Superconductor Technologies' (SCON) CEO Jeff Quiram on Q1 2019 Results - Earnings Call Transcript

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

Superconductor Technologies, Inc. (NASDAQ:SCON) Q1 2019 Earnings Conference Call May 9, 2019 11:00 AM ET

Executives

Jeff Quiram - President, CEO

Bill Buchanan - CFO

Analysts

Amit Dayal - H.C. Wainwright

Sameer Joshi - H.C. Wainwright

Bill Lap - Private Investor

Steve Kruger - Foresight Investing

Operator

If you'd 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 and Form 10-K. These documents are available online at STI's website, www.suptech.com or through the SEC's website.

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, 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. We continue to make progress in the first quarter ramping on our production capability to meet customer expectations. As we shared with you on our last earnings call late March, we're concentrating our ramp efforts on the two remaining processes required to manufacture our conductor's high performance magnet wired in high volume, the HCF's deposition machine and the final step of our copper encapsulation.

The deposition machine is in the final stages of routine maintenance and system upgrades, all upgrades to heater, temperature controls, heat shields and the rebalancing of the drum are completed in the first quarter. We are now bringing all process conditions back to best-known methods.

We undertook this upgrades to improve the process stability necessary to deliver higher yields and increased production capacity. For copper encapsulation, we're working with outside suppliers to optimize methods for coproduction, long length, and high volume.

We expect these final two steps to be signed off by operations in the second quarter. More importantly, we expect to start delivering conductors wire optimized for magnet applications in the second quarter, with the plan to ship 10s of kilometers later this year.

Our superconducting magnet customers are forecast with the need for 1000s of kilometers wire starting in the next few years. On producing superconducting magnet application for Conductus wire is for next generation fusion devices. In April, we announced that Conductus wire was selected by the Institute for Plasma Research, India, (IPR) for use in its Tokamak fusion development.

Recently we received a number of questions about fusion power applications. Let me take a few minutes to share our view of the mass of potential of this developing market. Fusion projects have been under belt by our governments and educational institutions for several decades. Millions of dollars have been invested today into the fundamental science and physics surrounding fusion.

Many technologies have taken giant leaps forward during the ensuing years from computer processing power to the discovery of advanced materials. The technology utilized to make superconducting wire has similarly made great advances during that time. Early fusion projects utilized low temperature superconducting materials.

As high temperature superconducting materials emerged, science has begun to incorporate HTS where it provided a distinct advantage. In recent years it has become evident that the second generation of HTS materials provided significant advantage for fusion projects especially techniques that value very strong magnets.

Due to the superior current density of the 2G HTS materials, for the first time designers see a path to the construction of a magnet powerful enough for the application that compact enough to make the overall device a manageable size. There are a number of fusion systems under development today leveraging multiple technical concepts at the core of the design to achieve the plasma reaction required in all fusion devices.

Various approaches include laser designs, magnetic targeted fusion, Tokamak fusion magnets and several other novel techniques. Tokamak architectures are a particular interest to STI as they utilize ultra-high performance magnets to contain the plasma. Tokamak designs have been under development for a number of years and represent a very significant portion of the funding two days to develop a fusion device.

The most notable recent example is the ITER Project, a $20 billion Tokamak fusion program that uses superconducting magnets 15.5 meters in height. The ITER system is expected to be the first fusion system to produce more power than it uses, a large set of achievement for the technology.

The development of this system began in 2006 utilizing the best superconducting materials available at that time. ITER is now 50% built and it's scheduled to become operational in 2025. It's important to note that since 2006, dramatic performance improvements have occurred with the advent of high-performance 2G HTS wire.

Many industry experts believe that this new wire will allow Tokamak designs that are significantly smaller addressing a huge current barrier to future commercialization. The main benefit drive from the new superconducting wire is to increase the electrical field or the superconducting magnets, thereby delivering the magnetic strength needed in a much smaller package.

We have discussed with you in the past the superior power density performance that Conductus wire brings to magnet applications. Another important element is the ability to operate at the higher temperature of 20 kelvin versus the legacy 4 kelvin. This temperature increase reduces the cost complexity and size of the overall cryo-cooling subsystems.

The recent advances in all areas of fusion has gained significant attention in the market. Investors such as Bill Gates, Jeff Bezos and Jack Ma have been involved in providing significant funding for fusion projects pursuing the promise of clean limitless energy. Fusion is a great complement to solar and wind and can operate 24/7 and offers and excellent way to provide load balancing for the power grid.

We look forward to being a part of the evolution in fusion technology as the industry transitions from theoretical physics to the creation of commercially viable fusion power generation facility.

Turning back to our recent success with IPR, this is an important design win for us. IPR is a well-respected Tokamak research center that has designed and built Tokamak's in the past. Their selection process included rigorous announces of many leading suppliers with the focus on wire performance, company's experience in superconductivity and local support.

Conductus wire's performance was successfully tested by IPR to ensure it met the required specification. We look forward to working with IPR as they move forward with the development of fusion device components utilizing the next generation wire technology represented by Conductus.

We also look forward to working with our distribution partner in India, TING Corporation, to regain to build on our customer footprint by providing additional customers with high-performance magnet wire that delivers a competitive advantage. Forwards, I turn the call over to Bill, I wanted to know that as discussed in prior calls, we are clearly focused on increasing capacity, piece length, and yield for our commercial magnet application customers.

Once these efforts are successfully completed, our current plan is to begin the second budget period of our Department of Energy next generational electric machine program. This project is aligned with our longer term goal of improving yield performance and providing longer length that increases capacity.

Now, Bill would recite a review of the financials. Bill?

Bill Buchanan

Thank you, Jeff. We did not record any commercial product revenues in the first quarter as we remained focused on ramping production from sample size orders to commercial kilometer length orders. Total R&D expenses amounted to $688,000 and were $577,000 in the prior year quarter.

These efforts remain exclusively focused on our Conductus wire. SG&A expenses were reduced to $861,000 in the first quarter of 2019 compared to $1,041,000 in the year-ago quarter. Net loss for the first quarter of 2019 was $2.3 million or loss of $0.70 per share compared to a net loss of $2.2 million or a loss of a $0.98 per share in the first quarter of 2018.

Under the balance sheet, as of March 30th, we had $3.6 million in cash and cash equivalents. In the first quarter of 2019, $2 million was used to fund our operations. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations well into the third quarter of 2019.

And now, operator please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Now we'll take our first question from Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal

Thank you. And good morning, everyone. Thank you for taking my question.

Jeff Quiram

Good morning.

Amit Dayal

Jeff, maybe just a big -- what is the size of the initial order that you expect to deliver in the second quarter. Is this in the 100s of meters range or larger. And is multiple orders or just a single order?

Jeff Quiram

We have several orders, they're all in the 100s of 100s of meters of wire, Amit.

Amit Dayal

Okay.

Jeff Quiram

So, they're all they're less than a kilometer but more than a 100 meters and for each. So, when you add them all together, it's in excess of a kilometer is what we plan to try to get out in the second quarter.

Amit Dayal

And these are going to be shipped in the second quarter, do you expect to recognize any revenues related to this in the second quarter or maybe later, how will that work?

Jeff Quiram

Bill. And I guess I'm not sure on the revenue recognition side whether we would actually recognize that revenue or not. Bill, do you have something on that?

Bill Buchanan

It would depend on how soon before the end of the quarter we would actually get that product out. There is a small acceptance period and that may delay the revenue recognition.

Amit Dayal

Okay.

Jeff Quiram

But other than that there's no other real revenue recognition issue that you're concerned about?

Amit Dayal

Understood.

Jeff Quiram

Okay, great.

Amit Dayal

This will in relation to the Tokamak opportunity, has sort of a long-term effort. Do you have a plan that timing for specific deliverables during the next few quarters and will you generate any revenues from any early efforts around this or will that take some time?

Bill Buchanan

Well, the goal of course on that is to get out these orders in the second quarter and what specifically with one of our customers the guidance has been that there will be an order for 10s of kilometers following on the successful completion of stage one. So, when we start shipping 10s of kilometers of wire, again the goal be to do that in the second half of the year, we will certainly be recognizing revenue from that.

Amit Dayal

Okay. And any other partnerships like TING that are maybe that you guys are working on that could materialize in next few quarters?

Bill Buchanan

We don’t have, really I would say TING is unique with our distribution methods as a representative that helps us with the Indian market. We don’t really, we sell direct into all other markets, so really no other partners of similar stature that I would say we're using.

Amit Dayal

Understood. That's all I have, guys. Thank you, so much.

Bill Buchanan

Alright Amit, thank you.

Amit Dayal

Thank you.

Operator

And we'll move on to our next question from Sameer Joshi with H.C. Wainwright. Please go ahead.

Sameer Joshi

Good morning. Thanks for taking my questions. Just a clarification on the previous question from Amit. Did you mean that that Tokamak opportunity is near term or I guess that is a more long-term opportunity, right?

Jeff Quiram

Well, when you look at some of these Tokamak opportunities, the long-term the potential demand is huge, in the near term there is certainly demand that will keep us busy for 2019 and beyond. So, I think it's just more of a question of scale, the scale of those opportunities, Sameer. But I'd say the near term opportunities with the Tokamak applications as well.

Sameer Joshi

Understood, okay.

Jeff Quiram

It's kind of a combination, it's a combination I guess is what I'd say.

Sameer Joshi

Okay, got it. And then, I know you mentioned the DOE opportunity you will focus on after you have completed these two remaining steps for the current roll out. So, what do you expect the timing of that to be and are the partners in concert with you for progress on that?

Jeff Quiram

Yes, I mean the other partners are ready to execute on their portion of their plan, where there has been quite a bit of design work that's been done. And so, now that's all about getting some more wire and building up, building a sample device and then working with the Department of Energy to get the relative to move forward to your queue.

So, it's all -- it will all work in concert with the partners and with the DOE as far as when exactly we kick off the second phase of that program. But yes, I'd say everybody is pretty much ready to go.

Sameer Joshi

Okay. And then, a question on the balance sheet. We see that the net PP&E amount is now around less than $800,000 and then we expect that to be depreciated over the next two or three, three or four, quarters. But what is the actual useful life of the equipment that you have and do you expect any additional CapEx requirements to build further capacity or to maintain this?

Jeff Quiram

Well, we continue to there is certainly and I think we expense most of the maintenance work that we do on in the machines and only one we do a major upgrade what we capitalize out. Is that correct, Bill?

Bill Buchanan

That is correct.

Jeff Quiram

So, I would say the intention is to not have any large capital expenditure associated with the machines that we have in place because they're today they're operating at certainly less than the design capacity of those machines. Now, we may make some decisions on bringing in additional drums for instance to be able to turn around the work on the RCE faster.

So, that would be a potential investment that we would make. Those are relatively modest, you're adding a drum for $300,000 to $400,000. So, those are not major investments. And then I guess the other side of it, Sameer, is that there is always the potential that we want to if we want to ramp-up the capacity in one of the areas of our template production.

And that would of course be something that we would potentially spend capital on. But those decisions haven’t been made yet and they're not they don’t need to be made yet. And those investments are relatively modest as well, a $1 million to $2 million at the most.

So, I think that yes you're going to see that. The depreciation is certainly in place to take that amount on the balance sheet down. The good news is the machinery is still useable and we have not -- we're not approaching the end of life run on any of those assets.

Sameer Joshi

Understood. And just one last clarification on the two remaining steps for the deposition and copper encapsulation. So, is there do these have to be completed before you can actually ship those 100s of meters of wire or is that wire in good enough shape to go without these process enhancements?

Jeff Quiram

Well, and what we -- when we really talking about is the complete sign-off by our operations team that says yes this process is completely dialed in and doesn't need to be modified. You are correct that we don’t need final sign-off on a process to be producing the 100s of meters of wire we need to send to these customers.

So, we're doing both, I mean we're trying to produce wire and we're really trying to get that process dialed in in the way that our production team can take control of it and sigh-off on him, say okay it's there's no more development work being done on refining a particular piece of what's going on in those processes and we're very close to that, so.

Sameer Joshi

Okay, understood. So, in the next, before the end of June you will be actually be able to in either event to be able to ship the wire; 100s of meters?

Jeff Quiram

That's correct.

Sameer Joshi

Thanks Jeff, thanks for taking my question. Thanks, Bill.

Jeff Quiram

Thank you, Sameer.

Bill Buchanan

Thank you.

Operator

[Operator Instructions] And we'll move on to our next question from Bill Lap, Private Investor. Please go ahead.

Bill Lap

Good morning, Jeff and Bill.

Jeff Quiram

Good morning.

Bill Lap

Can you hear me okay? Yes, good morning.

Jeff Quiram

Yes.

Bill Lap

Jeff, I came in a little late but I did hear you say that and Bill about the shipment you're going to have before June, it's almost a kilometer I think is the way you said by the time its shipped, is that correct of wire?

Jeff Quiram

Yes.

Bill Lap

Is that?

Jeff Quiram

Yes.

Bill Lap

So, can you give a kind of what would that be, hav4e you set the price for that or what would be the revenue if we can book it?

Jeff Quiram

We have set the price, I would say again the revenue when you're talking 100s of meters of wire, I mean just remember that you don’t get meaningful revenue though we're shipping multiple kilometers and so. It would be I guess I don’t want to say we're selling A kilometer for a particular price, Bill, I mean I don’t like get into that meeting our price by this morning call here.

But it's not going to be millions of dollars, let's just that it indicate profit.

Bill Lap

Okay. So, then when you do start, have you come to an agreement with the two vendors that if you after June you're going to be the two customers. Have you come to an agreement on the price once you start shipping, has that been negotiated at this point?

Jeff Quiram

We've negotiated, we've had a number of conversation around pricing and I would say it's all as hard to say that you've ever done discussing price because the market when the market continues to have an effect on what is going on. And we're not the only participants in that market.

But I feel pretty good on where we're at, the view we've given to our customers on what we plan on charging for the wire in the near term. And the discussions with all of our customers as we move forward is that the price for wire is certainly some of the factors that impact the price on wire or of the wire are the volume.

And so, as volume increases and becomes more manageable and more predictable and all those things, then yes pricing will be reflected accordingly. So, I guess I'm not going to say Bill that we have that everything is locked down and we have a rock solid agreement with all of our customers on what the price is going to be.

But I think everybody is aware of what the factors are that will impact the price going forward and we will continue to negotiate in that way about okay what's the next order look like and what do the order looks orders after that look like and we will work together with our customers to well to come to a point where everyone's agreeable.

Bill Lap

And then, you get I think you said you're shipping the two customers, am I correct or that buy before the quarter ends. Is that two customers or did you not say that?

Jeff Quiram

We said we have, I said we -- the question was do we have orders that who are the orders from and I said we have orders from two customers for 100s of meters each.

Bill Lap

Okay.

Jeff Quiram

When then I mean all of this start shipping in the second -- that'd be shipping in the second quarter, we can ship it all right.

Bill Lap

Okay but then will these two customers based on your conversations, would they is there will they take if one of them wants, would you take up your entire production or would there be between both of them. I mean, in other words, if these customers what they need would you supply both or the volume they're looking at would take up your whole capacity?

Jeff Quiram

I would say the volume from one of the customers can take up the vast majority of the capacity. So, it's we'll do what we can to meet the needs of everybody but yes I mean the potential is there, that will be primarily consumed with fulfilling the demands from one.

Bill Lap

Okay. So, basically you're looking if you get these orders from both customers or one, that one should get acceptance and start shipping, it could take up your whole capacity on your current machine, is that correct?

Jeff Quiram

We definitely believe that we will be ramping production very aggressively on our in our production facility and yes we will be stressing it pretty fully here as we approach the end of the year. That's the intention.

Bill Lap

Okay. Alright, I have no further questions. Thank you.

Jeff Quiram

Thank you, Bill.

Operator

And with it, our next question's from Steve Kruger with Foresight Investing. Please go ahead.

Steve Kruger

Good morning, Jeff. Could you characterize for us the progress you've made on yield, perhaps giving us some idea of what kind of lengths you can now produce defect free, are you up to a 100 meters defect free or 300 or 500 on a repeatable basis, can you give us some color on that?

Jeff Quiram

I'd say well we're probably doing consistently to be either as we're getting length that are less than right around a 100 meters, 80, 90 meters that are when you say defect free, so it's all the day drop off, they dramatically reduces the performance. So, and again we've talked about this in the past, it's all about you want consistency because whatever the weakest performance in the length of wire is it defeats the performance of the entire piece of wire.

Just remember, that for many of these applications that we're working on now, we're not trying it would be really we would love to get let's just say 500 meters defect free but we don’t need to get the length that we need are in the 30 to 40 meter piece is what without defects in it in order to meet these requirements.

So, that's really what we're trying to do is how many pieces can we get off when we're to think about yield is like well we're trying to fulfil this these particular orders, what the yield of being able to do that. So, we're not at 500 meters, we're low less than 100 but frankly that’s sufficient for what we're trying to do right now.

Steve Kruger

Okay. And when you go back to work on the DOE contract, and as I understand the next phase is to improve the yield, if you're just under a 100 now, what do you need to be at to meet the goals of the DOE contract when you're done with that in terms of length, repeatable lengths that are defect free?

Jeff Quiram

Well, again yield is calculated in a couple of different ways. So, yes it's how much continuous length are you getting without defect but it's also are you having non or any runs that are you don’t have any failures in the runs. Right?

Steve Kruger

Right.

Jeff Quiram

So, you want to be in a situation where every run is resulting in useable wire coming off of the machine and ultimately that's a combination of a number of things; did the run go as planned; are there any defects; is the composition of the wire correct. All those things kind of play into it but so I guess I'm really just trying to point all of that.

Those length is not the only thing that we're focused on to try to improve yield.

Steve Kruger

Okay. So, I understand that, that's great. But going back to well maybe in terms of both of those parameters, where do you need to be to satisfy the requirements of the DOE contract when you're done both in terms of defect free lengths you can make on a repeatable basis.

And also, let's say a percentage of the runs that are good runs?

Jeff Quiram

Well, I mean the DOE is, the DOE program it's all about improving your yield and improving your lines. And there are certainly milestones better in there that it's a constant negotiation between the different parties because frankly our commercial -- but the deal here of course would love to see that machine run and get continuous kilometer lengths over and over again.

And but on the other side of it we're trying to do is we're trying to build a motor that uses superconducting wire that doesn’t need kilometer lengths and really they just want us to be focused on getting them the wire they need to build the device. So, that’s our commercial partner.

So, you're really I guess what I'm saying is that I don’t think that there is a rock solid performance matric that needs to be met on the yield side that would determine whether that would say yes the program was completed successfully or the program wasn’t successfully. It all comes on to if we can build the device that utilizes the superconducting wire and gets us next generation motor looking I guess it's going to go.

I think that will be they will review to us a success by all parties involved.

Steve Kruger

Okay. Can you give us any color at dollar line, how much like what multiple improvement is your goal over the next year? And so, in terms of lengths and percentage of good runs?

Jeff Quiram

Well, I'd say the we're at a point where we think we'd probably need to be in the 20% 30% 40% improvement over the next several years and in pretty much all of those matrix. I mean, that's where we're close on the current lengths or maybe not as much as you would like. We have a few build runs where we would we're not to have failed runs.

I'd say it's so it's meaningful, 20% 30% improvement but it's not it doesn't we don’t need to be twice as good for instance.

Steve Kruger

Okay, that's very helpful. One last question if I may, in reading recently about China's building these ultra-high voltage transmission lines 1.1 million volts with these lines can carry. Is that likely to have --.

Jeff Quiram

Sorry, you turned off there a little bit at the end. Is it likely to have what? -- I'm sorry, I missed a lot. I think I lost the -- is there anybody else still on or did I get disconnected here?

Bill Buchanan

I think you're still connected, Jeff. This is Bill.

Jeff Quiram

Okay. Well, I'll try to answer the question, I didn’t get it all but I would say that my view on it is probably that goes ultra-high voltage transmission lines, if the question was going to be is that going to be utilizing superconducting wire in it, I would say my view on it today is that the answer is probably no, really just because of the lengths that we're talking about and the fact that almost all of those high voltage lines that are being designed today are all areal.

And that today is not really a good application for a superconducting transmission cable. But I think the biggest issue is just that hoping there's enough wire available from any source to do that sort of a project at this time.

Operator, I think we should move to another question. It sounds like Steve is disconnected.

Operator

And at this time we have no further question and I'd like to turn the call back over to management for any additional or closing remarks.

Jeff Quiram

Okay, very good. I would like to 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

And that concludes today's call. Thank you, for your participation. You may now disconnect.