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Edited Transcript of SCON earnings conference call or presentation 14-Aug-18 3:00pm GMT

Q2 2018 Superconductor Technologies Inc Earnings Call

SANTA BARBARA Aug 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Superconductor Technologies Inc earnings conference call or presentation Tuesday, August 14, 2018 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

* Moriah Shilton

LHA Investor Relations - SVP

* William J. Buchanan

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

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Conference Call Participants

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* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

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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 2018 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Moriah Shilton of LHA. Please go ahead, ma'am

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Moriah Shilton, LHA Investor Relations - SVP [2]

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Thank you, James. Good morning, and thank you for joining us for STI's 2018 Second Quarter Conference Call. If anyone has not yet received the earnings press release, it is now available at the company's website. If you would like to be added to our distribution list, or if you would like additional information about STI, you may call LHA at (415) 433-3777.

With us from management today are Jeff Quiram, President and Chief Executive Officer; and Bill Buchanan, Chief Financial Officer. I will review the safe harbor provisions of this conference call and then I will turn the call over to Jeff.

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

Jeff will begin the call today with an update on STI's Conductus wire program and then turn the call over to Bill for a review of the financials, after which, he will open the call for Q&A.

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

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

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Thank you, and good morning, everyone. In the second quarter, we generated $793,000 in revenue all related to our Next Generation Electric Machines, or NGEM, project with the U.S. Department of Energy. Since our work on the project began in June of last year, we have recorded $1.5 million in government contract revenues. NGEMs are expected to play an instrumental role in the future competitiveness of the electric grid, large-scale manufacturers and other industrial applications that utilize electric motors in excess of 5,000 horsepower. By offering unprecedented improvements in motor and generator efficiency, NGEMs are expected to provide solutions that leapfrog the current limitations of conventional technologies. Many in the electrical device industry believe that 2G HTS wire is the key enabling technology for NGEMs. This is especially true of our Conductus wire that delivers world-class high field, low temperature performance which will enable device manufactures to implement greatly improved magnet performance over conventional copper coil solutions.

With the utilization of these highly efficient NGEMs, customers can accelerate growth with a substantially reduced power infrastructure footprint independent of traditional grid buildout projects. As a result of these advantages, it is widely expected that NGEMs will experience broad adoption as the availability of appropriate 2G HTS wire enables NGEM production to increase. The projected multi-year cost savings of these next-generation motors is expected to easily justify the initial CapEx for the owners.

Developing, testing and then producing 2G HTS wire for this application is exactly the purpose of the 3-year NGEM DOE project that we began with our partners in June 2017. Last month, we met with the DOE to review our annual progress on the project. I'm very pleased to report that together with our partners, TECO Westinghouse Motor Company, Massachusetts Institute of Technology and the University of North Texas, we have successfully achieved key first year project milestones.

We produced and enhanced Conductus wire that delivered 1.5x the critical current performance and 2x increase in in-field magnet performance over the additional starting baseline outlined in 2017. All these results to date have been verified and confirmed through third-party testing. These performance improvements are crucial since it reduces the size of the motor and the amount of wire needed per device, which is a key to improving long-term cost competitiveness.

The objective of this project is to assist the DOE in their broader goal of advancing American manufacturing competitiveness by improving industrial motor efficiency to significantly reduce energy usage and the cost of operations.

In parallel to our work on wire performance, our partners, TECO and MIT, have been modeling the components of a 5,000-horsepower motor utilizing our Conductus wire. We have shifted our focus to fabrication of best-in-class Conductus wire in quantity, a prime goal for the second year of our DOE project and perhaps, more importantly, for our commercial customers. We intentionally use production equipment in the DOE program efforts as opposed to R&D tools. This approach should allow us to quickly implement the wire fabrication methods and provide for a smooth transition to production of the wire to meet customer requirements in the coming weeks.

With the transition to operations and progress for enhanced Conductus wire, we remain on track to begin wire shipments in the third quarter of 2018 to multiple commercial customers for evaluation purposes. On acceptance of our enhanced wire by our customers, our plan is to then begin full production.

Before I turn the call over to Bill for a review of the financials, I wanted to comment on the public offering we completed last month, which resulted in gross proceeds to STI of approximately $9 million. I know that investors have questions about the size and timing of the raise. However, we believe the transaction was appropriate as we prepare for production of our enhanced Conductus wire for our commercial customers. We're taking the long view into consideration. We are pleased with the financing and appreciate our investors' continued support.

Now Bill will provide a review of the financials. Bill?

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

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Thank you, Jeff. In our second quarter, revenue was $793,000, which consisted entirely of our government contract revenues compared to $8,000 in commercial product revenues in the year-ago quarter. Total R&D expenses amounted to $413,000 and were $678,000 in the prior year quarter. SG&A expenses were $1 million compared to $1.1 million in the year-ago quarter.

We effected a 1-for-10 reverse split of our common stock on July 24, 2018, following approvals from our Board of Directors and stockholders. Upon market open Tuesday, July 24, our common stock continued trading under the symbol SCON on a split-adjusted basis with a new CUSIP number. We implemented the reverse stock split for the purpose of regaining compliance with the NASDAQ stock market's listing maintenance standard that requires us to maintain at least a $1 per share minimum bid price. On August 7, 2018, we were notified by the NASDAQ stock market that we had regained compliance. The reverse stock split reduced the number of our outstanding shares of common stock to approximately 1.2 million. After adjusting our per share data for the reverse stock split, net loss for the second quarter was $1.5 million or a loss of $1.24 per share compared to a net loss of $2.5 million or a loss of $2.37 per share in the prior year quarter.

On to the balance sheet. As Jeff noted, on July 30, we completed a public offering with net proceeds of $7.98 million. In the first 6 months of 2018, $3.1 million was used to fund our operations and $600,000 was used to fund net changes in our working capital. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations well into the third quarter of 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 our first question today will come from Amit Dayal with H.C. Wainwright.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [2]

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In the press release, you highlight potential wire shipments to materialize in 3Q '18. So just a couple of questions on this. Is this -- the wires more specifically from the DOE? And who are the customers? And how large are these potential orders?

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

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The wire is the -- does incorporate many of the enhancements that we made in the DOE program, primarily just focused on improving the performance in the presence of a magnetic field, which is really what's important for the next generation electric motors. So we are implementing, in production, the enhancements that we made in the testing with the DOE over the course of the past year. The customers offer a variety of applications with the real -- the common thread in all of the customers is that they're all looking for wire that they plan to use in a high magnetic field environment. So they're building a coil of some type, so that will either be for a motor or it can be for a scientific device that uses the magnetic field for various things, sometimes for imaging, sometimes for other purposes but they're all common in that they're very interested and they require a strong magnetic field performing wire.

And so I guess when you talked -- when you asked the question about the size of the orders, I'll just say that all of these customers are -- they're working on programs and applications that are all very significant in size. On the motor side, when you think about motors, these large 5,000 horsepower and above motors that we're talking about, they all tend to consume significant quantities of wire, so 200 to 300 kilometers per motor. As we've stated, the design capacity of our factory is 750 kilometers annually. So you can see it doesn't take long for a motor application to consume most of that production. So the potential for all those customers, Amit, is quite large. That's really part of the -- well, that's one of the measuring sticks we use when we are determining who we're focused on as a customer, is really what the size of the opportunity is going forward.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [4]

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Got it. And in terms of potential pricing, maybe it's too early, but how should we think about how some of this wire can be priced in terms of per-kilometer or any other metric that you have available?

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

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Well, we can do -- again, wire cost is a function, to some degree -- well, not to some degree, to a significant degree, to how much current the wire carries. So the higher performing the wire, the higher cost -- the higher the price that you can charge per meter or per kilometer, however you want to divide that up. And again, the metric that is used in many instances to describe market pricing is a metric called the kiloamp-meter, which is a function of how much power you're carrying over a particular distance. Today, the market prices for wire have been relatively stable for a while, and really that is a function, primarily, of the fact that we continue to still be in a very supply-constrained environment. So all -- everybody that's building 2G HTS wire, they can pretty much sell it for that market price because that is -- there's plenty of consumers for the wire. And so at least, at this point in time, the market prices are relatively stable. I think we all know that as the industry ramps and as market demand for the wire gets greater and greater and we've ramped up production for a number of the competitors have increased production, we expect that the price -- you'll see just the normal operation of those prices going down as a function of economies of scale and -- but then again, our goal is, of course, to implement the savings that we recognize from increased production and move that along into pricing. But I guess the short answer is, today, the prices are pretty stable. We do expect that the prices will -- the market prices will go down as time goes on. But I think that that's still 1 or 2 years out before there's a dramatic move in that area.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [6]

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Got it. In terms of the DOE funding, is roughly $3 million now left from this contract? And how should we sort of see this coming through the next 2 years? Is that equally divided over the next 2 years? Or is there a different cadence to this?

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

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Bill, what 's the -- would you talk to the plan on really what the revenues look like over the course of the remaining of the -- remainder of the contract?

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William J. Buchanan, Superconductor Technologies Inc. - CFO, Principal Financial & Accounting Officer and VP [8]

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Yes. I would think, Amit, in year 2, we'll be -- we will continue pretty significant efforts, so it'll look a little larger than the last year here. And it'll look more like the last 6 months for the next year. And then as you move into the third year, much of the effort -- although we will still be the prime here, much of the effort will be moving to our subcontractors as they build these motors. Is that helpful?

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [9]

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Yes, yes, yes. And in terms of the mix of revenues, so far majority of it, at least for the last 2 quarters, has been the DOE-related revenue coming in. But beginning in Q3, should we see some customer or product-related revenue coming in? Or is that more of a 2019 sort of?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [10]

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I would say the revenue that we'll probably see in Q3 would be predominantly government. Any wire revenue will be in conjunction with the evaluation orders that we're fulfilling. In general, I would say that those revenues will probably be de minimis for the third quarter and we really don't start to see a mix shift until you see us building wire for -- in commercial volumes for these customers. So we need to complete the evaluation, get an approval and that's when you'll see the mix begin to shift. But I don't -- I think the earliest that you can see that even begin is fourth quarter. And even in the fourth quarter, you probably will end up with the government still being significantly larger than the wire.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [11]

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Got it. Just one last question for me. In terms of the recent public offering, how much cash on hand do we currently have now? And how should we expect it to sort of support operation, et cetera, relative to the burn rate?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [12]

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Well, I'll speak to the plans for utilizing the capital. Bill, you can chime in on cash on hand. We've been burning approximately $1.8 million a quarter for the last year, and that's a pretty stable area for us. And we expect that, that will continue. Now as we ramp production, there will be the need to bring on more personnel and things of that nature. Much of that though, of course, will be a function of what you're building and what you're shipping. So don't expect it to have a dramatic effect on the amount of cash we burn a quarter, with the only caveat to that being, as you begin the ramp, you may see some periodic disruptions. So for instance, you're spending more in January than you normally would and you'll receive the compensation for that in the revenue that you recognize in February, let's say. So there may be some shifts -- well, there will be some shifts in kind of how that cash is spent and the trajectory of that spend throughout the quarter maybe or throughout the year maybe, a little up and down depending on the month and depending on what you're getting in from the potential customers. But in general, we don't anticipate that having a dramatic effect on cash. With the only other comment to that being -- but if we would get, let's just say, a huge order that we really need to start preparing in a much more meaningful way to -- for 1 to 1.5 year-long build cycle, that may certainly impact the flow of cash. But we'll deal with that issue when we have to deal with it. Bill, do you want to talk about cash on hand?

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William J. Buchanan, Superconductor Technologies Inc. - CFO, Principal Financial & Accounting Officer and VP [13]

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Well, we just finished the financing with the $7.98 million, so approximately $8 million; and we have about $1 million in the bank. So we're sitting at about $9 million right now.

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Operator [14]

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Our next question comes from [William Lapp].

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Unidentified Analyst, [15]

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I just want to follow up on some of the questions from the last person. So how many customers do you think you'll be shipping sample wire to in the third quarter?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [16]

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We have a list of about -- I think it's 12 or 13 customers that are waiting for wire at the moment. I would say that the goal -- there's probably half of them are high priority, and the goal will be to ship to as many of them as we can as soon as we have the wire available to meet their needs. So I guess I can't give you an exact number in the third quarter, Bill, but that's the size of the customer base that we're dealing with for these evaluation purposes at this moment.

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Unidentified Analyst, [17]

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Is the wire ready to go now? It just needs to be produced? Or does it need more time to be refined or worked on?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [18]

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Well, we are running our machine in production mode. And then as we've talked in the past, the -- getting it off of our machine and having it be ready is step 1, and then there is some secondary processing that needs to occur. That happens outside of our factory in our supply chain, and so -- and it's not until we receive that wire back from the supply chain and certify it good again that we are ready to ship to the customer. So there's nothing that's ready to ship to the customer at this moment but we anticipate that changing shortly.

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Unidentified Analyst, [19]

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Okay. So basically, this is the same wire to the same 13 people. You don't have to make modification, it's just like a standard wire that you produce. Is that correct or incorrect?

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Jeffrey A. Quiram, Superconductor Technologies Inc. - President, CEO & Director [20]

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I would say that we are going to providing the same type of wire to -- when I talk about that dozen or so and the 6 high priority, they all have specifications that are consistent with what we're working on with the NGEM. There are other customers that have other requirements, and some of them are for lower-performing wire. Some of them are for wire that doesn't necessarily have the sort of magnetic field performance that others are looking for. So there are instances where we may ship wire -- let's just say, wire that's not good enough for the 6 target customers may ship to others that aren't so demanding from a specification perspective. But in general, the wire for the 6 target customers is pretty consistent.

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Unidentified Analyst, [21]

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So based on those 6 target, the ones you really want to get to, do you believe right now that the wire meets their specification?

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

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Well, if we don't believe it meets their specification, we won't ship it.

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Unidentified Analyst, [23]

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Okay. That's a good answer. All right. And then are we still -- what are we talking about? Are we talking about $35? What's the dollar -- you say it's stable now on the wire. What's the dollar number you're thinking of? Is it similar to what you projected in the past?

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

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It's similar to what we projected in the past. Again, using today the current market price, we'll use it in the kiloamp-meter metric that we've talked about. Market price today is around $250 a kiloamp-meter. That's been pretty stable for several years, but it's hard to translate that exactly into a price per meter because you have different aspects. You have the performance of the wire. You have the thickness of the wire and all of that. So let's just stick with the market price of $250 a kiloamp meter as the -- as our current view.

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Unidentified Analyst, [25]

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So what does that translate into kilometers? We can do 750 kilometers. What should we use for kilometer dollar?

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

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Well, again, when we calculated -- when we look at the design capacity of the factory at 750 kilometers a year and you use a market price of $250 a kiloamp meter and we use a performance metric of 500 amps is really what we use, that's where we came up with the $35 million design capacity from a revenue perspective. So if the performance is significantly higher than 500 amps, the sale price goes up and the revenue goes up, let's just say. If the -- but you got to weigh that against the other things that play into the equation like yield and all those other things that are input into the price which then, of course, drives revenue. But again, those were the metrics that were used to determine the size of the design capacity, so 750 kilometers at 500 amps of wire at $250 a kiloamp meter results in $35 million in revenue. That's the simple math.

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Unidentified Analyst, [27]

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Okay. Is the cost of goods lower now with the new process that you got? Or it's about the same?

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

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It's about the same. There's a little bit of additional processing that we're doing that does calculate or feed into the BOM. I guess the real issue is the BOM, in and of itself, has always been a relatively small overall cost element. It really comes down to how efficiently can you produce the wire and what's the yield that you get. That will be the primary driver. So the BOM is a little bit more expensive, but it doesn't dramatically change the business case at this time.

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Unidentified Analyst, [29]

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And you mentioned that you're sending this out to a supplier before you could ship the wire. I mean, is this a copper thing? Or what are you doing -- what are you sending out to be done to yours?

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

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Let's just call it the finishing layers, so whatever it might be. But yes, the final plating and the final encapsulation of the wire is something that is done outside.

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Unidentified Analyst, [31]

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But we don't have the same problem that we had on the FCLs. I mean this will be more easier to meet, right?

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

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Well, the bigger -- the thing that's different is the finishing layers can be thicker and you don't have the same mechanical stresses that are being placed on the wire when it's actually put into the device. So those are the 2 primary elements that are different between the NGEM wire and the FCL wire.

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Unidentified Analyst, [33]

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Okay. So Jeff, and you're looking at -- first of all, do you think that the 6 people that you think are your prime target, do you think they're more interested in buying the wire from you than someone else? I mean, I don't really understand how competitive it is. I mean do you have the only game in town if you get this working? Or can you talk a little bit about that, how your competitive advantage is based on your technology today?

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

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Well, I wouldn't say we're the only game in town. What I will say is what we have been demonstrating over the course of the past couple of years is that when people test our wire in the presence of a magnetic field, we've been able to show market-leading performance. So -- and again, all these customers are looking to build magnets and so that is a key consideration on their part. Now it's not to say that others can't -- we might be market-leading but are there others that are good enough? I'd say the answer is yes, which is actually -- I mean, that's the situation that we would rather be in, Bill. I don't -- when we were in the electronics space selling wire to the wireless operators, we had 100% market share of the market we were in and that's not necessarily a recipe for success in general. I mean, we -- you want a robust market. You want a number of people playing in it. You want a number of customers playing in it. And so we're not the only game in town but we have demonstrated market-leading performance in the presence of a magnetic field. I think that puts us in a good spot from a competitive perspective and the customers will decide who they want to go with. But it is a subset -- the people that can perform, that can deliver this high-performance wire is certainly a subset of all of the people that are in the 2G HTS wire business. So...

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Unidentified Analyst, [35]

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Okay. Based on your crystal ball, with no assurance, do you feel that you will have an order in the fourth quarter? What's your optimism?

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

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When you say an order, you mean a big commercial order?

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Unidentified Analyst, [37]

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Yes. In other words, they'll test the wire in the third...

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

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We have orders that we're shipping against now, so...

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Unidentified Analyst, [39]

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Yes, but that's small orders, right?

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

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That's right. We need the approval and we need a large order. It is certainly our goal and our desire to have one as we exit the year and prepare for 2019. But I don't control the timing on that, and so I'm not going to make any projections on it other than to say that, that's our hope.

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Unidentified Analyst, [41]

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Okay. But we're farther along than we've been for a long time, I would say. I don't know if you agree with that or not.

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

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I'd say we have an NGEM -- we have a product that is designed for this motor and magnet space that has been performing very well and now it's just a matter of completing the evaluation process and moving on. So I feel -- I'm optimistic about where we are.

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Operator [43]

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That will conclude today's question-and-answer session. I will now turn the conference over to Jeff Quiram for any additional or closing remarks.

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

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Thank you, and thank you all very much for joining us today. STI will be presenting at the following investor and industry conferences. We'll be at the H.C. Wainwright 20th Annual Global Investment Conference on September 4 through 6 in New York City. STI will also be presenting at the upcoming Applied Superconductivity Conference scheduled for October 28 through November 2 in Seattle. At this major international forum, participants meet to present and discuss the latest developments in the fields of superconductivity. The meeting will attract a broad spectrum of participants in research, technology development and industrial manufacturing of superconducting wire and devices along with end users for a variety of applications. Participants from the U.S. and international universities, industry, national laboratories and other government agencies will address recent progress in various applications. Our presentation on October 30 will be on 2G HTS coated conductors processing and testing enhancements for multiple applications. We look forward to speaking with you again on our next call. Good day.

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Operator [45]

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That does concludes today's conference call. Thank you for your participation, you may now disconnect.