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Edited Transcript of SCON earnings conference call or presentation 28-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Superconductor Technologies Inc Earnings Call

SANTA BARBARA Mar 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Superconductor Technologies Inc earnings conference call or presentation Tuesday, March 28, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cathy Mattison

Lippert/Heilshorn & Associates, Inc. - Assistant VP

* Jeffrey A. Quiram

Superconductor Technologies Inc. - CEO, President and Director

* William J. Buchanan

Superconductor Technologies Inc. - CFO, VP and Assistant Secretary

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Conference Call Participants

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* Sameer S. Joshi

Rodman & Renshaw Research - Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Superconductor Technologies Fourth Quarter 2016 Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Cathy Mattison of LHA. Please go ahead, ma'am.

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

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Thank you, Keith. Good morning, and thank you for joining us for STI's 2016 Fourth Quarter and Year-end Conference Call. If anyone has not yet received the earnings press release, it is now available at the company's website. If you would like to be added to our distribution list or if you would like additional information about STI, you may call LHA at (415) 433-3777.

With us from management today are Jeff Quiram, President and Chief Executive Officer; and Bill Buchanan, Chief Financial Officer.

I will review the safe harbor provisions of this conference call, then I will turn the call over to Jeff.

Various comments regarding management's beliefs, expectations and plans for the future are forward-looking statements are made -- 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 2015 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 statement.

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.

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

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

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Thank you, Cathy, and good morning, everyone. We're excited to speak with you today to deliver our year-end report. Our Conductus HTS wire program has made significant progress since our last call. Specifically, in late February, our internal testing produced results that met the technical specifications for several customers. We subsequently shipped wire to those customers for qualification approval.

I'd like to begin with a review of our progress in 2016 and then discuss next steps. During 2016, we designed and implemented significant performance improvements to our Conductus HTS wire. These enhancements consisted of dramatically increasing the mechanical strength of our wire early in the year and then delivering the required superconducting performance on the enhanced template.

On our Q3 call in November, we reported attaining approximately 80% of our critical current carrying capacity goal, while maintaining our target properties for improved mechanical strength. Earlier this year, we obtained the key 20% increase on the new wire architecture we were looking for.

Several customers are now conducting tests to validate our results in their applications and improve these samples. Once this critical objective has been achieved, we hope to quickly ship all existing qualification orders, including 3 new orders received in the fourth quarter.

As we have discussed in the past, our near-term focus is to attain final customer approval for one or more application. After which, our efforts will transition to ramping wire production to fulfill commercial scale orders.

Next, I'd like to provide some more information on STI's recent selection for our new U.S. Department of Energy program. In November, STI, in collaboration with our industry partner, TECO Westinghouse Motor Company, or TWMC, was selected by the DOE for its Next Generation Electric Machines program. STI is the prime recipient of this $4.5 million award. The program's intent is to bring about the rapid development of enabling technology used to manufacture superconducting industrial motors.

Our award is part of the DOE's stated goal of advancing American manufacturing competitiveness by improving industrial motor efficiency and significantly reducing energy usage and the cost of operation. Title of our project is Process Innovations for HTS Wire Manufacturing. Specific objectives are to improve the current carrying performance of our Conductus wire to 1,440 Amps at 65 Kelvin (inaudible) operating in a magnetic field of 1.5 Tesla and to reduce manufacturing costs.

To accomplish this goal, we've provided a detailed plan that would result in the fabrication of a demonstration coil designed by TWMC. We expect this proof of concept will be utilized to design a commercial scale HTS motor assembly for a future product offering.

We are excited to be working with our highly regarded collaborators on this project. TWMC is an industry leader, an end user and a device maker of over 100 years of experience in motor design and application. TWMC is committed to developing the transformational technology needed to achieve commercial viability for high-power superconducting Next Generation Electric Machines.

Our respected academic partners, Massachusetts Institute of Technology and the University of North Texas, will provide expertise related to cryogenics, coil design, performance measurement and characterization testing. Combined with STI's proprietary manufacturing process for superconducting materials, our team is dedicated to achieving the wide-scale commercialization of superconducting materials.

We are confident that the complementary capabilities brought together in this team will result in the successful completion of this project. The wire development activities in this project will directly support our market penetration strategy for superconducting turbines, generators and other large rotating machines. These applications are expected to generate the largest demand for superconducting wire in the future. We believe the industry and government support for HTS wire manufacturing initiatives confirm the importance of this key enabling technology to surpass the performance limitations of conventional materials and designs.

I'll report on 2 key patents awarded last month that enhance the protection of our unique HTS wire manufacturing capabilities. First patent further protects the process that improves Conductus wire's performance in the presence of a strong magnetic field. The ability to carry high electrical current in the presence of a strong magnetic field is a key enabler for the superconducting applications of the future.

Using a technique called pinning, superconducting wire performance is dramatically improved in high-field application. The traditional pinning approach is to utilize additional elements when manufacturing the superconducting layer, thereby, increasing the complexity of an already challenging process. STI has demonstrated the ability to incorporate pinning into our superconductor without using additional elements. This technique enables STI to meet the needs of our customers without the cost and difficulty of an increasingly complex manufacturing process. We believe that this will allow us to deliver the highest performing wire with high manufacturing yields, positioning us to be the cost leader in this space.

Our proprietary RCE-CDR process makes Conductus wire ideal for applications that require high infield performance such as motors, generators, MRI and NMR machines.

The second patent protects the system design developed by STI to improve monitoring efficiency when evaporating materials in vacuum. It reinforces the sustainable production advantages of our Conductus wire. We design our systems to simplify the manufacturing process, which allows us to increase efficiency and reduce cycle time.

One of the key advantages of our method is to use removable monitoring tools. This capability permits us to evaluate material evaporation status without disrupting the production process. In addition to saving time, this design reduces maintenance and cleaning requirements.

Flexibility provided by our proprietary manufacturing process enables STI to build superconducting wire in very unique ways. Our team continues to develop and implement trade secrets that improve our economics -- improve the economics of our Conductus wire and our commercial scale capacity.

We remain excited about the growing demand for more efficient alternatives to conventional materials and designs as well as our positioning in the industry.

Now I'll turn the call over to Bill for a review of the financials. Bill?

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William J. Buchanan, Superconductor Technologies Inc. - CFO, VP and Assistant Secretary [4]

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Thank you, Jeff. In our fourth quarter, revenue was $9,000 compared to $27,000 in the year ago quarter and was primarily from our wireless products for both periods. Total R&D expenses amounted to $691,000 and were $879,000 in the prior year quarter. Our fourth quarter and full year 2016 costs were lower principally as a result of our Conductus wire efforts moving from R&D to manufacturing. SG&A expenses were $1.3 million compared to $1.6 million in the year ago quarter.

Net loss for the fourth quarter was $2.5 million or a loss of $0.61 per share compared to a net loss of $2.4 million or a loss of $1.23 per share in the prior year quarter.

Please note that our per share data is adjusted for the 1-for-15 reverse stock split effective in July of 2016.

The total number of common shares outstanding at December 31, 2016, was 7.4 million shares.

On to the balance sheet. On December 31, 2016, cash and cash equivalents totaled $10.5 million. In the full year 2016, $8.1 million was used to fund our operations, and there were no changes in our working capital.

On December 14, 2016, we closed a public offering with gross proceeds of $10.3 million and after deducting the placement agent fees and other offering expenses, net proceeds of $9.2 million.

Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations well into the first quarter of 2018.

Current and noncurrent liabilities totaled $1.1 million at December 31.

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) We'll take our first question from Sameer Joshi with Rodman & Renshaw.

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

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Congratulations on the progress you're making on improving performance. So just -- so I will just paraphrase what I understood about your process. In the third quarter call, you had said that you had achieved 80% of the performance, and then the 20% increase you announced this -- in this press release makes it to your -- it has reached your goal. Is that how we look at it? Or was this 20% improvement over the old process?

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

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No. So it -- we have achieved the goal that we set out, which -- and the goal is basically -- has been established by what our customers are looking for. So yes, the 20% improvement over where we were has gotten us all the way to where our customer wants us to be and actually beyond, to be honest.

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

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Oh, okay. How many customers have actually been -- like how many customers have you sent this wire to, in addition to the 3 orders that are pending?

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

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I think we sent, in that same -- the same time, and I think it was 3 customers. Is that correct?

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William J. Buchanan, Superconductor Technologies Inc. - CFO, VP and Assistant Secretary [6]

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Yes.

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

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It was either 3 or 4, one of which being the (inaudible) customer, which is the one that we've been working with for an extensive period of time here and is really the one that we think is -- the closest to providing us a commercial agreement to move forward.

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

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Right. So that was going to be my next question. What are the other applications -- or customers that are doing the -- in addition to the actual customer?

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

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Well, there are motor applications, which are -- I won't say they're the same, but they're similar to the sort of work we're doing with the Department of Energy grant. So there are people that are building industrial scales, superconducting motors, and so there are opportunities there. And then, there are other larger devices. Some of them are MRI machines that are used in specialty coils in them. So they're not replacing the entire coil, but they're doing something unique in some aspect of how they build the coil where they use the HTS wire other than the low-temperature wire. And then there are other big devices that are focused on doing things like fusion energy and things of that nature that will consume a tremendous amount of high-temperature wire in the years to come. So all of those activities are -- those are all kind of high-field activities as we've discussed. The fault current limiter is not, but those others all need wire to perform well in high field. So the work we're doing in the DOE is very applicable to kind of all those other applications, Sameer.

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

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Right. No, that's great that DOE is sort of funding this process. Coming back to the FCL customer goal. Are you sending tens of meters of wire or is it hundreds of meters of wire that you're sending for testing?

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

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We're not sending hundreds of meters of wire because that's really the next step once the wire is completely accepted for use in their device. So it's tens of meters.

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

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And is it the 12-millimeter size width?

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

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I'm sorry, I missed that.

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

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Is the width a 12 millimeters for this? Or is it some other size wire?

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

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12-millimeter is where they want to go. I'm not exactly sure if the wire we just sent them is 12 millimeters. That's why I'm hesitating. But ultimately, they would prefer a 12-millimeter piece of wire, but I'm sorry I can't -- Bill, do you know if it was 12 or was it 4?

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William J. Buchanan, Superconductor Technologies Inc. - CFO, VP and Assistant Secretary [16]

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I am not exactly sure on the sample size. I'm a little weak there also.

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

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I'm not -- I'm sorry, Sameer, I don't know the answer to that question.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [18]

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It's okay. The reason why I asked is in light of your process improvements, I think, previously, your annual capacity for a 12-millimeter wire was around 250 kilometers. And correct me if I'm wrong.

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

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That's correct.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [20]

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Oh, okay. So is there any change in the capacity based on these improve -- performance improvements or process improvements that you have implemented?

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

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Well, I mean, really, the majority of the calculation that goes into what the capacity of the machine is, is primarily how quick you can turn it around and how often you can run it. And so I would say these process improvements help make the plan that we already have to be more doable. And to run that sort of capacity through that machine, you need rapid turnaround, you need to have very consistent operation. Many of these process improvements are focused on that. So I would say, Sameer, that I don't think it gives us dramatically greater capacity than what we've stated the machine has.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [22]

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Oh, okay. Understood. And that brings to my last 2 questions. Basically, the SG&A and R&D expenses. They have been -- over the last year, SG&A has been between $1.2 million and $1.4 million per quarter, and R&D has been in the $700,000 to $800,000 range. As you ramp up sales and as you start resuming commercial orders, how should we see these numbers changing?

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

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Well, I don't anticipate you'll see dramatic change in the G&A numbers as we ramp up production. Most of the increase that will occur in our operations will be, of course, for manufacturing personnel, and those will all show up in cost of goods sold instead of G&A. I would say the same thing holds true, to some extent, in R&D space. The only thing that would potentially change there is if we would decide to move forward with another machine, you would start to see some CapEx that would show up initially in the R&D area. But again, that's -- we're a ways away from making that decision. The only other costs in the R&D are basically headcount. We do probably look to add a couple people as we go through the year, but it won't be a dramatic increase in the R&D dollars in the near term.

Would you agree with that, Bill?

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William J. Buchanan, Superconductor Technologies Inc. - CFO, VP and Assistant Secretary [24]

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I would agree, yes.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [25]

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Okay. I just have one more, if you would. How quickly do you expect to see commercial orders from FCL and the other larger devices like MRI and NRM (sic) [ NMR ] customers?

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

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Well, the -- for the fault current limiter, especially, I think if we get final approval and meet the needs of that customer, we can see that order in a relatively near term. So hopefully, receiving orders in the second quarter where you're fulfilling them in the third quarter. Some of the large -- some of those other large applications like the NMR and the fusion devices, many of them, they're looking at, what I would call, I guess, modest demand this year but still demand in the kilometers. But the plan is really in the 2018 and beyond time frame to have, again, hundreds of kilometers to be bought in those applications. So I think there's a chance that there are some meaningful opportunity there in 2017, but it's really kind of 2018 and beyond where those will have the bigger numbers.

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Operator [27]

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We'll go next to William Lapp [ph] , private investor.

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Unidentified Participant, [28]

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I got a little late on the call, so I wasn't clear. When did you ship to the fault meter people, our leader in the fault meter, the samples? Was that the last week, last 2 weeks or? And then what do you expect the turnaround time for them to test it and confirm your results?

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

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I believe we shipped to them -- it was either late February, right at the end of February, or right at the first week of March. I can't remember exactly which day, Bill. But it was a little while ago.

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Unidentified Participant, [30]

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Oh, that's good. So what is their estimate for their testing and to see that you meet their qualification? Is it 45 days? Or how much time do they -- do you think it's going to take them to confirm that you meet their specification from the time...

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

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You're in the range that we've talked about in the past. It's a 4- to 6-week sort of turnaround. So we did meet with that customer at an industry event not long ago, and they reiterated to us their interest in the wire and their commitment to testing it as promptly as they could. So -- but yes, the 4- to 6-week time frame is consistent with what we've seen in the past.

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Unidentified Participant, [32]

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So we may know by the middle of April, right?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President and Director [33]

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That would be our expectation.

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Unidentified Participant, [34]

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So if they confirm that it meets the specifications, are you going to have a press release on that? Or would you wait until you get an order?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President and Director [35]

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Well, I would say we'd probably wait until we are officially approved and have an agreement to move forward with them commercially. So again, I think that passing the test is great, but actually, receiving the approval checkmark and then the -- putting that business relationship in place, I think, is a more relevant milestone for our investors to be made aware of.

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Unidentified Participant, [36]

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Okay. And I wasn't clear. So the capacity that -- the analyst just asked you about for the machine. That would -- what the 260,000 or the number of kilometers you talked about, that would not use your entire machine then, would it?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President and Director [37]

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Well, yes, it would, Bill, because we've always talked about capacity of 750 kilometers at 4-millimeter wide. So if -- which would calculate into 250 kilometers at 12 millimeters wide. So (inaudible)

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Unidentified Participant, [38]

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Okay, I see. Okay. So those other orders that may be coming down the path in the bigger -- in the latter part of the year you just spoke about would -- you may not have capacity for that, if they pick up your full capacity because we don't know what kind of quantity they're going to want at this point. So there wouldn't be much room if they picked up the whole machine. Correct or incorrect?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President and Director [39]

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Well, our hope is that we will certainly have that machine pretty much focused on meeting the needs of the first customers that we focused on. And yes, I think that -- for us, it's actually good. When I talk about the large orders from those other applications coming in the 2018 and beyond time frame, that's actually, from a timing perspective, works better for us because if we need to increase capacity and put in new machines, it takes us -- from the moment we make the decision to add a new machine, it will take us 9 to 12 months to have that machine operational. So if we end up with our current machine at capacity, it will be several quarters before we can add another chunk of capacity.

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Unidentified Participant, [40]

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So if they came in with an order like in April, you've got the business relation, the (inaudible) , "Could you start producing like in May, the wire?" What would be the lead time from once you solidify the business relationship? (inaudible) ready to start?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - CEO, President and Director [41]

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Well, we definitely -- yes, the real issue is and we already -- we've already started adding -- we've had some people on staff that are -- were positioned to run 2 shifts. The -- ultimately, when -- to get to capacity, we're -- that's really when we would probably go to a 3-shift schedule, but to answer your question, if we get a large order, we'll be starting to ramp up and try to get our production going immediately. So it really doesn't take us -- there's not going to be much of a delay between getting the order and beginning the efforts to fulfill that order. We've really -- we've got the machinery. We've got the people. Bill and his 5 [ph] key people will have to start working to start bringing in more of the raw materials and things of that nature. But we're in position to start right away, Bill.

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Unidentified Participant, [42]

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Well, this is really good news. And I'm hopeful that the acceptance and I've got a feeling the way you tested the wire before you signed (inaudible) . Bill, did any warrants get exercised during the last quarter? Or lately, I don't know if you mentioned that during the call.

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William J. Buchanan, Superconductor Technologies Inc. - CFO, VP and Assistant Secretary [43]

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We did not mention it. We did not mention it, no.

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Unidentified Participant, [44]

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Is there anything you want to comment on that or you can't?

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William J. Buchanan, Superconductor Technologies Inc. - CFO, VP and Assistant Secretary [45]

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I would rather not comment right now.

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

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I guess the point is, Bill, if warrants had been exercised that had -- that where capital had come in, we would have announced that.

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Operator [47]

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(Operator Instructions) We'll go next to James Collins [ph] , HTS Investments [ph] .

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Unidentified Analyst, [48]

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Bill, you mentioned, did I hear you right about 1,400 Amps somewhere in the presentation?

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

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Yes. Jim, it's 1,440 Amps. But the other thing to note is it's at 65 Kelvin, so most (inaudible)

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Unidentified Analyst, [50]

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Oh, okay. I see. Okay. Yes, right. Not at 77 right now.

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

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Right. So just for those on the call that aren't really familiar with that relationship between temperature and performance, the lower you cool the wire the higher the performance you get. So if you're doing 700 Amps at 77 Kelvin, if you cool it to 65, you do a lot more 700 Amps. So there's progress that needs to be made, Jim, but it's not like we need to double the performance or anything like that.

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Unidentified Analyst, [52]

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I see. As I recall, the problem that you had with the earlier fault current limiter wire was that after several iterations of trying to send in fault currents that the -- somehow the wire deteriorated. Is that testing done now in your in-house lab for this deterioration thing?

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

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We do the majority of the testing, Jim. I mean, the thing that we really focused on was the mechanical stresses that are on the wire. The fault current limiter uses relatively short pieces of wire, but they -- it depends on the design, but many of them produce -- they use short pieces and then make a lot of small coils, and those small coils are wrapped relatively tightly. The challenge we were having is when that coil was wrapped, when the wire was wrapped as tightly as they wanted to wrap it, it just wasn't -- the performance of that wire was reduced. So something was happening in the wire when you were wrapping it that tight. And so that's where we needed to go back and make the stack stronger to deal with those mechanical stresses, and that's what we did. So we...

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Unidentified Analyst, [54]

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And you tested that in your own lab? Is that for this tightness...

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

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Yes. We have all the testing apparatus necessary to do all that mechanical testing. Now the final cycle testing and there are things that our customers do to the wire that we can't always replicate, but we believe we've identified the things that needed to be fixed, and we believe we fixed it. And now we just need to wait and get that validation from them.

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Operator [56]

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(Operator Instructions) At this time, there are no further questions in the queue. For closing remarks, I'd like to turn the conference back over to Mr. Jeff Quiram. Please go ahead, sir.

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

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

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Operator [58]

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Ladies and gentlemen, this concludes today's conference. We appreciate your participation.