Tom Steipp - President and CEO
Tony Chung - CFO
Paul Hauck - VP of Worldwide Sales
Liquidmetal Technologies Inc (OTCPK:LQMT) Q2 2014 Earnings Conference Call August 12, 2014 4:30 PM ET
Good afternoon. Welcome to the Liquidmetal Technologies' First Quarter Fiscal 2014 Conference Call. My name is Ann, 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 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. 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 within 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 Web site 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, Ann. Welcome everyone and thank you for joining us on today's call. The second quarter of fiscal 2014 turned out to be an incredibly significant one. Here is a recap of the activities and results that occurred during the quarter.
Revenue for the second quarter was $153,000 versus $150,000 for 2013, up significance. We are pleased to report that we have reached the settlement agreement with Visser Precision Cast in a way that enhances our shareholder value, while minimizing expenses associated with the arbitration process. Secondly, we were able to extend our capture period agreement with Apple through February of 2015. This allows us to work in collaboration with a very important existing licensee, while providing Liquidmetal with important financial and legal support associated with maintaining and expanding our pattern portfolio.
Finally, we were able to raise additional cash with our equity line of credit. Year-to-date, we have raised 16 million for use in building the business most notably, for expanding our manufacturing, marketing and sales activities. Beyond these very significant milestones, I would like to review the progress of our strategic initiatives for fiscal 2014 where we are now able to turn our full attention to the number one focus to the business moving forward, the production of commercially variable parts.
As we evaluate what needs to happen next, we believe that it is critically important to have sales and support, engineering and manufacturing under one close-mid structure in order to grow the business as quickly as possible. Before I explain all that we are doing to complete our infrastructure and to support the production of commercial parts, I wanted to take just a moment to recap what we have learned from the production of past prototypes.
During the last four years, we’ve produced 32 prototypes. And while we believe that four will be transitioning into production this next year, the other 28 have provided substantial lessons learned that are now shaping the future direction of our business. Here’s the recap. Number one, stable technology is not only desirable, it is essential. You should note ENGEL and Materion release of commercial products in the fourth quarter of 2013 and first quarter of 2014.
Number four, R&D, marketing, sales and manufacturing, all need to be collocated during this next phase. Hoosier of the Visser arbitration clear the way for this to happen. Number three, sales and marketing strategies need to be fine-tuned focus on the development of applications that take full advantage of Liquidmetal’s unique performance advantages. We believe that hiring Paul Hauck has already yielded intangible results.
Number four, producing parts right in front of customer offers a level of creditability that is essential to our success. Therefore, we are opening our Manufacturing Center of Excellence in October.
With that last comment, I’d like to hand the call over to Paul, our VP of Worldwide Sales and Support, to give you a better understanding of the changes that are in process.
Thanks Tom. Our emphasis is to broadly develop commercial part applications across multiple markets. We are now revising many of our processes to stimulate and support the future growth of our business and adding capacity to provide customers with a great experience.
Some of our actions include; expanding our manufacturing sales representative, or MSR team, and providing them with strong training in our manufacturing capabilities and material properties; expanding our in-house sales and marketing team capabilities, implementing ISO/TS compliant business processes; refining our go-to-market messaging and broadcasting through major Web site upgrades and social media channels; developing marketing material that foster the use of our technology on metal part applications; and distributing an enhanced design guide to assist engineers with their efforts to develop Liquidmetal part designs.
These efforts are intended to drive an increase in customer interest and opportunities to grow our business. The development of our Manufacturing Center of Excellence in Rancho Santa Margarita, California will be cornerstone of our business and will support our sales and marketing efforts. On October 13, we will be holding our first formal training day for our MSRs giving them comprehensive details and direction on our process technology and providing an excellent networking opportunity. Immediately following that, we will have an open-house for customers in licensees on October 14th. This event will showcase the newly available commercial manufacturing capacity made available by Liquidmetal and our technology partners ENGEL and Materion.
Throughout the balance of the year as we implement many of the infrastructure and team improvements, we will focus on prototype orders for applications that represent opportunity for volume commercial production.
Over the next six to 12 months, we expect to see our business segment into three categories; first, there will be parts that we design, prototype and then produce in low volumes right here in Rancho Santa Margarita; second, there will be parts that we design and prototype here at Rancho Santa Margarita but which will ultimately be transferred to high volume certified license manufacturing partners or CLMs; finally, we expect a small number CLMs and customers to identify promising parts and obtain a license from us to produce them directly.
Now I’d like to turn the call over to Tony to take us through the financial details for the quarter.
Thanks, Paul. Our financial results for the second quarter of 2014 reflect our continued investments in the infrastructure required to support our robust parts in licensing business. In this context, let’s turn to the financial results for the second quarter ended June 30, 2014.
Revenue for the second quarter of 2014 remains consistent with that as 2013 at $153,000 and $150,000, respectively. Gross margin was $75,000 or 64% of product revenue compared to $39,000 or 26% of product revenue in Q2 of 2013.
As we have consistently disclosed in our MD&A section of our 10-Q, much of our current product mix consists of prototype parts and other revenue, which have variable cost percentages relative to revenue and related gross margin percentages, may not be representative of our future business. When and if 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 $2 million compared to $1.2 million in Q2 of 2013. The increase was mainly due to increases in legal expenses, associated with the arbitration proceedings and eventual settlement with Visser. In addition, we anticipate that sales and marketing expense for the upcoming quarters will increase due to the hiring of additional personnel in support of our ongoing sales and marketing efforts.
R&D expense increased to $392,000 from 224,000 in Q2 of 2013. The increase is mainly due to increases in internal projects related to the continued development of our technology and related production processes.
Now, I would like to go over some of our significant non-cash and non-operational expenses during the second quarter of 2014. The change in the value of our warrants resulted in a non-cash loss of $145 as a result of continued changes in the valuation assumptions, other warrant liability, inclusive of the underlying stock price. Amounts recorded in other non-operating expense accounts are minor in comparison to those recorded in Q2 2013 due to the July 2013 full settlement of the senior convertible notes issued under our 2012 private placement.
For a more thorough 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 with approximately $14 million of cash. During the second quarter of 2014, we raised an additional $9.5 million under the 2013 purchase agreement, which brings our total funds raised under this equity line to $16 million. We believe that these additional capital raises, 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 end of 2015 that includes an increased focus on sales and marketing activities as well as increases in capital expenditures to support the build-out of our Manufacturing Center of excellence.
In our long-term success, we’ll continue to be contingent upon our ability to raise additional capital and/or generate significant revenues to support our operations beyond 2015.
This completes my financial summary. For a more detailed and complete analysis of our results, please refer to our second quarter 10-Q 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.
Thanks, Tony. Well, in summary I hope you can see that Q2 was an excellent quarter for Liquidmetal, resolving the dispute with Visser, extending the capture period agreement with Apple and raising additional operating cash, were all necessary milestones as we begin to establish a foundation for the next phase of our growth.
As part of our continuing focus on strengthening our intellectual property portfolio, along with enhancing the business and economic foundation of our alloy solution, we will continue to work closely with Materion, ENGEL and our existing licensees. These arrangements with certified Liquidmetal partners are essential for our success. In parallel, we are learning from the initiatives, failures and successes of the last four years, taking specific and positive actions to build the foundation for the future. Here is what you can expect to see during the next couple of quarters.
Our technology base with Materion and ENGEL will get more exposure as more customers and licensees use the technology. We will certify some very capable mold vendors, enhance quality, extend technological capabilities, reduce lead-times and potentially lower cost. We will certify volume manufacturing partners on a non-exclusive basis to make high volume parts for our customers and ultimately to certify them as agents that extend our footprint and generate royalties.
We will also be searching for a few special customers with the vision, motivation and capability to produce their own parts on a narrowly defined limited exclusivity basis as royalty produced in licensees. We will continue to add qualified and motivated MSRs to the team, training them and providing a ready access to our facility. We will open our Manufacturing Center of Excellence here in the corporate office, showcasing the very first certified ENGEL molding machine, capable of fully automated operation. The center will be open to MSRs, customers, potential customers, licensees and investors during the month of October.
We will make prototype parts and commence low volume production here in California and ultimately we will produce high volume production parts in partnership with one or more of our CLMs. As you can see, we have high expectations for the next six to 12 months. Each of these initiatives is staffed and being worked on aggressively. In the coming quarter, I look forward to updating the status on all of these items.
This completes the formal part of our call. I am happy to now open it up for questions. Ann, please provide instructions to the participants.
(Operator Instructions) We will take our first question from Kevin LoGalbo, a Private Investor.
Just got a question about the agreement with Apple, can you elaborate a little bit more on that and what was the purpose of resigning that agreement and will Liquidmetal get any royalties?
I will answer the last part of it first. This is a non-royalty bearing agreement. It is an extension of the initial relationship that we had with Apple. It allows us to be very collaborative with one of our most important licensees. It also provides for a financial and legal support from them in the filing of those patents. So, it’s been a very positive mechanism for us in the past and we’re pleased that Apple wanted to extend that and we were able to reach agreement to extend it through February of 2015.
We will take our next question from Jenny Wilson from Montford Bridge.
What other sectors are you involving yourself in making prototypes and trying to licensing, in addition to the military and Apple computer, what are some of the other areas of your interest and focus?
Jenny, just for clarification, remember we have signed agreement with Apple but no financial tail is associated with that. Our focus so really is on, as you point out, aerospace, defense also medical and things like hunting and sporting goods in addition to some small complex parts associated with general industrial kinds of applications. Generally, parts that are complex, you can hold them in your hand and have unique utilization characteristics.
Can I ask a follow up question?
Is it so much the substance of what you are dealing? Like in other words, I don’t know what the chemical composition of Liquidmetal is at the present time, forgive me. Is it so much the substance that you are marketing or is it actually like you are marketing the packaging of the substance plus the engineering and the unique designs of inventions essentially that you are creating in your company with your engineering department? Or is it primarily just the chemical composition of Liquidmetal for other applications?
It is primarily the latter. We find that this new Liquidmetal capability amorphous metals require engineers to think about the parts that they make differently. And as a result, we wind up with a fair amount of collaboration with the customers, whereby our engineers helped design the parts, a machined part has different geometries than a molded part things like draft come into it so we help them with the design of the parts and then actually produce the prototypes and then upbeat and until low volumes. Beyond that, generally speaking, we expect to hand things off to volume manufacturers. But it is that engineered final part that is what we contract for.
We will take our next question from Elle Velasco, a Private Investor.
I am curious, I have been on these conference calls with you for about four years now since you came on-board and I have seen that we are making progress towards getting a manufacturing facility moving forward for the prototype parts. What I am curious about is in the event that you had a high volume manufacturing facility like Tetra Technologies or someone overseas in Asia, manufacturing high volume high volume parts. Is there a revenue stream that Liquidmetal would receive for that type of production?
The answer to that is yes. The process that we have envisioned at this point in time is we control the sales access so all of the MSRs are tightly linked and controlled by us. We design and build the prototypes and with the recent developments at Visser, we now do that all in our facility and we are hoping to showcase that in October. We would expect by virtue of having certified machines and common practices and process that the molds that we shoot prototype parts on here can be used for low volume production or could be sent to a contract manufacturer wherever they take that same mold and put it on in Engel machine. They would either then produce those parts for us as a subcontractor. Or as I mentioned in the call, we certainly envision customers and contract manufacturers.
Once they have gone through the process, once they made some parts, once we feel comfortable with their capabilities, we will provide licenses for those folks to make their own parts, or in the case of the CMs, to go out and solicit parts mostly from their existing customers to be made. Those last two will result in royalties to us. So all of these except for the Apple relationship, which was a unique one, we would expect to either get pretty high gross margins from parts we make here, slightly lower gross margins where the CM does that work for us or lower royalties in the event of royalty arrangement but obviously much higher volumes.
And so if a company like Apple were to use a contract manufacturer like Foxconn, Foxconn buying the alloy ingots from a Materion there would be no pass through for the ingots or any markup through the Liquidmetal?
No, they have the rights to do that and what they decide or when they decide or if they decide, is totally up to them and outside of our follow-on relationships.
We will take our next question from Larry Denmark, a Private Investor.
Hi, Tom. Always glad to hear you sound so excited. I have two questions. You mentioned that you expect four parts going to become commercial products. Did you say that that’s going to happen this year 2014?
Yes, I said it will happen within the next year, so it will likely be in 2015.
2015, okay. And how many accounts or potential customers do we have and of that number how many came aboard this year?
I do not have that number on the tip of my tongue, so I am going to have to get back to you on that. We did a fairly extensive audit on all the prototype parts we did. There were 32 of those that came from probably 25 customers and as I indicated in the call, about four of those are likely. I mean I absolutely likely to matriculate out into production the rest for a variety of reasons, that turned out to be learning experiences for us but have really formed the foundation for what Paul is doing with the MSRs. And I think what I would say is over the course of last year and certainly within last six months, our focus on what we are able to do and not able to do
We will take our next question from Charles Shaw, a Private Investor.
Follow-up on the four parts, the prototype parts that are more likely to come into production. First of all, what area are they in, can you say that? In other words medical, you have always said medical is probably the most likely, is that still the case?
Aerospace is one area and medical/dental is the other.
Okay, so are you saying then there is two in each type of thing, 4-0?
Actually the two in one and one in the other and the fourth one is a general category.
And let’s see, of the revenue stream that you described, the high gross margin, medium road and smaller gross margin, which would you think the most likely one will fall into?
The four that we have identified at this point in time, will likely fall into the middle category and they were parts that were begun with our relationship with Visser and will likely be produced by Visser. We are thrilled to get them into production but we don’t think that those will likely yield the same kind of gross margins as the ones we do here.
We will take our next question from Brian Miller from Underwood Miller & Associates.
From your previous conference call, you had mentioned that within this quarter you expected to see the delivery of the Engel aim ocean machine, in your call you had mentioned opening up the center there in October. So, have you already received the Engel machine?
Yes, it’s already installed and operational in a fully automated fashion and we look forward to allowing our MSRs, customers, licensees and even investors to come in and take a look at it during October.
Okay and also Paul had mentioned about having some new contract manufacturers what you said were on a non-exclusive basis. Have you already been working with any of those or can you elaborate more on any potential contract manufacturers or have you been approached by any to work with?
Well, we certainly have had discussions since we were able to sale the agreement with VPC, we have had really a two pronged effort going on in addition to the sales activities. One is to make sure that we had really a great stable of mold makers, the technology for mold making is critical to our success. We have got discussions with those and would anticipate some announcements on those over the course of the next quarter or so. In addition to that we have been talking to contract manufacturers who are in similar spaces most notably probably a metal injection molding. None of those have concluded at this point in time but we certainly have had seen no lack of interest as they look for ways to expand what they are doing and as we look for really qualified manufacturers to take on the volume production requirements for ourselves.
(Operator Instructions). We will go next to Tom Winkler, a Private Investor.
Listen, I talked to you about five or six quarters ago and my question at the time was really light at the end of the tunnel regards to revenue and now we are fast forward like year and a half down the line and I know things take time. But I am pretty disappointed that we got nothing to show for in a way of revenue, I mean we just keep prodding along and there is no money on the table and so I am kind of disillusioned about the whole thing. Is there any way or have you guys thought about just selling the company and just kind of paying all the investors out and move on?
Well, relative to the last I think the Board of Directors is always looking for the best outcome for investors at any given point in time but I would have to say that since five or six quarters ago we did not have a machine available for Engel. We didn’t have certified alloy available. Our production at the time was going through contract manufacturer that was located in another location and those things did create some problems for us. I think the management team here feels very good about where we are at this point in time. We didn’t have Paul and the experience that he brings to the team five quarters ago. So, it is fair to say and I go on record that we have restarted to a certain extent but we have not restarted from zero.
We have taken all the information that we learned in the past. We are leveraging a new set of MSRs and capabilities and certainly my takeaway is that by having engineering, manufacturing, sales and support all-in-one facility, we are certainly seeing early indications of things that are very, very positive. Having said that to get to full production is going to take somewhere in the neighborhood of six to 12 months at minimum. We are aware of that but I think we have tried to layout what the milestones are with greater clarity and we believe that having investors like yourself, licensees, potential customers, customers and MSRs actually be able to come in and see parts being made and machine operating put us in a much different position than we were before.
So with that operator, I think we are going to wrap up the call. Certainly look forward to giving everyone an update on the following quarters. Thank you all for taking the time to join us this afternoon.
This does conclude today’s conference. We thank you for your participation.
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