Liquidmetal: What's An Apple Contract Really Worth?

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Liquidmetal Technologies Inc. (OTCQB:LQMT), a technology company that develops and commercializes products made from amorphous alloys, has experienced a sharp run-up after rumors surfaced that Apple Inc. (NASDAQ:AAPL) would include the technology in the iPhone 5 and future products. But what does that contract mean for Liquidmetal and its shareholders?

Apple Pays a One-Time Fee

Liquidmetal entered into a license transaction with Apple on August 5, 2010 where, for a one-time fee, the company granted Apple a perpetual, worldwide, fully paid, exclusive license to commercialize their intellectual property in the consumer electronics industry through a new wholly owned subsidiary called Crucible Intellectual Property LLC.

According to a 10-K filing, the company recognized a portion of the one-time fee upon receipt of the initial payment and completion of the requirements in the license transaction. The remaining portion of the one-time fee was recognized at the completion of the required statement of work in the license transaction.

The complete one-time fee was recognized in fiscal 2010 with a $20 million licensing revenue payment seem on the 2011 10-K report, which was the first year that the company broke down its revenues by category. Notably, this payment represents the only direct financial upside from Apple related to the contract.

Potential Boost in Other Industries

Liquidmetal's amorphous alloys are unique materials that retain a random atomic structure when they solidify. Essentially, this enables the material to be significantly stronger than base alloys with the performance and processing characteristics of a plastic. The technology is therefore applicable in a number of different industries.

Despite Apple's one-time revenue and rights to the consumer electronics industry, the other industries that could utilize this technology include:

  1. Components for Certain Products - Higher margin consumer and commercial products like high-end printers, commercial imaging devices, aerospace components, medical devices and industrial machines could benefit from the technology.
  2. Sporting Goods & Leisure Products - Sporting goods products such as golf clubs, tennis rackets and skis could benefit from the technology, while high quality finishes using the technology have a play in the luxury goods sector (e.g. on watches).
  3. Medical Devices - Specialized blades and orthopedic instruments used for implant surgery procedures, dental devices and general surgery devices could benefit from the stronger and more durable alloys.

Apple's Indirect Benefit

Liquidmetal's recent run-up in share price may not be fully justified on the surface by rumors that Apple would include the technology in the new iPhone 5. After all, the $20 million payment was already recorded and gave Apple exclusive rights to the technology, even in the overall consumer electronics industry.

Despite this seeming downside, the license deal does provide the company with a great endorsement from one of the world's largest companies. It also increases the company's brand recognition, thanks to the fact that the technology is named after the company. And, this could lead to additional sales by turning the product into a "household name".

Of course, these benefits are forward-looking and investors may want to wait until the Apple hype wears off. The company did not report a positive operating income as of last year and remains in the early commercialization stages. But the Apple agreement could certainly pave the way towards brighter days ahead, making this a stock that's worth a second look.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.