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Liqiudmetal: Keeping Mum about Apple and Far More

by Melissa Davis - 8/19/2010 8:33:48 AM

This year, Liquidmetal Technologies (OTC: LQMT.PK) has kept some telling – and arguably material – secrets from its investors.

Take LQMT’s recent deal with Apple (Nasdaq: AAPL) as an obvious example. In a cryptic 8-K filing on Aug. 9, LQMT suddenly announced a contract with Apple that – on the surface – seemed to warrant a full-blown press release. Specifically, LQMT revealed that it had signed a “master transaction agreement” that would allow Apple to commercialize its technology for future use in its consumer electronics products.

LQMT never disclosed the terms of that licensing contract, however, allowing hopeful speculation to fuel the company’s shares instead. LQMT’s stock, which fetched just 13 cents a share a month ago, rocketed to a multiyear high of $1.76 last week before swiftly crashing on the lack of details associated with that high-profile deal. The stock, down another 10.6% on Wednesday, has now lost most of its Apple-related gains and currently trades for just 76 cents a share.

This spring, in the months leading up to that dramatic deal, LQMT kept quiet about another important development as well. In an even shorter 8-K filing on March 8, LQMT quietly disclosed that longtime Chairman John Kang had left the company without giving any reason for his departure. One week earlier, Kang was convicted at trial on fraud charges – carrying a potential five-year prison sentence – for inflating the financial results of another company he had previously led.

A federal judge has since overturned that conviction on a technicality, the St. Petersburg Times noted, ruling that the statute of limitations had already expired on the fraud case. Still, Internet records indicate, LQMT never revealed that its recent chairman – who spent more than 15 years with the company – had ever been tried or convicted at all.

LQMT is no stranger to government heat itself. The company became the target of a criminal investigation, with prosecutors scrutinizing its accounting practices and insider sales, several years ago. The company’s stock, once a Nasdaq highflier commanding $20 a share, had already fallen below $2 on the OTC Bulletin Board by that time.

The shares bottomed out at 8 cents in late April, when LQMT failed to file a past-due annual report that would have detailed the company’s current financial condition, and remained under pressure until news surfaced about the celebrated Apple deal.

Apple did not return a phone call seeking comments for this story. LQMT received a list of questions covering multiple issues – including the Apple deal, the company’s former chairman, its major stockholders and its current share count – but failed to supply any information about those matters.

“Questions regarding Apple we cannot answer, given their policy regarding new business ventures and relationships and the dissemination of information,” LQMT stated in a brief email reply. “The remainder of the financial questions will have to be addressed after we file our 10Q later this month.”

Toxic Waste

According to its last 10Q, LQMT clearly needed some funds.

In that Nov. 23 report, LQMT revealed that it had spent the past three years losing money and lacked the financing necessary to continue operations beyond the 2009 fiscal year. By then, LQMT had already fielded a formal default notice from one of its creditors and faced liens placed on its assets by others. The company had issued loads of convertible stock – with conversion prices ranging from just 10 cents to 22 cents a share – to satisfy its obligations in the meantime.

On May 28, LQMT followed up by inking a new $2 million loan agreement with an outfit called Norden that would deliver sizable short-term gains to the firm. Under the terms of that deal, Norden could begin purchasing up to 7.7 million shares of LQMT stock at 26 cents a share on the day the company satisfied that loan. LQMT paid the loan off in full on Aug. 5, the same day it inked the Apple deal, and Norden promptly exercised its right to purchase all of those cheap shares.

LQMT rocketed 72.5% to 88 cents – on massive volume of 8.24 million shares – that same day. The stock would continue to surge past $1.70 a share, with another 45 million shares changing hands, over the course of the next two days. It then collapsed with similar force, losing more than half of its newfound value, during the next two trading sessions.

History of Failure

LQMT fell even harder as a young Nasdaq company about eight years ago.

In May of 2002, with Kang serving as its CEO, LQMT went public at $15 a share. The stock rocketed to $22.50 a share the following month, the Tampa Tribune reported, but soon began losing serious ground after that time. By August of 2002, the newspaper observed, LQMT had cooled off completely and tumbled to just $4 a share. 

A year later, the St. Petersburg Times reported, the only analyst following LQMT had lost his faith in the company – citing its inability to capitalize on a promising cell phone deal with Motorola (NYSE: MOT) – and slapped the equivalent of a “sell” rating on the shares.

“Liquidmetal recently disclosed that a potential application it was working on for Motorola, a casing for a cellular phone, had been delayed indefinitely,” MarketWatch explained when covering the downgrade. “For another application, Liquidmetal said it was unable to meet Motorola’s price point … The companies have worked together for more than a year, but this interest has yet to result in an order.”

Last week, with LQMT soaring high on news of the Apple contract, industry experts began hinting about similar challenges. Since LQMT failed to provide any details about that deal – including its price tag and its potential for future revenue – experts questioned whether Apple had simply paid a modest fee for access to expensive technology that it may never use at all.

“Apple isn’t saying anything about the deal,” the Associated Press observed. “And it’s far from certain that the material (invented by LQMT) will ever make it into its products. Though it matches the sleek Apple aesthetic, it’s prohibitively expensive” as well.

Patriot Scientific (OTC: PTSC.OB), another microcap technology company, failed to flourish even after multiple electronics giants – including Intel (Nasdaq: INTC), Advanced Micro Devices (NYSE: AMD) and Hewlett-Packard (NYSE: HPQ) – reportedly paid the company millions of dollars in licensing fees. Although PTSC originally soared on news of those deals back in 2006, rocketing from mere pennies toward $2 a share, the stock has lost all of those gains since that time. That once-hot penny stock, still briskly traded to this day, currently fetches just 13 cents a share.

Government Target

Years ago, LQMT followed a similarly disturbing pattern. 

LQMT spent less than two months as a young stock market darling, past news reports show, before suddenly reversing course and losing most of its original market value. By 2004, LQMT faced class-action lawsuits for allegedly misleading investors and looming restatements that would soon banish the company’s stock to the lowly Pink Sheets.

LQMT’s independent auditing firm resigned in the meantime, saying that it was “unwilling to rely” on information supplied by Kang when examining the company’s books. Kang temporarily stepped down as CEO a few weeks later, the St. Petersburg Times reported, after becoming the target of an investigation focused on his past stock sales. 

His replacement, Ricardo Salas, lasted less than a year before coming under government scrutiny as well.

“Ricardo Salas, our previous president and CEO, has decided to resign from his position in the company,” Kang stated in an October 2006 conference call focused on the management shakeup. “This was unfortunate, but was due to the fact that he was recently named as one of the parties in the Department of Justice investigation.”

“Because he was named as one of the parties,” Kang continued, “he cannot hold an officer position of a public company.”

Fraud Conviction

Kang continued to serve as chairman, however, even though he had surfaced as a target of that investigation as well. By then, corporate filings show, he also faced criminal charges for alleged accounting fraud at yet another company.

While serving as chairman of LQMT, those records show, Kang doubled as a senior executive at a company called Medical Manager Health Systems. Between 1996 and 2000, he filled top posts at Medical Manager – including CEO and president – before the company ultimately sold itself to WebMD. (Interestingly, an executive bio reveals, Sangas helped found Medical Manager and briefly served as a company vice president during that timeframe as well.)

According to federal prosecutors, Medical Manager allegedly engaged in accounting fraud during the entire time that Kang helped lead the company. Together with former Medical Manager COO John Sessions, Kang was convicted at trial of multiple felonies – including conspiracy to commit mail, wire and securities fraud – earlier this year.

“As the president and vice president of their company, these defendants were supposed to lead their company with honor and integrity,” government prosecutors stated when announcing the convictions this March. “Instead, they orchestrated an elaborate accounting scheme meant to defraud investors about the financial success of their company.

“Corporate executives cannot decide to play by their own set of rules. The message is simple: Obey the laws or face prosecution for your crimes.”

Sweetheart Deal

At the time that LQMT filed its latest proxy statement in mid-2009, Kang still owned 5.135 million shares – or 10% of the shares outstanding – in the company. Although Kang has reported no stock sales since that time, regulatory filings indicate, he fails to appear on an (admittedly short) Internet list of major company shareholders.

Thomas Steipp, LQMT’s brand-new CEO, now holds that title instead. Before joining LQMT earlier this month, Steipp spent more than a decade serving as the CEO of a much larger technology firm known as Symmetricom (Nasdaq: SYMM). 

The company fared well under Steipp’s leadership at first, with the stock peaking in mid-2000 above $20 a share, but it later began to falter. The stock sank to around $4 by early 2003 and – with the company later restating its financials and slashing its workforce – never fully recovered from that fall. It closed Wednesday at $5.13 a share, near the low end of its 52-week range.

Steipp himself struck it rich, however. He scored more than $4.5 million worth of compensation during his last three years at Symmetricom, regulatory filings show, with almost half of that awarded for his final year on the job.

After a mere 13 months of retirement, Steipp has now reemerged as the chief of LQMT with another sweetheart deal. He collected 6 million shares of LQMT stock – and now controls 10.8% of the shares outstanding – after taking over as CEO on the same day that the company signed its contract with Apple.

The value of Steipp’s stock in LQMT soared from $1.74 million to $10.5 million during his first week at the helm. Today, that stock is still worth $4.56 million – more than double its original value – despite the recent plunge.

Massive Dilution

LQMT has treated other company insiders with generosity as well. 

On July 12, just weeks before finalizing the mysterious Apple deal, LQMT granted several company leaders – including Salas (who resurfaced two years ago as executive vice president) – options to purchase more than 3 million shares of stock at just 13 cents a share. LQMT then followed up by issuing restricted stock to company directors, valued at similarly low prices, on the day that it officially signed the Apple agreement. 

Ordinary LQMT investors have suffered untold dilution in the meantime. According to regulatory filings, LQMT’s share count has already jumped by more than a third to 63.8 million shares over the course of this year. According to those same filings, however, warrant and convertible stockholders could more than double – or even triple -- that share count going forward.

Meanwhile, LQMT already sought out permission to triple its authorized share count – from 100 million to 300 million – by issuing a dire warning to investors.

“If this proposal to increase our authorized shares does not pass,” LQMT cautioned last year, “we will be at risk that holders of the preferred stock and convertible notes will put us in default, charge us interest at default interest rates and possibly seize and sell our assets.”

Fuzzy Math

Without an accurate share count, LQMT investors cannot estimate the current market value of their company or determine if that valuation looks fair. 

If the share count remains at 63.8 million, LQMT sports a market capitalization of roughly $48.5 million. If the share count has climbed to between 100 million and 300 million, however, then the current stock price suggests a market value of $76 million to $228 million – potentially exceeding that featured by the Nasdaq-traded company Steipp previously oversaw – instead. 

For his part, Steipp sounds delighted with his lucrative post at LQMT despite the company’s checkered past. LQMT Chairman Abdi Mahamedi, a huge shareholder who replaced Kang after his conviction this spring, has expressed excitement about Steipp’s arrival as well.

“As an experienced CEO with a track record of success, Tom brings essential depth to the company’s management team at a time when our technology is seeing unprecedented commercial interest,” Mahamedi stated when introducing Steipp to investors last week. “His ability to create value through collaborative relationships, technological innovation and business process is important as the company embarks upon our next stage of growth.”

Mahamedi stands to benefit, quite handsomely, if that rosy outlook boosts the company’s share price. According to past regulatory filings, Mahamedi’s firm – which counts Kang’s brother among its investors -- controls 87.86 million shares of LQMT stock. That stake, including current stock holdings and exercisable warrants for additional shares, exceeds the last reported share count for the entire company.

* Note: No member of TheStreetSweeper's staff or advisory board has ever taken a financial position in LQMT or received any compensation from others who have positions in the stock. As editor of the site, Melissa Davis will never take a position in any of the stocks that she covers. To contact Ms. Davis, the author of this story, please send an email to editor@thestreetsweeper.org.

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