Liquidmetal Technologies, Inc. (OTCPK:LQMT) Q4 2012 Earnings Call February 26, 2013 4:30 PM ET
Tom Steipp - President & CEO
Tony Chung - CFO
Good afternoon. Welcome to the Liquidmetal Technologies’ Fiscal 2012 Conference Call. My name is Michaela and I will be your conference operator this afternoon. Joining us today 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, uncertainties and other factors include but are necessarily limited to, those set forth 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. Please go ahead.
Thank you, Michaela. Welcome everyone and thank you for joining us on today's call. Revenue for fiscal 2012 remained at a nominal level reflecting our continuing focus on manufacturing prototype parts as a precursor for long-term supply agreements with customers for production parts. Of more significance however was the shipment of 10 new liquid metal prototype parts to customers during 2012 versus three in 2011, which was up 233%. In particular, the bulk of these prototype shipments, seven out of 10 occurred in the second half of the year demonstrating the momentum and effectiveness of our sales and marketing efforts.
In addition, to the increase in prototypes during the second half of 2012, we continued monthly shipments of production parts to Swatch reflecting validation of our production capacity. We also experienced substantial growth in our IP portfolio, ending the year with 56 patents and more than 50 patent applications pending. Throughout the year, we also saw the expansion of our technology and product offerings to prospective customers.
During our discussion with potential customers who are looking for ways to push their product design envelopes, we often encountered design needs that can’t be met by Liquidmetal parts. Since our goal is to be a trusted advisor to these potential partners, we actively seek to solve their problems in the best possible way, even if that means using slightly different technology.
Towards that end, in the fourth quarter, we began to complete prototypes produced on 6-axis milling machines as well as Direct Metal Laser-Sintering, DMLS or 3D printing machines to one of our strategic customers in the aerospace and defense market. Just for clarification, these parts are not included in our totals for shipped prototypes in either the quarter or for the year.
In many ways 2012 laid the foundation for our next phase of development. In 2013, you will see us continue to build on these recent events especially in the following areas. First and foremost, we plan to continue our efforts to increase shipments and prototypes parts to customers primarily in the medical, defense, industrial and most recently the oil and gas markets. We now have 15 strategic cornerstone accounts which all have identified product champion and are aggressively testing samples or prototype parts. The bulk of our efforts over the next 12 months would be to further penetrate these accounts by leveraging the contacts and success that we have made to-date.
Secondly, we will renew efforts to license our technology to category leading companies receive the benefits of introducing Liquidmetal solutions into their markets. You will recall that we sold a non-exclusive license to Swatch in 2009 and exclusive license to Apple in 2010 and an exclusive license to Swatch in 2011. We see opportunities for significant partnerships in areas such as golf, oil and gas and eye wear.
License relationships are a way to expand the market for Liquidmetal as well as a non-dilutive way of raising cash for operations. In addition to the first two initiatives, we expect to continue our trust to increase the pool of intellectual property contained increasable.
During 2012, we issued one new patent bringing our total to 56 and filed an additional 50 patent applications. Our objective is to expand the breadth and depth of IP portfolio in a way that it maximizes the value of our technology to our partners, our customers and ultimately to our shareholders. Much of the intellectual property developed during the past year relates to the development of our injection molding machine.
These advancements have resulted in machines capable of higher quality, improved efficiency and an increased capacity for our customers and our licensees. In summary, we believe that continued focus on progress on each of these areas will result in a stronger base of satisfied customers, a broader base of licensees and partners and increased value for both customers and shareholders.
Before I turn the call over to Tony, I would like to make a brief comment about our upcoming special shareholder meeting which will take place on February 28. As you know, our board of directors has directed the company to seek an increase in the authorized number of shares from $400 million to $500 million. The purpose of this increase in authorized shares is simply to provide flexibility as the company seeks to meet this obligations under the terms of our financing completed in July of 2012.
As part of that funding, the company is required to amortize $1 million worth of debt principal each month in either stock or cash. In order to maximize long-term shareholder value, the board of directors would like to ensure that the company maintains the flexibility as obligation in either cash or stock. Therefore, I would strongly urge each of you to vote your shares in favor of the proposed increase.
Now, I would like to turn the call over to our CFO, Tony Chung, who will take us through the financial details for the year. I will then return to talk a little bit more about the operational progress in our first quarter of 2013 and then finally the outlook ahead.
Thanks Tom and good afternoon everyone. Our financial results for fiscal 2012 reflect our company's continued advancement to a development stage of both prototype parts production and our IP. In this context, let's turn to the financial results for the fiscal year ended 2012.
We generated $650,000 of revenue compared to $972,000 of revenue in 2011. The decrease was primarily due to a one-time license amendment fee of $381,000 from Swatch recognized in 2011.
Our gross margin decreased to $296,000 from $599,000 in 2011. However, excluding license and royalty revenue, our gross margin was $237,000 representing 40% of revenue in 2012 and $199,000 representing 35% of revenue in 2011.
Currently, our revenues consistent of prototypes and preproduction revenue. As we increase our revenues with shipments of production level parts, we expect our gross margin to stabilize and become more predictable.
Selling, marketing general and administrative expenses totaled $4.9 million versus $4.2 million in 2011. The increase was primarily due to the increased headcount for our sales and business development efforts as we continue to aggressively expand our sales and marketing presence within our current account base.
Research and development expense was $943,000 compared to $1.1 million in 2011. We spent less on production supplies and consultants during the year, while we continued to perform research and development of new Liquidmetal alloys and manufacturing techniques.
Now, I would like to go over some of our significant non-recurring expenses during 2012 and 2011. In 2012, we had a one-time non-cash expense of $6.3 million with a discount pricing received under Visser Precision Cast and Master Transaction Agreement in June 2012.
During 2011, we had a one-time expense related to legal settlement with SAGA our former licensee. Excluding these non-recurring expenses, our operating loss was $5.5 million compared to $4.8 million in 2011.
Turning to our balance sheet, we ended 2012 with $7.2 million of cash. We anticipate that our current capital resources together with income from operations will be sufficient to fund our operations through the end of 2013.
I would like to now turn the call back over to Tom.
Thanks Tony. Well, as Tony indicated during 2012, we continued to make steady progress in our transition from a development stage company to a commercial product company. Here's what you should expect us to be focusing on in the first quarter and the remainder of 2013.
Number one, further penetration at existing global accounts to increase the number of prototype and production parts. These efforts were evident based on number of prototype shipped in the second half of 2012 but we want to keep that momentum going through 2013.
Number two, renewed emphasis on license revenue as a source of non-dilutive cash for continuing operations.
And finally number three, the continued focus to extend and strengthen our IP portfolio as we leverage our core technology into commercial production capabilities that improve quality, the efficiency and production capacity for our customers and licensees.
In summary, we are encouraged by the progress we made in 2012. We continue to attract new customers who invest in prototype parts as well as convincing current customers to adapt more Liquidmetal prototype parts.
We are optimistic about the partnerships that we've made with some of the world’s most innovative companies. These companies have seen unique characteristics of Liquidmetal, high strength to weight, hardness and corrosion resistance as harbingers for the advancement of material science and a catalyst for design and manufacturing transformation.
We believe that the game changing capabilities of Liquidmetal are building a foundation of value for our customers as well as for our shareholders.
Before I open the call up to questions, I would like to remind everyone once again about the importance of voting on a proposed extension of our share authorization.
Now, with that, Michaela, please provide the appropriate instructions for those on the line for questions.
Yes sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of (inaudible) from JP Morgan. Please go ahead.
I have quick question. So I know that back in 2010 and then back last year, Apple renewed their cross licensing agreement with Liquidmetal and essentially that allows them to cross license technology that they had developed with Liquidmetal technologies to move the technology forward during the commercialization phase.
What I am curious about is I recently read about a new process where now Liquidmetal is able to be made into sheets as opposed to just use ingots And I am curious, could you elaborate upon what the manufacturing benefits would be of manufacturing Liquidmetal in sheets as opposed to in 100 diagram ingots?
Let me just make a brief clarification on the capture period agreement that we have with Apple, which does allow us to basically jointly develop IP. But the ownership of the IP is strictly with Liquidmetal goes into a special purpose entity called Crucible for which there are two license streams one that goes to Apple and one that goes to us. So, I suppose to cross licensee and just to update different.
I should make a general comment and that is that everything you’ve heard about Liquidmetal over the course of last 18 months to two years has to do with injection moulding whereby we take a 100 gram in as you point out and we heat that up and melt it and inject it into a mould. There are a variety of extensions of that which pot forming is one, where you take it and mould it, actually can be done outside of the vacuum into a different shape, making it into sheets, where you actually there is never way to make sheets, but what you can do a sheet is you can mould that around to different shape and you can also extrude liquid metal, you can make it into wire.
There are a number of things which we are truly you can do with it. The commercialization of those is probably further behind where we are with injection mould. So the point would be there are lots of thing you can do beyond injection moulding, the evolution of commercialization at this point in time, though is really at the injection moulding phase where you can make parts in a mould. Does that answer your question?
That does answer my questions. But I was curious about though is with these sheets will that allow you to make larger physical dimensions?
Potentially you could, the limitation with Liquidmetal is in cross sectional area. So if you get much beyond 8 or 9 millimeters, it is difficult to make an amorphous part. So if you had ships Liquidmetal then you could make parts that were dimensionally larger. So yeah, there is a number of things going on in that area and what I would say is that the strength of Liquidmetal as a company is that our patents portfolio or our IT portfolio really covers the breadth of the technology all the way from alloys, machines, molds, production, processors as well as application, so hopefully that is your question.
(Operator Instructions) Our next question comes from the line of [Kelly Holish] of Private Investor. Please go ahead.
I have three questions. The first question is regarding the technology that you just spoke about for doing sheets and multiple things like that, is the getting factor financial or is it more visibility, its kind of the later development?
So Kelly, again I would hack and back little bit, if this was 1913 and instead of 2013, we might be talking about plastics and steel or Liquidmetal, there are number of things that we know you can do with Liquidmetal beyond dye casting, injection molding, processes that we've commercialized at this point in time. It is partially true that we are constrained by a couple of resources in terms of moving beyond the research and development phases into commercial. And what I would say is that on a global basis there is tremendous amount of research going into both metallic glasses which is what Liquidmetal is.
One of the things that we try to actively promote is that as these new technological innovations comes to fruition; we believe that we created the ecosystem to get those to markets most quickly. So we have an alliance of partners, ourselves obviously we are working with Apple on IP, but Materion who makes our alloys, Engel who makes the machines, Visser who does our production in aggregate that group of partners is most able to turn new technological innovation to commercial parts and that's the strategy we've got at this point. Your second question Kelly.
Yeah, okay so Visser has a facility that they are building as I understand it with a certain square footage and is the capacity, can you comment on the capacity, the planned capacity of that facility in terms of potential throughput and revenue.
Yeah, I mean it’s a matter of tax record, the Visser facility is at the intersection of Quebec and I70 in Denver, Colorado. It’s roughly a 250,000 square foot facility. You know depending on the price of the parts that we would make from a machine the value and the amount of revenue that could be derived from a single machine probably runs anywhere from $2.5 million to $7 million to $10 million again depending on the list price of the parts that you would run through the machine. So let's put it this way, at this point in time we have a tremendous upside in terms of the capacity that the company enjoys. We think the foundation we are laying with global accounts is a way to ramp that up as quickly as we can, that's the strategy.
Did you say global accounts?
Our focus of 15 or so account we have right now are for the most part global accounts which mean they have 1000s and 1000s of parts and a global footprint. And then you had a third question.
Okay. Also you mentioned you know in one of your conferences that's on the internet for example and on your website I guess RedHat or something like that, in an interview you mentioned you know a potential going through a jump you know at some point we are securing a defense contract possibly $7 million to $8 million and you mentioned that I think you mentioned something to that extent in the last conference call but I don't recall exactly. So is that still on the table.
Yeah, I would say the focus of our marketing and sales activity at this point in time are with medical and defense companies. These do tend to be long sales lead time activities. I suspect what I probably said is that the bulk of the parts that we encountered in those kind of environments will generally have life cycles of 10 to 20 years, and that a general rule of thumb is that the revenue for a single part over the course of that 10 to 20 years is probably somewhere in the neighborhood of three quarters of million to a $1.5 million, sometimes $2.5 million.
So, we believe that the partnerships that we are developing at this point in time, we have very, very long-term beneficial residual values to the companies as we get in to production.
Thank you. Mr. Steipp there are no further questions in my queue. Do you have any closing comments?
No, I want to thank everyone for joining us on the wrap up for 2012 and we look forward to give an update at the end of first quarter of 2013. I will turn it back to you. Thank you, Michaela.
Thank you, sir, and thank you everyone for joining us for our presentation. This concludes today’s call. You may now disconnect.
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