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Edited Transcript of SCON earnings conference call or presentation 13-Aug-19 3:00pm GMT

Q2 2019 Superconductor Technologies Inc Earnings Call

SANTA BARBARA Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Superconductor Technologies Inc earnings conference call or presentation Tuesday, August 13, 2019 at 3:00:00pm 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. - VP & CFO & Principal Accounting Officer

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Conference Call Participants

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* Andrew Evan Shapiro

Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member

* Sameer S. Joshi

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

* Steven Kruger

* Moriah Shilton

LHA Investor Relations - SVP

* William Lapp

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Presentation

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Operator [1]

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Good day, and welcome to the Superconductor Technologies Second Quarter 2019 Conference Call. Today's call 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, Vickey. Good morning, and thank you for joining us for STI's Second Quarter 2019 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 2018 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 served markets and the company'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, and good morning, everyone. In the second quarter, we received initial orders for our Conductus, high-performance, magnet wire from multiple customers including the Institute for Plasma Research, India, which we previously announced and the startup customers as working to disrupt the fusion market with a low-cost, high-density fusion system.

We're encouraged by the traction that we are gaining and also by the industry's acceleration in the adoption of Superconductor magnet wire for applications in fusion.

The number of companies developing fusion systems that have joined the Fusion Industry Association now totaled 19.

Ertech, like the development of the new energy source, typically faces a steep challenge in moving from basic research into commercialization.

Moreover, in the fusion space, in addition to government efforts, substantial nongovernment capital is now being deployed to private companies to develop commercial fusion.

In addition, there is a growing focus on collaboration between the government and private spheres.

In early June, the Department of Energy announced the creation of a new innovative network for fusion energy or infuse program as a way to promote collaboration between the public and the private sectors.

One example of this collaboration is MIT's partnering with private industry to build the world's first highest performing maintenance for fusion energy.

Once this work is successful, those magnets will be used to build spark, the first positive net energy control fusion experiment. Speaking to the future, once these ongoing developments make fusion a commercial generating source, the world's energy system will be transformed.

The industry has identified 4 main areas of benefits.

First, the environmental impact. Fusion produces no harmful emissions or waste, which aligns with the increased focus on climate change that is placing greater importance on cleaner energies.

Second, energy abundance and security. Fusion has a power density that's 10 million times greater than fossil fuels. To give an example, half a bathtub of sea water will produce as much energy as 40 train cars of coal. This translates a virtually limitless power to last billions of years.

The hope is that this abundance will help -- will reduce the geopolitical plates over control of energy resources.

Third, access to energy. Today, 1.8 billion people, around the world, live without electricity. Ubiquitous fusion will create access to the energy grid that could empower people to elevate their families and communities out of poverty, while increasing health and security.

And fourth, there are multiple industrial benefits. Off the grid, fusion is well-suited for remote and energy-intensive operations such as desalinization, industrial heat and mining.

In the second quarter, while we made progress on the 2 remaining processes required to manufacture our Conductus wire in high volume, the HTS deposition machine and the final step of copper encapsulation, were not yet as high-yield manufacturing or high-volume manufacturing.

Too many processes have taken a few months longer than originally anticipated, however, we feel well positioned to complete them in the coming weeks for the following reasons.

First, we did achieve the targets specification for the wire performance of our HTS deposition machine in the quarter and improved our manufacturing clean room status.

The final steps are demonstrating capacity and production volumes to complete certification. We are in the process of installing a new temperature control system along with water flow control reliability improvements that provides the precision temperature control required for high uniformity across the deposition area.

Second, with regards to copper processing at long lengths, we have expanded our internal copper processing efforts to now include industry experts with best-in-class facilities for electroplating to scale in volume. Subsequent to quarter end, we started delivering initial quantities of our wire against existing orders.

We still believe, we will begin shipping tens of kilometers by the end of the year, as we ramp towards supporting our superconducting magnet customers' needs with thousands of kilometers of wire starting in the next few years.

Our efforts to commercialize Conductus wire for high infield magnetic performance applications are important to government and industry, both of which seek more efficient alternatives to existing conductors that are unable to meet the demands of the next-generation power solutions.

In conjunction with our partners Teco-Westinghouse Motor Company, Massachusetts Institute of Technology and the University of North Texas, we anticipate beginning Phase 2 of our Department of Energy project in the fourth quarter that is focused on the development of NGEM components.

This effort has significant synergies with our commercial goal of ramping capacity of best-in-class 2G HTS wire for superconducting magnet applications.

Finally, I'd like to comment on the announcement last week of the death of our Board Chairman Marty Kaplan.

Marty had been a champion of next-generation technologies for his entire career including superconductors. His contributions to STI, as our Chairman and long-standing Board member, are impossible for me to recall in this forum.

The entire STI team is extremely saddened by his untimely death.

For me personally, Marty was a valuable resource for guidance and coaching. But most importantly, he was a good friend. I believe that everyone who had the privilege to know Marty has a richer life as a result. We once again offer our sincere sympathies to his family for this tragic loss. And now Bill will provide a review of the financials. Bill?

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

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Thank you, Jeff. We did not record any commercial product revenues in the second quarter, as we remained focused on ramping production from sample size orders to commercial kilometers length orders.

Total R&D expenses amounted to $628,000 and were $413,000 in the prior year quarter. These efforts remain exclusively focused on our Conductus wire.

SG&A expenses were $1.094 million in the second quarter of 2019 compared to $1.006 million in the year ago quarter.

Net loss for the second quarter of 2019 was $2.6 million or a loss of $0.57 per share compared with net loss of $1.5 million or a loss of $1.24 per share in the second quarter of 2018.

Under the balance sheet, as of June 29, we had $2.5 million in cash and cash equivalents, which included net proceeds of $1.4 million, raised in a public offering conducted in the second quarter. In the second quarter of 2019, $2.3 million was used to fund our operations and $200,000 was used to fund increases in working capital. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations into the fourth quarter of 2019. And now, operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question today 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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The tens of kilometers that you are planning to ship this year, will it -- will there be actually at least 10 kilometers of wires that is sold -- shipped before the end of the year?

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

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That is our belief, Sameer. We, again, got some of these qualification shipments out in the customers' hands. And the goal is to pass the test, and then with the discussions we've had with them on sort of quantities that they're looking for, we believe that the best sort of demand that they will be looking to get by the end of the year.

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

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Okay. And then the tens of -- sorry, thousands of kilometers that you spoke in the next few years, a, does the few years mean 2 to 3 years or roughly 5 years? And part B is, is this demand expected mostly from fusion kind of companies? Or you're expecting it from your traditional markets?

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

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I think it's mostly from fusion at this time, Sameer. And those numbers are really the demand that people have talked about needing in the next 2 to 3 years, so not 5. And again, it's all about moving beyond their initial bills, then going in and building a whole device. So -- but yes, it's in the next 2 to 3 years.

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

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So then towards achieving these short-term and long-term goals, the progress on the deposition and encapsulation, how much of it will be a hindrance in the short term? Or like you said that you have expected it to be resolved within.

(technical difficulty)

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

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Well, yes, I mean, the primary hindrance for us in the short term has been just getting the yield off of our deposition machine. And we have -- the good news is we've started to definitely see some consistency and some repeatability on what we're doing, but it has come through a lot of work trying to dial it in. And so while we were doing that, we weren't really getting the wire that we wanted to ship. So we think we've resolved the majority of those issues, and now it's all about, while checking that last box, as we said, from a production group to say, yes, now we know we can run this machine consistently. We can get the same product off of it every time. And as soon as we cross that hurdle, then we'll be ready to begin the ramp and run a test.

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

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So based on...

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

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And copper encapsulation really doesn't appear to be the -- an issue because they've got some -- they've got very, very long -- they've got a lot of capacity in their systems. And so we really don't think that, that's going to be a ramping problem. But we haven't been able to run it at high volume yet because we haven't been able to give them the high volume of wire to do the copper encapsulation. So it's -- to some degree that's a little bit of a sequential. Until we can get them enough wire ourselves in the high volume, we can't really certify their high volume. And if you know that where it makes sense.

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

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Understood. Yes. Yes. Now understood. So in terms of the targeted yields that you're expecting or -- yes, or targeting, what is gross margins that you expect, say, when you start rolling out, say, 100 kilometers of wire?

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

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Well, again, our goal has always been and our belief has always been that we can have gross margins in -- over 50%, usually in the high 50s relatively early in the process. But that is -- that view as not really changed, Sameer. We believe that the -- we're seeing -- we need to get our yields up, we understand that. But the pressure on the price is still, I won't say, it's not meaningful, but it's still a supply-constrained environment. So as a result, you don't have that tremendous pricing pressure at the moment. And so that translates into what we believe will still have margins in over 50%. And our goal, of course, is to push that a little higher. But we know that the starting point is the important part because that's where you need to be at the beginning and that's -- we still think that, that's the case.

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

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Great. Great. Also you mentioned you hired the industry expert. Going forward, do you expect any increases in SG&A to support the ramp up of production or actually selling costs?

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

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I don't think that the SG&A is going to go up dramatically. Any of the increase that we'll see in headcount and expenditures, the majority of it will be in conjunction with our production group. It's not to say, we won't add an engineer here or there, but we don't need a big direct sales force, we don't need, at least, for now. We will have to provide some support, some additional support resources. But I think that's going to be quite modest. So we don't have any plans to dramatically increase SG&A in the next 2 years.

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

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And then last one from me. The NEGM (sic) [NGEM] -- sorry, the DOE program, that is planned to -- you are planning it to start in 4Q with -- and all other parties are onboard to start that in 4Q, already started?

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

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Yes. We've -- I think all of the parties have been in discussions with the Department of Energy and then really looking at what does this Phase 2 -- what do we exactly want it to look like and what are we going to do? Because we've refined the program a little bit as you move forward just to meet everybody's goals. And so for us, it's really -- we've really provided the guidance on when we think that we'll have some resources that we can deploy on the project. And it really won't be until the fourth quarter because right now we're still absolutely focused on the commercial side of this, and we expect that we will be for a while on that. So as soon we can free up some resources to target the objectives of that program, we will do so, but not until then.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [16]

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Sorry for the loss of Marty.

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Operator [17]

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Our next question will come from William Lapp, who is a private investor.

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William Lapp, [18]

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Jeff, I got cut out, I don't know on the call, so I may be repeating stuff. I'm just not clear on one thing, and I just want you to go over it please. So you've shipped all the quantities that the potential customers want and they're evaluating it, right? In other words, if they wanted 3 kilometers or what, they've got what they need to evaluate it. Is that correct?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [19]

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We've shipped the amount of wire, I won't say that we have shipped in totality every customer's requirements and wishes. We have shipped to several customers, and we've shifted enough wire to meet their needs. So I just want to be clear on that. So I don't want to say that, we've met everybody's needs, no. We continue to help customers that want more wire, but we have fulfilled the obligations to several and that's what we were talking about in the script.

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William Lapp, [20]

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Okay. So they're potentially without -- they're potentially at the position now where they could evaluate whether or not they would place an order. In other words, they're evaluating the wire you shipped and subject to your ability to produce in quantity, is there -- have they tested the wire and they're happy with it? Or -- can you shed any light on that, what they received?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [21]

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Well, they're in the process of testing it now, Bill. So we haven't received the definitive thumbs-up from anybody yet. But I will say before we shipped it, of course, we did some pretty extensive testing on it. So we feel good that it will meet the needs. But the customer hasn't weighted on that and, of course, their vote is the only one that matters.

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William Lapp, [22]

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Right. But they have enough of a sample that they can make that determination subject to the ability of you to consistently make the same wire and give them the needs -- give them the supply they need, correct?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [23]

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We believe so, yes.

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William Lapp, [24]

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Okay. Well, that's good news. I mean in other words, they have got what they want. And in the last conference call, we didn't have that, but now we have, at least the customer has the wire in its possession and has the ability to evaluate it. So what do you see then, is it -- do you see that -- let's assume the customer does like the wire, it meets their test. Is it then just a subject question of whether or not you can produce the quantity you want? Is that consistently or what would be the next hurdle if any?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [25]

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Well, I think most of our customers would share the same concern that we have, which is how quickly can we ramp up production and can we keep it ramped up? So we mean that is a very valid concern on their part and certainly what we've been focusing on of late. And that will be the task to -- and so that's why I think the -- you'll get a first set of orders from the customer. You -- and again, larger quantities and so that's where we're starting to talk about the tens of kilometers of orders. And then the ability to get orders that are dramatically larger than that is going to be -- well, it's going to be on and offs based on our performance and our ability to fulfill that first step. So that's the sequence that I think it will all occur in.

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William Lapp, [26]

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Okay. That makes sense. So they're going to get their feet wet for a smaller order and then once you start producing that. Do you have any timing of when you think that first order could come? I mean I know you don't have a crystal ball, but are you thinking that in the next month?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [27]

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Well, we are -- we've always believed in our conversations with our customers that it's -- it doesn't take weeks to test the wire. It takes a week probably and maybe a couple if they're building a small device with the wire, which is sometimes what some of them do. But they should be able to come to a realization on that relatively quickly and then it's a function of moving beyond that and whatever the negotiations will be around the order and all that.

And my goal, of course, would be to -- and I think the customer's goal as well because they need the wire. So the goal would be to move expeditiously through that process and move on to the wire. But no, I'm not going to throw out a date on the wire order.

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William Lapp, [28]

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Okay. That's understood. But do you continue to produce the wire still? I mean, even though, you've fulfilled some of them, let's assume, you have these 2 customers, are you still producing wire for them now as you're going along every day? Or is it for different customers?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [29]

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Yes. We're running the machine as often as we can. So...

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William Lapp, [30]

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Okay, so you're building up some inventory there, right?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [31]

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That's the goal.

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Operator [32]

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And we'll now go to Andrew Shapiro with Lawndale Capital.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [33]

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Sorry, I got access to the call late, and I might be repeating something. But to follow up on question asked before Mr. Lapp, if you could help clarify. The tens of kilometers that you're referring to by year-end, is that amount limited by your current capacity to produce up -- only up to that amount in that time period? Or that basically satisfies the customer's current need, which would be only tens of kilometers by year-end?

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

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Well, I think it's a little bit of both, Andrew. I mean I don't believe that we're going to have orders that will be dramatically over tens of kilometers. So -- and frankly, when the orders start to come in, if we get the orders in the not too distant future, the tens of kilometers is probably all we would be able to build in the fourth quarter by the end of the year. So I guess it's a combination of both of those items other than -- size of the order.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [35]

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Okay. And then in terms of, we'll call it capacity of speed of it, so here we are in end of August, you mentioned time horizon. So fourth quarter, tens of kilometers, and you used the phrase or the word ramping. Does that imply or can you give some insight that these machines, based on these particular technical specs and demands down the road of hundreds of kilometers, thousands of kilometers, is the current machines capacity basically 40 kilometers a year, tens of kilometers a quarter? Or are we talking about, you could do a 100 kilometers, can you do a 1,000 kilometers a year?

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

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Well, that machine never -- the design capacity of that machine, when we did it, was for kilometer lengths of wire and the capacity that it was designed for was 750 kilometers.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [37]

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Okay. A year?

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

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A year, annually. Now we've never run it anywhere near that throughput. So I would say that, well, the jury will be out. I mean we won't be able to say, for sure, that we can ever do that until we've actually done it. I would say -- in the short term, I would say that, that machine has -- it has capacity in the hundreds of kilometers. So I don't know if I could go all the way to 750. But I'd say we've got hundreds of kilometers of capacity for sure. And then we'll see how it goes when we start to ramp. So all -- it's all matter of how quickly...

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [39]

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So you've run it at that -- at short bursts, you've run it at that throughput already, it's hundreds of kilometers?

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

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Well, if you -- yes, if you run it -- if we would run it every day, for instance, and we would -- and every -- and all -- and you'd get very high yield off of it, so all the wire that came off of it was good and consistent, then yes, you would get that -- you would get capacity in the hundreds of kilometers a year. But we have not demonstrated the ability to do that over a long period of time, so that's why I'm -- that's kind of -- that's why I'm hedging in answering your question?

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [41]

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And it's a nice problem and it will be a nice problem to have. So when you price this, is it priced by the meter, by the kilometer? How does one define, between you and your customer, the pricing here for the revenues?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [42]

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It's a combination of the length of the wire and the amount of current that's carried. So it's a formula that goes into there. So the more current you carry, the more you can charge for it and -- but ultimately, you're charging on a per meter basis.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [43]

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Right. And have things progressed enough with these customers and the testing and the demand? They have a product they want to make in arguably arm's length contracting where we're not giving away the product anymore when it comes down to this next round of sales.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [44]

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The next round will certainly be -- when we're selling kilometers of wire, we will be selling them for what we believe is the rather justified market price or is the -- whatever the price would be for a long-term supply agreement. So no, we won't be giving it away at tens of kilometers.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [45]

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And I'm assuming up to this point, there's not been -- you are not disclosing in any way the range, so for us to kind of estimate or figure out kind of the -- a revenue stream here yet. Is -- will the purchase agreement disclose something like that so that we could start getting a handle on the revenue stream here? And what the revenue stream might be on a machine -- on the current machine with its particular capacity estimations?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [46]

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I'm not sure how exactly we'll disclose it. I doubt we'll talk specific pricing for anyone customer. But I think we will be in a position to say that this is the general size of the order, and this is the period over time with which we plan to fulfill it.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [47]

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Yes, that will be helpful. That will give us something.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [48]

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Yes. So we'll be able to give some information of granularity to help you guys build your model.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [49]

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Excellent. Okay. And then as we are or where we are now and, again, I've missed the first part of your script on that. What is the burn rate? I don't think, we'd say it's down to because I think you've got it down to the bare-bones already, but what's our quarterly burn rate at?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [50]

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It fluctuates a little bit. It's usually just under $2 million, $1.6 million to $1.9 million has been the run rate over the course of the last several quarters. Bill, would you agree with that?

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William J. Buchanan, Superconductor Technologies Inc. - VP & CFO & Principal Accounting Officer [51]

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I usually just say $2 million plus or minus couple of hundred thousands.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [52]

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Okay. Well, I mean that's fine. And then based on our current cash and all that, there were limitations on how much money you could raise on that last round. I think it's because you fulfilled the shelves. Was that what the limitation was on that? And if that's the case, what is the timing and the prospects I guess of either having another shelf or registration? Where and how do we -- you guys get the next round of cash to put us over the hump here?

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

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Well, those discussions -- those are options that we continue to look at all the time. I guess I -- obviously, that has to -- there'll have to be some movement on that in the not too distant future because we're out of money in the fourth quarter. So -- but, I guess I'm not prepared to say what's that going to look like? What's the structure going to look like? What's the size? I don't have the answer of those questions at the moment, Andrew.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [54]

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No, I guess, what I'm trying to get around the edges here is, am I correct, the last shelf has been fulfilled and so there is no current shelf available for, we'll call it, something quick and easy. Is that the case?

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

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No. It's not the case that the shelf is completely exhausted. But the other -- on the other side of it, yes, we all know that anything that you would be doing off of the baby shelf is, it's relatively modest. So it's only a -- what you -- it's only a bridge to wherever you're going, right?

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [56]

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Oh, yes -- no, I understand. I mean, I didn't know if you could raise $2 million more or $4 million or $6 million or even less than $2 million. I'm pretty sure the amount you can raise based on the current pricing of our shares does put a cap on how much could come -- be raised through that method. There's other methods, but I'm -- but I know that's like -- that would be quick method. But is there a quantification saying all that, we've got about $2 million available there, and then you have to otherwise go through other means or methods. And what would be the timing to file another registration for another shelf size?

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

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Well, you're asking very specific questions about those sorts of instruments. And I guess I'm not really comfortable responding. I would say there are shelf rules, those shelf rules are known by everybody. You can do the calculations.

Yes, you're right if you were to do something off of the shelf, it's a very modest amount of money that you would be raising, so you wouldn't be raising $5 million off of it. It would be significantly less than that. But you also just don't get to go file another S-3. You don't get -- you don't file another S-3 and renew the shelf. I mean there's the thing that limits the usability of an S-3 registration statement, is time. So there's only so much you can do in a capital year.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [58]

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Okay. So that's -- when is the next time you could do an S-3. It's a full year from now? 6 months?

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

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Well, I mean we have -- it's a rolling 12 months. The registration statement we have in effect is in effect until, I don't know, what Bill, another 3 years, 2 to 3 years?

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William J. Buchanan, Superconductor Technologies Inc. - VP & CFO & Principal Accounting Officer [60]

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Yes. And probably -- about 2 years, yes.

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

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Yes. So.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [62]

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So you have to shutter that, have a quiet period and then do a new one as long as it's a year beyond or something like that?

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

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No. What I guess I'm saying is I don't think you can do that. I don't think you can just say, okay, we're going to cancel this S-3 and now we're going to start a new one. And then the year clock starts ticking, and I don't think you can do that.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [64]

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Yes, I know, you certainly have to have a quiet period when you cancel your registration or an offering and then you do a new one and there's a certain window that has to wait. So then there's other option that you guys could go. Are you at the point where any of these prospective customers or supplier agreements might provide a form of financing? Or are we still kind of dealing with the private equity, private placement type of funding options?

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

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Most of our -- I think our -- most of our funding options, I think, we can safely say, most of them will come from the public markets in one way, shape or form and I'm not anticipating a significant influx of capital from a customer in the near term. So but I guess that's all I want to say about it, Andrew. I mean I'm not going to get in any specifics on that.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [66]

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No, no, no, I understand. I am just trying to get a handle on the visibility for us to when we can balance excitement with where we put new money.

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Operator [67]

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And we'll now take a question from Steve Kruger with Foresight Investing.

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Steven Kruger, [68]

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The recipe that you're using right now, I think, you've said that you've frozen the recipe for the HTS wire.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [69]

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Well, yes. We certainly know the conditions that -- we know the conditions that we want machines to run under to get the wire and to perform the way we want it. So yes, so there's no real tweaking of that. We know what the -- we know what the composition needs to be. We know all those things. So now it's just getting the machine to do that over and over again.

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Steven Kruger, [70]

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Right. Is there anything proprietary about the formulation recipe of your HTS wire? Or is it a formula that could be copied by other manufacturers of HTS wire?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [71]

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Well, I don't know that the -- there's certainly not a proprietary nature to like a composition mix of, for instance, the metals and the materials that we have in the superconducting layer. The thing that's somewhat unique and proprietary is really just that how we deposit the materials. So I guess the point is if you had the same -- the exact same composition of materials, and I'll just make up numbers. If you had 65% copper and 25% barium and 10% rare earth for instance. Well, if you did that exact composition on RCE process versus the MOD process versus the PLD process, the different processes that are used by other wire manufacturers in the world, you would have different performing wire even with the same composition, I guess is my point. Because the composition of the materials is only part of it, it's also the way that the -- it's the way that, that material has grown in the structure of that material inside of it, which is very unique based on the way you lay them down. So not -- no proprietariness on the mix, but quite a bit of proprietary differentiation on the haul.

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Steven Kruger, [72]

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Okay. The sample quantities that you've shipped so far and recently with this new -- the latest formulation that you're using. Did you actually get to -- were you able to measure the current carrying capacity of those sample shipments that you made?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [73]

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Yes.

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Steven Kruger, [74]

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And can you tell us what the current carrying capacity was of those sample quantities?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [75]

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Well, in general, let's just say 600 amps and up.

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Steven Kruger, [76]

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600 and up. Okay. And is that -- how does that compare to what the requirements are? The customers building these Tokamaks or...

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [77]

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Well, that's what the -- again, if it wasn't -- that, that is what the requirements are for the folks that are looking for the wire, I mean, if it wasn't meeting the requirements then, of course, we wouldn't be shipping it at all.

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Steven Kruger, [78]

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So the spec for the Tokamak wire is 600 amps and up, anything over 600.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [79]

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Yes. It depends on the customer, and it depends on their design. I mean they're all a little bit different, but yes, it's all pretty high-performing wire.

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Steven Kruger, [80]

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So what's the size of the world market right now, ballpark for HTS, second-generation HTS wire?

I think last time we talked, which was a while ago, you said it was about 3,000 kilometers.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [81]

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Yes. If you talk about the amount of wire that can be built a year, so that's really where the disconnect is, is, how much wire can the market build versus how much demand some of these customers talking about and that's where the big disconnect is. And I still think that you've got an industry that's producing wire on the single-digit thousands of kilometers. So I don't know, I mean is it 3,000, is it 4,000, it is 5,000 a year? I guess there's probably room for disagreement on that. But...

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Steven Kruger, [82]

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But it's that order magnitude. What I'm wondering is that this is big disconnect between capacity -- production capacity and prospective demand. But there are apparently other manufacturers out there who have the capability to produce HTS, 2G HTS wire. And what prevents them from ramping up to fulfill the prospective demand that's out there? And secondly, how does the current carrying capacity of the competitors' wire and other performance characteristics compared to the Conductus wire?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [83]

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Well, the answer is, yes, there are other suppliers of 2G HTS wire out there and nothing really limits their ability. Yes, they can increase capacity and many of them are. And so that is something that I expect that we'll see going forward. The -- again, the magnet wire, when you look at the performance of wire, especially for these large magnet applications, it's all about how much current do you carry, and how much current do you carry in the presence of a high magnetic field. We still come out very well on much of the testing on how our wire performs in that environment. There are others that have wire that performs very well in that environment as well. So the -- and it's all good news actually because I'd say the reality is that there was only 1 or 2 of us that could actually meet the requirements of these fusion guys. Going forward, they'd all be a whole lot more worried about where the wire is going to come from. But there are several suppliers out there that are showing some good performance. I still think we're very much near the top of that list. And so -- but yes, there are others out there, and that -- it's good as far as I'm concerned. I mean I think that there needs to be -- we need -- if the superconductor wire business is to grow to the size that we believe it can, the only way that will happen is that there's several providers of that wire out there. It won't happen if there's only 1 or 2 of us.

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Steven Kruger, [84]

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Yes, okay. So what do you do to increase capacity? How -- what next increment of capacity? Would you just add a second shift? Would that be your next step? Or would you have to buy new equipment? What you're thinking there?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [85]

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Well, we'll definitely add initially is what you just said. And that is, it will be production workers. It will be, run the machine more and put as many shifts on as you need to do it in most efficient way possible, and that's certainly what the manufacturing team is looking at. And then you would only -- I would only say we pull the trigger on a new machine when we get to the point where we feel like we're running our existing machines as fast as we can and doing as much as we can. And if there's still demand that is beyond that, then that's when we would have to make a decision on spending the capital and bringing in another machine. But that's definitely the second step and that will be -- that's not a decision that will be made in any time in the near future.

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Steven Kruger, [86]

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Yes. Right. So you've said the design capacity of the current machine was 750 kilometers per year. But I think you had previously said that was based on a 1 shift operation. Is that right?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [87]

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No. That was not. That was based on running that machine as aggressively as you could.

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Steven Kruger, [88]

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So 2-plus shifts per day?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [89]

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Yes. Absolutely.

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Steven Kruger, [90]

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So to get to the 750, you've got to increase yield and increase the number of shifts up to between 2 and 3 shifts a day.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [91]

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Yes.

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Steven Kruger, [92]

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Okay. When you first talked about the -- and announced the DOE contract, it seems to me that the discussion of applications for the wire with the big new thing was going to be was next-generation electric machines. There was really not much talk about Tokamak's infusion and all that. My sense is that, that's come about since you announced the DOE contract. Whatever happened to the prospective demand from next-generation electric machines, big motors, big generators that sort of thing.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [93]

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I feel...

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Steven Kruger, [94]

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Are they still there? Or has that gone away?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [95]

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No. I think it's definitely still there. I think that the -- I think perhaps the demand -- the near-term demand from the fusion players has really eclipsed kind of what was going on there. But I would say that a lot of the folks that are in that next-generation motor business still believe there's a whole lot of potential there. And I guess the thing that they're both kind of -- they're certainly not the same and that you're building magnets that are a different shape and, in many instances, a different scale. I mean, although the Tokamaks are quite big still at this time, but you are still doing -- you are still building magnets with them. And so from that perspective, a lot of the focus of the next generation machine projects was getting the performance of the wire up, getting that performance of the wire up in the presence of a high-magnetic field and so those desires and those initiatives are still quite common between NGEM applications and fusion. In fact, I think some people would probably say, well, next-generation electric machines, well, doesn't necessarily -- does not describe fusion. But you're exactly right when this project started, it was -- big thinking was on large industrial motors and that's still the case. I mean our primary partner in this project is a motor manufacturer. So -- but no, they haven't -- the motor guys haven't decided that, no, they don't want to do this anymore.

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Operator [96]

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And that will conclude our question-and-answer session. I'd like to turn the call back to Jeff Quiram, for any additional or closing remarks.

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [97]

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Thank you very much, and thanks to all of you, very much, for joining us today. STI will be presenting at the following investor and industry conference. We will be at the H.C. Wainwright 21st Annual Global Investment Conference on September 8 through 10 in New York City. And STI will also be presenting in the upcoming UCAS 2019 Conference in early September in Glasgow, Scotland. UCAS 2019 is the 14th European conference on applied superconductivity. This addition of UCAS will include short courses, satellite meetings and abstract submissions aim to bring together people who are working in various fields of applied superconductivity from across the world. We will be presenting a paper on 2G HTS coated conductors focused on process control improvements at STI. We will look forward to speaking to all of you again on our next call. Thank you very much and good day.

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Operator [98]

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And thank you very much. That concludes our conference for today. I'd like to thank, everyone, for your participation, and you may now disconnect.