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Edited Transcript of SCON earnings conference call or presentation 9-Nov-17 4:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Superconductor Technologies Inc Earnings Call

SANTA BARBARA Nov 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Superconductor Technologies Inc earnings conference call or presentation Thursday, November 9, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cathy Mattison

Lippert/Heilshorn & Associates, Inc. - Assistant VP

* Jeffrey A. Quiram

Superconductor Technologies Inc. - CEO, President & Director

* William J. Buchanan

Superconductor Technologies Inc. - CFO, Principal Accounting Officer, VP & Assistant Secretary

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Conference Call Participants

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* Sameer S. Joshi

Rodman & Renshaw Research - Associate

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Presentation

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Operator [1]

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Good day, everyone and welcome to the Superconductor Technologies, STI, Third Quarter 2017 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Cathy Mattison of LHA. Please go ahead.

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Cathy Mattison, Lippert/Heilshorn & Associates, Inc. - Assistant VP [2]

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Thank you, [Dena]. Good morning, and thank you for joining us for STI's 2017 Third Quarter 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. 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 2016 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, after which he will open up the call for Q&A.

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

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [3]

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Thank you, Cathy, and good morning, everyone. In the third quarter, we made significant progress in our HTS wire program, achieving a new record in current carrying performance. In addition, the results of the initial investigations on the U.S. Department of Energy project are very encouraging.

I'll begin with a review of our Conductus wire activities. First, during the quarter we accomplished a significant technical milestone. We attained the required specification for a key customer's application, a significant step forward and we subsequently shipped this wire for their qualification approval.

The Robinson Research Institute, a lab recognized internationally as an expert in the development of innovative superconducting products, independently confirmed that the wire met the required specifications. After receiving this validation, we began shipping the wire to several customers with near- term wire demand forecast to complete their product qualification testing. At this time, we are still awaiting feedback from those customers.

Also in the quarter, we began implementing our comprehensive engineering plan for our project with the U.S. Department of Energy. We're excited to be partnered with TECO Westinghouse Motor Company, the Massachusetts Institute of Technology and the University of North Texas as we work to produce the best-in-class, superconducting material that will enable next generation rotating machines.

STI's initial effort is focused on increasing the thickness and composition of the superconducting wire. We're pleased to report that we are already seeing positive results. Recently, we demonstrated a 40% improvement in critical current carrying capacity above the baseline set at the beginning of the project.

Ultimately, our program objective is to produce wire that delivers 1,440 amps per centimeter width at 65 kelvin in a 1.5 tesla field.

These program objectives are synergistic with our existing product roadmap [and correctly] address many customer requests for increased in-field magnetic performance along with lower priced superconducting wire. We gathered additional feedback from [market] participants during the quarter that continues to be encouraging. Customers continued to recognize the value of high performance of HTS wire as the gap from the standard low performance wire widens. High performance wire enables those customers to deliver end products that offer reduced size, weight and greatly improved overall efficiency.

In September, our experience at the EUCAS conference in Geneva was exciting for 2 reasons. First, it was very evident that the demand for HTS wire has never been higher. More importantly, we had very productive meetings with new and existing customers centered around developing a supply chain -- a supply plan, optimizing our development roadmap and executing it with the full support of these customers.

We will continue our ongoing discussions at upcoming events in December. There was heightened visibility for current and future initiatives involving superconducting fault current limiters, utility scale generators, transmission cables, fusion energy, ultra-high-performance magnets for science, electric aircraft and next generation energy storage devices. These broad-based initiatives by global leaders, primarily from Asia and Europe, represent a marked increase in activities required in superconducting technology beyond anything we have seen in the past.

In fact, many of the industry participants we met who were looking to procure 2G HTS wire for their projects, reported that the available supply is not even close to meeting the demand. Global research and development projects have a [planned need of] thousands of kilometers of wire for the building of next generation devices.

In summary, we're excited by our customers' enthusiasm for Conductus wire and the fact that the large industry participants around the world are looking to invest significant effort to create game-changing devices for next generation rotating machines. By delivering low-cost, high current conductors with improved mechanical properties, Conductus wire offers a disruptive solution to the 2G HTS wire market. Our wires high performance in a magnetic field offers capabilities that other manufacturers have not been able to replicate making it well suited for the revolutionary power applications emerging.

Before I turn the call over to Bill, I will mention 2 upcoming industry events STI will attend. We'll participate at the International Superconductivity Industrial Summit to be held in Houston, December 6. Also, in December, we will be at the International Symposium on Superconductivity in Tokyo. Both these events attract global leaders in the development of HTS applications.

We look forward to meeting with our customers and partners at these global events to continue to start the discussions that we had at EUCAS.

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

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William J. Buchanan, Superconductor Technologies Inc. - CFO, Principal Accounting Officer, VP & Assistant Secretary [4]

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Thank you, Jeff. In our third quarter, revenue was $130,000 which consisted entirely of government contract revenue compared to $22,000 in commercial product revenue in the year ago quarter. Total R&D expenses amounted to $766,000 and were $676,000 in the prior year quarter.

SG&A expenses were $1.1 million compared to $1.2 million in the year ago quarter. Net loss for the third quarter was $2.5 million or a loss of $0.23 per share compared to a net loss of $2.9 million or a loss of $0.93 per share in the prior year quarter. The total number of common shares outstanding at September 30, 2017 was 10.8 million shares. Under the balance sheet, on September 30, 2017 cash and cash equivalents totaled $4.7 million. Year-to-date $6 million was used to fund our operations and $200,000 was provided by changes in our working capital. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations through the first quarter of 2018. Current and noncurrent liabilities totaled $1.1 million at September 30.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will go to Sameer Joshi with H.C. Wainwright.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [2]

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Congratulations on the qualification. Just a question related to that. The technical advancements or changes that you have made are mainly targeted for the fault color -- current limited application. Do they also translate to other applications and would you be using these changes that you made to your process for all wire going forward?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [3]

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While some of them do, Sameer. I mean the majority are certainly applicable. The only thing that's different was certain applications that is either it's operating temperature or the magnetic field that the wire operates in. And so, whether the exact composition of the copper layer that we're using for instance would work in a high field environment is kind of yet to be determined. But for -- I will say that it does work for all applications that are operating in a self-field environment.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [4]

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So this and then the segue into a high magnetic field. I think the Department of Energy contract relates to that. Am I right?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [5]

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That's correct. And so as I mentioned in the prepared remarks what we really are working on there to -- to get it to work better in the presence of a magnetic field is you do change the composition of the super conductor a little bit and you also make it a little bit thicker to increase the current carrying while you're doing that. So those are the 2 areas we're primarily focused on. And then really once you have the -- it's once you have the performance that you need out of the wire, then that's usually when you have to figure out then how to finish it. So what's that final cap layer is going to be like. Some applications don't require one. So they just require a very thin protection layer that don't really have any effect on the wire performance because they don't use it. Some of the self-field applications we're working on today, they actually use the finishing layer as an element in their product design, so it's a slightly different situation.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [6]

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Thanks for that clarification. As far as the wire that you have shipped to potential customers, did you -- were these considered sales or is this something that you just provided them for testing?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [7]

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I'm sorry, Sameer, I missed that.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [8]

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Oh, sorry. Were any revenues recognized from this shipping -- shipments to these customers, the FCL customers?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [9]

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No, the revenue that we recognized during this quarter is entirely from our government program.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [10]

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And can you comment on were all these customers' applications for FCL or was there any other applications that were also being tested?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [11]

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They're not all for false current limiters, but they all are for self-field applications. So the other one -- the other area primarily where they're looking at right now is in the area of transmission.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [12]

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Transmission, okay. And -- so you mentioned EUCAS conference and potential customers that you met. What were the applications that were discussed there? Was it also again FCL and transmission or something else?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [13]

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A whole range of applications. A lot of them are in the area of rotating machines. So either big generators or very high field magnets that are used in science applications. And so -- the interesting thing when we are at EUCAS, EUCAS this year was held in Geneva. And one of the benefits of being in Geneva is that we were able to go out and look at some of the things that are being done at CERN. And I don't think -- I think everybody knows that CERN is -- CERN is quite an operation and when you talk about the amount of wire -- so you talk about super high field magnets for scientific purposes and some people would think of that as a relatively niche sort of endeavor, but everything that CERN -- everything that CERN does is on a huge -- is on a huge, huge volume basis. So, yes it would be a one-off. But it would consume wire -- the wire that you could build for years. So it's a -- there are all kinds of applications. Again most of them are applications that are known, some are emerging. The work we're doing [with] Department of Energy to improve the performance in field will be very, very beneficial to us for a great number of those. And so we're very happy that we continue to show kind of best-in-class performance in the area of in field current carrying and we are really keen to maintain that lead and take it further.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [14]

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In terms of further customer outreach, now that you have these technical issues out of the way, do you have any plans to strengthen your sales organization and outreach effort? And a part 2 of that question is, when do you expect the meaningful results to come out from the sales effort and the current FCL customers as well?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [15]

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Well, I think the primary investment that we're making in personnel will, when you talk about sales, it's really primarily more of a customer support function than it is a sales function. So I guess I should say it's the customer support aspect of sales that will be the one that's the most important. These are all pretty large customers. We've been dealing with all of them for a good period of time. So as far as outreach and digging down in the organizations, frankly a lot of that's already been done. So I think the primary investment will be in the resource we will need to also make sure that we are pleasing the customer in all ways they need. As you get ready to ship wire in volume that the customer support aspect will be -- will rise to the top of things that need to be focused on. As far as meaningful revenue, it all comes down to the final approval and then getting that large order. I would say probably earliest that occurs is the first quarter of next year.

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Operator [16]

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(Operator Instructions) We will go next to [William Lap].

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Unidentified Analyst, [17]

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For the fault current limiter, our major customer that you shipped the wire, is that in testing right now? I remember they had to get a spot in their lab to do it. Is it already in process, the testing of the wire you shipped?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [18]

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I can't say whether it's being tested at this very moment, Bill. But I do -- I do know that we talked with the head of the organization and he had stated that it was -- that was high priority for him that he would get on it as quickly as he could. So I anticipate that it will be -- if it's not underway now, it will be underway shortly.

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Unidentified Analyst, [19]

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And the lab testing, do you think -- is that a 4 to 6-week once it starts? Do you have any timing on that?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [20]

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It's usually -- once it starts, it's usually a 2 to 4-week feedback loop.

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Unidentified Analyst, [21]

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Because then I remember after that once they -- it meets it, then you're going to ship them, I think within the next 60 days or 90 days, some additional samples before you get the big orders. Is that the way it works?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [22]

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That is the way that that customer has stated they will go forward, yes.

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Unidentified Analyst, [23]

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And when did you ship this to them? Is it within the last 3 -- 2 weeks?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [24]

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I'm not sure on the exact date, Bill. But it was sometime in the last couple of weeks.

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Unidentified Analyst, [25]

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That's good news. Could you define in-field more for me? I am a little -- on the definition of what you're after. In-field constitutes what? How would you define the in-field? [You mentioned that]

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [26]

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What in-field really means is that you are not -- you may be building a coil, but you're not building a coil large enough where it actually creates a strong magnetic field. So when you're building a coil for a motor or a magnet, you're wrapping the wire around itself and then when you put the current through the wire, the purpose, the exact purpose of the structure is to create a magnetic field. In a self-field environment, you're really -- you're just using the wire to carry current. You're not trying to create a magnetic field, nor are you creating a magnetic field. And the reason that's important is because one of the challenges with high temperature super conductors is that it is a balancing act. So -- because you can put a lot of current through a wire, when you build a magnet, you can create a lot of magnetic field. But the downside is that, the presence of a magnetic field actually impedes the ability of the superconductor to carry current. And so that's why it's important when you're dealing with the composition of the superconductor, you're trying to -- you're trying to remove or lessen the negative effect of that magnetic field on the ability of the wire to carry current. It's frankly one of the reasons, Bill, that we -- that it's -- our manufacturing technique allows us to fine tune the composition a little bit more than some of the other manufacturing techniques. And we believe that that's why we were able to demonstrate better current handling performance in the presence of that magnetic field than others. (inaudible)?

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Unidentified Analyst, [27]

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How far is the -- the magnetic field is a little way away though. I mean, in other words the FCL is the current, but before you'd get to the motors and the magnetic, that's a little bit away, isn't that, like 6 months to [1 year] away?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [28]

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Well, I think the big challenge with motors and magnets is that they just -- they consume a lot of wire. And so when you talk to -- when you talk to the customers who are interested in that space they want to build a -- they want to build big motors, big superconducting motors. But every one of those motors consumes 300 or 400 or 500 kilometers of wire. And so with the current industry capacity that would mean that if they bought everything in the industry that was available to them, they could build less than 10 motors annually. And that's not really that attractive to most of these big multi-billion dollar companies. So I'd say the volume -- the volume of wire production as an industry needs to be more robust before you really see the big motors and generators take off. But from our perspective, having somebody build a motor or a build a fusion device that utilizes our wire, again consume -- will consume a lot of capacity and we're happy to do that right now. But I think long -- that's really why the rotating machine, high field applications are more long term than the self-field just because its absolute demand and the volume is so high that the industry is not really ready for them.

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Unidentified Analyst, [29]

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But if it works, I mean all you have to do is put in more machines. I mean, you could put in 10 machines at your location right?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [30]

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We can put in a lot of machines at our existing location, yes.

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Operator [31]

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And at this time, I'd like to turn the call back to Mr. Quiram for any additional or closing remarks.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President & Director [32]

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Thank you. I would like to thank all of you very much for joining us today. And we look forward to speaking with you again on our next call. Good day.

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Operator [33]

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Thank you. And that does conclude today's conference. Thank you for your participation. You may now disconnect.