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SUPERCONDUCTOR TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) General
We are a leading company in developing and commercializing high temperature
superconductor ("HTS") materials and related technologies. Superconductivity is
the unique ability to conduct various signals or energy (e.g., electrical
current or radio frequency ("RF") signals) with little or no resistance when
cooled to "critical" temperatures. HTS materials are a family of elements that
demonstrate superconducting properties at temperatures significantly warmer than
previous superconducting materials. Electric currents that flow through
conventional conductors encounter resistance that requires power to overcome and
generates heat. HTS materials can substantially improve the performance
characteristics of electrical systems, reducing power loss, lowering heat
generation, and decreasing electrical noise.
Commercialization
Our development efforts over the last 25 years have yielded an extensive patent
portfolio as well as critical trade secrets, unpatented technology and
proprietary knowledge. We have commercialized wireless products using our
proprietary technology and are currently focusing our efforts on commercializing
this technology in superconducting power applications, RF filters and
cryocoolers.
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• Wireless Networks. Our current commercial products help maximize the
performance of wireless telecommunications networks byimproving the
quality of uplink signals from mobile wireless devices. Our products
increase capacity utilization, lower dropped and blocked calls, extend
coverage, and enable higher wireless data throughput - all while
reducing capital and operating costs for the carrier.
• Superconducting Power Applications. We are adapting our unique HTS
materials deposition techniques to deliver energy efficient,
cost-effective and high performance 2G HTS wire technology for next
generation power applications. We have identified several large
initial target markets for our 2G HTS wire including energy (wind
turbines, smart grid) and industrial (motors, generators)
applications. To accelerate development and manufacturing processes
for our 2G HTS wire, we are partnering with HTS industry leaders and
the United States National Labs. In July 2011, we renewed our three
year Cooperative Research and Development Agreement with Los Alamos
National Laboratory. These technological interchanges will help us
meet the technical challenges and performance metrics for both high
performance and cost effective 2G HTS wire.
• RF Filters. Our RF filter structures resemble a circuit on a
semiconductor using a circuit that is etched into HTSmaterials that
are deposited on a wafer. Our unique and innovative circuits allow us
to utilize the characteristics of the HTS materials for this
application, and we have developed unique tuning methods that allow us
to produce a frequency specific filter. We are also leveraging our
unique technology to design advanced reconfigurable filters, which
have the potential to drastically reduce the size and cost of mobile
devices.
• Cryocoolers. We developed a unique cryocooler that can efficiently and
reliably cool HTS circuits to the critical temperature (77 degrees
Kelvin), and as a result, our wireless products are maintenance free
and reliable enough to be deployed for many years.
Our development efforts can take a significant number of years to commercialize,
and we must overcome significant technical barriers and deal with other
significant risks.
Our Wireless Business
Our current revenue comes from the design, manufacture, and sale of high
performance infrastructure products for wireless communication applications. We
have three current product lines all of which relate to wireless base stations:
• SuperLink®, a highly compact and reliable receiver front-end HTS
wireless filter system to eliminate out-of-bandinterference for
wireless base stations, combining filters with a proprietary
cryogenic cooler and a cooled low-noise amplifier;
• AmpLink®, a ground-mounted unit for wireless base stations that
includes a high-performance amplifier and up to six dual duplexers;
and
• SuperPlex, a high-performance multiplexer that provides extremely
low insertion loss and excellent cross-band isolation designed to
eliminate the need for additional base station antennas and reduce
infrastructure costs.
We sell most of our current commercial products to a small number of wireless
carriers in the United States, including AT&T and Verizon Wireless. Verizon
Wireless and AT&T each accounted for more than 10% of our commercial revenues in
each of the last three years. Demand for wireless communications equipment
fluctuates dramatically and unpredictably and recently has been trending
downward. The wireless communications infrastructure equipment market is
extremely competitive and is characterized by rapid technological change, new
product development, product obsolescence, evolving industry standards and price
erosion over the life of a product. We expect these trends to continue and they
may cause significant fluctuations in our quarterly and annual revenues.
Our Strategic Initiatives
In addition to our ongoing sale of products for wireless applications described
above, we have created several unique capabilities and an HTS manufacturing
system related to a new HTS wire platform, RF filters and cryocoolers that we
are seeking to commercially deploy by leveraging our leadership in
superconducting technologies, extensive intellectual property, and HTS
manufacturing expertise.
HTS Wire Platform
Our 2G HTS wire product development is focused on large markets where the
advantages of HTS wire are recognized by the industry. Our initial product
roadmap targets three important applications: superconducting high power
transmission cable, superconducting fault current limiters (SFCL) and
superconducting rotating machines such as motors and generators.
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Superconducting High Power Transmission Cable:
Superconducting high power transmission and distribution cable transmit 5 to 10
times the electrical current of traditional copper or aluminum cables with
significantly improved efficiency. HTS power cable systems consist of the cable,
which is comprised of hundreds of strands of HTS wire wrapped around a copper
core, and the cryogenic cooling system to maintain proper operating conditions.
HTS superconducting cables offer solutions for utilities facing challenges that
include: substation footprint availability, lack of available rights of way, and
high load connections between substations. HTS power cables are particularly
suited to high load areas such as the dense urban business districts of large
cities, where purchases of easements and construction costs for traditional low
capacity cables may be cost prohibitive.
Superconducting Fault Current Limiter (SFCL):
With power demand on the rise and new power generation sources being added, the
grid has become overcrowded and vulnerable to catastrophic faults. Faults are
abnormal flows of electrical current like a short circuit. As the grid is
stressed, faults and power blackouts increase in frequency and severity. SFCLs
act like powerful surge protectors, preventing harmful faults from taking down
substation equipment by reducing the fault current to a safer level (20 - 50%
reduction) so that the existing switchgear can still protect the grid. SFCLs
protect against damaging fault currents and blackouts while enhancing system
safety, stability, and efficiency. A critical benefit for new build outs is the
improved system reliability when renewables, like solar and wind, are added.
When compared to a complete substation upgrade, SFCLs are a significantly lower
capital investment.
Superconducting Rotating Machines - Motors and Generators:
Superconducting motors, generators, turbines and other rotating machines are
expected to generate large future demand for 2G HTS wire. Coils utilizing HTS
wire will enable electric motors and generators to operate at much higher power
densities. When compared to a copper wire based electric machine with equivalent
output power, future superconducting motors and generators will enable
significant size reductions for the motors with higher efficiency. One potential
application for high-powered HTS generators is expected to be 10+ megawatt
offshore wind turbines. Offshore superconducting wind turbines promise to
capture clean energy at a lower cost than competing renewables, while delivering
power directly to growing coastal cities. Offshore superconducting wind turbines
are a long-term initiative for HTS technologies. Wind energy is taking shape as
a critical world resource for electric power. Today, wind energy is primarily
land based. The expected future trend is to exploit a largely untapped supply of
offshore wind energy. However, it will take time to build enough infrastructure
for offshore wind power to significantly contribute to the power grid.
Superconducting wind turbines are expected to play a unique role offshore since
conventional technology cannot achieve the necessary "power per tower". The
increase in power density provided by superconducting turbines significantly
reduces generator weight and maximizes power per tower, turning wind power into
an economically viable alternative. Size reduction translates directly to cost
savings by greatly reducing the amount of magnetic steel and structural steel
required. Superior 2G HTS wire power handling performance at a lower cost will
enable superconducting wire to replace incumbent and competing technologies.
RF Filters
Conventional RF filters are fabricated primarily from aluminum blocks with
hollow cavities, resonators, and tuning elements incorporated to make a
frequency specific filter. Our filter structures resemble a circuit on a
semiconductor using a circuit that is etched into HTS materials that are
deposited on a wafer. Our unique and innovative circuits allow us to utilize the
characteristics of the HTS materials for this application. We have also
developed unique tuning methods that allow us to produce a frequency specific
filter.
In July 2012 we announced we were contributing 14 patents regarding our
innovative Reconfigurable Resonance™ (RcR) technology, experienced executive
leadership and technical expertise as our minority investment in Resonant
LLC. Resonant intends to commercialize RcR for the mobile communication products
industry. The contributed patents do not relate to either our current wireless
business nor to our 2G HTS wire initiative.
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Cryocoolers
HTS circuits need to be cooled to the critical temperature that enables the
superconducting properties of the materials to be utilized. To meet this need,
we developed a unique cryocooler that can efficiently and reliably cool the
circuit to the critical temperature (77 degrees Kelvin). As a result, our
wireless products are maintenance free and reliable enough to be deployed for
many years.
Results of Operations
Quarter and six months ended June 30, 2012 compared to the quarter and six
months ended July 2, 2011
Net revenues decreased by $520,000 or 47%, to $596,000 in the second quarter of
2012 from $1.1 million in the second quarter of 2011. Total net revenues
decreased by $1.7 million, or 64%, to $995,000 in the first six months of 2012
from $2.7 million in the same period of 2011. Net revenues consist primarily of
commercial product revenues and government contract revenues.
Net commercial product revenues decreased by $572,000, or 52%, to $529,000 in
the second quarter of 2012 from $1.1 million in the second quarter of 2011. The
decrease is the result of lower sales volume for our SuperLink products. For the
first six months of 2012, net commercial revenue decreased to $873,000 from $2.7
million in the same period of 2011, a decrease of $1.8 million, or 68%. The
decrease in the six month period was the result of lower sales of both our
SuperLink and AmpLink products. We sell our SuperLink and other performance
enhancement products to large North American wireless operators. As our
customers continue to invest in 4G networks, spending on 3G data networks, where
our products are deployed, has become a secondary priority. This market dynamic
has impacted and we believe will continue to impact our commercial revenue. The
average sales prices for our products were unchanged. Our three largest
customers accounted for 95% of our total net commercial product revenues in the
first six months of 2012 and 99% in the same period of 2011. These customers
generally purchase products through non-binding commitments with minimal
lead-times. We also continue to experience challenges to revenue growth in the
commercial wireless market. Consequently, our commercial product revenues can
fluctuate dramatically from quarter to quarter based on changes in our
customers' capital spending patterns, and revenues may continue to be impacted
by such challenges.
Government contract and other revenues increased by $52,000 from $15,000 in the
second quarter of 2011 to $67,000 in the second quarter of 2012. For the first
six months of 2012, government contract revenues increased to $122,000 from
$32,000, an increase of $90,000, or 281%. This increase is attributable to the
addition of two small government contracts procured in early 2012.
Cost of commercial product revenues includes all direct costs, manufacturing
overhead and provision for excess and obsolete inventories. The cost of
commercial product revenues decreased to $1.1 million in the second quarter of
2012 compared to $1.3 million for the second quarter of 2011, a decrease of
$187,000 or 15%. For the first six months of 2012, the cost of commercial
product revenues totaled $1.9 million compared with $2.9 million for the first
six months of 2011, a decrease of $1.0 million, or 34%. The lower costs resulted
principally from lower production as a result of lower sales. We had an expense
provision for obsolete inventories in the first half of 2012 of $182,000
compared to no expense provision in the first half of 2011.
Our cost of commercial sales includes both variable and fixed cost components.
The variable component consists primarily of materials, assembly and test labor,
overhead, which includes equipment and facility depreciation, transportation
costs and warranty costs. The fixed component includes test equipment and
facility depreciation, purchasing and procurement expenses and quality assurance
costs. Given the fixed nature of such costs, the absorption of our production
overhead costs into inventory decreases and the amount of production overhead
variances expensed to cost of sales increases as production volumes decline
since we have fewer units against which to absorb our overhead costs.
Conversely, the absorption of our production overhead costs into inventory
increases and the amount of production overhead variances expensed to cost of
sales decreases as production volumes increase since we have more units against
which to absorb our overhead costs. As a result, our gross profit margins
generally decrease as revenue and production volumes decline due to lower sales
volume and higher amounts of production overhead variances expensed to cost of
sales; and our gross profit margins generally increase as our revenue and
production volumes increase due to higher sales volume and lower amounts of
production overhead variances expensed to cost of sales.
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The following is an analysis of our commercial product gross loss:
Dollars in thousands Three Months Ended Six Months Ended
June 30, 2012 July 2, 2011 June 30, 2012 July 2, 2011
Net commercial product sales $ 529 100 % $ 1,101
100 % $ 873 100 % $ 2,704 100 %
Cost of commercial product sales 1,078 204 % 1,265
115 % 1,922 220 % 2,934 109 %
Gross loss $ (549 ) (104 )% $ (164 ) (15 )% $ (1,049 ) (110 )% $ (230 ) (9 )%
We had a gross loss of $549,000 in the second quarter of 2012 from the sale of
our commercial products compared to a gross loss of $164,000 in the second
quarter of 2011. We experienced a gross loss in the second quarters of 2012 and
2011 because the level of commercial sales was insufficient to cover our fixed
manufacturing overhead costs. We regularly review inventory quantities on hand
and provide an allowance for excess and obsolete inventory based on numerous
factors including sales backlog, historical inventory usage, forecasted product
demand and production requirements for the next twelve months. Gross margin in
the second quarters and first six months of 2012 and 2011 was not impacted by
the sale of previously written-off inventory.
Cost of government and other contract revenues totaled $43,000 in the second
quarter of 2012 compared to $15,000 in the second quarter of 2011 and $95,000 in
the first half of 2012 compared to $30,000 in the first half of 2011. This
increase was the result of higher expenses associated with more revenue from
government contracts. Because these contracts are generally priced on a "cost
plus" basis, increases in revenue generally result in increases in associated
costs. As a percentage of government and other contract revenues, these costs
decreased to 78% in the first half of 2012 compared to 99% in the first half of
2011 because of the cost plus nature of the contracts.
Research and development expenses relate principally to development of our HTS
wire products and other products related to our expertise. These expenses
totaled $1.3 million and $2.5 million, respectively, in the three and six months
ended June 30, 2012 compared to $1.4 million and $3.3 million in the three and
six month period ended July 2, 2011. These expenses were $0.8 million higher in
the prior six month period when we voluntarily terminated a patent license we
had with a third party along with certain other related intangible assets. As a
result, capitalized cost was charged to expense during the six months ended
July 2, 2011.
Selling, general and administrative expenses totaled $1.6 million and $3.0
million, respectively, in the three and six months ended June 30, 2012 compared
to $1.7 million and $3.3 million in the three and six months ended July 2, 2011.
The reduction was primarily from lower sales expenses.
Interest income for the three and six months ended June 30, 2012 was $3,000 and
$5,000 respectively compared to $2,000 and $4,000, respectively, in the three
and six months ended July 2, 2011. The increases resulted from higher interest
rates in the 2012 periods.
There was no interest expense for the three and six months ended June 30, 2012.
Interest expense for the three and six months ended July 2, 2011 was $7,000 and
$14,000, respectively, and was the result of our line of credit with a bank. We
had not used the line of credit in a number of years and allowed it to expire in
2011.
We had a net loss of $3.4 million for the quarter ended June 30, 2012, compared
to a net loss of $3.2 million in the same period of 2011. For the six months
ended June 30, 2012 our loss totaled $6.4 million compared to a net loss of $6.9
million for the six months ended July 2, 2011.
The net loss available to common stockholders totaled $0.09 per common share in
the second quarter of 2012, compared to a net loss of $0.10 per common share in
the same period of 2011. The net loss available to common stockholders totaled
$0.17 per common share in the first half of 2012 compared to $0.22 per common
share in the first half of 2011.
Liquidity and Capital Resources
Cash Flow Analysis
As of June 30, 2012, we had working capital of $5.6 million, including $5.4
million in cash and cash equivalents, compared to working capital of $7.2
million at December 31, 2011, which included $6.2 million in cash and cash
equivalents. We currently invest our excess cash in short-term,
investment-grade, money-market instruments with maturities of three months or
less.
Cash and cash equivalents decreased by $0.8 million from $6.2 million at
December 31, 2011 to $5.4 million at June 30, 2012. Cash was provided by
financing activities offset by uses in operations and by purchases of property
and equipment.
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Cash used in operations totaled $5.5 million in the first six months of 2012. We
used $5.4 million to fund the cash portion of our net loss. We also used cash to
fund a $337,000 increase in accounts receivable and patents, offset by cash
provided by a $420,000 decrease in inventory and other assets, as well as an
increase in accounts payable and accrued expenses.
Net cash used in investing activities totaled $1.8 million in the first six
months of 2012. Purchases of equipment for our HTS wire initiative were $1.8
million and $37,000 was provided by equipment sales. In the first six months of
2011, we used $647,000 to purchase property and equipment and there were no
equipment sales.
We used $134,000 in financing activities in the first six months of 2012
compared to $303,000 in the first six months of 2011 to repurchase common shares
from our employees to satisfy tax withholding obligations that arose upon the
vesting of restricted stock awards.
Financing Activities
We have historically financed our operations through a combination of cash on
hand, cash provided from operations, equipment lease financings, available
borrowings under bank lines of credit and both private and public equity
offerings.
Net cash provided by financing activities through June 30, 2012 totaled $6.6
million, net of $582,000 in expenses. The financing was from two activities: the
registered direct sale of 6,711,219 shares of common stock at $1.05 per share in
February 2012 and at-the-market sales to or through Citadel Securities of 97,372
shares of common stock at an average price of $1.60 per share in January and
early February 2012. These financing activities were slightly offset in the
first six months of 2012 by the $134,000 used to repurchase shares from our
employees to satisfy tax withholding obligations mentioned above.
Contractual Obligations and Commercial Commitments
We have not had any material changes outside of the ordinary course of business
in our contractual obligations as disclosed in our Annual Report on Form 10-K
for 2011.
Capital Expenditures
We plan to invest approximately $2.1 million in fixed assets during the
remainder of 2012. This $2.1 million and the $1.9 million already spent in the
first six months of 2012 are for the purchase of equipment and facilities
improvements for our HTS wire initiative. There have been no fixed asset
expenditures in the six months ended June 30, 2012, and we do not plan any
additional fixed asset expenditures in 2012 for our existing wireless business.
Future Liquidity
For the first six months of 2012, we incurred a net loss of $6.4 million and had
negative cash flows from operations of $5.5 million. In the full 2011 year, we
incurred a net loss of $13.4 million and had negative cash flows from operations
of $10 million. Our independent registered public accounting firm has included
in their audit reports for 2011 and 2010 an explanatory paragraph expressing
doubt about our ability to continue as a going concern.
At June 30, 2012, we had $5.4 million in cash and cash equivalents. We believe
our cash resources will not be sufficient to fund our business for at least the
next twelve months. We believe the key factors to our liquidity will be our
ability to successfully use our expertise and our technology to generate
revenues in various ways, including commercial operations, government contracts,
joint ventures and licenses and we plan to leverage our leadership in
superconducting technologies, extensive intellectual property, and HTS
manufacturing expertise to develop and produce HTS wire. Because of the
uncertainty of these factors, we will need to raise funds to meet our working
capital needs. If we require additional financing, we cannot assure you that
additional financing will be available on acceptable terms or at all. If we
issue additional equity securities to raise funds, the ownership percentage of
our existing stockholders would be reduced. New investors may demand rights,
preferences or privileges senior to those of existing holders of common stock.
If we cannot raise any needed funds, we might be forced to make further
substantial reductions in our operating expenses, which could adversely affect
our ability to implement our current business plan and ultimately our viability
as a company.
Net Operating Loss Carryforward
As of December 31, 2011, we had net operating loss carryforwards for federal and
state income tax purposes of approximately $308.4 million and $181.5 million,
respectively, which expire in the years 2012 through 2031. However, during 2011
we concluded that under the Internal Revenue Code change of control limitations,
a maximum of $94.4 million and $70.2 million, respectively, would be available
for reduction of taxable income and reduced both the deferred tax asset and
valuation allowance accordingly. Due to the uncertainty surrounding their
realization, we recorded a full valuation allowance against our net deferred tax
assets. Accordingly, no deferred tax asset has been recorded in the accompanying
condensed consolidated balance sheets.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our historical financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with GAAP. The preparation of these condensed
consolidated financial statements in conformity with those principles requires
us to make estimates of certain items and judgments as to certain future events
including, for example, those related to bad debts, inventories, recovery of
long-lived assets (including intangible assets), income taxes, warranty
obligations, and contingencies. These determinations, even though inherently
subjective and subject to change, affect the reported amounts of our assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. While we believe that our estimates are based on reasonable
assumptions and judgments at the time they are made, some of our assumptions,
estimates and judgments will inevitably prove to be incorrect. As a result,
actual outcomes will likely differ from our accruals, and those differences -
positive or negative - could be material. Some of our accruals are subject to
adjustment, as we believe appropriate, based on revised estimates and
reconciliation to the actual results when available.
In addition, we identified certain critical accounting policies which affect
certain of our more significant estimates and assumptions used in preparing our
consolidated financial statements in our Annual Report on Form 10-K for 2011. We
have not made any material changes to these policies.
Backlog
Our commercial backlog consists of accepted product purchase orders with
scheduled delivery dates during the next twelve months. We had commercial
backlog of $231,000 at June 30, 2012, compared to $13,000 at December 31, 2011.
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