Item 1 – Financial Statements
LIQUIDMETAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(
$
in thousands, except
par value and
share data)
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
33,871
|
|
|
$
|
35,229
|
|
|
Restricted cash
|
|
|
5
|
|
|
|
5
|
|
|
Trade accounts receivable
|
|
|
124
|
|
|
|
120
|
|
|
Inventory
|
|
|
63
|
|
|
|
31
|
|
|
Prepaid expenses and other current assets
|
|
|
311
|
|
|
|
363
|
|
|
Total current assets
|
|
|
34,374
|
|
|
|
35,748
|
|
|
Property and equipment, net
|
|
|
11,727
|
|
|
|
11,767
|
|
|
Patents and trademarks, net
|
|
|
301
|
|
|
|
322
|
|
|
Other assets
|
|
|
14
|
|
|
|
14
|
|
|
Total assets
|
|
$
|
46,416
|
|
|
$
|
47,851
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
150
|
|
|
$
|
253
|
|
|
Accrued liabilities
|
|
|
516
|
|
|
|
270
|
|
|
Deferred revenue
|
|
|
28
|
|
|
|
31
|
|
|
Total current liabilities
|
|
|
694
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
Other long term liabilities
|
|
|
856
|
|
|
|
856
|
|
|
Total liabilities
|
|
$
|
1,550
|
|
|
$
|
1,410
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Common stock, $0.001 par value; 1,100,000,000 shares authorized; 914,316,624 and 914,206,832 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
|
|
|
914
|
|
|
|
914
|
|
|
Warrants
|
|
|
18,179
|
|
|
|
18,179
|
|
|
Additional paid-in capital
|
|
|
286,469
|
|
|
|
286,276
|
|
|
Accumulated deficit
|
|
|
(260,622
|
)
|
|
|
(258,854
|
)
|
|
Non-controlling interest in subsidiary
|
|
|
(74
|
)
|
|
|
(74
|
)
|
|
Total shareholders' equity
|
|
|
44,866
|
|
|
|
46,441
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
46,416
|
|
|
$
|
47,851
|
|
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,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
223
|
|
|
$
|
80
|
|
|
Licensing and royalties
|
|
|
-
|
|
|
|
-
|
|
|
Total revenue
|
|
|
223
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
179
|
|
|
|
81
|
|
|
Gross margin (loss)
|
|
|
44
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling, marketing, general and administrative
|
|
|
1,433
|
|
|
|
1,585
|
|
|
Research and development
|
|
|
489
|
|
|
|
610
|
|
|
Total operating expenses
|
|
|
1,922
|
|
|
|
2,195
|
|
|
Operating loss
|
|
|
(1,878
|
)
|
|
|
(2,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
110
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
(1,768
|
)
|
|
|
(2,163
|
)
|
|
Net loss attributable to non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
Net loss and comprehensive loss attributable to
Liquidmetal Technologies shareholders
|
|
$
|
(1,768
|
)
|
|
$
|
(2,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
914,280,027
|
|
|
|
908,912,441
|
|
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
Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,768
|
)
|
|
$
|
(2,163
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
279
|
|
|
|
252
|
|
|
Stock-based compensation
|
|
|
182
|
|
|
|
281
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(4
|
)
|
|
|
120
|
|
|
Inventory
|
|
|
(32
|
)
|
|
|
(76
|
)
|
|
Prepaid expenses and other current assets
|
|
|
52
|
|
|
|
94
|
|
|
Accounts payable and accrued liabilities
|
|
|
109
|
|
|
|
67
|
|
|
Deferred revenue
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
Net cash used in operating activities
|
|
|
(1,185
|
)
|
|
|
(1,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(184
|
)
|
|
|
(47
|
)
|
|
Net cash used in investing activities
|
|
|
(184
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
11
|
|
|
|
42
|
|
|
Net cash provided by financing activities
|
|
|
11
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and restricted cash
|
|
|
(1,358
|
)
|
|
|
(1,436
|
)
|
|
Cash and restricted cash at beginning of period
|
|
|
35,234
|
|
|
|
41,309
|
|
|
Cash and restricted cash at end of period
|
|
$
|
33,876
|
|
|
$
|
39,873
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
Accrued capital expenditures
|
|
|
(36
|
)
|
|
|
-
|
|
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, 2019 and 2018
(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, 2019 and March 31, 2018 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, 2019 are not necessarily indicative of the results that may be expected for any future periods or the year ending December 31, 2019. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 5, 2019.
Leases
In February 2016, the Financial Accounting Standards Board (“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. The Company adopted the requirements of this guidance as of January 1, 2019, utilizing the modified retrospective approach. Due to the Company not having any qualifying lease obligations, the adoption of this guidance did not have any impact on the Company’s consolidated financial statements.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2019 and 2018
(numbers in thousands, except share and per share data)
(unaudited)
Liability Classified Warrants
In July 2017, the FASB issued an accounting standards update which modifies the requirements for the classification of certain financial instruments with down round features as equity versus liabilities. The guidance will allow for financial instruments previously required to be presented as liabilities due to the presence of down round features to be presented as equity upon meeting other criteria. The Company adopted the requirements of this update effective as of January 1, 2019, utilizing the full retrospective transition option. Accordingly, the Company reclassified the warrant liability to additional paid in capital on its December 31, 2018 consolidated balance sheets, which increased additional paid-in capital by $6,970, increased accumulated deficit by $4,778, and decreased warrant liability by $2,192. In addition, because of the retrospective adoption, the Company credited change in fair value of warrant liability on its consolidated statements of operations by $1,267 for year ended December 31, 2018. The change in fair value of the warrant liability was offset by a $1,267 credit to accumulated deficit on the consolidated balance sheets. Similarly, the Company credited change in fair value of warrant liability on its consolidated statements of operations by $275 for three months ended March 31, 2018. The adoption of this guidance had no impact on the Company’s consolidated statement of cash flows in the current or previous interim and annual reporting periods. The following table provides a reconciliation of warrant liability, additional paid-in capital, accumulated deficit, and change in fair value of warrant liability on the consolidated balance sheets for the year ended December 31, 2018 and the three-months ended March 31, 2018 (in thousands):
|
|
|
Balance Sheet
|
|
|
|
|
Warrant Liability
|
|
|
Additional Paid-in Capital
|
|
|
Accumulated Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of 12/31/2018 (Prior to Adoption of ASU 2017-11)
|
|
$
|
925
|
|
|
$
|
279,306
|
|
|
$
|
(252,809
|
)
|
|
Reverse beginning balance as of January 1, 2018
|
|
|
(2,192
|
)
|
|
|
6,970
|
|
|
|
(4,778
|
)
|
|
Change in fair value of warrant liability
|
|
|
1,267
|
|
|
|
-
|
|
|
|
(1,267
|
)
|
|
Balance as of 12/31/2018 (After Adoption of ASU 2017-11)
|
|
$
|
-
|
|
|
$
|
286,276
|
|
|
$
|
(258,854
|
)
|
|
|
|
Statement of Operations
|
|
|
|
|
Change in Value of Warrant Liability
|
|
|
Net Loss and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of 3/31/2018 (Prior to Adoption of ASU 2017-11)
|
|
$
|
(275
|
)
|
|
$
|
(2,438
|
)
|
|
Reverse beginning balance as of January 1, 2018
|
|
|
-
|
|
|
|
-
|
|
|
Change in fair value of warrant liability
|
|
|
275
|
|
|
|
275
|
|
|
Balance as of 3/31/2018 (After Adoption of ASU 2017-11)
|
|
$
|
-
|
|
|
$
|
(2,163
|
)
|
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.
|
Other recent pronouncements
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2019 and 2018
(numbers in thousands, except share and per share data)
(unaudited)
|
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.
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.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2019 and 2018
(numbers in thousands, except share and per share data)
(unaudited)
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
.
|
P
repaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets totaled $311 and $363 as of March 31, 2019 and December 31, 2018, respectively. Included within these totals are the following:
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid service invoices
|
|
$
|
91
|
|
|
$
|
79
|
|
|
Prepaid manufacturing and mold costs
|
|
|
95
|
|
|
|
91
|
|
|
Prepaid insurance premiums
|
|
|
125
|
|
|
|
193
|
|
|
Total
|
|
$
|
311
|
|
|
$
|
363
|
|
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2019 and 2018
(numbers in thousands, except share and per share data)
(unaudited)
Inventory totaled $63 and $31 as of March 31, 2019 and December 31, 2018, respectively. Included within these totals are the following:
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Work in progress
|
|
|
63
|
|
|
|
31
|
|
|
Total
|
|
$
|
63
|
|
|
$
|
31
|
|
|
6.
|
Property and Equipment, net
|
Property and equipment consist of the following:
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Land, building, and improvements
|
|
$
|
9,093
|
|
|
$
|
9,039
|
|
|
Machinery and equipment
|
|
|
5,892
|
|
|
|
5,745
|
|
|
Computer equipment
|
|
|
300
|
|
|
|
282
|
|
|
Office equipment, furnishings, and improvements
|
|
|
181
|
|
|
|
181
|
|
|
Total
|
|
|
15,466
|
|
|
|
15,247
|
|
|
Accumulated depreciation
|
|
|
(3,739
|
)
|
|
|
(3,480
|
)
|
|
Total property and equipment, net
|
|
$
|
11,727
|
|
|
$
|
11,767
|
|
Depreciation expense for the three months ended March 31, 2019 and 2018 was $258 and $231, respectively. For the three months ended March 31, 2019 and 2018, $23 and $13 of depreciation expense, respectively, was included in cost of sales and $235 and $218 was included in selling, marketing, general, and administrative expenses, respectively.
The Company’s manufacturing activities and efforts have historically 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 capabilities and infrastructure have been historically made based on certain assumptions and expectations regarding the time and investment required to reach minimum volume manufacturing levels, to scale and generate sustainable revenues, and to ultimately reach profitability. As a result of the Company’s inability to gain traction in receiving and fulfilling orders for the volume production of parts, the Company has commenced a comprehensive review of the options available in the context of its current strategy. While no decisions have been made, any change to the current strategy, depending on its nature, may result in future impairments of the Company’s manufacturing assets, inclusive of patents and trademarks.
|
7
.
|
Patents and T
rademarks, net
|
Net patents and trademarks totaled $301 and $322 as of March 31, 2019 and December 31, 2018, 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.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2019 and 2018
(numbers in thousands, except share and per share data)
(unaudited)
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 $21 for the three months ended March 31, 2019 and 2018, respectively.
Other assets totaled $14 and $14 as of March 31, 2019 and December 31, 2018, respectively, and consisted of long-term deposits.
Accrued liabilities totaled $516 and $270 as of March 31, 2019 and December 31, 2018, respectively. Included within these totals are the following:
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll, vacation, and bonuses
|
|
$
|
206
|
|
|
$
|
178
|
|
|
Accrued severance
|
|
|
284
|
|
|
|
10
|
|
|
Accrued audit fees
|
|
|
26
|
|
|
|
82
|
|
|
Total
|
|
$
|
516
|
|
|
$
|
270
|
|
|
1
0
.
|
Other Long-
T
erm L
iabilities
|
Other long-term liabilities were $856 as of March 31, 2019 and December 31, 2018, 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.
|
1
1
.
|
Stock Compensation Plan
s
|
On April 4, 2002, our shareholders and Board of Directors adopted the 2002 Equity Incentive Plan (“2002 Plan”). The 2002 Plan provided for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries. A total of 10,000,000 shares of our common stock were available to be granted under the 2002 Plan. The 2002 Plan expired by its terms in April 2012, and remains in effect only with respect to the equity awards that have been granted prior to its expiration. As of March 31, 2019 and December 31, 2018, there were 169,000 and 169,000 options, respectively, outstanding under the 2002 Plan.
On June 28, 2012, the Company adopted the 2012 Equity Incentive Plan (“2012 Plan”), with the approval of the shareholders, which provides for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries. The 2012 Plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for the granting to employees and consultants of non-statutory stock options. In addition, the Plan permits the granting of stock appreciation rights, or SARs, with or independently of options, as well as stock bonuses and rights to purchase restricted stock. A total of 30,000,000 shares of the Company’s common stock may be granted under the 2012 Plan, and all options granted under the 2012 Plan had exercise prices that were equal to the fair market value on the date of grant. During the three months ended March 31, 2019, the Company granted no options to purchase shares of common stock. Under this plan, the Company had outstanding grants of options to purchase 10,455,665 and 11,755,503 shares of the Company’s common stock as of March 31, 2019 and December 31, 2018, respectively.
On January 27, 2015, the Company adopted its 2015 Equity Incentive Plan (“2015 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 available for issuance under the 2015 Plan. All options granted under the 2015 Plan had exercise prices that were equal to the fair market value on the dates of grant. During the three months ended March 31, 2019, the Company granted no options to purchase shares of common stock. Under this plan, the Company had outstanding grants of options to purchase 16,906,667 and 16,906,667 shares of the Company’s common stock as of March 31, 2019 and December 31, 2018, respectively.
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2019 and 2018
(numbers in thousands, except share and per share data)
(unaudited)
Stock based compensation expense attributable to these plans was $182 and $281 for the three months ended March 31, 2019 and 2018, respectively.
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 $0 and $56 during the three months ended March 31, 2019 and 2018, respectively.
|
12.
|
Consolidated Statements of Changes in Equity
|
The following table provides the Company’s changes in equity for the three months ended March 31, 2019:
|
|
|
Preferred Shares
|
|
|
Common
Shares
|
|
|
Common
Stock
|
|
|
Warrants
part of
Additional
Paid-in
Capital
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Non-
Controlling
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
-
|
|
|
|
914,206,832
|
|
|
$
|
914
|
|
|
$
|
18,179
|
|
|
$
|
286,276
|
|
|
$
|
(258,854
|
)
|
|
$
|
(74
|
)
|
|
$
|
46,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
109,792
|
|
|
|
-
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,768
|
)
|
|
|
|
|
|
|
(1,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
|
-
|
|
|
|
914,316,624
|
|
|
$
|
914
|
|
|
$
|
18,179
|
|
|
$
|
286,469
|
|
|
$
|
(260,622
|
)
|
|
$
|
(74
|
)
|
|
$
|
44,866
|
|
The following table provides the Company’s changes in equity for the three months ended March 31, 2018:
|
|
|
Preferred
Shares
|
|
|
Common
Shares
|
|
|
Common
Stock
|
|
|
Warrants
part of
Additional
Paid-in
Capital
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Non-
Controlling
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
-
|
|
|
|
908,768,116
|
|
|
$
|
909
|
|
|
$
|
18,179
|
|
|
$
|
284,894
|
|
|
$
|
(250,154
|
)
|
|
$
|
(73
|
)
|
|
$
|
53,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
415,476
|
|
|
|
-
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
281
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,163
|
)
|
|
|
-
|
|
|
|
(2,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2018
|
|
|
-
|
|
|
|
909,183,592
|
|
|
$
|
909
|
|
|
$
|
18,179
|
|
|
$
|
285,217
|
|
|
$
|
(252,317)
|
)
|
|
$
|
(73
|
)
|
|
$
|
51,915
|
|
|
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 27,531,332 shares of common stock, at prices ranging from $0.07 to $0.38 per share, were outstanding at March 31, 2019, 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 a price of $0.07 per share, outstanding at March 31, 2019, 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 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 a price of $0.07 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.
|
14
.
|
Commitments and Contingencies
|
Legal Contingencies
During October 2018, the Company received a notice of intent to sue from a former employee. The Claims raised in the notice included accusations of pay discrimination, employment misclassification, and unfair labor practices. In April 2019, the Company reached a confidential settlement of the matter in the amount of $250. The Company has accrued this amount as of March 31, 2019, as a component of general and administrative expenses.
|
15
.
|
Related Party Transactions
|
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 a newly formed company owned 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 major shareholder. As of March 31, 2019, 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 $0 and $5 during the three months ended March 31, 2019 and 2018, 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 R
eport on Form 10-Q
. All amounts described
in this section are
in thousands, except
percentages, periods of time, and
share and per share dat
a
.
This management’s discussion and analysis, as well as other sections of this
Quarterly R
eport 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,
201
8
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 entered into a cross-license of our respective technologies.
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, and 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.
During March 2017, we signed contracts with Eontec to purchase two hot-crucible amorphous metal molding machines (“Machines”) at a total purchase price of $780,000. The Machines were delivered to our 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, 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, 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 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 that we developed through February 2012. Subsequently, this obligation was extended to apply to 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 Agreement
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.
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, the companies 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 components 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 and all third parties (including us), 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:
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Revenue recognition
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Impairment of long-lived assets and definite-lived intangibles
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Deferred tax assets
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Valuation of liability classified warrants and options and embedded derivatives
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Valuation of inventory
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Share based compensation
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Our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”) contains further discussions on our critical accounting policies and estimates.
Results of Operations
Comparison of the three months ended March 31, 2019 and 2018
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For the three months
ended March 31,
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2019
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2018
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(unaudited)
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(unaudited)
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in 000's
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% of
Products
Revenue
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in 000's
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% of
Products
Revenue
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Revenue:
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Products
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$
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223
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$
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80
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Licensing and royalties
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-
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-
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Total revenue
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223
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80
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Cost of sales
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$
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179
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80%
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$
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81
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101%
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Gross margin (loss)
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44
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20%
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(1
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-1%
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Selling, marketing, general and administrative
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1,433
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643%
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1,585
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1981%
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Research and development
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489
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219%
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610
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763%
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Operating loss
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(1,878
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(2,196
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Interest income
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110
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33
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Net loss
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$
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(1,768
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)
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$
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(2,163
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Revenue
and
operating
expenses
Revenue
. Total revenue increased to $223 thousand for the three months ended March 31, 2019 from $80 thousand for the three months ended March 31, 2018. The increase was attributable to a continued focus on small scale early-production orders in an effort to build a significant, recurring, funnel of production business during the 2019 period and prospectively.
Cost of
sales
. Cost of sales was $179 thousand, or 80% of products revenue, for the three months ended March 31, 2019, an increase from $81 thousand, or 101% of products revenue, for the three months ended March 31, 2018. The decrease in our cost of sales as a percentage of products revenue for the three months ended March 31, 2019 was primarily attributable to lower raw material costs as a result of market adjustments taken during the third quarter of 2018 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, 2019, 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
Profit
. Our gross profit increased to $44 thousand from $(1) thousand for the three month periods ended March 31, 2019 and 2018, respectively. Our gross profit, as a percentage of products revenue, increased to 20% from (1)% for the three month periods ended March 31, 2019 and 2018, 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,
m
arketing,
g
eneral and
a
dministrative
. Selling, marketing, general, and administrative expenses were $1,433 thousand and $1,585 thousand for the three months ended March 31, 2019 and 2018, respectively. The decrease in expenses was due to overall lower costs associated with employee compensation as a result of prior period headcount reductions and reductions in stock-based compensation. These decreases were partially offset by $250 thousand in legal accruals to settle employment matters.
Research and
d
evelopment
. Research and development expenses decreased to $489 thousand for the three months ended March 31, 2019, from $610 thousand for the three months ended March 31, 2018. The decrease in expense was mainly due to reduction in mold, tools, 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 $1,878 thousand and $2,196 thousand for the three months ended March 31, 2019 and 2018, 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
expense
s
Interest
i
ncome.
Interest income relates to interest earned from our cash deposits for the respective periods. Such amounts were $110 thousand and $33 thousand for the three months ended March 31, 2019 and 2018, respectively.
Liquidity and Capital Resources
Cash used in operating activities
Cash used in operating activities totaled $1,185 thousand and $1,431 thousand for the three months ended March 31, 2019 and 2018, 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 $184 thousand and $47 thousand for the three months ended March 31, 2019 and 2018, 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 $11 thousand and $42 thousand for the three months ended March 31, 2019 and 2018, 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, 2019 and 2018, 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 previously required that the Company engage in equity sales under various stock purchase agreements to support its operations and strategic initiatives. 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.
Our 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 our 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 commercialization of our technology are made with the goal of reaching volume manufacturing levels, scaling and generating sustainable revenues, and ultimately reaching profitability. As part of our regular review of available markets, the pace at which development projects are being converted into production contracts, and our manufacturing costs, we have determined that current results, inclusive of opportunities in the development pipeline, are unsatisfactory and untenable. As such, we have commenced a comprehensive review of the options available to us in the context of our current strategy. While no decisions have been made, any change to the current strategy, depending on its nature, may result in fundamental changes to our marketing and sales approach, cost structure and/or manufacturing outlook.
Off Balance Sheet Arrangements
As of March 31, 2019, we did not have any off-balance sheet arrangements.