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Executives

Tom Steipp - President & Chief Executive Officer

Tony Chung - Chief Financial Officer

Liquidmetal Technologies Inc. (OTCQB:LQMT) Q3 2012 Earnings Call November 13, 2012 4:30 PM ET

Operator

Good afternoon. Welcome to the Liquidmetal Technologies Third Quarter 2012 Conference Call. My name is Amber and I will be your conference operator this afternoon. Joining us on today's call are Liquidmetal’s President and CEO, Tom Steipp; and CFO, Tony Chung. Following their remarks we will open up the call for your questions.

Before we proceed, I would like to provide the company's safe harbor statement with important cautions regarding forward-looking statements made during this call as follows. All statements made by management during this call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended.

Such forward-looking statements include but are not limited to, those made by Mr. Steipp and Mr. Chung regarding the company's cash, revenue outlook and technology development. While management has based any forward-looked statements made during the call on its current expectations, the information on which such expectations were based may change. These forward-looking statements rely on a number of assumptions concerning future events and are subject to a number or risks, uncertainties and other factors, many of which are outside the company's control that could cause actual results to materially differ from such statements.

Such risks and uncertainties and other factors include but are necessarily limited to, those that fall under risk factors in the company's annual report on Form 10-K for the year ended December 31, 2011. Accordingly, you should not place any reliance on forward-looking statements as a prediction of actual results. The company disclaims any intention and undertakes no obligation to update or revise any forward-looking statements. You are also urged to carefully review and consider the various disclosures in the company's annual report on Form 10-K for the year ended December 31, 2011, as well as other public filings with the SEC since such date.

I would also like to remind everyone that this call will be available for replay starting later this evening via a link available in the Investor Relations section of the company's website at www.liquidmetal.com. Now I would like to turn the call over to the company's President and CEO, Mr. Tom Steipp.

Tom Steipp

Thank you, Amber. Welcome everyone and thank you for joining us on today's call. Highlight in the quarter was the shipment of four new prototype parts to new customers in the medical, industrial and aerospace industries, who have expressed a keen interest in the unique capabilities of Liquidmetal.

This brings the year-to-date total of prototype shipments to seven and our overall total to ten. As a general rule, in the prototype stage customers test and assess the quality of their initial part deliveries. Then once the engineering in test phase is completed and the production mold is finalized, we can begin the process of moving towards full production. It’s important to understand that the evaluation of complex, high-value parts is time consuming and approval cycles for purchase orders are typically extended, particularly in the aerospace and medical industry.

Also during the quarter our company passed a significant milestone as our partner, The Swatch Group, transitioned from lab prototype shipments which have been ongoing for over 15 months, to full production status. This is the first occurrence of a customer advancing its production process beyond the prior lab prototype deliveries and into full scale production. This milestone gives us increasing confidence in the production capabilities of our contract manufacturing partner Visser Precision Cast as well as Materion Brush, who produces the bulk Liquidmetal alloy.

Going forward, we will no longer be shipping amorphous rods as seen in the Swatch video, but instead we ship finished rings that are then processed to a stunning bezel, which as they state in the video, will retain its beauty forever. During the quarter, previously shipped parts were qualified by two companies. In one case these assessments by the engineering groups have led to orders for additional parts that we expect to ship in Q4 or first quarter 2013.

We continue to expect revenues to ramp slowly through 2013 as various prototype customers progress through these development phases. As I shared on prior calls, the long term success of Liquidmetal requires close collaboration between sales, engineering and manufacturing resources. To extend our sales reach and leverage our resources we have formed two key partnerships in the third quarter. First we expanded our strategic partnership with Materion to capitalize on their global sales team’s expertise in customer relationship.

Secondly, we engaged Nomad Sales, an independent manufacturer’s rep firm to promote commercial applications of Liquidmetal throughout the Midwest United States. Both of Nomad Sales partners have more than 25 years of industry experience and relationships to bring to bear on advancing the further market adoption of Liquidmetal alloys. This is important since designing complex parts within the context of a new technology framework can be difficult even for the most sophisticated customers. We believe that the expertise that Materion and Nomad in designing and selling beryllium, titanium and stainless steel parts, is readily transferable to Liquidmetal and will ultimately expedite the sales process.

Now before I comment further, I would like to turn the call over to our CFO, Tony Chung, who will take us through the financial details for the quarter.

Tony Chung

Thanks, Tom, and good afternoon everyone. Thanks for joining us. As Tom mentioned, our financial results for the third quarter reflect the fact that our company continues to advance through a development stage. In this context, let's turn to the results. We generated modest revenues as we continue to focus on delivery of prototype parts to perspective customers. Selling, marketing, general and administrative expenses totaled $1.4 million in the third quarter, compared to $877,000 in the same quarter a year ago.

The increase was primarily due to legal, accounting and other professional fees associated with financing activities, as well as SEC and shareholder proxy filings. R&D expenses were $217,000 for the third quarter as compared to $273,000 in the same quarter last year. The decrease was primarily due to a decrease in spending on production supplies and R&D consulting services. Although R&D expenses decreased year-over-year, we continued to advance research associated with our liquid metal alloy and related processing capability, as well as manufacturing techniques to advance the development of liquid metal alloy.

Net loss totaled $1.1 million or negative $0.01 per share for the third quarter, as compared to a net loss of $1.9 million or negative $0.01 per share in the same quarter last year. The improvement was primarily due to non-cash gains related to the change in fair value of bonds, and embedded conversion future liability, amortization of debt discount as well as losses from discontinued operations in previous year.

Now turning to the balance sheet. Our cash position was $8.7 million at the end of the quarter compared to $1.5 million at the of the second quarter. The increase was due to the $12 million capital raised completed in July 2012, net of previous outstanding liability. We believe that our existing capital resources are adequate to finance our operations through the end of 2013, as we continue to make prudent use of these recourses.

This completes my financial summary. For a more complete and detailed analysis of these results, please review our Form 10-Q which we filed today. I will be happy to discuss any questions you have in the Q&A. Now I would like to turn the call back over to Tom.

Tom Steipp

Thanks, Tony. This was a good quarter. We continued to make steady progress in our transition from a development stage to a commercial stage company, by shipping more prototype products than we have in any prior quarter. Looking forward we see multiple ways to measure our progress but a key metrics will continue to be the shipment of new prototype parts with an emphasis on shipping multiple parts for specific applications and specific customers where Liquidmetal adds value.

Naturally, we expect that this will lead to winning cornerstone customers, particularly in our target markets of medical, industrial and aerospace defense. You will see us continue to focus on IP. We are after all primarily and IP company. We are working to improve process and quality along the full spectrum of our Liquidmetal ecosystem and are pleased about the continued support and investment of our partners. We want to assure you that our management team is keenly aware of the critical importance of working capital.

Our recent financing was structured to provide us adequate cash to execute on our plan through 2013. However, the monthly amortization of this debt increases dilution and puts pressure on our stock trading activity. Therefore, our focus remains intently on growing revenue. First from prototype parts, and then as in the case of Swatch, through production parts while exploring significant revenue opportunities through the licensing of market segments to global industry leaders.

In summary, we have reached a critical time in the commercialization of our Liquidmetal technology. We have established a portfolio of more than 100 patents and patent applications that support Liquidmetal as the only commercially viable, bulk, amorphous alloy producer in today's market place.

Now with that let's turn the -- open the call to questions. Amber, please provide the appropriate instructions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will go first to [Jon Harrilson with Harrilson Baleburg].

Unidentified Speaker

Tom, a couple of questions for you. Who paid for the prototypes? Was that the customer or was that a...?

Tom Steipp

Let me see. In two of them, we paid for the prototypes and two of them customer paid for the prototypes.

Unidentified Speaker

Okay. On the convertible payments, Tom, can you tell me who that payment is being made? Are they asking for in cash, are they asking for in shares?

Tony Chung

I can answer that Jon, this is Tony. We are paying in shares and subsequent to 9/30, we have been issuing shares to pay down the promissory notes.

Unidentified Speaker

Tony, (inaudible) stock price are we having to pay in many more shares than was originally thought?

Tony Chung

Yes, it is, the numbers of shares that we would issue is dependent on the stock price. Now you know we can't obviously control the stock price but we are working with the note holders to ensure that we have the capability of paying with shares and we have received or we are corresponding with them and working with them to allow us to conserve cash for operations.

Unidentified Speaker

Okay. Last question, Tony or Tom, would the Swatch -- the piece for manufacturing for Swatch now out of Visser, can you share the revenue on that?

Tom Steipp

We don’t share the specific revenue but remember that we had essentially a onetime license fee associated with that. So the revenues are relatively modest. They represent our royalty payment that we received from swatch. So the significance is that we are shipping production units, in this particular case the royalties will not be a substantial amount.

Operator

(Operator Instructions) And we will go next to [Kelly Holish] a private investor.

Unidentified Speaker

I have a question about your revenue models going forward. It seems that you accept license fees from some of your customers. At what point do you feel like you will transition and get stronger pull through on reoccurring royalty due to production. And how do you see that particularly affecting your financials going forward?

Tom Steipp

Yeah, let me just be real clear. We have only licensed two customers. One was Apple. We have received no royalties from Apple. The second one was Swatch and the royalties there are fairly modest. We are looking at other companies where there is a potential for a license fee. It’s probably important to point out that the more cash you have in the bank, the better -- the easier it is to negotiate for both upfront payments as well as higher royalties. So we would be balancing the revenue and profitability of part sales basically with license fees. And we will be looking at both of those alternatives.

It’s really hard to say, we don’t really have a business model that says that, other than to say, that generally speaking our highest long-term profitability is with the sale of parts. It is sometimes a worthwhile trade off to get cash in the door through licenses, which is certainly one of the things that we are mindful of. So we will be analyzing those on a per instance basis.

Unidentified Speaker

Sure, I understand. And I noticed on your website, it says something to -- that you guys have objective to get into high margin parts sale. So are you the first point of contact for all parts and production sales with your customer?

Tom Steipp

We are. We are the point of contact. So our business model in that respect is very clear. We have a very complete patent portfolio. It’s now up to total of 100, where over 50 patents and over 50 patent applications as well. That gives us protection really on the full spectrum of alloy composition, molds, machines, production capability. But we do interface with the customers so that we get the first hand which is critical for new startups like ourselves. We get the first hand information about what the problems are that they are trying to solve. So the orders come through us, we get them to our contract manufacturer who then buys the machines and the alloy. They ship and build, we collect and pay them. So that’s the way the business model works.

Operator

And we will take our next question from [Blake Corton with Unique Investments].

Unidentified Speaker

I missed unfortunately the very beginning of the call and I don’t know if you discussed the Apple licensing that has been extended till 2014. Could you give me a little bit of update on that please?

Tom Steipp

Yeah. That’s actually not an Apple license that was extended. That is a capture period was extended. What it says essentially is that we collaborate with Apple on the development of intellectual property. They pay for that which is a significant help to our bottom line. If it’s done for them, they own it and we get a license. If we come up with it, we own it and they get a license. The net result is that everything between February of 2012 and February of 2014 will be available to Liquidmetal shareholders and our partners.

Tony Chung

Just to clarify, the Apple license in consumer electronics is perpetual. It’s just the intellectual property that has been extended to February 2014.

Unidentified Speaker

Well, how do you see it, where do you see Liquidmetal having a significant benefit from the partnership?

Tom Steipp

I think it’s very clear from my perspective that the benefit is twofold. One is that, anything Apple is developed into enhanced manufacturability of parts will benefit us, as anything we are doing to increase the manufacturability of parts has the potential to benefit them. And the second thing is, as we look for partners to help us in the process of bringing this all to market and investing -- perhaps more importantly investing in all of the things that are necessary to bring it to market. The fact that there are at least two of us looking at commercializing parts, and I am clearly not speaking for Apple, it makes pretty easy for us to attract high quality partners when they have the potential at least of working with ourselves and Apple. And I would point to Materion and Engel as two specific examples of that.

Operator

And we will go next to [Steve Penn] private investor.

Unidentified Speaker

I have a quick question for you. I guess the first thing is I understand that VPC is exclusive in terms of contract manufacturing to Liquidmetal, is that correct?

Tom Steipp

That’s correct, yes.

Unidentified Speaker

Now, can VPC also manufacture for others?

Tom Steipp

They are not precluded in their agreement for manufacturing for others.

Unidentified Speaker

Okay. I guess my concern is, obviously as VPC is the exclusive Liquidmetal, if there is any issue regarding demand where Liquidmetal needs to get certain things done on a certain time period. And VPC has its machinery committed to somebody else. I just was wondering where Liquidmetal stands in that chain?

Tom Steipp

Well, I should point out that all of the things that are used with respect to Liquidmetal production are really under our control and those assets are not used by any other, I mean they don’t use those to produce for anything else. So for instance, they can't put a sales force in place and go out and find other customers to make parts for, using any of the equipment that is part of the Liquidmetal process.

Operator

And we will go next to [James Casey] private investor.

Unidentified Speaker

I just had a question that I wanted to ask about, it kind of has to do with the agreement with Apple and the development of new intellectual property. One thing that I have become aware of is that, [Han Hei], which I believe is a another company that works with Apple has developed a way of welding pieces of zirconium based amorphous metals together. And I was curious -- wondering if that was a way that Apple has worked around anything that they developed going to a joint Apple portfolio. You know if [Han Hei] is developing something using zirconium based amorphous alloys, that is something Apple would be able to use. So I think it’s not something that Apple directly developed. And so if I understand that correctly, would that be something that we wouldn’t have in our portfolio?

Tom Steipp

I really can't and wouldn’t comment on developments that are outside our direct knowledge. It is very clear what things Apple shares with us, what things they don’t share with us. I think it’s fairly safe to say that there are large organizations that do a lot of research. We won't know everything they are doing, would be my guess.

Operator

(Operator Instructions) And we will go next to [Richard Brodal] private investor.

Unidentified Speaker

My questions have been answered.

Tom Steipp

Best of all possible worlds.

Unidentified Speaker

Thanks.

Tom Steipp

Okay. If there are -- doesn’t look like there is any additional question, with that we will bring this one to a close and look forward to talking to everybody in another quarter. Thank you very much for your time. Bye.

Operator

Thank you. That does conclude our conference. You may now disconnect.

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