from the customer.

[Unidentified Analyst:]

One other question the gentlemen before me brought this up and I just want to make sure that I understood your answer. When you use the word to qualify basically what you mean is that is going before some general industry [indiscernible] but rather as you are being qualified on an individual customer basis you are sending in samples and then he is turning around and telling you it needs to have this [indiscernible] or it needs to have this [indiscernible] in order for us to be able to use it. Is that correct?

[Jeff Quiram:]

That is correct it is not an industry qualification it is a customer qualification.

[Unidentified Analyst:]

So it’s just a question of testing your product on an individual customer basis. I know you have answered the question before I just wanted to make sure that I understood you correctly. So as far as competitors are concerned, are there any major competitors that keep you awake at night?

[Jeff Quiram:]

Well there are wire suppliers that have been in the business for years and are the incumbents.

[Unidentified Analyst:]

I am talking about the fault limiter. I am sorry that’s just for fault limiter part.

[Jeff Quiram:]

Those are potential customers of ours. So I don’t if you keep in up in night but I think some of them have better design. Some of them are going be more successful than other and as I stated we kind of we make our own internal evaluations of who we think is in a position to be more successful and we of course put as much energy as those that we think we’re going be more successful than others are getting more of our attention.

[Unidentified Analyst:]

In order competitors are there any competitors in that aspect of the wire industry that you are concerned about?

[Jeff Quiram:]

There are alternative of wires.

[Unidentified Analyst:]

Not customers I mean competitors.

[Jeff Quiram:]

Well yes there is low temperature wires there is MgB2 there are other HTS wire suppliers those are investing to competitive landscape those guys are all areas to watch all areas to be concerned about. And do we worry about them yes but our primary job right now is to get our problems solved and get our product out there and I aspire to be worrying about what competitor A is doing we're not at that point right now. We still believe that if we solve our own problems we're going have an demand for our wire but the market share the debate about who is going to be the winner five or ten years from now we'll play out over the next several years that’s not really the real concern I have right now which is let’s get our work qualified let's start providing it into the market and then we'll worry about market share gains.

[Operator:]

That does conclude today's question-and-answer session. At this time I'd like to turn the conference over to Mr. Jeff Quiram for any additional or closing remarks.

[Jeff Quiram:]

I’d just like to thank you all of you very much for joining us on this call today that went a little long. But we do look forward to speaking with you again and keeping you updated on our next calls as we progress. Thank you very much.

[Operator:]

That does conclude today's conference. Thank you for your participation.