Superconductor Technologies' (SCON) CEO Jeff Quiram on Q4 2015 Results - Earnings Call Transcript

Superconductor Technologies Inc. (NASDAQ:SCON)

Q4 2015 Earnings Conference Call

March 23, 2016 11:00 AM ET

Executives

Cathy Mattison - IR

Jeff Quiram - President and CEO

Bill Buchanan - CFO

Analysts

Bill Lapp - Private Investor

Jon Hickman - Ladenburg and Thalmann

Operator

Good day, everyone, and welcome to the STI Fourth Quarter 2015 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Cathy Mattison with LHA. Please go ahead, ma'am.

Cathy Mattison

Thank you, operator. Good morning and thank you for joining us for STI's 2015 fourth quarter and year-end conference call. If anyone has not yet received the earnings press release, it is now available at the company's website. If you would like to be added to our distribution list or if you would like additional information about STI, you may call LHA at 415-433-3777. With us from management today are Jeff Quiram, President and Chief Executive Officer; and Bill Buchanan, Chief Financial Officer. I will review the Safe Harbor provisions of this conference call and then I will turn the call over to Jeff.

Various comments regarding management's beliefs, expectations and plans for the future are forward-looking statements and are made in reliance upon the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and are subject to various risks, uncertainties 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 section of STI's 2014 Annual Report on Form 10-K. These documents are available online at STI's website, www.suptech.com or through the SEC's website, www.sec.gov.

Forward-looking statements are based on information presently available to senior management and STI has not assumed any duty to update any forward-looking statements. Jeff will begin with an update on STI’s Conductus wire program and then turn the call over to Bill for a review of the financials.

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

Jeff Quiram

Thank you and good morning, everyone. I would like to begin by reiterating that our near-term critical path objectives of obtaining customer approval for large scale deployment remains intact. We have made considerable progress in meeting this objective, but as of today we still have additional work to do. The first I will provide is update on this objective.

In 2015, we conducted extensive lifecycle testing with multiple customers as part of the product certification process. We have repeatedly achieved market current handling performance that meets or exceeds our customer specifications. Our efforts remain focused on completing the previously identified mechanical stress test for our target applications. During recent lifecycle testing with key customers, we have determined that we must improve the mechanical strength of our Conductus wire prior to adding the final finishing layers of silver and copper. We are aggressively pursuing the resolution of this final performance criterion.

Now I will review what we accomplished in 2015. Conductus wire performance continues to improve. For high magnetic fields which is critical for magnets, MRI, NMR and motor applications, Paul Scherrer Institute, one of the most advanced applied research centers in the world validated Conductus wire's industry leading performance. On the superconducting fault current limiter side, Conductus wire obtained greater than 900 amps at 77 Kelvin on a 12 millimeter wide wire.

Our improved performance is resulting in success in the market. We continue to leverage our strategic agreement with Robinson Research Institute. The New Zealand based institute has a strong presence in Asia and unique capabilities in the production of HTS Roebel cable that is used in superconducting machines and magnets and other innovative products.

In fact, in 2015 we qualified Conductus wire for Robinson's Roebel cable. Following that important milestone, we shipped wire to two customers for further qualification in magnet applications. We also entered into a distribution agreement with TING Corporation to address opportunities in India. TING provides its global clients with state-of-the-art technology from North America and the European Union, and specializes in the supply of 2G HTS wire to India. We've already begun testing activities with several applications and the feedback has been positive.

Throughout the year, we successfully shipped against outstanding orders and commitments. Our customer's forecasted demand still exceeds our capacity for the foreseeable future. In 2015, we grew the number of customers to 37. Many of our customers have increased the personnel and capital investments in their superconducting projects. They are working closely with us in order to secure reliable supply of high performance Conductus wire to enable them to commercialize their products and execute on their attractive business plans.

We continue to prioritize our efforts on the key customers that are actively selling products today. We believe that they are positioned to consume large quantities of wire will give us the fastest path to market. At a high level our customer engagement gives us confidence that we will get commitments once our wire is approved.

Furthermore, the market continues to be attractive. Over the past year, demand for HTS wire grew as more superconducting projects were approved for the grid, in particular with approximately 250,000 power substations currently in operation around the world, there is significant market opportunity for this superconducting fault current limiter solution.

In addition, several new superconducting products have recently been released. Industry participants consistently tell us that they need more sources of high quality HTS wire. Our qualification activities remain focused on three product applications all which are utilizing wire today. Those are our fault current limiters, magnets and power transmission cables.

In summary, we are dedicated to completing the final qualification stage with our customers look forward supplying them with Conductus wire that improves the product availability, performance and economics of HTS solutions.

Now to Bill for a review of the financials. Bill?

Bill Buchanan

Thank you, Jeff. In our fourth quarter, revenue was $27,000 compared to $82,000 in the year-ago quarter and was primarily from our wireless products for both periods. The commercial gross margins were negative in the fourth quarter. We expect significant gross margin improvements as we bring our wire production equipment up to capacity.

Total R&D expenses amounted to $879,000 and were $1.5 million for the prior year quarter. Our 2015 efforts were lower as we transitioned to our 2G wire efforts to manufacturing.

SG&A expenses were $1.6 million compared to $1.4 million in the year ago quarter. This increase was the result of non-cash stock-based compensation expenses. We recognized a non-cash gain of $800,000 from the exercised price adjustment and the fair value adjustment of our warrants issued in August of 2013. This amount will fluctuate quarterly based on several factors including our stock price. Net loss for the fourth quarter was $2.4 million or loss of $0.08 per share compared to a net loss of $2.8 million loss or loss of $0.22 per share in the prior year quarter. The total number of common shares outstanding at December 31, 2015 was 39.6 million shares.

For the full year of 2015, total net revenue was $244,000 versus $632,000 in 2014. The net loss was $8.6 million or $0.44 per share this compared to a net loss of $8.3 million or $0.64 per share in 2014 which included a one-time gain of $3.5 million in the second quarter of 2014 from the company's investment in Resonant Inc. Our 2015 net loss included a full year gain of $4.8 million from the fair value adjustment of our warrant issued in August 2013. Under the balance sheet, on December 31, 2015 cash and cash equivalents totaled $7.5 million. This included $8.6 million in net proceeds from our October 2015 registered public offering. For the full year of 2015, $8.2 million was used to fund our operations and $300,000 was used for changes in our working capital. Capital expenditures in 2015 were $141,000. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations into the fourth quarter of 2016. Current and non-current liabilities totaled $1.2 million at December 31.

And now operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go ahead and take a first question from Bill Lapp who is a private investor, please go ahead your line is open.

Bill Lapp

I'd like a little more clarification on the stress test for the wire, is this for all applications or just the fault media?

Jeff Quiram

The primary application we’re focused on now on these stress test, Bill if for the fault current limiter.

Bill Lapp

And is this just a new problem it came up or is this has been one you’ve had before?

Jeff Quiram

Well, what it really you know we’ve talking for the last several quarters about really the – we passed all of the technical performance on the wire and we’re trying to get the finishing layers right, we will pass on the tests. And so what really we discovered that there is something going on underneath those finishing layers that needs to be improved and really this came about as we got a pretty good amount of test data from multiple customers in the middle of December and we saw some anomalies and we were trying to figure out what was transpiring because as you know we’ve been making progress on these finishing layers and thought we were getting really close, but we were never able to pull it over the line and then the data was starting to give us an indication that there was something else that we needed to look at.

And so we announced in January that we made a modification in the machine right around the end of the year primarily to put some different materials down or to put it down in a different manner I guess is the way I would say it. And so we’re still trying to figure out what we really need to do to strengthen the wire before that finishing layer because that’s what it comes down to. And so it is slightly different than what we were working with on the finishing layer. All the work we've done on the finishing layer is not lost but we need to do something before we put that final layer down to make sure that the wire survives the mechanical testing.

Bill Lapp

So you've been working on this for like two and a half months since you found out, right?

Jeff Quiram

We’ve been working on it since – yeah, well since probably the first of the year when we really aggressively started looking at that – the aspects underneath the finishing layer.

Bill Lapp

When you say the -- that's nothing to do with the coding that’s just the finishing layer of the wire itself, right?

Jeff Quiram

Well the finishing layer are – there are two finishing layers. You put down silver to protect the superconductor and then you many times the final finishing layer is dependent on the application and in this instance in fault current limiters that final finishing layer is copper.

Bill Lapp

So is it the copper or the silver layer that’s not strong enough?

Jeff Quiram

It's the stuff that's underneath both those layers.

Bill Lapp

So in other words, you’re saying the basic component under the silver and the copper isn't strong enough?

Jeff Quiram

Yeah, so our wire – our wire is and again most wires when you look at 2G HTS wire it’s a stack, right and there are different layers of the substrate, different layers, you’re putting superconductor down and what we’re seeing is that whole stack needs to be strengthened. And we have some really good idea of where that needs to be tweaked and that's what we're doing right now.

Bill Lapp

So like American Superconductor selling wire, we saw the announcement that the other parties coming in to help, I don't know the company, do they have that same problem?

Jeff Quiram

Well, I mean again, they use a significantly different manufacturing process. Well, they have the same problem, they have to pass the same mechanical tests and everybody needs to pass the same mechanical tests but the issues that they’re dealing with are different probably than ours because of the basic construction of the wire. And then the other issue assuming that we are dealing with very high-performance wire which is kind of a different animal than what they're dealing with too.

Bill Lapp

So let me just go a little further. When you – so here you send out new wire for testing that you've been tweaking or you're still working on the tweaking before you send it to the vendor to test it for strength?

Jeff Quiram

No, we’re testing it, we can do a lot of strength testing ourselves and so we’re doing that. We continue to have interaction with customers. We’re not going to send them another piece of wire until we know it’s going to pass.

Bill Lapp

And so far in your tests, are you seeing, I mean have you seen anything that passed the test but it’s not uniform yet or I just wonder how far you are in solving the problem?

Jeff Quiram

I'll just say we have some candidates for where the problem is and we have significant amount of test plan around narrowing that down and figuring it out how to change it and I guess that's what all I have to say about it, Bill. I mean, that’s what we're...

Bill Lapp

But you’re optimistic. I mean it's not an insolvable problem?

Jeff Quiram

No, not at all. I mean, it's a little bit of a surprise to us just because we thought we had been passing it and so now, we just seem to figure out what needs to be modified and tweaked and that's what we're doing. So, no, we do not -- it's certainly not something that is insurmountable, but at the same time, it's a delay and it's -- which is not in anybody's best interest and we recognize that we want to get it done as quickly as we can.

Bill Lapp

Okay. So once you get that done, let's assume you run that test internally, you find out that it meets the strength test, you’re not afraid to send it out. Do we envision any problem with the copper now being overlaid? Because you’re not overlaying the copper when you're running this test, correct or incorrect?

Jeff Quiram

No. We're not overlaying the copper. We've done so much work with that finishing layer, Bill, over the course of last year. I think we have a really good handle on what needs to be done there.

Bill Lapp

Because you don't look for that to be a problem?

Jeff Quiram

I don't expect that it’s a problem. I won't say that the first piece of wire we send out and put copper on will definitely work -- will be perfect, but we're not starting from square one.

Bill Lapp

Okay. So once you solve this, it should move pretty fast?

Jeff Quiram

That's our expectation.

Bill Lapp

Okay. Now, could you reiterate what you said about your priorities? So once you solve this stress test, you’ve got a couple fault meter people, 2, 3 or whatever, are they ready to order, did you say, I was doing something else when you commented on where your business partners were theoretically the fault meter purchases?

Jeff Quiram

Well, I mean they continue to talk about the practice that they need more wire, they need additional wire supply and that in order for them to execute on their business plans, they need a greater supply of wire. So, nobody of course has come out and given us any sort of guarantee that if we do x, they’ll buy y.

Bill Lapp

Yeah. But you've got competitors. You’ve got 2 or 3 that you’re looking at. So one goes, the other may go.

Jeff Quiram

I believe that if we give them wire that meets their needs and helps them grow their business faster that we'll be in a good position to get some orders.

Bill Lapp

Okay. All right. And then just for Bill Buchanan, so you say the fourth quarter, we got cash, is that the middle of the fourth quarter, where would we have a problem?

Bill Buchanan

Well, I'll just reiterate what I said that we're going to get into the fourth quarter and I can't tell you exactly how far. I don't want to reiterate.

Bill Lapp

Okay. All right. Okay. So, I guess the next question is if these warrants may expire, because prices may not be up there, are you thinking of extending the warrants at all or do you want to comment on that -- on the April 13 warrants?

Bill Buchanan

We have not discussed that yet, Bill.

Bill Lapp

Okay. Thank you for taking the call.

Bill Buchanan

Okay. Thank you, Bill.

Jeff Quiram

Thank you.

Operator

Thank you. [Operator Instructions] We'll go out and take our next question from Jon Hickman with Ladenburg and Thalmann. Please go ahead. Your line is open.

Jon Hickman

Hi, Jeff. Appreciated your comment. I was wondering could you just explain what mechanical strength means. Does that mean you are bending the wire or stretching it or what?

Jeff Quiram

So based on the application, in most instances, people are taking wire, customers are taking wire and they're building a coil or they're building -- they're wrapping and building a maintenance, they're doing -- it's not just laying in a straight line and so what -- it depends on their manufacturing technique, but so you have stress strains -- so for instance, usually when you’re wrapping something, it's under tension, so they have supplications on how hard they need to be able to pull the wire and then basically how tight they wrap it. I mean, those are -- and then of course, there is the engineering background on top of that. So you need to survive a force that’s greater than the one they're going to apply to it. And so it's in both directions, it's in wrapping and then it's in kind of pulling and stretching. Our issue isn't in the pulling and stretching, the issue is as you wrap it.

Jon Hickman

So is the crystal structure breaking?

Jeff Quiram

Well, all I'll say is that the wire performance needs to stay consistent. So you measure it before you do the test and then you measure it after the test and it needs to be the same, and right now, it's not. So that's the part that needs to be solved and so I guess you could say that something is breaking in that it's not continuing to work the way that it was supposed to work and it's all now figuring out, okay, how you stop it from breaking when you're out at the type, that's what we're working on.

Jon Hickman

Okay. Thank you.

Jeff Quiram

Okay, Jon. Thank you.

Operator

Thank you. [Operator Instructions] And it does appear we have no further questions at this time. I will now turn the program back over to Jeff for any additional or closing remarks.

Jeff Quiram

Thank you. I would like to thank all of you for joining us today on the call and we look forward to speaking with you again next time. Thank you very much. Have a good day.

Operator

And that does conclude today’s program. We like to thank you for your participation. Have a wonderful time and we’ll -- you may disconnect at any time.

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