Superconductor Technologies' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Superconductor Technologies Inc. (NASDAQ:SCON)

Q4 2013 Results Earnings Conference Call

March 27, 2014 11:00 AM ET

Executives

Cathy Mattison - IR, Lippert/Heilshorn & Associates, Inc.

Jeff Quiram - President & Chief Executive Officer

Bill Buchanan - Chief Financial Officer

Analysts

Jon Hickman - Ladenburg

Scott Billeadeau - Walrus Partners

Operator

Good day ladies and gentleman, thank you for standing by. Welcome to the STI, fourth quarter and year-end 2013 conference call.

During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, March 27, 2014.

And I would now like to turn the conference over to Cathy Mattison with LHA. Please go ahead ma’am.

Cathy Mattison

Thank you, Brittany. Good morning everyone and thank you for joining us for STI's fourth quarter conference call. By now you should have received a copy of the press release. If you have not, please feel free to contact LHA at 415- 433-3777 and we will get that out to you right away.

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 2012 Annual Report on Form 10-K. These documents are available online at STI's website, www.suptech.com or through the SEC 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.

And now, I would like to turn the call over to Jeff.

Jeff Quiram

Thank you, Cathy and thank you all for joining us today. First I’ll provide a quick synopsis of 2013 and then give an update on the current status of our Conductus wire Program and then Bill will review the financials.

We entered 2013 well positioned to begin pilot production of Conductus wire with a full suite of equipment in place and operational in Q1. During Q2 we recognized our first revenue from Conductus wire and by the fourth quarter we were shipping hundreds of meters of wire to multiple customers.

Our level of order backed customer commitments also accelerated throughout the year, growing from two in the first half to seven in the second half. Our industry leading customers are from eight countries that cover a diverse set of superconducting applications. These include smart grid devices such as superconducting fault current limiter, industrial motors, transmission cables, generators, high filed magnets and nuclear magnetic resonance devices.

We’ve also been contacted for advanced physics quantum levitation devices and high efficiency transportation applications. Our ability to fulfill customer orders and sample request while executing on our aggressive business plan has enabled us to build strong relationships with these customers.

We also dramatically improved the performance of Conductus wire during 2013. From our first successful run in February of 2013, we have continuously improved the critical current levels, extended wire length and improved our output yield. We have demonstrated, on a pilot level, the ability of STI's thin film manufacturing process to achieve higher performance and scalable output of superconducting wire.

With the successful completion of a $12 million capital raise in August, we launched the build of our initial commercial scale machine as we expand manufacturing capacity to produce the quantities of Conductus wire our customers require. In 2014 our plan is to produce commercial volumes of superconductor wire. We have advanced towards that goal by attaining several key production milestones.

Regarding wire performance, this quarter STI shipped Conductus wire in both 10 mm and 4 mm widths. This round of wire performed at currents as high as 450 amps per centimeter (A/cm) width and demonstrated our success in splitting wire to custom widths with no degradation in current carrying capacity. This is important as our customers desire to purchase various widths of wire, including 3 mm, 4 mm and 10 mm.

We completed a full capacity run of Conductus wire in our pilot equipment with over 90% of the output performing at an average of 350 amps per centimeter (A/cm) width. The high yield and consistency of the wire’s performance clearly demonstrates on a pilot level the effectiveness of STI’s proprietary RCE-CDR process.

We continue to substantially increase the throughput of our pilot production equipment, providing us with more wire to ship to more customers. As a result, over the past three months we’ve shipped hundreds of meters of Conductus wire to nine customers.

To reiterate how we categorize customers, stage one customers are evaluating the wire’s performance in a static lab environment. Stage two customers are testing the wire in a simulated device to qualify the wire for widespread deployment. This testing includes stress certification such as strain, bending and twisting under tension.

And then stage three customers are those who have successfully completed all qualification testing and our ready to build their superconducting devices with Conductus wire integrated into the product. Those devices are then sold to end use companies such as power grid operators, high-energy labs, medical device companies and other industrial manufacturers. At this point then, the customer will place additional orders and will look to enter commercial agreements that secure the supply of Conductus wire to meet the forecasted demand.

Of the nine customers announced in our March 11 press release, six of them are new. Four are in the second stage of wire evaluation process, while the other five are in the first stage.

Out top priority is to ship Conductus wire to stage two customers, so that they can complete their wire qualification efforts for their specific product application. As such, we continue to prioritize our pilot production output to meet those opportunities that align with our goal to commercialize Conductus wire on a large scale.

Our goal is to continue to secure additional purchase orders and enter into business agreements that consume all of the additional capacity of the Conductus wire as we ramp up in the second half of 2014. This includes securing one or two larger stage three customers, who we expect will place purchase orders for thousands of meters of Conductus wire.

We are confident we are close to successfully converting customers to stage three for several reasons. First, customers require consistent wire performance results that are in their devices and they continue to tell us that STI produces best in class wire performance, while providing superior uniformity.

Next, several stage two customers have provided very positive feedback that Conductus wire meets the current carrying performance expectations for their devices. We are working closely with them to standardize the wire for their specific application. Many of these customers are now focusing on post wire production enhancements to meet their technical requirements. In particular, we had made excellent progress with stage two fault current limiter and magnet applications.

Our customers need to address critical current cost and supply availability concerns of 2G HTS wire to be commercially successful. HTS Conductus wire is viewed as an attractive way to address those challenges as they look to lock down supply.

Lastly, the number of customer visits and factory tours of our Austin facility has increased. While this step is not necessarily required to financial a purchase order, we believe these visits validate the level of serious interest in STI as a wire supplier. Our customers continue to work closely with us. We are very pleased with the progress we have made to optimize specifications to meet their application requirements.

Now I’ll briefly review the status of our 1-kilometer RCE production machine. Work on our Austin facility to support the equipment started in the fourth quarter of 2013 and will be completed in Q1. Parts began arriving in the fourth quarter of last year and we began the sub-assembly fabrication in January of 2014.

The system is scheduled to be production ready late in the second quarter of 2014. Project costs are in line with our expectations and we are on track to have capacity of 750 kilometers in annual production by the end of the year.

In addition to our production progress, we continue to leverage our intellectual property. Earlier this year we entered a licensing agreement for intellectual property developed to our wireless business. In consideration for the use of that patent, we will receive cost savings on support equipment that we will use for HTS wire programs. The equipment will enhance STI’s capabilities as we expand to full production.

Also we continue to enhance and protect our intellectual property by filling four additional patents. STI received two patent awards in the fourth quarter of 2013; one was for our RCE-CDR fabrication process from the Japanese Patent Office and the second patent was for our cryocooler design from the U.S. Patent and Trademark Office.

As part of our ongoing marketing program to promote Conductus wire, in November STI participated in the International Symposium on Superconducting and the International Superconductivity Industry Summit, both in Japan, as well as the Low Temperature Superconductivity workshop sponsored by the U.S Department of Energy. In April we plan to attend the Hannover Messe, a leading trade fair for the industrial technology in Hannover, Germany.

In summary 2013 was a year where we prepared to launch Conductus wire commercially and funded our plan to do so. We have reached important milestones over the past three months due to continuous increase in the volume and the wire performance we are getting out of our pilot machine.

The number of applications for which our wire is being tested is growing. The forecasted global demand form our customers with superconducting wire continue to increase and far exceeds our planned production capacity. We are shipping all the wire that we can produce still at this time.

Several customers have progressed from the evaluation stage to being very close to completing qualification testing, which we believe will result in commercial agreements for the purchase of our Conductus wire in the very near future. Our new 750 kilometer machine is on plan to be production ready late in the second quarter of 2014 and we remain focused on our transition from pilot to commercial production and are confident that we will achieve our business while the cash will break even late in 2014.

Now, I will turn the call over 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 the amount is not yet material and our 2012 and 2013 revenue was primarily from wireless products.

Our fourth quarter revenue was $150,000 compared to $1.1 million in the year ago quarter. The commercial gross margins from the sales of our wireless products were positive in the fourth quarter and in the year ago quarter.

Total R&D expenses amounted to $1.3 million for the quarter, the same as the year ago quarter. SG&A expenses were $1.2 million, also the same as the year ago quarter. This quarter we recognized a non-cash expense of $1.5 million, for 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 fourth quarter was $3.9 million or a loss of $0.23 per share, compared to a net loss of $2.3 million or a loss of $0.65 per share in the prior year’s quarter. The total number of common shares outstanding at December 31, 2013 was 11.6 million shares.

For the year 2013, total net revenue was $1.7 million versus $3.5 million in 2012. The net loss was $12.2 million or $1.71 per share compared to a net loss of $10.9 million or $3.34 per share.

Onto the balance sheet, in 2013, $8.3 million was used to fund our cash loss and changes in our working capital were negligible. At December 31, 2013 cash and cash equivalents totaled $7.5 million and working capital totaled $6.6 million. From January of this year through March 21, 2014 more than 1.4 million warrants to purchase our common shares which were issued as part of our underwritten public offering that closed in August of 2013 have been exercised, generating net proceeds to STI of approximately $3.7 million.

These warrant exercises represent 14% of the August 2014 issued warrants. Proceeds from the exercise of these warrants are an addition to the company’s cash balance as of December 31, 2013 previously mentioned. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations through at least the third quarter of 2014.

At the end of the fourth quarter 2013 accounts receivable was $6,000. Current and non-current liabilities totaled $7.5 million at December 31 and included $5.7 million for the fair-value of our warrants.

Before we take your questions, I would like to note, we are pleased with the confidence in STI, demonstrated by our investors through their increased investment. Our increased cash reserves enable us to focus on the execution and the growth of our Conductus wire initiative. We are very excited about our progress to-date and our plans to produce Conductus wire on a commercial scale in 2014 and beyond.

And now operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And our first question comes from the line of Jon Hickman with Ladenburg. Please go ahead.

Jon Hickman – Ladenburg

Hi Jeff. Thanks for taking my call.

Jeff Quiram

Sure.

Jon Hickman – Ladenburg

I was under the impression that you had already reached like stage three with a couple – with at least one customer earlier this year, but that’s not the case?

Jeff Quiram

Well, the way we define stage three Jon is that you actually have, you’ve been standardized and you’ve now really entered into the arrangement where they are purchasing wire to be fully deployed in their products. So I’m not sure why you would have through that that point had been reached; maybe we had a misunderstanding on what exactly stage three…

Jon Hickman – Ladenburg

On what stage three was, okay. So, I guess - it would be safe to say that you have reached the stage where someone’s completed all the testing?

Jeff Quiram

Yes, we have definitely have reached the stage where folks have completed all of the testing. We continue to have discussions with them on several other items and I would say that nobody has yet taken the step where they have fully qualified our wire and stated that it’s going to be used in their device.

Jon Hickman – Ladenburg

Okay. So you said that you’ve been shipping to nine customers, four are in stage two and five are in stage one, is that correct?

Jeff Quiram

Yeah, that was in the fourth quarter.

Jon Hickman – Ladenburg

Yes, okay. And then so – and then you said you were furthest down the path with the fault current limiter application and the magnet application?

Jeff Quiram

Yes, some of those customers that were in stage two actually received wire from us in the third quarter. So several of them have had wire now for a while. And so that, when we talked about people being primarily done with their qualification testing, it would be the folks that received the wire in that timeframe.

Jon Hickman – Ladenburg

So are you at this stage where like somebody could say they’ve fully qualified you. Like could that happen any day now? I mean, are people that far along?

Jeff Quiram

I would say people – there are a subset of those stage two customers that are far enough along where I believe they could make a final certification decision.

Jon Hickman – Ladenburg

Okay. So the timing is just like whenever these guys get around to deciding to do that.

Jeff Quiram

Well again, I think we talked about this in the past. These are all, they are large companies, they are companies that are making decisions on a critical component that’s going into a product that they are bringing to market. They have a process that they go through to do those evaluations and make those decisions and they do make those decisions and go through that process with their own approach and their own pace.

We of course we’re doing everything we can to make sure that we’re giving them the information they need in as timely a manner as possible, so that they can move the process forward as quickly as we can, but you know we’re not really driving the speed with which they move. I mean they’ll do what they do.

Jon Hickman – Ladenburg

In both of these applications, the magnet and the fault current limiter, you’re talking about lengths per product in the hundreds of meters right, not thousands of meters?

Jeff Quiram

Well, in many instances you have, especially in the fault current limiters, you’re talking about – they need thousands of meters, but they need them in short lengths.

Jon Hickman – Ladenburg

Yes, okay. Well, each product doesn’t need thousands of meters, right.

Jeff Quiram

Each product does mean thousands of meters. Each product needs depends on the design, about three to six to 10 kilometers of wire.

Jon Hickman – Ladenburg

Yes, okay, okay.

Jeff Quiram

So we are building a bunch of little coils, they are using 20 and 30 meter pieces to build little coils, but then they are using lengths of these coils.

Jon Hickman – Ladenburg

Now, at the very end of your - when you’re talking about the various applications that you’re contributing to or testing, you mentioned two kind of new ones. Can you review those or…?

Jeff Quiram

Well, I mean I don’t really want to get into a tremendous amount of detail, because frankly many of those, when you talk about quan levitation devices and other things associated with transportation, I mean a lot of those enquiries are coming from research institutions that I guess they are doing a lot of work. I think it’s a future application that could probably consume a ton of wire, but its not as near term as some of the others.

So when we talked about how we prioritized against wire and when we may get wire off our pilot machine, there is a pecking order on where we send it. We rank the opportunities based on when we think they will occur and the overall attractiveness of them to us as a company.

But we do give wire and again, we ship everything that we’re building and frankly there are customers out there that have placed orders with us and tell us and ship us, you know ship them anything that we have. Anything that’s super conducting they’ll take, you know, whether it’s 100 amps or 200 amps or 300 amps and so in many instances if you have a research institution that will take all of that, many times they are working on those sorts of applications. They are buying the wire from us and if there’s nobody else that needs 150-amp wire for instance, we’ll ship it to them.

Jon Hickman – Ladenburg

Would you care to comment on the use of your wire for superconducting charging stations for the electric vehicle marketplace?

Jeff Quiram

Well, I think where that’s been discussed in some level of detail is when you move to a charging station that really meets the needs that some of the electrical vehicle companies have talked about, which is that you make the experience, the charging experience, similar to – the same experience as putting gas in your tank. So you pull in, you hook something up and you wait for five or 10 minutes and then you leave.

There has been discussion around the fact that that’s how they would like charging stations for electrical cars to work. Now there is couple of different approaches of course, some of them are changing out batteries, but for those that don’t want to change out batteries they talk about having to do rapid charging.

I think where superconducting wire potentially fits in there is as a – you build a superconducting transmission cable that goes from the energy source to the battery. Now I think we’ve talked about this in the past Jon. I mean the real challenge is today the batteries can’t take the rapid charge that they need to, just to get a full charge in a five or 10-minute period. So battery technology is still really not where it needs to be to attain that goal.

But if it did get there and you did want to put that much power into a battery in a very short period of time, the thought is that you would use a superconducting cable to hook that power source to the battery; that’s really an area where it would fit in a charging station.

Jon Hickman – Ladenburg

Okay, I’ll let someone else ask questions. Thanks.

Jeff Quiram

Okay, thank you Jon.

Operator

(Operator Instructions) Your next question comes from the line of Scott Billeadeau with Walrus Partners. Please go ahead.

Scott Billeadeau - Walrus Partners

I guess a couple of questions. I think you had mentioned stage one, stage two and those, when guys are qualifying, is there any additional qualifying that needs to occur on your commercial production equipment as opposed to your pilot production equipment. Is there another phase that needs to occur for them to accept wire from the new equipment?

Jeff Quiram

Each customer has a slightly different view on that, but the majority of them are very confident that what we’re doing, the actual manufacturing technique that we’re using is exactly the same, the way you grow the crystal, and really when you look at the productive scale machine, its really just a nature of scale and so a lot of the things are testing.

They are testing the wire to see how much current it will carry; they are testing the wire to see if it will take the stress and the bending and all of that as they wrap it and the wire coming off of that larger machine is going to be exactly the same. So from that perspective, many of them are looking at it and saying, well no.

Now of course the wire still needs to perform and so if they have a metric that says they require 400-amp or 450-amp wire, the wire coming off of that new machine has to meet those requirements, but your really talking about – your not changing the manufacturing process when you move to the machine and in many instances that’s the trigger point where they say well, we have to qualify, because we changed the process.

Scott Billeadeau - Walrus Partners

Okay. And then a follow up, as your working with potential customers in terms of them qualifying, going through the qualification process, maybe you can give us lets say, how much of what they are doing is dependant upon the wire versus other components or other things related to their own systems that – I’m trying to figure out how much is in your hands or how much is you know purely wire testing as opposed to testing a system that happens to have your wire in it, if you know what I mean?

Jeff Quiram

I do know what you mean and again, I’ll just have to say that, it varies by customer, so some of them are in different spots, but again the folks that we’ve really been focused on are people that actually have a product that they’ve already, that they are building and they are already shipping it out, and either they are using another brand of high temperature wire or in some instances are using low temperature wire and so.

Now that’s I guess the main targets for us. I mean the folks that are already that far along, there are a whole host of others that are in various stages of completing the design of their whole system and getting everything nailed down and all their systems, their electronics, their software, the cooling, I mean all of those things do play into these products. So it’s a mixed bag I guess I’ll say.

Scott Billeadeau - Walrus Partners

Yes. And I suppose for some of those, your product is allowing a new product for them, so well is it fair to say its your type or a different – your enabling them to do something that they couldn’t before or…

Jeff Quiram

Well yes. I mean, well the superconducting wire in and of itself allows you to do that and in some instances, because we are generating very high current performance, so the fact that we can carry 400-amps versus the kind of industry standard of 150-amps to 200-amps makes it different as well, because the more current you can carry, they can take that into account when they are designing the product and they can change the product to take advantage of that initial current carrying capacity, so we’re seeing that as well.

Scott Billeadeau - Walrus Partners

Yes, and then I think your financial case, its something that you - with the money you have on the balance sheet and the money just exercised by the warrants gets you through Q3 of ’14 and I think that does not assume the rest of the warrants converted, but I mean the…

Jeff Quiram

No, we’re just talking what we have in our hands right now, but we don’t think it functions about what might happen in the future.

Scott Billeadeau - Walrus Partners

Yes, and between now and then we have the idea to continue on that incremental – in the incremental warrants like you said you had – I think you said $3.7 million came from 14% of the warrants and so is that fair to say that you know that’s pretty equal, and the incremental 86% is going to raise about five times as much as that roughly. I mean that’s the rate math they use.

Jeff Quiram

Yes, approximately. I think that’s the approximate math, yes.

Scott Billeadeau - Walrus Partners

Yes, alright. Alright, great thanks.

Jeff Quiram

Okay, thank you for your questions.

Operator

Thank you. (Operator Instructions) Ladies and gentlemen, we have no further questions in the queue at this time. I’d like to turn the call back to management for any closing remarks.

Jeff Quiram

Very good. 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

Thank you. Ladies and gentlemen, this concludes the STI fourth quarter and year-end 2013 conference call. We thank you for your participation. You may now disconnect.

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Superconductor Technologies Inc. (SCON): Q4 EPS of -$0.34 may not be comparable to consensus of -$0.19. Revenue of $0.15M (-85.8% Y/Y)