Superconductor Technologies Inc. (SCON) CEO Jeff Quiram on Q2 2019 Results - Earnings Call Transcript

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Superconductor Technologies Inc. (OTCQB:SCON) Q2 2019 Results Earnings Conference Call August 13, 2019 11:00 AM ET

Company Participants

Moriah Shilton - Investor Relations, Senior Vice President at LHA Investor Relations

Jeff Quiram - President, Chief Executive Officer

Bill Buchanan - Chief Financial Officer

Conference Call Participants

Sameer Joshi - H.C. Wainwright

William Lap - Private Investor

Andrew Shapiro - Lawndale Capital

Steve Kruger - Foresight Investing

Operator

Good day and welcome to the Superconductor Technologies second quarter 2019 conference call. Today's call is being recorded.

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

Moriah Shilton

Thank you Vicki. 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.

Jeff Quiram

Thank you and good morning everyone. In the second quarter, we received initial order for our Conductus high-performance magnet wire from multiple customers, including the Institute for Plasma Research, India, (IPR), which we have previously announced and a startup customer that is working to disrupt the fusion market with a low-cost, high-density fusion system. We are encouraged by the traction that we are gaining and also by the industry's acceleration in the adoption of superconducting magnet wire for applications in fusion.

The number of companies developing fusion systems that have joined the fusion industry association now totals 19. Hard-tech, 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 non-government 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 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 highest performing magnets for fusion energy. Once this is successful, those magnets will be used to build SPARC, the positive net energy controlled fusion experiment.

Looking 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 four main areas of benefit. 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 you an example, half bathtub of seawater will produce as much energy as 40 train cars can pull. This translates to virtually limitless power to last billions of years. The hope is that this abundance will hopefully reduce the geopolitical plays 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 two remaining processes required to manufacture our Conductus wire in high-volume, the HCF's deposition machine and the final step of our copper encapsulation, we are not yet at high-yield manufacturing or high-volume manufacturing. A few remaining processes have taken a few months longer than originally anticipated. However, we feel we are well-positioned to complete them in the coming weeks for the following reasons.

First, we did achieve the target's 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 volume for recertification. 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' need for 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 industries, 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 would like to comment on the announcement last week of the death of our Board Chairman, Marty Kaplan. Marty has been a champion of next generation technologies though his entire career, including superconductors. His contributions to STI as our Chairman and long-standing Board member are impossible for me to recount 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 richer life as a result. We once again offer our sincere sympathies to his family for this tragic loss.

Now, Bill would provide a review of the financials. Bill?

Bill Buchanan

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 kilometer 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 $1,094,000 in the second quarter of 2019, compared to $1,006,000 in year ago quarter. Net loss for the second quarter of 2019 was $2.6 million or a loss of $0.57 per share compared to a 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.

Question-and-Answer Session

Operator

[Operator Instructions]. And we will take our first question today from Sameer Joshi with H.C. Wainwright. Please go ahead.

Sameer Joshi

Thanks. Thanks Jeff and thanks Bill for taking my questions. The tens of kilometers that you are planning to ship this year, will there be actually at least 10 kilometers of wire that is sold or shipped before the end of the year?

Jeff Quiram

That is our belief, Sameer. Again, we have go this qualification shipments out in the customers' hands and the goal is to pass the test and then with the discussions we have had with them on sort of quantities that they are looking for, we believe that that's the sort of demand that they will be looking to get by the end of the year.

Sameer Joshi

Okay. And then the thousands of kilometers that you spoke in the next few years, A, does the few years mean two to three years or roughly five years? And part B is, is this demand expected mostly from fusion kind of companies? Or are you expecting it from your traditional markets?

Jeff Quiram

I think it's mostly from fusion at this time, Sameer and those numbers are really the demand that people are talking about needing in the next two to three years, so not five.

Sameer Joshi

Okay.

Jeff Quiram

And again, it's all about moving beyond their initial build, so then going in and building a whole the device. But yes, it's in the next two to three years.

Sameer Joshi

So then towards achieving this short term and long term goals, the progress on the deposition and encapsulation, how much of it will be an hindrance in the short term or like you said that you like expect it to be resolve within --

Jeff Quiram

Well, yes, the primary hindrance for us in the short term has been just getting the yield off of our deposition machine. And the good news is, we have started to definitely see some consistency and some repeatability on what we are 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 have resolved the majority of those issues and now it's all about, well, checking that last box, as we said, from our 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 will be ready to begin to ramp in earnest.

Sameer Joshi

So based on --

Jeff Quiram

The copper deposition really doesn't appear to be an issue because they have got some very, very long, they have got a lot of capacity in their system. So we really don't think that that' going to be a ramping problem. But we have them able to run it at high volume yet because we haven't been able to get in the high volume of wire through the copper encapsulation. So to some degree, that's a little bit of sequential until we get them enough wire ourselves in the high volumes, we can't really certify their high volumes, if you know what I mean, if that makes sense.

Sameer Joshi

Right. Understood. Yes. No, I understood. So in terms of the targeted yields, that you are expecting or targeting, what is the gross margins that you expect, say, when you start rolling out, say, 100 kilometers of wire?

Jeff Quiram

Well, again, our goal have always been and our believe has always been that we can have gross margins in the over 50%, usually in the high-50s relatively early in the process. So that view has not really changed, Sameer. We believe that we need to get our yield 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, we will still have margins in the 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 we still think that that's the case.

Sameer Joshi

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

Jeff Quiram

I don't think that the SG&A is going to go up dramatically. Any of the increase that we will see in headcount and expenditures, the majority of it will be in conjunction with our production group. 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 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 two years.

Sameer Joshi

And then the last one from me. The DoE program, you are planning it to start in 4Q and all other parties are onboard to start that in 4Q or restart it?

Jeff Quiram

Yes. I think all the parties have been in discussions with the Department of Energy and 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 refine the program a little bit as you move forward just to meet everybody's goal. And so for us, we have really provided the guidance on when we think that we will have some resources that we can deploy on project and it really won't be until the fourth quarter because right now we are still absolutely focused on the commercial side of this and we expect that we will be for a while on that. So as soon as we can free up some resources to target the objectives of that program, we would do so, but not until then.

Sameer Joshi

Got it. Thanks for taking my questions and the sorry for the loss of Marty.

Jeff Quiram

No problem. Thank you Sameer.

Operator

Our next question will come from William Lap, who is a private investor. Please go ahead.

William Lap

Hi. Good morning Jeff and Bill.

Jeff Quiram

Good morning.

William Lap

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

Jeff Quiram

We have shipped the amount of wire, I won't say that we have shipped in totality every customers' requirements and wishes. We have shipped to several customers and we shipped enough wire to meet their needs. So I just wanted to be clear on that. So I don't want to say 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.

William Lap

Okay. So they are potentially at a position now where they could evaluate whether or not they would place an order. In other words, they are evaluating the wire you shipped and subject to your ability to produce in quantity, have they tested the wire and they are happy with it? Or can you shed any light on that, what they received?

Jeff Quiram

Well, they are in the process of testing it now, Bill. So we haven't received a definitive thumps 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 in on that yet. Of course, their vote is the only one that matters.

William Lap

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 supply they need, correct?

Jeff Quiram

We believe so, yes.

William Lap

Okay. Well, that's good news. I mean in other words, they have got what they want. 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 -- let's assume the customer does like the wire, it meets their tests, is it then just a subject question of whether or not you can produce the quantity they want? Is that consistently? Or what would be the next hurdle, if any?

Jeff Quiram

Well, I think most of our customers share the same concern that we have which is how quickly can we ramp up production and can we keep it ramped up. So that is a very valid concern on their part. It's certainly what we have been focusing on of late. And that will be the task. And so that's why I think you will get a first set of orders from customer and again larger quantities. And so that's where we are 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 is going to be on-offs based on our performance and our ability to fulfill that first steps. So that's the sequence that I think it will all occur in.

William Lap

Okay. That makes sense. So they are going to get their feet wet for a small 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 next month?

Jeff Quiram

Well, we have always believed in our conversations with our customers that it doesn't take weeks to test the wire. It takes a week probably maybe a couple if they are 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 whenever the negotiation 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 am not going to throw out a date on the wire order, Bill.

William Lap

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

Jeff Quiram

We are running the machine as often as we can.

William Lap

Okay. So you are building up some inventory then, right?

Jeff Quiram

That's the goal.

William Lap

Okay. All right. Thank you Jeff.

Jeff Quiram

Thank you Bill.

Operator

And we will now go to Andrew Shapiro with Lawndale Capital.

Andrew Shapiro

Hi. Thank you. Sorry, I got access to the call late and I might be repeating something but to follow-up on a question asked before, Mr. Lap, if you can help clarify. The tens of kilometers that you are referring to by year-end, is that amount limited by your current capacity to produce only up to that amount in that time period? Or that basically satisfies the customers' current needs, which would be only tens of kilometers by year-end?

Jeff Quiram

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

Andrew Shapiro

Okay. And then in terms of, we will call it capacity or speed of it, so here we are. And 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 the demands down the road of hundreds of kilometers, thousands of kilometers, is the current machine's capacity basically 40 kilometers a year, tens of kilometers a quarter? Or are we talking about you could do 100 kilometers? Can you do 1,000 kilometers a year?

Jeff Quiram

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

Andrew Shapiro

Okay. A year?

Jeff Quiram

A year, annually.

Andrew Shapiro

Okay.

Jeff Quiram

Now, we have never run it at anywhere near that throughput. So I would say that, well, the jury would be out. I mean we won't be able to say for sure that we can ever do that until we have actually done it. In the short term, I would say that that machine, it has capacity in the hundreds of kilometers. So I don't know if I would just go all the way to 750, but I would say we have got hundreds of kilometers of capacity for sure. And then we will see how it goes when we start to ramp. It's all a matter of how quickly we can ramp.

Andrew Shapiro

So you have run it at that short burst, you have run it at that throughput already, these hundreds of kilometers?

Jeff Quiram

Well, yes, if we would run it every day, for instance and we 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 capacity in the hundreds of kilometers a year.

Andrew Shapiro

Okay.

Jeff Quiram

But we have not demonstrated the ability to do that over a long period of time. So that's why I am hesitant in answering your question.

Andrew Shapiro

Sure. 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?

Jeff Quiram

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

Andrew Shapiro

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

Jeff Quiram

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

Andrew Shapiro

And I am assuming up to this point there is nothing, you are not disclosing in any way the range for us to kind of estimate or figure out kind of a revenue stream here yet? 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 the current machine with this particular capacity estimations?

Jeff Quiram

I am not sure how exactly we will disclose it. I doubt we will talk specific pricing for any one 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.

Andrew Shapiro

That would be helpful, yes. That will give us something.

Jeff Quiram

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

Andrew Shapiro

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

Jeff Quiram

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?

Bill Buchanan

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

Andrew Shapiro

Okay. Well, I mean that's fine. And then based on your current cash and all that and the limitations on how much money you could raise on that last round, I think it's because you fulfilled a shelf. 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 self or registration? Where and how do you guys get the next round of cash to put us over the hump here?

Jeff Quiram

Well, those discussions, those are options that we continue to look at all time I guess that obviously there has to still has to be some movement on that in the not-too-distant future, because we are out of money in the fourth quarter. But I guess I am not prepared to say what's that going to look like, what structure it is going to look like or what's the size. I don't have the answers to those questions at the moment, Andrew.

Andrew Shapiro

No. I guess what I am 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 will call it something quick and easy? Is that the case?

Jeff Quiram

No. It's not the case that the shelf is completely exhausted.

Andrew Shapiro

Okay.

Jeff Quiram

But on the other side of it is, 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 bridge to wherever you are going, right.

Andrew Shapiro

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 am pretty sure the amount you can raise based on the current pricing of our shares, does put a cap on how much could be raised through that method. There's other methods. But I know that would be a quick method but is there a quantification saying all that, we have 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?

Jeff Quiram

Well, you are asking a very specific questions about those sorts of instruments and I guess I am 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 are 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 something significantly less than that. But you just don't get to go and file another S-3. You don't file another S-3 and renew the shelf. There is the thing that limits the usability of an S3 registration statement is time. So there is only so much you can do in a capital year.

Andrew Shapiro

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

Jeff Quiram

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

Bill Buchanan

Yes. About two years, yes.

Jeff Quiram

Yes.

Andrew Shapiro

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

Jeff Quiram

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

Andrew Shapiro

Yes. You certainly have to have a quiet period when your registration or an offering and then do a new one, there is a certain window that has to wait. So then there's other options 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?

Jeff Quiram

I think most of our funding options, I think, we can take would say most of them will come from the public markets in one way, shape or form and I am not anticipating a significant influx of capital from a customer in the near term. But I guess that's all I have to say about it, Andrew. I mean I am not get into any specifics on that.

Andrew Shapiro

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

Jeff Quiram

All right. Thank you.

Operator

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

Steve Kruger

Hi Jeff. Thanks for taking my question.

Jeff Quiram

Hi Steve.

Steve Kruger

My question is really, the recipe that you are using right now, I think you have said that you have frozen the recipe for the HTS wire.

Jeff Quiram

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

Steve Kruger

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

Jeff Quiram

Well, I don't know that they -- they are certainly not a proprietary nature to like a composition mix of, for instance, the metal and the material that we have in a superconducting wire. The thing that's somewhat unique and proprietary is really just how we deposit the materials. So I guess the point is, if you had the exact same composition of materials, I will just make up numbers. So if you had 65% copper and 25% barium and 10% rare earth, for instance. Well, if you did that composition on the 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 been 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 that material has grown and the structure of that material inside of it, which is very unique based on the lay them on it. So no proprietary-ness on the mix, but quite a bit of proprietary differentiation on the how.

Steve Kruger

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

Jeff Quiram

Yes.

Steve Kruger

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

Jeff Quiram

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

Steve Kruger

600 and up, okay. And how does that compare to what the requirements are the customers buildings these tokamaks?

Jeff Quiram

Well, again, 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.

Steve Kruger

So the specs for the tokamak wire is 600 amps an up? Anything over 600 amps?

Jeff Quiram

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

Steve Kruger

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.

Jeff Quiram

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 are some of these customers talking about. And that's where the big disconnect is. And I still think that you have got an industry that's producing wire, well, in the single digit thousands of kilometers. So I don't know, is it three, is it four, is it 5,000 a year. I guess there is probably room for disagreement on that.

Steve Kruger

But it's that order of magnitude? What I am wondering is that this big disconnect between 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 on the competitor's wire and other performance characteristics compare to the Conductus wire?

Jeff Quiram

Well, the answer is yes, there are other suppliers of 2GS HTS wire out there and nothing really limits their ability. And yes, they can increase capacity and many of them are. And so that is something that I expect that we will see going forward. Again, the magnet wire, when you look at the performance all wire especially for these large magnet applications, it's all about how much current do you carry and how much current 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 it that environment as well. And it's all good news actually because I would say the reality is that if there was only one or two of us that could actually meet the requirements of these fusion guys going forward, they would all be a whole lot more worried about where the wire is going to come from. But there are several wires out there that are showing some good performance. I still think we are very much near the top of that list. But yes, there are others out there and it is good as far as I am concerned. I think that there needs to be -- if the superconducting wire business was to grow to the size that it believe it can, the only way that will happen if there was several providers of that wire out there. It won't happen if there is only one or two of us.

Steve Kruger

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

Jeff Quiram

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

Steve Kruger

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

Jeff Quiram

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

Steve Kruger

So two-plus shifts per day.

Jeff Quiram

Yes, absolutely.

Steve Kruger

Okay. So to get to the 750, you have got to increase yield and increase the number of shifts up to between two and three shifts a day.

Jeff Quiram

Yes.

Steve Kruger

Okay. When you first that talked about and announced the DoE contract, it seems to me that the discussion, applications for the wire, what the big new thing was going to be was Next Generation Electric Machines. There was really not much talk about tokamaks and fusion and all that. My sense is that, that has come about since you won out the DoE contract. Whatever happened to the prospective demand from Next Generation Electric Machines, big motors, big generators, that sort of thing? Are they still there? Or has that gone away?

Jeff Quiram

No. I think it's definitely still there. 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 is whole lot of potential there. And I guess the thing that they are both trying to -- they are certainly not the same in that you are building magnets that are different shape and in many instances a different scale. I mean, the tokamaks are quite big still at this time. But you are still building magnets with them. And so from that perspective, a lot of focus of the next generation machine project was getting the performance of the wire up, getting the 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 doesn't not describe fusion. But you are exactly right. When this project started, the 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. But no, the motor guys haven't decided that no, they don't want to do this anymore.

Steve Kruger

Okay. Great. Thank you, Jeff. That's all for now. Best of luck

Jeff Quiram

Thank you Steve. All right. Thank you.

Operator

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

Jeff Quiram

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 conferences. We will be at the H.C. Wainwright 2first Annual Global Investment Conference on September 8 through 10 in New York City. And STI will also be presenting in the upcoming EUCAS 2019 conference in early September in Glasgow, Scotland. EUCAS 2019 is the 1fourth European Conference on Applied Superconductivity. This edition of EUCAS will include short courses, satellite meetings and abstract submissions aimed to bring together people who 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 improvement at STI. We look forward to speaking to all of you again on our next call. Thank you very much and good day.

Operator

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

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