Liquidmetal Technologies' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Liquidmetal Technologies, Inc. (OTCPK:LQMT) Q2 2013 Earnings Conference Call August 6, 2013 4:30 PM ET

Executives

Tom Steipp – President and Chief Executive Officer

Tony Chung – Chief Financial Officer

Analysts

Mark Bruce Raymond – Quest Capital Strategies, Inc.,

Operator

Good afternoon. Welcome to the Liquidmetal Technologies’ Second Quarter 2013 Conference Call. My name is Pricilla, and I will be your conference operator this afternoon. Joining us on today’s 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 questions 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 not 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, 2012.

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, 2012, 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, Pricilla. Welcome everyone and thank you for joining us on today's call. Revenue for the second quarter of 2013 was a $150,000 reflecting our continuing focus on manufacturing prototypes, but with some significant developments in our ability to deploy Liquidmetal into companies and applications were the unique properties of our alloy really shine. As a result, I would like to focus today’s call on three specific topics, prototype applications, our debt repayment, and technology.

I’ll begin by discussing the five parts and three industries that made up our prototype shipments for the quarter. While the number of parts shipped was flat with last quarter, the number of new industries three was up and the quality of our partnerships with each is encouraging.

Our first two parts were shipped into the automotive industry. As many of you know, automotive engines are a highly sophisticated, technological combinations of steel, titanium, stainless steel, aluminum and a variety of other exotic materials. Titanium as an example is strong and durable, but not as much so as Liquidmetal. There are applications where the material properties of Liquidmetal are superior to titanium. In the second quarter we shipped two different parts to customers for their continued testing.

Our second part seems to be just what the doctor ordered when medical practitioners need a spring, clamp, the norm today is spring, steel, stainless, or titanium. The problem with current technology is that this clamp force decreases over time, with each opening and closing movement. Liquidmetal, in contrast, is significantly more resilient, our preliminary tests indicate that a useful life of up to 10 times greater for this targeted application. These parts have also been shift to our medical innovation partner for further testing.

Our final two parts went to a golf original design manufacturer, who will be conducting tests on both the driving distance, as well as the durability and quality. As we’ve indicated on earlier calls, the club based was designed by iGolf, the parts were then assembled into finished drivers in fairway woods and testing begins in the coming weeks. As with our automotive and medical parts, the competition appears to be titanium. There will be more on this during the coming quarter.

Moving along to my next topic, we paid off our senior convertible note, as previously announced we took advantage of the recent changes in the market and moved aggressively to pay off our debt with company’s stock. As a result, we are now debt free and have a much cleaner balance sheet.

Finally, I would like to say a word about our technology evolution. We have an extraordinary technology team here at Liquidmetal headed up by Dr. Glendon Gilbert, who has done an extraordinary job of building our intellectual property portfolio over the course of the last several years.

With our most recent activity, we now have 58 issued patterns and 55 patterns supplied forward. Our focus has been and will continue to be to put together a series of patterns, partners, and know how that forms the world’s most comprehensive ecosystem for Liquidmetal research, design, and production.

Our strategic path forward consist of really two parallel tracks. The first is to identify cornerstone applications in global accounts and to produce viable production parts that validate the capabilities of Liquidmetal in a competitive market.

The second track is to provide the ability for our licensees to research, design, and produce their own Liquidmetal parts. In this scenario, we at Liquidmetal need to provide a comprehensive license that allows our licensees access to certified Liquidmetal alloy, injection molding machines and knowledge for their own use. Earlier partnerships with Materion and Engel are step in this direction. We would expect to have more details on this program during the second half of the coming year.

Now I would like to turn the call over to Tony, who will take us through the financial details for the quarter.

Tony Chung

Thanks Tom and good afternoon everyone. Our financial results for the second quarter of 2013 reflect our company’s continued advancement to a development stage for both prototype parts production and intellectual property. In this context, let’s turn to our financial results. Revenue for the second quarter of 2013 was $150,000 compared to $214,000 in Q2 of 2012.

Gross margin was $39,000 or 26% of total revenue compared to $112,000 or 54% of total revenue in Q2 of 2012. As much of our current products mix consists of prototype parts and other revenue which have variable cost percentages relative to revenue. Our gross margin percentages may not be representative of our future business. When an if we began increasing our revenues with shipments of routine commercial parts through our third-party contract manufacture, we expect our gross margin percentages to stabilize and be more predictable.

Selling, marketing general and administrative expense was $1.2 million compared to $1 million in Q2 of 2012. The increase was mainly due to additional payroll expenses for new hires, including an Executive Vice President of Business Developing and Operations, and a Field Sales Engineer to facilitate the adoption of our technology.

R&D expense increased to $224,000 from $211,000 in Q2 of 2012. The increase is mainly due to the hiring of our Vice President of Engineering at the end of 2012. We’ve continued to invest in our Research and Development by developing new Liquidmetal alloys and related processing capabilities. Excluding the one-time manufacturing contract cost in 2012, our operating loss totaled $1.4 million versus an operating loss of $1.1 million for Q2 of 2012.

Now, I would like to go over some of our significant non-cash and non-operational expenses during the second quarter of 2013. The change in the value of warrants resulted in a non-cash gain of $286,000. Additionally, the change in value of the embedded conversion future liability resulted in a non-cash gain of $1.4 million and our debt discount amortization was $2.1 million. Furthermore so a discussion of these non-cash fluctuations, please refer to the management discussion and analysis section of our quarterly report.

Turning our attention to the balance sheet, we ended the quarter was $4.2 million of cash. We anticipate that our current capital resources together with income from operation will be sufficient to fund our operations through the first quarter of 2014. Such factors will likely require that we raise additional fund and or generate significant license revenues to support our operation beyond the first quarter of 2014.

As Tom alluded to earlier, you will note that in our subsequent events footnote disclosure of our second quarter 10-Q documents. On July 18, 2013 we paid off in full, our senior convertible notes that were originally due on September 01, 2013 by issuing $18.7 million common stock to our note holders. We believe this is a significant milestone for the Company and allows the Company to have more flexibility in raising capital to fund our operation. This completes my financial summary for more derailed and complete analysis of our results. Please refer to our second quarter 10-Q quarterly report which we filed earlier today.

Now I would like to turn the call back over to Tom, who will provide further overview of our operational activity and outlook.

Tom Steipp

Thanks Tony. Well, I would summarize this call by saying that second quarter of 2013 and July were exciting for Liquidmetal. We were able to shipped five prototype parts into three, high potential markets of automotive, medical, and Golf. In each of these markets, the competition appears to be titanium but we believe that the extraordinary material qualities of Liquidmetal provide a substantial competitive advantage in these targeted applications. Our particular note is the opportunity in golf. We understand what it takes to compete and win in that market. We believe that our current technology and new partnership approach give us a unique opportunity for success.

Secondarily, I’m very satisfied with our progress and position with respect to technology. Our patent portfolio and knowledge have continued to grow, positioning us as a clear leader in the race to create an ecosystem that will allow us and our licensees to profitly advance the technology. We know that virtually every world class university has an active research program in both metallic glasses as to many corporations.

Having said that, we believe that we are the clear leaders an establishing a complete system of intellectual property, alloys, injection molding machines and knowledge, providing a foundation for license to research, design, and production on a global scale.

Finally, I would like to say a word about our debt in cash position. We’re clearly pleased to be free from our debt load. At this point, we feel that our cash reserves are sufficient to last through the first quarter of 2014. Obviously, we are being cautious with cash expenditures, while being as aggressive as possible about turning prototypes into production evolving the machine technology to the next level and perusing license and alternatives wherever possible.

With that summary, I would like to turn the call over to Pricilla for any questions that might be out there.

Question-and-Answers Session

Operator

(Operator Instructions) We will take our first question from Charles Wagner with [Interglow] your line is open.

Unidentified Analyst

Good afternoon Tom.

Tom Steipp

Hey Charles, how are you?

Unidentified Analyst

Not too bad. Just I had a couple of quick questions. A couple of weeks ago the stock ran real hard like $80 million in a day and we termed it to maybe be about the sheets that you all are able to produce now. Are you able to elaborate on that?

Tom Steipp

Really the only thing I can elaborate on Charles is that, as I mentioned in the call script, our focus has been on increasing our intellectual property in particular our patent portfolios and I think, I’ve mentioned on other calls that our focus at this point in time is non-injection molding technology, but we certainly see opportunities in the future for other ways to process Liquidmetal. So, this is another arrow in the quiver so to speak, but it is not an announcement of a new production capability.

Unidentified Analyst

Okay. Can you comment on the V Matter stuff?

Tom Steipp

I really don’t, V Matter is not a Liquidmetal subsidiary or licensee at this point in time. We believe that they may have a connection to one of our licensees and we’re taking a look at that, we are certainly aware of their website.

Unidentified Analyst

Okay, all right. Thanks a lot.

Operator

Thank you. And we’ll take the next question from [Bill Moore] of Private Investor. Your line is open.

Tom Steipp

Hi Bill. Hello Bill.

Unidentified Analyst

Yes. Apple has some new patents on producing large one sheets of Liquidmetal. What rights does Liquidmetal have to those preps?

Tom Steipp

We have no rights to Apple patents, just by a way of clarification, all of the patents that we filed under a released agreement, are done in conjunction with Apple, those patents are all owned by Liquidmetal in an special-purpose entity called Crucible, and Apple has the rights to those as we have rights to those.

Unidentified Analyst

And I'm sorry was that; did you are saying you do have the right to produce though sheets under Apple’s patents?

Tom Steipp

So all the things that we have patents to; we have the rights to do. I'm not aware of the broad set of all the patents that Apple maybe filing in the both metallic glass areas, but certainly those that are in Crucible, we have rights to as does Apple. Those that are outside Crucible we would not have rights to at this point in time.

Unidentified Analyst

Yeah my understanding was those were within Crucible, am I incorrect?

Tom Steipp

No the ones that went out last week were inside Crucible, and we and Apple both have license stream rights to those, theirs is in consumer electronics and ours is outside consumer electronics.

Unidentified Analyst

Thank you.

Tom Steipp

Sure.

Operator

Thank you we’ll go now to Mark Raymond with Quest Capital. Your line is open.

Mark Bruce Raymond – Quest Capital Strategies, Inc.,

Thank you. Hi guys.

Tom Steipp

Hi Mark.

Mark Bruce Raymond – Quest Capital Strategies, Inc

My question you’ve set off some prototypes, what kind of feedback both positive and negative that we receive from that?

Tom Steipp

Basically I think we sent prototypes to, I think we sent-off, I'm going from memory here by about 28 prototypes and some of those have ended in non-moving forward. The bulk of them, the majority of them are obviously continuing to move forward and in some cases we’re on our second or third shipment of parts to those folks as they either modify the design or continue to test themselves. So the answer to that would vary based on the individual prototype that you’re asking about. They are all kind of indifferent stages Mark.

Mark Bruce Raymond – Quest Capital Strategies, Inc

All right are any close to being able to start picking up some significant orders?

Tom Steipp

Well we certainly are working as aggressively as we can to get them to be in that position.

Mark Bruce Raymond – Quest Capital Strategies, Inc

I understand. Okay thank you.

Tom Steipp

Forecasting when they are going to say enough, testing is enough is always a bit difficult. So I try not to do that.

Mark Bruce Raymond – Quest Capital Strategies, Inc

I understand. Thank you.

Tom Steipp

Okay.

Operator

We’ll your our next question from [Dough Saba] with (inaudible) Consulting. Your line is open.

Tom Steipp

Dough?

Unidentified Analyst

I’m sorry good afternoon. I had a question on the mention of titanium, how does this titanium class compared to someone manufacturing with Liquidmetal?

Tom Steipp

Titanium in and off itself is substantially less expensive the Liquidmetal. Our advantage is in two distinct areas. One is, the after machine titanium, which you have to take a lot of it away. You don’t have to do that with Liquidmetal basically the parts that we seen to be most competitive or once that are molded, come out of the mould with a modest amount of post-processing. What I would say is in the three prototypes that we’ve shipped in the last quarter and in Q2, there are unique properties of Liqidmetal in terms of flexibility, reflectivity in the case of golf, or durability in the case of the automotive that make you – that Liquidmetal a unique opportunity for people who wanted to go through that development process, and we’re excited about having the opportunity to do that with them.

Unidentified Analyst

Okay, great. Thank you very much.

Tom Steipp

Sure.

Operator

Thank you. We’ll go now to (inaudible) a Private Investor. Your line is opened.

Unidentified Analyst

Hi, good afternoon gentleman.

Tom Steipp

Hi, Kevin.

Tony Chung

Hello.

Unidentified Analyst

I have two questions if you like. My first question is regarding 3D printing. Have you guys ever been approached by any of the companies involved in this – I know are some speak of 3D printing being able to reach the base station and with that alloy that you guys produce be significantly useable in that area?

Tom Steipp

So the answer to that is, we are certainly aware of the 3D printing technologies and we believe that Liquidmetal has at least some application in that area, but I would go on to say that is one of those forward-looking areas we don’t have any commercialized 3-D printing available at this time.

Unidentified Analyst

Gotcha. Okay and then my second question is I know a lot of smaller companies are down by disclosure agreements, once they have gotten a contract, the larger companies don’t allow them to report their name or use the name of the company. Are you going to try to be able to publish the name of the companies you may or may not be working with, so that the investors can have some to hold on to about, who you are working and so on versus nondisclosure?

Unidentified Company Representative

I would love to be able to do that, but I think you accurately reflected the state of Investor Relations at this point in time. I can tell you that if you look at the list of people working with we stated phone call after phone call, our target are global leaders, people who are willing to take risks from an innovation standpoint to move to the next level of performance capabilities in their specific areas. But we are generally not allowed to release names on those.

Unidentified Analyst

Okay. And thanks gentlemen I look forward to hopefully you guys have a great third quarter, and future.

Tom Steipp

Thanks Kevin.

Operator

Thank you we’ll go now to [Austin Johnson], a Private Investor. Your line is open.

Unidentified Analyst

Hi actually my question is already answered in regard to Apple, so thank you for that.

Unidentified Company Representative

Okay no problem Austin. I think we got really get it early.

Operator

Okay we will go to [Tom Winkler] also a Private Investor, your line is open.

Unidentified Analyst

Yeah hi Tom, how are you doing today?

Tom Steipp

Well Tom.

Unidentified Analyst

Good, good. I just wanted to see what is the likelihood of landing, I mean, what’s the likelihood of landing a contract within the next couple of months? And I mean, like one to two – we’ve been – I mean lot of investors, Liquidmetal investors have been waiting for a long time. And I’ve been with it for a long time. And we see our – and that’s been quite too negative, but we’ve seen our – lot of dilution over time and we get a lot these false hopes in between here. But we just keep on hanging in and getting keep on getting more beat up more beat up as time those by. Is there any light at the end of the tunnel?

Tom Steipp

Well certainly we believe that there is, good use of the term, light at the end of the tunnel, as I responded to one of the earlier callers. Predicting what the testing process will be is an in exact science especially as we are going through this the first time. Obviously the team here, the management team and the Board are very focused on not only moving from prototypes to production, but doing that as quickly as possible, and at the same time exploring our opportunities for things like licensing.

Unidentified Analyst

Question (inaudible) what it doesn’t sounds like a whole bunch actually, are any of these prototypes out of Europe at all or European countries I should say companies?

Tom Steipp

It actually in this particular case they are not, we generally don’t call that out, because most of the companies we work with have a global footprint. And actually that probably would be the case in this situation as well, least in terms of sales, but in terms of head quartering, no we’re not dealing with any international companies on this particular one, although, again we’ve disclosed on conference calls before that some number of our parts have going to international partners.

Operator

Thank you. And we will take a final question [Joe Levi] also a Private Investor. Your line is open.

Tom Steipp

Hi Joe. Joe?

Operator

Mr. Levi your line is open. Okay we’ll take our next question from [Charles Shaw] a Private Investor. Your line is open.

Unidentified Analyst

Hi good afternoon Tom.

Tom Steipp

Hi, Charles.

Unidentified Analyst

A couple of questions please. I noticed from the 10-Q that it appears that there’s some relationship with the golf subsidiary, where Liquidmetal has a little more control. Am I reading that correctly?

Tom Steipp

Yeah that’s a long-standing situation, Tony why don’t you just give him the capital structure of Liquidmetal golf?

Tony Chung

Yes our golf entity is basically 79% owned by us, and as you can see in our financial statements there is minority interest activity on the income statement and the balance sheet. We’ve announced later part of 2012 that we are moving forward with the Golf business. And we’ve alluded to it a couple of times during our previous earnings call. We do have majority ownership and we are moving forward with the business.

Unidentified Analyst

Good, that’s great. So being a golfer myself, I could use on hedge. And is there any way I could buy a Liquidmetal golf clubs from you direct?

Tom Steipp

Well, I would tell you what, send us an e-mail and we’ll see what we can do for you. There are a lot of Liquidmetal – old Liquidmetal golf clubs around. But as I indicated in this call, moving forward, we’ll probably use in a different technology to provide those and we really need to wait till the testing is done before we tell you anything.

Unidentified Analyst

And I guess what I'm trying to get to is that seems like one that might be close on horizon, am I correct in that?

Tom Steipp

You know this is all a function of testing and what I would say relative to aerospace, medical, or automotive is, it is very difficult to forecast how long those things would take. At least in the area of golf, however, we do at least have some experience there and other companies made golf clubs before the approach that we have at this point in time is pretty dramatically different and that we’re using outside engineering and partners to help us with that. So..

Unidentified Analyst

Great and one last question...

Tom Steipp

We will be moving in as forward as fast as we can. We would like to get you an advantage on your friends.

Operator

Thank you and we will take one final question here from and [Ann Davis] a private investor. You line is open.

Unidentified Analyst

Yes. First I want to lend Tom and Tony for investing their life into something to make it work. Secondly, a background is as Vice President of a major corporation, top-10 corporation, the reason I tell you that it is, I asked its peers from evaluation that you do have your hands on something that could be very competitive in the marketplace. I’m very, very pleased to see that you’re keeping tabs on what you say and what you say to whom, because in this marketplace I don’t have to tell what a great idea will do in terms of someone wanting to take it from you. So I commend you for that. I would ask you who do you have on your Board as members of your Board advising you.

Tom Steipp

I just refer you to the Investor page, Liquidmetal Investor page we articulate who the Board members are, I won’t go in through each of their qualifications, but you know I would say that we have an excellent Board majority of which now parenthetically are independent Board members. And at least one has substantial experience in retail selling, on a very large scale.

Unidentified Analyst

Okay.

Tom Steipp

The others have a broad range of experience in terms of small company experience, fund raising experience, Board governance, those sorts of things.

Unidentified Analyst

All it takes is enthusiasm, passion and success can happen, so it really doesn’t matter backgrounds of people, it may enter the type of people that you get honestly?

Tom Steipp

Yeah.

Unidentified Analyst

You’re marketing. I’m sorry.

Tom Steipp

As I said, I think we’ve – we tried to build an excellent Board and feel as though we’ve accomplished that.

Operator

Thank you. And that is all of our questions. I would now like to turn the call over back to Mr. Steipp for closing remarks.

Tom Steipp

Thank you, Pricilla. First of all I would like to thank everyone for joining us on the second quarter call for 2013 and we’ll look forward to giving you an update on the progress we’ve made at the end of third quarter. Thank you.

Operator

This does conclude today’s conference. Thank you for joining. Everyone have a great day.

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