Liquidmetal's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Liquidmetal Tech (OTCPK:LQMT) Q3 2013 Earnings Call November 8, 2013 4:30 PM ET

Executives

Thomas Steipp - President and Chief Executive Officer

Tony Chung - Chief Financial Officer

Analysts

Operator

Good afternoon, and welcome to the Liquidmetal Technologies' third quarter 2013 conference call. My name is Melissa, 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 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 you 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 of 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. Please go ahead, sir.

Thomas Steipp

Thank you, Melissa. Welcome, everyone, and thank you for joining us on today's call. The third quarter of 2013 turned out to be a very significant quarter indeed. Revenue for quarter was $456,000, which is up from previous quarters.

We continue to focus on promising projects with select customers, resulting in three new prototype shipments. We also shipped additional parts to two customers that are currently in progress, qualifying parts for future production.

This was the first quarter since transitioning two our current technology that we were able to publish a press release, detailing both an application and naming a satisfied customer. The success story in this case was the canard for Lockheed Martin's EAPS missile. The canard is scheduled to be part of a live fire test early next year.

This is an exciting opportunity for two reasons. First, the canard is a critical component for a large scale, long-life defense program. Secondly, our technology was selected because of the remarkable precision and consistency, which we are able to attain from our manufacturing process. We have talked for a number of quarters about the advancements in the underlying technology as we move to provide commercially available solutions that can be placed into large scale production.

During Q3, we were pleased to announce the availability of a standard, Liquidmetal injection molding system from ENGEL. One of the world's leading suppliers of injection molding equipment. These machines have already been quoted, have a standard availability and can be installed and supported anywhere in the world.

This allows current and future licensees to have direct control over research, development and production of liquidmetal alloy parts for their proprietary applications. The resulting solution is very similar and operation tangles plastic injection molding machines, allowing nearly any facility currently operating this type of machine to add liquidmetal alloy into their designed portfolio.

Unlike other metal molding methods, Liquidmetal parts are made in a single operation and do not require additional steps such as debinding, sintering, to maintain extremely fine finish, exacting geometry and uncommon strength.

With approval of the majority of our shareholders of record, we have increased the authorized numbers of shares from 500 million to 700 million. This provides us with much needed flexibility to continue operating the company in a manner that will allow us to maximize shareholder value in the shortest period of time.

In addition to increasing authorized number of shares, we were able to secure a $20 million equity line of credit. The terms of this financing are we believe more attractive than the financing we did last year. Again, this in conjunction with the increased share authorization, gives us the financial flexibility to continue investing in a way that maximizes shareholder value in the near-term.

Finally, we filed a voluntary 8-K for the sake of transparency on November 1, 2013, indicating that we have a disagreement with Visser Precision Cast over a number of issues relating to the agreements that we signed with them on June 1, 2012. At this point, we are in arbitration. The company believes that all claims by VPC are without merit and we are vigorously pushing for solution that is in the best interest of our shareholders.

On the sales front, we continue to build our network of manufacturing sales representative. These MSRs are the key to increasing awareness of Liquidmetal at that design stage, across the broad array of industries that benefit from our performance and cost advantages.

Now, I'd like to turn the call over to Tony, to take us through the financial details for the quarter.

Tony Chung

Thanks, Tom, and good afternoon. Our financial results for the third quarter of 2013 reflect our company's continued advancement through a development stage for both prototype parts production and our proprietary intellectual property. In this context, let's turn to our financial results.

Revenue for the third quarter of 2013 was $456,000 compared to $107,000 in Q3 of 2012. The increase was primarily due to increases in research and development services, under existing purchase orders. Gross margin was $60,000 or 13% of total revenue compared to $34,000 or 32% of total revenue in Q3 of 2012.

Consistent with prior quarters, our current product mix consist of prototype parts, R&D services and other revenues that have higher internal variable cost percentages relative to revenue. Therefore our gross margin percentages may not be representative of our future business. As we begin increasing our revenues with shipments of routine commercial parts, we expect our gross margin percentages to stabilize and be more predictable.

Selling, marketing, general and administrative expense was $1.2 million compared to $1.4 million in Q3 of 2012. The decrease was mainly due to reductions in legal and consulting expenses, which were slightly offset by increases in payroll expense for the quarter.

R&D expense increased to $368,000 from $217,000 in Q3 of 2012. The increase is mainly due to testing and research expenses related to our Golf subsidiary, as well as the hiring of our Vice President of Engineering at the end of 2012. We continue to invest in our research and development by developing new Liquidmetal alloys and related processing capabilities, inclusive of product testing efforts related to our Golf subsidiary that were completed in the third quarter of 2013.

Now, I would like to go over some of our significant non-cash and non-operational expenses during the third quarter of 2013. The change in the value of our warrants resulted in a non-cash loss of $2,511,000, as a result of increases in our underlying market share prices of our common stock. The change in value of the embedded conversion feature liability recorded as of the date of legal conversion of our senior convertible notes, resulted in a non-cash loss of $2,435,000.

Our debt discount amortization was $361,000, as a result of normal amortization of original issued discounts and deferred financing costs through the date of legal conversion of the senior convertible notes. And lastly, we recorded a $91,000 gain on extinguishment of our convertible notes, as a result of early satisfaction of our senior convertible notes on July 17, 2013.

Turning our attention to our liquidity position, we ended the quarter with $3 million of cash in the bank. As Tom alluded to earlier, our shareholders approved our proposed increase to the authorized share limit from 500 million to 700 million shares. In addition, I am happy to elaborate on the fact that the company was able to secure a $20 million equity line facility over a three year term.

Upon effective registration, we may provide notice to our investors that we'd like to sell shares up to certain dollar and volume in it. Upon notice, the investors are required to accept deliver of the shares at a certain discount price to market price. The benefit to this financing structure is that we control how much and how often we raise funds.

We can also terminate the equity line at any time or we can secure other financing transactions, while the equity line is still in place. This allow us the flexibility to raise funds real-time, through various funding structures as market conditions allow and fund our operations for the next several years.

This completes my financial summary. For a more detailed and complete analysis of our results, as well as the funding transaction, please refer to our third quarter 10-Q report filed earlier today, as well as our 8-K, which we anticipate filing on Monday.

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

Thomas Steipp

Thanks, Tony. Well, as I mentioned in last call, our strategic path forward consist of 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 competitive markets. The Lockheed Martin's canard, illustrates the progress that we're making on this front. The second track is to provide the ability for licensees to research design and produce their own Liquidmetal parts. The ENGEL announcement is a significant step forward for these licensing initiatives.

I would like to make a specific comment about the increased share authorization in recently acquired equity line facility. For clarity, I do not see us making any significant increases in our quarterly expense profile in the short-term. We're at a point where the technology is stabilizing at a level where it can be used in relatively large scale environment. As such we will be making some modest increases in sales and marketing as we take what has been proven and scaled within the accounts and industries where we have begun to get traction.

Perhaps most importantly this equity line gives us the flexibility to ramp operations immediately in response to improvement in market conditions for our solutions. As I stated before, our first and primary source of short term revenue is targeted at prototypes and production parts. In parallel, we are attempting to ramp up license revenue, which we believe will expand the market for our products and services on a much broader front than we could do with organic production. As the last resort however, the increase in share authorization and acquisition of a significant line of credit gives us sustain power that we need to fully develop this technology to the benefit of our shareholders.

That completes the formal part of our call, I'm happy to open it up to questions at this point in time. Melissa?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from [ph] Alberto Velasco, Private Investor.

Unidentified Analyst

I was curious with regards to the new turnkey model with ENGEL, did Liquidmetal derived any income off of the sale of the turnkey machine?

Thomas Steipp

We don't really comment on how things have broken out. I think it's safe to say that we have a very good relationship with them. We put a significant amount of R&D into the machines and we have IP on those. So there is some relationship, but not one that I am free to comment on at this point in time.

Operator

And our next question will come from [ph] John Hannan, Private Investor.

Unidentified Analyst

Just quick question how is your relationship with Apple going [technical difficulty], just curious how the partnership you guys are moving forward?

Thomas Steipp

We have a joint development agreement. We've extended the capture period with Apple. And I would say our relationship with Apple is excellent. We have consistent views on the opportunity and congruence on the goals that we're trying to solve.

Operator

And our next question will come from [ph] Tom Meranda, Private Investor.

Unidentified Analyst

Actually the second caller asked similar question. It was about Apple.

Operator

And our next question will come from Charles Wagner with [ph] InterGlobe Technologies.

Unidentified Analyst

Tom, just wanted to know you said that the canards were made with utmost precision, who actually made those?

Thomas Steipp

Those were made through a standard process. We work with Lockheed to get the order and those parts were made by Visser Precision Cast, our contract manufacturer.

Unidentified Analyst

So they actually were able to do those decently or whatever?

Thomas Steipp

Yes.

Unidentified Analyst

I guess a couple of months ago Mr. Chung, had filed something about, kind of if you all were bought out that they would be able to get new salary or stuff like that? Do you look at any kind of buyout possibly coming since this technology is getting ready to maybe take off?

Thomas Steipp

I certainly wouldn't comment on any rumors about takeovers. What I would say, Charles, is that change of control agreements is what I think you're referring to, are very standard executive compensation package. I actually point out that for anybody to take advantage of the terms of change of control, the company not only needs to be acquired, but that individual needs to be terminated as part of the process.

So its' really just a safety net to make sure that we as executives in the company are not conflicted about questions that might come in about either acquiring or some other relationship with the company. Again, they are very standard part of transaction at executive level of companies.

Operator

Our next question and that will come from [ph] Cedric Pierre, Private Investor.

Unidentified Analyst

I did miss a little bit of the conference call, but I just wanted to know, where do you see Liquidmetal has grown in the next year or so?

Thomas Steipp

It's such a pretty broad comment.

Unidentified Analyst

I'd just like to know if there is anything big significant coming in the future.

Thomas Steipp

I think there is thruster in three areas, converting our prototypes into production; looking for licensing opportunities; and continuing to extend the technology. We view ourselves very much as a technology development firm heavily entrenched in IP. If you look at the number of patents we've added to the portfolio since the licensing with Apple, we believe we've made significant progress and intend to continue that.

Operator

And our next question, we'll go to [ph] Neil Wayne, Private Investor.

Unidentified Analyst

I had a question regarding current arbitration with VPC and what you envision, either best case or worse case scenario, I mean, in our likelihood going to end, that they will no longer be an exclusive manufacture going forward into the future? Or can you elaborate on again what you envision a best case or worse case scenario being likelihood?

Thomas Steipp

I really cannot. As you may or may not be aware, arbitration proceedings are private. We will disclose anything that we believe is required by SEC or important from our transparency standpoint. One of the things that I would say, I mean we do have some disagreements with VPC. At the same time, I would expect both organizations, Liquidmetal and VPC to continue operations pretty much on a standard basis.

We're going to continue to sell and bring in opportunities and they're going to continue to produce. This arbitration is the process that was set up in the agreements that we signed last year. We'll let it work its way through and as appropriate we'll notify the investor community. So I really can't comment beyond that.

Unidentified Analyst

There is a follow-up to that. I mean, yes I know a lot of people are kind of curious with introduction of the ENGEL machine that is now available and it just opens up the door for a lot more possibilities, potential production and control on behalf of the end-user or manufacturer. Certainly the intention of that or acknowledgement of that had to be something that maybe VPC got upset with. I am not asking to read their minds, but in many ways, doesn't that turn the production, manufacturing away from VPC and more towards the control of your potential licensees?

Thomas Steipp

I really can't comment on that other than to say, we believe there is an awful lot of room here to grow the market. So the reason I state this is parallel path is we believe that for that foreseeable future we will be making parts, selling parts as well as looking at license opportunities.

The most significant thing I think to takeaway from the introduction of the ENGEL machine is that for the first time since I've been here, this technology is at point where it can actually be packaged up, sold by someone else, and deployed globally into any manufacturing facility that you would want to put it into.

So we are well beyond what I would call the prototype stage by virtue of ENGEL, putting the machines out there and selling them, supporting them, we can virtually support any kind of manufacturing no matter what the size, but I think that's significant when you talk about the evolution of a new technology.

Operator

And that does conclude our question-and-answer session at this time. I'd like to turn the call back over to our presenters for any additional or closing remarks.

Thomas Steipp

I think that pretty much wraps it up. Again, third quarter was a significant one for us. We're very pleased with the amount of progress that we've made and look forward to talking to everyone at the end of the year. Thank you.

Operator

That's does conclude our conference for today. Thank you for participation. You may now disconnect.

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