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SCON > SEC Filings for SCON > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for SUPERCONDUCTOR TECHNOLOGIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SUPERCONDUCTOR TECHNOLOGIES INC


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 and cryogenic coolers using our proprietary technology and are currently focusing our efforts on this technology in superconducting power applications.

• Wireless Communications. Our current commercial products help maximize the performance of wireless telecommunications networks by improving 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.

• 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.


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• Electric Power Utilities. As discussed above, 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, cables, fault current limiters) and industrial (motors, generators) applications. We are partnering with HTS industry leaders to accelerate our development and manufacturing processes for our 2G HTS wire.

Our development efforts (including those described under "Our Strategic Initiatives" below) can take a significant number of years to commercialize, and we must overcome significant technical barriers and deal with other significant risks, some of which are set out in our public filings, including in particular the "Risk Factors" included in Item 1A of this Report.

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-band interference 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. As a result of this downward trend, we have managed our inventory to historically low levels, which may result in longer delivery lead times, which may not be acceptable to our customers. If this downward trend continues we may be compelled to refocus our manufacturing away from wireless products altogether. As we transform the company into a HTS wire manufacturer, we continue to evaluate the various options available for our wireless business. Our commercial operations are subject to a number of significant risks, some of which are set out in our public filings, including in particular the "Risk Factors" included in Item 1A of this Report.

Our Strategic Initiatives

In addition to our ongoing sale of products for wireless applications described above, we have created several unique capabilities and a HTS manufacturing system related to a new HTS wire platform, 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.

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 100's 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, low efficiency conventional cables, environmental issues related to aging oil filled cables 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.


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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 a 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 supporting 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. And 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.

Advanced RF Filters for mobile communications

In July 2012, we contributed 14 issued and pending patents regarding our innovative Reconfigurable Resonance™ (RcR) technology, limited use of our Santa Barbara facility, experienced executive leadership and technical expertise as our minority investment in Resonant LLC. Resonant will require financing in order to commence active development, and is currently exploring financing options and there is no assurance as to whether Resonant will obtain the necessary financing.

Other Assets and Investments

From time to time we may pursue joint ventures with other entities to commercialize our technology. As of December 31, 2012 and March 30, 2013, our interest in Resonant LLC was 30%, and the net value of the assets contributed, which is estimated to approximate fair value, was $423,000 and $241,000, respectively. We have accounted for this investment using the equity method, and for the period ending March 30, 2013 we incurred an inception to date expense of $182,000. This unaudited amount, which was recently reported to us, is the sum of $70,000 for the three month period ended March 30, 2013 and $112,000 for the period since Resonant LLC's inception to December 31, 2012. 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.

In 2007, we formed a joint venture with Hunchun BaoLi Communication Co. Ltd. ("BAOLI") to manufacture and sell our SuperLink interference elimination solution in China. We use the equity method of accounting for our 45 percent joint venture interest. The joint venture agreement called for our joint venture partner to supply the capital and local expertise, and for us to provide a license of certain technology and supply key parts for manufacturing. Since 2007, we have been conducting lab and field trials in the existing China 2G market using our TD-SCDMA and SuperLink solutions. Although those activities continue, the parties have not completed their contributions to the joint venture, including most of the funding and our license, within the two year period specified by the agreement and Chinese law. The future of the joint venture, including any commencement of manufacturing and the transfer of our processes, will depend on product demand in China, completion of funding by our joint venture partner, as well as a number of other conditions, including certain critical approvals from the Chinese and United States governments. There continues to be no assurance that these conditions will be met and even if these conditions are met and the approvals received, the results from our joint venture will be subject to a number of significant risks associated with international operations and new ventures, some of which are set forth in our public filings, including in particular the "Risk Factors" included in Item 1A of this Report.


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Results of Operations

Quarter Ended March 30, 2013 compared to the Quarter Ended March 31, 2012

Net revenues increased by $377,000, or 94%, to $776,000 in the first quarter of 2013 from $399,000 in the first quarter of 2012. Net revenues consist primarily of commercial product revenues and government contract revenues.

Net commercial product revenues increased by $432,000, or 126%, to $776,000 in the first quarter of 2013 from $344,000 in the first quarter of 2012. The increase is the result of higher sales volume for all of our 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. Even though our sales have improved in the current period, we believe this market dynamic will continue to impact our commercial revenue. Sales prices for our products were essentially unchanged. Our three largest customers accounted for 99% of our total net commercial product revenues in the first quarter of both 2013 and 2012. 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.

We had no government contract and other revenues in the current period compared to $55,000 in the first quarter of 2012. This decrease is attributable to the completion of two minor contracts in 2012 and our current use of our relatively fixed engineering resources for our HTS wire research and development.

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 $226,000 in the first quarter of 2013 compared to $844,000 for the first quarter of 2012, a decrease of $618,000 or 73%.

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 to absorb our overhead costs against. 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 to absorb our overhead costs against. 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.

The following is an analysis of our commercial product gross profit and margins:

                                                       For the quarters ended
                                              March 30, 2013            March 31, 2012
                                                       (Dollars in thousands)
   Net commercial product sales             $   776       100.0 %    $  344         100.0 %
   Total cost of commercial product sales       226          29 %       844         245.3 %

   Gross profit (loss)                      $   550          71 %    $ (500 )      (145.3 %)

We had a gross profit of $550,000 in the first quarter of 2013 from the sale of our commercial products compared to a gross loss of $500,000 in the first quarter of 2012. We experienced a gross profit in the first quarter of 2013 due to higher sales, the reduction of warranty reserves, reduced manufacturing use of our facilities and the sale of $300,000 of previously reserved inventory. In first quarter of 2013 we also had no provision for obsolete inventories expense compared to $92,000 in the first quarter of 2012. The loss in 2012 was 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, and forecasted product demand and production requirements for the next twelve months.

There was no cost of government and other contract revenues in the first quarter of 2013 compared to $52,000 in the first quarter of 2012. Because these contracts are generally priced on a "cost plus" basis, increases in revenue generally result in increases in associated costs. There were no government and other contract sales or costs in the first quarter of 2013. Costs were 95% of government and other contract revenues in the first quarter of 2012.


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Research and development expenses relate to development of new wire products and new wire products manufacturing processes. Total expenses totaled $1,438,000 in the first quarter of 2013 compared to $1,161,000 in the same quarter of 2012, an increase of 24%. The increase is the result of increased efforts for improving the manufacturability of our new HTS wire products.

Other expense of $182,000 in the first quarter of 2013 was our share of the results of operations of our joint venture with Resonant LLC. This unaudited amount, which was recently reported to us, is the sum of $70,000 for the three month period ended March 30, 2013 and $112,000 for the period since Resonant LLC's inception to December 31, 2012.

Selling, general and administrative expenses were $1.3 million in both the first quarter of 2013 and 2012.

Interest income was $1,000 in the first quarter of 2013 and $2,000 in the first quarter 2012.

We had a net loss of $2.4 million for the quarter ended March 30, 2013, compared to a net loss of $3.0 million in the first quarter of 2012.

The net loss available to common stockholders totaled $0.58 per common share in the first quarter of 2013, compared to a net loss of $1.01 per common share in the first quarter of 2012.

Liquidity and Capital Resources

Cash Flow Analysis

As of March 30, 2013, we had working capital of $1.1 million, including $1.7 million in cash and cash equivalents, compared to working capital of $3.1 million at December 31, 2012, which included $3.6 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 $1.9 million from $3.6 million at December 31, 2012 to $1.7 million at March 30, 2013. Cash was principally used in operations, and to a less extent, for the purchase of property and equipment.

Cash used in operations totaled $1.8 million in the first quarter of 2013. We used $1.8 million to fund the cash portion of our net loss. We also used cash to fund a $0.3 million increases in accounts receivable, inventory and patents and licenses. These uses were offset by a $0.3 million decrease provided by a reduction in prepaid expenses and other assets, and increases in accounts payable, accrued expenses and other liabilities.

Net cash used in investing activities totaled $172,000 in the first quarter of 2013. Purchases of equipment for our HTS wire initiative were $178,000 and $6,000 was provided by equipment sales. In the first quarter of 2012, $966,000 was used to purchase property and equipment and there were $15,000 in equipment sales.

There was no financing activity in the first quarter of 2013. First quarter of 2012 common stock sales of $6.6 million were offset by $129,000 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.

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 2012.

Capital Expenditures

We invested $178,000 for fixed assets in the first quarter of 2013. We plan to invest approximately $3.0 million in fixed assets during the remainder of 2013. These amounts, and the $3.6 million spent in 2012, and placed into service in the current period, are for the purchase of equipment and facilities improvements for our HTS wire initiative. We do not plan any additional fixed asset expenditures in 2013 for our existing wireless business.

Future Liquidity

For the quarter ended March 30, 2013, we incurred a net loss of $2.4 million and had negative cash flows from operations of $1.8 million. In the full 2012 year, we incurred a net loss of $10.9 million and had negative cash flows from operations of $8.2 million. Our independent registered public accounting firm has included in its audit reports for 2012 and 2011 an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.


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At March 30, 2013, we had $1.7 million in cash and cash equivalents and in a registered direct offering completed April 26, 2013 we raised proceeds of $1.95 million, net of offering costs of $236,000, from the sale of 513,827 shares of common stock and an equal number of warrants. We believe our current cash resources and these recently raised proceeds will not be sufficient to fund our business for the next twelve months. We believe the key factors to our future liquidity will be our ability to successfully use our expertise and our technology to generate revenues in various ways, including commercial operations, joint ventures, 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 expected timing and uncertainty of these factors, we will need to raise funds to meet our working capital needs.

Additional financing may not 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, 2012, we had net operating loss carryforwards for federal and state income tax purposes of approximately $311.9 million and $192.1 million, respectively, which expire in the years 2013 through 2032. However, during 2012, we concluded that under the Internal Revenue Code change of control limitations, a maximum of $105.7 million and $80.9 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 balance sheets.

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 accounting principles generally accepted in the United States. 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.

On March 11, 2013, we effected a 1-for-12 reverse stock split of our common stock, or the Reverse Stock Split. As a result of the Reverse Stock Split, every twelve shares of our pre-Reverse Stock Split common stock were combined and reclassified into one share of our common stock. The Reverse Stock Split did not change the authorized number of shares or the par value of our common stock. Certain of the information contained in the documents incorporated by reference herein and therein present information on our common stock on a pre-Reverse Split basis. Share and per share data included herein has been retroactively restated for the effect of the reverse stock split. 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 2012. 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 $235,000 at March 30, 2013, compared to $313,000 at December 31, 2012.

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