Superconductor Technologies' (SCON) CEO Jeff Quiram on Q1 2014 Results - Earnings Call Transcript

Superconductor Technologies, Inc. (NASDAQ:SCON)

Q1 2014 Earnings Conference Call

May 8, 2014 11:00 AM ET

Executives

Kirsten Chapman - IR

Jeff Quiram - President and CEO

Bill Buchanan - CFO

Analysts

Jon Hickman - Ladenburg

Operator

Good morning, ladies and gentleman, and thank you for standing by. Welcome to the STI First Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instruction will be provided at that time. (Operator Instructions) I would like to remind everyone that this conference is being recorded today, May 8, 2014.

I will now turn the conference over to Kirsten Chapman of LHA. Please go ahead.

Kirsten Chapman

Thank you, Sierra. Good morning everyone and thank you for joining us for STI’s first 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 today from management 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. This document is available online at STI’s Web site, www.suptech.com or through the SEC Web site, 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, it is my please to turn the call over to Jeff Quiram. Please go ahead, Jeff.

Jeff Quiram

Thank you, Kirsten, and good morning everyone. I will begin with a big update on Conductus wire Program and then I’ll turn over to Bill for review of the financials.

Throughout 2013 demand for Conductus wire grew every quarter and I’m happy to report this positive momentum continued in the first quarter of 2014. Recently, we’ve successfully completed a run that fully illustrated the effectiveness of our proprietary RCE-CDR process. By producing Conductus wire, we supposed the performance is utilizing our pilot production equipment. The particular production round of Conductus wire little bit of minimum current across the entire depositions on it but at least 500 amps per centimeter width at 77 degrees Kelvin.

The 100 meter equivalent of 4 mm wire was achieved by processing 50 meters of 10 mm wire and a 10 mm wide wire. This round represents 100% yield for this system. As we have discussed, yield is the most is the most important metric for any manufacturing process since the higher is the yield will lower the actual cost of wire produced. In addition, a higher yield also increases the amount of sale of wire that a machine can produce.

We have demonstrated the capability to meet the demand and need of a diverse set of applications included superconducting fault current limiter, superconducting power cables and high filed magnets. Many of our customers are looking to take advantage of better wire performance to improve the value proposition of their superconducting products. They hope to accomplish this by reducing size and weight or substantially enhancing the functionality of the device.

High performance 500 amp Conductus wire offers an attractive alternative to address this market opportunity. The primary remaining deliverable that we must address is production capacity. Existing customer profits require a large quantity of superconducting wire approved device ranging from 100s of meters per small magnet applications to 100,000s of meters for a medium size transmission power cable project. In order to meet this future demand, STI must transition from our pilot RCE system to the 1 kilometer production machine.

We expect this machine to produce an initial capacity of 750 kilometers of Conductus wire per year. We believe that our scalable manufacturing technique gives us the unique ability to quickly ramp production to meet demand. We have developed a plan for additional capacity in the second half of 2015. This expansion decision will be driven primarily by committed customer demand levels. Late in the third quarter of 2013, we ordered our first production scale RCE equipment capable of 1 kilometer length.

With the delivery of many sub-assembly is complete, our plan is to have that machine operational at the end of the second quarter with the production of commercial volumes starting in the third quarter. Our plan is to ramp that machine to full capacity by the end of 2014. Project cost is still remained in line with our expectations.

Now, I will review the customer activity for the first quarter. With the increased output of high performance Conductus wire from our pilot equipment this quarter, we have continued to accelerate wire shipments by only we’ll be shipping more wires to more customers we’re also able to provide quicker turnaround for stage two customers as they complete their qualification effort on Conductus wire for their superconducting devices.

Even with the production increase from our pilot machine, the demand for more is already in-house and other committed projects of qualification will continue to exceed our wire availability until that production machine is operational. We continue to prioritize customers’ deliveries based on the size and near-term signing of the opportunity.

In the first quarter, three new customers placed purchase orders. We completed nine order shipments including first-time shipments to five customers. Six shipments were to Stage I customers for performance evaluation and three shipments were for stage II customers who are doing rigorous testing in prototype devices. Our priorities is then qualified for deployment on a commercial scale with at least one customer. As part of the qualification process we continue to work closely with customers as they finalize various specifications and the acceptance test methodology.

Once qualification testing is complete, we expect the customers will enter commercial agreements and place orders for future projects. We’re in the late stage of this process with several customers and we believe they intend to secure supply production in the second half of 2014 and beyond.

Superconducting materials clearly offer solutions to problems that conventional products cannot address, thus creating a large market opportunity. Tier-1 International Companies continue to validate the market with commitments to superconducting projects. In April we attended the Hannover Messe, a leading trade fair for the industrial technology which showcased successful deployments. There are multiple commercial projects currently in operation and many more planned for 2015 and beyond.

In particular the superconducting fault current limiter, and transmission cables are gaining traction with electrical utilities after demonstrating benefits that include lower power grid system losses and lengthening the service length of existing equipment. Industry trends including the demand for higher efficiency power deliver solutions remain important to many participants worldwide.

In addition to our operational progress this quarter, we continue to strengthen our global intellectual property portfolio to protect our growing market position. In May, STI was awarded a new patent for a superconducting material composition and manufacturing process. This award further strengthens the patent portfolio of our Conductus Superconducting Wire Technology.

In summary, a great part of our team’s accomplishments as we transition from Pilot to commercial production. Based on the progress we are making we continue to remain confident that we will achieve our business goal of cash flow breakeven 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 first quarter we again recorded revenue from our Conductus wire sales, however the amount is not yet material and our revenue was primarily from wireless products.

Our first quarter revenue was $389,000 compared to $776,000 in the year ago quarter. The commercial gross margins from the sales of our wireless products were positive in the first quarter and the year ago quarter.

Total R&D expenses amounted to $1.5 million for the quarter, and $1.4 million in the first quarter of 2013. SG&A expenses were $1.3 million, the same as the year ago quarter. This quarter we recognized a non-cash expense of $232,000 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 first quarter was $2.9 million or a loss of $0.25 per share, compared to a net loss of $2.4 million or a loss of $0.58 per share in the prior year’s quarter. The total number of common shares outstanding at March 29, 2014 was 3.1 million shares.

Onto the balance sheet, at March 29, 2014, cash and cash equivalents totaled $7.8 million. In the first quarter $2.3 million was used to fund our operations and $300,000 was provided by changes in our working capital. We invested in an additional $1.5 million in capital expenditures for HTS wire program during the quarter.

Our son $7.8 million cash balance includes the previously announced net proceeds of approximately $3.8 million from the exercise of outstanding warrants during the quarter. Working capital totaled $6.7 million. Based on our current forecast we expect our existing cash resources will be sufficient to fund our planned operations to at least the third quarter of 2014.

At the end of the first quarter 2014 accounts receivable was $308,000. Current and non-current liabilities totaled $8.2 million at March 29, 2014 and included $5.9 million for the fair-value of our warrants. We are executing a very detailed plan to bring Conductus Wire to market and we’re pleased with the great progress we are making operationally and with our customers.

And now operator, please open the call for questions.

Question-and-Answer Session

Operator

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

Jon Hickman - Ladenburg

I was wondering if you would repeat the number Bill for the how much cash came in from warrants?

Bill Buchanan

$3.8 million.

Jon Hickman - Ladenburg

Okay so Jeff, it sounds to me - well, first now that you can do 500 amps kind of like all day long, can you tell me what happened with your recipe because six months ago you were having trouble getting like consistent in the 400 amps?

Jeff Quiram

We have talked about the real challenge that you have on your building the materials. Its number one the composition of the materials so it’s the mix of metals and then the way you create the oxide. So it’s all about balancing the composition of the material and then very tightly control and how you have those crystals formed and a lot of that is driven by the pressure you have in vacuum and I’m getting little technical here but you’re asking what change - we’re doing a better job of controlling the vacuum between the various chambers and we did that by modifying the machine a little bit to do these things slightly different. And we’re changing the composition of the materials slightly and by that I just mean the mix. And by dialing that in that has allowed to build materials and how we’re getting significantly higher performance

Jon Hickman - Ladenburg

And what’s the highest tubing of the measure?

Jeff Quiram

Well, you have a new machine that will come into help us measure these longer lengths of wire that will produce of our production machine and that also will increase the level of adjusting above -- our current machine only test 650 amps I think and all we know is that we’ve produced wire that’s better than 650 amps, we just don’t know how much better, we can’t test it.

Jon Hickman - Ladenburg

So when you say a minimum of 500 it could be considerably higher than that actually some of that?

Jeff Quiram

All we’re doing -- what we’re saying is that we delivered a wire that and again I think as we’ve discussed the performance of the wire is determined by the weakest point in the wire. The weakest point in that 100 meter length of wire was 500.

Jon Hickman - Ladenburg

Okay.

Jeff Quiram

It was greater than 500 amps.

Jon Hickman - Ladenburg

So then with this performance you can go ahead and shift to that cable project customer now?

Jeff Quiram

Yes, I mean, that is the amount of current, the current capacity is really what that customer is looking for and then they’re looking for multiple lengths of wire and again those lengths are in the single digit meter. So the good news is we have accomplished that 500 amp milestone and now we’re definitely working with that customer in order to sit together and do the testing and finalize all the things that they need from us. We both remain committed to the project and it’s a high priority for both because we think that when that cable built we’re going to have [indiscernible] cable of material and most current that ever going to carry. So we’re working with that once all the things that need to be done with that wire are done, go get it and we’ll build the cable with it. And their goal is then to have that thing completed tested and operational within 90 days. So that’s the best process we’re looking forward with them and we’re very excited that to be working them.

Jon Hickman - Ladenburg

So once you ship the wire that they want to be done in 90 days of the testing?

Jeff Quiram

Yes, the 90 days will take them that record time to construct the cable and then do all the exhausted testing that they do on those power cables once they’re built and have the report -- that’s the amount of time they have committed to us they’ll have it completely done.

Jon Hickman - Ladenburg

And when do you think you can shift their 24 pieces of wire?

Jeff Quiram

Well, I mean that’s -- we’re still working through some issues on and I think we’ve talked about this a little bit on the last calls where the protection layer they want to put on the wire before they put in their cable, which is again kind of outside of what we do. So we’re working with them just okay while you need the particular cap layer what’s make sure exactly what that is and then we work with the folks that actually do that for a living and if you get that done, but as far as the pieces we built internally we done with that and now we’re working through the other issues with them.

Jon Hickman - Ladenburg

Okay, so maybe this is a question for Bill. The 700 -- once you get the machine the 750,000 kilometer machine, right, per year?

Jeff Quiram

750 kilometer.

Jon Hickman - Ladenburg

750 kilometer. The estimated revenues coming off that machine had been like, if you, you know honestly your basis have been something like $35 million, if you at kind of prevailing prices. Is that so?

Jeff Quiram

That’s correct.

Jon Hickman - Ladenburg

Now if this is that layer is based on two kind of a 200 - 250 kind of amps performance.

Jeff Quiram

What we really look at it, John, we look at it say -- we can build 750 km of wire, at a particular width at a particular performance. If somebody require significantly less than 500 amps for instance, what you can do is basically you cut the wire in half. So if you need 500 amps would you cut it half and now you have 250.

Jon Hickman - Ladenburg

Okay.

Jeff Quiram

So, if that was good enough for them, well then now you have 250, but all by the way of [indiscernible].

Jon Hickman - Ladenburg

So do you guys think that anybody else who is consistently producing above 500 amps wires? I thought they were usually was considerably lower than that.

Jeff Quiram

I would say, we see different claims from different forks. I put a lot more credence in the conversations we have with our customers than what we are hearing from them and the reality of those conversations is those guys aren’t getting a bunch of 500 amp wire. Even if they were they wouldn’t be that interested in talking with us. So I would say that, no, there is not a lot of 500 amp wire being produced in the market place today.

Jon Hickman - Ladenburg

So now, my last question, and then I will let someone else to talk. Do you think that you indicated people are not going to order in commercial volumes that with second half of the year now, because they want to see your machine. And you know, you’re only seeing fully kind of up and running. Is that what I inferred from your comment?

Jeff Quiram

No. I don’t think I said that. I think I said that we will have the volume necessary to ship to these commercial enterprises in the second half of the year, hopefully starting on late third quarter. So you know that’s only one be available, as far as when they order it, you know, we talked about this square lined order -- again the thing that’s that the industry knows, that this is not an order out of inventory business right now. There is nobody sitting there with kilometers and kilometers of wires of 2G HTS wires sitting on the shelf waiting for someone to order. And I don’t think the best could change. So I expect that we need to finish these qualification efforts with one of these customers. We need to be approved. And I mean, they will - I expect that the wire will be ordered before as though.

Jon Hickman - Ladenburg

Okay, so you’re still, I mean personally I’m following this company I would have expected an order by now. I guess, that’s where I’m coming. But you don’t think anything has really changed except these people need to finish their last testing efforts.

Jeff Quiram

I don’t think, I don’t think anything has changed in the underlying industry -- that we need to believe that provider is not going de-consume. I share your opinion and I am frankly surprised that we don’t have an order yet. But I am also very encouraged by the activity that we have underway and all the work we do with these customers. I mean, it’s continuous, it’s ongoing and it’s everyday. We are working on and so forth. So it’s not like, it’s wire, the deflating wires with customers shipping out wire into black hole and they’re not doing anything with it, you know apart from that case. So we need to get to the process but then I am going to be there, their chosen wire supplier. And then we need to get a wire, we need to fulfill that order. And you get orders and fulfill that order. That’s the process we are working on. We want it to happen, as quickly as everybody else does.

Jon Hickman - Ladenburg

Are you actually like -- have talked to your customers what we’re actually talking about?

Jeff Quiram

Well, you know, down the road, if there’s going to be an order or is there anybody - yes, anybody like stretching their arms or, well we’re pushing on as much as we can. Remember, you know, these are big companies. We’re at the WWE event, we are the ring announcer. We’re not twisting their arms necessarily. We are certainly trying to influence them or certainly trying to give them the move but ultimately they will move when they want to. So I wouldn’t characterize anything that we’re doing as arm twisting, I’d I say we’re trying to persuade, we’re trying to answer their questions more than anything and any concerns they may have. Both of things are standing in the way of getting order but we deal with those and that’s what we’re focusing our efforts on doing that. But again I wouldn’t characterize it as - we not kind of force anybody because we know from experience -- you can’t force customer to it. So they’re going to like by what we do and what we can show them and that we do that. We’re confident that we’ll get the order.

Jon Hickman - Ladenburg

Okay. I’ll let someone else ask question.

Jeff Quiram

Thank you, John.

Operator

(Operator Instructions) There are no further questions at this -- oh my apologies. We have a question from Bill Lap (ph). Please go ahead.

Unidentified Analyst

Good. I just got in this call. I’m just doing this the final of Jonathan’s question. But I mean I think what everybody wants to know and I think you’re trying to say as you’re farther along now than you’ve ever been on getting an order as you’ve got so many people playing and that just matter of not a gift but win, when did you say that’s proper characterization?

Jeff Quiram

That is the way I’d characterize it, Bill, yes.

Unidentified Analyst

So it’s a matter of -- and it seems to me you’ve got enough players in the deal they had -- if one of them collapse (ph) the others are going to have more quick and we’re just trying to answer team how close are with the closest, can you give us any light on -- you’ve got five players there, is there any one that’s the five that’s a long for committee?

Jeff Quiram

Well, I mean, I would say that you’re working with multiples and so you’re right there all at that slightly different stages and the final steps. I guess I would say that one or two probably are further along. As far as finishing the qualification and all that I mean that is the -- you’re asking the $64,000 question and there is a goal for being close to being done. It’s got to be soon. We definitely believe that and we’ve been working through those issues now for several months with the numbers of them. But I think as I have said this before, all we can do is all we just keep doing what right now what we can and making sure that we’re not intervening the process. And then I expect that will be shortly but I don’t have - we’re not going to give anybody a firm date because I don’t know.

Unidentified Analyst

But from a same power now I wasn’t on beginning of the call; with the additional cash aren’t -- I mean you’ve really had felt the end of the third quarter don’t you really now based on the current balance sheet as of 331?

Jeff Quiram

Yes, we’ve stated that we have existing cash to make it at least through the different quarter and yes I would say that the some continued success and all we’ve been very -- we’ve been very encouraged and very thankful for the ongoing support from our investors that have been buying more shares and hope we’d get some good news and that can continue. So from a financial research perspective we’re in better shape now than we were at the start of the year. And we have this exiting cash to execute on our plan and that’s what we’re doing.

Unidentified Analyst

Going back to the customer, the customer like Jeff has, the one you’re having discussions you’re having monetary discussions to cost of the wire and how much you can produce besides the qualification and whether it works, are you getting into the financials terms with them?

Jeff Quiram

I mean many of these customers before they go through the exhaustive efforts to qualify your wire need to have some level of comfort that you can produce sufficient quantifies and that you can use that your consolidative price that make sense to them. So many of those conversation that we’ve had before and of course we’ll get more -- they'll more get specific as we get into details of whatever somebody they want to order and of course as we bring this production machine online that anybody, if there is a customer offer that still has any concern about the amount of wire we can produce although we’ll answering that question. So we’re already answered it despite the point what our plan is but soon we’ll answering the wire that’s coming out of that machine. So, yes, you do a lot of those efforts Bill before you even decide that we’re going to spend a tremendous amount of time with somebody. We have to have some sort of common agreement on or common understanding of whether what we’re doing is going to make sense to them and I think we will reach that point with all of them where we even start to ship them wire.

Unidentified Analyst

Well it seems to me, I wasn’t on the beginning of the call, but the consistency of the 500 amps and the fact that you are doing such good production is a big feather in your hat.

Jeff Quiram

Well, it’s definitely a step forward and that’s what everybody is -- and that’s what we’re all is going to be dreamt on; are we confident at what we serve? Are we going to accomplish? And are we doing it when we say we’re going to do it? You know, as long as we are moving that long forward, I think it is hopeful for us and all, and we’re discussing with all of these customers.

Unidentified Analyst

Without being repetitive, was there any discussion in your call about the fact now putting the new machine and the fact you got the research machine down there, it’s going to be pretty easy to duplicate on the big 750 km machine.

Jeff Quiram

We talked that, Jon asked the question about the recipe and you know what’s different and what’s allowed to see if you get the better performance and you know the answer is we know how we did it. We knew how we did it before, you know part of it just to get the prototype where the power production machines to perform the way we wanted it to perform and until now we’ve got it. We’ve been able to control certain aspects of it the way we wanted to and the way we know the production machine will be able to do it. And so every time you do a run like that and show what conditions allow you to get that kind of performance on the material you want that’s all good, because you can load it right into the new machine.

Bill Buchanan

It sounds like you don’t have much problem anymore if you loaded it up, you are going to get the same result, I mean basically you are at the point where you got the recipe down I think, but then I maybe wrong on it.

Jeff Quiram

I think we’ve had the recipe, so having the recipe is go forward and doing the machine - the actual production machine to execute against their recipe is the second challenge, and you have done that. We’ve done that on the pilot machine and frankly we kind of know where the challenges were on that pilot machine and then we’ve known that for a while and we’ve remedied some of those issues when we are on the new machine. That’s one of the reasons we took this. That’s one of the reasons we went to power production in the first place.

Jeff Quiram

Okay. I am personally encouraged by that and I don’t think it’s going to be that difficult once I am wrong, when you get the new machine up and running that you are going to be that much further along to produce.

Operator

And we have a follow up question from Mr. Jon Hickman of Ladenburg, please go ahead.

Jon Hickman - Ladenburg

Just one quick question, the cable project you had and then kind of put on hold for a while and now just you’re shipping for them, or going to ship to them; that’s an international customer, right?

Jeff Quiram

That’s correct.

Operator

Mr. Quiram, there are no further questions at this time, please continue.

Jeff Quiram

Very good, we appreciate all of you joining us today and look forward for our next conversation with you. Thank you very much and have a good day.

Operator

Ladies and gentlemen, this does concludes the conference call for today. We thank you for your participation. You may now disconnect.

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