Liquidmetal(R) Technologies, Inc. reported revenues for the second quarter increased 199% to $6.4 million from revenues of $2.1 million for the second quarter of 2002. On a sequential quarterly basis, revenues were slightly below the $6.6 million generated in the first quarter of 2003, while roughly in line with management's previously announced revenue outlook for the quarter. Revenues for the first six months of 2003 were 260% higher, at $13.0 million versus $3.6 million a year ago.
“As outlined during our last quarterly update, we have engaged in intensive efforts to restructure the company's operations and sharpen our product focus in support of our stated objective of achieving profitability in the fourth quarter of 2003,” said John Kang, President and Chief Executive Officer. “This involved a rigorous assessment of both our progress and shortcomings as a still emerging company and resulted in a substantial realignment of our organizational size, facilities, marketing and manufacturing emphasis. With these efforts now largely behind us, we are realizing benefits that we believe will be reflected in our results going forward, beginning with our ongoing third quarter.”
Kang recounted the following major restructuring steps undertaken during the second quarter:
- Company wide headcount has been reduced by approximately 43%;
- Unprofitable parts that disproportionately consume plant resources and impact costs are being eliminated from the company's manufacturing and R&D pipeline or phased out as obligations are fulfilled;
- Manufacturing and administrative facilities have been consolidated; and
- New pricing and manufacturing feasibility thresholds have been instituted to optimize product development efforts and personnel utilization.
As a result of cost reduction measures, the company incurred approximately $0.8 million in severance, fixed asset write-down, and facility consolidation expenses during the second quarter. Cost of goods sold for the quarter included approximately $1.3 million associated with production of certain unprofitable parts that have now been discontinued and $0.8 million for a part that is being phased out of production. In aggregate, these amounts equaled $2.9 million.
“While negatively affecting second quarter results, the restructuring actions have positioned the company for lower operating expense and future growth. Our previously stated target was to achieve 40% lower operating expenses in the third quarter versus our first quarter run rate. We are well on track to reach this goal. At the same time, we have narrowed our manufacturing focus to those products combining the shortest time to market with the highest margin opportunities, as we drive to boost revenues on the foundation of a lower cost structure,” Kang said.
The loss from continuing operations in the second quarter totaled $6.3 million, or $0.15 per share, compared with a loss of $4.3 million, or $0.11 per share, in the second quarter of 2002. For the first six months of 2003, the loss from continuing operations was $12.1 million, or $0.29 per share, compared with $8.8 million, or $0.24 per share, for the same period in 2002.
Including discontinued operations, the company posted a second quarter net loss of $6.3 million, or $0.15 per share, compared to a net loss of $3.2 million, or $0.09 per share, for the second quarter of 2002. Net loss including discontinued operations for the six months was $12.1 million, or $0.29 per share, versus a loss of $8.3 million, or $0.23 per share, for the first six months of 2002.
Second quarter gross profit was $20,000 compared to $957,000 in the same period last year. The corresponding gross margin for the second quarter was nominal, compared with 44.6% in the prior year quarter. Gross profit for the 2003 six months was $2.7 million versus $1.7 million for the first six months of 2002. The six-month gross margin was 20.8% versus a 48.2% gross margin in the prior year six months. In addition to the aforementioned cost reduction measures, the declines in gross margin for the current periods were due to the following factors: a revenue mix of lower-margin business both year-over-year and sequentially; higher unit costs resulting from low yields on a new cell phone component introduced into production during the second quarter; inadequate pricing on a second cell phone component that has since been re-priced; and a higher percentage of plant operating costs allocated to manufacturing, as opposed to research and development expense during previous quarters as new plant operations were being brought on line. Also affecting comparisons is the fact that prior year revenues were derived mainly from the company's high-margin industrial coatings business, which now represents a comparatively small portion of revenues.
Earnings per share calculations were based on 41,586,986 and 41,409,218 weighted average shares outstanding for the 2003 second quarter and six months, respectively, versus 37,697,190 and 36,395,648 average shares in the respective prior year periods.
Capital expenditures of $1.2 million for the quarter and $2.9 million for the six months mainly reflected manufacturing and R&D-related equipment costs that are expected to continue to decline through the balance of the year. Cash and cash equivalents totaled $14.0 million at June 30, 2003.
The year-over-year growth in second quarter revenues was driven by the company's bulk alloy segment, including: sales of proprietary manufacturing equipment by the company's equipment division; production of bulk Liquidmetal alloy casing components for electronic product manufacturers; prototyping of parts for customers in ongoing product development; and revenues from ongoing research and development programs with defense and medical product customers. Bulk alloy segment revenues totaled $5.7 million, or 89% of total company revenues for the quarter. The company's industrial coatings segment contributed the remaining $0.7 million, or 11%.
Revenues benefited significantly from a new strategic alliance established during the second quarter. In June, the company entered into an exclusive 10-year license agreement with LLPG, Inc., a corporation headed by Jack Chitayat, a former director of the company. The purpose of the agreement is to accelerate efforts to commercialize Liquidmetal alloys, particularly emerging precious metal-based compositions, in the jewelry and high-end luxury products market. The agreement gives LLPG and its strategic partners in the Swiss jewelry and luxury goods industry the right to exploit markets for platinum and gold-based amorphous Liquidmetal alloys currently being developed or commercialized by Liquidmetal Technologies. Liquidmetal Technologies, in turn, will receive royalty payments over the life of the contract on all products produced and sold by LLPG. In conjunction with its technology licensing contract, LLPG purchased two proprietary Liquidmetal alloy melting machines and three proprietary Liquidmetal alloy casting machines in the second quarter for a total purchase price of $2.0 million.
The number of different bulk alloy parts in production during the second quarter totaled nine components for six products, compared with eight components for five products in the preceding first quarter. Part shipments in the second quarter were to ongoing customer Samsung and a new cell phone component customer, KTF (Korea Telecom). An additional 15 parts for eight products were in active prototyping during the second quarter, for electronics, medical and sporting goods customers.
Product news during the second quarter included the announcement of an agreement with Sony Corporation to develop a new digital camera featuring a Liquidmetal alloy casing, and the launch of major Liquidmetal branding campaigns by sporting goods manufacturers HEAD Sport and Rawlings. On July 25, HEAD released a new line of HEAD Liquidmetal(R) tennis racquets, including Andre Agassi's new “weapon of choice”, the HEAD Liquidmetal(R) Radical. Rawlings has announced plans to roll out a full line of Rawlings(R) Liquidmetal(R) baseball bats in the Fall of 2003.
The company also reported that in early July it was awarded the first of two contracts under a previously announced $5.25 million 2003 Defense Appropriations allocation for the continued development of Liquidmetal alloy-based products and materials for defense-related applications. The second contract is expected to be awarded by early August.
“These second quarter accomplishments–the efforts to restructure our operations and reduce our costs, the growth in number of parts in production and active prototyping, a major new customer relationship, and the addition of a new strategic partner dedicated to promoting Liquidmetal products across a large target market–underscore our commitment to achieving profitability in the fourth quarter of 2003 while progressing toward our fundamental objective of building the Liquidmetal family of alloys into a pervasive technology,” Kang said. “We look forward to building on our renewed foundation and focus.”
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share data) (unaudited) For the Three For the Six Months Ended June 30, Months Ended June 30, --------------------- --------------------- 2003 2002 2003 2002 ---- ---- ---- ---- REVENUE $ 6,409 $ 2,144 $ 12,968 $ 3,607 COST OF SALES 6,389 1,187 10,272 1,869 -------- -------- -------- -------- Gross Profit 20 957 2,696 1,738 -------- -------- -------- -------- OPERATING EXPENSES: Selling, general, and administrative 4,704 2,860 9,211 5,129 Research and development 2,809 1,660 6,847 4,356 -------- -------- -------- -------- Total expenses 7,513 4,520 16,058 9,485 -------- -------- -------- -------- LOSS BEFORE INTEREST, OTHER INCOME, INCOME TAXES, MINORITY INTEREST AND DISCONTINUED OPERATIONS (7,493) (3,563) (13,362) (7,747) Interest expense (115) (791) (178) (1,103) Interest income 102 96 233 96 Gain on sale of marketable securities held-for-sale 1,178 -- 1,178 -- -------- -------- -------- -------- LOSS BEFORE INCOME TAXES, MINORITY INTEREST AND DISCONTINUED OPERATIONS (6,328) (4,258) (12,129) (8,754) Income taxes (8) -- (8) -- -------- -------- -------- -------- LOSS BEFORE MINORITY INTEREST AND DISCONTINUED OPERATIONS (6,336) (4,258) (12,137) (8,754) Minority interest in loss (income) of consolidated subsidiary 10 (10) 3 (10) -------- -------- -------- -------- LOSS FROM CONTINUING OPERATIONS (6,326) (4,268) (12,134) (8,764) Gain from disposal of discontinued retail golf segment, net -- 1,038 -- 508 -------- -------- -------- -------- NET LOSS (6,326) (3,230) (12,134) (8,256) Foreign exchange translation gain 1,099 161 159 37 Net unrealized loss on marketable securities held-for-sale (527) -- (1,668) -- -------- -------- -------- -------- COMPREHENSIVE LOSS $(5,754) $ (3,069) $ (13,643) $ (8,219) ======== ======== ======== ======== PER COMMON SHARE BASIC AND DILUTED: Loss from continuing operations $ (0.15) $ (0.11) $ (0.29) $ (0.24) ======== ======== ======== ======== Income (loss) from discontinued operations $ 0.00 $ 0.03 $ 0.00 $ 0.01 ======== ======== ======== ======== Net loss $ (0.15) $ (0.09) $ (0.29) $ (0.23)