Superconductor Technologies Inc. (SCON) CEO Jeff Quiram on Q2 2018 Results - Earnings Call Transcript

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About: Superconductor Technologies Inc. (SCON)
by: SA Transcripts

Superconductor Technologies Inc. (NASDAQ:SCON) Q2 2018 Earnings Conference Call August 14, 2018 12:00 PM ET

Executives

Moriah Shilton - Investor Relations, Lippert/Heilshorn & Associates

Jeff Quiram - President and Chief Executive Officer

Bill Buchanan - Chief Financial Officer

Analysts

Amit Dayal - H.C. Wainwright

Operator

Good day, and welcome to the Superconductor Technologies Second Quarter 2018 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Moriah Shilton of LHA. Please go ahead, ma’am.

Moriah Shilton

Thank you, James. Good morning and thank you for joining us for STI’s 2018 Second Quarter 2018 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 sections of STI’s 2017 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 the call today with an update on STI’s Conductus wire program.

I’ll then turn the call over to Bill for a review of the financials, after which he will open up the call for Q&A. And now I would like to turn the call over to Jeff.

Jeff Quiram

Thank you, and good morning, everyone. In the second quarter, we generated $793,000 in revenue, all related to our next-generation electric machine, or NGEM, project with the US Department of Energy. Since I worked on the project began in June of last year, we have recorded $1.5 million in government contract revenues. NGEMs are expected to play an instrumental role in the future competitiveness of the electric grid, large-scale manufacturers and other industrial applications that utilize electric motors in excess of 5,000 horsepower. By offering unprecedented improvements in mortar and generator efficiency, NGEMs are expected to provide solutions that we brought at the current limitations of conventional technologies.

Many in the electrical device industry believe that to 2G HTS wire is the key enabling technology for NGEMs. This is especially true of our conductors’ wire that delivers world-class, high-field, low-temperature performance, which will enable device manufacturers to implement greatly improved magnet performance over conventional copper coil solutions. With the utilization of these highly efficient NGEMs, customer can accelerate growth with the substantially reduce power infrastructure footprint independent of traditional grid build-off projects. As a result of these advantages, it is widely expected that NGEMs will experience broad adoption as the availability of appropriate 2G HTS wire enables NGEM production to increase. The projected multi-year cost savings of these next-generation motors is expected to easily justify the initial CapEx for the owners.

Developing, testing and then producing 2G HTS wire for the application is exactly the purpose of the 3-year NGEM DOE project that we began with our partners in June 2017. Last month, we met with the DOE to review our annual progress on the project. I’m very pleased to report that together with our partners, TECO Westinghouse Motor Company, Massachusetts Institute of Technology and the University of North Texas, we have successfully achieved key first-year project milestones.

We produced an enhance Conductus wire that delivered 1.5 times of critical current performance and 2 times increase in infield magnet performance over the initial starting baseline outline in 2017. All of these results to-date have been verified and confirmed through third-party testing. These performance improvements are crucial since it reduces the size of the motor and the amount of wire needed per device, which is a key to improving long-term cost competitiveness. The objective of this project is to assist the DOE in their broader goal of advancing American manufacturing competitiveness by improving industrial motor efficiency to significantly reduce energy usage and the cost of operation.

In parallel to our work on our wire performance, our partners TECO and MIT have been modeling the components of a 5,000 horsepower motor utilizing our conductor’s wire.

We have shifted our focus to fabrication of best-in-class Conductus wire in quantity, a prime goal for the second year of our DOE project and perhaps more importantly for our commercial customers. We intentionally use production equipment in the DOE program efforts as opposed to R&D tools. This approach will allow us to quickly implement the wire fabrication methods and provide for a smooth transition to production of the wire to meet customer requirements in coming weeks.

With the transition to operations and progress for enhanced Conductus wire, we remain on track to begin wire shipments in the third quarter of 2018 to multiple commercial customers for evaluation purposes. On acceptance of our enhanced wire about our customers, our plan is to then begin full production.

Before I turn the call over to Bill for a review of financials, I wanted to comment on the public offering we completed last month, which resulted in a gross proceeds to SSI of approximately $9 million. And earlier investors had questions about the size and timing of the rates. However, we believe the transaction was appropriate as we prepared for production of our enhanced Conductus wire for our commercial customers. We’re taking the long view into consideration. We are pleased with the financing and appreciate our investors’ continued support.

Now Bill will provide a review of the financial. Bill?

Bill Buchanan

Thank you, Jeff. In our second quarter, revenue was $793,000, which consisted entirely of our government contract revenues compared to $8,000 in commercial product revenues in the year ago quarter. Total R&D expenses amounted to $413,000 and were $678,000 in the prior year quarter. SG&A expenses were $1 million compared to $1.1 million in the year ago quarter.

We affected a one-for-ten reverse split of our common stock on July 24, 2018, following approvals from our Board of Directors and stockholders. Upon market open, Tuesday, July 24, our common stock continued trading under the symbol FCON on a split-adjusted basis with a new CUSIP number. We implemented the reverse stock split for the purpose of regaining compliance with the NASDAQ stock market’s listing maintenance standard that requires us to maintain at least $1-per-share minimum bid price. On August 7th 2018, we were notified by the NASDAQ stock market that we get regained compliance.

Reverse stock split reduced the number of our outstanding shares of common stock to approximately 1.2 million. After adjusting our per share data for the reverse stock split, net loss for the second quarter was $1.5 million or loss of a $1.24 per share compared to a net loss of $2.5 million or a loss of $2.37 per share in the prior year quarter.

On to the balance sheet, as Jeff noted, on July 30, we completed a public offering with net proceeds of $7.98 million. In the first six months of 2018, $3.1 million was used to fund our operations and $600,000 was used to fund net changes in our working capital. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our plant operations well into the third quarter of 2019.

And now, operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question today will come from Amit Dayal with H.C. Wainwright.

Amit Dayal

Thank you. Good morning, Jeff. Good morning, Bill. In the press release you highlight potential wire shipments to materialize in 3Q ’18. Just a couple of questions on this. Is this the wires more specifically from the DOEF? And who are the customers and how large are these potential orders?

Jeff Quiram

The wire is the -- does incorporate many of the enhancements that we made in the DOE program primarily just focus on improving the performance in a magnetic field which is really what’s important for the next-generation electric motors. So we are implementing in production the enhancement that we made in the testing with the DOE over the course of the past year. The customers are for a variety of applications with the real -- the common thread in all of the customers is that they’re all looking for wire that they plan to use in a high magnetic field environment. So they’re building a coil of some type. So that will either be for a motor or it can be for a scientific device that uses the magnetic field for various things, sometimes for imaging, sometimes for other purposes, but they’re all common in that period, they’re very interested and they require a strong magnetic field performing wire. And so, I guess, when you talked – when you asked the question about the size of the orders, I’ll just say that all of these customers are, they’re working on programs and applications that are all very significant in size. On the motor side, when you think about motors, these large 5,000 horsepower and above motors that we’re talking about. They all tend to consume significant quantities of wire, so 200 to 300 kilometers per motor. As we’ve stated, the designed capacity of our factory is 750 kilometers annually. So you can see it doesn’t take long for a motor application to consume most of that production. So the potential for all those customers, Amit, is quite large. That’s really part of the last one in the magnetic sticks we used when we’re determining who were focused on as customers as really what the size of the opportunity is going forward.

Amit Dayal

And in terms of potential pricing, maybe it’s too early, but how should we think about how some of this wire can be priced? In terms of per kilometer or any other metric that you have available?

Bill Buchanan

Wire cost is a function too some degree, or not to some degree to significant degree to how much current the wire carries. So the higher performing the wire, the higher cost, the higher the price that you can charge per meter, per kilometer, however you want to divide that up. And again, the metric that is used in many instances to describe market pricing is a metric called the kiloamp meter, which is a function of how much power you’re carrying over particular distance. Today, the market prices for wire have been relatively stable for a while and really that is a function primarily of the fact that we continue to still be in a very supply constrained environment.

So all everybody that’s building 2G HTS wire, they can pretty much sell it for that market price because that is -- there’s plenty of consumers for the wire. And so at least at this point in time, the market prices are relatively stable. I think we all know that as the industry ramps and as market demand for the wire gets greater and greater. And we’ve ramped up production for a number of the competitors have increased production. We expect that the price you’ll see just the normal operation of those prices going down as a function of economies of scale. But then again, our goal is, of course to implement the savings that we recognize from increased production and move that along into pricing. But I guess the firm answer is today the prices are pretty stable. We do expect that the prices will -- the market prices will go down as time goes on, but I think that that’s still a year or two out before there’s a dramatic move in that area.

Amit Dayal

Got it. In terms of the DOE funding, is roughly $3 million left from this contract? And how should we sort of see this coming through the next two years? Is it equally divided over the next two years or is there a different cadence?

Jeff Quiram

Bill, what’s the – would you talk to the plan on really what the revenues look like over the course of the remainder of the contract?

Bill Buchanan

Yeah. I think in year two, we’ll be -- we will continue a pretty significant effort. So it will be little larger than the last year – they did look more like a last six months for the next year. And then as you move into the third year, much of the effort -- although we will still be the prima here, much of the effort will be moving to our subcontractors as they build these motors. Is that helpful?

Amit Dayal

Yes, it is. And in terms of the mix in revenues, so far majority of it at least for the last two quarters has been DOE-related revenue coming in. But beginning in Q3, should we see some customer or product-related revenue coming in or is that more of a 2019 sort of?

Bill Buchanan

I would say the revenue that we’ll probably see in Q3 would be predominantly government. Any wire revenue will be in conjunction with the evaluation orders that we’re fulfilling. In general I would say that those revenues will probably be de minimis for the third quarter. And we really don’t start to see a mix shift and until you see us building wire for in commercial volumes for these customers. So we need to get up. We need a complete evaluation and get an approval, and that’s when you’ll see the mix begin to shift. But I don’t -- I think the earliest that you can see that even begin is fourth quarter. And even in the fourth quarter you probably will end up with the government still being significantly larger than the wire.

Amit Dayal

Got it. Just one last question from me. In terms of the recent public offering, how much cash on hand do we currently have now? How should we expect it to sort of support operations, et cetera, relative to the burn rate?

Jeff Quiram

Well, I’ll speak to the plans for utilizing the capital. Bill, you can chime in on cash on hand. We’ve been burning approximately $1.8 million a quarter or the last year, and that’s a pretty stable area for us and we expect that, that will continue. Now as we ramp production, there will be the need to bring on more personnel and things of that nature. Much of that, of course, will be a function of what’s you’re billing and what you’re shipping. So don’t expect it to have a dramatic effect on the amount of cash we burn a quarter. With the only caveat to that being as you begin to ramp, you may see some periodic disruptions. So for instance you’re spending more in January than you normally would and you’ll receive the conversation for that in the revenue that you recognize in February, let’s say. So there may be some shifts. Well, there will be some shifts in kind of how that cash is spent. And the trajectory of that spend throughout the quarter maybe, or throughout the year maybe a little up and down, depending on the month and depending on what you’re getting from the potential customers. But in general, we don’t anticipate that having a dramatic effect on cash. With the only other comment to that being, but if we would get, let’s just a huge order that we really need to start preparing in a much more meaningful way to, for a year, a year and a half one bill cycle, that may certainly impact the flow cash. But we’ll deal with that issue when we have to deal with it. Bill, you want to talk about cash on hand?

Bill Buchanan

Well, we just finish the financing with the $7.98 million, so approximately $8 million, and when we had about $1 million in the bank. We’re sitting at about $9 million right now.

Operator

Our next question comes from [William Lapp].

Unidentified Analyst

I just want to follow up on some of the questions so I’m the last person. So how many customers do you think you’ll be shipping sample wire to in the third quarter?

Jeff Quiram

We have a list of about -- I think it’s 12 or 13 customers that are waiting for wire at the moment. I would say that the goal -- there’s probably half of them or high priorities and the goal will be to ship to as many of them as we can as soon as we have the wire available to meet their needs. So I guess I can’t give you an exact number in the third quarter, Bill, but that’s the size of the customer base that we’re dealing with for these evaluation purposes at this moment.

Unidentified Analyst

Is the wire ready to go now? It just needs to be produced or does just need more time to be refined product?

Jeff Quiram

Well, we are running our machine in production mode. And then as we’ve talked in the past, the getting it off of our machine and having it be ready is step one and then there is some secondary processing that needs to occur that happens outside of our factory in our supply chain. So it is not until we receive that wire back from the supply chain and certified good again that we are ready to shift to the customer. So there’s nothing ready to ship to customer at this moment, but we anticipate that changing shortly.

Unidentified Analyst

So basically this is the same way or to the same 13 people. You don’t have to make modification. It just like the standard wire the two 2 produce. Is that correct or incorrect?

Jeff Quiram

I would say that we are going to be providing the same type of wire to when I talk about those, that that dozen or so and the six high priority. They all have specifications that are consistent with what we’re working on with what we’re working on with the NGEL. There are other customers that have other requirements, and some of them are for lower performing wires, some of them for wire that doesn’t necessarily have the sort of magnetic field performance that others are looking for. So there are instances where we may ship wire let’s just say wireless not good enough for the six target customers may shift to others that aren’t so demanding from a specification perspective. But in general, the wire for the six target customers is pretty consistent.

Unidentified Analyst

So based on those six targets, the ones you really want to get to, do you believe right now that the wire meets their specification?

Jeff Quiram

Well, if we don’t believe in mutual specification, we won’t ship it.

Unidentified Analyst

Okay, that’s a good answer. What are we talking about, are we talking about 35 hours, what’s the dollar you say its stable now on the wire, what’s the dollar number you’re think enough. So it’s similar to what you projected in the past?

Bill Buchanan

It’s similar to what we projected in the past again using the day the current market price will use it in the – meter method that we‘ve talked about. Market price today as we’re on, $250,000 a kiloamp bearer pretty stable for several years. But it’s hard to translate that exactly into a price per meter because you have different aspects. You have the performance of the wire, you have the fitness of the wire and all of that. So let’s just stick with the market price of $250 – as our current view.

Unidentified Analyst

So what does that translate into kilometers we can do so in the 150 kilometers, what should we use for the kilometer?

Jeff Quiram

Well again, when we calculate it, when we look at the design capacity of the factory at 750 kilometers a year and you use a market price of $250 a kiloamp meter and we use a performance metric of 500 amps is really what we use. That’s where we came up with the $35 million design capacity from a revenue perspective. So if the performance is significantly higher than 500 amps. The cell price goes up, and the revenue goes up, let’s just say.

Yes, but you had to weigh that I guess the other things that play into the equation like yield and well and all those other things that are input into the price which then of course drives revenue. But again, those were the message that are used to determine the size of design path here we saw 750 kilometers at 500 amps of wire and $250 – is also $35 million of revenue. That’s a simple math.

Unidentified Analyst

Okay. Is the cost of goods lower now what’s the new process you got or is about the same?

Jeff Quiram

It’s about the same as there is a little bit of additional processing that we’re doing that does calculate or feed into the bomb. I guess the real issue is that the – in and other self has always been a relatively small overall cost element. It really comes on to how efficiently can you produce the wire and what’s the yield that you get, that will the primary driver. So the bom is a little bit more expensive, but it doesn’t dramatically change the business case at this time.

Unidentified Analyst

And you mentioned that you’re sending this out to supplier before you could ship the wire. I mean, this is a copper thing? Or what are you doing, what are you sending out to be done?

Jeff Quiram

Let’s just call the finishing layers, so whatever it might be. But yes, so the final plating and the final encapsulation of the wire is something that this gone outside.

Unidentified Analyst

But we don’t have the same problem that we had on the FCLs. I mean, this would be more easier to meet, right?

Jeff Quiram

Well, the bigger, the thing that’s different is the finishing layers can be thicker, and you don’t have to, you don’t have the same mechanical stresses that are being placed on the wire, when it’s actually put into the device. So those are the two primary elements that are different between NGEM layer at the FCL wire.

Unidentified Analyst

So Jeff, you’re looking at -- first of all. Do you think that the 6 people that you think your prime target, do you think they’re more interested in buying the way from you and someone else? I mean, I don’t really understand how competitive it is. I mean, do you have the only game in town if you get this working? Or can you talk a little bit about that? How your competitive advantages based on your technology today?

Jeff Quiram

Well, I wouldn’t say we’re only game in town. What I will say is what we have been demonstrating over the course of the past couple years. Is that when people test our wire in the presence of the magnetic field, we’ve been able to show market-leading performance. So and again, all these customers are looking to build magnets, so that is a key consideration on their part. Now it’s not to say that others can’t, we might be market leading, but are there that are good enough? I’d say the answer is yes, which is actually, I mean, that’s the situation that we would rather be in, Bill. I don’t, when we were in the electronic space, selling wire to the wireless operators, we had a 100% market share of the market we were in. And that’s not necessarily a recipe for success in general. I mean, you want a robust market. You want a number of people playing in it. You want a number of customers playing in it. And so we’re not the only game in town, but we have demonstrated market-leading performance and in the presence of magnetic field. I think that puts us in a good spot from a competitive perspective, and the customers will decide if they want to go up. The people that can perform, that can deliver this high performance wire certainly a subset of all of the people that are in 2G HTS wire business.

Unidentified Analyst

Based on your crystal ball with no assurance, do you feel that you will have an order in the fourth quarter? What’s your optimism?

Jeff Quiram

You mean a big commercial order?

Unidentified Analyst

Yes. I mean another words best wire…

Jeff Quiram

We have orders that we are [indiscernible].

Unidentified Analyst

Yes. But that’s small orders, right?

Jeff Quiram

That’s right. We need to the approval and we need a large order, is certainly our goal and our desire to have one as we exit the year and prepare for 2019. But I don’t control the timing on that, so I’m not going to make on projections on and other to say our hope.

Unidentified Analyst

Okay, but we’re further aligned and we’ve been to a long time, I would say. I don’t know if you agree with that?

Jeff Quiram

I’d say we have a product that is designed for this mortar and magnus some space that has been performing very well and now it’s just a matter of completing the evaluation process and moving on. So I feel I’m optimistic about where we are.

Unidentified Analyst

Thank you. I appreciate your comments. That’s all I had.

Operator

That will conclude today’s question-and-answer session. I will now turn the conference over to Jeff Quiram for any additional and closing remarks.

Jeff Quiram

Thank you and thank you all very much for joining us today. SGI will be presenting at the following investor and industry conferences. We’ll be at the HC ceive rate 20th Annual Global Investment conference to September 4th to 6 in New York City. SGI will also be presenting at the upcoming five super com activity conference scheduled for October 28th to November 2nd in Seattle. At this major international forum, participants need to present and discuss the latest developments in the fields of superconductivity. The meeting will attract a broad spectrum of participants in research, technology development and industrial manufacturing of superconducting wire in devices along with end users for a variety of applications. Participants from the US and international, universities, industries, national laboratories and other government agencies will address recent progress in various applications. Our presentation on October 30th will be on-code of investors, processing and testing enhancements from multiple applications.

We look forward to speaking with you again on our next call. Good day.

Operator

That does conclude today’s conference call. Thank you for your participation. You may now disconnect.