Liquidmetal Technologies, Inc. (OTCQB:LQMT) Q1 2014 Results Earnings Conference Call May 8, 2014 4:30 PM ET
Tom Steipp - President and CEO
Tony Chung - CFO
Paul Hauck - Vice President of Worldwide Sales and Support
Good afternoon. Welcome to the Liquidmetal Technologies' First Quarter Fiscal 2014 Conference Call. My name is Kevin, and I will be your conference operator this afternoon.
Joining us on today's call are Liquidmetal's President and CEO, Tom Steipp; CFO, Tony Chung and our special guest Paul Hauck, our recently hired Vice President of Worldwide Sales. 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-looking 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 of 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, 2013.
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, 2013, 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.
Thank you, Kevin. Welcome everyone. Thank you for joining us on today's call. The first quarter of fiscal 2014 turned out to be significant in the overall evolution of Liquidmetal. Here is a recap of the results and advancements that occurred during the first quarter leading up to this call.
Revenue for the first quarter was $160,000 versus $122,000 for the first quarter of 2013. The arbitration with VPC continues to progress with the hearing now scheduled for August 2014. We continue to focus on outcomes that will be in the best interest of our shareholders and customers.
We successful raised $11.5 million to-date under our equity line of credit to fund continuing operations including the expansion of our marketing and sales activities.
As our summary for first quarter and preview for the fiscal year 2014, I'd like to recap our strategic goals and tactical activities.
Since beginning the exclusive licensing arrangement - signing the exclusive licensing arrangement with Apple, in August of 2010, we streamlined the organization and focused our efforts on building out the significant IP intellectual property portfolio around a scalable commercialized echo system, the zirconium based alloys and metal molding machines.
Our current IP portfolio has increased to 63 issuing patterns and 56 additional pattern pending filed.
As the technology began to stabilize, we shifted our efforts to building out a partnership network that was capable of making the very significant investments, necessary to bring this technology to commercial availability on a global basis.
At the same time we began the very major process of moving the manufacturing capability out of our facility in Rancho Santa Margarita to remote location with our contract manufacturer, Visser Precision Cast in Denver Colorado proving that the technology was stable enough to have a third party with close collaboration and full access to our technology, manufactured Liquidmetal parts successfully.
This complete process accommodated in the fourth quarter of 2013 and the first quarter of 2014 with the full commercial availability of two alloys for Materion and a state-of-the-art metal molding machine from ENGEL.
To be clear, our focus as an organization is to be a catalyst for changing the way that people think about how they develop small complex parts. Our role in that is to be the process development experts.
Defining, refining and expending the alloys manufacturing systems and application components to allow our customers and licensees to use Liquidmetal Technology to its fullest potential.
This entails a careful integration of marketing, sales, engineering and manufacturing functions into unified program to serve customers, licensees and partners.
During this past quarter we took an important step forward by hiring Paul Hauck as our Worldwide Vice President of Sales and Support. Paul brings a 30 year track record of significant achievement within the Metal Injection Molding industry which went from three revenue to over $2 billion during that spend.
Here is what you will see from us during the coming year. An increase in marketing activities builds around applications. A revamping of our web coverage to expand the numbers and focus on those who have proven success in MIM and other complimentary metal working technology.
The establishment of our Liquidmetal Technology Development Center in Rancho Santa Margarita to include state-of-the-art manufacturing which will allow us to showcase the technology with perspective customers and licenses.
And finally an expansion of our licensing efforts to leverage our Liquidmetal Technology echo system which is ready enable to be deployed worldwide.
We believe that technology and market are at a point where coordinated and focused investment in marketing and sales, we yield significant returns for the company.
During the past quarter I've gotten a number of inquiries from investors about Paul and his decision to leave a very established company in the MIM industry and join Liquidmetal.
While we have a corporate policy that only Tony Chung, Otis Buchanan and I will talk directly to investors, I thought that it would be appropriate to let you here firsthand from Paul about his experience and motivation for joining the team. Please, Paul.
Thanks Tom. It's a pleasure and exciting to be here at Liquidmetal. As you already mentioned, I did spend nearly 30 years in the MIM industry including three terms as the President of the International Metal Injection Molding Association and three terms on the board of governors for the Metal Powder Industries Federation.
I participated in a number of different functional roles in both startups and more established companies during that period. Along the way I watched the industry grow from virtually to no revenue to over $2 billion last year. I participated in the expansion of intellectual property and license enabled growth. I saw the technology evolve, mature and growing capabilities.
Today, MIM - virtually every market you can imagine but there are things you cannot do with MIM. In my former position I saw part everyday that we're not a good fit for MIM. Some of those parts could be done easily with Liquidmetal and that's what makes my role here particularly exciting for me.
I actually see Liquidmetal as a complimentary capability which many of my former customer's and sales representatives are likely to embrace.
Simply we may complex metal applications possible. The technology has five particularly important attributes worth mentioning. One, incredible accuracy, counter reflect the accuracy of the mold including high gravitation tools.
Two, amazing reputability but only 0.2% shrinkage in fully dense material shot-to-shot repeatability is impressive.
Three, remarkable properties, as molded high strength, high hardness in 2% strain limit are very unique process results.
Four, premium surface finish. At less than 4.0 RA micro-inch as molded surface finish, liquid metal is not easily duplicated by other metal working technologies without some form of costly secondary operations.
Five, unbeatable economics. Highly complex parts with excellence surface finish in physical properties from a one step process provides attractive economics.
The sales and marketing needs of Liquidmetal are very familiar to me. I have experienced and let the sales and marketing process before. To transfer processes and enable design participation, I believe that my former customers will find that they can leverage the capabilities of our technology and achieve significant value for Liquidmetal, which will compliment their continued purchases apart from MIM and other metal working technologies.
Finally, Liquidmetal has an incredibly talented team and the R&D organization is second to none that I worked with and that is critical as we work with customers to enable new applications with this amazing process.
In short, I'm very excited to be here. I think that I bring an important skill set to the team that probably was as critical before all the other pieces were in place but which is absolutely sensual going forward.
This process will take some time but there aren't new challenges here that I haven't dealt with before and I look forward to helping Liquidmetal become an another success story like MIM.
Now I would like to turn the call over to Tony to take us through the financial details for the quarter.
Thank you, Paul. Our financial results for Q1 2014 reflect our company's continued advancement through a development stage for both prototype parts production and our IP, the continued implementation of our core business strategy and our continued partnering with our customers and licensees for the advancement of our technology. In this context, let's turn to the financial results for first quarter ended March 31, 2014.
Revenue for the first quarter of 2014 was $160,000 compared to $122,000 in Q1 2013 primarily due to increases in research and development projects with licensees. Gross margin was $20,000 or 13% of total revenue compared to $40,000 or 32% of total revenue in Q1 2013.
As disclosed in our MD&A section of our 10-Q most of our current product mix consists of prototype parts and other revenue which has variable cost percentages relative to revenue, our gross margin percentages may not be representative of our future business.
When and if we begin increasing our revenues we should maintain routine commercial parts we expect our gross margin percentages to stabilize and be more predictable.
Selling, marketing, general and administrative expense was $1.9 million compared to $1.3 million in Q1 of 2013. The increase was primarily due to increases in legal expenses, associated with our ongoing arbitration proceedings with Visser Precision Cast.
In addition, we anticipate that sales and marketing expense for the upcoming quarters will increase to support product sales and marketing initiatives.
R&D expense increased to 334,000 from 236,000 in Q1 of 2013. The increase - primarily due to increases in internal projects, related to the continued development of our technology and related production processes.
We continue to invest in our research and development by developing new Liquidmetal alloy and related processing capabilities.
Now, I'd like to go over some of our significant non-cash and non-operational expenses during the first quarter of 2014.
The change in the value of our warrants resulted in a non-cash loss of $1.7 million as a result of increases in the underlying market share price of our common stock.
Amounts recorded in other non-operating expense accounts are minor in comparison to those recorded in Q1 2013 due to the full settlement of the senior convertible notes issued under our 2012 private placement during July 2013.
For a more thorough discussion of these non-cash fluctuations, please refer to the management discussion and analysis section of our quarterly reports.
Turning our attention to the balance sheet, we ended the quarter with approximately $7 million of cash. You will note that in our subsequent events result disclosure of our first quarter 10-Q document, we raised an additional $5 million to draw down under our equity line of credit during April and May that brings our total funds raised under our equity line to $11.5 million.
We believe that these additional capital raise when considered with cash on hand as of the balance sheet date, provide adequate liquidity and flexibility in continuing to execute our overall strategy through the middle part of 2015, that includes an increased focus on sales and marketing activities, as well as increases in capital expenditures, to support the build-outs of our technology development center.
Our long term success will continue to be contingent upon our ability to raise additional capital and to generate significant license revenue to support our operations beyond the middle of 2015.
This completes my financial summary. For a more detailed and complete analysis of our results, please refer to our first quarter 10-Q report, which we filed earlier today.
Now I'd like to turn the call over to Tom, who will provide further overview of our operational activity and outlook.
Thanks Tony. Well, as you heard in this call, first quarter represented yet another milestone in our ongoing efforts to grow and commercialize Liquidmetal Technology for the benefit of our customers, licensees, partners and ultimately our shareholders.
Over the last few years, we've built out a strong foundation of IP, in the realms of alloy, metal molding machines and applications. A consortium of the world's most prominent and technologically advanced companies to commercialize the availability of alloy and molding machines.
And finally, in advanced manufacturing capability, that is being replicated beyond its current boundaries to benefit existing and future customers, partners and licensees.
Throughout the course of this year, you will see us increase our investments in marketing and sales to one, established Liquidmetal as a leading authority and centre of collaborative development on all aspects of Liquidmetal Technology.
Two, to increase the size and expertise of our sales rep organizations, to include enhanced training and support activities.
Three, expand innovative marketing activities, which communicate the capabilities and benefits of Liquidmetal as a disruptive force in certain applications, complementing MIM and other metal working technologies.
And, four, open a world-class technology development centre in Rancho Santa Margarita, where customers and licensees can view firsthand, how Liquidmetal can provide innovative solutions.
We are all excited about the - launching these new initiatives and look forward to giving you an update on our progress during the next call.
That completes the formal part of our call. Now I'll turn it over to the operator, Kevin, for any calls, - questions.
Thank you. (Operator Instructions) And let's take our first question from Gregory Smith with
SWAT Systems (ph). Please go ahead.
Good morning, Tom, hi Tony, how're you?
Two question for you, about the medical, otherwise approval process, we see that there was some interest in that market, I'm just curious how long you think it'll take to approve the non-beryllium based Liquidmetal for medical devices? And, that might give us an indication about when the medical device method might open up?
Yeah, let me just make a comment about the medical and dental market. Greg, there is - it really depends on where the application is. Obviously the most extreme is implanted devices, which we are not focused because of the length of those surveys.
So, FDA approval, runs organically from six months or so in some of the dental places to longer period to other things.
So, we have had the non-beryllium based alloy available for a period of time. We have provided samples to customers, and I guess what I would say is, it's a little difficult to say exactly what the, how the approval would affect, the approval cycles would affect availability, but what I can say is we had, quite a substantial amount of experience making parts utilizing that. And it is our belief at this point in time, that the material qualities or the non-beryllium based alloys are not very different from those of our LM-1B.
So, we were excited about the test results and that it now gives us two alloys for us to sell.
Great. Thank you. That's all I had.
We'll go next to Alberto Velasco of Private Investor. Please go ahead.
Hi, Tom. I heard you discuss during your presentation a couple minutes ago, you had mentioned that with the research and development costs that were incurred this past quarter, that that is designed to compliment the research and development of the licensees, is that correct?
In many cases, that is correct, although to be clear, we do R&D for our customers on specific parts that they are working on with licensees for applications or development work that they may have, as well as with partners.
So, it's a little difficult to segment it precisely because many of the needs overlap. But go ahead with your question.
Well, I'm curious, is there any way to project what the - I guess, what kind of a revenue sharing agreement, what kind of percentage Liquidmetal might receive as a beneficiary with regards to technology that 's developed as a joint venture.
Yes. Well, the simple answer to your question is no. For clarification, we have no joint ventures at this point in time. We clearly have collaborative development activities that are resulting in, for example, new and improved machines from ENGEL and new and improved alloys from Materion.
But relative to trying to project revenue streams as a result of those, - we really don't have a business model that projects that, I mean there are certain relationships that we have, that do benefit us and there are others who are aware, all we are trying to do is expand the technology.
So, with that going through our point-by-point, I really can't give you a specific, other than to say, our business model going forward, it's really made up of two components. One is the, sale of parts directly to customers, for which we will generally have contract manufacture, make those parts.
As well as, taken the technology which we now believe, as of last couple of quarters, very stable, being able to have licensees access to that, for which we will primarily receive royalties and those will be done on a case-by-case basis depending on the benefit and the value that Liquidmetal brings to the solutions.
We'll take our next question from Steven Lining with Spring Designs (ph).
Hi gentlemen, thank you for taking my call.
I was curious to what would be a realistic size limitation, either small or large, using Liquidmetal as your primary part component.
Yeah, that's an easy, that's an easy one to answer. We are limited to, roughly a 100 gram charge, and out of that 100 gram ENGEL, roughly 20% of it or so, is used up in runners and what we call our cookie.
So, as Paul mentioned, we have the ability to have single-cavity and multi-cavity design. So, generally speaking, what we do is, we'll have parts that are either a single part, which could be up to 60 grams to 80 grams, which is probably somewhere in the neighborhood of 4/6 or so, depending on how thick it is or we might have as many as 64 parts that are only a gram to a gram and a half.
So, it gives you some limits in terms of the small components as well as the larger sizes that we can do at this point in time. I should also point out, Steve , that, over the course of the next several years, we fully expect the technology to extend itself into sheets and extrusion and other things.
But to be clear, we are focused on what we can do today and that parts that are, roughly less than 80 grams.
Can I ask a follow-up question?
Are there, any other material that did not play nice with Liquidmetal that you would encounter any kind of failures over time being, and some other brass or aluminum together?
No. We've had expensive cash and, I guess what I would say is, from a corrosion stand point, we are, we're not reactive to corrosive environments for the most part, and in terms of interactions with other metals, we've not run into any at all that we're aware of.
Wonderful. Thank you, I appreciate the call.
(Operator Instructions) We'll take our next question from Joe Funk, Private Investor (ph). Please go ahead.
Hi, I've got a question on the new beryllium free alloy, what is the cost difference on that from the beryllium version?
There maybe a modest difference in the cost Joe, a lot of it will depend on the volumes, but we would expect to be on the same order and lot of volumes, it maybe slightly higher, but we don't expect that to be, major consideration in terms of our part assessment and those kinds of things.
But, from a material standpoint, from a toughness standpoint and the durability, it is one of the better alloys we've ever come across and we tested a lot over the years.
And with the beryllium free alloy, will that still be susceptible though - if you had it in a high temperature application, it wouldn't be good for that situation?
Yeah. That's the case, we are limited in terms of high temperature applications, but, as you can imagine, despite extraordinary amount of testing and - our feeling that the beryllium based metals are very, very safe, when used as prescribed.
There are a number of industries where they just have an interest in not using alloys that have beryllium item and at this point in time, that gives us a, pretty significant, significantly broader scope of applications we can look at and industries that we can talk to.
And maybe just one last question on the, the new ENGEL machine, is that still scheduled to be showing up here in end of June this year?
We have one scheduled for arrival, early in the summer for our technology development centre. To be clear, again, we're going to continue to use contract manufacturers for the bulk of our manufacturing, as Visser is doing today.
But we have determined that, we know a lot about it here, we developed most of the advanced technologies and capabilities and having a centre where people can come in, watch their parts being prototyped and see the latest from us.
It's really essential in our overall ability to sell and close the business. So, we're excited about opening that up in a not too distant future.
We'll take our next question from Jim Haraldson with Haraldson Salberg Trust (ph).
Good afternoon gentlemen.
Tony, a question for you on the finance side, please. You mentioned that you drew down $5 million on the line of credit, is that correct?
No, till-date, we've drawn down total of $11.5 million.
You had new 5 million draw down in April, is that correct?
Yes, in April and May, subsequent to our quarter end.
Can you tell me what price those are?
On average, from the beginning to the amount that we've drawn down to date, we're looking at on average about $0.20.
Okay. And you're saying that will take you through May of next year.
Is that count any sort of settlement that may occur with Visser?
If there is any settlement, we don't believe it's going to be a monetary one. But it does not include any type of settlement, cash-in or cash-out, it simply relate to our operation.
Thank you. We'll take our next question from Ross Rockwell, Private Investor (ph). Please go ahead.
Tom, thanks for the call, appreciate. I just had another question for clarification on the arbitration, you mentioned that you're going to have a hearing in August.
And, my question, is kind of two part, is that, where it will be resolved or will it be resolved no later than August. And in the meantime, is that process, is that a new term, executing or disposing any other contract for manufacturing?
In terms of the first part of the question, the hearing is scheduled for August, since this is an arbitration, it will be settled in one way or another there. Our goal is to makes sure that the arbitration does not impact our customers or our selling process in any way unduly, but obviously when there is a litigation component going on, it's less than ideal situation.
Our goal has just been to try to mitigate that to the extent we can and not have it impact us or our customers.
We'll take our next question from Mike Presteri, a Private Investor (ph).
Hi guys, thanks for taking my call. Had a couple of quick question, I'm actually just a perspective investor, just came across this story and it looks very promising.
I just wanted to ask a few questions to come and give myself, maybe the investor community, is listening a better idea of what you guys are doing. Just I'm reading about you guys, can you give me a better understanding of, I know you touched on the different components you worked, you had lease contracts within the aerospace sector, I think one of the biggest things that dragged your attention for many people was, expectations behind what's going on with Apple and what might you produce from that?
But, I don't get the impression, that's really a main driving emphasis behind your business mode. I think it just generates a lot of enthusiasm in a short term.
I'm wondering if you can kind of comment on, to a perspective investor, where you first see yourself going from this point moving forward in terms of the continued sectors you'll remain President and maybe some new endeavors which you're going to start getting to down the road?
Sure. I think we've covered this before Mike, but, the license agreement we have with Apple does not generate significant, any notable revenue for us going forward if Apple, if and when Apple decides to use the technology.
Obviously their interest in any subsequent use, if they were to use it, would improve, would provide a level of credibility we hadn't had in the past. We don't comment about what's going on with them, but although I would certainly point to the fact that, utilizing their partnership and to a certain extent their resources, we have generated somewhere in the neighborhood of 58 patent applications in the last three years.
So, we certainly believe that the work we've been doing with Apple and other licensees and other partners, people like Materion and ENGEL have allowed us to flash out that IP portfolio as well as, make sure that we have commercially viable machine.
So, in terms of where would go, I think initially we focused on aerospace, medical and some specialty parts, at this point in time we can, - don't see that changing at all, we've got an, a lot of prototypes out there.
What will change a little bit, is that Paul has 30 years worth of experience working with high-level executives and a number of very specific companies. And he's got a wealth of experience in terms of what parts these companies struggle with and he knows what capabilities we have at Liquidmetal.
So, one of the reasons we are going to be focusing on putting the technology development centre in place, ramping up our sales and marketing activities, is to take advantage of that, and the fact that we now have alloy and material, which could be deployed fundamentally any place in the world.
So, that's where our focus will be over the short term and obviously we want to go places where there's already a level of trust and confidence between our sales team or sales reps and the customer. That's where we'll be able to make progress most quickly.
And ladies and gentlemen, this does conclude today's question-and-answer session. At this time, I'll turn the call back over to your presenters for any additional or closing comments.
Okay. I just want to thank everyone for joining us on the call. I'd like to point out that we will be updating our investor presentation on the website, effective, basically tomorrow. And we look forward to give everyone an update on our sales and marketing activities next quarter. Thank you.
Ladies and gentlemen, this does conclude today's conference. As a reminder, this call will be available for replays, starting later this evening via a link in the Investor Relations section of our company's website at www.liquidmetal.com.
Once again, thank you for your participation. Have a great day.
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