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EX-32.2 - EXHIBIT 32.2 - LIQUIDMETAL TECHNOLOGIES INC | ex_112334.htm |
EX-32.1 - EXHIBIT 32.1 - LIQUIDMETAL TECHNOLOGIES INC | ex_112333.htm |
EX-31.2 - EXHIBIT 31.2 - LIQUIDMETAL TECHNOLOGIES INC | ex_112332.htm |
EX-31.1 - EXHIBIT 31.1 - LIQUIDMETAL TECHNOLOGIES INC | ex_112331.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2018 |
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OR |
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File No. 001-31332
LIQUIDMETAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware |
33-0264467 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification No.) |
20321 Valencia Circle
Lake Forest, CA 92630
(Address of principal executive offices, zip code)
Registrant’s telephone number, including area code: (949) 635-2100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of common shares outstanding as of May 4, 2018 was 909,183,592.
LIQUIDMETAL TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED March 31, 2018
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q of Liquidmetal Technologies, Inc. contains “forward-looking statements” that may state our management’s plans, future events, objectives, current expectations, estimates, forecasts, assumptions or projections about the company and its business. Any statement in this report that is not a statement of historical fact is a forward-looking statement, and in some cases, words such as “believes,” “estimates,” “projects,” “expects,” “intends,” “may,” “anticipates,” “plans,” “seeks,” and similar words or expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual outcomes and results to differ materially from the anticipated outcomes or results. These statements are not guarantees of future performance, and undue reliance should not be placed on these statements. It is important to note that our actual results could differ materially from what is expressed in our forward-looking statements due to the risk factors described in the section of our Annual Report on Form 10-K for the year ended December 31, 2017 entitled “Risk Factors,” as well as the following risks and uncertainties:
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Our ability to fund our operations in the long-term through financing transactions on terms acceptable to us, or at all; |
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Our history of operating losses and the uncertainty surrounding our ability to achieve or sustain profitability; |
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Our limited history of developing and selling products made from our bulk amorphous alloys; |
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Our limited history of licensing our technology to third parties; |
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Lengthy customer adoption cycles and unpredictable customer adoption practices; |
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Our ability to identify, develop, and commercialize new product applications for our technology; |
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Competition from current suppliers of incumbent materials or producers of competing products; |
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Our ability to identify, consummate, and/or integrate strategic partnerships; |
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The potential for manufacturing problems or delays; and |
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Potential difficulties associated with protecting or expanding our intellectual property position. |
We undertake no obligation, other than as required by applicable law, to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
FINANCIAL INFORMATION
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except par value and share data)
March 31, |
December 31, |
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2018 |
2017 |
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(Unaudited) |
(Audited) |
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ASSETS |
||||||||
Current assets: |
||||||||
Cash |
$ | 39,873 | $ | 41,309 | ||||
Restricted cash |
5 | 5 | ||||||
Trade accounts receivable |
37 | 157 | ||||||
Inventory |
467 | 391 | ||||||
Prepaid expenses and other current assets |
232 | 326 | ||||||
Total current assets |
$ | 40,614 | $ | 42,188 | ||||
Property and equipment, net |
12,281 | 12,465 | ||||||
Patents and trademarks, net |
387 | 408 | ||||||
Other assets |
14 | 14 | ||||||
Total assets |
$ | 53,296 | $ | 55,075 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
163 | 92 | ||||||
Accrued liabilities |
361 | 365 | ||||||
Deferred revenue |
1 | 7 | ||||||
Total current liabilities |
$ | 525 | $ | 464 | ||||
Long-term liabilities: |
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Warrant liabilities, long-term |
2,467 | 2,192 | ||||||
Other long-term liabilities |
856 | 856 | ||||||
Total liabilities |
$ | 3,848 | $ | 3,512 | ||||
Shareholders' equity: |
||||||||
Preferred Stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively |
- | - | ||||||
Common stock, $0.001 par value; 1,100,000,000 shares authorized; 909,183,592 and 908,768,116 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively |
909 | 909 | ||||||
Warrants |
18,179 | 18,179 | ||||||
Additional paid-in capital |
278,247 | 277,924 | ||||||
Accumulated deficit |
(247,814 | ) | (245,376 | ) | ||||
Non-controlling interest in subsidiary |
(73 | ) | (73 | ) | ||||
Total shareholders' equity |
49,448 | 51,563 | ||||||
Total liabilities and shareholders' equity |
$ | 53,296 | $ | 55,075 |
The accompanying notes are an integral part of the consolidated financial statements.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE LOSS
($ in thousands, except share and per share data)
(unaudited)
For the Three Months Ended March 31, |
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2018 |
2017 |
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Revenue |
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Products |
$ | 80 | $ | 48 | ||||
Licensing and royalties |
- | - | ||||||
Total revenue |
80 | 48 | ||||||
Cost of sales |
81 | 62 | ||||||
Gross loss |
(1 | ) | (14 | ) | ||||
Operating expenses |
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Selling, marketing, general and administrative |
1,585 | 1,703 | ||||||
Research and development |
610 | 392 | ||||||
Total operating expenses |
2,195 | 2,095 | ||||||
Operating loss |
(2,196 | ) | (2,109 | ) | ||||
Change in value of warrant liabilities, gain (loss) |
(275 | ) | 1,150 | |||||
Interest income |
33 | 14 | ||||||
Net loss and comprehensive loss |
(2,438 | ) | (945 | ) | ||||
Net loss attributable to non-controlling interest |
- | 2 | ||||||
Net loss and comprehensive loss attributable to Liquidmetal Technologies shareholders |
$ | (2,438 | ) | $ | (943 | ) | ||
Net loss per common share attributable to Liquidmetal Technologies shareholders, basic and diluted |
$ | (0.00 | ) | $ | (0.00 | ) | ||
Number of weighted average shares - basic and diluted |
908,912,441 | 888,053,138 |
The accompanying notes are an integral part of the consolidated financial statements.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2018
($ in thousands, except share data)
(unaudited)
Preferred Shares |
Common |
Common |
Warrants part of Additional Paid-in Capital |
Additional |
Accumulated |
Non- Controlling Interest |
Total |
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Balance, December 31, 2017 |
- | 908,768,116 | $ | 909 | $ | 18,179 | $ | 277,924 | $ | (245,376 | ) | $ | (73 | ) | $ | 51,563 | ||||||||||||||||
Stock option exercises |
415,476 | - | 42 | 42 | ||||||||||||||||||||||||||||
Stock-based compensation |
281 | 281 | ||||||||||||||||||||||||||||||
Net loss |
(2,438 | ) | - | (2,438 | ) | |||||||||||||||||||||||||||
Balance, March 31, 2018 |
- | 909,183,592 | $ | 909 | $ | 18,179 | $ | 278,247 | $ | (247,814 | ) | $ | (73 | ) | $ | 49,448 |
The accompanying notes are an integral part of the consolidated financial statements.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands, except per share data)
(unaudited)
For the Three |
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2018 |
2017 |
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Operating activities: |
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Net loss |
$ | (2,438 | ) | $ | (945 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
252 | 108 | ||||||
Stock-based compensation |
281 | 434 | ||||||
Change in value of warrant liabilities, (gain) loss |
275 | (1,150 | ) | |||||
Changes in operating assets and liabilities: |
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Trade accounts receivable |
120 | 95 | ||||||
Inventory |
(76 | ) | (383 | ) | ||||
Prepaid expenses and other current assets |
94 | 38 | ||||||
Accounts payable and accrued liabilities |
67 | (715 | ) | |||||
Deferred revenue |
(6 | ) | 4 | |||||
Net cash used in operating activities |
(1,431 | ) | (2,514 | ) | ||||
Investing Activities: |
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Purchases of property and equipment |
(47 | ) | (8,510 | ) | ||||
Net cash used in investing activities |
(47 | ) | (8,510 | ) | ||||
Financing Activities: |
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Proceeds from exercise of stock options |
42 | 123 | ||||||
Net cash provided by financing activities |
42 | 123 | ||||||
Net decrease in cash and restricted cash |
(1,436 | ) | (10,901 | ) | ||||
Cash and restricted cash at beginning of period |
41,314 | 58,901 | ||||||
Cash and restricted cash at end of period |
$ | 39,878 | $ | 48,000 | ||||
Supplemental Schedule of Non-Cash Investing and Financing Activities: |
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Cashless exercise of warrants |
- | 975 |
The accompanying notes are an integral part of the consolidated financial statements.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2018 and 2017
(numbers in thousands, except share and per share data)
(unaudited)
1. Description of Business
Liquidmetal Technologies, Inc. (the “Company”) is a materials technology and manufacturing company that develops and commercializes products made from amorphous alloys. The Company’s family of alloys consists of a variety of bulk alloys and composites that utilizes the advantages offered by amorphous alloys technology. The Company designs, develops, manufactures and sells products and custom parts from bulk amorphous alloys to customers in a wide range of industries. The Company also partners with third-party manufacturers and licensees to develop and commercialize Liquidmetal alloy products.
Amorphous alloys are, in general, unique materials that are distinguished by their ability to retain a random atomic structure when they solidify, in contrast to the crystalline atomic structure that forms in other metals and alloys when they solidify. Liquidmetal alloys are proprietary amorphous alloys that possess a combination of performance, processing, and potential cost advantages that the Company believes will make them preferable to other materials in a variety of applications. The amorphous atomic structure of bulk alloys enables them to overcome certain performance limitations caused by inherent weaknesses in crystalline atomic structures, thus facilitating performance and processing characteristics superior in many ways to those of their crystalline counterparts. The Company’s alloys and the molding technologies it employs results in components that exhibit: exceptional dimensional control and repeatability that rivals precision machining, excellent corrosion resistance, brilliant surface finish, high strength, high hardness, high elastic limit, alloys that are non-magnetic, and the ability to form complex shapes common to the injection molding of plastics. Interestingly, all of these characteristics are achievable from the molding process, so design engineers do not have to select specific alloys to achieve one or more of the characteristics as is the case with crystalline materials. The Company believes these advantages could result in Liquidmetal alloys supplanting high-performance alloys, such as titanium and stainless steel, and other incumbent materials in a wide variety of applications. Moreover, the Company believes these advantages could enable the introduction of entirely new products and applications that are not possible or commercially viable with other materials.
The Company’s revenues are derived from i) selling bulk Liquidmetal alloy products to customers who produce medical devices, automotive assemblies, sports and leisure goods, and non-consumer electronic devices, ii) selling tooling and prototype parts such as demonstration parts and test samples for customers with products in development, iii) product licensing and royalty revenue, and iv) research and development revenue. The Company expects that these sources of revenue will continue to significantly change the character of the Company’s revenue mix.
2. Basis of Presentation and Recent Accounting Pronouncements
The accompanying unaudited interim consolidated financial statements as of and for the three months ended March 31, 2018 and March 31, 2017 have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. All intercompany balances and transactions have been eliminated in consolidation. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for any future periods or the year ending December 31, 2018. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 6, 2018.
Revenue Recognition
On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) with respect to all contracts using the modified retrospective method. As a majority of the Company’s sales revenue continues to be recognized when products are shipped from its manufacturing facility, and there was no change in the recognition model historically applied to active license and royalty contracts under the new revenue standard, there was no adjustment to the opening balance of retained earnings. The impact to the Company’s results of operations is not expected to be material, on an on-going basis, because the analysis of the Company’s contracts under the new revenue standard supports a recognition model consistent with the Company’s current revenue recognition model. Revenue on the majority of the Company’s contracts will continue to be recognized over time because of the continuous transfer of control to the customer.
Products- Product revenues are primarily generated from the sales and prototyping of molds and bulk alloy products. Revenue is recognized when i) persuasive evidence of an arrangement exists, ii) delivery has occurred, iii) the sales price is fixed or determinable, iv) collection is probable and v) all obligations have been substantially performed pursuant to the terms of the arrangement. When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, it records deferred revenue, which represents a contract liability. The Company will recognize deferred revenue as products revenue after it has transferred control of the goods or services to the customer and all revenue recognition criteria are met. Such amounts are not expected to be material on an ongoing basis.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2018 and 2017
(numbers in thousands, except share and per share data)
(unaudited)
Licensing and royalties- License revenue arrangements in general provide for the grant of an exclusive or non-exclusive right to manufacture and/or sell products covered by patented technologies owned or controlled by the Company. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined period of time. Licensing revenues that are one-time fees upon the granting of the license are recognized when i) the license term begins in a manner consistent with the nature of the transaction and the earnings process is complete, ii) when collectability is reasonably assured or upon receipt of an upfront fee, and iii) when all other revenue recognition criteria have been met. Pursuant to the terms of these agreements, the Company has no further obligation with respect to the grant of the license. Licensing revenues that are related to royalties are recognized as the royalties are earned over the related period.
Practical Expedients and Exemptions- The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, marketing, general and administrative expenses. The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount for which it has the right to invoice for services performed.
Fair Value Measurements
The estimated fair values of financial instruments reported in the consolidated financial statements have been determined using available market information and valuation methodologies, as applicable. The fair value of cash and restricted cash approximate their carrying value due to their short maturities and are classified as Level 1 instruments within the fair value hierarchy.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value based upon the following fair value hierarchy:
Level 1 — |
Quoted prices in active markets for identical assets or liabilities; |
Level 2 — |
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
Level 3 — |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The Company has several financial instruments, namely warrant liabilities that are recorded at fair value on a periodic basis using Level 2 measurement inputs. These instruments are evaluated under the hierarchy of FASB ASC Subtopic 480-10, FASB ASC Paragraph 815-25-1 and FASB ASC Subparagraph 815-10-15-74 addressing the accounting for certain financial instruments with characteristics of both liabilities and equity and derivative accounting. The fair value of such instruments is estimated using the Black-Scholes option pricing model. Due to the presence of certain anti-dilution and exercise price reset provisions, such instruments are required to be classified as liabilities (see Note 10).
As of March 31, 2018, the following table represents the Company’s fair value hierarchy for items that are required to be measured at fair value on a recurring basis:
Fair Value |
Level 1 |
Level 2 |
Level 3 |
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Warrant liabilities (long-term) |
2,467 | - | 2,467 | - |
As of December 31, 2017, the following table represents the Company’s fair value hierarchy for items that are required to be measured at fair value on a recurring basis:
Fair Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Warrant liabilities (long-term) |
2,192 | - | 2,192 | - |
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2018 and 2017
(numbers in thousands, except share and per share data)
(unaudited)
Recent Accounting Pronouncements
Leases
In February 2016, the FASB issued an accounting standards update which modifies the accounting for leasing arrangements, particularly those arrangements classified as operating leases. This update will require entities to recognize the assets and liabilities arising from operating leases on the balance sheet. This guidance is effective for fiscal and interim periods beginning after December 15, 2018 and is required to be applied retrospectively to all leasing arrangements. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the Securities and Exchange Commission (“SEC”) did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
3. Significant Transactions
Manufacturing Facility Purchase
On February 16, 2017, the Company purchased a 41,000 square foot manufacturing facility located in Lake Forest, CA, where operations commenced during July 2017. The purchase price for the property was $7,818.
2016 Purchase Agreement
On March 10, 2016, the Company entered into a Securities Purchase Agreement (the “2016 Purchase Agreement”) with Liquidmetal Technology Limited, a Hong Kong company (the “Investor”), which is controlled by the Company’s Chairman and CEO, Professor Lugee Li (“Professor Li”). The 2016 Purchase Agreement provided for the purchase by the Investor of a total of 405,000,000 shares of the Company’s common stock for an aggregate purchase price of $63,400. The transaction occurred in multiple closings, with the Investor having purchased 105,000,000 shares at a purchase price of $8,400 (or $0.08 per share) at the initial closing on March 10, 2016 and the remaining 200,000,000 shares at $0.15 per share and 100,000,000 shares at $0.25 per share for an aggregate purchase price of $55,000 on October 26, 2016.
In addition to the shares issuable under the 2016 Purchase Agreement, the Company issued to the Investor a warrant to acquire 10,066,809 shares of common stock (of which the right to exercise 2,609,913 of the warrant shares vested on March 10, 2016 and the right to exercise the remaining 7,456,896 warrant shares vested on October 26, 2016 at an exercise price of $0.07 per share). The warrant will expire on the tenth anniversary of its issuance date.
Further, the 2016 Purchase Agreement provided that the Investor would have the right to designate three members of the Company’s board of directors, with one such member serving as Chairman. The 2016 Purchase Agreement also provided that, with certain limited exceptions, if the Company issues any shares of common stock at any time through the fifth anniversary of the 2016 Purchase Agreement, the Investor will have a preemptive right to subscribe for and to purchase at the same price per share (or at market price, in the case of issuance of shares pursuant to stock options) the number of shares necessary to maintain its ownership percentage of Company-issued shares of common stock.
Eontec License Agreement
On March 10, 2016, in connection with the 2016 Purchase Agreement, the Company and DongGuan Eontec Co., Ltd., a Hong Kong corporation (“Eontec”), entered into a Parallel License Agreement (the “License Agreement”) pursuant to which the Company and Eontec agreed to cross-license their respective technologies. The Company’s Chairman and CEO, Professor Li, is also a major shareholder and Chairman of Eontec.
The License Agreement provides for the cross-license of certain patents, technical information, and trademarks between the Company and Eontec. In particular, the Company granted to Eontec a paid-up, royalty-free, perpetual license to the Company’s patents and related technical information to make, have made, use, offer to sell, sell, export and import products in certain geographic areas outside of North America and Europe. In turn, Eontec granted to the Company a paid-up, royalty-free, perpetual license to Eontec’s patents and related technical information to make, have made, use, offer to sell, sell, export and import products in certain geographic areas outside of specified countries in Asia. The license granted by the Company to Eontec is exclusive (including to the exclusion of the Company) in the countries of Brunei, Cambodia, China (P.R.C and R.O.C.), East Timor, Indonesia, Japan, Laos, Malaysia, Myanmar, Philippines, Singapore, South Korea, Thailand and Vietnam. The license granted by Eontec to the Company is exclusive (including to the exclusion of Eontec) in North America and Europe. The cross-licenses are non-exclusive in geographic areas outside of the foregoing exclusive territories.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2018 and 2017
(numbers in thousands, except share and per share data)
(unaudited)
Beyond the License Agreement, the Company collaborates with Eontec to accelerate the commercialization of amorphous alloy technology. This includes but is not limited to developing technologies to reduce the cost of amorphous alloys, working on die cast machine technology platforms to pursue broader markets, sharing knowledge to broaden our intellectual property portfolio, and utilizing Eontec’s volume production capabilities as a third party contract manufacturer.
During March 2017, the Company signed contracts with Eontec to purchase two hot-crucible amorphous metal molding machines (“Machines”) at a total purchase price of $780. The Machines were delivered to the Company’s new manufacturing facility located in Lake Forest, CA in April 2017 and were operational during the fourth quarter of 2017.
Apple License Transaction
On August 5, 2010, the Company entered into a license transaction with Apple Inc. (“Apple”) pursuant to which (i) the Company contributed substantially all of its intellectual property assets to a newly organized special-purpose, wholly-owned subsidiary, called Crucible Intellectual Property, LLC (“CIP”), (ii) CIP granted to Apple a perpetual, worldwide, fully-paid, exclusive license to commercialize such intellectual property in the field of consumer electronic products, as defined in the license agreement, in exchange for a license fee, and (iii) CIP granted back to the Company a perpetual, worldwide, fully-paid, exclusive license to commercialize such intellectual property in all other fields of use.
Under the agreements relating to the license transaction with Apple, the Company was obligated to contribute, to CIP, all intellectual property developed through February 2016. The Company is also obligated to maintain certain limited liability company formalities with respect to CIP at all times after the closing of the license transaction.
Other License Transactions
On January 31, 2012, the Company entered into a Supply and License Agreement for a five year term with Engel Austria Gmbh (“Engel”) whereby Engel was granted a non-exclusive license to manufacture and sell injection molding machines to the Company’s licensees. Since that time, the Company and Engel have agreed on an injection molding machine configuration that can be commercially supplied and supported by Engel. On December 6, 2013, the companies entered into an Exclusivity Agreement for a 10 year term whereby the Company agreed, with certain exceptions and limitations, that the Company and its licensees would purchase amorphous alloy injection molding machines exclusively from Engel in exchange for certain royalties to be paid by Engel to the Company based on a percentage of the net sales price of such injection molding machines.
The Company’s majority-owned Liquidmetal Golf subsidiary has the exclusive right and license to utilize the Company’s Liquidmetal alloy technology for purposes of golf equipment applications. This right and license is set forth in an intercompany license agreement between Liquidmetal Technologies and Liquidmetal Golf. This license agreement provides that Liquidmetal Golf has a perpetual and exclusive license to use Liquidmetal alloy technology for the purpose of manufacturing, marketing, and selling golf club parts and other products used in the sport of golf. The Company owns 79% of the outstanding common stock of Liquidmetal Golf.
In June 2003, the Company entered into an exclusive license agreement with LLPG, Inc. (“LLPG”). Under the terms of the agreement, LLPG has the exclusive right to commercialize Liquidmetal alloys, particularly precious-metal based compositions, in jewelry and high-end luxury product markets. The Company, in turn, will receive royalty payments over the life of the contract on all Liquidmetal products produced and sold by LLPG. The exclusive license agreement with LLPG expires on December 31, 2021.
In March 2009, the Company entered into a license agreement with Swatch Group, Ltd. (“Swatch”) under which Swatch was granted a non-exclusive license to the Company’s technology to produce and market watches and certain other luxury products. In March 2011, this license agreement was amended to grant Swatch exclusive rights as to watches, but non-exclusive as to Apple, and the Company’s license agreement with LLPG was simultaneously amended to exclude watches from LLPG’s rights. The Company will receive royalty payments over the life of the contract on all Liquidmetal products produced and sold by Swatch. The license agreement with Swatch will expire on the expiration date of the last licensed patent.
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets totaled $232 and $326 as of March 31, 2018 and December 31, 2017, respectively. Included within these totals are the following:
March 31, |
December 31, |
|||||||
Prepaid service invoices |
$ | 99 | $ | 116 | ||||
Prepaid insurance premiums |
133 | 210 | ||||||
Total |
232 | 326 |
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2018 and 2017
(numbers in thousands, except share and per share data)
(unaudited)
5. Inventory
Inventory totaled $467 and $391 as of March 31, 2018 and December 31, 2017, respectively. Included within these totals are the following:
March 31, |
December 31, |
|||||||
Raw materials |
$ | 423 | $ | 367 | ||||
Work in progress |
44 | 24 | ||||||
Total |
467 | 391 |
6. Property and Equipment, net
Property and equipment consist of the following:
March 31, |
December 31, |
|||||||
Land, building, and improvements |
$ | 8,947 | $ | 8,947 | ||||
Machinery and equipment |
5,624 | 5,577 | ||||||
Computer equipment |
253 | 253 | ||||||
Office equipment, furnishings, and improvements |
181 | 181 | ||||||
Total |
15,005 | 14,958 | ||||||
Accumulated depreciation |
(2,724 | ) | (2,493 | ) | ||||
Total property and equipment, net |
$ | 12,281 | $ | 12,465 |
Depreciation expense for the three months ended March 31, 2018 and 2017 was $231 and $86, respectively. For the three months ended March 31, 2018 and 2017, $13 and $6 of depreciation expense, respectively, was included in cost of sales and $218 and $80 was included in selling, marketing, general and administrative expenses, respectively.
On February 16, 2017, the Company purchased a 41,000 square foot building located at 20321 Valencia Circle, Lake Forest, California 92630. In July 2017, the Company commenced use of the facility, primarily for manufacturing and office space. The total purchase price for the property was $7,818, exclusive of closing costs. The Company funded the purchase through available cash on hand.
During March 2017, the Company signed contracts with Eontec to purchase two hot-crucible amorphous metal molding machines at a total purchase price of $780. The machines were delivered to the Company’s new manufacturing facility in April 2017 and were operational during the fourth quarter of 2017.
The Company’s current manufacturing efforts are focused on the identification, design, and successful prototyping of customer applications, including, but not limited to, medical and automotive components. Experience has shown that customers will perform numerous tests and extensively evaluate components and products before incorporating them into their finished products. The time required for testing, evaluating, and designing the Company’s components and products for use in a customer’s products, and in some cases, obtaining regulatory approval, can be significant, with an additional period of time before a customer commences volume production of products incorporating Liquidmetal components and products, if ever. The time it takes to transition a customer from limited production to full-scale production runs will depend upon the nature of the processes and products into which Liquidmetal alloys are integrated.
Investments in the Company’s manufacturing infrastructure are made with the goal of reaching volume manufacturing levels, scaling and generating sustainable revenues, and ultimately reaching profitability. In the event applications in the current development pipeline do not result in meaningful revenues and/or there is a fundamental shift in the Company’s market outlook for the technology, the Company’s overall business strategy may need to change. Such decisions, depending on their nature, may result in future impairments of the Company’s manufacturing assets, inclusive of patents and trademarks. Pending a change in operational direction, and significant assumptions impacting ultimate recovery of these assets, the Company plans to continue to pursue volume manufacturing from its facility.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2018 and 2017
(numbers in thousands, except share and per share data)
(unaudited)
7. Patents and Trademarks, net
Net patents and trademarks totaled $387 and $408 as of March 31, 2018 and December 31, 2017, respectively, and primarily consisted of purchased patent rights and internally developed patents.
Purchased patent rights represent the exclusive right to commercialize the bulk amorphous alloy and other amorphous alloy technology acquired from California Institute of Technology (“Caltech”), through a license agreement with Caltech and other institutions. All fees and other amounts payable by the Company for these rights and licenses have been paid or accrued in full, and no further royalties, license fees or other amounts will be payable in the future under the license agreement.
In addition to the purchased and licensed patents, the Company has internally developed patents. Internally developed patents include legal and registration costs incurred to obtain the respective patents. The Company currently holds various patents and numerous pending patent applications in the United States, as well as numerous foreign counterparts to these patents outside of the United States.
The Company amortizes capitalized patents and trademarks over an average of 10 to 17 year periods. Amortization expense for patents and trademarks was $21 and $22 for the three months ended March 31, 2018 and 2017, respectively.
8. Other Assets
Other assets totaled $14 and $14 as of March 31, 2018 and December 31, 2017, respectively, and consisted of long-term deposits.
9. Accrued Liabilities
Accrued liabilities totaled $361 and $365 as of March 31, 2018 and December 31, 2017, respectively. Included within these totals are the following:
March 31, |
December 31, |
|||||||
Accrued payroll, vacation, and bonuses |
$ | 198 | $ | 149 | ||||
Accrued severance |
122 | 164 | ||||||
Accrued audit fees |
41 | 52 | ||||||
Total |
361 | 365 |
10. Warrant Liabilities
Pursuant to FASB ASC 815, the Company is required to report the value of certain warrants as a liability at fair value and record the changes in the fair value of the warrant liabilities as a gain or loss in its consolidated statements of operations and comprehensive loss due to the price-based anti-dilution rights of warrants.
During June 2012, the Company issued warrants to purchase a total of 15,000,000 shares of common stock to Visser Precision Cast, LLC under a Master Transaction Agreement (the “Visser MTA Agreement”). These warrants had an original exercise price of $0.22 per share and an expiration date of June 1, 2017 and were originally valued at $4,260. These warrants also had certain anti-dilution and exercise price reset provisions which qualify the warrants to be classified as a liability under FASB ASC 815. As a result of subsequent issuances of the Company’s common stock, which resulted in an anti-dilution impact, the exercise price of these warrants was reduced to $0.16 as of March 22, 2017 and December 31, 2016. In addition, the number of shares to be issued under the warrants as a result of the anti-dilution provision increased to 21,317,094 as of March 22, 2017 and December 31, 2016. On March 22, 2017, Visser Precision Cast exercised, on a cashless basis, all 21,317,094 warrants, resulting in the issuance of 4,241,386 shares of the Company’s common stock. Upon exercise, the Company reclassified $975 of the associated warrant liability to additional paid in capital, with $4 being allocated to common stock and $971 to additional paid in capital. The change in warrant value for these warrants for the three months ended March 31, 2018 and 2017 was a gain of $0 and $553, respectively.
On July 2, 2012, the Company issued warrants to purchase a total of 18,750,000 shares of common stock as part of the July 2012 Private Placement. These warrants have an exercise price of $0.384 per share, expire on January 2, 2018, and were originally valued at $5,053. These warrants have certain anti-dilution and exercise price reset provisions which qualify the warrants to be classified as a liability under FASB ASC 815. During the year ended December 31, 2017 investors party to the July 2012 Private Placement exercised a total of 10,540,750 warrants at an exercise price of $0.17 per share. As a result of these warrant exercises, the Company issued 7,457,902 shares of common stock, for total consideration of $712, and associated warrant liabilities of $1,247 were reclassified to additional paid in capital. The change in warrant value for these warrants for the three months ended March 31, 2018 and 2017 was a gain of $0 and $396, respectively.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2018 and 2017
(numbers in thousands, except share and per share data)
(unaudited)
On March 10, 2016, the Company issued warrants to purchase a total of 10,066,809 shares of common stock as part of the 2016 Purchase Agreement. These warrants have an exercise price of $0.07 per share, expire on March 10, 2026, and were originally valued at $760. These warrants have certain anti-dilution and exercise price reset provisions which qualify the warrants to be classified as a liability under FASB ASC 815. As of March 31, 2018, these warrants were valued at $2,467 under the Black-Scholes valuation model utilizing the following assumptions: (i) expected life of 7.94 years, (ii) volatility of 106%, (iii) risk-free interest rate of 2.7%, and (iv) dividend rate of 0. The change in fair value for these warrants for the three months ended March 31, 2018 and 2017 was a loss (gain) of $275 and $(201), respectively.
The following table summarizes the change in the Company’s warrant liabilities as of March 31, 2018:
2016 Purchase |
||||
Agreement |
||||
Beginning Balance - December 31, 2017 |
$ | 2,192 | ||
Change in value of warrant liabilities, (gain) |
275 | |||
Exercises |
- | |||
Ending Balance - March 31, 2018 |
$ | 2,467 | ||
Included in current liabilities |
$ | - | ||
Included in long-term liabilities |
$ | 2,467 |
The Company had warrants to purchase 10,066,809 and 10,066,809 shares of common stock outstanding as of March 31, 2018 and December 31, 2017, respectively, which were valued and classified as liabilities under FASB ASC 815.
11. Other Long-Term Liabilities
Other long-term liabilities were $856 as of March 31, 2018 and December 31, 2017, and consisted of long-term, aged payables to vendors, individuals, and other third parties that have been outstanding for more than 5 years. The Company is in the process of researching and resolving the balances for settlement and/or escheatment in accordance with applicable state law.
12. Stock Compensation Plans
Under the Company’s 2002 Equity Incentive Plan (the “2002 Plan”), which provided for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries, the Company granted options to purchase the Company’s common stock. A total of 10,000,000 shares of the Company’s common stock were available for issuance under the 2002 Plan. The 2002 Plan expired by its terms in April 2012, but remains in effect only with respect to the equity awards that had been granted prior to its expiration. Under the 2002 Plan, the Company had outstanding grants of options to purchase 189,000 and 189,000 shares of the Company’s common stock as of March 31, 2018 and December 31, 2017, respectively.
On June 28, 2012, the Company adopted its 2012 Equity Incentive Plan, with the approval of the Company’s shareholders, which provided for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries. All options granted under this plan had exercise prices that were equal to the fair market value on the dates of grant. During the three months ended March 31, 2018, the Company granted options to purchase 287,175 shares of common stock. Under this plan, the Company had outstanding grants of options to purchase 21,445,035 and 21,570,994 shares of the Company’s common stock as of March 31, 2018 and December 31, 2017, respectively.
On January 27, 2015, the Company adopted its 2015 Equity Incentive Plan, which provided for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries. A total of 40,000,000 shares of the Company’s common stock are authorized for issuance under this plan. All options granted under this plan had exercise prices that were equal to the fair market value on the dates of grant. During the three months ended March 31, 2018, the Company granted options to purchase 270,000 shares of common stock. Under this plan, the Company had outstanding grants of options to purchase 11,700,000 and 12,675,000 shares of the Company’s common stock as of March 31, 2018 and December 31, 2017, respectively.
Stock based compensation expense attributable to these plans was $281 and $434 for the three months ended March 31, 2018 and 2017, respectively.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2018 and 2017
(numbers in thousands, except share and per share data)
(unaudited)
In connection with the separation of former executives and directors, the Company has modified previously granted equity awards to allow for the acceleration of vesting of equity awards, and the extension of the timing to exercise vested awards, following the respective separation dates. The Company incurred incremental stock-based compensation expense of $56 and $172 during the three months ended March 31, 2018 and 2017, respectively.
13. Loss Per Common Share
Basic earnings per share (“EPS”) is computed by dividing earnings (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the applicable period. Diluted EPS reflects the potential dilution of securities that could share in the earnings.
Options to purchase 33,334,035 shares of common stock, at prices ranging from $0.07 to $0.47 per share, were outstanding at March 31, 2018, but were not included in the computation of diluted EPS for the same period as the inclusion would have been antidilutive, given the Company’s net loss. Warrants to purchase 10,066,809 shares of common stock, with prices ranging from $0.07 to $0.17 per share, outstanding at March 31, 2018, were not included in the computation of diluted EPS for the same period as the inclusion would have been antidilutive, given the Company’s net loss.
Options to purchase 46,084,241 shares of common stock, at prices ranging from $0.07 to $0.77 per share, were outstanding at March 31, 2017, but were not included in the computation of diluted EPS for the same period as the inclusion would have been antidilutive, given the Company’s net loss. Warrants to purchase 20,607,559 shares of common stock, with prices ranging from $0.07 to $0.17 per share, outstanding at March 31, 2017 were not included in the computation of diluted EPS for the same period as the inclusion would have been antidilutive, given the Company’s net loss.
14. Commitments and Contingencies
Alloy Purchase Commitments
As of March 31, 2018 and December 31, 2017, the Company has signed firm purchase commitments for alloy supplies that will be delivered over the next twelve months. Total commitments were $236 and $308 as of March 31, 2018 and December 31, 2017, respectively.
Operating Lease Commitments
The Company previously leased its offices and warehouse facilities under various lease agreements, certain of which were subject to escalations based upon increases in specified operating expenses or increases in the Consumer Price Index. During June 2017, the Company terminated the remaining portion of the lease agreements, effective June 30, 2017. The termination resulted in the Company paying certain fees, related to new tenant accommodations and broker fees, equaling $125, which were off-set against previously recorded deferred rent expenses. This resulted in an additional expense of $17, which was included in rent expense for the year ended December 31, 2017. Additionally, concurrent with ceasing of operations at these facilities, the Company accelerated depreciation of remaining installed leasehold improvements in the amount of $30. As of December 31, 2017, the Company had no further obligations under these lease agreements.
Rent expense was $0 and $56 for the three months ended March 31, 2018 and 2017, respectively.
15. Related Party Transactions
On August 16, 2017, the Company and Tony Chung, the Company’s former Chief Financial Officer, entered into a Separation Agreement and General Release pursuant to which Mr. Chung resigned as an officer and employee of the Company (the “Tony Chung Separation Agreement”). The Tony Chung Separation Agreement provided for the payment of severance compensation to Mr. Chung in the form of a continuation of his base annual salary of $240 (subject to tax withholdings) for a period of 12 months and reimbursement for COBRA healthcare coverage for a period of 12 months. In addition, it provided for the accelerated vesting of 247,650 of the unvested stock options held by Mr. Chung as of the separation date and the extension of the exercise period of his options until the first anniversary of the date of the Tony Chung Separation Agreement. This resulted in a total of 2,889,749 stock options being exercisable by Mr. Chung as of the separation date and resulted in an additional $89 of stock-based compensation expense during the year ended December 31, 2017. In connection with the Tony Chung Separation Agreement, Mr. Chung and the Company granted each other mutual general releases subject to customary exceptions. Subsequently, Mr. Ching was appointed to the Company’s Board of Directors. As of March 31, 2018 and December 31, 2017, the Company had accrued liabilities totaling $105 and $164, respectively, relating to the Tony Chung Separation Agreement.
On March 10, 2016, the Company entered into the 2016 Purchase Agreement with Liquidmetal Technology Limited, providing for the purchase of 405,000,000 shares of the Company’s common stock for an aggregate purchase price of $63,400. Liquidmetal Technology Limited was formed in 2016 in contemplation of the transactions under the 2016 Purchase Agreement and is controlled by Professor Li. In connection with the 2016 Purchase Agreement and also on March 10, 2016, the Company and Eontec, entered into a license agreement pursuant to which the Company and Eontec entered into a cross-license of their respective technologies. Eontec is a publicly held Hong Kong corporation of which Professor Li is the Chairman and a major shareholder. As of March 31, 2018, Professor Li is a greater-than 5% beneficial owner of the Company and serves as the Company’s Chairman, President, and Chief Executive Officer. Equipment and services procured from Eontec were $5 and $624 during the three months ended March 31, 2018 and 2017, respectively.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis should be read in conjunction with the consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q. All amounts described in this section are in thousands, except percentages, periods of time, and share and per share data.
This management’s discussion and analysis, as well as other sections of this Quarterly Report on Form 10-Q, may contain “forward-looking statements” that involve risks and uncertainties, including statements regarding our plans, future events, objectives, expectations, estimates, forecasts, assumptions, or projections. Any statement that is not a statement of historical fact is a forward-looking statement, and in some cases, words such as “believe,” “estimate,” “project,” “expect,” “intend,” “may,” “anticipate,” “plan,” “seek,” and similar words or expressions identify forward-looking statements. These statements involve risks and uncertainties that could cause actual outcomes and results to differ materially from the anticipated outcomes or results, and undue reliance should not be placed on these statements. These risks and uncertainties include, but are not limited to, the matters discussed under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and other risks and uncertainties discussed in other filings made with the Securities and Exchange Commission (including risks described in subsequent reports on Form 10-Q and Form 8-K and other filings). We disclaim any intention or obligation, other than as required by applicable law, to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Overview
We are a materials technology company that develops and commercializes products made from amorphous alloys. Our Liquidmetal® family of alloys consists of a variety of proprietary bulk alloys and composites that utilize the advantages offered by amorphous alloy technology. We design, develop and sell custom products and parts from bulk amorphous alloys to customers in various industries. We also partner with third-party manufacturers and licensees to develop and commercialize Liquidmetal alloy products.
Amorphous alloys are, in general, unique materials that are distinguished by their ability to retain a random atomic structure when they solidify, in contrast to the crystalline atomic structure that forms in other metals and alloys when they solidify. Liquidmetal alloys are proprietary amorphous alloys that possess a combination of performance, processing, and potential cost advantages that we believe will make them preferable to other materials in a variety of applications. The amorphous atomic structure of bulk alloys enables them to overcome certain performance limitations caused by inherent weaknesses in crystalline atomic structures, thus facilitating performance and processing characteristics superior in many ways to those of their crystalline counterparts. Our alloys and the molding technologies we employ result in components that exhibit exceptional dimensional control and repeatability that rivals precision machining, excellent corrosion resistance, brilliant surface finish, high strength, high hardness, high elastic limit, alloys that are non-magnetic, and the ability to form complex shapes common to the injection molding of plastics. All of these characteristics are achievable from the molding process, so design engineers do not have to select specific alloys to achieve one or more of the characteristics as is the case with crystalline materials. We believe these advantages could result in Liquidmetal alloys supplanting high-performance alloys, such as titanium and stainless steel, and other incumbent materials in a wide variety of applications. Moreover, we believe these advantages could enable the introduction of entirely new products and applications that are not possible or commercially viable with other materials.
Our revenues are derived from i) selling our bulk amorphous alloy custom products and parts for applications which include, but are not limited to, non-consumer electronic devices, medical products, automotive components, and sports and leisure goods; ii) selling tooling and prototype parts such as demonstration parts and test samples for customers with products in development; and iii) product licensing and royalty revenue. We expect that these sources of revenue will continue to significantly change the character of our revenue mix as operations are scaled.
Our cost of sales consists primarily of the costs of manufacturing, which include raw alloy and internal labor required to operate our on-site production cells. Selling, general, and administrative expenses currently consist primarily of salaries and related benefits, travel, consulting and professional fees, depreciation and amortization, insurance, office and administrative expenses, and other expenses related to our operations.
Research and development expenses represent salaries, related benefits expenses, consulting and contract services, expenses incurred for the design and testing of new processing methods, expenses for the development of sample and prototype products, and other expenses related to the research and development of Liquidmetal bulk alloys. Costs associated with research and development activities are expensed as incurred. We plan to enhance our competitive position by improving our existing technologies and developing advances in amorphous alloy technologies. We believe that our research and development efforts will focus on the discovery of new alloy compositions, the development of improved processing technology, and the identification of new applications for our alloys.
Licensing Transactions
Eontec License Agreement
On March 10, 2016, in connection with the 2016 Purchase Agreement, we entered into a Parallel License Agreement (the “License Agreement”) with DongGuan Eontec Co., Ltd., a Hong Kong corporation (“Eontec”) pursuant to which we each agreed to cross-license our respective technologies. The Company’s Chairman and CEO, Professor Lugee Li, is also a major shareholder and Chairman of Eontec.
The License Agreement provides for the cross-license of certain patents, technical information, and trademarks between us and Eontec. In particular, we granted to Eontec a paid-up, royalty-free, perpetual license to our patents and related technical information to make, have made, use, offer to sell, sell, export and import products in certain geographic areas outside of North America and Europe. In turn, Eontec granted to us a paid-up, royalty-free, perpetual license to Eontec’s patents and related technical information to make, have made, use, offer to sell, sell, export and import products in certain geographic areas outside of specified countries in Asia. The license granted by us to Eontec is exclusive (including to the exclusion of us) in the countries of Brunei, Cambodia, China (P.R.C and R.O.C.), East Timor, Indonesia, Japan, Laos, Malaysia, Myanmar, Philippines, Singapore, South Korea, Thailand and Vietnam. The license granted by Eontec to us is exclusive (including to the exclusion of Eontec) in North America and Europe. The cross-licenses are non-exclusive in geographic areas outside of the foregoing exclusive territories.
Beyond the License Agreement, we collaborate with Eontec to accelerate the commercialization of amorphous alloy technology. This includes but is not limited to developing technologies to reduce the cost of amorphous alloys, working on die cast machine technology platforms to pursue broader markets, sharing knowledge to broaden our intellectual property portfolio, and utilizing Eontec’s volume production capabilities as a third party contract manufacturer.
Apple License Transaction
On August 5, 2010, we entered into a license transaction with Apple Inc. (“Apple”) pursuant to which (i) we contributed substantially all of our intellectual property assets to a newly organized special-purpose, wholly-owned subsidiary, called Crucible Intellectual Property, LLC (“CIP”), (ii) CIP granted to Apple a perpetual, worldwide, fullypaid, exclusive license to commercialize such intellectual property in the field of consumer electronic products, as defined in the license agreement, in exchange for a license fee, and (iii) CIP granted back to us a perpetual, worldwide, fully-paid, exclusive license to commercialize such intellectual property in all other fields of use.
Under the agreements relating to the license transaction with Apple, we were obligated to contribute, to CIP, all intellectual property developed through February 2016. We are also obligated to maintain certain limited liability company formalities with respect to CIP at all times after the closing of the license transaction.
Visser Precision Cast, LLC License Transaction
On June 1, 2012, we entered into a Master Transaction Agreement (the “Visser MTA”) with Visser Precision Cast, LLC (“Visser”) relating to a strategic transaction for manufacturing services and financing. On May 20, 2014, we and Visser entered into a settlement agreement significantly amending the Visser MTA, whereby we granted to Visser a fully paid-up, royalty-free, irrevocable, perpetual, worldwide, non-transferable, nonexclusive sublicense to all of our intellectual property developed on or prior to May 20, 2014 (the “Effective Date”). Visser does not have any rights, now or in the future, to our intellectual property developed after the Effective Date. The license to our intellectual property developed on or prior to the Effective Date does not include the right to use the “Liquidmetal” trademark or any of our other trademarks, except in certain defined situations, as set forth in the amended and restated agreement.
In addition, the settlement amended and restated the two warrants we issued to Visser in June 2012 to purchase 15,000,000 shares of our common stock at an exercise price of $0.22 per share. The amended and restated warrant agreement includes the effect of anti-dilution adjustments and is exercisable for 21,317,094 shares at an exercise price $0.16 per share under the anti-dilution provisions of the warrants. On March 22, 2017 Visser exercised, on a cashless basis, all 21,317,094 warrants, resulting in the issuance of 4,241,386 shares of our common stock. Upon exercise, we reclassified $975,000 of the associated warrant liability to permanent equity, with $4,000 being allocated to common stock and $971,000 to additional paid in capital. (see Note 10 in the accompanying footnotes to the consolidated financial statements).
Other License Transactions
On January 31, 2012, we entered into a Supply and License Agreement for a five year term with Engel Austria Gmbh (“Engel”) whereby Engel was granted a non-exclusive license to manufacture and sell injection molding machines to our licensees. Since that time, we and Engel have agreed on an injection molding machine configuration that can be commercially supplied and supported by Engel. On December 6, 2013, we entered into an Exclusivity Agreement for a ten year term whereby we agreed, with certain exceptions and limitations, that we and our licensees would purchase amorphous alloy injection molding machines exclusively from Engel in exchange for certain royalties to be paid by Engel to us based on a percentage of the net sales price of such injection molding machines.
Our Liquidmetal Golf subsidiary has the exclusive right and license to utilize our Liquidmetal alloy technology for purposes of golf equipment applications. This right and license is set forth in an intercompany license agreement between Liquidmetal Technologies and Liquidmetal Golf. This license agreement provides that Liquidmetal Golf has a perpetual and exclusive license to use Liquidmetal alloy technology for the purpose of manufacturing, marketing, and selling golf club parts and other products used in the sport of golf. We own 79% of the outstanding common stock of Liquidmetal Golf.
In June 2003, we entered into an exclusive license agreement with LLPG, Inc. (“LLPG”). Under the terms of the agreement, LLPG has the exclusive right to commercialize Liquidmetal alloys, particularly precious-metal based compositions, in jewelry and high-end luxury product markets. We, in turn, will receive royalty payments over the life of the contract on all Liquidmetal products produced and sold by LLPG. The exclusive license agreement with LLPG expires on December 31, 2021.
In March 2009, we entered into a license agreement with Swatch Group, Ltd. (“Swatch”) under which Swatch was granted a non-exclusive license to our technology to produce and market watches and certain other luxury products. In March 2011, this license agreement was amended to grant Swatch exclusive rights as to watches, but non-exclusive as to Apple, and our license agreement with LLPG was simultaneously amended to exclude watches from LLPG’s rights. We will receive royalty payments over the life of the contract on all Liquidmetal products produced and sold by Swatch. The license agreement with Swatch will expire on the expiration date of the last licensed patent.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions.
We believe that the following accounting policies are the most critical to our consolidated financial statements since these policies require significant judgment or involve complex estimates that are important to the portrayal of our financial condition and operating results:
• |
Revenue recognition |
|
• |
Impairment of long-lived assets and definite-lived intangibles |
|
• |
Deferred tax assets |
|
• |
Valuation of liability classified warrants and options and embedded derivatives |
|
• |
Valuation of inventory |
|
• |
Share based compensation |
Our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”) contains further discussions on our critical accounting policies and estimates.
Results of Operations
Comparison of the three months ended March 31, 2018 and 2017
For the three months ended March 31, |
||||||||||||||||
2018 |
2017 |
|||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
in 000's |
% of Products Revenue |
in 000's |
% of Products Revenue |
|||||||||||||
Revenue: |
||||||||||||||||
Products |
$ | 80 | $ | 48 | ||||||||||||
Licensing and royalties |
- | - | ||||||||||||||
Total revenue |
80 | 48 | ||||||||||||||
Cost of sales |
$ | 81 | 101% | 62 | 129% | |||||||||||
Gross loss |
(1 | ) | -1% | (14 | ) | -29% | ||||||||||
Selling, marketing, general and administrative |
1,585 | 1981% | 1,703 | 3548% | ||||||||||||
Research and development |
610 | 763% | 392 | 817% | ||||||||||||
Operating loss |
(2,196 | ) | (2,109 | ) | ||||||||||||
Change in value of warrant liabilities, gain (loss) |
(275 | ) | 1,150 | |||||||||||||
Interest income |
33 | 14 | ||||||||||||||
Net loss |
(2,438 | ) | (945 | ) |
Revenue and operating expenses
Revenue. Total revenue increased to $80 thousand for the three months ended March 31, 2018 from $48 thousand for the three months ended March 31, 2017. The increase was attributable to a higher volume of prototyping and pre-production orders during the 2018 period as compared to the respective 2017 period.
Cost of sales. Cost of sales was $81 thousand, or 101% of products revenue, for the three months ended March 31, 2018, an increase from $62 thousand, or 129% of products revenue, for the three months ended March 31, 2017. The decrease in our cost of sales as a percentage of products revenue for the three months ended March 31, 2018 was primarily attributable lower raw material costs as a result of market adjustments taken during the fourth quarter of 2017 and improvements in production throughput. The cost to manufacture products and parts from our bulk amorphous alloys is variable and differs based on the unique design of each product. Given the continued development and refinement of our manufacturing efforts during the three months ended March 31, 2018, our cost of sales as a percentage of products revenue continues to be volatile and is expected to show continued improvement over time with increases in volume and continuous refinements to our internal processes. When we begin increasing our products revenues with shipments of routine, commercial products and parts through our manufacturing facility and/or third party contract manufacturers, we expect our cost of sales percentages to decrease, stabilize and be more predictable.
Gross loss. Our gross loss decreased to $(1) thousand from $(14) thousand for the three month periods ended March 31, 2018 and 2017, respectively. Our gross loss, as a percentage of products revenue, decreased to (1)% from (29)% for the three month periods ended March 31, 2018 and 2017, respectively. Early prototype and pre-production orders generally result in a higher cost mix, relative to revenue, than would otherwise be incurred in an on-site production environment, with higher volumes and more established operating processes, or through contract manufacturers. As such, our gross profit percentages have fluctuated and may continue to fluctuate based on volume and quoted production prices per unit and may not be representative of our future business. When we begin increasing our products revenues with shipments of routine, commercial products and parts through future orders to our manufacturing facility and/or third party contract manufacturers, we expect our gross profit percentages to stabilize, increase and be more predictable.
Selling, marketing, general and administrative. Selling, marketing, general and administrative expenses were $1,585 thousand and $1,703 thousand for the three months ended March 31, 2018 and 2017, respectively. The decrease in expenses was due to overall lower costs associated with employee compensation as a result of prior period headcount reductions.
Research and development. Research and development expenses increased to $610 thousand for the three months ended March 31, 2018, from $392 thosuand for the three months ended March 31, 2017. The increase in expense was mainly due to increased headcount to support product and alloy development initiatives. We continue to (i) perform research and development of new Liquidmetal alloys and related processing capabilities, (ii) develop new manufacturing techniques, and (iii) contract with consultants to advance the development of Liquidmetal alloys and related production processes.
Operating loss. Operating loss was $2,196 thousand and $2,109 thosuand for the three months ended March 31, 2018 and 2017, respectively. Fluctuations in our operating loss are primarily attributable to variations in operating expenses, as discussed above.
We continue to invest in our technology infrastructure to expedite the adoption of our technology, but we have experienced long sales lead times for customer adoption of our technology. Until that time when we can either (i) increase our revenues with shipments of routine, commercial products and parts through a combination of our manufacturing center or third party contract manufacturers or (ii) obtain significant licensing revenues, we expect to continue to have operating losses for the foreseeable future.
Other income and expenses
Our statement of operations contains various, significant items that are non-operational in nature. These categories of expenses may have significant gains and losses based on the volatility of our stock price as follows:
Change in value of warrant liabilities, gain (loss). The change in value of warrant liabilities was a non-cash loss of $(275) thousand for the three months ended March 31, 2018. This compares to a non-cash gain of $1,150 thousand for the three months ended March 31, 2017. These adjustments result from periodic valuation adjustments related to fluctuations in our stock price, and other inputs, for warrants issued in connection with the Visser MTA, the July 2012 Private Placement, and the 2016 Purchase Agreement. Changes in the value of our warrants are non-cash and do not affect the core operations of our business or liquidity.
Interest income. Interest income relates to interest earned from our cash deposits for the respective periods. Such amounts were $33 thousand and $14 thousand for the three months ended March 31, 2018 and 2017, respectively.
Liquidity and Capital Resources
Cash used in operating activities
Cash used in operating activities totaled $1,431 thousand and $2,514 thousand for the three months ended March 31, 2018 and 2017, respectively. The cash was primarily used to fund operating expenses related to our business and product development efforts.
Cash used in investing activities
Cash used in investing activities totaled $47 thousand and $8,510 thousand for the three months ended March 31, 2018 and 2017, respectively. Investing outflows primarily consist of capital expenditures to support our manufacturing efforts including the purchase of our new manufacturing facility and additional production equipment.
Cash provided by financing activities
Cash provided by financing activities totaled $42 thousand and $123 thosuand for the three months ended March 31, 2018 and 2017, respectively. Cash provided by financing activities is comprised of cash received for the issuance of shares following the exercise of stock options during the three months ended March 31, 2018 and 2017, respectively.
Financing arrangements and outlook
During 2016, we raised a total of $62.7 million through the issuance of 405,000,000 shares of our common stock in multiple closings under the 2016 Purchase Agreement. The Company has a relatively limited history of producing bulk amorphous alloy products and components on a mass-production scale. Furthermore, the ability of future contract manufacturers to produce the Company’s products in desired quantities and at commercially reasonable prices is uncertain and is dependent on a variety of factors that are outside of the Company’s control, including the nature and design of the component, the customer’s specifications, and required delivery timelines. These factors have required that the Company engage in equity sales under various stock purchase agreements to support its operations and strategic initiatives. Uncertainty as to the outcome of these factors has previously raised substantial doubt about the Company’s ability to continue as a going concern. As a result of the funding under the 2016 Purchase Agreement, the Company anticipates that its current capital resources, when considering expected losses from operations, will be sufficient to fund the Company’s operations for the foreseeable future.
Off Balance Sheet Arrangements
As of March 31, 2018, we did not have any off-balance sheet arrangements.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
None.
Item 4 – Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and Vice President of Finance (Principal Financial Officer), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2018. Based on their evaluation, our Chief Executive Officer and Vice President of Finance have concluded that our disclosure controls and procedures were effective as of March 31, 2018.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION
There have been no significant developments with respect to legal proceedings specifically affecting Liquidmetal Technologies, Inc. or its subsidiaries since the filing of the 2017 Annual Report.
For a detailed discussion of the risk factors that should be understood by any investor contemplating an investment in our stock, please refer to Part I, Item 1A “Risk Factors” in the 2017 Annual Report. There have been no material changes from the risk factors previously disclosed in Part I, Item 1A “Risk Factors” in the 2017 Annual Report.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this Quarterly Report on Form 10-Q, we did not issue or sell any unregistered equity securities.
Item 3 – Defaults Upon Senior Securities
None.
Item 4 – Mine Safety Disclosures
None.
None.
The following documents are filed as exhibits to this Report:
Exhibit Number |
Description of Document | |
31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.1 |
The following financial statements from Liquidmetal Technologies, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 (unaudited), formatted in XBRL: (i) Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, (ii) Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2018 and 2017, (iii) Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2018, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017, and (v) Notes to Consolidated Financial Statements. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LIQUIDMETAL TECHNOLOGIES, INC. |
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(Registrant) |
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Date: May 8, 2018 |
/s/ Lugee Li |
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Lugee Li |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: May 8, 2018 |
/s/ Bryce Van |
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Bryce Van |
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Vice President of Finance |
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(Principal Financial and Accounting Officer) |
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