Tom Steipp - President and CEO Tony Chung - CFO

Jay Fisher - Financial Logic Corporation

Good afternoon. Welcome to the Liquidmetal Technologies Third Quarter Fiscal 2014 Conference Call. My name is Elise and I will be your conference operator this afternoon. Joining us on today’s call are Liquidmetal’s President and CEO, Tom Steipp and CFO, Tony Chung. Following their remarks, we will open up the call for your questions. Before we proceed, I would like to provide the Company’s Safe Harbor statement with important questions regarding forward-looking statements made during this call as follows. All statements made by management during this call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, but are not limited to, those made by Mr. Steipp and Mr. Chung regarding the Company’s cash, revenue outlook and technology development. While management has based any forward-looking statements made during the call on its current expectations, the information on which such expectations were based may change. These forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of risks, uncertainties and other factors, many of which are outside the Company’s control that could cause actual results to materially differ from such statements. Such risks, uncertainties and other factors include, but are not necessarily limited to, those set forth under Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Accordingly, you should not place any reliance on forward-looking statements as a prediction of actual results. The Company disclaims any intention and undertakes no obligation to update or revise any forward-looking statements. You are also urged to carefully review and consider the various disclosures in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as well as other public filings with the SEC since such date. I would also like to remind everyone that this call will be available for replay starting later this evening via a link available in the Investor Relations section of the Company’s website at www.liquidmetal.com. Now, I would like to turn the call over to the Company’s President and CEO, Mr. Tom Steipp. Please go ahead, sir.

Thank you, Elise. Welcome everyone and thank you for joining us on today’s call. The third quarter of fiscal 2014 marked our official transition from sales, marketing and engineering into the world of manufacturing here at Liquidmetal. I’ll begin with a recap of the activities form this quarter, followed by a review of financial topics by Tony and then I’ll finish up with a summary comment. Revenue for the third quarter was $97,000. We held our first training class for 13 manufacturer sales reps, MSRs, at the manufacturing center of excellence on October 13th. We hosted our first customer day with 29 attendees at this facility on October 14th. We hosted 34 investor for a close up look at our manufacturing capabilities on October 16th. Some numbers of you were able to attend. We published a revised 2.0 design guide to expand and accelerate customer and MSR understanding of our unique design parameters and material properties. We certified two Liquidmetal mold suppliers, Mold Craft and Matrix. We booked new prototype orders, one from a large aerospace defense contractor and multiple parts from a specialty products company. We increased our presence on a variety of social media platforms, blogs, Twitter, YouTube, Facebook, Instagram and LinkedIn. Our goal with all of these is to drive interest in the technology and to facilitate faster market adaptation. Beyond these very significant milestones, I would like to review the progress of our strategic initiatives for FY14 where we have now turned our full attention to the number one focus of the business, making commercially viable production parts. These production parts could potentially come from one of three general areas: first, previously produced prototypes through VPC, Visser Precision Cast; two, currently targeted strategic markets like aerospace, automotive and medical; or finally, from specialty markets like sporting goods, firearms, knives or hunting. With respect to the 32 previously produced prototypes that went through VPC, four parts remain active, potential production for these parts will require ongoing work and further negotiation with VPC. With respect to our strategic markets, 15 MSRs have completed our latest training program. These reps are a great resource, covering most actions of the country and targeting specific customers in the aerospace defense, automotive and medical industries. These markets hold attractive opportunities for our technology with large programs that run for multiple years. However, sales cycles tend to be fairly lengthy. While limited sales occur every year during evaluation period, large volumes can often be several years into the future. We are pleased with our current sales coverage in these markets and are excited to announce that we received our first order through the MSR network for a prototype part from aerospace defense customer during the third quarter. This order was received early enough that we were able to build a part --- build a mold at Mold Craft and make parts and ship 100 spec-compliant parts from our newly opened Manufacturing Center of Excellence at the end of October. With one eye on these strategic markets, we are also interested in generating near-term revenue from technical accounts in specialty markets where decision cycles are often shorter and much less complicated. Our MSRs are working to find well qualified parts in these markets as well. Again, I am pleased to announce that we received several prototype orders from one new specialty customer during this period. The mold designs are complete and scheduled for delivery to our facility in Q4. As I stated in our last call, I expect that the consolidation of sales, marketing, engineering and manufacturing in one physical location will dramatically improve product quality, shorten process time and potentially lower cost. Certainly the results associated with getting our first part to the Manufacturing Center of Excellence here in California are truly encouraging. Liquidmetal has refined its focus on prototype part opportunities to those that are used by customers to validate the use of Liquidmetal technology in specific product applications. We are working with our MSRs and potential customers to ensure that we are addressing opportunities that are really leveraging our existing technology. Now I would like to turn the call over Tony to take us trough the financial details for the quarter.

Thanks, Tom. Our financial results for the third quarter of 2014 reflect our continued investments in the infrastructure required to support a robust parts and licensing business. In this context, let’s turn to the financial results for the third quarter ended September 30, 2014. Revenues for the third quarter of 2014 was $97,000 versus $456,000 in 2013. The overall decrease is due to 2013 revenue being primarily related to contracted R&D while during 2014 revenue was all related to prototype, consistent with our R&D team’s effort on the commercializing our technology. Gross margin was $12,000 or 12% of product revenue compared to $60,000 or 13% of product revenue in Q3 of 2013. As we have consistently disclosed in our MD&A section of our 10-Qs, much of our current product mix consists of prototype parts and other revenue which have variable comp percentages relative to revenue. And relating gross margin percentages may not be representative of our future business. If and when we begin increasing our revenues with shipments of routine commercial parts, we expect our gross margin percentages to stabilize and be more predictable. Selling, marketing, general and administrative expense was $1.8 million compared to 1.2 million in Q3 of 2013. The increase was mainly due to the hiring of additional personnel in support of our ongoing sales and marketing efforts. R&D expense increased to 498,000 from 368,000 in Q3 of 2013. The increase is mainly due to increases in internal projects related to the continued development of our technology and related production processes. Now I would like to go over some of our significant non-cash and non-operational expenses during the third quarter of 2014. The change in the value of our warrants resulted in a non-cash gain of $1.6 million as a result of continued changes in the valuation assumptions, other warrant liability as well as a decline in our stock price during Q3 of 2014. Amounts recorded in other non-operating expense accounts are minor in comparison to those recorded in Q3 of 2013 due to the full settlement in July 2013 of the senior convertible notes issued under our 2012 private placement. For a more thorough discussion of these non-cash fluctuations, please refer to the MD&A section of our quarterly report. Turning our attention to the balance sheet, we ended the quarter with approximately $12 million of cash. During the quarter of 2014, we entered into the 2014 purchase agreement with Aspire Capital which will allow us to raise $30 million of capital through strategic equity sales over the next three years. Notwithstanding the forgoing funding facility, we believe our cash on hand as of the balance sheet date provides adequate liquidity to allow us to execute our overall strategy through the end of 2015. Our strategy includes an increased focus on sales and marketing activities as well as increases in capital expenditure to support the continued build out of our manufacturing center of excellence. Our long term success will continue to be contingent upon our ability to raise additional capital and/or generate significant revenues to support our operations beyond 2015. This completes my financial summary. For a more thorough and detailed complete analysis of our results, please refer to our third quarter 10-Q report which we filed earlier today. Now I’d like to turn the call back over to Tom who will provide further overview of our operational activity and outlook.

Thanks, Tony. Well, as you can see, the transition from having only sales, marketing and R&D with an exclusive manufacturer to an integrated full scale manufacturing capability has occurred fairly quickly and relatively seamlessly. This reflects both our sense of urgency as well as our confidence in the functional capabilities now located here in California. Expect that the consolidation of these functions under one roof will dramatically speed our time to market while significantly enhancing product quality and our understanding of the applications where the extraordinary material properties of Liquidmetal deliver the greatest value to our customers. Our entire team is excited about the results of our latest MSR training, customer visits, and the investor meetings that occurred in mid October. This is prime to pump for future business and we see the multiple orders for prototypes that we received during the reporting period as a positive indicator. This completes the formal part of the call. I’m happy to now open up for question. Elise, please provide instructions for the participants.

[Operator Instructions] We’ll go first to David Underwood. Please go ahead.

[Technical Difficulty] I have a few questions for you guys. When you spoke about your prototype in aerospace, is that a functional [indiscernible]?

So these could be used in either commercial or government, could be either side. We are not aware of the specific program. But we view the fact that we were able to number one acquire our parts, get the order placed, build it and ship it as quickly as we were able to in this facility was an encouragement to the whole team.

For the specialty product, for that prototype, you had basically a sample of [indiscernible] work. Are you able to tell exactly what specialty product sales were?

We're at a place right now I am not really able to do that at this point in time. We did -- we are trying to however make a distinction between aerospace parts, which we have done in the past, automotive and medical parts some of which we have done in the past as well, those tend to be longer lead time items. Things that we put in the specialty markets, we believe, number one, not part of those major categories; and two, tend to we believe have shorter times to commercialization than do the others.

So in 2015, in terms of actual production contract, like you never previously stated that there was an estimated or plan to actually have like roughly four contracts by next year and at the shareholder meeting you had directed that. Is that -- Are you still working on having an estimated four or so contracts next year or you now just view them also in the specialty area?

I will say that the quality of our connection is now very good. But, I did say on the last conference call that we had 32 parts outstanding, that four of those, at least based on our analysis, were viable. The clarification that I probably should have made last time and then I certainly did make this time is that those parts were all viable. They were prototyped at VPC. They would need to be produced at VPC which requires an ongoing work on our part to make sure that they are qualified with the customer, that they have got the right quality and cost components and obviously cost components involves negotiations with the manufacturers. So those four, while they are certainly viable parts, I am not making any projections as to whether they will actually get through that process in 2015. The aerospace when we did the last quarter, we certainly expect to get more orders for it. But again, I noted those will be prototype quantity orders. The other parts that we are making for the specialty supplier do have some possibility of getting through and we will certainly update shareholders on subsequent calls on how that’s going. Right now the schedule is that mold will be delivered in the fourth quarter. So on our next call we will have some update on that.

And I just had like two more quick ones. For the molds that are produced for the prototypes, are those -- is the engineering and the production and the fabrication of those molds, are those being paid for by the customers who are requesting those or is it [Multiple Speakers] absorb cost?

Those are generally paid for by the customers. For AP, we will collaboratively engineer the mold and by the way that’s done very much in close collaboration with Mold Craft and Matrix, but it’s usually they see that pay for the mold as well as some number of parts.

And then final one is, could you comment about what your strategy is about expanding into like Europe and Asia? I know Paul had mentioned that by the end of this year the MSR certification will be wrapping up and then you will be moving into kind of that same type of sales force in Europe.

Without trying to put timeframes on it, I think it is safe to say we will fill out our sales coverage in the U.S. initially. We will then probably move towards Europe where we have a really great partner in Engel who has a machine set up and running and a showcase available to bring customers into – in Europe. And I would say the third area would probably be moving to Asia Pacific. So it will be in that order. At this point in time we need to prove the process is out year with the really strong teams that we have got in the U.S. first, then we will go to Europe and finally in Asia.

Thank you. [Operator Instructions] We will go next to Jay Fisher with Financial Logic Corporation. Please go ahead. Jay Fisher - Financial Logic Corporation: I have just two quick questions. First, you previously had mentioned a breakeven point of about $20 million in revenue. Is this still accurate and when do you anticipate reaching this point?

I would say it's generally accurate with the following caveats. Our business model includes parts that we make here. Those will be relatively low volume, relatively higher gross margin parts. Once we get past that initial startup phase, some number of our customers are either going to want to produce the parts themselves or have one of their more normal CMs make the parts. In those cases, we will likely, for passing on to another CM, we'll likely take the order here, but have the production done at a CM. And in that case, the revenue level will be there, but obviously the gross margin will be lower. And then the third phase, and this is one that really going to handle when we get there yet. But, when we have CMs who are able to take our prototyped parts that were done here, make them with high quality and delivery. We will begin opening up availability to customers and CMs to bring more parts into the system where we’ll just collect royalties. So, and the royalties obviously on a percentage of revenue are going to be higher than either of the other two categories I mentioned. So I would say the $20 million number is generally a good ballpark if we were to make all of the parts here with a relatively small percentage that are done by CMs and licensees. But the mix of that overtime will dictate whether 20 million is the right number for breakeven or not. But that's the only thing I can tell you at this point in time. It's the sequence that I just gave you is the likely sequence. We’ll start out making the parts here, qualify the alloys, the machines with the design, make sure the parts work, what the costs are, then we'll move it out to customers and CMs and then finally we'll open it up to royalty based work. Jay Fisher - Financial Logic Corporation: And then my second question is, do you have any update or are there any updates available on the EAPS program with Lockheed?

No, other than the fact that EAPS is probably a poster child for the caveat that I gave earlier, which is aerospace just tends to be a longer sales cycle. I think we shipped each part certainly every year since we started and often a couple of times during the year. But those are long term programs and any update on there would have to come from Lockheed or the program office.

[Operator Instructions] Well go next to [Gentry Roth]. Please go ahead.

You're turning this vision into something that's really looking like very promising and I think you guys have done a great job. I just wanted to – I think the last question sort of clarified where the revenue opportunities are. You mentioned the parts are made at home or at the shop. The CMs and then the royalties, is that and I think that just kind of clarifies that that’s where the revenue opportunities sort of exist.

There is a sequence there. We get the highest gross margins for produced parts and the best knowledge of what the applications are. When the order flows through us, we make the parts here. We don’t have and don’t anticipate having high value manufacturing capabilities that are well established all around the world. Once we get past those lower volumes, we will turn them over. We’ll sacrifice some gross margin for cost -- potentially cost and certainly validation of manufacturing in different geographic areas. And then the third would be once those guys have proven themselves, we will be providing licenses, but it will take a while.

And when you turn over, when you mentioned turnover is this where you would validate utilizing the angle machines that their shops installing those kind of processes at their shop? I guess when I say shop, CM's place. Is that kind of how that is going to work?

That’s a – before we turn anything over to either a CM or a licensee, we will require that either CM or licensee use certified alloy from Materion right now, certified machines from Engel and certified mold makers and we have two at this point in time. So we’ll literally take the mold off our machine here, ship it to them and they will start the production processes using the other materials at a different facility.

And the Engel and Materion relationships, is there any revenue opportunity when they sell those systems into the manufacturing process what you have ultimately sold?

There is always opportunity for modest revenue in association with those things. We don’t view that as a major part of our business however.

And I will sort of just touch on this. I know it’s something that is still on everybody’s mind. When it comes to the Apple MTA, can you touch on the Swatch agreement I guess more so? And is the Swatch agreement still in place? Is there an MTA on the Swatch agreement and does -- is there any sort of conflict as it relates to Apple utilizing their MTA to make a watch? And I have a question and a follow-up to that.

Let me just say that both agreements are in place to the extent that we can’t comment on and they have been publicly filed. And what they decide to use those licenses for are covered by the licenses that we provide. I don’t have any comment on anything relative to conflicts or non-conflicts or any of those kinds of discussion topics.

Thank you. We appreciate your time today. It is now my pleasure to turn the conference back over to our speakers for any closing or final remark.

Okay. That drives to close our third quarter call. We appreciate everyone taking the time. And we will look forward to giving you an update after fourth quarter. Thank you, Elise.

Thank you. This does conclude our program. Thank you for your participation. You may disconnect at any time. And have a great day.