Superconductor Technologies Annual Report 2018

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORTPURSUANT TO SECTIONS 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934(Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the fiscal year ended December 31, 2018OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the transition period from to Commission File Number 0-21074 SUPERCONDUCTOR TECHNOLOGIES INC.(Exact name of registrant as specified in its charter) Delaware 77-0158076(State or other jurisdiction ofincorporation or organization) (IRS EmployerIdentification No.)9101 Wall Street, Suite 1300, Austin, Texas 78754(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (512) 334-8900Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon stock, $0.001 par value The NASDAQ Stock Market, LLCSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ or No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ or No ☒Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past90 days. Yes ☒ or No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ or No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best ofRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the ExchangeAct. Large accelerated filer ☐ Accelerated filer ☐Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ or No ☒The aggregate market value of the common stock held by non-affiliates was $9.6 million as of June 29, 2018 (the last business day of our most recently completedsecond fiscal quarter). The closing price of the common stock on that date was $9.20 as reported by the NASDAQ Capital Market. For purposes of this determination, weexcluded the shares of common stock held by each officer and director and by each person who was known to us to own 10% or more of the outstanding common stock asof June 29, 2018. The exclusion of shares owned by the aforementioned individuals and entities from this calculation does not constitute an admission by any of suchindividuals or entities that he or it was or is an affiliate of ours.We had 3,802,609 shares of common stock outstanding as of the close of business on March 21, 2019. Table of ContentsSUPERCONDUCTOR TECHNOLOGIES INC.FORM 10-K ANNUAL REPORTYear Ended December 31, 2018Unless otherwise noted, the terms “we,” “us,” and “our” refer to the combined and ongoing business operations of Superconductor Technologies Inc.and its subsidiaries Page SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 1 WHERE YOU CAN FIND MORE INFORMATION PART I Item 1. Business 3 Item 1A. Risk Factors 8 Item 1B. Unresolved Staff Comments 16 Item 2. Properties 16 Item 3. Legal Proceedings 16 Item 4. Mine Safety Disclosures 16 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17 Item 6. Selected Financial Data 18 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27 Item 8. Financial Statements and Supplementary Data 27 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 27 Item 9A. Controls and Procedures 27 Item 9B. Other Information 28 PART III Item 10. Directors, Executive Officers and Corporate Governance 28 Item 11. Executive Compensation 28 Item 12. Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 28 Item 13. Certain Relationships and Related Transactions, and Director Independence 28 Item 14. Principal Accounting Fees and Services 28 PART IV Item 15. Exhibits and Financial Statement Schedules 29 Item 16. Form 10-K Summary 32 iTable of ContentsSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-k (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Actof 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We claim the protection of the safe harbor contained inthe Private Securities Litigation Reform Act of 1995 for these forward looking statements. Our forward-looking statements relate to future events orour future performance and include, but are not limited to, statements concerning our business strategy, future commercial revenues, market growth,capital requirements, new product introductions, expansion plans and the adequacy of our funding. Other statements contained in this Report thatare not historical facts are also forward-looking statements. We have tried, wherever possible, to identify forward-looking statements by terminologysuch as “may,” “will,” “could,” “should,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and other comparableterminology.We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time,are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and theactual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to beincorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly,investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, toanticipate future results or trends.Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed orimplied by forward-looking statements include the following: • our limited cash and a history of losses; • our need to materially grow our revenues from commercial operations and/or to raise additional capital (which financing may not beavailable on acceptable terms or at all) to continue to implement our current business plan and maintain our viability, with our existingcash reserves only expected to be sufficient into the third quarter of 2019; • the performance and use of our equipment to produce wire in accordance with our timetable; • overcoming technical challenges in attaining milestones to develop and manufacture commercial lengths of our high temperaturesuperconducting (HTS) wire; • the possibility of delays in customer evaluation and acceptance of our HTS wire; • the limited number of potential customers and customer pressures on the selling prices of our products; • the limited number of suppliers for some of our components and our HTS wire; • there being no significant backlog from quarter to quarter; • our market being characterized by rapidly advancing technology; • the impact of competitive products, technologies and pricing; • manufacturing capacity constraints and difficulties; • the impact of any financing activity on the level of our stock price; • the dilutive impact of any issuances of securities to raise capital; • cost and uncertainty from compliance with environmental regulations; • local, regional, and national and international economic conditions and events, and the impact they may have on us and our customers,and; 1Table of Contents • if we fail to maintain the listing of our common stock with a U.S. national securities exchange, the liquidity of our common stock could beadversely affected.For further discussion of these and other factors see, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and “Risk Factors” in this Report.This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expresslyqualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to releasepublicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report. 2Table of ContentsPART I ITEM 1.BUSINESSGeneralWe are a leading company in developing and commercializing high temperature superconductor (“HTS”) materials and related technologies.Superconductivity is the unique ability to conduct electricity with little or no resistance when cooled to “critical” temperatures. HTS materials are afamily of elements that demonstrate superconducting properties at temperatures significantly warmer than previous superconducting materials. Electriccurrents that flow through conventional conductors encounter resistance. This resistance requires power to overcome and generates heat. HTS materialscan substantially improve the performance characteristics of electrical systems, reduce power loss, and lower heat generation providing extremely highcurrent carrying density and zero resistance to direct current.We were established in 1987 shortly after the discovery of HTS materials. Our stated objective was to develop products based on these materialsfor the commercial marketplace.After analyzing the market opportunities available, we decided to develop products for the utility and telecommunications industries.Our initial product was completed in 1998 and we began delivery to a number of wireless network providers. In the following 13 years, wecontinued to refine and improve the platform, with the primary focus on improving reliability, increasing performance and runtime, and mostimportantly, removing cost from the manufacturing process of the required subsystems. Our cost reducing efforts led to the invention of our proprietary,high-yield and high throughput HTS material deposition manufacturing process.In late 2010, we transitioned our research and development efforts to adapting our proprietary HTS material deposition techniques to theproduction of our HTS Conductus® wire for next generation power applications, which is our primary opportunity to grow our future revenues.In November 2016, we were selected as the prime recipient of the $4.5 million program award provided by the U.S. Department of Energy’s(DOE) Office of Energy Efficiency and Renewable Energy (EERE), on behalf of the Advanced Manufacturing Office, for its Next Generation ElectricMachines (NGEM) program and, in June 2017, the related contract was finalized and we have commenced work under that contract. See ‘Other Assetsand Investments’ below.In early 2018, we announced the concentration of our future Conductus wire product development efforts on NGEM to capitalize on severalaccelerating energy megatrends. This refined focus is very synergistic with our program with the Department of Energy (DOE) award for thedevelopment of superconducting wire to enable NGEM.Our Proprietary TechnologyOur development efforts over the last 30 years have yielded an extensive patent portfolio as well as critical trade secrets, unpatented technologyand proprietary knowledge. We have an extensive patent portfolio in addition to critical trade secrets, unpatented technology and proprietaryknowledge. In June 2016, we were awarded U.S. Patent No. 9,362,025 from the U.S. Patent and Trademark Office (USPTO) further protecting our uniquecapabilities for improving the performance of our Conductus superconducting wire in applications that utilize the advantages for operating in thepresence of high magnetic field. In February 2017 we were awarded two patents from the USPTO: U.S. Patent No. 9,564,258, associated with U.S. PatentNo. 9,362,025, providing additional protection for the foundation from which we will build high performance wire for our customers, and U.S. PatentNo. 9,567,661 protecting the system design developed by STI to improve monitoring efficiency when 3Table of Contentsevaporating materials in vacuum. In July 2017, EU patent 2188495 (08797906.8) was granted, this patent follows the U.S. Patent granted by U.S.8,607,560. This patent is focused on METHOD FOR CENTERING RECIPROCATING BODIES AND STRUCTURES MANUFACTUREDTHEREWITH, related to our Sapphire Cryocooler. Our current patents expire at various dates from 2019 to 2034. We enter into confidentiality andnon-disclosure agreements with our employees, suppliers and consultants to protect our proprietary information.Our strategic plan is to utilize our core proprietary technology in superconductivity and leverage our proprietary manufacturing processes tobuild Conductus wire for use in electrical power devices, including NGEM and tokamak fusion devices. As discussed above, we are adapting ourunique HTS material deposition techniques to produce our energy efficient, cost-effective and high performance Conductus wire technology for nextgeneration power applications. We have identified three energy market megatrends that can be addressed by superconducting wire: decentralizedrenewable energy, high energy efficiency and sustainable transportation. We are working with leading industry device manufacturers to completequalification and acceptance testing of Conductus wire. Our plan is for significant commercial production of Conductus wire following completion ofqualification orders.Our development efforts (including those described under “Our Future Business” below) can take a significant number of years to commercialize,and we must overcome significant technical barriers and deal with other significant risks, some of which are set out in our public filings, including inparticular the “Risk Factors” included in Item 1A of this Report.Our Future BusinessWe have created several unique capabilities and HTS manufacturing systems related to our Conductus wire platform that we are seeking toproduce by leveraging our leadership in superconducting technologies, extensive intellectual property and HTS manufacturing expertise.HTS Wire PlatformOur Conductus wire products are used in large markets where the advantages of HTS wire are recognized. Our product roadmap currently focuseson superconducting high field magnets used in tokamak fusion devices, including those used in next generation electrical machines (NGEM). Otherpotential targets for our technology include superconducting high power transmission cable, and superconducting fault current limiters (SFCL).Our Current Product FocusSuperconducting High Field magnets:There are a variety of applications that utilize superconducting magnets in order to capitalize on their unique ability to create extremely highmagnetic fields. The NMR and MRI machines of today utilize such superconducting magnets for this very reason. Currently, high-fieldsuperconducting magnets are manufactured using commercially available superconducting wire such as niobium-titanium (NbTi) or niobium-tin(Nb3Sn). NMR and MRI device manufacturers and manufacturers of other NGEM look towards advances in superconducting technologies to improvethe overall performance of their systems by dramatically increasing the magnetic fields while reducing size. In fusion science, the leading state-of-theart tokamak, a device which uses a powerful magnetic field to confine a hot plasma has been limited to NbTi and Nb3Sn material. High demand for arobust, high performance and low cost superconducting wire has spurred rapid development of a next generation alternative. In the last 10 years, newsecond generation (2G) Rare Earth, Barium, Copper Oxide (ReBCO) superconducting materials have been proven to drastically increase magnetic fieldstrengths, especially at low temperatures. These advanced ReBCO based superconductors now provide an excellent alternative to NbTi and Nb3Snbased materials. 4Table of ContentsOther Potential Targets For Our TechnologySuperconducting High Power Transmission Cable:Superconducting high power transmission and distribution cable transmit 5 to 10 times the electrical current of traditional copper or aluminumcables with significantly improved efficiency. HTS power cable systems consist of the cable, which is comprised of 100’s of strands of HTS wirewrapped around a copper core, and the cryogenic cooling system to maintain proper operating conditions. HTS power cables are particularly suited tohigh load areas such as the dense urban business districts of large cities, where purchases of easements and construction costs for traditional lowcapacity cables may be cost prohibitive. The primary application for HTS cables is medium voltage feeds to load pockets in dense urban areas. In thesehigh demand zones the grid is often saturated with aging infrastructure. HTS technology brings a considerable amount of power to new locations wherethe construction of additional transmission to distribution substations, with major transformer assets, is not feasible. Another potential use of HTSpower cable is to improve grid power transmission by connecting two existing substations. In dense urban environments many substations often reachcapacity limits and require redundant transformer capacity to improve reliability. HTS cables can tie these existing stations together, avoiding verycostly transformer upgrades and construction costs.Superconducting Fault Current Limiter (SFCL):With power demand on the rise and new power generation sources being added, the grid has become overcrowded and vulnerable to catastrophicfaults. Faults are abnormal flows of electrical current like a short circuit. As the grid is stressed, faults and power blackouts increase in frequency andseverity. SFCLs act like powerful surge protectors, preventing harmful faults from taking down substation equipment by reducing the fault current to asafer level (20 – 50% reduction) so that the existing switchgear can still protect the grid. Currently, electrical-utilities use massive 80kA circuitbreakers, oversized transformers and fuses to prevent faults from damaging their equipment and protecting against surges. However, once a fault hasoccurred, standard circuit breakers suffer destructive failure and need to be replaced before service can be restored. In addition, Smart Grid andembedded alternative energy generation enhancements will increase the need for SCFLs. Grid operators face a major challenge in moving power safelyand efficiently, from generators to consumers, through several stages of voltage transformation step downs and step ups. At each stage, valuable energyis lost in the form of waste heat. Moreover, while demands are continually rising, space for transformers and substations — especially in dense urbanareas — is severely limited. Conventional oil-cooled transformers pose a fire and environmental hazard. Compact, efficient superconductingtransformers, by contrast, are cooled by safe, abundant and environmentally benign liquid nitrogen. As an additional benefit, these actively-cooleddevices will offer the capability of operating in overload, to twice the nameplate rating, without any loss of life to meet occasional utility peak loaddemands.Other Assets and InvestmentsIn November 2016, we were selected as the prime recipient of the $4.5 million program award provided by the U.S. Department of Energy’s Officeof Energy Efficiency and Renewable Energy, on behalf of the Advanced Manufacturing Office, for its Next Generation Electric Machines (NGEM)program. We are collaborating in this program with TECO-Westinghouse Motor Company, an industry leading manufacturer of electric generators andmotors, and the Massachusetts Institute of Technology and University of North Texas. The combined team will focus on improving the manufacturingprocess of superconductive wires to improve performance and yield while reducing cost at high enough temperatures where nitrogen can be used as thecryogenic fluid. Advancing these enabling technologies has the potential to boost the competitiveness of American manufacturers and take thedevelopment of more efficient electric machines a giant step further. These technology R&D projects aim to significantly improve industrial motors formanufacturing, helping companies who use these motors in manufacturing save energy and money over the long run.In September 2014, STI and Robinson Research Institute entered a strategic agreement to jointly engage end customers and partners in thebuilding of superconductor products utilizing our Conductus superconducting wire 5Table of Contentsand Robinson Research Institute’s superconducting device technology. The Robinson Research Institute, based at Victoria University of Wellington inNew Zealand, has unique capabilities in the production of HTS Roebel cable used in superconducting machines and magnets, and in the developmentof HTS MRI and HTS transformers. The Robinson Research Institute has been a valuable ally as we prepare for the commercial launch of Conductuswire; Robinson’s performance characterization expertise and applications knowledge are truly impressive. Robinson is an expert in the development ofinnovative superconducting products. Jointly, we have identified initial projects including applications such as rotating machines, transformers,scientific magnets and MRI systems. Additionally, Robinson and its partners have a strong focus on Asia and we believe our agreement will help usexpand our reach into that fast-growing market. Working alongside many industry leaders, the Robinson Research Institute and its partners have builtsuperconducting devices for the energy industry, recently completing a transformer for use in the electrical grid. In the healthcare market, Robinson hasfocused on applications of MRI systems where HTS wire gives a competitive advantage.In 2007, we formed a joint venture with Hunchun BaoLi Communication Co. Ltd. (“BAOLI”) for the purpose of manufacturing and selling ourSuperLink interference elimination solution in China. The joint venture was subsequently terminated prior to our joint venture partner and usproviding our capital and technology contributions and our obligations were terminated.LicensesWe grant licenses for our technology to other companies. We have granted licenses to, among others, (1) Bruker for Nuclear Magnetic Resonanceapplication, (2) General Dynamics for government applications, (3) Star Cryoelectronics for Superconducting Quantum Interference Deviceapplications and (4) Theva for network infrastructure wireless electronic devices.Government ContractsFor 2018 and 2017, government related contracts accounted for 100% and 98%, respectively, of our revenues. Going forward, as we focus ourefforts on production of our Conductus wire for next generation power applications, we expect these contract revenues to be a less significant part ofour revenues.ManufacturingOur manufacturing process involves the operation of sophisticated production equipment and material handling by production technicians. Wepurchase inventory components and manufacture inventory based on existing customer purchase requests, and to a lesser extent, on sales forecasts. OurAustin, Texas facility addresses our growth expectations for our superconducting wire initiative. The opening of this facility coincided with thedelivery of our first superconducting wire production equipment in early 2012. Sales of our Conductus wire are expected to increase as we move tocommercial production of Conductus wire following completion of qualification orders.A number of components used in our products are available from only a limited number of outside suppliers due to unique designs, as well ascertain quality and performance requirements. We do not have guaranteed supply arrangements with any of these suppliers, do not maintain anextensive inventory of parts or components and customarily purchase sole or limited source parts and components pursuant to purchase orders. Ourreliance on sole or limited source suppliers involves certain risks and uncertainties, many of which are beyond our control, and some of which are setout in our public filings, including in particular the “Risk Factors” included in Item 1A of this Report.Marketing and SalesWe utilize a direct selling model due to the concentrated customer base for superconducting wire. 6Table of ContentsCompetitionWe face competition in various aspects of our technology and product development. Our products compete on the basis of performance,functionality, reliability, pricing, quality and compliance with industry standards. Our primary competitors include American Superconductor (AMSC),SuperPower (Furukawa), SuNam, Bruker, Shanghai Superconductor, BASF, SuperOx, Fujikura, Sumitomo, Shanghai Creative SuperconductorTechnologies Co., Ltd (SCSC), Oxolutia, MetOx, THEVA, Showa Cable Systems (SWCC), and Suzhou Advanced Materials Research Institute(SAMRI).Research and DevelopmentOur 2016 through 2018 research and development activities were focused entirely on developing our Conductus wire product. We spent a totalof $2.4 million, $2.6 million and $2.8 million for 2018, 2017 and 2016, respectively, on research and development.Environmental IssuesWe use certain hazardous materials in our research, development and manufacturing operations. As a result, we are subject to stringent federal,state and local regulations governing the storage, use and disposal of such materials. Current or future laws and regulations could require substantialexpenditures for preventative or remedial action, reduction of chemical exposure, waste treatment or disposal. Although we believe that our safetyprocedures for the handling and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, there is alwaysthe risk of accidental contamination or injury from these materials. To date, we have not incurred substantial expenditures for preventive action withrespect to hazardous materials or for remedial action with respect to any hazardous materials accident. However, the use and disposal of hazardousmaterials involves the risk that we could incur substantial expenditures for such preventive or remedial actions. If such an accident were to occur, wecould be held liable for resulting damages. The liability in the event of an accident or the costs of such remedial actions could exceed our resources orotherwise have a material adverse effect on our financial condition, results of operations or cash flows.Corporate InformationOur facilities and principal executive offices are located at 9101 Wall Street, Suite 1300, Austin, Texas 78754. Our telephone number is(512) 334-8900. We were incorporated in Delaware on May 11, 1987. Additional information about us is available on our website atwww.suptech.com. The information on our web site is not incorporated herein by reference.EmployeesAs of December 31, 2018, we had a total of 25 full time employees. None of our employees are represented by a labor union, and we believe thatour employee relations are good.BacklogOur commercial backlog consists of accepted product purchase orders with scheduled delivery dates during the next twelve months. We hadcommercial backlog of $151,000 at December 31, 2018, compared to $48,000 at December 31, 2017. At December 31, 2018 and December 31, 2017,in addition to this commercial backlog, we had evaluation and qualification orders with unspecified delivery dates for $80,000 and $80,000,respectively. 7Table of ContentsITEM 1A.RISK FACTORSThe following section includes some of the material factors that may adversely affect our business and operations. This is not an exhaustive list,and additional factors could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changingenvironment. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of allsuch risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from thosecontained in any forward-looking statements. This discussion of risk factors includes many forward-looking statements. For cautions about relying onsuch forward looking statements, please refer to the section entitled “Forward Looking Statements” at the beginning of this Report immediately priorto Item 1.Risks Related to Our BusinessWe have a history of losses and may never become profitable.In each of our last five years, we have experienced significant net losses and negative cash flows from operations. In 2018, we incurred a net lossof $8.1 million and had negative cash flows from operations of $6.9 million. In 2017, we incurred a net loss of $9.5 million and had negative cashflows from operations of $7.4 million. Our independent registered public accounting firm has included in its audit reports an explanatory paragraphexpressing substantial doubt about our ability to continue as a going concern. If we fail to increase our revenues, we may not achieve and may notmaintain profitability, we may not realize our investment in infrastructure, and may not meet our expectations or the expectations of financial analystswho report on our stock.We may need to raise additional capital. If we are unable to raise capital, our ability to implement our current business plan and ultimately ourviability as a company could be adversely affected.At December 31, 2018, we had $5.6 million in cash and cash equivalents. Our current forecast is that our existing cash resources will be sufficientto fund our planned operations into the third quarter of 2019. Our cash resources may therefore not be sufficient to fund our business through the end ofthe current fiscal year. Therefore, unless we can materially grow our revenues from commercial operations during such period, we will need to raiseadditional capital during this fiscal year ending December 31, 2019 to continue to implement our current business plan and maintain the viability ofthe Company.We believe the key factors to our future liquidity will be our ability to successfully use our expertise and our technology to generate revenues invarious ways, including commercial operations, joint ventures and licenses. Because of the expected timing and uncertainty of these factors, we willneed to raise funds to meet our working capital needs.Additional financing may not be available on acceptable terms or at all. If we issue additional equity securities to raise funds, the ownershippercentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existingholders of common stock and could also require that we issue warrants in connection with sales of our stock. If we cannot raise any needed funds togrow our commercial resources, we might be forced to make changes to, or delay aspects of, our business plan which could adversely affect our abilityto implement our current business plan and ultimately our viability as a company.Our strategic initiative to develop a new wire platform may not prove to be successful and our decision to focus our research and development effortson next generation power applications (NGEM) may not be the most advantageous market opportunity for HTS.We have spent a considerable amount of resources in developing a new wire platform for power applications. In late 2010, we transitioned ourresearch and development efforts to adapting our proprietary HTS 8Table of Contentsmaterial deposition techniques to the production of our HTS Conductus wire. In early 2018, we announced the concentration of our future Conductuswire product development efforts on NGEM to capitalize on several accelerating energy megatrends. While this refined focus is very synergistic withour program with the Department of Energy (DOE) award for the development of superconducting wire to enable NGEM, other applications for the useof HTS wire may ultimately prove to have been more advantageous to us had we not focused on NGEM.Substantial technical and business challenges remain before we can have a commercially successful product introduction. We may not be able toovercome these challenges in a timely or cost effective manner, if at all. Such a failure could adversely impact our prospects, liquidity, stock price andcarrying value of our fixed assets.There are numerous technological challenges that must be overcome in order for our Conductus wire to become commercially successful and ourability to address such technological challenges may adversely affect our ability to gain customers.Our plan is for commercial production of Conductus wire following completion of qualification orders. We have experienced in the past, andmay continue to experience, delays in achieving commercial production of Conductus. Commercialization can be delayed, among other factors, bytechnological challenges as we seek to improve our products and processes, delays from customer qualification orders and customer analysis of thoseorders, and decisions made by our customers with respect to post-qualification orders. Many of the factors that affect successful commercialization ofour products are affected by third party decisions.Conductus wire is uniquely positioned to address three key technical challenges in the market: high performance, improved economics andcommercial-scale capacity. To date, we, along with existing HTS wire manufacturers, have not overcome these challenges to allow for broadcommercialization of HTS wire. Customers cannot purchase long-length wire with any reasonable confidence or guaranteed volume; and electricutilities lack confidence in product availability which leads to delays in their deployment roadmap. HTS wire performance is currently below whatmany customers require. Many power applications require high performance wire with high current carrying capacity, mechanical durability, electricalintegrity with low AC losses and minimal splices. Producing high performance HTS wire has proven difficult, especially at volumes required for largescale deployment. The high demand for high performance wire available in very low volume results in a high wire price that narrows the market andlimits commercial viability.We have made significant progress in these areas, however delays in our Conductus wire development, as a result of technological challenges orother factors, may result in the introduction or commercial acceptance of our Conductus wire products later than expected.The commercial uses of superconducting wire and superconducting wire related products are limited today, and a broad commercial market maynot develop.Even if the technological hurdles are overcome, there is no certainty that a robust commercial market for unproven HTS wire products will cometo fruition. To date, commercial use of HTS wire has been limited to small feasibility demonstrations, and these projects are largely subsidized bygovernment authorities. While customer demand is high and market forecasts project large revenue opportunity for superconducting wire in powerapplications, the market may not develop and superconducting wire might never achieve long term, broad commercialization. In such an event, wewould not be able to commercialize our Conductus wire initiative and our business could be adversely impacted.We have limited experience marketing and selling superconducting wire products, and our failure to effectively market and sell our superconductingwire solutions would lower our revenue and cash flow.We have limited experience marketing and selling our Conductus wire. Once our Conductus wire is ready for commercial use, we will have tohire and develop a marketing and sales team to effectively demonstrate the 9Table of Contentsadvantages of our product over both more traditional products and competing superconducting products or other adjacent technologies. We may notbe successful in our efforts to market this new technology.We expect continued customer pressures to reduce our product pricing which may adversely affect our ability to operate on a commercially viablebasis.We expect to face pressure to reduce prices and accordingly, the average selling price of our Conductus wire. We anticipate customer pressure onour product pricing will continue for the foreseeable future. HTS wire is currently being sold at $250/kiloampere-meter (kA-m). At this price, HTS wirerepresents a significant cost of the end device. A price reduction is required for long term commercialization. Cryogenic systems, including cryocoolersand cryostats, have been developed but will also need to be cost optimized as HTS wire becomes available in volume. We have plans to further reducethe manufacturing cost of our products, but there is no assurance that our future cost reduction efforts will keep pace with price erosion. We will need tofurther reduce our manufacturing costs through engineering improvements and economies of scale in production and purchasing in order to achieveadequate gross margins. We may not be able to achieve the required product cost savings at a rate needed to keep pace with competitive pricingpressure. Additionally, we may be forced to discount future orders or may never reach commercial viability. If we fail to reach our cost savingobjectives or we are required to offer future discounts, our business may be harmed.We face competition with respect to various aspects of our technology and product development.Our current wireless products compete on the basis of performance, functionality, reliability, pricing, quality, and compliance with industrystandards. With respect to our Conductus wire materials, our competition includes American Superconductor (AMSC), SuperPower (Furukawa), SuNam, Bruker, Shanghai Superconductor, BASF, SuperOx, Fujikura, Sumitomo, THEVA, Showa Cable Systems (SWCC), and Suzhou Advanced MaterialsResearch Institute (SAMRI). In addition, we currently supply components and license technology to several companies that may eventually decide tomanufacture or design their own HTS components, rather than purchasing or licensing our technology. If we are unable to compete successfully againstour current or future competitors, then our business and results of operations will be adversely affected.We may not be able to compete effectively against alternative technologies.Our products also compete with a number of alternative approaches and technologies. Some of these alternatives may be more cost effective oroffer better performance than our products and we may not succeed in competing against these alternatives.We currently rely on specific technologies and may not successfully adapt to the rapidly changing market environments.We must overcome technical challenges to commercialize our Conductus wire. If we are able to do so, we will need to attain customer acceptanceof our Conductus wire, and we cannot ensure that such acceptance will occur. We will have to continue to develop and integrate advances to our coretechnologies. We will also need to continue to develop and integrate advances in complementary technologies. We cannot guarantee that ourdevelopment efforts will not be rendered obsolete by research efforts and technological advances made by others. Our business success depends uponour ability to keep pace with advancing technology, including materials, processes and industry standards.We may experience significant fluctuations in sales and operating results from quarter to quarter.Our quarterly results may fluctuate due to a number of factors, including: • the lack of any contractual obligation by our customers to purchase their forecasted demand for our products; 10Table of Contents • variations in the timing, cancellation, or rescheduling of customer orders, shipments and government contracts; and • high fixed expenses that may disproportionately impact operating expenses, especially during a quarter with a sales shortfall.If our customers desire to purchase products in excess of the forecasted amounts or in a different product mix, there may not be enough inventoryor manufacturing capacity to fill their orders. Customer backlog may not be converted in to commercial revenues.Due to these and other factors, our past results have limited predictive value as to our Conductus wire initiative or government contract revenues.Future revenues and operating results may not meet the expectations of stock analysts and investors. In either case, the price of our common stockcould be materially adversely affected.Worldwide economic uncertainty may adversely affect our business, operating results and financial condition.The United States and global economies continue to experience a period of economic and financial uncertainty, which could result in economicvolatility having direct and indirect adverse effects on our business, operating results and financial condition in a number of ways. For example,current or potential customers may delay or decrease spending with us, may delay paying us for previously purchased products, or may not pay us atall. In addition, this recent downturn has had, and may continue to have, an unprecedented negative impact on the global credit markets. If we arerequired to obtain financing in the near term to meet our working capital or other business needs, we may not be able to obtain that financing. Further,even if we are able to obtain the financing we need, it may be on terms that are not favorable to us, with increased financing costs and restrictivecovenants.Our reliance on a limited number of suppliers and the long lead time of components for our products could impair our ability to manufacture anddeliver our systems on a timely basis.A number of components used in our products are available from a limited number of outside suppliers due to unique designs as well as certainquality and performance requirements. Our reliance on sole or limited source suppliers involves certain risks and uncertainties, many of which arebeyond our control. These include the possibility of a shortage or the discontinuation of certain key components. Any reduced availability of theseparts or components when required could impair our ability to manufacture and deliver our systems on a timely basis and result in the delay orcancellation of orders, which could harm our business.In addition, the purchase of some of our key components involves long lead times and, in the event of unanticipated increases in demand for oursolutions, we may be unable to obtain these components in sufficient quantities to meet our customers’ requirements. We do not have guaranteedsupply arrangements with any of these suppliers, do not maintain an extensive inventory of parts or components and customarily purchase sole orlimited source parts and components pursuant to purchase orders. Business disruptions, quality issues, production shortfalls or financial difficulties of asole or limited source supplier could materially and adversely affect us by increasing product costs, or eliminating or delaying the availability of suchparts or components. In such events, our inability to develop alternative sources of supply quickly and on a cost-effective basis could impair ourability to manufacture and deliver our systems on a timely basis and could harm our business.Our reliance on a limited number of suppliers exposes us to quality control issues.Our reliance on certain single-source and limited-source components exposes us to quality control issues if these suppliers experience a failure intheir production process or otherwise fail to meet our quality requirements.A failure in single-source or limited-source components or products could force us to repair or replace a product utilizing replacement components. Ifwe cannot obtain comparable replacements or effectively return or redesign our products, we could lose customer orders or incur additional costs,which could have a material adverse effect on our gross margins and results of operations. 11Table of ContentsOur ability to protect our patents and other proprietary rights is uncertain, exposing us to possible losses of competitive advantage.Our efforts to protect our proprietary rights may not succeed in preventing infringement by others or ensure that these rights will provide us witha competitive advantage. Pending patent applications may not result in issued patents and the validity of issued patents may be subject to challenge.Third parties may also be able to design around the patented aspects of the products. Additionally, certain of the issued patents and patent applicationsare owned jointly with third parties. Because any owner or co-owner of a patent can license its rights under jointly-owned patents or applications,inventions made by us jointly with others are not subject to our exclusive control. Any of these possible events could result in losses of competitiveadvantage.We depend on specific patents and licenses to technologies, and we will likely need additional technologies in the future that we may not be able toobtain.We utilize technologies under licenses of patents from others for our products. These patents may be subject to challenge, which may result insignificant litigation expense (which may or may not be recoverable against future royalty obligations). Additionally, we continually try to developnew products, and, in the course of doing so, we may be required to utilize intellectual property rights owned by others and may seek licenses to do so.Such licenses may not be obtainable on commercially reasonable terms, or at all. It is also possible that we may inadvertently utilize intellectualproperty rights held by others, which could result in substantial claims.Intellectual property infringement claims against us could materially harm results of operations.Our products incorporate a number of technologies, including high-temperature superconductor technology, technology related to othermaterials, and electronics technologies. Our patent positions, and that of other companies using high-temperature superconductor technology, isuncertain and there is significant risk that others, including our competitors or potential competitors, have obtained or will obtain patents relating toour products or technologies or products or technologies planned to be introduced by us.We believe that patents may be or have been issued, or applications may be pending, claiming various compositions of matter used in ourproducts. We may need to secure one or more licenses of these patents. There can be no assurances that such licenses could be obtained oncommercially reasonable terms, or at all. We may be required to expend significant resources to develop alternatives that would not infringe suchpatents or to obtain licenses to the related technology. We may not be able to successfully design around these patents or obtain licenses to them andmay have to defend ourselves at substantial cost against allegations of infringement of third party patents or other rights to intellectual property. Inthose circumstances, we could face significant liabilities and also be forced to cease the use of key technology.Other parties may have the right to utilize technology important to our business.We utilize certain intellectual property rights under non-exclusive licenses or have granted to others the right to utilize certain intellectualproperty rights licensed from a third party. Because we may not have the exclusive rights to utilize such intellectual property, other parties may be ableto compete with us, which may harm our business.Because competition for target employees is intense, we may be subject to claims of unfair hiring practices, trade secret misappropriation or otherrelated claims.Companies in HTS wire industries whose employees accept positions with competitors frequently claim that competitors have engaged in unfairhiring practices, trade secret misappropriation or other related claims. We may be subject to such claims in the future as we seek to hire qualifiedpersonnel, and such claims may result in material litigation. If this should occur, we could incur substantial costs in defending against these claims,regardless of their merits. 12Table of ContentsOur success depends on the attraction and retention of senior management and technical personnel with relevant expertise.As a competitor in a highly technical market, we depend heavily upon the efforts of our existing senior management and technical teams. Theloss of the services of one or more members of these teams could slow product development and commercialization objectives. Due to the specializednature of our products, we also depend upon our ability to attract and retain qualified technical personnel with substantial industry knowledge andexpertise. Competition for qualified personnel is intense, and we may not be able to continue to attract and retain qualified personnel necessary for thedevelopment of our business.Regulatory changes could substantially harm our business.Certain regulatory agencies in the United States and other countries set standards for operations within their territories. HTS wire is subject to aregulatory regime, which may become more strictly regulated if the market grows. Any failure or delay in obtaining necessary approvals could harmour business.We may acquire or make investments in companies or technologies that could cause loss of value to stockholders and disruption of business.We may explore opportunities to acquire companies or technologies in the future. Other than the acquisition of Conductus, Inc. in 2002, we havenot made any such acquisitions or investments to date and, therefore, our ability as an organization to make acquisitions or investments is unproven.An acquisition entails many risks, any of which could adversely affect our business, including: • failure to integrate operations, services and personnel; • the price paid may exceed the value eventually realized; • loss of share value to existing stockholders as a result of issuing equity securities to finance an acquisition; • potential loss of key employees from either our then current business or any acquired business; • entering into markets in which we have little or no prior experience; • diversion of financial resources and management’s attention from other business concerns; • assumption of unanticipated liabilities related to the acquired assets; and • the business or technologies acquired or invested in may have limited operating histories and may be subject to many of the same risks towhich we are exposed.In addition, future acquisitions may result in potentially dilutive issuances of equity securities, or the incurrence of debt, contingent liabilities oramortization expenses or charges related to goodwill or other intangible assets, any of which could harm our business. As a result, if we fail to properlyevaluate and execute acquisitions or investments, our business and prospects may be seriously harmed.If we are unable to implement appropriate controls and procedures to manage our potential growth, we may not be able to successfully offer ourproducts and implement our business plan.Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning andmanagement process. Growth in future operations would place a significant strain on management systems and resources. We expect that we wouldneed to improve our financial and managerial controls, reporting systems and procedures, and would need to expand, train and manage our work forceworldwide. Furthermore, we expect that we would be required to manage multiple relationships with various customers and other third parties. 13Table of ContentsCompliance with environmental regulations could be especially costly due to the hazardous materials used in the manufacturing process. Inaddition, we could incur expenditures related to hazardous material accidents.We are subject to a number of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic,volatile or otherwise hazardous chemicals used in our business. Current or future laws and regulations could require substantial expenditures forpreventative or remedial action, reduction of chemical exposure, waste treatment or disposal. Any failure to comply with present or future regulationscould result in the imposition of fines, suspension of production or interruption of operations. In addition, these regulations could restrict our ability toexpand or could require us to acquire costly equipment or incur other significant expense to comply with environmental regulations or to clean upprior discharges.In addition, although we believe that our safety procedures for the handling and disposing of hazardous materials comply with the standardsprescribed by state and federal regulations, there is always the risk of accidental contamination or injury from these materials. To date, we have notincurred substantial expenditures for preventive action with respect to hazardous materials or for remedial action with respect to any hazardousmaterials accident, but the use and disposal of hazardous materials involves risk that we could incur substantial expenditures for such preventive orremedial actions. If such an accident were to occur, we could be held liable for resulting damages. The liability in the event of an accident or the costsof such remedial actions could exceed our resources or otherwise have a material adverse effect on our financial condition, results of operations or cashflows.The reliability of market data included in our public filings is uncertain.Since we operate in a rapidly changing market, we have in the past, and may from time to time in the future, include market data from industrypublications and our own internal estimates in some of the documents we file with the Securities and Exchange Commission. The reliability of thisdata cannot be assured. Industry publications generally state that the information contained in these publications has been obtained from sourcesbelieved to be reliable, but that its accuracy and completeness is not guaranteed. Although we believe that the market data used in our filings with theSecurities and Exchange Commission is and will be reliable, it has not been independently verified. Similarly, internal company estimates, whilebelieved by us to be reliable, have not been verified by any independent sources.Risks Related to Our Common StockOur stock price is volatile.The market price of our common stock has been, and is expected to be, subject to significant volatility. The value of our common stock maydecline regardless of our operating performance or prospects. Factors affecting our market price include: • our perceived prospects and liquidity; • progress or any lack of progress (or perceptions related to progress) in timely overcoming the remaining substantial technical andcommercial challenges related to our Conductus wire initiative; • variations in our operating results and whether we have achieved key business targets; • changes in, or our failure to meet, earnings estimates; • changes in securities analysts’ buy/sell recommendations; • differences between our reported results and those expected by investors and securities analysts; • announcements of new contracts by us or our competitors; • market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors; and • general economic, political or stock market conditions. 14Table of ContentsRecent events have caused stock prices for many companies, including ours, to fluctuate in ways unrelated or disproportionate to their operatingperformance. The general economic, political and stock market conditions that may affect the market price of our common stock are beyond ourcontrol. The market price of our common stock at any particular time may not remain the market price in the future.If we fail to maintain the listing of our common stock with a U.S. national securities exchange, the liquidity of our common stock could be adverselyaffected.Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delistedfrom the NASDAQ Capital Market or if we are unable to transfer our listing to another stock market.Our common stock is listed for trading on the NASDAQ Capital Market. NASDAQ has adopted a number of continued listing standards that areapplicable to our common stock, including a requirement that the bid price of our common stock be at least $1.00 per share. Failure to maintain theminimum bid price can result in the delisting of our common stock from the NASDAQ Capital Market. We have previously fallen out of compliancewith the minimum bid price requirement and have implemented reverse stock splits to regain compliance. Most recently, we effected a one-for-tenreverse stock split on July 24, 2018 for the purpose of regaining compliance with the minimum bid requirement following a notice from the ListingQualifications Department of the Nasdaq Stock Market on May 22, 2018 and received a notice of re-compliance from the Listing QualificationsDepartment of the Nasdaq Stock Market on August 7, 2018. We currently have approximately 3,802,609 publicly held shares as of March 21, 2019.Because of NASDAQ’s continued listing standard which requires that we maintain at least 500,000 publicly held shares, our ability to effectuate areverse split in the future is limited to a reverse split ratio that would maintain compliance with such publicly held share requirement. This effectivelimit to a reverse split ratio could prevent us from remediating a minimum bid price violation under circumstances where our stock price wassubstantially below $1.00 and a higher ratio was needed to remediate the noncompliance.If our common stock is delisted by NASDAQ, our common stock may be eligible to trade on the OTC Bulletin Board, OTC QB or anotherover-the-counter market. Any such alternative would likely result in it being more difficult for us to raise additional capital through the public orprivate sale of equity securities and for investors to dispose of, or obtain accurate quotations as to the market value of, our common stock. In addition,there can be no assurance that our common stock would be eligible for trading on any such alternative exchange or markets.We have a significant number of outstanding warrants and options, and future sales of the shares obtained upon exercise of these options orwarrants could adversely affect the market price of our common stock.As of December 31, 2018, we had outstanding options exercisable for an aggregate of 140,323 shares of common stock at a weighted averageexercise price of $25.29 per share and warrants to purchase up to 3,796,849 shares of our common stock at a weighted average exercise price of $10.60per share. The holders may sell these shares in the public markets from time to time under a registration statement or under Rule 144, withoutlimitations on the timing, amount or method of sale. As our stock price rises, the holders may exercise their warrants and options and sell a largenumber of shares. This could cause the market price of our common stock to decline.Our corporate governance structure may prevent our acquisition by another company at a premium over the public trading price of our shares.It is possible that the acquisition of a majority of our outstanding voting stock by another company could result in our stockholders receiving apremium over the public trading price for our shares. Provisions of our restated certificate of incorporation and our amended and restated bylaws, eachas amended, and of Delaware 15Table of Contentscorporate law could delay or make more difficult an acquisition of our company by merger, tender offer or proxy contest, even if it would create animmediate benefit to our stockholders. For example, our restated certificate of incorporation does not permit stockholders to act by written consent, andour bylaws generally require ninety days advance notice of any matters to be brought before the stockholders at an annual or special meeting.In addition, our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the terms, rights andpreferences of this preferred stock, including voting rights of those shares, without any further vote or action by the stockholders. At March 21, 2019,1,370,710 shares of preferred stock remained unissued. The rights of the holders of common stock may be subordinate to, and adversely affected by, therights of holders of preferred stock that may be issued in the future. The issuance of preferred stock could also make it more difficult for a third party toacquire a majority of our outstanding voting stock, even at a premium over our public trading price.Furthermore, our certificate of incorporation also provides for a classified board of directors with directors divided into three classes servingstaggered terms. These provisions may have the effect of delaying or preventing a change in control of us without action by our stockholders and,therefore, could adversely affect the price of our stock or the possibility of sale of shares to an acquiring person.We do not anticipate declaring any cash dividends on our common stock.We have never declared or paid cash dividends on our common stock and do not plan to pay any cash dividends in the near future. Our currentpolicy is to retain all funds and earnings for use in the operation and expansion of our business. ITEM 1B.UNRESOLVED STAFF COMMENTSNot applicable. ITEM 2.PROPERTIESWe lease all of our properties. All of our operations, including our manufacturing facilities, are currently located in an industrial complex inAustin, Texas comprising approximately 94,000 square feet. In December 2016, we renewed our Austin lease for an additional three year term and thatlease now expires in April 2020. Our Austin lease contains a renewal option. Although we currently have excess capacity, we believe our facility canbe managed in a flexible and cost effective manner and is adequate to meet current and reasonably anticipated needs for approximately the next twoyears. ITEM 3.LEGAL PROCEEDINGSFrom time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business.Excluding ordinary, routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe wouldreasonably be expected to have a material adverse effect on our business, financial condition or results of operation or cash flow. ITEM 4.MINE SAFETY DISCLOSURESNot applicable. 16Table of ContentsPART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket for Common StockOur common stock is traded on the NASDAQ Capital Market under the symbol “SCON.” The following table shows the high and low sales pricesfor our common stock as reported by NASDAQ for each calendar quarter in the last two fiscal years: 2018 High Low Quarter ended December 31, 2018 $2.50 $ 1.03 Quarter ended September 29, 2018 $12.88 $1.47 Quarter ended June 30, 2018 $10.90 $8.50 Quarter ended March 31, 2018 $14.90 $9.30 2017 High Low Quarter ended December 31, 2017 $14.20 $9.50 Quarter ended September 30, 2017 $18.90 $8.80 Quarter ended July 1, 2017 $24.70 $12.10 Quarter ended April 1, 2017 $18.00 $10.40 Holders of RecordWe had 9 holders of record of our common stock on March 21, 2019. This number does not include stockholders for whom shares were held in a“nominee” or “street” name. We estimate that there are more than 5,000 beneficial owners of our common stock.DividendsWe have never paid cash dividends and intend to employ all available funds in the development of our business. We have no plans to pay cashdividends in the near future.Our ability to declare or pay dividends on shares of our common stock is subject to the requirement that we pay an equivalent dividend on eachoutstanding share of our Preferred Stock (on an as-converted basis).Sales of Unregistered SecuritiesWe did not conduct any offerings of equity securities during the fourth quarter of 2018 that were not registered under the Securities Act of 1933.Repurchases of Equity SecuritiesNone. 17Table of ContentsSecurities Authorized for Issuance Under Equity Compensation PlansEquity Compensation Plan Information Plan Category Number of securities to beissued upon exercise ofoutstanding options,warrants and rights Weighted-averageexercise price ofoutstanding options,warrants and rights Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding securitiesreflected in column (a)) Equity compensation plans approvedby security holders 140,323 $25.29 78,452 Equity compensation plans notapproved by security holders — — — Total 140,323 $25.29 78,452 ITEM 6.SELECTED FINANCIAL DATAThe information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with our FinancialStatements and Notes thereto appearing in Item 15 of Part IV of this Report and “Management’s Discussion and Analysis of Financial Condition andResults of Operations”. Years Ended December 31, 2018 2017 2016 2015 2014 (In thousands, except per share data) Statement of Operations Data: Net revenues: Net commercial product revenues $— $11 $131 $244 $632 Government and other contract revenues 1,556 435 — — — Total net revenues 1,556 446 131 244 632 Costs and expenses: Cost of revenues 2,245 3,072 3,444 3,004 1,558 Cost of government and other contract revenues 1,210 331 — — — Other research and development 2,352 2,644 2,784 4,125 5,992 Selling, general and administrative 3,972 4,062 5,146 5,838 5,389 Total costs and expenses 9,779 10,109 11,374 12,967 12,939 Loss from operations (8,223) (9,663) (11,243) (12,723) (12,307) Other income (expense), net 92 136 127 4,121 4,056 Net loss $(8,131) $(9,527) $(11,116) $(8,602) $(8,251) Basic and diluted net loss per common share $(4.03) $(9.06) $(35.31) $(65.97) $(96.73) Weighted average number of shares Outstanding 2,017 1,052 315 131 85 Years Ended December 31, 2018 2017 2016 2015 2014 Balance Sheet Data: Cash and cash equivalents $5,616 $3,056 $10,452 $7,469 $1,238 Working capital (deficit) 4,998 2,562 9,693 6,900 (407) Total assets 7,614 5,996 15,214 14,365 10,799 Long-term debt, including current portion 17 54 172 400 5,624 Total stockholders’ equity 6,745 5,112 14,098 13,122 4,002 18Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis Management’s Discussion and Analysis of Financial Condition and Results of Operations includes many forward-looking statements. Forcautions about relying on such forward looking statements, please refer to the section entitled “Forward Looking Statements” at the beginning ofthis Report immediately prior to Item 1.GeneralWe are a leading company in developing and commercializing high temperature superconductor (“HTS”) materials and related technologies.HTS materials can substantially improve the performance characteristics of electrical systems, reducing power loss, lowering heat generation, anddecreasing electrical noise.Results of Operations2018 Compared to 2017Total revenues increased by $1,110,000 or 249%, to $1,556,000 in 2018 from $446,000 in 2017. Government contract revenues were $1,556,000or 100% of total revenue, of our total revenue in 2018 and $435,000 or 98% of total revenues in 2017. Sales of our Conductus wire are expected toincrease as we reach commercial production of Conductus wire.Cost of commercial product revenues includes all direct costs, manufacturing overhead, preproduction process development and provision forexcess and obsolete inventories. The cost of commercial product revenues totaled $2.2 million for 2018 compared to $3.1 million in 2017. Cost ofgovernment product revenues totaled $1.2 million for 2018 compared to $0.3 million in 2017.Our cost of commercial product revenues includes both variable and fixed cost components. The variable component consists primarily ofmaterials, assembly and test labor, overhead, which includes equipment and facility depreciation, transportation costs and warranty costs. The fixedcomponent includes test equipment and facility depreciation, purchasing and procurement expenses and quality assurance costs. Given the fixednature of such costs, the absorption of our production overhead costs into inventory decreases and the amount of production overhead variancescharged to cost of sales increases as production volumes decline since we have fewer units to absorb our overhead costs against. Conversely, theabsorption of our production overhead costs into inventory increases and the amount of production overhead variances expensed to cost of salesdecreases as production volumes increase since we have more units to absorb our overhead costs against. As a result, our gross profit margins generallydecrease as revenue and production volumes decline due to lower sales volume and higher amounts of production overhead variances expensed to costof sales; and our gross profit margins generally increase as our revenue and production volumes increase due to higher sales volume and lower amountsof production overhead variances expensed to cost of sales.The following is an analysis of our product gross profit margins for 2018 and 2017: Years EndedDecember 31, Dollars in Thousands 2018 2017 Commercial product revenues $— $11 Cost of commercial product revenues 2,245 3,072 Gross loss $(2,245) $(3,061) We had a gross loss of $2.2 million in 2018 from the sale of our commercial products compared to a gross loss of $3.1 million in 2017. Weexperienced a gross loss in 2018 and 2017 due to: our increased manufacturing 19Table of Contentsefforts to bring our Conductus wire production to market; our processes not yet being finalized for high yield manufacturing and; our sales beinginsufficient to cover our overhead. As we emphasize improving manufacturing processes and increasing our yields at lower than optimal capacity, weexpect gross losses to continue in 2019.In June 2017, we finalized negotiations on a $4.5 million DOE contract and have begun work on this government contract. Our first year goalsunder this contract are to increase current carrying capacity and reduce costs of our Conductus wire. Our 2018 government contract revenues were$1,556,000 and cost of government contract revenues, which include all direct contract costs and overhead, were $1,210,000.Research and development expenses relate to development of new wire products and new wire product manufacturing processes. In 2017, weceased research and development efforts for our wireless commercial products. Research and development expenses totaled $2.4 million in 2018compared to $2.6 million in 2017, a decrease of $0.2 million, or 8%. Our 2018 expenses were lower compared to 2017 as a result of our efforts movingfrom research and development to manufacturing of our new Conductus wire products.Selling, general and administrative expenses totaled $4.0 million in 2018 compared to $4.1 million in 2017, a decrease of $0.1 million, or 3%.The lower expenses in 2018 were primarily the result of lower stock-based compensation expense.We had a gain from the decreased fair value of warrant derivatives of $52,000 in 2018 compared to a gain of $99,000 in 2017. The primaryreason for the gains was the drop in our stock price offset by the resulting effect of the reduction in the exercise price of certain warrants. This warrantliability is adjusted to fair value each reporting period, and any change in value is recognized in the statement of operations. In 2018, we also had a$24,000 warrant price revaluation expense due to our March 2018 financing. There was no price revaluation in 2017. See Note 5 — Stockholders’Equity: Warrants.Other income of $64,000 and $37,000 in 2018 and 2017, respectively, was interest income.Net loss totaled $8.1 million in 2018, compared to $9.5 million in 2017, a decrease of $1.4 million, or 15%. The decrease in net loss principallyresulted from $1.1 million higher 2018 government revenues and $0.3 million lower expenses.The net loss available to common stockholders totaled $4.03 per common share in 2018, compared to a net loss of $9.06 per common share in2017, a decrease of $5.03, or 56%. The decreased loss per common share in 2018 principally resulted from a greater number of common sharesoutstanding at December 31, 2018 compared to December 31, 2017.2017 Compared to 2016Our 2017 revenues consisted primarily of government contract revenues. Total revenues increased by $315,000 or 241%, to $446,000 in 2017from $131,000 in 2016. Government contract revenues were $435,000 or 98%, of our total revenue in 2017 and $0 in 2016. Product revenue for wireoutside of our government contracts was $11,000 or 2% of total revenue in 2017 compared to $1,000 or 1% of total revenue in 2016. Sales of ourConductus wire are expected to increase as we reach commercial production of Conductus wire.Cost of commercial product revenues includes all direct costs, manufacturing overhead, preproduction process development and provision forexcess and obsolete inventories. The cost of commercial product revenues totaled $3.1 million for 2017 compared to $3.4 million in 2016.Our cost of commercial product revenues includes both variable and fixed cost components. The variable component consists primarily ofmaterials, assembly and test labor, overhead, which includes equipment and 20Table of Contentsfacility depreciation, transportation costs and warranty costs. The fixed component includes test equipment and facility depreciation, purchasing andprocurement expenses and quality assurance costs. Given the fixed nature of such costs, the absorption of our production overhead costs into inventorydecreases and the amount of production overhead variances charged to cost of sales increases as production volumes decline since we have fewer unitsto absorb our overhead costs against. Conversely, the absorption of our production overhead costs into inventory increases and the amount ofproduction overhead variances expensed to cost of sales decreases as production volumes increase since we have more units to absorb our overheadcosts against. As a result, our gross profit margins generally decrease as revenue and production volumes decline due to lower sales volume and higheramounts of production overhead variances expensed to cost of sales; and our gross profit margins generally increase as our revenue and productionvolumes increase due to higher sales volume and lower amounts of production overhead variances expensed to cost of sales.The following is an analysis of our product gross profit margins for 2017 and 2016: Years Ended December 31, Dollars in Thousands 2017 2016 Commercial product revenues $11 100% $131 100% Cost of commercial product revenues 3,072 2,792% 3,444 2,629% Gross loss $(3,061) 2,783% $(3,313) 2,529% We had a gross loss of $3.1 million in 2017 from the sale of our commercial products compared to a gross loss of $3.3 million in 2016. Weexperienced a gross loss in 2017 and 2016 due to: our increased manufacturing efforts to bring our Conductus wire production to market; our processesnot yet being finalized for high yield manufacturing and; our sales being insufficient to cover our overhead. As we emphasize improvingmanufacturing processes and increasing our yields at lower than optimal capacity, we expect gross losses to continue in the first half of 2018.In June 2017, we finalized negotiations on a $4.5 million DOE contract and have begun work on this government contract. Our first year goalsunder this contract are to increase current carrying capacity and reduce costs of our Conductus wire. Our 2017 government contract revenues were$435,000 and cost of government contract revenues were $331,000.Research and development expenses relate to development of new wire products and new wire product manufacturing processes. In 2017, weceased research and development efforts for our wireless commercial products. Research and development expenses totaled $2.6 million in 2017compared to $2.8 million in 2016, a decrease of $0.2 million, or 7%. Our 2017 expenses were lower compared to 2016 as a result of our efforts movingfrom research and development to manufacturing of our new Conductus wire products.Selling, general and administrative expenses totaled $4.1 million in 2017 compared to $5.1 million in 2016, a decrease of $1.0 million, or 20%.The lower expenses in 2017 were primarily the result of lower stock-based compensation expense.We had a gain from the decreased fair value of warrant derivatives of $0.1 million in 2017 compared to a gain of $.2 million in 2016. The primaryreason for the gains was the drop in our stock price offset by the resulting effect of the reduction in the exercise price of certain warrants. This warrantliability is adjusted to fair value each reporting period, and any change in value is recognized in the statement of operations. In 2016, we also had a$66,000 warrant price revaluation expense due to our August 2016 and December 2016 financing. There was no price revaluation in 2017. See Note 5— Stockholders’ Equity: Warrants.Other income of $37,000 and $10,000 in 2017 and 2016, respectively, was interest income. 21Table of ContentsNet loss totaled $9.5 million in 2017, compared to $11.1 million in 2016, a decrease of $1.6 million, or 14%. The decrease in net loss principallyresulted from $1.0 million lower 2017 selling general and administrative expenses and $0.4 million increased revenues from government contractwork.The net loss available to common stockholders totaled $9.06 per common share in 2017, compared to a net loss of $35.31 per common share in2016, a decrease of $26.25, or 74%. The decreased loss per common share in 2017 principally resulted from a greater number of common sharesoutstanding at December 31, 2017 compared to December 31, 2016.Liquidity and Capital ResourcesCash Flow AnalysisAs of December 31, 2018, we had net working capital of $5.0 million, including $5.6 million in cash and cash equivalents, compared to networking capital of $2.6 million at December 31, 2017, which included $3.1 million in cash and cash equivalents. We currently invest our excess cashin short-term, investment-grade, money-market instruments with maturities of three months or less. Our investments have no exposure to the auctionrate securities market.Cash and cash equivalents increased by $2.5 million from $3.1 million at December 31, 2017 to $5.6 million at December 31, 2018. In 2018,$6.9 million cash was used in operations, while $9.7 million was provided by financing activities.In 2018 and 2017, net cash used in investing activities was $189,000 and $152,000, respectively. Our 2018 and 2017 investing activities werefor the purchase of property and equipment.In 2018, net cash provided by two financing activities: (1) the March 2018 offering of our common stock, common stock equivalents andwarrants provided gross proceeds of $2.0 million and, after deducting the placement agent fees and our offering expenses, net proceeds of $1.7 million;(2) the July 2018 offering of our common stock, Series E Convertible Preferred Stock and warrants provided gross proceeds of $9.0 million and, afterdeducting the placement agent fees and our offering expenses, net proceeds of $7.98 million.In 2017, net cash provided by financing activities was $200,000 from the exercise of outstanding warrants.Net cash was provided by two financing activities in 2016: (1) the August 2016 offering of our common stock and Series C Convertible PreferredStock and warrants provided gross proceeds of $2.2 million and, after deducting the placement agent fees and our offering expenses, net proceeds of$1.9 million; and (2) the December 2016, offering of our common stock and Series D Convertible Preferred Stock and warrants provided gross proceedsof $10.3 million and, after deducting the placement agent fees and our offering expenses, net proceeds of $9.2 million.Financing ActivitiesWe have historically financed our operations through a combination of cash on hand, equipment lease financings, available borrowings underbank lines of credit and both private and public equity offerings.On July 30, 2018 we completed a public offering of an aggregate of 2,571,429 shares of our common stock (or common stock equivalents) andwarrants to purchase an aggregate of 2,571,429 shares of common stock with gross proceeds to us of $9.0 million. The net proceeds to us from theoffering, after deducting the placement agent fees and our estimated offering expenses, was $7.98 million.On March 9, 2018, we completed a registered offering of common stock (and common stock equivalents) with total gross proceeds ofapproximately $2 million. The net proceeds to us from the registered offering, after deducting the placement agent fees and our estimated offeringexpenses, was approximately $1.7 million. 22Table of ContentsIn 2017, we had no private or public offerings.During 2016 we completed the following financings: (1) the August 2016, offering of 29,360 shares of our common stock, 1,294.595255 sharesof our Series C Convertible Preferred Stock and 53,506 warrants provided gross proceeds of $2.2 million and, after deducting the placement agent feesand our offering expenses, net proceeds of $1.9 million; and (2) the December 2016, offering of 179,878 shares of our common stock, 7,586.82 sharesof our Series D Convertible Preferred Stock and 685,667 warrants provided gross proceeds of $10.3 million and, after deducting the placement agentfees and our offering expenses, net proceeds of $9.2 million.We currently intend to use the net proceeds of these offerings for working capital and general corporate purposes. General corporate purposesmay include capital expenditures. In addition, we may use a portion of any net proceeds to acquire complementary products, technologies, orbusinesses.Contractual Obligations and Commercial CommitmentsWe incur various contractual obligations and commercial commitments in our normal course of business. They consist of the following:Operating Lease Obligations. Our operating lease obligations consist of facilities leases in Austin, Texas, as well as several smaller equipmentleases.Patents and Licenses. We have entered into a licensing agreement requiring royalty payments ranging from 0.5% to 1.0% of specified productsales. The agreement contains a provision for the payment of guaranteed or minimum royalty amounts. Typically, the licensor can terminate our licenseif we fail to pay minimum annual royalties.Purchase Commitments. In the normal course of business, we incur purchase obligations with vendors and suppliers for the purchase of inventory,as well as other goods and services. These obligations are generally evidenced by purchase orders that contain the terms and conditions associated withthe purchase arrangements. We are committed to accept delivery of such material pursuant to the purchase orders subject to various contract provisionsthat allow us to delay receipt of such orders or cancel orders beyond certain agreed upon lead times. Cancellations may result in cancellation costspayable by us.Tabular Disclosure of Contractual Obligations. At December 31, 2018, we had the following contractual obligations and commercialcommitments: Payments Due by Period Contractual Obligations Total 2019 2020 and 2021 2022 and 2023 2024 andbeyond Operating leases $1,170,000 $935,000 $233,000 $2,000 $— Minimum license commitment 70,000 10,000 20,000 20,000 20,000 Fixed asset and inventory purchase commitments 60,000 60,000 — — — Total contractual cash obligations $1,300,000 $1,005,000 $253,000 $22,000 $20,000 Capital ExpendituresWe plan to invest in fixed assets during 2019 on an as-needed basis to enhance manufacturing our Conductus wire products. These expendituresare expected not to exceed $1 million. 23Table of ContentsFuture LiquidityIn 2018, we incurred a net loss of $8.1 million and had negative cash flows from operations of $6.9 million. In 2017, we incurred a net loss of$9.5 million and had negative cash flows from operations of $7.4 million. Our cash resources may, therefore, not be sufficient to fund our businessthrough the end of the current fiscal year. Therefore, unless we can materially grow our revenues from commercial operations during such period, wewill need to raise additional capital during this fiscal year ending December 31, 2019 to continue to implement our current business plan and maintainour viability. Our independent registered public accounting firm has included in their audit reports for 2017 through 2018 an explanatory paragraphexpressing substantial doubt about our ability to continue as a going concern.At December 31, 2018 we had $5.6 million in cash. We believe the key factors to our future liquidity will be our ability to successfully use ourexpertise and our technology to generate revenues in various ways, including commercial operations, joint ventures, and licenses and we plan toleverage our leadership in superconducting technologies, extensive intellectual property, and HTS manufacturing expertise to develop and produceour Conductus wire.We forecast that our existing cash resources will be sufficient to fund our planned operations into the third quarter of 2019. Unless we materiallygrow our revenues from commercial opportunities during 2019, we will need to raise additional capital to continue to implement our current businessplan and maintain our viability.Net Operating Loss CarryforwardAs of December 31, 2018, we had net operating loss carryforwards for federal and state income tax purposes of approximately $345.9 millionwhich expire in the years 2019 through 2037. Of these amounts, $69.7 million resulted from the acquisition of Conductus. Under the Internal RevenueCode change of control limitations, a maximum of $20.7 million will be available for reduction of future taxable income. The 2017 Tax Act did notimpact our 2017 or 2018 operating results or income tax expense.Due to the uncertainty surrounding their realization, we have recorded a full valuation allowance against our net deferred tax assets. Accordingly,no deferred tax asset has been recorded in the accompanying consolidated balance sheets.Section 382 of the Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards based on a statutoryrate of return (usually the “applicable federal funds rate”, as defined in the Internal Revenue Code) and the value of the corporation at the time of a“change of ownership” as defined by Section 382. We had changes in ownership in August 1999, December 2002, June 2009, August 2013 andDecember 2016. In addition, we acquired the right to Conductus’ net operating losses, which are also subject to the limitations imposed bySection 382. Conductus underwent six ownership changes, for purpose of this rule, which occurred in February 1999, February 2001, December2002, June 2009, August 2013, and December 2016. Therefore, the ability to utilize Conductus’ and our net operating loss carryforwards of$327.7 million which were incurred prior to the 2016 ownership changes, will be subject in future periods to annual limitations of $126,000. Netoperating losses released from this limitation and/or incurred by us subsequent to the ownership changes and therefore not subject to this limitationtotaled $18.2 million. An additional $126,000 in losses were released from limitation during the year under Section 382.Market RiskWe are exposed to various market risks, including changes in interest rates. Market risk is the potential loss arising from adverse changes inmarket rates and prices. We do not enter into derivatives or other financial instruments for trading or speculation purposes. Our money marketinvestments have no exposure to the auction rate securities market. 24Table of ContentsAt December 31, 2018, we had approximately $5 million invested in a money market account yielding approximately 0.5%. Assuming no yieldon this money market account and no liquidation of principal for the year, our total interest income would decrease by less than $25,000 per annum.InflationWe do not foresee any material impact on our operations from inflation.Critical Accounting Policies and EstimatesOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidatedfinancial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recoveryof long-lived assets, income taxes, warranty obligations, contract revenue and contingencies. We base our estimates on historical experience and onvarious other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptionscould cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates underdifferent assumptions or conditions.On July 24, 2018, we effected a 1-for-10 reverse stock split of our common stock, or the Second Reverse Stock Split. As a result of the SecondReverse Stock Split, every ten shares of our pre-Second Reverse Stock Split common stock were combined and reclassified into one share of ourcommon stock. The Second Reverse Stock Split did not change the authorized number of shares or the par value of our common stock.On July 19, 2016, we effected a 1-for-15 reverse stock split of our common stock, or the Reverse Stock Split. As a result of the Reverse StockSplit, every fifteen shares of our pre-Reverse Stock Split common stock were combined and reclassified into one share of our common stock. TheReverse Stock Split did not change the authorized number of shares or the par value of our common stock.Share and per share data included in this Item 7 have been retroactively adjusted, as applicable, for the effect of the reverse stock splits. Certain ofthe information contained in the documents incorporated by reference herein and therein present information on our common stock on a pre-reversestock split basis.We identified certain critical accounting policies which affect certain of our more significant estimates and assumptions used in preparing ourconsolidated financial statements in this Annual Report on Form 10-K for 2018. We have not made any material changes to these policies.We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of theconsolidated financial statements. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers tomake required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actualmarket conditions are less favorable than those projected by management, additional inventory write-downs may be required.Our inventory is valued at the lower of its actual cost or net realizable value of the inventory. We review inventory quantities on hand and onorder and record, on a quarterly basis, a provision for excess and obsolete 25Table of Contentsinventory and/or vendor cancellation charges related to purchase commitments. If the results of the review determine that a write-down is necessary, werecognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basisfor inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjustedfor known changes in demands for such products, or the estimated forecast of product demand and production requirements. We recognize allmanufacturing preproduction process development expenses as cost of revenues in the period they are incurred. Our business is characterized by rapidtechnological change, frequent new product development and rapid product obsolescence that could result in an increase in the amount of obsoleteinventory quantities on hand. Demand for our products can fluctuate significantly. Our estimates of future product demand may prove to be inaccurate,and we may understate or overstate the provision required for excess and obsolete inventory.Commercial product revenues consist of revenue from sales of products, net of trade discounts and allowances. We recognize revenue whenevidence of an arrangement exists, contractual obligations have been satisfied, title and risk of loss have been transferred to the customer andcollection of the resulting receivable is reasonably assured. At the time revenue is recognized, we provide for the estimated cost of product warranties ifallowed for under contractual arrangements and return products. Our warranty obligation is affected by product failure rates and service delivery costsincurred in correcting a product failure. Should such failure rates or costs differ from these estimates, accrued warranty costs would be adjusted.We indemnify, without limit or term, our customers against all claims, suits, demands, damages, liabilities, expenses, judgments, settlements andpenalties arising from actual or alleged infringement or misappropriation of any intellectual property relating to our products or other claims arisingfrom our products. We have no known losses and we cannot reasonably develop an estimate of the maximum potential amount of payments that mightbe made under our indemnities because of the uncertainty as to whether a claim might arise and how much it might total.Government contract revenues are principally generated under research and development contracts. Contract revenues are derived primarily fromresearch contracts with agencies of the United States Government. Credit risk related to accounts receivable arising from such contracts is consideredminimal. These contracts may include cost-plus, fixed price and cost sharing arrangements and are generally short-term in nature.All payments to us for work performed on contracts with agencies of the U.S. Government are subject to adjustment upon audit by the DefenseContract Audit Agency. Based on historical experience and review of current projects in process, we believe that the audits will not have a significanteffect on our financial position, results of operations or cash flows. The Defense Contract Audit Agency has audited us through 2017.We periodically evaluate the realizability of long-lived assets as events or circumstances indicate a possible inability to recover the carryingamount. Long-lived assets that will no longer be used in our business are written off in the period identified since they will no longer generate anypositive cash flows for us. Such evaluation is based on various analyses, including cash flow and profitability projections, as well as alternative uses,such asgovernment contracts or awards. The analyses necessarily involve significant management judgment. In the event the projected undiscounted cashflows are less than net book value of the assets, the carrying value of the assets will be written down to their estimated fair value. Our future cash flowsmay vary from estimates.The fair value of our warrant liabilities was determined using the binomial lattice valuation model, including an equal probabilities tree and anearly exercise factor. These derivative liabilities were adjusted to reflect fair value at each period end, with any increase or decrease in the fair valuerecognized in our consolidated statement of operations. These warrants expired on August 9, 2018 and had no value at December 31, 2018.Stock-based employee compensation cost is recognized using the fair-value based method for all awards granted. We issue stock option awardsand restricted share awards to employees and to non-employee directors 26Table of Contentsunder our stock-based incentive plans. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricingmodel. Compensation cost related to restricted share awards is recorded based on the market price of our common stock on the grant date. We recognizecompensation expense over the expected service period, generally the vesting period on a straight-line basis from the grant date.Our valuation allowance against the deferred tax assets is based on our assessments of historical losses and projected operating results in futureperiods. If and when we generate future taxable income in the U.S. against which these tax assets may be applied, some portion or all of the valuationallowance would be reversed and an increase in net income would consequently be reported in future years. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSee “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk.” ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAAll information required by this item is listed in the Index to Financial Statements in Part IV, Item 15(a)1 of this Report. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENot applicable. ITEM 9A.CONTROLS AND PROCEDURESDisclosure Controls and Procedures; Changes in Internal Control Over Financial ReportingWe have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,as amended). As of the end of the period covered by this report we carried out an evaluation under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934, as amended. Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures are effective.There were no changes in our internal controls over financial reporting during the fourth quarter of the year ended December 31, 2018 that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting.We do not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative totheir costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, have been detected.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined inRule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our 27Table of Contentsmanagement assessed the effectiveness of our internal controls over financial reporting as of December 31, 2018. In making its assessment of theeffectiveness of our internal controls over financial reporting, our management used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on these criteria, our management has concludedthat, as of December 31, 2018, our internal control over financial reporting is effective.This Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.This Report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission. ITEM 9B.OTHER INFORMATIONNone.PART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders to befiled with the Securities and Exchange Commission within 120 days after the end of our year ended December 31, 2018. ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders to befiled with the Securities and Exchange Commission within 120 days after the end of our year ended December 31, 2018. ITEM 12.SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders to befiled with the Securities and Exchange Commission within 120 days after the end of our year ended December 31, 2018. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCENone. ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders to befiled with the Securities and Exchange Commission within 120 days after the end of our year ended December 31, 2018. 28Table of ContentsPART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) The following documents are filed as part of this Report:1. Index to Financial Statements. Our consolidated financial statements and the Report of Marcum LLP, Independent Registered PublicAccounting Firm are included in Part IV of this Report on the pages indicated: Page Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets as of December 31, 2018 and 2017 F-2 Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 F-3 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 F-5 Notes to Consolidated Financial Statements F-6 2. Financial Statement Schedule Covered by the Foregoing Report of Independent Registered Public Accounting Firm. Schedule II — Valuation and Qualifying Accounts F-26 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notesthereto.3. Exhibits Number Description of Document3.1 Restated Certificate of Incorporation of Registrant as amended through March 1, 2006. (14)3.2 Certificate of Amendment of Restated Certificate of Incorporation of Registrant, filed March 11, 2013. (18)3.3 Certificate of Amendment of Restated Certificate of Incorporation of Registrant, filed July 18, 2016. (25)3.4 Certificate of Amendment of Restated Certificate of Incorporation of Registrant, filed July 19, 2018, effective July 24, 2018. (29)3.4 Amended and Restated Bylaws of Registrant. (14)3.5 Amendment adopted March 29, 2010 to Amended and Restated Bylaws of Registrant. (15)3.6 Amendment adopted October 28, 2013 to Amended and Restated Bylaws of Registrant. (19)4.1 Form of Common Stock Certificate. (13)4.2 Form of Series B Preferred Stock Certificate. (24)4.3 Form of Series C Preferred Stock Certificate. (26)4.4 Form of Series D Preferred Stock Certificate. (27)4.5 Form of Series E Preferred Stock Certificate. (28)4.6 Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock of Registrant filedNovember 13, 2007. (12) 29Table of ContentsNumber Description of Document 4.7 Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock of Registrant and form ofSeries B Convertible Preferred Stock Certificate. (24) 4.8 Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock of Registrant and form ofSeries C Convertible Preferred Stock Certificate. (26) 4.9 Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock of Registrant and form ofSeries D Convertible Preferred Stock Certificate. (27) 4.10 Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock of Registrant. (29) 4.11 Form of Warrant to Purchase Common Stock issued by Registrant on March 25, 2015, pursuant to the Purchase Agreement. (21) 4.12 Form of Placement Agent Warrant to Purchase Common Stock issued by Registrant on March 25, 2015. (21) 4.13 Form of Series [A][B] Common Stock Purchase Warrant issued by Registrant on October 14, 2015. (22) 4.14 Form of Placement Agent Warrant to Purchase Common Stock issued by Registrant on October 14, 2015. (22) 4.15 Form of Warrant to Purchase Common Stock issued by Registrant on August 2, 2016. (26) 4.16 Form of Placement Agent Warrant to Purchase Common Stock issued by Registrant on August 2, 2016. (26) 4.17 Form of Warrant to Purchase Common Stock issued by Registrant on December 14, 2016. (27) 4.18 Form of Pre-Funded Common Stock Purchase Warrant issued by Registrant on March 9, 2018. (28) 4.19 Form of Placement Agent Common Stock Purchase Warrant issued by Registrant on March 9, 2018. (28) 4.20 Form of Series A Common Stock Purchase Warrant issued by Registrant on March 9, 2018. (28) 4.21 Registration Rights Agreement dated March 6, 2018. (28) 4.22 Form of Common Stock Purchase Warrant issued by Registrant on July 30, 2018. (29) 4.23 Form of Placement Agent Common Stock Purchase Warrant issued by Registrant on July 30, 2018. (29)10.1 Form of Change in Control Agreement dated March 28, 2003. (1)***10.2 Form of Amendment No. 1 to Change in Control Agreement dated as of May 24, 2005. (7)***10.3 Form of Amendment No. 2 to Change in Control Agreement dated as of December 31, 2006. (9)***10.4 Patent License Agreement by and between Registrant and Lucent Technologies GRL LLC. (2)**10.5 License Agreement between Registrant and Sunpower dated May 2, 2005. (3)**10.6 Employment Agreement between Registrant and Jeffrey Quiram dated as of February 14, 2005. (4)***10.7 Amendment to Employment Agreement between Registrant and Jeffrey Quiram dated as of December 31, 2006. (9)***10.8 2003 Equity Incentive Plan As Amended May 25, 2005. (6)***10.9 Form of Notice of Grant of Stock Options and Option Agreement for 2003 Equity Incentive Plan. (4)*** 30Table of ContentsNumber Description of Document10.10 Management Incentive Plan (July 24, 2006). (8)***10.11 Compensation Policy for Non-Employee Directors dated March 18, 2005. (5)***10.12 Form of Director and Officer Indemnification Agreement. (20)***10.13 Lease Agreement between the Registrant and Prologis Texas III LLC dated December 5, 2011. (16)10.14 First Amendment to Lease Agreement between the Registrant and Prologis Texas III LLC dated August 23, 2012. (17)10.15 Second Amendment to Lease Agreement between Registrant and Prologis Texas III LLC dated July 18, 2014. (20)10.16 Agreement between Registrant and Hunchun BaoLi Communication Co., Ltd. (“BAOLI”) dated August 17, 2007. (10)10.17 First Amendment to Agreement between Registrant and BAOLI dated November 1, 2007. (11)10.18 Second Amendment to Agreement between Registrant and BAOLI dated January 7, 2008. (11)10.19 2013 Equity Incentive Plan adopted October 25, 2013, and forms of Award Agreements. (23) ***14 Code of Business Conduct and Ethics. (7)21 List of Subsidiaries. (30)23.1 Consent of Marcum, LLP, Independent Registered Public Accounting Firm. (30)31.1 Statement of CEO Pursuant to 302 of the Sarbanes-Oxley Act of 2002. (30)31.2 Statement of CFO Pursuant to 302 of the Sarbanes-Oxley Act of 2002. (30)32.1 Statement of CEO Pursuant to 906 of the Sarbanes-Oxley Act of 2002. (30) *32.2 Statement of CFO Pursuant to 906 of the Sarbanes-Oxley Act of 2002. (30) *101 Financials provided in XBRL format. (38) (1)Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2003, filed May 13, 2003.(2)Incorporated by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, filed March 11, 2004.(3)Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2004, filed November 10, 2004.(4)Incorporated by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, filed March 16, 2005.(5)Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2005, filed May 6, 2005.(6)Incorporated by reference from Registrant’s Current Report on Form 8-K filed May 27, 2005.(7)Incorporated by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, filed March 8, 2006.(8)Incorporated by reference from Registrant’s Current Report on Form 8-K filed July 28, 2006.(9)Incorporated by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, filed April 2, 2007.(10)Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2007, filed November 13, 2007.(11)Incorporated by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed March 27, 2008.(12)Incorporated by reference from Registrant’s Current Report on Form 8-K/A filed February 25, 2008. 31Table of Contents(13)Incorporated by reference from Registrant’s Form 10-K filed March 28, 2014.(14)Incorporated by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, filed March 17, 2010.(15)Incorporated by reference from Registrant’s Current Report on Form 8-K filed April 2, 2010.(16)Incorporated by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, filed March 30, 2012.(17)Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2012, filed November 13, 2012.(18)Incorporated by reference from Registrant’s Current Report on Form 8-K filed March 14, 2013.(19)Incorporated by reference from Registrant’s Current Report on Form 8-K filed October 31, 2013.(20)Incorporated by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014, filed March 12, 2015.(21)Incorporated by reference from Registrant’s Current Report on Form 8-K filed March 24, 2015.(22)Incorporated by reference from Registrant’s Form S-1/A filed October 6, 2015.(23)Incorporated by reference as Exhibit A to Registrant’s Schedule 14A filed October 31, 2013.(24)Incorporated by reference from Registrant’s Current Report on Form 8-K filed October 13, 2015.(25)Incorporated by reference from Registrant’s Current Report on Form 8-K filed July 18, 2016.(26)Incorporated by reference from Registrant’s Current Report on Form 8-K filed August 2, 2016.(27)Incorporated by reference from Registrant’s Form S-1/A filed December 6, 2016.(28)Incorporated by reference from Registrant’s Current Report on Form 8-K filed March 9, 2018.(29)Incorporated by reference from Registrant’s Amendment No. 1 to Registration Statement on Form S-1, filed July 24, 2018.(30)Filed herewith.*Furnished, not filed.**Confidential treatment has been previously granted for certain portions of these exhibits.***This exhibit is a management contract or compensatory plan or arrangement.(b)Exhibits. See Item 15(a) above. ITEM 16.FORM 10-K SUMMARYNone. 32Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and Board of Directors ofSuperconductor Technologies Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Superconductor Technologies Inc. (the “Company”) as of December 31, 2018 and2017, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period endedDecember 31, 2018, and the related notes and Schedule II — valuation and qualifying accounts (collectively referred to as the “financial statements”).In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity withaccounting principles generally accepted in the United States of America.Explanatory Paragraph — Going ConcernThe accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described inNote 2, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet itsobligations and sustain is operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments thatmight result from the outcome of this uncertainty.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (UnitedStates) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtainan understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for ouropinion./s/ Marcum LLPMarcum LLPWe have served as the Company’s auditor since 2009.Los Angeles, CAMarch 29, 2019 F-1Table of ContentsSUPERCONDUCTOR TECHNOLOGIES INC.CONSOLIDATED BALANCE SHEETS December 31,2018 December 31,2017 ASSETS Current Assets: Cash and cash equivalents $5,616,000 $3,056,000 Accounts receivable, net — 151,000 Inventory, net 173,000 102,000 Prepaid expenses and other current assets 61,000 83,000 Total Current Assets 5,850,000 3,392,000 Property and equipment, net of accumulated depreciation of $12,172,000 and $11,200,000,respectively 1,009,000 1,793,000 Patents, licenses and purchased technology, net of accumulated amortization of $1,026,000 and$984,000, respectively 686,000 742,000 Other assets 69,000 69,000 Total Assets $7,614,000 $5,996,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $313,000 $349,000 Accrued expenses 539,000 481,000 Total Current Liabilities 852,000 830,000 Other long term liabilities 17,000 54,000 Total Liabilities 869,000 884,000 Commitments and contingencies (Notes 7 and 8) Stockholders’ Equity: Preferred stock, $.001 par value, 2,000,000 shares authorized, 330,787 and 328,925 issued andoutstanding, respectively — — Common stock, $.001 par value, 250,000,000 shares authorized, 3,270,609 and 1,074,659 sharesissued and outstanding, respectively 3,000 11,000 Capital in excess of par value 326,486,000 316,714,000 Accumulated deficit (319,744,000) (311,613,000) Total Stockholders’ Equity 6,745,000 5,112,000 Total Liabilities and Stockholders’ Equity $7,614,000 $5,996,000 See accompanying notes to the consolidated financial statements. F-2Table of ContentsSUPERCONDUCTOR TECHNOLOGIES INC.CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31 2018 2017 2016 Commercial product revenues $— $11,000 $131,000 Government contract revenues 1,556,000 435,000 — Total revenues 1,556,000 446,000 131,000 Costs and expenses: Cost of commercial product revenues 2,245,000 3,072,000 3,444,000 Cost of government contract revenues 1,210,000 331,000 — Research and development 2,352,000 2,644,000 2,784,000 Selling, general and administrative 3,972,000 4,062,000 5,146,000 Total costs and expenses 9,779,000 10,109,000 11,374,000 Loss from operations (8,223,000) (9,663,000) (11,243,000) Other Income and Expense Adjustments to fair value of warrant derivatives 52,000 99,000 183,000 Adjustment to warrant exercise price (24,000) — (66,000) Other income 64,000 37,000 10,000 Net loss $(8,131,000) $(9,527,000) $(11,116,000) Basic and diluted net loss per common share $(4.03) $(9.06) $(35.31) Basic and diluted weighted average number of common shares outstanding 2,016,869 1,052,473 314,838 See accompanying notes to the consolidated financial statements. F-3Table of ContentsSUPERCONDUCTOR TECHNOLOGIES INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ConvertiblePreferred Stock Common Stock Capital inExcess ofPar Value AccumulatedDeficit Total Shares Amount Shares Amount Balance at December 31, 2015 330,873 $— 264,055 $1,000 $304,091,000 $(290,970,000) $13,122,000 Issuance of common stock (net of costs) 209,239 3,222,000 3,222,000 Issuance of Series C preferred stock 1,295 — 1,118,000 1,118,000 Issuance of Series D preferred stock 7,587 — 6,748,000 6,748,000 Stock-based compensation 1,004,000 1,004,000 Cancellation of shares from reverse stock split (4) Conversion of Series C preferred stock to common stock (1,295) — 41,981 Conversion of Series B preferred stock to common stock (1,948) — 37,100 Conversion of Series D preferred stock to common stock (2,745) — 183,000 Net loss (11,116,000) (11,116,000) Balance at December 31, 2016 333,767 — 735,371 1,000 316,183,000 (302,086,000) 14,098,000 Conversion of Series D preferred stock to common stock (4,842) — 322,788 Issuance of common stock (net of costs) from exercise ofoutstanding warrants 13,333 200,000 200,000 Stock-based compensation 3,167 341,000 341,000 Net loss (9,527,000) (9,527,000) Balance at December 31, 2017 328,925 — 1,074,659 1,000 316,724,000 (311,613,000) 5,112,000 Issuance of Series E preferred stock 4,135 Conversion of Series E preferred stock to common stock (2,273) 649,429 Issuance of common stock (net of costs) 1,509,000 2,000 9,678,000 9,680,000 Stock-based compensation 84,000 84,000 Warrant Exercises 38,720 Cancellation of shares from reverse stock split (1,199) Net Loss (8,131,000) (8,131,000) Balance at December 31, 2018 330,787 $— 3,270,609 $3,000 $326,486,000 $(319,744,000) $6,745,000 See accompanying notes to the consolidated financial statements. F-4Table of ContentsSUPERCONDUCTOR TECHNOLOGIES INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2018 2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(8,131,000) $(9,527,000) $(11,116,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,015,000 1,885,000 2,139,000 Stock-based compensation expense 84,000 341,000 1,004,000 Adjustments to fair value of warrant derivatives (52,000) (99,000) (183,000) Adjustments to warrant exercise price 24,000 — 66,000 Changes in assets and liabilities: Accounts receivable 151,000 (143,000) 28,000 Inventory (70,000) (34,000) 52,000 Prepaid expenses and other current assets 22,000 26,000 12,000 Patents and licenses 14,000 212,000 (130,000) Other assets — 27,000 32,000 Accounts payable, accrued expenses and other liabilities 12,000 (132,000) (9,000) Net cash used in operating activities (6,931,000) (7,444,000) (8,105,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (189,000) (152,000) — Net cash used in investing activities (189,000) (152,000) — CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of common and preferred stock 9,680,000 — 11,088,000 Net proceeds from exercise of warrants — 200,000 — Net cash provided by financing activities 9,680,000 200,000 11,088,000 Net increase (decrease) in cash and cash equivalents 2,560,000 (7,396,000) 2,983,000 Cash and cash equivalents at beginning of year 3,056,000 10,452,000 7,469,000 Cash and cash equivalents at end of year $5,616,000 $3,056,000 $10,452,000 See accompanying notes to the consolidated financial statements. F-5Table of ContentsSUPERCONDUCTOR TECHNOLOGIES INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1 — The CompanySuperconductor Technologies Inc. (together with our subsidiaries, “we” or “us”) was incorporated in Delaware on May 11, 1987. We develop andproduce high temperature superconducting (HTS) materials and associated technologies. We have generated more than 100 patents as well asproprietary trade secrets and manufacturing expertise. We are now leveraging our key enabling technologies in HTS materials and cryogenics,to pursue emerging opportunities in the electrical grid and in equipment platforms that utilize electrical circuits. In January 2012, we took possessionof a facility in Austin, Texas and have moved our HTS wire processes and our research and development to Austin.Our initial superconducting products were completed in 1998, and we began delivery to a number of wireless network providers. In the following13 years, our cost reducing efforts led to the invention of our proprietary, high-yield and high throughput HTS material deposition manufacturingprocess.Since 2010 we have focused our research and development efforts on adapting our successful HTS materials deposition techniques to theproduction of our HTS Conductus® wire for next generation power applications. While most of our current commercial product revenues come from thesale of high performance wireless communications infrastructure products, production of our Conductus wire is our principal opportunity to grow ourfuture revenue.Historically, we used research and development contracts as a source of funds for our commercial technology development. Although we are notcurrently involved as either a contractor or subcontractor on contracts with the U.S. government, in November 2016, we were selected as the primerecipient of a $4.5 million program award provided by the U.S. Department of Energy and, in June 2017, the related contract was finalized and we havenow commenced work under that contract.Note 2 — Summary of Significant Accounting PoliciesBasis of PresentationWe have incurred significant net losses since our inception and have an accumulated deficit of $319.7 million. In 2018, we incurred a net loss of$8.1 million and had negative cash flows from operations of $6.9 million. In 2017, we had an accumulated deficit of $311.6 million, a net loss of$9.5 million and negative cash flows from operations of $7.4 million. At December 31, 2018, we had $5.6 million in cash. Our current forecast is thatour existing cash resources will be sufficient to fund our planned operations into the third quarter of 2019. Our cash resources may therefore not besufficient to fund our business through the end of the current fiscal year. Therefore, unless we can materially grow our revenues from commercialoperations during such period, we will need to raise additional capital during this fiscal year ending December 31, 2019 to continue to implement ourcurrent business plan and maintain our viability. Additional financing may not be available on acceptable terms or at all. If we issue additional equitysecurities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences orprivileges senior to those of existing holders of common stock. If we cannot raise any needed funds, we might be forced to make further substantialreductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as acompany. These factors raise substantial doubt about our ability to continue as a going concern.Our plans regarding improving our future liquidity will require us to successfully use our expertise and our technology to generate revenues invarious ways, including commercial operations, joint ventures and licenses.We have invested and will continue to invest significant capital in our Austin, Texas manufacturing facility to enable us to produce our Conductuswire products. However, delays in the timing of our ability to, including but F-6Table of Contentsnot limited to, raise additional capital, unexpected production delays, and our ability to sell our Conductus wire products in large scale couldsubstantially impact our estimates used in the determination of expected future cash flows and/or expected future profitability. The accompanyingconsolidated financial statements do not include any adjustments that may result from the outcome of the uncertainties set forth above.In 2018, we undertook steps to reduce our ongoing operating costs and we raised net cash proceeds of $9.7 million from the sale of our commonand preferred shares and warrants.On July 24, 2018, we effected a 1-for-10 reverse stock split of our common stock, or the Second Reverse Stock Split. As a result of the SecondReverse Stock Split, every ten shares of our pre-Second Reverse Stock Split common stock were combined and reclassified into one share of ourcommon stock. The Second Reverse Stock Split did not change the authorized number of shares or the par value of our common stock.On July 19, 2016, we effected a 1-for-15 reverse stock split of our common stock, or the Reverse Stock Split. As a result of the Reverse StockSplit, every fifteen shares of our pre-Reverse Stock Split common stock were combined and reclassified into one share of our common stock. TheReverse Stock Split did not change the authorized number of shares or the par value of our common stock.Share and per share data included in the Notes to Consolidated Financial Statements have been retroactively adjusted, as applicable, for theeffect of the reverse stock splits. Certain of the information contained in the documents incorporated by reference herein and therein presentinformation on our common stock on a pre-reverse stock split basis.Recent Accounting PronouncementsEffective January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amended guidance establishes a single comprehensive model for companies touse in accounting for revenue arising from contracts with customers and superseded most of the existing revenue recognition guidance, includingindustry-specific guidance. There was no impact from adopting the standard on our financial statements and related disclosures.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASCTopic 840. ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets andcorresponding lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases as either finance or operating, with classificationaffecting the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018,including interim periods within those fiscal years. Early adoption is permitted. We plan to apply this guidance at January 1, 2019 and will record ourleases on our consolidated balance sheets as right-of-use assets and lease liabilities. We also expect to elect this new standard’s available transitionpractical expedients. Consequently, financial information will not be updated and disclosures required under the new standard will not be provided fordates and periods before January 1, 2019. We have reviewed our leases and other agreements in order to determine the effects of the new guidance onour consolidated financial statements. We have determined that we have leases that meet the criteria for recognition of right-of-use assets and leaseliabilities on the balance sheet under the new guidance. We are not party to any leases for which we are the lessor. We believe the adoption will causeus to recognize approximately $1.0 million in each, right-of-use assets and lease liabilities, in our consolidated financial statements.Effective January 1, 2018, the Company adopted the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification ofCertain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow classification issues. Prior to this ASU, GAAP did notinclude specific guidance on these eight cash flow classification issues. The adoption of this ASU did not have a material impact on our consolidatedfinancial statements and disclosures. F-7Table of ContentsIn July 2017, the FASB issued ASU 2017-11, Earnings Per Shares (Topic 260), Distinguishing Liabilities from Equity (Topic 480) andDerivatives and Hedging (Topic 815): Part I, Accounting for Certain Financial Instruments with Down Round Features. ASU 2017-11 changes theclassification analysis of certain equity-linked financial instruments, such as warrants and embedded conversion features, such that a down roundfeature is disregarded when assessing whether the instrument is indexed to an entity’s own stock under Subtopic 815-40. As a result, a down roundfeature — by itself — no longer requires an instrument to be remeasured at fair value through earnings each period, although all other aspects of theindexation guidance under Subtopic 815-40 continue to apply. ASU 2017-11 is effective for fiscal years, and interim periods within those fiscal years,beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the potential impact of adopting ASU 2017-11 on ourconsolidated financial statements and related disclosures.In August 2018, the FASB issued ASU 2018-13, Disclosure Framework — Changes to the Disclosure Requirements for Fair ValueMeasurements which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosureframework project. Adoption of this guidance is required for fiscal years and interim periods within those fiscal years, beginning after December 15,2019. We are evaluating the impact of adopting this new standard on our financial statements.Principles of ConsolidationThe consolidated financial statements include the accounts of Superconductor Technologies Inc. and its wholly owned subsidiaries. Allsignificant intercompany transactions have been eliminated from the consolidated financial statements.Cash and Cash EquivalentsCash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Cash and cash equivalents aremaintained with what management believes to be quality financial institutions and exceed FDIC limits. Historically, we have not experienced anylosses due to such concentration of credit risk.Accounts ReceivableWe grant uncollateralized credit to our customers. We perform usual and customary credit evaluations of our customers before granting credit.Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of theamount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience. Past duebalances are reviewed for collectability. Account balances are charged off against the allowance when we deem it is probable the receivable will not berecovered. We do not have any off-balance-sheet credit exposure related to our customers.Revenue RecognitionOn January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers, and all of the related amendments and applied it to allcontracts. The adoption ASC topic 606 has had no effect to our consolidated financial statements.Commercial revenues are recognized once all of the following conditions have been met: a) an authorized purchase order has been received inwriting, b) the customer’s credit worthiness has been established, c) shipment of the product has occurred, d) title has transferred, and e) if stipulated bythe contract, customer acceptance has occurred and all significant vendor obligations, if any, have been satisfied.Government contract revenues are principally generated under research and development contracts. Revenues from research-related activities arederived from contracts with agencies of the U.S. Government. F-8Table of ContentsCredit risk related to accounts receivable arising from such contracts is considered minimal. All payments to us for work performed on contracts withagencies of the U.S. Government are subject to adjustment upon audit by the Defense Contract Audit Agency. Based on historical experience andreview of our current project in process, we believe that adjustments from open audits will not have a significant effect on our financial position, resultsof operations or cash flows.Shipping and Handling Fees and CostsShipping and handling fees billed to customers are included in net commercial product revenues. Shipping and handling fees associated withfreight are generally included in cost of commercial product revenues.WarrantiesWe offer warranties generally ranging from one to five years, depending on the product and negotiated terms of purchase agreements with ourcustomers. Such warranties require us to repair or replace defective product returned to us during such warranty period at no cost to the customer. Ourestimate for warranty related costs is recorded at the time of sale based on our actual historical product return rates and expected repair costs. Such costshave been within our expectations.IndemnitiesIn connection with the sales and manufacturing of our commercial products, we indemnify, without limit or term, our customers and contractmanufacturers against all claims, suits, demands, damages, liabilities, expenses, judgments, settlements and penalties arising from actual or allegedinfringement or misappropriation of any intellectual property relating to our products or other claims arising from our products. We cannot reasonablydevelop an estimate of the maximum potential amount of payments that might be made under our indemnities because of the uncertainty as to whethera claim might arise and how much it might total. Historically, we have not incurred any expenses related to these indemnities.Research and Development CostsResearch and development costs are charged to expense as incurred and include salary, facility, depreciation and material expenses. Researchand development costs are charged to research and development expense.InventoriesInventories are stated at the lower of cost or net realizable value, with costs primarily determined using standard costs, which approximate actualcosts utilizing the first-in, first-out method. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision forexcess and obsolete inventory and/or vendor cancellation charges related to purchase commitments. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reservesestablish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based onhistorical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements.Costs associated with idle capacity are charged to operations immediately.Property and EquipmentProperty and equipment are recorded at cost. Equipment is depreciated using the straight-line method over their estimated useful lives rangingfrom three to five years. Leasehold improvements and assets financed under capital leases are amortized over the shorter of their useful lives or the leaseterm. Furniture and fixtures are depreciated over seven years. Expenditures for additions and major improvements are capitalized. Expenditures F-9Table of Contentsfor minor tooling, repairs and maintenance and minor improvements are charged to operations as incurred. When property or equipment is retired orotherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. There were no disposals in 2017 or 2018.Patents, Licenses and Purchased TechnologyPatents and licenses are recorded at cost and are amortized using the straight-line method over the shorter of their estimated useful lives orapproximately seventeen years.Long-Lived AssetsThe realizability of long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover the carryingamount. Long-lived assets that will no longer be used in the business are written off in the period identified since they will no longer be used inoperations and generate any positive cash flows for us. Periodically, long-lived assets that will continue to be used by us will need to be evaluated forrecoverability. Such evaluation is based on various analyses, including cash flow and profitability projections, as well as alternative uses, such asgovernment contracts or awards. The analyses necessarily involve significantmanagement judgment. In the event the projected undiscounted cash flows are less than net book value of the assets, the carrying value of the assetswill be written down to their estimated fair value. We tested our long lived assets for recoverability in each of the last three years and did not believethere was any impairment.We have invested and will continue to invest significant capital in our Austin, Texas manufacturing facility to enable us to produce ourConductus wire products. Delays in the timing of our ability to, including but not limited to, raise additional capital, unexpected production delays,our ability to sell our Conductus wire products in large scale could substantially impact our estimates used in the determination of expected future cashflows and/or expected profitability. The accompanying consolidated financial statements do not include any adjustments that may result from theoutcome of these uncertainties.Income TaxesWe recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases ofassets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) resultsfrom the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or alldeferred tax assets will not be realized.The guidance further clarifies the accounting for uncertainty in income taxes and sets a consistent framework to determine the appropriate levelof tax reserve to maintain for uncertain tax positions. This interpretation uses a two-step approach wherein a tax benefit is recognized if a position ismore-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50% likely to berealized and sets out disclosure requirements to enhance transparency of our tax reserves.Unrecognized tax positions, if ever recognized in the consolidated financial statements, are recorded in the statement of operations as part of theincome tax provision. Our policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of the income tax provision.No liabilities for uncertain tax positions were recorded in the current year. No interest or penalties on uncertain tax positions have been expensedto date. We are not under examination by any taxing authorities. The federal statute of limitations for examination of us is open for 2015 andsubsequent filings. Additionally, the statute of limitations for examination of our net operating loss carryforwards is open for a 20 year periodsubsequent to each loss year.We implemented ASU 2016-09 during the first quarter of 2017 as stipulated in the FASB guidance for publicly traded entities. To account for theimplementation of ASU 2016-09, we accounted for previously F-10Table of Contentsunrecognized excess tax benefits by recognizing those benefits. Due to our full valuation allowance, this recognition has no effect on the net accrualafter the valuation allowance.Marketing CostsAll costs related to marketing and advertising our products are charged to operations as incurred or at the time the advertising takes place.Advertising costs were not material in each of the three years in the period ended December 31, 2018.Net Loss Per ShareBasic and diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number ofcommon shares outstanding in each year. Net loss available to common stockholders is computed after deducting accumulated dividends oncumulative preferred stock, deemed dividends and accretion of redemption value on redeemable preferred stock for the period and beneficialconversion features on issuance of convertible preferred stock. Potential common shares are not included in the calculation of diluted loss per sharebecause their effect is anti-dilutive.Stock-based Compensation ExpenseWe have in effect several equity incentive plans under which stock options and awards have been granted to employees and non-employeemembers of the Board of Directors. We are required to estimate the fair value of share-based awards on the date of grant. The value of the award isprincipally recognized as expense ratably over the requisite service periods. We have estimated the fair value of stock options as of the date of grantusing the Black-Scholes option pricing model. The Black-Scholes model considers, among other factors, the expected life of the award and theexpected volatility of our stock price. We evaluate the assumptions used to value stock options on a quarterly basis. The fair values generated by theBlack-Scholes model may not be indicative of the actual fair values of our equity awards, as they do not consider other factors important to thoseawards to employees, such as continued employment and periodic vesting.The following table presents details of total stock-based compensation expense that is included in each functional line item on our consolidatedstatements of operations: 2018 2017 2016 Cost of commercial product revenues $3,000 $1,000 $6,000 Research and development 12,000 47,000 142,000 Selling, general and administrative 69,000 293,000 856,000 $84,000 $341,000 $1,004,000 The impact to the consolidated statements of operations for 2018, 2017 and 2016 on basic and diluted earnings per share was $0.04, $0.32 and$3.19, respectively. No stock compensation cost was capitalized during the three year period ended December 31, 2018.Use of EstimatesThe preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States ofAmerica requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Thesignificant estimates in the preparation of the consolidated financial statements relate to the assessment of the carrying amount of accounts receivable,inventory, fixed assets, intangibles, fair value of options and warrants, F-11Table of Contentsestimated provisions for warranty costs, accruals for restructuring and lease abandonment costs, contract revenues, income taxes and disclosures relatedto the litigation. Actual results could differ from those estimates and such differences may be material to the consolidated financial statements.Fair Value of Financial InstrumentsWe have estimated the fair value amounts of our financial instruments using the available market information and valuation methodologiesconsidered appropriate. We determined the book value of our cash and cash equivalents, accounts receivable, and other current assets and other currentliabilities as of December 31, 2018 and December 31, 2017 approximate fair value.The fair value of our warrant derivative liability was estimated using the Binomial Lattice option valuation model.Fair value for financial reporting purposes is defined as the exchange price that would be received for an asset or paid to transfer a liability (anexit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on themeasurement date, ASC 820, “Fair Value Measurement and Disclosures”, also establishes a fair value hierarchy which requires an entity to maximizethe use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that maybe used to measure fair value:Level 1 — quoted prices in active markets for identical assets or liabilitiesLevel 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observableLevel 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)The fair value of our warrant liabilities was determined based on level 3 inputs. These derivative liabilities, which expired in August 2018 andhad no value at December 31, 2018, were adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recordedin results of operations as Adjustment to Fair Value of Derivatives. See Note 5 — Stockholders Equity — Warrants.Comprehensive IncomeWe have no items of other comprehensive income in any period and consequently have not included a Statement of Comprehensive Income.Segment InformationWe have historically operated in a single business segment: the research, development, manufacture and marketing of high performance productsused in cellular base stations. We derived net commercial product revenues primarily from the sales of our AmpLink and SuperPlex products which wesold directly to wireless network operators in the United States. Net revenues derived principally from government contracts are presented separatelyon the consolidated statements of operations for all periods presented. As discussed in this Report, we are adapting our unique HTS material depositiontechniques to produce our energy efficient, cost-effective and high performance Conductus wire.Certain Risks and UncertaintiesOur long-term prospects are dependent upon the successful commercialization and market acceptance of our Conductus wire products. We do notcurrently have a customer buying significant amounts of our wire products. With respect to our Conductus wire business, we expect to also have somecustomer concentration in that F-12Table of Contentsbusiness as we continue to commercialize our wire product. The loss of or reduction in sales, or the inability to collect outstanding accounts receivable,from any significant customer could have a material adverse effect on our business, financial condition, results of operations and cash flows.We currently rely on a limited number of suppliers for key components of our products. The loss of any of these suppliers could have materialadverse effect on our business, financial condition, results of operations and cash flows.In connection with the sales of our commercial products, we indemnify, without limit or term, our customers against all claims, suits, demands,damages, liabilities, expenses, judgments, settlements and penalties arising from actual or alleged infringement or misappropriation of any intellectualproperty relating to our products or other claims arising from our products. We cannot reasonably develop an estimate of the maximum potentialamount of payments that might be made under our indemnities because of the uncertainty as to whether a claim might arise and how much it mighttotal.For more risks of our business, see Item 1A, “Risk Factors” in this Report and other filings with the Securities and Exchange Commission.Note 3 — Short Term BorrowingsNoneNote 4 — Income TaxesWe incurred a net loss in each year of operation since inception resulting in no current or deferred tax expense for 2018, 2017 or 2016.Due to our operating losses, the 2017 Tax Act did not impact our 2018 operating results or income tax expense. The primary impact of the 2017Tax Act was the re-measurement of our deferred tax assets, based upon the new U.S. statutory corporate tax rate of 21% and the required change to therelated valuation allowance. The deferred tax assets decreased by $2,380,000 as a result of the change in tax rates.As of December 31, 2018, the Company’s foreign subsidiaries had negative earnings and profits. As a result, no income tax provision wasrequired for the deemed repatriation tax or the global intangible low tax income (GILTI) tax.The benefit for income taxes differs from the amount obtained by applying the federal statutory income tax rate to loss before benefit for incometaxes for 2018, 2017 and 2016 as follows: 2018 2017 2016 Tax benefit computed at federal statutory rate 21.0% 34.0% 34.0% Increase (decrease) in taxes due to: Change in tax rate under tax reform (25.0) Change in valuation allowance (21.0) (9.0) (34.0) — % — % — % F-13Table of ContentsThe significant components of deferred tax assets (liabilities) at December 31 are as follows: 2018 2017 Loss carryforwards $4,355,000 $2,563,000 Depreciation & Amortization 826,000 951,000 Stock Option Compensation 376,000 358,000 Other 127,000 34,000 Less: valuation allowance (5,686,000) (3,906,000) $— $— As of December 31, 2018, we had net operating loss carryforwards for federal and state income tax purposes of approximately $345.9 millionwhich expire in the years 2019 through 2037. Of these amounts, $69.7 million resulted from the acquisition of Conductus. Under the Internal RevenueCode change of control limitations, a maximum of $20.7 million will be available for reduction of future taxable income.Due to the uncertainty surrounding their realization, we have recorded a full valuation allowance against our net deferred tax assets. Accordingly,no deferred tax asset has been recorded in the accompanying balance sheet. The valuation allowance increased by $1,780,000 in 2018 and decreasedby $907,000 in 2017.Section 382 of the Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards based on a statutoryrate of return (usually the “applicable federal funds rate,” as defined in the Internal Revenue Code) and the value of the corporation at the time of a“change of ownership” as defined by Section 382. We had changes in ownership in August 1999, December 2002, June 2009, August 2013, andDecember 2016. In addition, we acquired the right to Conductus’ net operating losses, which are also subject to the limitations imposed bySection 382. Conductus underwent six ownership changes, which occurred in February 1999, February 2001, December 2002, June 2009, August2013, and December 2016. Therefore, the ability to utilize Conductus’ and our net operating loss carryforwards of $327.7 million which were incurredprior to the 2016 ownership changes, will be subject in future periods to annual limitations of $126,000. Net operating losses released from thislimitation and/or incurred by us subsequent to the ownership changes and therefore not subject to this limitation totaled $18.2 million. An additional$126,000 in losses were released from limitation during the year under Section 382.Note 5 — Stockholders’ EquityPublic OfferingsWe have historically financed our operations through a combination of cash on hand, cash provided from operations, equipment leasefinancings, available borrowings under bank lines of credit and both private and public equity offerings.On July 30, 2018 we completed a public offering of an aggregate of 2,571,429 shares of our common stock (or common stock equivalents) andwarrants to purchase an aggregate of 2,571,429 shares of common stock with gross proceeds to us of $9.0 million. The net proceeds to us from theoffering, after deducting the placement agent fees and our estimated offering expenses, was $7.98 million. The offering was priced at $3.50 per share ofcommon stock (or common stock equivalent), with each share of common stock (or common stock equivalent) sold with one five-year warrant topurchase one share of common stock, at an exercise price of $3.50 per share.In connection with the offering, we issued 1,390,000 shares of our common stock at a price of $3.50 per share, with each share of common stockcoupled with a five year warrant to purchase one share of common stock, at an exercise price of $3.50 (the “Warrants”). These securities were offered inthe form of a Class A Unit but were immediately separable and were issued separately at the closing. F-14Table of ContentsFor certain investors who would otherwise hold more than 4.99% (or at the election of a purchaser, 9.99%) of our common stock following theregistered offering, we issued to such investors an aggregate of 4,135.0015 Class B Units (equivalent to 1,181,429 shares of our common stock),consisting of shares of a new class of preferred stock designated Series E Convertible Preferred Stock with a stated value of $1,000 and which areconvertible into our common stock at a conversion price equal to $3.50 per share of common stock, together with an equivalent number of Warrants inthe same form and economic terms based on the related purchase price as the purchasers of the Class A Units (the “Class B Units” and together with the“Class A Units”, the “Units”). These securities offered in the form of a Class B Unit were immediately separable and were issued separately at theclosing. At September 29, 2018, 1,573.0015 Series E Convertible Preferred Stock had been converted into 449,429 shares of common stock and 2,562Series E Convertible Preferred Stock, convertible into 732,000 shares of common stock, remained unconverted. From September 29, 2018 throughDecember 31, 2018, an additional 700 Series E Convertible Preferred Stock had been converted into 200,000 shares of common stock and 1,862 SeriesE Convertible Preferred Stock, convertible into 532,000 shares of common stock, remained unconverted. On March 21, 2019, the remaining 1,862Series E Convertible Preferred Stock, were converted into 532,000 shares of common stock.On March 9, 2018, we issued a total of 158,100 shares of common stock (or common stock equivalents) in the form of 119,000 shares of ourcommon stock at a price of $12.65 per share and, for investors who would otherwise hold more than 9.99% of the Company’s common stock followingthe registered offering, we agreed to issue to such investors pre-funded warrants to purchase 39,100 shares of the Company’s common stock at a price of$12.55 per warrant subject to payment of an additional $0.10 upon exercise, which are common stock equivalents. This registered offering of commonstock (and common stock equivalents) provided gross proceeds to us of $2.0 million, and net proceeds to us, after deducting the placement agent feesand our estimated offering expenses, of $1.7 million. In a concurrent private placement, we issued to the investor unregistered warrants to purchase158,100 shares of common stock. The warrants have an exercise price of $11.40 per share, and are exercisable immediately and will expire five yearsand nine months from the date of issuance.On April 4, 2018, the 39,100 pre-funded warrants issued in connection with our March 2018 financing noted above were exercised, on a cashlessbasis, and we issued 38,720 shares of our common stock.We did not conduct any offerings in 2017.On December 14, 2016 we issued 179,878 shares of common stock at a price of $15 per share, with each share of common stock coupled with afive year warrant to purchase one share of common stock, at an exercise price of $20. For certain investors who would otherwise have held more than4.99% of our common stock following the registered offering, we agreed to issue to such investors , in lieu of shares of common stock, 7,586.82 sharesof a new class of preferred stock designated Series D Convertible Preferred Stock with a stated value of $1,000 and which are convertible into ourcommon stock at a conversion price equal to $15 per share of common stock, together with an equivalent number of warrants in the same form andeconomic terms based on the related purchase price as the purchasers of the common stock. Each of the Series D Preferred and the warrants include abeneficial ownership limitation such that the holder may not exercise the warrant if, following such exercise, the holder (together with its affiliates andcertain related parties) would hold more than 4.99% of the number of shares of our common stock outstanding, which limitation, subject to increase ordecrease upon at least 60 days’ notice by a holder, cannot be increased above 9.99%. The sale of these shares reset the exercise price of the warrantsrelated to our August 2013 financing to $15. This offering provided gross proceeds of $10.3 million and, after deducting the placement agent fees andour offering expenses, net proceeds of $9.2 million.On August 2, 2016, we issued (i) an aggregate of 29,360 shares of our common stock at a price of $30.8375 per share and (ii) to investors, whosepurchase of our common stock would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning morethan 4.99% of our outstanding common stock immediately following the consummation of this offering, an aggregate of 1,294.595255 shares of F-15Table of Contentsour Series C Convertible Preferred Stock. The Series C Preferred has a stated value of $1,000 and is convertible into shares of our common stock at$30.8375 per share. Subject to certain prohibitions on conversion, the 1,294.595255 shares of Series C Preferred would be convertible into anaggregate of 41,981 shares of our common stock. In a concurrent private placement, each Purchaser in the registered offering also received warrants topurchase 0.75 of a share of common stock for each share of common stock (or common stock underlying the Series C Preferred) purchased in suchregistered offering, or up to an aggregate of 53,506 warrants. The warrants have an exercise price of $30 per share and are exercisable during the periodfollowing the nine month anniversary of the date of issuance of the warrants until the five and a half year anniversary of thedate of issuance. The warrants are exercisable for cash or, solely in the absence of an effective registration statement or prospectus, by cashless exercise.Each of the Series C Preferred and the warrants include a beneficial ownership limitation such that the holder may not exercise the warrant if, followingsuch exercise, the holder (together with its affiliates and certain related parties) would hold more than 4.99% of the number of shares of our commonstock outstanding, which limitation, subject to increase or decrease upon at least 60 days’ notice by a holder, cannot be increased above 9.99%. Inaddition, we granted the placement agent in the registered offering and concurrent private placement, an aggregate of 4,994 five-year warrants topurchase our common shares at $38.55. This offering provided gross proceeds of $2.2 million and, after deducting the placement agent fees and ouroffering expenses, net proceeds of $1.9 million.Preferred StockPursuant to our Certificate of Incorporation, the Board of Directors is authorized to issue up to 2,000,000 shares of preferred stock (par value$.001 per share) in one or more series and to fix the rights, preferences, privileges, and restrictions, including the dividend rights, conversion rights,voting rights, redemption price or prices, liquidation preferences, and the number of shares constituting any series or the designation of such series.There is no beneficial conversion feature related to the conversion or liquidation of any of our preferred shares.In February 2008, we issued to Hunchun BaoLi Communication Co. Ltd. (“BAOLI”) and two related purchasers a total of (a) 3,101,361 shares ofour common stock and (b) 611,523 shares of our Series A Preferred Stock . Subject to the terms and conditions of our Series A Preferred Stock and tocustomary adjustments to the conversion rate, each share of our Series A Preferred Stock was initially convertible into ten shares of our common stockwith any conversion subject to the number of shares of our common stock beneficially owned by BAOLI and affiliates following such conversion notexceeding 9.9% of our outstanding common stock. At December 31, 2018, 328,925 shares of our Series A Preferred Stock were outstanding which,subject to the foregoing restrictions, are convertible into 1,827 shares of common stock. Except for a preference on liquidation of $.001 per share, eachshare of Series A Preferred Stock is the economic equivalent of the number of shares of common stock into which it is convertible. Except as requiredby law, the Series A Preferred Stock does not have any voting rights.As of December 31, 2018, all of our issued Series B, C and D Preferred Stock had been converted into our common stock.In late July 2018, we issued 4,135.0015 Series E Convertible Preferred Stock with a stated value of $1,000 and which are convertible into ourcommon stock at a conversion price equal to $3.50 per share of common stock (see Public Offerings above). At December 31, 2018, 2,273.0015 SeriesE Convertible Preferred Stock had been converted into 649,429 shares of common stock and 1,862 Series E Convertible Preferred Stock, convertibleinto 532,000 shares of common stock, remained unconverted. On March 21, 2019, the remaining 1,862 Series E Convertible Preferred Stock, wereconverted into 532,000 shares of common stock.Common StockOn July 30, 2018 we issued 1,390,000 shares of common stock at a price of $3.50 per share, with each share of common stock coupled with a fiveyear warrant to purchase one share of common stock, at an exercise price of F-16Table of Contents$20. For certain investors who would otherwise hold more than 4.99% of our common stock following the registered offering, we agreed to issue tosuch investors in the form of Class A Units, 4,435.0015 shares of a new class of preferred stock designated Series E Convertible Preferred Stock with astated value of $1,000 and which are convertible into 1,181,429 shares of our common stock at a conversion price equal to $3.50 per share.On April 4, 2018, 39,100 pre-funded warrants issued in connection with our March 9, 2018 financing noted below were exercised, on a cashlessbasis, and we issued 38,720 shares of our common stock.On March 9, 2018, we issued a total of 158,100 shares of common stock (or common stock equivalents) in the form of 119,000 shares of ourcommon stock at a price of $12.65 per share and, for investors who would otherwise hold more than 9.99% of the Company’s common stock followingthe registered offering, we agreed to issue to such investors pre-funded warrants to purchase 39,100 shares of the Company’s common stock at a price of$12.55 per warrant subject to payment of an additional $0.10 upon exercise, which are common stock equivalents.On December 14, 2016 we issued 179,878 shares of common stock at a price of $15 per share, with each share of common stock coupled with afive year warrant to purchase one share of common stock, at an exercise price of $20. For certain investors who would otherwise hold more than 4.99%of our common stock following the registered offering, we agreed to issue to such investors in the form of Class B Units, 7,586.82 shares of a new classof preferred stock designated Series D Convertible Preferred Stock with a stated value of $1,000 and which are convertible into 505,788 shares of ourcommon stock at a conversion price equal to $15 per share.On July 27, 2016, we entered into a Securities Purchase Agreement with certain investors pursuant to which we agreed to issue, (i) an aggregate of29,360 shares of our common stock at a price of $30.8375 per share and (ii) to investors, whose purchase of our common stock would otherwise resultin the investor, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common stockimmediately following the consummation of the offering, an aggregate of 1,294.595255 shares of our Series C Convertible Preferred Stock (the “SeriesC Preferred”). The Series C Preferred had a stated value of $1,000 and were convertible into 41,981 shares of our common stock at $30.8375 per share.Equity AwardsAt December 31, 2018, we had two equity award option plans, the 2003 Equity Incentive Plan and the 2013 Equity Incentive Plan (collectively,the “Stock Option Plans”) although we can only grant new options under the 2013 Equity Incentive Plan. Under the Stock Option Plans, stock awardsmay be made to our directors, key employees, consultants, and non-employee directors and may consist of stock options, stock appreciation rights,restricted stock awards, performance awards, and performance share awards. Stock options must be granted at prices no less than the market value onthe date of grant.There were no stock option exercises in the last three years.No stock options were granted in 2017 or 2016, but stock options were granted in 2018. The weighted average fair value of options has beenestimated at the date of the grant using the Black-Scholes option-pricingmodel. The following are the significant weighted average assumptions used for estimating the fair value under our stock option plans: 2018 2017 2016 Per share fair value at grant date $1.45 — — Risk free interest rate 3.0% — — Expected volatility 224.7% — — Dividend yield 0% — — Expected life in years 4.0 — — F-17Table of ContentsThe expected life was based on the contractual term of the options and the expected employee exercise behavior. Typically, options to ouremployees and Board Members have a 2 year vesting term and a 10 year contractual term and vest at 50% after one year and 50% after two years. Therisk-free interest rate is based on the U. S. Treasury zero-coupon issues with a remaining term equal to the expected option life assumed at the grantdate. The future volatility is based on our 4 year historical volatility. We used an expected dividend yield of 0% because we have never paid adividend and do not anticipate paying dividends. We assumed aggregate forfeiture rates of 10% to 20% based on historical stock option cancellationrates over the last 4 years.At December 31, 2018, common stock totaling 78,452 shares were available for future grants and options covering 140,323 shares wereoutstanding but not yet exercised. Option activity during the three years ended December 31, 2018 was as follows: Number ofShares WeightedAverageExercise Price Outstanding at December 31, 2015 13,157 $381.00 Granted — — Canceled (41) 6,742.20 Exercised — — Outstanding at December 31, 2016 13,116 360.30 Granted — — Canceled (503) 45.10 Exercised — — Outstanding at December 31, 2017 12,613 370.30 Granted 128,000 1.92 Canceled (290) 4,723.90 Exercised — — Outstanding at December 31, 2018 140,323 $25.29 The following table summarizes information concerning currently outstanding and exercisable stock options at December 31, 2018: Exercisable Range ofExercise Prices NumberOutstanding WeightedAverageRemainingContractualLife in Years WeightedAverageExercise Price NumberExercisable WeightedAverageExercisePrice $1.92 - $1.92 128,000 9.8 $1.92 0 $— 33.00 - 33.00 5,267 6.9 33.00 5,267 33.00 318.00 - 318.00 6,217 4.9 318.00 6,217 318.00 378.00 - 2,844.00 777 4.1 1,087.68 777 1,087.68 $3,150.00 - $5,148.00 62 1.5 4,722.63 62 4,722.63 140,323 9.4 $25.29 12,323 $268.00 Our outstanding options expire on various dates through October 2028. The weighted-average contractual term of outstanding options was 9.4years and the weighted-average contractual term of currently exercisable stock options was 5.6 years. There were no exercisable options atDecember 31, 2018, December 31, 2017 or December 31, 2016 with a price less than the then market value.The grant date fair value of each share of our restricted stock awards is equal to the fair value of our common stock at the grant date. Shares ofrestricted stock under awards all have service conditions and vest over F-18Table of Contentsone to four years. The following is a summary of our restricted stock award transactions for the year ended December 31, 2018: Number ofShares WeightedAverage GrantDate Fair Value Balance nonvested at December 31, 2017 3,166 $10.70 Granted — — Vested (1,166) 10.81 Forfeited — — Balance nonvested at December 31, 2018 2,000 $10.68 The weighted-average grant date fair value of our restricted stock awards, their total fair value and the fair value of all shares that have vestedduring each of the past three years is as follows: Year ended December 31 2018 2017 2016 Weight-average grant date fair value — $10.70 — Fair value of restricted stock awards granted — $48,000 — Fair value of restricted stock awards vested — $23,000 — For the majority of restricted stock awards granted, the number of shares issued on the date the restricted stock awards vest may be net of theminimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. For the three yearspresented here, there was no such withholding.No stock compensation cost was capitalized during the periods. At December 31, 2018, the total compensation cost related to non-vested optionawards not yet recognized was $167,000 and the weighted-average period over which the cost is expected to be recognized is 1.2 years. The totalcompensation cost related to non-vested stock awards not yet recognized was $12,000, and the weighted-average period over which the cost isexpected to be recognized is 9 months.WarrantsThe following is a summary of outstanding warrants at December 31, 2018: Common Shares Total CurrentlyExercisable Price perShare Expiration Date (1) Warrants related to April 2013 financing 1,713 1,713 $817.50 April 26, 2019 (2) Warrants related to February 2015 agreement 306 306 $450.45 February 13, 2020 (3) Warrants related to March 2015 financing 10,209 10,209 $244.88 September 24, 2020 (4) Warrants related to March 2015 financing 1,021 1,021 $306.09 March 20, 2020 (5) Warrants related to October 2015 financing 135,517 135,517 $60.00 October 14, 2020 (6) Warrants related to October 2015 financing 9,034 9,034 $65.63 October 14, 2020 (7) Warrants related to August 2016 financing 53,506 53,506 $30.00 February 2, 2022 (8) Warrants related to August 2016 financing 4,994 4,994 $38.55 August 2, 2021 (9) Warrants related to December 2016 financing 685,667 685,667 $20.00 December 14, 2021 (10) Warrants related to March 2018 financing 158,100 158,100 $11.40 September 9, 2023 (11) Warrants related to March 2018 financing 11,067 11,067 $15.80 March 6, 2023 (12) Warrants related to July 2018 financing 2,571,429 2,571,429 $3.50 July 25, 2023 (13) Warrants related to July 2018 financing 154,286 — $4.38 July 25, 2023 F-19Table of ContentsOn July 30, 2018 we completed a public offering of an aggregate of 2,571,429 shares of our common stock (or common stock equivalentsinitially in the form of Series E Preferred Stock) and warrants to purchase an aggregate of 2,571,429 shares of common stock with gross proceeds to usof $9.0 million. The net proceeds to us from the offering, after deducting the placement agent fees and our estimated offering expenses, was$7.98 million. The offering was priced at $3.50 per share of common stock (or common stock equivalent), with each share of common stock (orcommon stock equivalent) sold with one five-year warrant to purchase one share of common stock, at an exercise price of $3.50 per share. Theplacement agent also received warrants to purchase 154,286 shares of common stock, at an exercise price of $4.375, that are subject to a six monthlock-up and will expire July 25, 2023.On March 7, 2018, we announced the pricing of a registered offering of common stock (and common stock equivalents) with total gross proceedsof approximately $2 million. The closing of the registered public offering was completed on March 9, 2018. The net proceeds to us from the registeredoffering, after deducting the placement agent fees and our estimated offering expenses, was $1.7 million. In a concurrent private placement, we issuedto the investor in the registered offering, an unregistered warrant (the “Warrants”) to purchase one share of common stock for each share of commonstock or Pre-funded Warrants purchased in the registered offering. The Warrants have an exercise price of $11.40 per share, shall be exercisableimmediately and will expire five years and six months from the date of issuance. The Warrants are exercisable for cash or, solely in the absence of aneffective registration statement or prospectus, by cashless exercise. The exercise price of the Warrants is not subject to a “price-based” anti-dilutionadjustment.On December 14, 2016 we issued 179,878 shares of common stock at a price of $15 per share, with each share of common stock coupled with afive year warrant to purchase one share of common stock, at an exercise price of $20. For certain investors who would otherwise have held more than4.99% of our common stock following the registered offering, we agreed to issue to such investors, in lieu of shares of common stock, 7,586.82 sharesof a new class of preferred stock designated Series D Convertible Preferred Stock with a stated value of $1,000 and which are convertible into 505,788shares of our common stock at a conversion price equal to $15 per share. The warrants include a beneficial ownership limitation such that the holdermay not exercise the warrant if, following such exercise, the holder (together with its affiliates and certain related parties) would hold more than 4.99%of the number of shares of our common stock outstanding, which limitation, subject to increase or decrease upon at least 60 days’ notice by a holder,cannot be increased above 9.99%.On August 2, 2016, in a concurrent private placement transaction, investors who purchased shares of common stock or Series C Preferred in ourregistered offering received warrants to purchase 0.75 of a share of common stock for each share of common stock (or common stock underlying theSeries C Preferred) purchased in such registered offering, or up to an aggregate of 53,506 warrants. The warrants have an exercise price of $30 per shareand are exercisable during the period following the nine month anniversary of the date of issuance of the warrants until the five and a half yearanniversary of the date of issuance. The warrants are exercisable for cash or, solely in the absence of an effective registration statement or prospectus,by cashless exercise. The warrants include a beneficial ownership limitation such that the holder may not exercise the warrant if, following suchexercise, the holder (together with its affiliates and certain related parties) would hold more than 4.99% of the number of shares of our common stockoutstanding, which limitation, subject to increase or decrease upon at least 60 days’ notice by a holder, cannot be increased above 9.99%. In addition,we granted the placement agent in the registered offering and concurrent private placement, an aggregate of 4,994 five-year warrants to purchase ourcommon shares at $38.55.Our warrants are exercisable by paying cash or, solely in the absence of an effective registration statement or prospectus, by cashless exercise forunregistered shares of common stock. The exercise price of the warrants is subject to standard antidilutive provision adjustment in the case of stockdividends or other distributions on shares of common stock or any other equity or equity equivalent securities payable in shares of common stock,stock splits, stock combinations, reclassifications or similar events affecting our common stock, and also, subject to limitations, upon any distributionof assets, including cash, stock or other property to our stockholders. The F-20Table of Contentsexercise price of the warrants is not subject to “price-based” anti-dilution adjustment. We have determined that these warrants related to issuance ofcommon stock are subject to equity treatment because the warrant holder has no right to demand cash settlement and there are no unusual anti-dilutionrights.Certain warrants that expired on August 9, 2018 were not considered indexed to our common shares under ASC 815-40, and required separateaccounting as derivative instruments with changes in fair value recognized in earnings each period. The warrants contained a provision whereby thewarrant exercise price would be decreased in the event that future common stock issuances were made at a price less than the then exercise price. Due tothe potential variability of their exercise price, these warrants do not qualify for equity treatment, and therefore were recognized as a liability. Thewarrant liability was adjusted to fair value each reporting period, and any change in value was recognized in the statement of operations. Using thebinomial lattice valuation model, including an equal probabilities tree and early exercise factor of 30%, the significant weighted average assumptionsfor these expired warrants at December 31, 2017 was as follows: expected life of 8 months; risk free interest rates of 1.5% expected volatility of 69%and; dividend yield of 0% and the December 31, 2017 fair value of these warrants was estimated to be $28,000. Due to their expiration these warrantshad no value at December 31, 2018. The fair value of warrants accounted for as derivative liabilities was decreased by $28,000 from December 31,2017 to December 31, 2018.Using the binomial lattice valuation model, including an equal probabilities tree and early exercise factor of 30%, the significant weightedaverage assumptions for estimating the fair value of these warrant liabilities at December 31, 2017 as follows: expected life of 8 months; risk freeinterest rates of 1.5%; expected volatility of 69% and; dividend yield of 0%. The December 31, 2017 fair value of these warrants was estimated to be$28,000. The fair value was reduced by $99,000 from December 31, 2016 to December 31, 2017 principally due to our reduced market stock price.Note 6 — Employee Savings PlanIn December 1989, the Board of Directors approved a 401(k) savings plan (the “401(k) Plan”) for our employees that became effective in 1990.Eligible employees may elect to make contributions under the terms of the 401(k) Plan; however, contributions by us are made at the discretion ofmanagement. We made a contribution of $72,000 to the 401(k) plan in 2018, and $66,000 and $62,000 in 2017 and 2016, respectively.Note 7 — Commitments and ContingenciesOperating LeasesWe lease our offices and production facilities under non-cancelable operating leases. All of our operations, including our manufacturingfacilities, are located in an industrial complex in Austin, Texas. We occupy approximately 94,000 square feet in Austin, Texas under a long-term leasethat expires in April 2020. Our Austin lease contains a renewal option and also requires us to pay utilities, insurance, taxes and other operatingexpenses. Although we currently have excess capacity, we believe this facility can be managed in a flexible and cost effective manner and is adequateto meet current and reasonably anticipated needs for approximately the next two years.For 2018, 2017 and 2016, rent expense was $387,000, $385,000, and $643,000, respectively.Patents and LicensesWe have entered into various licensing agreements requiring royalty payments ranging from 0.13% to 2.5% of specified product sales. Certain ofthese agreements contain provisions for the payment of guaranteed or minimum royalty amounts. In the event that we fail to pay any minimum annualroyalties, these licenses may automatically be terminated. These royalty obligations terminate in 2026. Royalty expenses totaled $45,000 in F-21Table of Contents2018, $45,000 in 2017 and $45,000 in 2016. Under the terms of certain royalty agreements, royalty payments made may be subject to audit. Therehave been no audits to date and we do not expect any possible future audit adjustments to be significant.The minimum lease payments under operating leases and license obligations are as follows: Years Ended December 31, Licenses OperatingLeases 2019 $10,000 $935,000 2020 10,000 230,000 2021 10,000 3,000 2022 10,000 2,000 2023 10,000 — Thereafter 20,000 — Total payments $70,000 $1,170,000 Note 8 — Contractual Guarantees and IndemnitiesDuring our normal course of business, we make certain contractual guarantees and indemnities pursuant to which we may be required to makefuture payments under specific circumstances.WarrantiesWe establish reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with ourcustomers. Our warranty reserves are established at the time of sale and updated throughout the warranty period based upon numerous factors includinghistorical warranty return rates and expenses over various warranty periods.Intellectual Property IndemnitiesWe indemnify certain customers and our contract manufacturers against liability arising from third-party claims of intellectual property rightsinfringement related to our products. These indemnities appear in development and supply agreements with our customers as well as manufacturingservice agreements with our contract manufacturers, are not limited in amount or duration and generally survive the expiration of the contract. Giventhat the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unableto determine the maximum amount of losses that we could incur related to such indemnifications.Director and Officer Indemnities and Contractual GuaranteesWe have entered into indemnification agreements with our directors and executive officers, which require us to indemnify such individuals to thefullest extent permitted by Delaware law. Our indemnification obligations under such agreements are not limited in amount or duration. Certain costsincurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies. Given that theamount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executiveofficer, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities. Historically, any amounts payablepursuant to such director and officer indemnities have not had a material negative effect on our business, financial condition or results of operations.We have also entered into severance and change in control agreements with certain of our executives. These agreements provide for the paymentof specific compensation benefits to such executives upon the termination of their employment with us. F-22Table of ContentsGeneral Contractual Indemnities/Products LiabilityDuring the normal course of business, we enter into contracts with customers where we agree to indemnify the other party for personal injury orproperty damage caused by our products. Our indemnification obligations under such agreements are not generally limited in amount or duration.Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed, we are unable todetermine the maximum amount of losses that we could incur relating to such indemnities. Historically, any amounts payable pursuant to suchindemnities have not had a material negative effect our business, financial condition or results of operations. We maintain general and product liabilityinsurance as well as errors and omissions insurance, which may provide a source of recovery to us in the event of an indemnification claim.Note 9 — Legal ProceedingsFrom time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We arenot currently a party to any legal proceedings that we believe would reasonably be expected to have a material adverse effect on our business, financialposition or results of operations or cash flows.Note 10 — Loss Per ShareLoss per share is based on the weighted-average number of common shares outstanding and diluted earnings (loss) per share was based on theweighted-average number of common shares outstanding plus all potentially dilutive common shares outstanding.Since their impact would be anti-dilutive, our loss per common share does not include the effect of the assumed exercise or vesting of any of thefollowing shares: 2018 2017 2016 Outstanding stock options 140,323 12,613 13,115 Unvested restricted stock awards 2,000 3,166 56 Outstanding warrants 3,796,849 929,416 945,546 Total 3,939,172 945,195 958,717 Also, the convertible preferred stock, which is convertible into 533,827 and 1,827 and 324,615 shares of common stock at December 31, 2018and 2017 and 2016, respectively, was not included since their impact would be anti-dilutive.Note 11 — Details of Certain Financial Statement Components and Supplemental Disclosures of Cash Flow Information and Non-Cash ActivitiesBalance Sheet Data: December 31,2018 December 31,2017 Accounts receivable: Accounts receivable-trade $3,000 $154,000 Less: allowance for doubtful accounts (3,000) (3,000) $— $151,000 F-23Table of Contents December 31,2018 December 31,2017 Inventories: Raw materials $161,000 $74,000 Reserve for raw materials — — Work-in-process 12,000 10,000 Reserve for work-in-process — — Finished goods — 18,000 Reserve for finished goods — — $173,000 $102,000 December 31,2018 December 31,2017 Property and Equipment: Equipment $11,911,000 $11,723,000 Leasehold improvements 1,065,000 1,065,000 Furniture and fixtures 205,000 205,000 13,181,000 12,993,000 Less: accumulated depreciation and amortization (12,172,000) (11,200,000) $1,009,000 $1,793,000 Depreciation and amortization expense amounted to $1,015,000, $1,885,000, and $2,061,000 in 2018, 2017, 2016, respectively. December 31,2018 December 31,2017 Patents, Licenses and Purchased Technology: Patents pending $— $44,000 Patents issued 1,712,000 1,682,000 Less accumulated amortization (1,026,000) (984,000) Net patents issued 686,000 698,000 $686,000 $742,000 F-24Table of ContentsAmortization expense related to these items totaled $43,000, $36,000 and, $78,000 in 2018, 2017, and 2016, respectively. Amortizationexpenses related to these items are expected to total $40,000 in 2019 and $40,000 in 2020. December 31,2018 December 31,2017 Accrued Expenses and Other Long Term Liabilities: Salaries payable $119,000 $104,000 Compensated absences 195,000 173,000 Compensation related 6,000 4,000 Warranty reserve 8,000 8,000 Deferred rent 39,000 46,000 Other 189,000 172,000 Fair value of warrant derivatives — 28,000 Total 556,000 535,000 Less current portion (539,000) (481,000) Long-term portion $17,000 $54,000 2018 2017 2016 Warranty Reserve Activity: Beginning balance $8,000 $8,000 $23,000 Additions — — — Deductions — — (15,000) Ending balance $8,000 $8,000 $8,000 F-25Table of ContentsSUPERCONDUCTOR TECHNOLOGIES INC.Schedule II — Valuation and Qualifying Accounts Additions BeginningBalance Charged toCosts &Expenses Charged toOtherAccounts Deductions EndingBalance 2018 Allowance for Uncollectible Accounts $3,000 $— $— $— $3,000 Reserve for Inventory Obsolescence — — — — Reserve for Warranty 8,000 — — — 8,000 Deferred Tax Asset Valuation Allowance 3,906,000 — 1,780,000 — 5,686,000 2017 Allowance for Uncollectible Accounts 5,000 2,000 — — 3,000 Reserve for Inventory Obsolescence — — — — Reserve for Warranty 8,000 — — — 8,000 Deferred Tax Asset Valuation Allowance 2,999,000 — 907,000 — 3,906,000 2016 Allowance for Uncollectible Accounts 5,000 — — — 5,000 Reserve for Inventory Obsolescence 774,000 — 774,000 — — Reserve for Warranty 23,000 — — (15,000) 8,000 Deferred Tax Asset Valuation Allowance $ 17,275,000 $— $— $(14,276,000) $2,999,000 F-26Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized, on this 29th day of March 2019. SUPERCONDUCTOR TECHNOLOGIES INC.BY: /s/ Jeffrey A. Quiram Jeffrey A. Quiram President and Chief Executive OfficerPOWER OF ATTORNEYKNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William J.Buchanan, his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report onForm 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following personson behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date/s/ Jeffrey A. QuiramJeffrey A. Quiram President, Chief Executive Officer and Director(Principal Executive Officer) March 29, 2019/s/ William J. BuchananWilliam J. Buchanan Chief Financial Officer(Principal Financial and Accounting Officer) March 29, 2019/s/ Julia S. JohnsonJulia S. Johnson Director March 29, 2019/s/ David W. VellequetteDavid W. Vellequette Director March 29, 2019/s/ Lynn J. DavisLynn J. Davis Director March 29, 2019/s/ Martin A. KaplanMartin A. Kaplan Chairman of the Board March 29, 2019EXHIBIT 21SUBSIDIARIES OF SUPERCONDUCTOR TECHNOLOGIES INC.Conductus, Inc., a Delaware corporationSTI Investments Limited, a British Virgin Islands companySuperconductor Investments (Mauritius) Limited, a Mauritius companyExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in this Registration Statement of Superconductor Technologies Inc. on Form S-8 (File Nos.333-106594, 333-126121, 333-193008), on Form S-3 (File No. 333-228676, 333-202702), and on Form S-1 (File Nos. 333-226025, 333-224148) ofour report (which includes an explanatory paragraph as to the Company’s ability to continue as a going concern), dated March 29, 2019, with respectto our audits of the consolidated financial statements of Superconductor Technologies Inc. as of as of December 31, 2018 and 2017, and for each of thethree years in the period ended December 31, 2018, appearing in the Annual Report on Form 10-K of Superconductor Technologies Inc. for the yearended December 31, 2018./s/ Marcum LLPMarcum LLPLos Angeles, CaliforniaMarch 29, 2019EXHIBIT 31.1Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 byPrincipal Executive Officer and Principal Financial OfficerRegarding Facts and Circumstances Relating to Exchange Act FilingsI, Jeffrey A. Quiram, certify that: 1.I have reviewed this annual report on Form 10-K of Superconductor Technologies Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 29, 2019 /s/ Jeffrey A. QuiramJeffrey A. QuiramPresident and Chief Executive OfficerEXHIBIT 31.2Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 byPrincipal Executive Officer and Principal Financial OfficerRegarding Facts and Circumstances Relating to Exchange Act FilingsI, William J. Buchanan, certify that: 1.I have reviewed this annual report on Form 10-K of Superconductor Technologies Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 29, 2019 /s/ William J. BuchananWilliam J. BuchananChief Financial Officer (Principal Accounting andFinancial Officer)EXHIBIT 32.1Statement Pursuant to Section 906 the Sarbanes-Oxley Act of 2002ByPrincipal Executive Officer and Principal Financial OfficerRegarding Facts and Circumstances Relating to Exchange Act FilingsDated: March 29, 2019I, Jeffrey A. Quiram, Chief Executive Officer of Superconductor Technologies Inc., hereby certify, to my knowledge, that:1. the accompanying Annual Report on Form 10-K of Superconductor Technologies for the annual period ended December 31, 2018 (the“Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934, as amended; and2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations ofSuperconductor Technologies Inc.IN WITNESS WHEREOF, the undersigned has executed this Statement as of the date first written above. /s/ Jeffrey A. QuiramJeffrey A. QuiramPresident and Chief Executive OfficerEXHIBIT 32.2Statement Pursuant to Section 906 the Sarbanes-Oxley Act of 2002ByPrincipal Executive Officer and Principal Financial OfficerRegarding Facts and Circumstances Relating to Exchange Act FilingsDated: March 29, 2019I, William J. Buchanan, Chief Financial Officer of Superconductor Technologies Inc., hereby certify, to my knowledge, that:1. the accompanying Annual Report on Form 10-K of Superconductor Technologies for the annual period ended December 31, 2018 (the“Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934, as amended; and2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations ofSuperconductor Technologies Inc. /s/ William J. BuchananWilliam J. BuchananChief Financial Officer (Principal Financial and Accountingand Officer)

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