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Edited Transcript of SCON earnings conference call or presentation 13-Nov-18 4:00pm GMT

Q3 2018 Superconductor Technologies Inc Earnings Call

SANTA BARBARA Jan 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Superconductor Technologies Inc earnings conference call or presentation Tuesday, November 13, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey A. Quiram

Superconductor Technologies Inc. - President, CEO & Director

* William J. Buchanan

Superconductor Technologies Inc. - CFO, Principal Financial & Accounting Officer and VP

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Conference Call Participants

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* Sameer S. Joshi

H.C. Wainwright & Co, LLC, Research Division - Associate

* Steven Kruger

* Moriah Shilton

LHA Investor Relations - SVP

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Presentation

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Operator [1]

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Good day, and welcome to the Superconductor Technologies Third Quarter 2018 Conference Call. Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Moriah Shilton of LHA. Please go ahead.

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Moriah Shilton, LHA Investor Relations - SVP [2]

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Thank you, Derrick. Good morning, and thank you for joining us for STI's 2018 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, and then I will turn the call over to Jeff.

Various comments regarding management's beliefs, expectations and plans for the future are forward-looking statements and are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and are subject to various risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ from those expressed in the forward-looking statements, and those differences could be material. Forward-looking statements can be affected by many other factors, including those described in the Risk Factors and the MD&A sections of STI's 2017 Annual Report on Form 10-K. These documents are available online at STI's website, www.suptech.com, or through the SEC's website, www.sec.gov. Forward-looking statements are based on information presently available to senior management, and STI has not assumed any duty to update any forward-looking statements. Jeff will begin 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 the call for Q&A.

And now I would like to turn the call over to Jeff.

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

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Thank you, Moriah, and good morning, everyone. In the third quarter, we generated $517,000 in revenue related to our Next Generation Electric Machines or NGEM project with the U.S. Department of Energy. STI is the prime for the program with our partners TECO Westinghouse Motor Company, Massachusetts Institute of Technology and the University of North Texas. Since our work began in June of last year, we have recorded approximately $2 million in government contract revenues.

In the third quarter, we also successfully completed our planned optimization of our Conductus wire for high-performance magnet applications. We have demonstrated a 2x performance improvement since the beginning of this focused R&D effort in June of 2017. This significant improvement in Conductus wire allows our customers to design and build new devices that deliver higher performance and improved efficiency while also reducing the size and weight of the device.

As a leader in the development of 2G HTS wire, our materials are uniquely positioned for magnet applications. Our Conductus wire utilizes 3 elemental metals for the superconducting layer, the rare earth compound, along with barium and the copper. HTS compounds are the only materials known to man that can construct the low-energy consumption magnet while delivering the very high fields required by these next-generation magnet applications. With strong forecasted demand from commercial customers we continue to believe magnet applications will be the largest addressable market for our technology going forward.

With our Conductus magnet wire now meeting critical current performance requirements, our customers orders have transitioned from sample lengths to thousands of meters. In fact, a clear message received from our meetings with customers at the Applied Superconductivity Conference last week is that the industry needs NGEM wire for multiple applications now. Companies are forecasting significant demand in the near term. This demand is aligned with several accelerating energy megatrends, decentralized renewable energy, high-energy efficiency and sustainable transportation as we first discussed in March of 2018.

One example of the expected growth. According to Navigant Consulting, on a 5-year basis, from 2015 to 2019, distributed energy resources in the United States are growing almost 3x faster than traditional centralized generation. In order to accelerate the time to market of our Conductus wire with these new enhancements, we conducted our R&D efforts utilizing our production systems. The specifications for this high-performance magnet wire have been integrated into our design and have been adopted into our manufacturing process.

We completed the transition from R&D to production in Q3 of 2018. In Q4, we plan to further integrate production enhancements designed to provide improved process control to maximize yield. It's anticipated that the production machine upgrades will be completed in December 2018. We are currently in discussions with our customers to secure significant initial orders and supply agreements as we refine our build plan for 2019.

Our initial ramp plan takes us into production, delivering thousands of meters in Q1 2019 with a plan for meaningful commercial revenues in second half of the year. In addition to our commercial work, the second budget period for our DOE project is expected to begin shortly, where we will be focused on producing components for a 5,000-horsepower motor utilizing our Conductus wire.

As we are focused on moving to production of our commercial magnet wire, we anticipate starting Phase 2 of our project late in Q1 or early Q2 of 2019, with an initial focus on methods to improve yield. The goal of the 3-year project is to improve performance of Conductus wire to 1,440 amps, operating at 65 kelvin in a 1.5-tesla field and reducing cost by improving yield.

Our enhanced Conductus wire is also well positioned to meet the needs of new high-field, low-temperature applications, including NMR, proton accelerators, particle accelerators and fusion devices. These applications operate at magnetic fields above 20 tesla and temperatures between 4 kelvin and 50 kelvin. These new devices are expected to use significant amounts of 2G HTS wire to construct magnets utilized to trap or guide high levels of energy.

Fusion devices are of particular interest of late with exciting new advancements in project plans for fabrication of fusion machines. These efforts over the next few years are anticipated to require hundreds of kilometers of 2G HTS wire, beginning in 2019, moving to thousands of kilometers of wire in 2021 and beyond.

Promise of fusion devices is the development of a revolutionary way to produce energy in a clean, environmentally friendly way that is highly efficient and extremely low cost. Companies focused on developing these fusion machines have received strategic investments from such visionaries as Bill Gates and Jeff Bezos along with innovative electric flow grid operators. We look forward to working with fusion developers around the world as they begin selecting 2G HTS wire suppliers that can deliver the desired volumes of high-performance wire.

Before I turn the call over to Bill, I wanted to reinforce that our team is focused on transitioning from being a leader in the development of high-performance magnet wire to the large-scale manufacture of 2G HTS wire that meets industry needs. Our goals are aligned with DOE targets as they focus on improving U.S. competitiveness in superconducting technologies manufactured in the United States.

Now Bill will provide a review the financials. Bill?

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

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Thank you, Jeff. In our third quarter, revenue was $517,000, which consisted entirely of our government contract revenues, compared to $130,000 in commercial product revenues in the year ago quarter.

Total R&D expenses amounted to $665,000 and were $766,000 in the prior year quarter. SG&A expenses were $1 million compared to $1.1 million in the year ago quarter. After adjusting for our per share data for the 1-for-10 reverse stock split we completed on July 24, 2018, net loss for the third quarter was $2.2 million or a loss of $0.88 per share compared to a net loss of $2.5 million or a loss of $2.34 per share in the prior year quarter.

On to the balance sheet. On July 30, we completed a public offering with net proceeds of $7.98 million. As of September 29, we had $7.6 million in cash and cash equivalents. In the first 9 months of 2018, $5.1 million was used to fund our operations and $100,000 was provided by net changes in our working capital. 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 2018.

In the next few weeks, we will be renewing our S-3 shelf registration statement. Our last S-3 registration statement expired in March 2018. We have no current plans to raise additional funds.

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'll take our first question from Sameer Joshi with H.C. Wainwright.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [2]

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Just a clarification. You mentioned 2 projects in 1Q '19 and 2Q '19 to improve yields. Is this related to the fusion devices or is this related to something else?

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

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Well, the move to improve yields, Sameer, is not really focused on any one particular application. It's more of an overall focus on improving the -- well, the profitability of wire. So I mean, I think as we've talked about in the past, the actual BOM content in the superconducting wire is relatively low in -- as a percentage. And so it's all a function of how much yield you can get every run and that the higher the yield, the higher the profitability. So yield is kind of an across-the-board sort of focus that will provide benefits to all applications not really focused on any one. But the -- one of the key elements of the DOE project was the government really looking for attempts to try to make that yield numbers better so that again, profitability is better and ultimately, that will then translate in the ability to sell the price at -- to sell the wire at a more competitive price, which then enables more applications to utilize the wire. So it's just kind of a cycle that will continue. So I would say efforts to improve yield will never really stop. It will be an ongoing focus for as long as I can foresee.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [4]

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Right, right. So is this the same as the DOE second stage? The other [project], does that coincide with the DOE second stage of funding?

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

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Well, it's certainly an aspect -- it's an aspect of the -- of year 2. So when we -- the DOE program really was 3 things. It was in 3 periods. The first year was really focused on improving the performance of the wire and looking at -- and doing experiments where you were trying to change the structure of the superconducting material so that it would carry more current in the presence of a magnetic field. So that was the primary focus of year 1. Year 2, the focus is it shifts to trying to improve yield of the wire that you -- the recipe that you've now developed to increase performance while also providing wire to our partners that are then using the wire to build -- to begin to build the devices that will go into the motors. And then year 3 is to then go forward and actually produce a kind of a pilot device that will demonstrate the ability of that wire to meet the requirements. So yes, working on yield is part of what the DOE project was put in place for. And I guess, the good news is all is -- to us has been that it's very synergistic with work we were going to be doing or that we would need to do it in any event and it just allows us to accelerate the work in that -- in those areas.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [6]

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Understood now. Okay, got it. In terms of your ramping up or rather building up inventory, what level of inventory are you targeting for these orders that you expect next year?

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

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Well, I think what will probably end up happening, Sameer, I mean, we have pretty significant number of orders in-house now. And I think that -- I don't know that we'll ever really be building much inventory, I guess, is the way I want to respond. I think the view on it right now is that we'll probably be shipping wire as quickly as we can build it is really the focus. So our focus at the moment is not to necessarily build inventory. It's to get the wire coming off of the machine in a more regular manner at higher yields and at consistent performance. So that's the focus. And as soon as you get wire that meets the needs of any customer that we have existing order for, we're shipping it.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [8]

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Understood, okay. So in terms of the discussions that you are currently having with multiple potential customers, can you give as qualitative as well as quantitative requirements from that customer, like what kind of applications and what level of wire -- what kilometers of wire do they expect?

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

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Well, most of the requirements are for the magnet wire that we've been working on, so the wire that is suitable for use with magnet applications. So in general, that's the type of wire that we're talking to -- the majority of the customers that are looking to make significant purchases going forward in the next year or so. Today, we received orders in kilometer lengths. And I would say the view right now is that many of the orders that are being talked about are in the high double digit to mid-triple-digit kilometer sort of orders. So very significant orders from our perspective. Certainly, when you start getting into the hundreds of kilometers of wire that needs to be produced, that will certainly then transition our, well, our focus and our -- the progress we need to make into really running those production machines regularly and getting a lot of wire off them, so -- but that's the sort of size that many of the customers are talking about.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [10]

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Okay. So in relation to that, do you expect any additional products and assets to be enlisted in -- or any additional personnel being hired over the next few quarters?

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

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I missed that a little bit, Sameer. Any additional personnel, is that what you said?

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [12]

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Yes. Yes, any OpEx and CapEx requirements basically over the next few quarters?

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

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Well, as we ramp production, we will certainly be hiring more production workers. And that, of course, will -- tends to show up in the cost of goods sold category. So the goal is not to -- is only related -- is sort of expenses that will flow in that way. There are a few capital -- relatively small capital purchases that need to be made. But I would say that we're not really focused on making large capital purchases until we start moving into the next set of production equipment, and we're not really ready to do that yet. So any -- there may be a small increase in capital spending, but it won't be significant, at least not in the short term. Now our goal would for us to be -- our goal would be to -- we have so many orders in place that we definitely need to begin to ramp capacity beyond what we have in our adjusted capital. And at that point, we would be happy to go out and start investing more capital, but we haven't made those decisions yet. So I just want to be -- make sure I'm clear on that.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [14]

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No, no, that is clear. Just one last clarification. Most of your third quarter revenues were from the DOE project, and the next stage is not expected until next year. So would your fourth quarter revenues -- are there any other fourth quarter revenues from DOE?

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

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I -- well, Bill, you might be able to know if there's any revenues that actually flowed into the fourth quarter. I would say they're not significant revenues. But Bill, would you respond to that?

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William J. Buchanan, Superconductor Technologies Inc. - CFO, Principal Financial & Accounting Officer and VP [16]

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Yes. It won't be as high as the third quarter, but there are some government revenues that's coming in the fourth quarter, yes.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [17]

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But we haven't really launched the year 2 budget period. So there will be -- until that happens, you'll see the revenues go down a little bit.

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Operator [18]

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Our next question comes from [William Lapp], a private investor.

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Unidentified Participant, [19]

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I think, Bill, if you want to clarify, I think you said there would -- the revenues, the cash would last through the third quarter of 2018. You meant 2019, didn't you?

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William J. Buchanan, Superconductor Technologies Inc. - CFO, Principal Financial & Accounting Officer and VP [20]

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2019, yes.

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Unidentified Participant, [21]

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Okay, just want to clarify that. So you're burning at about $1.7 million a quarter, it looks like, based on your $5.1 million. Jeff, you talked about these production and these orders. But I'm trying to understand, when are you going to start selling stuff and make -- and producing revenue? I mean, you say you got these orders for thousands. So when do you expect, in quarter 1, quarter 2, do you expect to be producing revenue from the sales other than -- what kind of sales are you talking about? These -- all these orders they want, what’s going to come out in the revenues in quarter 1 and quarter 2?

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

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We are expecting to ship wire in -- well, hopefully, late this quarter and in quarter 1. When you're talking -- in many instances, you're talking single-digit kilometers, Bill. So single-digit kilometers are relatively modest levels of volume. But if we're shipping multiple kilometers, we should be able to. We should be able to get into tens of thousands and a little bit more than that in revenue from those levels of shipments. As we said, it's when you get into the hundreds of kilometers that you start to ship, that's when you really start seeing meaningful revenues and that's still several quarters away.

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Unidentified Participant, [23]

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So I mean, do you think -- in the first quarter, in the second quarter, you think you'll produce revenues of $100,000 to $200,000 from outside shipments. I mean, trying to -- we're trying to get a flavor. I mean, this has been going on for a while. Now you're at the point where they'll accept the wire. So we want to know when do you think -- are you saying until the third quarter until you get any revenue or substantial revenue? And what are you talking about for the first and second quarter rather than the government revenue? Can you give us kind of an idea what you're talking about?

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

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Well, it will be -- in most instances, and the way I'm looking at it right now, Bill, it will be modest revenues, so -- and I'm not going to give a firm forecast. Is it $25,000, is it $100,000? It's not $1 million in wire shipment, let's just say that. So it's going to be something less than [that project].

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Unidentified Participant, [25]

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Less than $1 million. I mean, is it going to be like over $100,000? Or do you think it's going to be over $100,000?

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

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I would say that we can get to the point where we're approaching $100,000 first quarter to late in second quarter or to late first quarter to beginning of second quarter, but probably not -- it won't be in the fourth quarter.

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Unidentified Participant, [27]

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So is the wire ready to ship now? I mean, have we got all -- are they doing -- they're going to be testing these new greater lengths that they indicated? Once these tests come in, are we talking 3, 4, 5 customers? How many customers are we talking about that would be buying the wire in the third quarter and fourth quarter if things work out?

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

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We have orders on hand from, I think, it's 6 customers that are really looking for wire that are -- what I would call the magnet wire that we're discussing here. So well, that's the number of customers.

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Unidentified Participant, [29]

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Okay. So I mean, in other words, you're talking about renewing the S-3, and one of the things that we don't need is more dilution. So the question is, if you get to the third quarter, are you going to have the ability to self-finance and move on unless you get a big order and maybe get a lease machine? In other words, are you -- do you see in your future here that the third and fourth quarter, you'll be shipping enough wire that you'll be making money and be able to self-fund it without going to the well again?

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

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Well, that's -- everybody's preference would be to get to the point where we're self-sufficient and needing no additional capital. I understand your concern. I understand what -- I'm not going to be able to tell you that, yes, in the third quarter, we're going to be cash flow positive. I don't think we'll be there yet. Because as we've talked in the past, we need between $5.5 million and $6 million in quarterly revenues to be cash flow positive. And that's probably not where we're at in the third quarter. So the goal really is to, hopefully, we start to show the ramp. If the sort of orders that are being discussed with various customers begin to show themselves, that will then set us up to have a pretty significant backlog that we'll have a path to being able to deliver a significant amount of revenue. And then the question will be how do we execute on the plan to be able to do that and do it in the most capital-efficient manner we can and do it to try to minimize things like dilution that you talked about. So our goal is perfectly aligned with yours on that. I just -- I can't look in my crystal ball right now and tell you exactly how that will play out 2 to 3 quarters from now.

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Unidentified Participant, [31]

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Okay. But based on the wire you're producing and what you've delivered to these people in samples, you're pretty optimistic that you've got a lot of the problems for production out of the way, and now it's just a matter of them giving them the wire and testing it in their own design. In other words, we're not going to run into another problem where the wire isn't working is what I'm trying to say.

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

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Well, we don't believe that we -- we believe that we've dealt with all of the problems associated with the mechanical strength. So we think that we've got the mechanical strength issues behind us. So we're not going to be in a situation where we get a wire that's not meeting the specifications for that. I think we're -- I'm always hesitant to say that everything's all -- until you ramp from doing tens of meters to doing thousands of meters, it's very difficult for me to tell you with 100% certainty that there's not going to be any issues that present themselves. It's one of the things that we've been working on, and it continues to be a process that you work through and you'd get better and better, and you're ramping up the various processes that go into building the wire. And you try to do it in an orderly manner so that you -- if you find any challenges, you solve those challenges. And as you hit them and then move on. I expect that we will have challenges as this ramp process continues. And all I can say is that we're expecting there to be challenges, and we're expecting to get on them rapidly and try to fix them. I don't see any big showstoppers staring us in the face right now, but it's not all smooth sailing either. So I don't -- I'm not looking at it saying, yes, we've got -- everything is exactly how I would like it, and I don't anticipate any problem whatsoever. I can't say that. But am I confident that we're building wire that will meet customers' needs and that we can build, the answer is yes. And so now we just need to do it.

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Unidentified Participant, [33]

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So -- but the good news is that the wire you're building now, it's not different ones. I mean, it's a generic type of wire for everybody, right? I mean, in other words, it's the same wire for customer 1, 2, 3, 4 and 5? Am I wrong on that? So that you don't have to adjust for this and that, we had the other one with the FCL, where you had to have a different -- in other words, it's the same wire. They don't want the same wire, correct or incorrect?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [34]

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I would say that the basic requirements for the wire are similar. There are people that have differing performance requirements that they would like to see. Now what's going to happen -- in my mind, what will happen is that the people who stepped forward and placed the large orders, I mean, that's the sort of -- that's the wire that will then be produced. And if there are other people that want that flavor of wire exactly, they can certainly utilize it. But I guess, I don't want to lead you to believe that every customer that we're shipping magnet wire to right now is happy with an identical piece of wire, but they are in the same sort of ballpark on the requirements for thicknesses of various wires and things of that nature. But there's always somebody that wants 500 amps and somebody else that wants 700 amps and somebody else that says, "Hey, I only need 300 amps." I mean, that's always going to be the case. And I guess, what's going to come about is once there's a leader or 2 in the clubhouse that have large orders in place for a specific version of wire, it will what naturally we'll be focused on building. And if we can meet the needs of others with it, we will.

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Unidentified Participant, [35]

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Okay. And do you have -- do you think right now, the 6 customers -- have you identified the 2 key leaders that will probably be the most likely to build the most wire for the 2 big customers?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [36]

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Well, we have our own view on -- from discussions with the customers and others on who will move and who will move faster and who has ultimately the more robust business case and ultimately, more advanced. So we have our opinions on that, but I guess, it will all -- it does all come down to who actually does step forward and execute on their business plan sooner rather than later. And that is not something that we don't look at with any certainty, but we have our views on it. So yes, have we handicapped the rank of those customers who we think is going to do what? Yes, we have and I -- but I guess, the only way -- the only people that will determine whether that is true or not are the customers themselves. So we'll see where that goes.

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Unidentified Participant, [37]

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And I presume you're telling the customers you better get in line and move fast because somebody may beat you to the production line.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [38]

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Those are the conversations that I had pretty regularly. And I think that I can safely say that we're not the only people that have those challenges. And so yes, I mean, we have those conversations. I mean, every -- they know that the amount of wire that we can build is -- we are not -- we don't have a limitless capacity at the moment. And so I think I've said this before, there -- the -- 1 or 2 customers can probably consume pretty much everything we can build in the next year or 2. So the first 1 that's -- the first 1 or 2 that step up, they'll be the ones that get the wire. And then we'll just have to be ramping production to try to meet the needs of others as quickly as we can. And I guess, that's enough said on that.

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Unidentified Participant, [39]

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Okay. But the question is, do they really have alternatives to go to? I mean, isn't your wire the best producing -- of what they need in the magnetic field? Where are they going to -- is there other people that can get this wire from?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [40]

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Well, it depends what their -- it depends what the requirements are of the individual customer. So I said there are people that want really, really high performance, and there are people that are okay with lower performance. And of course, the lower the performance requirements are of the customer, the more candidates they have to help them. So I guess, I won't say that customers have no options. They certainly always have options. And our -- of course, our goal is to make sure that we're -- I don't [think they've] been on -- we don't want them to have to do business with us. They want to do business with us because we've got the solution that meets their needs the best, so...

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Operator [41]

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Our next question comes from Steve Kruger with Foresight Investing.

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Steven Kruger, [42]

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I got a bunch of questions, Jeff. How do you measure yields, Jeff? In other words, is there a minimum defect-free length that defines an acceptable yield? Do you -- if you produce 3 meters and then there's a defect, is that all flown away? Do you have to get to a certain length before you say that, that length is acceptable? How do you measure that?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [43]

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Yes, that's a really -- that's an interesting question, Steve, and a very -- and a complex one because it is a function of -- when you really look at it, it's a function of what are the -- what do the customers want and are there pieces that you can get off above? Let's say you have a run that is suboptimal. So you want it to be 500 amps, for instance, but it's only 200 amps. Well, if there are customers that you can ship 200-amp wire to, well then, you'd get some yield off of that run, but it's not the full yield that you're looking for, right? So it's probably more complicated than I want to go into on this call. I will say that you are correct that the way you measure it is really a function of what lengths are you looking for and what's the minimum performance that you're looking for on the lengths. And then it's, okay, how much wire did I put on the machine? And how much wire did I get off the machine that meets those requirements? And ultimately, that is how you calculate yield. And then the goal, of course, is to just get better and better as you move forward, but...

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Steven Kruger, [44]

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Can you share with us at this point -- give us any insight as to, however you're measuring yield, What the yield is right now? Is it 10%, is it 40%, is it 60%? Where are you right now? And once you complete, if you complete the second phase of the DOE project successfully, where would the yield be at that point?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [45]

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Yes. I think the yield number now is very hard to -- it's very hard to give you primarily because we -- the machine is in the hands of our production people, but it hasn't been in their hands for very long and so -- and it's very hard to -- any yield numbers that we would use that came from when we were doing experiments for the DOE are really kind of useless because you know the yield isn't good because you're always changing the knobs. Well, now the knobs are on the hands of the people that are going to try to keep them consistent and the focus on taking the yield and getting it better and better. So I would say we don't really have a good yield number right now to start with, but we should over the course of the next few weeks and months. I mean, right now, if I have to say what the yield was, I'd say it's quite low.

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Steven Kruger, [46]

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Okay. And is there a bogey in the DOE contract?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [47]

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No. The DOE contract was focused more on putting some monitoring items in place to be able to better control the process and thereby enhance the yield, but the DOE program is more about showing an improvement in yield versus an actual number. You have -- if you don't meet 65% yield, for instance, it's a fail. No, that's not what it is. It's a show of improvement.

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Steven Kruger, [48]

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Okay. Did the DOE fund anyone else with a similar kind of grant? Are you the only people that the DOE is supporting with this high-temperature superconducting wire?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [49]

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The DOE has done grants for several participants in the space. But I will say, everyone's project is a little bit different. So they're not all exactly the same. But your question was, are they funding other projects in the HTS space? The answer is yes. Is the project -- does it exactly have the sort of focus on yield and manufacturability and things of that nature? That, I don't know. I mean, I'm not privy to what everybody else is doing with their DOE programs. So we do know they funded and have fund in several programs. We were one of -- we received some of that family of programs that they funded back 1.5 years ago. We got one of the largest grants. Many of the others were smaller. So I don't think that any one project, any 2 projects are exactly the same.

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Steven Kruger, [50]

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Okay. You -- last quarter, you said that you expected to make sample shipments in the third quarter. And then in the press release today, you said that customer orders have transitioned from sample lengths to thousands of meters. I got a couple of questions here. Did you, in fact, make sample shipments in the third quarter to these 6 customers? And did the -- how many of the 6 actually approved the samples? Did the samples actually qualify and meet their requirements? And secondly, the wording is a little bit murky here. You said that customer orders have transitioned to thousands of meters, but in the next sentence, you say you're in discussions to secure orders. So what does it mean that customer orders have transitioned to thousands of meters? Does that mean they gave you indication that, that's what they will place once they actually place the order?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [51]

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No. What that means is that we've actually received orders that instead of being for 50 meters or 100 meters, we're receiving orders for kilometers.

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Steven Kruger, [52]

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So do you actually have orders in hand, firm orders for multiple kilometer lengths of HTS, your Conductus wire?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [53]

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Yes.

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Steven Kruger, [54]

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And are there delivery dates associated with those orders?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [55]

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No. I mean, there are not firm delivery dates on the orders, and that's really what I -- I guess, what I'm trying to say is the -- we're trying to ramp production on the machine. We're trying to get the -- we're trying to fulfill the orders as quickly as we can. We are, in many instances, a lot of these sample orders today are still -- they're trying to -- that's the best efforts sort of date. So they are not firm dates because -- well, the reality is, as soon as we get the -- it's a multi-step process. So we have to get the wire off our machine. We have to send it out and get it finished. We have to bring it back and test it. And the reality is, as soon as we have a good piece of wire that will fulfill the need of an order, we ship it. And we know that, that's not the optimal place to be. We know that's not where we're going to want to be when you get into production. There will be firm ship schedules and all of that. But until you have -- until we have the process really nailed down as far as the entire process with us and our suppliers and the wire type, it's -- we're not there yet. So anyway, it's the best efforts activity right now. And I think we're making progress on it and are successful. If we're able to do that successfully on ramping and doing that with the customers, that's when we'll see the larger orders that we'll hopefully secure in the next quarter or so.

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Steven Kruger, [56]

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Okay. Did you actually ship samples that were accepted and met customer requirements in the third quarter?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [57]

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I would say we have not received a firm acceptance from any customer that's gone beyond and said, "Okay. Yes, we've accepted your wire. And now we're going to place the large commercial order." I'd say we have not crossed that chasm yet.

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Steven Kruger, [58]

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What’s your goal in terms of the time frame for reaching that milestone?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [59]

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Well, there are definitely people that are talking about the supply that they need in the 2019 mark -- 2019 time frame. And they are planning on placing orders to make that happen. So if we're to be one of the participants in those 2019 supply agreements, we need to get some approvals soon. So I would like to get some approvals in the next -- I'd like to get approvals today, but I think it's more likely that we'll do it over the course of the next 2 to 3 months, and that's what we're focused on.

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Steven Kruger, [60]

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Okay. Is it reasonable to assume that if you reach that stage with a customer, you've actually got a firm order with approved wire, you would make an announcement to that effect?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [61]

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That is absolutely our intent, and so it -- in many -- and again, it all comes down to -- those are -- and again, with what the announcement will say and how much detail we'll provide will, in many instances, be a function of the agreement that you have with a customer. But yes, we will consider -- I consider that material information, and we will disclose it -- we'll disclose as much as we can, as soon as we can when that happens.

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Steven Kruger, [62]

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Okay. And it's -- is it possible that you'd make -- we'd see an announcement like that before the end of the year? Is that within the realm of possibility?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [63]

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I'd say it's possible but probably not likely.

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Operator [64]

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Thank you. And it does appear we have no further questions. I'd like to turn the conference back over to Jeff Quiram for any additional or closing remarks.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [65]

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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 [66]

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Thank you. And again, ladies and gentlemen, that does conclude today's call. We do thank you for your participation. You may now disconnect.