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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-K**

 

**x****      ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2009**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from             to            **

** **

**CommissionFile No**.** 000-31332**

 

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** **

**LIQUIDMETALTECHNOLOGIES, INC.**

(Exact name of Registrant asspecified in its charter)

 

| **Delaware**                                                     | ** ** | **33-0264467**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or  organization) |       | (I.R.S. Employer  Identification No.) |

 

**30452EsperanzaRancho Santa Margarita, CA 92688** (address of principal executiveoffice, zip code)

 

Registrant’s telephonenumber, including area code: **(949) 635-2100**

** **

Securitiesregistered pursuant to Section 12(b) of the Act:******None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

** **

**Title ofeach Class**Common Stock, $0.001 par value

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o  No x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o  No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes x  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K   o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer o |   | Accelerated filer o         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-accelerated filer o   |   | Smaller reporting company x |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o  No x

 

Theaggregate market value of the registrant’s Common Stock held by non-affiliatesof the registrant as of June 30, 2009 was approximately $6,500,357. Forpurposes of this calculation only, (i) shares of Common Stock are deemedto have a market value of $0.18 per share, the closing price of the CommonStock as reported on the OTC Bulletin Board on June 30, 2009 and(ii) each of the executive officers, directors and persons holding morethan 10% of the outstanding Common Stock as of June 30, 2009 is deemed tobe an affiliate.

 

Thenumber of common shares outstanding as of August 20, 2010 was 84,763,339,respectively.

 

 

 

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**TABLE OFCONTENTS**

 
| ** **    | ** **                                                                                                           | **Page** |
|---------------|----------------------------------------------------------------------------------------------------------------------|----------|
| PART I   |                                                                                                                 |     |
| Item 1.  | Business                                                                                                             | 3        |
| Item 1A.      | Risk Factors                                                                                                         | 13       |
| Item 1B.      | Unresolved  Staff Comments                                                                                           | 22       |
| Item 2.  | Properties                                                                                                           | 22       |
| Item 3.  | Legal Proceedings                                                                                                    | 23       |
| Item 4.  | Submission  of Matters to a Vote of Security Holdings                                                                | 23       |
| PART II  |                                                                                                                 |     |   |
| Item 5.  | Market For  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities. | 24       |
| Item 6.  | Selected  Financial Data                                                                                             | 25       |
| Item 7.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 27       |
| Item 7A. | Quantitative  and Qualitative Disclosures About Market Risk                                                          | 40       |
| Item 8.  | Financial  Statements and Supplementary Data                                                                         | 40       |
| Item 9.  | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                | 40       |
| Item 9A(T).   | Controls and  Procedures                                                                                             | 41       |
| Item 9B.      | Other Information                                                                                                    | 41       |
| PART III |                                                                                                                 |     |   |
| Item 10. | Directors,  Executive Officers and Corporate Governance                                                              | 42       |
| Item 11. | Executive  Compensation                                                                                              | 44       |
| Item 12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     | 48       |
| Item 13. | Certain  Relationships and Related Transactions. And Director Independence                                           | 53       |
| Item 14.      | Principal Accountant  Fees and Services                                                                              | 54       |
| PART IV  |                                                                                                                 |     | 55 |
| Item 15. | Exhibits and  Financial Statement Schedules                                                                          |     |

 

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**PART I**

 

**Forward-Looking Statements**

 

This annual report on Form 10-Kof Liquidmetal Technologies, Inc. contains “forward-looking statements”that may state our management’s current expectations, estimates, forecasts, andprojections about the company and its business. Any statement in this reportthat is not a statement of historical fact is a forward-looking statement, andin some cases, words such as “believe,” “estimate,” “project,” “expect,” “intend,”“may,” “anticipate,” “plans,” “seeks,” and similar expressions identifyforward-looking statements. Forward-looking statements involve risks anduncertainties that could cause actual outcomes and results to differ materiallyfrom the anticipated outcomes or result. These statements are not guarantees offuture performance, and undue reliance should not be placed on thesestatements.  It is important to note thatLiquidmetal Technologies, Inc.’s actual results could differ materiallyfrom what is expressed in our forward-looking statements due to the riskfactors described in the section of this report entitled “Risk Factors” in Item1A of this report as well as the following risks and uncertainties:

 

·                  Our history of operating losses and uncertainty surroundingour ability to achieve or sustain profitability;

·                  Our limited history of developing, manufacturing, andselling products made from our bulk amorphous alloys;

·                  Lengthy customer adoption cycles and unpredictable customeradoption practices;

·                  Our ability to identify, develop, and commercialize newproduct applications for our technology;

·                  Competition from current suppliers of incumbent materialsor producers of competing products;

·                  Our ability to identify, consummate, and/or integratestrategic partnerships;

·                  The potential for manufacturing problems or delays; and

·                  Potential difficulties associated with protecting orexpanding our intellectual property position.

 

Liquidmetal Technologies, Inc.undertakes no obligation to update publicly any forward-looking statements,whether as a result of new information, future events or otherwise.

 

**Item 1.Business**

 

In this annual report on Form 10-K,unless the context indicates otherwise, references to “the Company”, “LiquidmetalTechnologies”, “our Company”, “we”, “us”, and similar references refer toLiquidmetal Technologies, Inc. and its subsidiaries.

 

**Overview**

 

We are a materialstechnology company that develops and commercializes products made fromamorphous alloys.  Our Liquidmetal® family of alloys consists of a varietyof proprietary coatings, powders, bulk alloys, and composites that utilize theadvantages offered by amorphous alloy technology. We develop, manufacture, andsell products and components from bulk amorphous alloys to customers in variousindustries, and we also partner with third-party licensees and distributors todevelop and commercialize bulk Liquidmetal alloy products. We believe that ourproprietary bulk alloys are the only commercially viable bulk amorphous alloyscurrently available in the marketplace.  In addition to our bulk alloys,we market and sell a line of proprietary amorphous alloy-based industrialcoatings under the Liquidmetal ArmacorTM Coatings brand.

 

Amorphous alloys areunique materials that are distinguished by their ability to retain a randomatomic structure when they solidify, in contrast to the crystalline atomicstructure that forms in other metals and alloys when they solidify. Liquidmetalalloys possess a combination of performance, processing, and potential costadvantages that we believe will make them preferable to other materials in avariety of applications. The amorphous atomic structure of our alloys enablesthem to overcome certain performance limitations caused by inherent weaknessesin crystalline atomic structures, thus facilitating performance and processingcharacteristics superior in many ways to those of their crystallinecounterparts. For example, our zirconium-titanium Liquidmetal alloys areapproximately 250% stronger than commonly used titanium alloys such asTi-6Al-4V, but they also have some of the beneficial processing characteristicsmore commonly associated with plastics. We believe these advantages couldresult in Liquidmetal alloys supplanting high-performance alloys, such astitanium and stainless steel, and other incumbent materials in a wide varietyof applications. Moreover, we believe these advantages could enable theintroduction of entirely new products and applications that are not possible orcommercially viable with other materials.

 

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**General CorporateInformation**

 

We were originallyincorporated in California in 1987, and we reincorporated in Delaware in May 2003. Our principal executive offices are located at 30452 Esperanza, Rancho SantaMargarita, California 92688. Our telephone number at that address is (949)635-2100. Our Internet website address is www.liquidmetal.com and all of ourfilings with the Securities and Exchange Commission  (“SEC”) are available free of charge on ourwebsite.

** **

**Subsidiaries and Other Locations**

 

We currently own and operate amanufacturing facility in Pyongtaek, South Korea, which became operational inthe third quarter of 2002.  This Korean subsidiary handles our BulkLiquidmetal alloy business which includes market opportunities to manufactureand sell components made out our bulk alloys.  We operate a distributionwarehouse division in Huntsville, Texas to handle our Liquidmetal alloyindustrial coatings which are used primarily as protective coatings forindustrial machinery and equipment, such as drill pipe used by the oil drillingindustry and boiler tubes used by coal burning power plants.  Lastly, weoperate a coatings application business based in Dothan, Alabama used tosupport our industrial coatings business.

** **

**Segments**

 

InApril 2002, we began classifying operations into two reportable segments:Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used bycoal burning power plants.  BulkLiquidmetal alloys include market opportunities to manufacture and sellcomponents made out of our bulk alloys. The expenses incurred by the bulk Liquidmetal alloy segment aremanufacturing, research and development costs, and selling expenses associatedwith identifying and developing market opportunities.  Bulk Liquidmetal alloy products can bedistinguished from Liquidmetal alloy coatings in that the bulk Liquidmetalalloy can have significant thickness, up to approximately one inch, whichallows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.  Revenue and expenses associated with researchand development services are included in the bulk Liquidmetal alloy segment.

 

Resultsof segment operations and assets are included in Note 15 to the ConsolidatedFinancial Statements contained in this Form 10-K.

 

**Our Technology**

 

The performance, processing, andpotential cost advantages of Liquidmetal alloys are a function of their uniqueatomic structure and their proprietary material composition.

 

***UniqueAtomic Structure***

 

The atomic structure ofLiquidmetal alloys is the fundamental feature that differentiates them fromother alloys and metals. In the molten state, the atomic particles of allalloys and metals have an amorphous atomic structure, which means that the atomicparticles appear in a completely random structure with no discernible patterns.However, when non-amorphous alloys and metals are cooled to a solid state,their atoms bond together in a repeating pattern of regular and predictableshapes, or crystalline grains. This process is analogous to the way ice formswhen water freezes and crystallizes. In non-amorphous metals and alloys, theindividual crystalline grains contain naturally occurring structural defectsthat limit the potential strength and performance characteristics of thematerial. These defects, known as dislocations, consist of discontinuities orinconsistencies in the patterned atomic structure of each grain. Unlike otheralloys and metals, bulk Liquidmetal alloys can retain their amorphous atomicstructure throughout the solidification process and therefore do not developcrystalline grains and the associated dislocations. Consequently, bulkLiquidmetal alloys exhibit superior strength and other superior performance characteristicscompared to their crystalline counterparts. Our Liquidmetal alloy coatings, incontrast to our bulk alloys, have a crystalline atomic structure when initiallyapplied, but their atomic structure becomes amorphous as the coatings rubagainst surfaces under force, thus improving their performance over time.

 

Priorto 1993, commercially viable amorphous alloys could be created only in thinforms, such as coatings, films, or ribbons. However, in 1993, researchers atthe California Institute of Technology (Caltech) developed the firstcommercially viable amorphous alloy in a bulk form. Today, bulk Liquidmetalalloys can be formed into objects that are up to one inch thick, and we are notaware of any other commercially available amorphous alloys that can achievethis thickness. We obtained the exclusive right to commercialize the bulkamorphous alloy through a license agreement with Caltech and have developed thetechnology to enable the commercialization of the bulk amorphous alloys.

 

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***ProprietaryMaterial Composition***

 

Theconstituent elements and percentage composition of Liquidmetal alloys arecritical to their ability to solidify into an amorphous atomic structure. Wehave several different alloy compositions that have different constituentelements in varying percentages. These compositions are protected by variouspatents that we own or exclusively license from third parties, includingCaltech. The raw materials that we use in Liquidmetal alloys are readilyavailable and can be purchased from multiple suppliers.

 

**Advantages ofLiquidmetal Alloys**

 

Liquidmetal alloys possess a uniquecombination of performance, processing and cost advantages that we believemakes them superior in many ways to other commercially available materials fora variety of existing and potential future product applications.

 

***PerformanceAdvantages***

 

Ourbulk Liquidmetal alloys provide several distinct performance advantages overother materials, and we believe that these advantages make the alloys desirablein applications that require high yield strength, strength-to-weight ratio,elasticity and hardness.

 

Thehigh yield strength of bulk Liquidmetal alloys means that a high amount ofstress must be exerted to create permanent deformation. However, because theyield strength is so high, the yield strength of many of our bulk Liquidmetalalloy compositions is very near their ultimate strength, which is the measureof stress at which total breakage occurs. Therefore, very little additionalstress may be required to break an object made of bulk Liquidmetal alloys oncethe yield strength is exceeded. Although we believe that the yield strength ofmany of our bulk alloys exceeds the ultimate strength of most other commonlyused alloys and metals, our bulk alloys may not be suitable for certainapplications, such as pressurized tanks, in which the ability of the materialto yield significantly before it breaks is more important than its strengthadvantage. Additionally, although our bulk alloys show a high resistance tocrack initiation because of their very high strength and hardness, certain ofour bulk alloys are sensitive to crack propagation under certain long-term,cyclical loading conditions. Crack propagation is the tendency of a crack togrow after it forms. We are currently developing new alloy compositions thathave improved material properties to overcome these limitations.

*** ***

***ProcessingAdvantages***

 

Theprocessing of a material generally refers to how a material is shaped, formed,or combined with other materials to create a finished product. Bulk Liquidmetalalloys possess processing characteristics that we believe make them preferableto other materials in a wide variety of applications. In particular, our alloysare amenable to processing options that are similar in many respects to thoseassociated with plastics. For example, we believe that bulk Liquidmetal alloyshave superior net-shape casting capabilities as compared to high-strengthcrystalline metals and alloys.  “Net-shape casting” is a type of castingthat permits the creation of near-to-net shaped products that reduce costlypost-cast processing or machining. Additionally, unlike most metals and alloys,our bulk Liquidmetal alloys are capable of being thermoplastically molded inbulk form. Thermoplastic molding consists of heating a solid piece of materialuntil it is transformed into a moldable state, although at temperatures muchlower than the melting temperature, and then introducing it into a mold to formnear-to-net shaped products.  Accordingly, thermoplastic molding can bebeneficial and economical for net shape fabrication of high-strength products.

 

BulkLiquidmetal alloys also permit the creation of composite materials that cannotbe created with most non-amorphous metals and alloys. A composite is a materialthat is made from two or more different types of materials. In general, theability to create composites is beneficial because constituent materials can becombined with one another to optimize the composite’s performancecharacteristics for different applications. In other metals and alloys, thehigh temperatures required for processing could damage some of the composite’sconstituent materials and therefore limit their utility. However, therelatively low melting temperatures of bulk Liquidmetal alloys allow mildprocessing conditions that eliminate or limit damage to the constituentmaterials when creating composites. In addition to composites, we believe thatthe processing advantages of Liquidmetal alloys will ultimately allow for avariety of other finished forms, including sheets and extrusions.

 

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Notwithstandingthe foregoing advantages, our bulk Liquidmetal alloys possess certainlimitations relative to processing. The beneficial processing features of ourbulk alloys are made possible in part by the alloys’ relatively low meltingtemperatures. Although a lower melting temperature is a beneficialcharacteristic for processing purposes, it renders certain bulk alloycompositions unsuitable for certain high-temperature applications, such as jetengine exhaust components. Additionally, the current one-inch thicknesslimitation of our zirconium-titanium bulk alloy renders our alloys currentlyunsuitable for use as structural materials in large-scale applications, such asload-bearing beams in building construction. We are currently engaged inresearch and development with the goal of developing processing technology andnew alloy compositions that will enable our bulk alloys to be formed intothicker objects.

*** ***

***CostAdvantages***

 

Liquidmetalalloys have the potential to provide cost advantages over other high-strengthmetals and alloys in certain applications. Because bulk Liquidmetal alloy hasprocessing characteristics similar in some respects to plastics, which lendsitself to near-to-net shape casting and molding, Liquidmetal alloys can in manycases be shaped efficiently into intricate, engineered products. Thiscapability can eliminate or reduce certain post-casting steps, such asmachining and re-forming, and therefore has the potential to significantlyreduce processing costs associated with making parts in high volume.

 

Additionally,because the near-to-net shape processing of Liquidmetal alloys reduces the needfor capital-intensive heavy industrial equipment such as that found in foundryand forging operations, Liquidmetal alloys can be processed with a smallermachinery footprint, which allows for more efficient development of facilitiesand reduced permitting and regulatory costs. We believe that these advantagesmay allow our customers an opportunity to maintain or improve the performanceof their products without a commensurate increase in cost.

** **

**Our Strategy**

 

As a result of the experience andknowledge that we have gained through our activities to date, and recognizing thatdeveloping and commercializing a revolutionary new technology is anevolutionary process, we are continually modifying our business strategy toenable us to better capitalize on our evolving core strengths and moreeffectively pursue revenue growth and profitability.  The key elements of our strategy include:

 
| · | * * | *Identifying and Developing New Applications for Our  Liquidmetal Alloy Technology.* We intend to continue to  identify and develop new applications that will benefit from the performance,  processing, and cost advantages of Liquidmetal alloys.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
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| · | * * | *Focusing Our Marketing and Internal Manufacturing  Activities on Select Products with Expected Higher Gross-Margins.*We intend to  focus our marketing and internal manufacturing activities on select products  with anticipated higher gross margins.  This strategy is designed to  align our product development initiatives with our manufacturing processes  and manufacturing cost structure, and to reduce our exposure to more  commodity-type product applications that are prone to unpredictable demand  and fluctuating pricing.  Our focus is primarily on higher-margin  products that possess design features that take optimal advantage of our  existing and developing manufacturing technology and that command a price  commensurate with the performance advantages of our alloys.  In addition  to our focus on products with higher gross margins, we will continue to  engage in prototype manufacturing, both for internally manufactured products  and for products that will ultimately be licensed to or manufactured by third  parties.                                                                                                                                                                                                                        |
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| · | * * | *Further Developing Our Manufacturing Processes,  Capabilities, and Efficiencies for Bulk Liquidmetal Alloys.* We intend to  improve and enhance our internal manufacturing processes, capabilities, and  efficiencies in order to maintain quality control over products made from  bulk Liquidmetal alloys, to focus on improvements to the processing of our  alloys, and to protect our intellectual property. As our alloys become more  pervasive, however, we expect to enter into additional strategic  relationships that would involve the licensing of Liquidmetal technology to  third parties for certain market segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
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| · | * * | *Pursuing Strategic Partnerships In Order to More Rapidly  Develop and Commercialize Products*. We intend to actively  pursue and support strategic partnerships that will enable us to leverage the  resources, strength, and technologies of other companies in order to more  rapidly develop and commercialize products.  These partnerships may  include licensing transactions in which we license full commercial rights to  our technology in a specific application area, or they may include  transactions of a more limited scope in which, for example, we outsource  manufacturing activities or grant distribution rights.  We believe that  utilizing such a partnering strategy will enable us to reduce our working  capital burden, better fund product development efforts, better understand  customer adoption practices, leverage the technical and financial resources  of our partners, and more effectively handle product design and process  challenges.  As this partnering strategy evolves, a growing portion of  our revenue mix may be comprised of revenue from the provision of product  development services, technical support, and engineering services, as well as  revenues from royalties on the sale of Liquidmetal alloy products by our  partners. |

 

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| · | * * | *Advancing the Liquidmetal® Brand*. We believe  that building our corporate brand will foster continued adoption of our  technology. Our goal is to position Liquidmetal alloys as a superior  substitute for materials currently used in a variety of products across a  range of industries. Furthermore, we seek to establish Liquidmetal alloys as  an enabling technology that will facilitate the creation of a broad range of  commercially viable new products. To enhance industry awareness of our  company and increase demand for Liquidmetal alloys, we are reviewing various  brand development strategies that could include collaborative advertising and  promotional campaigns with select customers, industry conference and trade  show appearances, public relations, and other means. |
|--------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Applications forLiquidmetal Alloys**

 

Wehave focused our commercialization efforts for Liquidmetal alloys on fouridentified product areas.  We believe that these areas are consistent withour strategy in terms of market size, building brand recognition, and providingan opportunity to develop and refine our processing capabilities. Although webelieve that strategic partnering transactions could create valuableopportunities beyond the parameters of these target markets, we anticipatecontinuing to pursue these markets both internally and in conjunction withpartners.

 

***Components for Electronic Products***

 

Weproduce components for electronic devices using our bulk Liquidmetal alloys andbelieve that our alloys offer enhanced performance and design benefits forthese components in certain applications.  Bulk Liquidmetal alloys can beused for various structural components of a cellular phone, including the shield,faceplate, hinge, hinge housings, back plate, side plates, brackets, and thecover on the phones. We initially targeted the electronic casings marketbecause of its potential for high product volumes and branding opportunities;however, unpredictable customer adoption practices, short product model lives,processing limitations, and intense pricing pressures make it very challengingto compete in this high-volume market.  Accordingly, we are currentlylimiting our focus in this market to higher-margin applications that have thepotential to benefit from the unique performance characteristics of bulkLiquidmetal alloys.  We continue to believe that the highstrength-to-weight ratio and elastic limit of bulk Liquidmetal alloys enablethe production of stronger and thinner electronic devices as compared toplastic, zinc, and magnesium, and we intend to focus on products that requirethese design and performance benefits.

 

***Sporting Goods and Leisure Products***

 

Weare developing a variety of applications for Liquidmetal alloys in the sportinggoods and leisure products area.

 

In the sporting goodsindustry, we believe that the high strength, hardness, and elasticity of ourbulk alloys have the potential to enhance performance in a variety of products,and we further believe that many sporting goods products are conducive to ourinternal manufacturing strategy of focusing on high-margin products that meetour design criteria.  Substantial opportunities also exist for ouramorphous alloy coatings, powders and composites. In 2003, Rawlings SportingGoods Company launched a new line of baseball and softball bats that utilize aLiquidmetal alloy coating, and HEAD NV Sport launched a new line of HEAD®Liquidmetal® tennis racquets that incorporates Liquidmetal alloy in compositeform in their racquet design. In 2005, we have also launched goods that utilizeLiquidmetal alloy including skis.  Other potential applications for ouralloys in this industry include golf clubs, eyewear, fishing, hunting, andother sport products.

 

In the leisure productscategory, we believe that bulk Liquidmetal alloys can be used to efficientlyproduce intricately engineered designs with high-quality finishes, such aspremium watchcases, and we further believe that Liquidmetal alloy technology canbe used to make high-quality, high-strength jewelry from precious metals. We have successfully produced prototype rings made from an amorphousLiquidmetal platinum alloy that is harder (and hence more scratch resistant)than conventional platinum jewelry.

 

In order to acceleratethe commercialization of Liquidmetal alloys in the jewelry and high-end luxuryproducts market, in June 2003, we entered into an exclusive, ten-yearlicense agreement with LLPG, Inc. (“LLPG”).  Under the terms of theagreement, LLPG has the right to commercialize Liquidmetal alloys, particularlyprecious-metal based compositions, in jewelry and high-end luxury productmarkets.

 

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***Medical Devices***

 

We are engaged inproduct development efforts relating to various medical devices that could bemade from Liquidmetal alloys. We believe that the unique properties of bulkLiquidmetal alloys provide a combination of performance and cost benefits thatcould make them a desirable replacement to incumbent materials, such asstainless steel and titanium, currently used in various medical deviceapplications.  Our ongoing emphasis has been on surgical instrumentapplications for Liquidmetal alloys. These include, but are not limited to,specialized blades, orthopedic instruments utilized for implant surgeryprocedures, dental devices, and general surgery devices. The potential valueoffered by our alloys is high performance in some cases and cost reduction inothers, the latter stemming from the ability of Liquidmetal alloys to be netshape cast into components, thus reducing costs of secondary processing. Thestatus of most components in the prototyping phase is subject to non-disclosureagreements with our customers.

 

We believe that ourfuture success in the medical device market will be driven largely bystrategically aligning ourselves with well-established companies that areuniquely positioned to facilitate the introduction of Liquidmetal alloys intothis market, especially as it relates to the unique processing challenges andstringent material qualification requirements that are prevalent in thisindustry.  We also believe that our prospects for success in this marketwill be enhanced through our focus on optimizing existing alloy compositionsand developing new alloy compositions to satisfy the industry’s rigorousmaterial qualification standards.

*** ***

***Industrial Coatings and Powders***

 

We continue to marketand sell amorphous alloy industrial coatings and powders under the LiquidmetalArmacorTM Coatings brand name. Liquidmetal alloy coatings are usedprimarily as a protective coating for industrial machinery and equipment. Sincethe inception of this business in the late 1980s, our proprietary coatings havedemonstrated a high degree of hardness and low coefficient of friction which,when combined with their strong adhesion properties, reduce the wear andconsequent failure of the machinery and equipment on which they are used. Incontrast to our bulk alloys, we sell Liquidmetal coatings primarily in the formof a wire or powder feedstock that is melted and applied to machinery orequipment through welding or thermal spray processes.

 

Our Liquidmetal coatingsare widely used in the oil drilling industry as a protective coating on drillpipe and casings, and we estimate that our coatings represent a dominant shareof annual worldwide sales of hard band coatings for new oil drill pipe.Drilling often places tremendous stress on pipes and casings, especiallywhenever the drill changes direction. Both the drill pipe and casing experienceexcessive wear, which leads to higher replacement costs and greater failurerates. Liquidmetal coatings are used to provide a protective coating, or hardband, around the outside of the drill pipe and the inside of casings to reducewear and failure rates and accordingly reduce operating costs.

 

Liquidmetal coatingshave also been sold into the power generation industry specifically for thepurpose of coating boiler tubes in coal-burning power plants in order to extendthe lives of these boilers. Boiler tubes are subject to high heat, erosion, andcorrosion and often require costly replacement, both in terms of replacementparts and length of downtime for installation. Additionally, residue build-upin boiler tubes of coal burning power plants creates operating inefficiencies.Historic performance and testing of Liquidmetal coatings have demonstrated thatour coatings extend the life of these boiler tubes meaningfully beyond theircurrent average life depending on the specific environment. In addition, ourcoatings have demonstrated the ability to reduce build-up of residue on boilertubes, helping to improve the efficiencies of the boilers. Historically, wehave not concentrated sales efforts on the boiler tube market in a substantialway. However, given the size of the market and potential opportunities for ourcoatings, we have recently dedicated greater effort to this area.

** **

**Going Concern /Liquidity**

 

We have experiencedsignificant cumulative operating losses since our inception. Our net income forthe fiscal year ended December 31, 2009 was $0.3 million while our netloss for the fiscal years ended December 31, 2008 and 2007 was $6.6million, and $5.6 million, respectively.  In the audit report on ourfinancial statements for our fiscal years ended December 31, 2009 and2008, our auditors included a going-concern qualification indicating that oursignificant operating losses and working capital deficit cause substantialdoubt about our ability to continue as a going concern. By issuing an opinionstating that there is substantial doubt about our ability to continue as agoing concern, our auditors have indicated that they are uncertain as towhether we have the capability to continue our operations without additionalfunding.

 

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On May 1, 2009, wecompleted a financing transaction (the “Transaction”) whereby aggregate cash of$2.5 million and principal and accrued interest of $20.6 million due under thepreviously issued 8% Convertible Subordinated Notes due January 2010 (the “PriorNotes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7.5 million of new 8% Senior Secured Convertible SubordinatedNotes due January 2011 (the “Exchange Notes”).  The Transaction was consummated pursuant to aSecurities Purchase and Exchange Agreement, dated May 1, 2009 (the “SecuritiesPurchase Agreement”), among the exchanging note holders and investors(collectively, the “Buyers”).  TheSecurities Purchase Agreement gives the Buyers option to subscribe for anadditional 1,000,000 shares of Series A-1 Preferred Stock at $5.00 pershare at any time prior to six months from the closing date (the “Series A-1Option”).  On August 5, 2010, werepaid in full all principal and interest on the Exchange Notes in the amountof $8.2 million, and all security interests on our assets securing suchobligations were released and terminated.

 

On October 30, 2009,we entered into an agreement with various investors to issue 180,000 shares ofconvertible Series A-1 Preferred Stock for $0.9 million of cash pursuantto the Series A-1 Option.

 

OnMay 28, 2010, we issued $2.0 million of 13% Subordinated Promissory Note (“January 2011Subordinated Note”) due on the earlier date of January 3, 2011 or the dateon which all outstanding amounts are due under the Company’s 8% January 2011Notes.  Following the due date, theinterest on the January 2011 Subordinated Note shall be 15%.  The January 2011 Subordinated Note maybe repaid in whole or in part at any time without penalty or premium, but issubordinate in right of payment to the January 2011 Notes and may not bepaid until after the January 2011 Notes are paid in full.  We may, at our sole discretion, elect to payall or any portion of the outstanding principal or accrued interest in cash orthe Company’s common stock or any combination thereof, at a value equal to thelower of $0.26 per share or the average market price per share for the 10previous trading days immediately prior to the date the payment is made. As acondition for the January 2011 Subordinated Note, Carlyle Liquid Holdings,LLC, a current stockholder of the Company granted the holder of the January 2011Subordinated Note a warrant to purchase up to 7,700,000 shares of the Company’scommon stock at a price equal to $0.26 per share, which warrant is exercisablefor a period of 90-days beginning on the date in which we repay the January 2011Subordinated Note in cash (if we repay in cash).  OnAugust 5, 2010, we repaid in full all principal and accrued interest of$2.0 million on the January 2011 Subordinated Note.  In connection with the repayment, on August 10,2010, we entered into a Subscription Agreement pursuant to which we issued7,870,307 shares of our common stock for an aggregate price of $2.0 million.

 

We have approximately$0.3 million of principal and accrued interest outstanding as of December 31,2009, under the 8% unsecured subordinated notes (the “Bridge Notes”), whichwere due August 17, 2007.  On August 5,2010, we repaid in full all principal and interest on the Bridge Notes in the amount of $0.3million.

 

We have $0.3 million of outstanding loan asof December 31, 2009 under a factoring, loan, and security agreement witha financing company.  In June 2009,we received a formal notice of default from the financing company for repaymentof the outstanding loan balance and entered into a settlement agreement withthe financing company whereby we agreed to repay approximately $0.1 millioneach month until the outstanding loans and accrued fees have been repaid.   As of December 31, 2009, we were unableto pay the $0.1 million monthly payments and were in discussions with thefinancing company to either extend or enter into another settlementagreement.  On August 5, 2010, we repaid in full allprincipal, interest and fees on the factoring loan in the amount of $0.3million and all securityinterests on our assets securing such obligation was released and terminated.

 

We have outstanding liens on assets by our SouthKorean subsidiary by various creditors for past-due trade payables totaling$1.3 million, of which $1.1 million is held by creditors in South Korea, as of December 31,2009.  We are currently working toresolve the matter with each creditor****by seeking aforbearance or compromise.  If we cannotrepay the amounts due or obtain a forbearance or compromise, the creditors mayseek to foreclose on the Company’s assets located in South Korea.  Such a foreclosure would have material adverseeffect on our operations, financial condition, and results of operations.

 

**Liquidmetal Golf**

 

From 1997 until September 2001,we were engaged in the retail marketing and sale of golf clubs through amajority owned subsidiary, Liquidmetal Golf. The retail business of LiquidmetalGolf was discontinued in September 2001. Although the retail golf clubbusiness has been discontinued, Liquidmetal Golf is engaged in the developmentof golf club components for golf original equipment manufacturers that willintegrate these components into their own clubs and then sell them under theirrespective brand names. Liquidmetal Technologies owns 79% of the outstandingcommon stock in Liquidmetal Golf.

 

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Our Liquidmetal Golfsubsidiary has the exclusive right and license to utilize our Liquidmetal alloytechnology for purposes of golf equipment applications. This right and licenseis set forth in an intercompany license agreement between LiquidmetalTechnologies and Liquidmetal Golf. This license agreement provides thatLiquidmetal Golf has a perpetual and exclusive license to use Liquidmetal alloytechnology for the purpose of manufacturing, marketing, and selling golf clubcomponents and other products used in the sport of golf. In consideration ofthis license, Liquidmetal Golf has issued 4,500,000 shares of Liquidmetal Golfcommon stock to Liquidmetal Technologies.

** **

**Our IntellectualProperty**

 

Our intellectualproperty consists of patents, trade secrets, know-how, and trademarks.Protection of our intellectual property is a strategic priority for ourbusiness, and we intend to vigorously protect our patents and otherintellectual property. Our intellectual property portfolio includes 50 owned orlicensed U.S. patents and numerous patent applications relating to thecomposition, processing, and application of our alloys, as well as various foreigncounterpart patents and patent applications.

 

Our initial bulkamorphous alloy technology was developed by researchers at the CaliforniaInstitute of Technology (“Caltech”). We have purchased patent rights thatprovide us with the exclusive right to commercialize the amorphous alloy andother amorphous alloy technology acquired from Caltech through a licenseagreement (“Caltech License Agreement”) with Caltech.  In addition to the patents and patentapplications that we license from Caltech, we are building a portfolio of ourown patents to expand and enhance our technology position. These patents andpatent applications primarily relate to various applications of our bulkamorphous alloys, the composition of our coatings and powders, and the processingof our alloys. The patents relating to our coatings expire on various datesuntil 2020 and the patents relating to our bulk amorphous alloys expire onvarious dates between 2013 and 2028. Our policy is to seek patent protectionfor all technology, inventions, and improvements that are of commercialimportance to the development of our business, except to the extent that webelieve it is advisable to maintain such technology or invention as a tradesecret.

 

In order to protect theconfidentiality of our technology, including trade secrets, know-how, and otherproprietary technical and business information, we require that all of ouremployees, consultants, advisors and collaborators enter into confidentiality agreementsthat prohibit the use or disclosure of information that is deemed confidential.The agreements also obligate our employees, consultants, advisors andcollaborators to assign to us developments, discoveries and inventions made bysuch persons in connection with their work with us.

** **

**Research andDevelopment**

 

Weare engaged in ongoing research and development programs that are driven by thefollowing key objectives:

 
| · | * * | *Enhance  Material Processing and Manufacturing Efficiencies.* We plan to  continue research and development of processes and compositions that will  decrease our cost of making products from Liquidmetal alloys.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
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| · | * * | *Optimize  Existing Alloys and Develop New Compositions.*We believe that the  primary technology driver of our business will continue to be our proprietary  alloy compositions. We plan to continue research and development on new alloy  compositions to generate a broader class of amorphous alloys with a wider  range of specialized performance characteristics. Since 2003, we have  successfully expanded our portfolio of bulk amorphous alloys to include  additional zirconium-titanium alloys, as well as alloys based on other  metals, such as gold and platinum.  Although these various compositions  are at different stages of development and only a few are currently suitable  for commercial use, we believe that a larger alloy portfolio will enable us  to increase the attractiveness of our alloys as an alternative to incumbent  materials and, in certain cases, drive down product costs.  We also  believe that our ability to optimize our existing alloy compositions will  enable us to better tailor our alloys to our customers’ specific application  requirements. |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | * * | *Develop  New Applications.* We will continue the research and development of  new applications for Liquidmetal alloys. We believe the range of potential  applications will broaden by expanding the forms, compositions, and methods  of processing of our alloys.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

We conduct our researchand development programs internally and also through strategic relationshipsthat we enter into with third parties. Our internal research and developmentefforts are conducted by a team of 10 scientists and engineers whom we eitheremploy directly or as a consultant.

 

In addition to ourinternal research and development efforts, we enter into cooperative researchand development relationships with leading academic institutions.  We haveentered into development relationships with other companies for the purpose ofidentifying new applications for our alloys and establishing customerrelationships with such companies. Some of our product development programs arepartially funded by our customers. We are also engaged in negotiations withother potential customers regarding possible product development relationships.Our research and development expenses for the years ended December 31,2009, 2008 and 2007, were $1.2 million, $1.0 million, and $1.1 million,respectively.

 

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**Manufacturing**

 

Wecurrently own and operate a 166,000 square foot manufacturing facility inPyongtaek, South Korea, which became operational in the third quarter of2002.  We believe that the facility will meet our anticipatedmanufacturing needs for the foreseeable future, although these needs may changedepending upon the actual and forecasted orders we receive for our products. Wecurrently intend to develop supplemental research and development, prototypingand manufacturing capabilities elsewhere, including the United States, forpurposes of meeting our long-term manufacturing needs and our customers’requirements.

 

InJune 2006, we entered into a joint venture agreement with SAGA, SpA inPadova, Italy, (“SAGA”) a specialist precision parts manufacturer. Thejoint venture is named Liquidmetal SAGA Italy, Srl (“LSI”), under which LSI iscurrently acting as a contract manufacturer to our company for the purpose ofproducing prototypes and certain products in Europe.

 

InJune 2007, we entered into a licensing agreement with Liquidmetal KoreaCo. Ltd (“LMK”), a South Korean company, for a 10-year exclusive license to manufacture Liquidmetal alloys forcustomers whose principal headquarters or major operations are based in SouthKorea.  Subsequent to December 31,2009, the licensing agreement with LMK was terminated on June 15, 2010.

 

**Raw Materials**

 

Liquidmetalalloy compositions are comprised of many elements, all of which are availablecommodity products. We believe that each of these raw materials is readilyavailable in sufficient quantities from multiple sources on commerciallyacceptable terms. However, any substantial increase in the price orinterruption in the supply of these materials could have an adverse effect onour profitability.

 

**Customers**

 

During2009, one customer, Liquidmetal Korea Co. Ltd. (“LMK”), accounted for more than10% of our revenues from continuing operations. During both of 2008 and 2007, two customers, Grant Prideco andLiquidmetal Korea, accounted for 10% or more of our revenues from continuingoperations. We expect that a significant portion of our revenue may continue tobe concentrated in a limited number of customers, even as our bulk Liquidmetalalloy business grows.

 

**Competition**

 

We are not aware of anyother company or business that manufactures, markets, distributes, or sellsbulk amorphous alloys or products made from bulk amorphous alloys. We believeit would be difficult to develop a competitive bulk amorphous alloy withoutinfringing our patents. However, our bulk Liquidmetal alloys face competitionfrom other materials, including metals, alloys, plastics and composites, whichare currently used in the commercial applications that we pursue. For example,we face significant competition from plastics and zinc in our electronicscomponents business, and titanium and composites will continue to be usedwidely in medical devices and sporting goods. Based on our experience with developingproducts for a variety of customers, we believe that the selection of materialsby potential customers will continue to be product-specific in nature, with thedecision for each product being driven primarily by the performance needs ofthe application and secondarily by cost considerations and design flexibility.Because of the relatively high strength of our alloys and the designflexibility of our process, we are most competitive when the customer isseeking a higher strength as well as greater design flexibility than currentlyavailable with other materials. However, if currently available materials, suchas plastics, are strong enough for the application, our alloys are often notcompetitive those applications with respect to price. We also believe that ouralloys are generally not competitive with the cost of some of the basic metals,such as steel, aluminum or copper, when such basic metals can be used inspecific applications, but our alloys are generally more competitive with priceon more exotic metals, such as titanium. Our alloys could also face competitionfrom new materials that may be developed in the future, including new materialsthat could render our alloys obsolete.

 

Our Liquidmetal alloycoatings face competition from industrial coatings currently manufactured orsold by other companies. At present, the primary competitors of our coatingsbusiness are Varco International, Inc. and Arnco Technology Trust,Limited. Although we believe, based on market data gathered by us, that ourcoatings compete favorably with these companies’ products and that we continueto maintain the dominant market share with respect to protective coatings foroil and gas drill pipe and casings, these competitors are largerwell-established businesses that have substantially greater financial,marketing, and other resources than we do.

 

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We will also experienceindirect competition from the competitors of our customers. Because we willrely on our customers to market and sell finished goods that incorporate ourcomponents or products, our success will depend in part on the ability of ourcustomers to effectively market and sell their own products and compete intheir respective markets.

** **

**Backlog**

 

In our bulk alloysegment, because of the minimal lead-time associated with orders of bulk alloyparts, we generally do not carry a significant backlog. In our coatingssegment, we typically ship our coating products shortly after receipt of anorder, and our coatings backlog is therefore also insignificant. In both ourbulk alloy segment and coatings segment, the backlog as of any particular dategives no indication of actual sales for any succeeding period.

 

**Sales andMarketing**

 

We direct our marketingefforts towards customers that will incorporate our components and productsinto their finished goods. To that end, we will continue to hire businessdevelopment personnel who, in conjunction with engineers and scientists, willactively identify potential customers that may be able to benefit from theintroduction of Liquidmetal alloys to their products. In some cases, we willdevelop applications in conjunction with existing or potential customers. Byadopting this strategy, we intend to take advantage of the sales and marketingforces and distribution channels of our customers to facilitate thecommercialization of our alloys.  We also direct business developmentefforts toward companies who we believe could be viable candidates forpotential partnering transactions, such as licensing relationships,distribution arrangements, joint ventures, and the like.

 

**Employees**

 

As of December 31,2009, we had 52 full-time and 2 part-time employees for a total of 54employees. As of that date, none of our employees were represented by a laborunion.  We have not experienced any work stoppages and we considerour employee relations to be favorable.

 

**GovernmentalRegulation**

 

Medical instruments incorporatingour Liquidmetal alloys will be subject to regulation in the United States bythe FDA and corresponding state and foreign regulatory agencies. Any orthopedicdevices that we develop will be regulated in a similar manner. Medical devicemanufacturers to whom we intend to sell our products may need to obtain FDAapproval before marketing their medical devices that incorporate our products.Medical device manufacturers may need to obtain similar approvals beforemarketing these medical device products in foreign countries.

 

Because we intend tosell our medical device products to medical device manufacturers, we do notbelieve that we will need to obtain FDA approval or similar foreign approvalsbefore selling products to medical device manufacturers.  Nonetheless, asa manufacturer of medical device components, we would be subject to qualitycontrol and record keeping requirements of FDA and other federal and statestatutes and regulations, as well as similar regulations in foreign countries.

 

The process ofobtaining and maintaining required FDA and foreign regulatory approvals formedical devices that incorporate our products could be lengthy, expensive, anduncertain for our customers. Additionally, regulatory agencies can delay orprevent product introductions. Generally, before a medical device manufacturercan market a product incorporating one of our products, our customer mustobtain for their finished product marketing clearance through a 510(k) premarketnotification or approval of a pre-market approval application, or PMA. The FDAwill typically grant a 510(k) clearance if the applicant can establishthat the device is substantially equivalent to a predicate device. It generallytakes a number of months from the date of a 510(k) submission to obtainclearance, but it may take longer, particularly if a clinical trial isrequired.

 

The FDA may find that a510(k) is not appropriate for a medical device that incorporates ourproduct or that substantial equivalence has not been shown and as a result willrequire a PMA. A PMA application must be submitted if a proposed medical devicedoes not qualify for a 510(k) pre-market clearance procedure. PMAapplications must be supported by valid scientific evidence to demonstrate thesafety and effectiveness of the device, typically including the results ofclinical trials, bench tests, and laboratory and animal studies. The PMAprocess can be expensive, uncertain and lengthy, requires detailed andcomprehensive data, and generally takes significantly longer than the 510(k) process.Additionally, the FDA may never approve the PMA.

 

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Similar regulations inforeign countries vary significantly from country to country and with respectto the nature of the particular medical device. The time required to obtainthese foreign approvals to market our products may be longer or shorter thanthat required in the United States, and requirements for such approval maydiffer from FDA requirements.

** **

**Environmental Law Compliance**

 

Ourmanufacturing operations are subject to national, state, and localenvironmental laws in each of South Korea and the United States. We believethat we are in material compliance with all applicable environmentalregulations. While we continue to incur costs to comply with environmentalregulations, we do not believe that such costs will have a material effect onour capital expenditures, earnings, or competitive position.

 

**Item 1A.Risk Factors**

 

This report containsforward-looking statements (within the meaning of the Private SecuritiesLitigation Reform Act of 1995) that are based on management’s currentexpectations, estimates, forecasts, and projections about the Company and itsbusiness. In addition, other written or oral statements which constituteforward-looking statements may be made from time to time by or on behalf ofLiquidmetal Technologies, Inc. Any statement in this report that is not astatement of historical fact is a forward-looking statement, and in some cases,words such as “believe,” “estimate,” “project,” “expect,” “intend,” “may,” “anticipate,”“plans,” “seeks,” and similar expressions identify forward-looking statements.Forward-looking statements involve risks and uncertainties that could causeactual outcomes and results to differ materially from the anticipated outcomesor result. These statements are not guarantees of future performance, and unduereliance should not be placed on these statements. Liquidmetal Technologies, Inc.undertakes no obligation to update publicly any forward-looking statements,whether as a result of new information, future events or otherwise.

 

Factors that could cause actualresults to differ materially from what is expressed or forecasted in ourforward-looking statements include, but are not limited to, the following:

 

**We have incurredsignificant operating losses in the past and may not be able to achieve orsustain profitability in the future.**

 

We have experienced significantcumulative operating losses since our inception.  Our net income for the fiscal year ended December 31,2009 was $0.3 million while our net loss for the fiscal years ended December 31,2008 and 2007 was $6.6 million and $5.6 million, respectively.  We had an accumulated deficit ofapproximately $162.8 million at December 31, 2009. Of this accumulateddeficit, $44.5 million was attributable to losses generated by our discontinuedequipment manufacturing and retail golf operations.  We anticipate that we may continue to incuroperating losses for the foreseeable future. Consequently, it is possible that we may never achieve positive earningsand, if we do achieve positive earnings, we may not be able to achieve them ona sustainable basis.

 

**Wehave a limited history of developing, manufacturing, and selling products madefrom our bulk amorphous alloys.**

 

We have marketed andsold industrial coatings to distributors in the coatings industry since 1987.Prior to the third quarter of 2002, our experience selling products made frombulk amorphous alloys has been limited to our discontinued retail golfbusiness, which had a different marketing strategy than the one we arecurrently employing.  Therefore, we have a relatively limited history of producingbulk amorphous alloy components and products on a mass-production basis. Furthermore, our ability to produce our products in desired quantities and atcommercially reasonable prices is uncertain and is dependent on a variety offactors that are outside of our control, including the nature and design of thecomponent, the customer’s specifications, and required delivery timelines.

** **

**Werely on assumptions about the markets for our products and components that, ifincorrect, may adversely affect our profitability.**

 

We have a relativelyshort history producing bulk amorphous alloy components on a mass-productionbasis. We have made assumptions regarding the market size for, and themanufacturing requirements of, our products and components based in part oninformation we received from third parties and also from our limited history.If these assumptions prove to be incorrect, we may not achieve anticipatedrevenue targets or profitability.

 

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**If wecannot establish and maintain relationships with customers that incorporate ourcomponents and products into their finished goods, we will not be able toincrease our revenue and commercialize our products.**

 

Our business is basedupon the commercialization of a new and unique materials technology. Ourability to increase our revenues will depend on our ability to successfullymaintain and establish relationships with customers who are willing toincorporate our proprietary alloys and technology into their finished products.However, we believe that the size of our company and the newness of ourtechnology and manufacturing process may continue to make it challenging to maintainand establish such relationships. In addition, we rely and will continue torely to a large extent on the manufacturing, research, and developmentcapabilities, as well as the marketing and distribution capabilities, of ourcustomers in order to commercialize our products. Our future growth and successwill depend in large part on our ability to enter into these relationships andthe subsequent success of these relationships. If our products are selected foruse in a customer’s products, we still may not realize significant revenue fromthat customer if that customer’s products are not commercially successful.

** **

**It maytake significant time and cost for us to develop new customer relationships,which may delay our ability to generate additional revenue or achieveprofitability.**

 

Our ability to generaterevenue from new customers is generally affected by the amount of time it takesfor us to, among other things:

 

·                  identify a potential customer and introduce thecustomer to Liquidmetal alloys;

 

·                  work with the customer to select and design the partsto be fabricated from Liquidmetal alloys;

 

·                  make the molds and tooling to be used to produce theselected part;

 

·                  make prototypes and samples for customer testing;

 

·                  work with our customers to test and analyze prototypesand samples; and

 

·                  with respect to some types of products, such asmedical devices, to obtain regulatory approval.

 

We currently do nothave a sufficient history of selling products made from our bulk amorphousalloys to predict accurately the length of our average sales cycle. We believethat our average sales cycle from the time we deliver an active proposal to acustomer until the time our customer fully integrates our bulk amorphous alloysinto its product could be a significant period of time. Our history to date hasdemonstrated that the sales cycle could extend significantly longer than weanticipate. The time it takes to transition a customer from limited productionto full-scale production runs will depend upon the nature of the processes andproducts into which our alloys are integrated.  Moreover, we have foundthat customers often proceed very cautiously and slowly before incorporating afundamentally new and unique type of material into their products.

** **

**Afterwe develop a customer relationship, it may take a significant amount of timefor that customer to develop, manufacture, and sell finished goods thatincorporate our components and products.**

 

Our experience hasshown that our customers will perform numerous tests and extensively evaluateour components and products before incorporating them into their finishedproducts. The time required for testing, evaluating, and designing our componentsand products into a customer’s products, and in some cases, obtainingregulatory approval, can take a significant amount of time, with an additionalperiod of time before a customer commences volume production of productsincorporating our components and products, if ever. Moreover, because of thislengthy development cycle, we may experience a delay between the time we accrueexpenses for research and development and sales and marketing efforts and thetime when we generate revenue, if any. We may incur substantial costs in anattempt to transition a customer from initial testing to prototype and fromprototype to final product. If we are unable to minimize these transitioncosts, or to recover the costs of these transitions from our customers, our operatingresults will be adversely affected.

 

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**Alimited number of our customers generate a significant portion of our revenue.**

 

For the near future, weexpect that a significant portion of our revenue will be concentrated in alimited number of customers. For example, for the years ended December 31,2009, 2008 and 2007, revenues from two customers, Grant Prideco and LiquidmetalKorea, represented approximately 39%, 19% and 22% respectively, of totalrevenues from continuing operations.  Areduction, delay, or cancellation of orders from one or more of these customersor the loss of one or more customer relationships could significantly reduceour revenue. Unless we establish long-term sales arrangements with thesecustomers, they will have the ability to reduce or discontinue their purchasesof our products on short notice.

** **

**Weexpect to rely on our customers to market and sell finished goods thatincorporate our products and components, a process over which we will havelittle control.**

 

Our future revenuegrowth and ultimate profitability will depend in part on the ability of ourcustomers to successfully market and sell their finished goods that incorporateour products. We will have little control over our customers’ marketing andsales efforts. These marketing and sales efforts may be unsuccessful forvarious reasons, any of which could hinder our ability to increase revenue orachieve profitability. For example, our customers may not have or devotesufficient resources to develop, market, and sell their finished goods thatincorporate our products. Because we typically will not have exclusive salesarrangements with our customers, they will not be precluded from exploring andadopting competing technologies. Also, products incorporating competingtechnologies may be more successful for reasons unrelated to the performance ofour customers’ products or the marketing efforts of our customers.

** **

**Ourgrowth depends on our ability to identify, develop, and commercialize newapplications for our technology.**

 

Our future growth andsuccess will depend in part on our ability to identify, develop, andcommercialize, either alone or in conjunction with our customers, newapplications and uses for Liquidmetal alloys. If we are unable to identify anddevelop new applications, we may be unable to develop new products or generateadditional revenue. Successful development of new applications for our productsmay require additional investment, including costs associated with research anddevelopment and the identification of new customers. In addition, difficultiesin developing and achieving market acceptance of new products would harm ourbusiness.

** **

**We maynot be able to effectively compete with current suppliers of incumbentmaterials or producers of competing products.**

 

The future growth andsuccess of our bulk amorphous alloy business will depend in part on our abilityto establish and retain a technological advantage over other materials for ourtargeted applications. For many of our targeted applications, we will competewith manufacturers of similar products that use different materials. Thesedifferent materials may include plastics, titanium alloys, or stainless steel,among others. For example, we have targeted the cellular phone component marketas an application for bulk Liquidmetal alloys. In this market, we believe wewill compete with other manufacturers of cellular phone components who useplastics or metal to construct their components. These other manufacturers maybe able to manufacture their cellular phone components, particularly those madefrom plastics, at significantly less cost than our alloys. In other markets, wewill compete directly with suppliers of the incumbent material. In addition, ineach of our targeted markets, our success will depend in part on the ability ofour customers to compete successfully in their respective markets. Thus, evenif we are successful in replacing an incumbent material in a finished product,we will remain subject to the risk that our customer will not competesuccessfully in its own market.

** **

**Ourbulk amorphous alloy technology is still at an early stage of commercializationrelative to many other materials.**

 

Our bulk amorphousalloy technology is a relatively new technology as compared to many othermaterial technologies, such as plastics and widely-used high-performancecrystalline alloys.  Historically, the successful commercialization of anew materials technology has required the persistent improvement and refiningof the technology over a sometimes lengthy period of time.  Accordingly,we believe that our company’s future success will be dependent on our abilityto continue expanding and improving our technology platform by, among otherthings, constantly refining and improving our manufacturing processes,optimizing our existing amorphous alloy compositions for various applications,and developing and improving new bulk amorphous alloy compositions.  Ourfailure to further expand our technology base could limit our growthopportunities and hamper our commercialization efforts.

 

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**Futureadvances in materials science could render Liquidmetal alloys obsolete.**

 

Academic institutionsand business enterprises frequently engage in the research and testing of newmaterials, including alloys and plastics. Advances in materials science couldlead to new materials that have a more favorable combination of performance,processing, and cost characteristics than our alloys. The future development ofany such new materials could render our alloys obsolete and unmarketable or mayimpair our ability to compete effectively.

** **

**Ourgrowth depends upon our ability to retain and attract a sufficient number ofqualified employees.**

 

Our business is basedupon the commercialization of a new and unique materials technology. Our futuregrowth and success will depend in part on our ability to retain key members ofour management and scientific staff, who are familiar with this technology andthe potential applications and markets for it. For example, as a result oftheir experience and knowledge of our alloy technology, we believe that ourfuture growth and success will depend in large part on the efforts of LarryBuffington, our former President and Chief Executive Officer. We do not have “keyman” or similar insurance on any of these individuals. If we lose theirservices or the services of other key personnel, our financial results orbusiness prospects may be harmed. Additionally, our future growth and successwill depend in part on our ability to attract, train, and retain scientificengineering, manufacturing, sales, marketing, and management personnel. Wecannot be certain that we will be able to attract and retain the personnelnecessary to manage our operations effectively. Competition for experiencedexecutives and scientists from numerous companies and academic and otherresearch institutions may limit our ability to hire or retain personnel onacceptable terms. In addition, many of the companies with which we compete forexperienced personnel have greater financial and other resources than we do.Moreover, the employment of non-citizens may be restricted by applicableimmigration laws.

** **

**We maynot be able to successfully identify, consummate, or integrate strategicpartnerships.**

 

As a part of ourbusiness strategy, we intend to pursue strategic partnering transactions thatprovide access to new technologies, products, markets, and manufacturingcapabilities. These transactions could include licensing agreements, jointventures, or even business combinations. We believe that these transactionswill be particularly important to our future growth and success due to the sizeand resources of our company and the newness of our technology. For example, wemay determine that we may need to license our technology to a larger manufacturerin order to penetrate a particular market. In addition, we may pursuetransactions that will give us access to new technologies that are useful inconnection with the composition, processing, or application of Liquidmetalalloys. We may not be able to successfully identify any potential strategicpartnerships. Even if we do identify one or more potentially beneficialstrategic partnering, we may not be able to consummate these transactions onfavorable terms or obtain the benefits we anticipate from such a transaction.

** **

**We mayencounter manufacturing problems or delays or may be unable to producehigh-quality products at acceptable costs.**

 

We have relativelylimited experience in manufacturing our products and may be required tomanufacture a range of products in high volumes while ensuring high quality andconsistency. Although we currently own and operate a 166,000 square feetmanufacturing facility in South Korea, we cannot guarantee that the facilitywill be able to produce the intended products with production yields, qualitycontrols, and production costs that provide us with acceptable margins orprofitability or satisfy the requirements of our customers.

** **

**Weexpect to derive a substantial portion of our revenue from sales outside theUnited States, and problems associated with international business operationscould affect our ability to manufacture and sell our products.**

 

We expect that we willcontinue to manufacture a substantial portion of our initial bulk Liquidmetalalloy products in our South Korean facility and derive a material portion ofour revenues from customers in South Korea and revenues from productsmanufactured by our licensing partner in China.  For our fiscal yearsended December 31, 2009, 2008 and 2007, approximately 31%, 5% and 27%, ofour revenues came from customers located in South Korea, respectively.  Asa result, our manufacturing operations and financial results are subject torisks of political instability, including the risk of conflict between NorthKorea and South Korea and tensions between the United States and North Korea.In addition, we anticipate that the trend of foreign customers accounting for asignificant portion of our total revenues may continue. Specifically, we expectto continue to derive a significant amount of revenue from sales to customerslocated in Asia. A downturn in the economies of Asian countries where ourproducts will be sold, particularly South Korea’s economy, could materiallyharm our business.

 

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Consequently, ouroperations and revenue likely will be subject to a number of risks associatedwith foreign commerce, including:

 

·                  staffing and managing our manufacturingfacility located in South Korea;

 

·               product or material transportation delays ordisruption, including the availability and costs of air and othertransportation between our South Korean facility and the United States;

 

·                  political and economic instability, includinginstability involving China and North Korea that may disrupt our operations inSouth Korea;

 

·                  potentially adverse tax consequences, which mayreduce the profitability of products manufactured overseas or sold to overseascustomers;

 

·                  burden of complying with complex foreign lawsand treaties, which could limit our ability to conduct our business ascontemplated in South Korea; and

 

·                  trade protection laws, policies, and measuresand other regulatory requirements affecting trade and investment that couldadversely affect the profitability of our South Korean Operations, includingloss or modification of exemptions for taxes and tariffs.

 

Moreover, customers maysell finished goods that incorporate our components and products outside of theUnited States, which exposes us indirectly to additional foreign commercerisks.

** **

**Asubstantial increase in the price or interruption in the supply of rawmaterials for our alloys could have an adverse effect on our profitability.**

 

Our proprietary alloycompositions are comprised of many elements, all of which are availablecommodity products. Although we believe that each of these raw materials iscurrently readily available in sufficient quantities from multiple sources oncommercially acceptable terms, if the prices of these materials substantiallyincrease or there is an interruption in the supply of these materials, suchincrease or interruption could adversely affect our profitability. For example,if the price of one of the elements included in our alloys substantiallyincreases, we may not be able to pass the price increase on to our customers.

** **

**Werely on our suppliers for mold making and manufacture of our bulk amorphousalloy parts.**

 

We have outsourced muchof our mold making and manufacturing of our bulk amorphous alloy parts.Therefore, our revenue growth is dependent on our ability to obtain sufficientmanufacturing capacity.  Our suppliers may allocate their limited capacityto fulfill the production requirements of other customers.  In the eventof a disruption of the operations of our suppliers, we may not have a secondarymanufacturing source immediately available. Such an event could causesignificant delays in shipments and may adversely affect our cost of goods soldand our results of operations.

** **

**Ourbusiness is subject to the potential adverse consequences of exchange ratefluctuations.**

 

We expect to conductbusiness in various foreign currencies and will be exposed to market risk fromchanges in foreign currency exchange rates and interest rates. Fluctuations inexchange rates between the U.S. dollar and such foreign currencies may have amaterial adverse effect on our business, results of operations, and financialcondition and could specifically result in foreign exchange gains and losses.The impact of future exchange rate fluctuations on our operations cannot beaccurately predicted. To the extent that the percentage of our non-U.S. dollarrevenue derived from international sales increases in the future, our exposureto risks associated with fluctuations in foreign exchange rates will increasefurther. Moreover, as a result of operating a manufacturing facility in SouthKorea, a substantial portion of our costs are and will continue to bedenominated in the South Korean won. Adverse changes in the exchange rates ofthe South Korean won to the U.S. dollar will affect our costs of goods sold andoperating margins and could result in exchange losses. The average foreignexchange rates for the years ended December 31, 2009, 2008 and 2007 were1,279, 1,103 and 935 South Korean Won to the U.S. dollar, respectively. Thefluctuations in the exchange rates resulted in foreign currency translationgain (loss) of $0.4 million, ($1.8) million and $0.2 million for the yearsended December 31, 2009, 2008 and 2007, respectively.

 

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**Ourinability to protect our licenses, patents, and proprietary rights in theUnited States and foreign countries could harm our business because thirdparties may take advantage of our research and development efforts.**

 

We have obtainedseveral patents relating to amorphous alloy technology, and we have otherrights to amorphous alloy patents through an exclusive license from theCalifornia Institute of Technology (“Caltech”).  Our success depends inpart on our ability to obtain and maintain patent and other proprietary rightprotection for our technologies and products in the United States and othercountries. If we are unable to obtain or maintain these protections, we may notbe able to prevent third parties from using our proprietary rights.Specifically, we must:

 

·                  protect and enforce our owned and licensed patents andintellectual property;

 

·                  exploit our patented technology (owned and licensed);and

 

·                  operate our business without infringing on theintellectual property rights of third parties.

 

Our licensed technologycomprises several issued United States patents covering the composition andmethod of manufacturing of the family of Liquidmetal alloys. We also holdseveral United States and corresponding foreign patents covering themanufacturing processes of Liquidmetal alloys and their use. The patents relatingto our coatings have various expiration dates until 2020, and those relating toour bulk amorphous alloys have expiration dates between 2013 and 2028. Wecontinue to hold other coatings related patents; however, if we are unable toprotect our proprietary rights prior to the expiration of these patents, we maylose the advantage we have established as being the first to market bulkamorphous alloy products. In addition, the laws of some foreign countries donot protect proprietary rights to the same extent as the laws of the UnitedStates, and we may encounter significant problems and costs in protecting ourproprietary rights in these foreign countries.

 

Patent law is stillevolving relative to the scope and enforceability of claims in the fields inwhich we operate. Our patent protection involves complex legal and technicalquestions. Our patents and those patents for which we have license rights maybe challenged, narrowed, invalidated, or circumvented. We may be able toprotect our proprietary rights from infringement by third parties only to theextent that our proprietary technologies are covered by valid and enforceablepatents or are effectively maintained as trade secrets. Furthermore, others mayindependently develop similar or alternative technologies or design around ourpatented technologies. Litigation or other proceedings to defend or enforce ourintellectual property rights could require us to spend significant time andmoney and could otherwise adversely affect our business.

** **

**Othercompanies may claim that we infringe their intellectual property rights, whichcould cause us to incur significant expenses or prevent us from selling ourproducts.**

 

Our success depends, inpart, on our ability to operate without infringing on valid, enforceable patentsor proprietary rights of third parties and not breaching any licenses that mayrelate to our technology and products. Future patents issued to third partiesmay contain claims that conflict with our patents and that compete with ourproducts and technologies, and third parties could assert infringement claimsagainst us. Any litigation or interference proceedings, regardless of theiroutcome, may be costly and may require significant time and attention of ourmanagement and technical personnel. Litigation or interference proceedingscould also force us to:

 

·                   stop or delay using our technology;

 

·                   stop or delay our customers from selling,manufacturing or using products that incorporate the challenged intellectualproperty;

 

·                   pay damages; or

 

·                   enter into licensing or royalty agreements thatmay be unavailable on acceptable terms.

** **

**Ourlevel of indebtedness reduces our financial flexibility and could impede ourability to operate.**

 

As of December 31,2009, our long-term debt was $14.1 million, net of debt discount of $3.2million, including the current portion of such debt.  Our long-term debt(including the current portion) includes the following:

 

·                  $4.7 million in principal outstanding under the 8%Senior Secured Convertible Notes due January 2011 (the “January 2011Notes”) issued in May 1, 2009;

 

·                  $1.4 million in principal outstanding under the BankMidwest term loan issued in July 2007;

 

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·                  $0.1 million in principal outstanding under the BankMidwest capital loans issued in August 2007 and October 2008;

 

·                  $7.6 million in principal outstanding under the C3Capital Partners Subordinated Promissory Notes due July 2012 issued in July 2007;and

 

·                  $0.3 million in principal outstanding under the 8%Unsecured Subordinated Notes issued in 2006 private placements.

 

As of December 31,2009, our short-term debt was $0.9 million.  Our short-term debt includedthe following:

 

·                  $0.3 million in outstanding advances received under afactoring, loan, and security agreement executed in April 2005, asamended, with a financing company;

 

·                  $0.3 million in outstanding advances received under arevolving loan from Bank Midwest issued in July 2007;

 

·                  $0.1 in outstanding advances received from John Kang,our former Chairman; and

 

·                  $0.2 in outstanding advances received from RicardoSalas, our Executive Vice President.

 

The $0.3 million inaggregate principal amount under the 8% Unsecured Subordinated Notes became duein August 2007, and $4.7 million in aggregate principal amount under our January 2011Notes is due on January 3, 2011.

 

Our level of debtaffects our operations in several important ways, including the following:

 

·                  a significant portion of our cash flow from operationsis likely to be dedicated to the payment of the principal of and interest onour indebtedness;

 

·                  we may be unable to refinance our indebtedness onterms acceptable to us or at all;

 

·                  our cash flow may be insufficient to meet our requiredprincipal and interest payments; and

 

·                  we may be unable to obtain additional loans as aresult of covenants and agreements with existing debt holders.

 

In addition, ourconvertible notes and related documents contain restrictive covenants pursuantto which we generally may not incur any indebtedness that would be senior to,or on the same rank as, the convertible notes with respect to payment orsecurity.  These covenants may curtailour ability to raise capital in the future or otherwise restrict our ability toenter into a transaction that we believe would be in the best interest of ourstockholders.

** **

**We arein default under various debt obligations.**

 

We have approximately$0.3 million of principal and accrued interest outstanding as of December 31,2009, under the 8% unsecured subordinated notes (“Bridge Notes”), which weredue August 17, 2007.  As of the date of this report, we did not havesufficient funds to repay the Bridge Notes and were in default under the BridgeNotes.  On August 5, 2010, we repaid in full all principal andinterest on the Bridge Notes in the amount of $0.3 million.

 

We have $0.3 million of outstanding loan asof December 31, 2009 under a factoring loan, and security agreement with afinancing company.  As of the date of this report, we did not havesufficient funds to repay the loan and were in default under this loan.  On August 5, 2010, we repaid in full allprincipal and interest on the factoring loan in the amount of $0.3 million and all security interests on our assetssecuring such obligation was released and terminated.

 

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**Evolvingregulation of corporate governance and public disclosure may result inadditional expenses and continuing uncertainty.**

 

Changing laws,regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations,are creating uncertainty for public companies. As a result of these new rules andthe size and limited resources of our company, we will incur additional costsassociated with our public company reporting requirements, and we may not beable to comply with some of these new rules. In addition, these new rules could make it more difficult or morecostly for us to obtain certain types of insurance, including director andofficer liability insurance, and this could make it difficult for us to attractand retain qualified persons to serve on our board of directors.

 

We are presentlyevaluating and monitoring developments with respect to new and proposed rules andcannot predict or estimate the amount of the additional costs we may incur orthe timing of such costs. These new or changed laws, regulations, and standardsare subject to varying interpretations, in many cases due to their lack ofspecificity, and as a result, their application in practice may evolve overtime as new guidance is provided by regulatory and governing bodies. This couldresult in continuing uncertainty regarding compliance matters and higher costsnecessitated by ongoing revisions to disclosure and governance practices.

 

We are committed tomaintaining high standards of corporate governance and public disclosure. As aresult, we intend to invest resources to comply with evolving laws,regulations, and standards, and this investment may result in increased generaland administrative expenses and a diversion of management time and attentionfrom revenue-generating activities to compliance activities. If our efforts tocomply with new or changed laws, regulations, and standards differ from theactivities intended by regulatory or governing bodies due to ambiguitiesrelated to practice, regulatory authorities may initiate legal proceedingsagainst us and we may be harmed.

** **

**Thetime and cost associated with complying with government regulations to which wecould become subject could have a material adverse effect on our business.**

 

Some of theapplications that we have identified or may identify in the future may besubject to government regulations. For example, any medical devices such asprecision ophthalmic instruments and orthopedic devices made from our alloyslikely will be subject to extensive government regulation in the United Statesby the Food and Drug Administration, or FDA. Any medical device manufacturersto whom we sell Liquidmetal alloy products may need to comply with FDArequirements, including premarket approval or clearance under Section 510(k) ofthe Food Drug and Cosmetic Act before marketing in the United StatesLiquidmetal alloy medical device products. These medical device manufacturersmay be required to obtain similar approvals before marketing these medicaldevices in foreign countries. Any medical device manufacturers with which wejointly develop and sell medical device products may not provide significantassistance to us in obtaining required regulatory approvals. The process ofobtaining and maintaining required FDA and foreign regulatory approvals couldbe lengthy, expensive, and uncertain. Additionally, regulatory agencies candelay or prevent product introductions. The failure to comply with applicableregulatory requirements can result in substantial fines, civil and criminalpenalties, stop sale orders, loss or denial of approvals, recalls of products,and product seizures.

 

In addition, theprocessing of beryllium, a minor constituent element of some of our alloys, canresult in the release of beryllium into the workplace and the environment andin the creation of beryllium oxide as a by-product. Beryllium is classified asa hazardous air pollutant, a toxic substance, a hazardous substance, and a probablehuman carcinogen under environmental, safety, and health laws, and variousacute and chronic health effects may result from exposure to beryllium. We arerequired to comply with certain regulatory requirements and to obtain a permitfrom the U.S. Environmental Protection Agency or other government agencies toprocess beryllium. Our failure to comply with present or future governmentalregulations related to the processing of beryllium could result in suspensionof manufacturing operations and substantial fines or criminal penalties.

 

To the extent that ourproducts have the potential for dual use, such as military and non-militaryapplications, they may be subject to import and export restrictions of the U.S.government, as well as other countries. The process of obtaining any requiredU.S. or foreign licenses or approvals could be time-consuming, costly, anduncertain. Failure to comply with import and export regulatory requirements canlead to substantial fines, civil and criminal penalties, and the loss ofgovernment contracting and export privileges.

** **

**Theexistence of minority stockholders in our Liquidmetal Coatings and LiquidmetalGolf subsidiaries creates potential for conflicts of interest.**

 

We directly own 69.25%of outstanding common membership units of Liquidmetal Coatings, LLC, oursubsidiary that has exclusive right over industrial coatings market and 79% ofthe outstanding capital stock of Liquidmetal Golf, our subsidiary that has theexclusive right to commercialize our technology in the golf market.  Theremaining 30.75% of Liquidmetal Coatings, LLC common membership units are ownedby 4 members and the remaining 21% of

 

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Liquidmetal Golf stockis owned by approximately 95 stockholders of record. As a result, conflicts ofinterest may develop between us and the minority members of LiquidmetalCoatings and stockholders of Liquidmetal Golf. To the extent that our officersand directors are also officers or directors of Liquidmetal Coatings andLiquidmetal Golf, matters may arise that place the fiduciary duties of theseindividuals in conflicting positions.

 

**Ourstock price has experienced volatility and may continue to experiencevolatility.**

 

During 2009, thehighest bid price for our common stock was $0.44 per share, while the lowestbid price during that period was $0.08 per share.  The trading price of our common stock couldcontinue to fluctuate widely due to:

 

·                  quarter-to-quarter variations in results ofoperations;

 

·                  loss of a major customer;

 

·                  announcements of technological innovations by us orour potential competitors;

 

·                  changes in, or our failure to meet, the expectationsof securities analysts;

 

·                  new products offered by us or our competitors;

 

·                  announcements of strategic relationships or strategicpartnerships; or

 

·                  other events or factors that may be beyond ourcontrol.

 

In addition, thesecurities markets in general have experienced extreme price and trading volumevolatility in the past. The trading prices of securities of many companies atour stage of growth have fluctuated broadly, often for reasons unrelated to theoperating performance of the specific companies. These general market and industryfactors may adversely affect the trading price of our common stock, regardlessof our actual operating performance.  Ifour stock price is volatile, we could face securities class action litigation,which could result in substantial costs and a diversion of management’sattention and resources and could cause our stock price to fall.

 

**Ourconvertible notes and warrants contain anti-dilution provisions that, iftriggered, could cause substantial dilution to our then-existing stockholders.**

 

Theconvertible notes issued in our May 1, 2009 financing transaction (“January 2011Notes”) contain “full-ratchet” anti-dilution rights.  As a result of these anti-dilution rights, ifwe issue or grant in the future any rights to purchase any of our common stock,or other security convertible into our common stock, for an effective per shareprice less than the conversion price then in effect, the conversion price ofall unconverted January 2011 Notes will be decreased to equal such lowerprice.  The foregoing adjustments to theconversion price of the January 2011 Notes will not apply to certainexempt issuances, including issuances pursuant to employee stock option plansand strategic transactions.

 

Inaddition to the above-described full-ratchet anti-dilution rights, warrantsissued under the January 2011 Notes and certain previously issued warrantscontain “weighted-average” anti-dilution provisions.  As of December 31, 2009, we had warrantsto purchase 59,928,242 shares at exercise prices ranging from $0.50 to $1.75 withweighted-average anti-dilution provisions.  Under these provisions, if we issue shares inthe future for consideration below the conversion or exercise prices then ineffect, then (with certain exceptions, including the issuance of stock options)the conversion price for our convertible notes would automatically be reduced(allowing the holders of the notes to receive additional shares of common stockupon conversion) and the exercise price of the warrants would automatically bereduced (with a corresponding increase in the number of shares issuablepursuant to such warrants).

 

Toillustrate the impact of these weighted-average anti-dilution provisions,because of the issuance of the January 2011 Notes in May 2009 and thereduction of the conversion price of certain previously issued warrants, theabove-described warrants outstanding as of December 31, 2009 includes anaggregate of 3,214,451 additional shares of our common stock that have becomeissuable as a result of the operation of these weighted-average anti-dilutionprovisions.  It is also possible that afuture triggering of the full-ratchet anti-dilution rights in our January 2010Notes could result in a corresponding triggering of the above-describedweighted-average anti-dilution provisions in the other notes and warrants.

 

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Ifour available funds and cash generated from operations are insufficient to satisfyour liquidity requirements in the future, then we may need to raise substantialadditional funds in the future to support our working capital requirements andfor other purposes. If shares of our common stock or securities convertibleinto or exercisable for our common stock are issued in consideration of suchfunds at an effective per share price lower than the conversion and exerciseprices of our convertible notes and warrants, then these anti-dilutionprovisions would be triggered, thus possibly causing substantial dilution toour then-existing stockholders if the notes are converted or the warrants areexercised. Further, subsequent sales of the shares in the public market coulddepress the market price of our stock by creating an excess in supply of sharesfor sale.

 

**Wehave never paid dividends on our common stock, and we do not anticipate payingany cash dividends in the foreseeable future.**

 

We have paid no cashdividends on our common stock to date. We currently intend to retain our futureearnings, if any, to fund the development and growth of our businesses, andupon the completion of this offering, we do not anticipate paying any cashdividends on our capital stock for the foreseeable future. In addition, theterms of existing or any future debts may preclude us from paying dividends onour stock. As a result, capital appreciation, if any, of our common stock willbe your sole source of gain for the foreseeable future.

 

**Antitakeoverprovisions of our certificate of incorporation and bylaws and provisions ofapplicable corporate law could delay or prevent a change of control that youmay favor.**

 

Provisions in ourcertificate of incorporation, our bylaws, and Delaware law could make it moredifficult for a third party to acquire us, even if doing so would be beneficialto our stockholders. These provisions could discourage potential takeoverattempts and could adversely affect the market price of our shares. Because ofthese provisions, you might not be able to receive a premium on your investment.These provisions:

 

·                  authorize our board of directors, without stockholderapproval, to issue up to 10,000,000 shares of “blank check” preferred stockthat could be issued by our board of directors to increase the number ofoutstanding shares and prevent a takeover attempt;

 

·                  limit stockholders’ ability to call a special meetingof our stockholders;

 

·                  provide for a classified board of directors; and

 

·                  establish advance notice requirements to nominatedirectors for election to our board of directors or to propose matters that canbe acted on by stockholders at stockholder meetings.

 

The provisionsdescribed above could delay or make more difficult transactions involving achange in control of us or our management.

 

**Item 1B. Unresolved Staff Comments**

 

None.

 

**Item 2. Properties**

 

Our principal executiveoffices and principal research and development offices are located in RanchoSanta Margarita, California and consist of approximately 15,000 square feet.This facility is occupied pursuant to a lease agreement that expires on April 20,2012.

 

In Kingwood, Texas, welease an office for our coatings business segment.  This facility, which is approximately 2,715square feet, is leased through December 31, 2012.

 

In Huntsville, Texas,we lease a warehouse for our coatings business segment.  This facility, which is approximately 4,500square feet, is leased through August 1, 2012.

 

In Dothan, Alabama, welease an application facility for our coatings business segment.  This facility, which is approximately 5,000square feet, is leased through June 30, 2010.

 

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Our principalprototyping and manufacturing facility is in Pyongtaek, South Korea, and consistsof approximately 166,000 square feet. We lease the land on which this facilityis located, although we own the buildings, fixtures, and all personal propertylocated on the land. The parcel of land consists of approximately four acresand is leased through 2022.

 

We currently expectthat the foregoing facilities will meet our anticipated internal manufacturing,research, warehousing, and administrative needs for the foreseeable future.

 

**Item 3.Legal Proceedings**

 

On August 6, 2010, SAGA, SpAin Padova, Italy, (“SAGA”) filed a litigation case against us claimingdamages of $3.2 million for payment on a loan and for breach of contract inconnection with the formation of LSI, a joint venture between us and SAGA.  We are in the process of responding to theclaim and working with SAGA to resolve the matter.

 

**Item 4.  Submission of Matters to a Vote of Security Holdings**

 

None.

 

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**PART II**

 

**Item 5. Market For Registrant’s Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities**

 

Our common stock is currently quoted on theOTC Bulletin Board under the symbol “LQMT.” On April 6, 2010, the last reported sales price of our common stockwas $0.10 per share.  As of April 6,2010, we had 267 record holders of our common stock.

 

The following table sets forth, on a pershare basis, the range of high and low bid information for the shares of ourcommon stock for each full quarterly period within the two most recent fiscalyears and any subsequent interim period for which financial statements areincluded.  These quotations reflectinter-dealer prices, without retail mark-up, mark-down or commission and maynot necessarily represent actual transactions.

 
| **2009**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| Fourth Quarter |       | $        | 0.21       |    | $          | 0.11 |   |
| Third Quarter  |       | $        | 0.22       |    | $          | 0.14 |   |
| Second Quarter |       | $        | 0.44       |    | $          | 0.16 |   |
| First Quarter  |       | $        | 0.30       |    | $          | 0.08 |   |

 
| **2008**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| Fourth Quarter |       | $        | 0.33       |    | $          | 0.06 |   |
| Third Quarter  |       | $        | 0.57       |    | $          | 0.20 |   |
| Second Quarter |       | $        | 0.75       |    | $          | 0.50 |   |
| First Quarter  |       | $        | 0.75       |    | $          | 0.53 |   |

 

Wehave never paid a cash dividend on our common stock. We do not anticipatepaying any cash dividends on our common stock in the foreseeable future, and weplan to retain our earnings to finance future growth.

 

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**Item 6. Selected Consolidated Financial Data**

 

Thefollowing table shows our selected consolidated financial data as of and forthe years ended December 31, 2005 through 2009.

 
| ** **                                                                                              | ** ** | **For the Years Ended December 31,**      | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                                                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                              | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ** **                                                                                              | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Consolidated Statement of  Operations Data:**                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue                                                                                                 |       | $                                                                  | 14,720     |   | $ | 22,083 |   | $ | 29,022 |   | $ | 27,669 |   | $ | 16,365 |   |
| Cost of sales                                                                                           |       | 9,097                                                              |       | 17,131 |   | 26,459 |   | 22,418 |   | 15,129 |   |
| Gross profit                                                                                            |       | 5,623                                                              |       | 4,952 |   | 2,563 |   | 5,251 |   | 1,236 |   |
|                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses                                                            |       | 6,740                                                              |       | 6,529 |   | 8,921 |   | 9,962 |   | 8,534 |   |
| Research and development expenses                                                                       |       | 1,173                                                              |       | 1,022 |   | 1,123 |   | 950 |   | 1,120 |   |
| Impairment of long-lived assets                                                                         |       | 1,381                                                              |       | 132 |   | — |   | — |   | 4,487 |   |
| Total operating expenses                                                                                |       | 9,294                                                              |       | 7,683 |   | 10,044 |   | 10,912 |   | 14,141 |   |
|                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss before interest, other income, income taxes, non-controlling  interest and discontinued operations |       | (3,671                                                             | )          | (2,731 | ) | (7,481 | ) | (5,661 | ) | (12,905 | ) |
| Loss from extinguishments of debt                                                                       |       | (1,471                                                             | )          | — |   | (648 | ) | — |   | (1,247 | ) |
| Change in value of warrants, gain                                                                       |       | 9,835                                                              |       | 1,890 |   | 4,923 |   | 279 |   | 3,985 |   |
| Change in value of conversion feature, gain (loss)                                                      |       | 1,827                                                              |       | 1,987 |   | 6,965 |   | (226 | ) | 9,118 |   |
| Other expense                                                                                           |       | (308                                                               | )          | (17 | ) | — |   | — |   | — |   |
| Other income                                                                                            |       | —                                                             |       | 429 |   | 226 |   | 572 |   | — |   |
| Interest expense                                                                                        |       | (5,862                                                             | )          | (7,712 | ) | (9,364 | ) | (9,509 | ) | (6,021 | ) |
| Interest income                                                                                         |       | —                                                             |       | 3 |   | 123 |   | 23 |   | 17 |   |
|                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Gain (loss) before income taxes, minority interest  and discontinued operations                         |       | 350                                                                |       | (6,151 | ) | (5,256 | ) | (14,522 | ) | (7,053 | ) |
| Income taxes                                                                                            |       | (168                                                               | )          | — |   | — |   | — |   | — |   |
|                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) before non-controlling interest                                                           |       | 182                                                                |       | (6,151 | ) | (5,256 | ) | (14,522 | ) | (7,053 | ) |
| Non-controlling interest                                                                                |       | 69                                                                 |       | (421 | ) | (384 | ) | — |   | — |   |
|                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                                                                |       | 251                                                                |       | (6,572 | ) | (5,640 | ) | (14,522 | ) | (7,053 | ) |
|                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                       |       | $                                                                  | 251        |   | $ | (6,572 | ) | $ | (5,640 | ) | $ | (14,522 | ) | $ | (7,053 | ) |
|                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) per share from continuing operations  - basic and diluted                                 |       | $                                                                  | 0.01       |   | $ | (0.15 | ) | $ | (0.13 | ) | $ | (0.33 | ) | $ | (0.17 | ) |
|                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) per share from continuing operations  - basic                                             |       | $                                                                  | 0.01       |   | $ | (0.15 | ) | $ | (0.13 | ) | $ | (0.33 | ) | $ | (0.17 | ) |
| Income (loss) per share from continuing operations  - diluted                                           |       | $                                                                  | 0.00       |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average common shares - basic                                                                  |       | 46,084                                                             |       | 44,735 |   | 44,730 |   | 43,809 |   | 41,833 |   |
| Weighted average common shares - diluted                                                                |       | 214,429                                                            |       | 44,735 |   | 44,730 |   | 43,809 |   | 41,833 |   |

 

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| ** **                                                  | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**               | ** ** |
|                                                        |       |                                  |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet Data:**                        |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                   |       | $                                     | 151        |   | $ | 157 |   | $ | 1,180 |   | $ | 144 |   | $ | 1,392 |   |
| Working capital (deficiency)                                |       | (13,084                               | )          | (20,755 | ) | (12,324 | ) | (23,157 | ) | (10,993 | ) |
| Total assets                                                |       | 10,440                                |       | 13,240 |   | 22,513 |   | 22,244 |   | 21,563 |   |
| Long-term debt, including current portion, net of  discount |       | 14,054                                |       | 22,693 |   | 20,724 |   | 14,705 |   | 6,776 |   |
| Shareholders’ equity (deficiency)                      |       | (18,367                               | )          | (20,380 | ) | (14,580 | ) | (10,363 | ) | (1,320 | ) |
|                                                             |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 7. Management’s Discussion and Analysis ofFinancial Condition andResults of Operations**

 

*This management’s discussion and analysis should be read inthe conjunction with the condensed consolidated financial statements and notesincluded elsewhere in this report on Form 10-K.*

 

*This management’s discussion and analysis, as well as othersections of this report on Form 10-K, may contain “forward-lookingstatements” that involve risks and uncertainties, including statementsregarding our plans, future events, objectives, expectations, forecasts, orassumptions. Any statement that is not a statement of historical fact is aforward-looking statement, and in some cases, words such as “believe,” “estimate,”“ project,” “expect,” “intend,” “may,” “anticipate,” “plans,” “seeks,” andsimilar expressions identify forward-looking statements. These statementsinvolve risks and uncertainties that could cause actual outcomes and results todiffer materially from the anticipated outcomes or results, and undue relianceshould not be placed on these statements. These risks and uncertaintiesinclude, but are not limited to, the matters discussed under the caption “RiskFactors” in Item 1A of this report and other risks and uncertaintiesdiscussed in filings made with the Securities and Exchange Commission (includingrisks described in subsequent reports on Form 10-Q, Form 10-K,Form 8-K, and other filings). Liquidmetal Technologies, Inc.disclaims any intention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events, orotherwise.*

 

**OVERVIEW**

 

We are a materials technology company thatdevelops and commercializes products made from amorphous alloys.  Our Liquidmetal® family of alloys consists ofa variety of proprietary coatings, powders, bulk alloys, and composites thatutilize the advantages offered by amorphous alloy technology. We develop,manufacture, and sell products and components from bulk amorphous alloys tocustomers in various industries, and we also partner with third-party licenseesto develop and commercialize bulk Liquidmetal alloy products. We believe thatour proprietary bulk alloys are the only commercially viable bulk amorphousalloys currently available in the marketplace. In addition to our bulk alloys, we market and sell a line of proprietaryamorphous alloy-based industrial coatings under the Liquidmetal ArmacorTM coatings brand.

 

Amorphous alloys are unique materials thatare distinguished by their ability to retain a random atomic structure whenthey solidify, in contrast to the crystalline atomic structure that forms inother metals and alloys when they solidify. Liquidmetal alloys possess acombination of performance, processing, and potential cost advantages that webelieve can make them preferable to other materials in a variety ofapplications. The amorphous atomic structure of our alloys enables them toovercome certain performance limitations caused by inherent weaknesses incrystalline atomic structures, thus facilitating performance and processingcharacteristics superior in many ways to those of their crystallinecounterparts. For example, our zirconium-titanium Liquidmetal alloys areapproximately 250% stronger than commonly used titanium alloys such asTi-6Al-4V, but they also have some of the beneficial processing characteristicsmore commonly associated with plastics. We believe these advantages couldresult in Liquidmetal alloys supplanting high-performance alloys, such astitanium and stainless steel, and other incumbent materials in a wide varietyof applications. Moreover, we believe these advantages could enable theintroduction of entirely new products and applications that are not possible orcommercially viable with other materials.

 

Our revenues arederived from two principal operating segments: Liquidmetal alloy industrialcoatings and bulk Liquidmetal alloy products.  Liquidmetal alloy industrial coatings are usedprimarily as a protective coating for industrial machinery and equipment, suchas drill pipe used by the oil drilling industry and boiler tubes used incoal-burning power plants. Bulk Liquidmetal alloy segment revenue includessales of parts or components of electronic devices, medical products, andsports and leisure goods; tooling and prototype parts (including demonstrationparts and test samples) for customers with products in development, productlicensing and arrangements, and research and development revenue relatingprimarily to defense and medical applications.  We expect that these sources of revenue willcontinue to significantly change the character of our revenue mix.

 

The cost of sales forour Liquidmetal coatings segment consists primarily of the costs of outsourcingour manufacturing to third parties. Consistent with our expectations, our costof sales has been increasing over historical results as we further build ourbulk Liquidmetal alloy business. Although we plan to continue outsourcing themanufacturing of our coatings, we will internally manufacture many productsderived from our bulk Liquidmetal alloys.

 

Selling, general, and administrativeexpenses currently consist primarily of salaries and related benefits,severance costs, travel, consulting and professional fees, depreciation andamortization, insurance, office and administrative expenses, and other expensesrelated to our operations.

 

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Research anddevelopment expenses represent salaries, related benefits expense, stock-basedcompensation, depreciation of research equipment, consulting and contractservices, expenses incurred for the design and testing of new processingmethods, expenses for the development of sample and prototype products, andother expenses related to the research and development of Liquidmetal alloys.Costs associated with research and development activities are expensed asincurred. We plan to enhance our competitive position by improving our existingtechnologies and developing advances in amorphous alloy technologies. Webelieve that our research and development efforts will focus on the discoveryof new alloy compositions, the development of improved processing technology,and the identification of new applications for our alloys.

 

Impairment ofLong-Lived Assets consists of a write-down of $1.4 million of our manufacturingfacility in Pyongtaek, South Korea. While we have actively marketed themanufacturing facility for ultimate sale, we were unable to sell this facilityand determined that the carrying value of the idle equipment exceeded its fairvalue in the amount of $1.4 million during the fourth quarter of fiscal year2009.

 

Change in Value ofWarrants consists of changes to the fair value of warrants outstanding at eachperiod.  The warrants have been accountedfor as a liability in accordance with Emerging Issues Task Force Issue No. 00-19,“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock,” with the change in fair values reported inearnings. The fair values are determined using a Black-Scholes pricing modeland fluctuations in our stock price have had the greatest impact on thevaluation of outstanding warrants.

 

Change in Value ofConversion Feature consists of changes to the fair value of the embeddedconversion feature of our senior convertible notes.  The embedded conversion feature has beenaccounted for as a separate derivative instrument in accordance with ASC 815with a change in fair values reported in earnings.  The change in fair values is determined usinga Black-Scholes pricing model and fluctuations in our stock price have had thegreatest impact on the valuation of outstanding conversion features.

 

On May 21, 2003,we completed a reincorporation by transitioning from a California corporationto a Delaware corporation. The reincorporation was effected through the mergerof the former California entity into a newly created wholly owned Delawaresubsidiary. The reincorporation changed the legal domicile of our company butdid not result in any change to our business, management, employees, fiscalyear, assets or liabilities, or location of facilities. As part of thereincorporation, each share of the California corporation was automaticallyconverted into one share of the Delaware corporation.  In addition, total authorized shares decreasedfrom 200,000,000 shares to 100,000,000 shares.

 

On June 26, 2006,we entered into a joint venture agreement with SAGA, SpA in Padova, Italy,(“SAGA”) a specialist precision parts manufacturer.  The joint venture is named Liquidmetal SAGAItaly, Srl (“LSI”).  We also entered intoan exclusive manufacturing license agreement for the eyewear industry with LSI. Under the joint venture agreement, wehave the option to buy ownership interest in LSI, initially, of 19.9% to up to50%.  In December 2006, we havepurchased 19.9% interest in the joint venture. In January 2007 and June 2007,we contributed additional $0.2 million and $0.1 million, respectively, into LSIas additional investment.  Thecontribution did not change our 19.9% interest in LSI.  Under the licensing agreement, at any timefollowing 18 months after the effective date of the agreement, LSI may exerciseits option to sell to us certain business assets including manufacturingequipment acquired under the joint venture. During the fourth quarter of the year ended December 31, 2009, wewrote-off its investment of $0.3 million in the joint venture due to slowerthan anticipated growth in the eyewear industry.  During the years ended December 31, 2009,2008 and 2007, we recognized revenues of $0, $0 and $0.1 million, respectively,of Liquidmetal alloys sold to SAGA for use in the joint venture.

 

On August 6, 2010, SAGA fileda litigation case against us claiming damages of $3.2 million for payment on aloan and for breach of contract in connection with the formation of LSI, ajoint venture between us and SAGA.  Weare in the process of responding to the claim and working with SAGA to resolvethe matter.

 

In a connection to anequipment purchase agreement entered into with Grace Metal, currentlyLiquidmetal Korea Co., Ltd. (“LMK”), a South Korean corporation, effectiveJune 1, 2007, we discontinued our post-processing operation in Weihai,China and transferred our manufacturing staff and equipment in Weihai to LMKunder an amendment to the equipment purchase agreement with LMK. Further, wetransferred certain of our manufacturing staff from our South Korean plant toLMK. LMK was formed by an investor group that includes the former director andofficer of our company, James Kang, who is also the brother of John Kang,former Chairman of the Board of our company.

 

On July 24, 2007,we transferred substantially all of the assets of our Liquidmetal alloyindustrial coatings business to a newly formed, newly capitalized subsidiarynamed Liquidmetal Coatings, LLC, a Delaware limited liability company (“LMC”),and LMC assumed substantially all of the liabilities of the coatings business.  The transfer included the thermal spraycoatings assets and liabilities acquired under a purchase agreement with FosterWheeler Energy Services in June 2007. We hold a 69.25% ownership interestin LMC. The results of operation of LMC are consolidated and comprise ourLiquidmetal alloy industrial coatings segment for financial reporting purposes.

 

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***Results of Operations***

 

***Comparison of the years ended December 31,2009 and 2008***

 

*Revenue.* Revenue decreased $7.4million to $14.7 million for the twelve months ended December 31, 2009from $22.1 million for the twelve months ended December 31, 2008. The decrease consisted of $2.7 million decrease in sales and prototypingof parts manufactured from bulk Liquidmetal alloys to consumer electronicscustomers as a result of increased reliance on our licensee to market and sellbulk Liquidmetal alloys, a decrease of $3.9 million from sales of our coatingproducts as a result of decrease in demand from oil drilling applications, anda decrease of $0.8 million from our research and development contracts.

 

*Cost of Sales.* Cost of sales decreased to$9.1 million, or 62% of revenue, for the twelve months ended December 31,2009 from $17.1 million, or 78% of revenue, for the twelve months ended December 31,2008.  The decreases were a result of acontinued change in revenue mix during the twelve months ended December 31,2009.  The cost to manufacture parts fromour bulk Liquidmetal alloys is variable and differs based on the unique designof each product.  However, the cost ofsales for the products sold by the coatings business segment is generallyconsistent because the Liquidmetal coatings products are produced by thirdparties and sold wholesale to various industries.

 

*Selling, General, and Administrative Expenses*. Selling,general, and administrative expenses increased to $6.7 million, or 46% ofrevenue, for the twelve months ended December 31, 2009 from $6.5 million,or 30% of revenue, for the twelve months ended December 31, 2008. Theincrease was primarily a result of an increase in bad debt expense of $1.3million offset by a decrease in salaries and related benefits expense of $0.4million, decrease in product warranty expense of $0.2 million, decrease inprofessional services expense of $0.2 million, decrease in travel expenses of$0.2 million and decrease in depreciation expense of $0.1 million.

 

*Research and Development Expenses*. Research anddevelopment expenses increased to $1.2 million, or 8% of revenue, for thetwelve months ended December 31, 2009 from $1.0 million, or 5% of revenue,for the twelve months ended December 31, 2008. The increase was primarilya result of an increase in salaries and related benefits expenses of $0.1million and increase in amortization expense of $0.1 million.  We continue to perform research anddevelopment of new Liquidmetal alloys and related processing capabilities,develop new manufacturing techniques, and contract with consultants to advancethe development of Liquidmetal alloys.

 

*Impairment of Long-Lived Assets*. Impairment oflong-lived assets was $1.4 million or 9% of revenue for the twelve months endedDecember 31, 2009 from a write-down of our manufacturing facility inPyongtaek, South Korea.  Impairment of long-livedassets was $0.1 million, or 1% of revenue, for the twelve months ended December 31,2008 from of a write-downof idle equipment held by our South Korean subsidiary, Liquidmetal TechnologiesCo., Ltd. While we have actively marketed our manufacturing facility andthe idle equipment for ultimate sale, we were unable to sell them anddetermined that their carrying value exceeded their fair value.

 

*Loss from Extinguishments of Debts*. Loss fromextinguishments of debt increased to $1.5 million, or 10% of revenue, for thetwelve months ended December 31, 2009 from $0 for the twelve months ended December 31,2008.  The $1.5 million loss wasrecognized from the extinguishment of certain of our convertible andsubordinated notes during the second quarter of 2009.

 

*Changein Value of Warrants.* Change in value of warrants increased to a gain of $9.8 million, or 67%of revenue, during the twelve months ended December 31, 2009 from a gainof $1.9 million, or 9% of revenue, during the twelve months ended December 31,2008.  The change in value of warrantsconsisted of warrants issued from convertible and subordinated notes fundedbetween 2004 and 2009 primarilyas a result of fluctuations in our stock price.

 

*Changein Value of Conversion Feature*.  Change in the value of our conversion featureliability resulted in gain of $1.8 million, or 12% of revenue, during thetwelve months ended December 31, 2009 from a gain of $2.0 million, or 9%of revenue, during the twelve months ended December 31, 2008 primarily asa result of fluctuation in our stock prices.

 

*Other Expense.*  Other expense increased to $0.3 million forthe twelve months ended December 31, 2009 from $17 thousand for the twelvemonths ended December 31, 2008, primarily from a write-down of our jointventure, Liquidmetal SAGA Italy, srl, with SAGA, SpA .

 

*Other Income.*  Other income was $0.4 million, or 2% ofrevenue, for the twelve months ended December 31, 2008, primarily fromgain $0.2 million recognized from deferred gain on sale of equipment from 2007and $0.2 million from write off accounts payables.  There was no other income for the twelve months ended December 31,2009.

 

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*Interest Expense*. Interest expense was $5.9million, or 40% of revenue, for the twelve months ended December 31, 2009and was $7.7 million, or 35% of revenue, for the twelve months ended December 31,2008.  Interest expense consistsprimarily of debt amortization and interest accrued on outstanding convertibleand subordinated notes, borrowings under a factoring, loan, and securityagreement, a revolving loan agreement, and the Kookmin loan.  The decrease was due to extinguishment ofcertain of our convertible and subordinated notes during the second quarter of2009.

 

*Interest Income.* Interest income was $3 thousand for the twelvemonths ended December 31, 2008 from interest earned on cash deposits.  There was no interest income for the twelvemonths ended December 31, 2009.

 

***Comparison of the years endedDecember 31, 2008 and 2007***

 

*Revenue.* Revenue decreased $6.9million to $22.1 million for the twelve months ended December 31, 2008from $29.0 million for the twelve months ended December 31, 2007. The decrease included $5.0 million decrease in sales and prototyping ofparts manufactured from bulk Liquidmetal alloys to consumer electronicscustomers as a result of increased reliance on licensees to manufacture andsell bulk Liquidmetal alloy parts and a decrease of $1.9 million from sales ofour coating products as a result of decrease in demand from oil drillingapplications.

 

*Cost of Sales.* Cost of sales decreased to$17.1 million, or 78% of revenue, for the twelve months ended December 31,2008 from $26.5 million, or 91% of revenue, for the twelve months ended December 31,2007.  The decreases were a result of achange in revenue mix during the twelve months ended December 31, 2008primarily from increased royalty revenues.  We also believe that higher manufacturingvolumes and greater mix of higher-margin products in the future will cause thegross profit to improve over time.  Thecost to manufacture parts from our bulk Liquidmetal alloys is variable anddiffers based on the unique design of each product.  However, the cost of sales for the productssold by the coatings business segment is generally consistent because theLiquidmetal coatings products are produced by third parties and sold wholesaleto various industries.

 

*Selling, General, and Administrative Expenses*. Selling,general, and administrative expenses decreased to $6.5 million, or 30% ofrevenue, for the twelve months ended December 31, 2008 from $8.9 million,or 31% of revenue, for the twelve months ended December 31, 2007. The decreasewas primarily a result of decrease in wages and expenses of $0.4 million,decrease in professional and consulting fees of $1.3 million, decrease in baddebt expense of $0.3 million, decrease in depreciation and amortization expenseof $0.1 million, and decrease in office and equipment rent expense of $0.1million.

 

*Research and Development Expenses*. Research anddevelopment expenses decreased to $1.0 million, or 5% of revenue, for thetwelve months ended December 31, 2008 from $1.1 million, or 4% of revenue,for the twelve months ended December 31, 2007. The decrease was primarilydue to decrease in wages and related expenses. We continue to perform research and development of new Liquidmetalalloys and related processing capabilities, develop new manufacturingtechniques, and contract with consultants to advance the development ofLiquidmetal alloys.

 

*Impairment of Long-Lived Assets*. Impairment oflong-lived assets was $0.1 million, or 1% of revenue, for the twelve monthsended December 31, 2008 from of a write-down of idle equipment held by our SouthKorean subsidiary, Liquidmetal Technologies Co., Ltd. While we have activelymarketed the idle equipment for ultimate sale since early 2004, we were unableto sell this equipment and determined that the carrying value of the idleequipment exceeded its fair value in the amount of $0.1 million during thefourth quarter of fiscal year 2008.  There was noimpairment of long-lived assets recognized during the twelve months ended December 31,2007.

 

*Loss from Extinguishments of Debts*. Loss fromextinguishments of debt decreased to $0 for the twelve months ended December 31,2008 from $0.6 million, or 2% of revenue, for the twelve months ended December 31,2007.  The $0.6 million loss wasrecognized from the extinguishment of certain of our convertible andsubordinated notes in 2007.

 

*Changein Value of Warrants.* Change in value of warrants decreased to a gain of $1.9 million, or 9%of revenue, during the twelve months ended December 31, 2008 from a gainof $4.9 million, or 17% of revenue, during the twelve months ended December 31,2007.  The change in value of warrantsconsisted of warrants issued from convertible notes and subordinated notesfunded between 2004 and 2007 primarilyas a result of fluctuations in our stock price.

 

*Changein Value of Conversion Feature*.  Change in the value of our conversion featureliability from our convertible notes funded between 2004 and 2007 resulted ingain of $2.0 million, or 9% of revenue, during the twelve months ended December 31,2008 from a gain of $7.0 million, or 24% of revenue, during the twelve monthsended December 31, 2007 primarily as a result of fluctuation in our stockprices.

 

*Other Expense.*  Other expense was $17 thousand for the twelvemonths ended December 31, 2008, primarily from loss on disposal ofassets.  There was no other expenserecognized for the twelve months ended December 31, 2007.

 

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*Other Income.*  Other income was $0.4 million, or 2% ofrevenue, for the twelve months ended December 31, 2008, primarily fromgain $0.2 million recognized from deferred gain on sale of equipment from 2007and $0.2 million from write off accounts payables.  Other income was $0.2 million, or 1% of revenue, for the twelve monthsended December 31, 2007, primarily from gain recognized from sale ofequipment.

 

*Interest Expense*. Interest expense was $7.7million, or 35% of revenue, for the twelve months ended December 31, 2008and was $9.4 million, or 32% of revenue, for the twelve months ended December 31,2007.  Interest expense consistsprimarily of debt amortization and interest accrued on outstanding convertibleand subordinated notes, borrowings under the April 2005 factoring, loan,and security agreement, the Kookmin loan, the Bank Midwest loans, and lateregistration and late filing fee penalties.

 

*Interest Income.* Interest income was $3 thousand for the twelvemonths ended December 31, 2008 and $0.1 million for the twelve monthsended December 31, 2007, from interest earned on cash deposits.

 

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**QUARTERLYRESULTS**

 

Thefollowing information presents our unaudited quarterly operating results for2009 and 2008. The data has been prepared by Liquidmetal Technologies, Inc.on a basis consistent with the Consolidated Financial Statements includedelsewhere in this Form 10-K, and includes all adjustments, consisting ofnormal recurring accruals, that we consider necessary for a fair presentationthereof. These operating results are not necessarily indicative of our futureperformance.

 
| ** **                                                          | ** ** | **For the Three Months Ended**                 | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Consolidated Statements of Operations Data:** | ** ** | **12/31/09**                                                       | ** ** | **09/30/09** | ** ** | **06/30/09** | ** ** | **03/31/09** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                                          | ** ** | **(Unaudited)**                                                    | ** ** |
| Revenue                                                             |       | $                                                                  | 3,400      |   | $ | 4,209 |   | $ | 3,519 |   | $ | 3,592 |   |
| Cost of sales                                                       |       | 2,152                                                              |       | 2,909 |   | 1,895 |   | 2,141 |   |
| Gross profit                                                        |       | 1,248                                                              |       | 1,300 |   | 1,624 |   | 1,451 |   |
|                                                                |       |                                                               |       |   |   |   |   |   |   |
| Operating expenses                                                  |       |                                                               |       |   |   |   |   |   |   |
| Selling, general, and administrative                                |       | 2,454                                                              |       | 1,341 |   | 1,357 |   | 1,588 |   |
| Research and development                                            |       | 276                                                                |       | 349 |   | 301 |   | 247 |   |
| Impairment of long-lived assets                                     |       | 1,381                                                              |       | — |   | — |   | — |   |
| Total operating expenses                                            |       | 4,111                                                              |       | 1,690 |   | 1,658 |   | 1,835 |   |
| Loss from operations                                                |       | (2,863                                                             | )          | (390 | ) | (34 | ) | (384 | ) |
|                                                                |       |                                                               |       |   |   |   |   |   |   |
| Loss from extingquishment of debt                                   |       | —                                                             |       | — |   | (1,471 | ) | — |   |
| Change in value of warrants, gain (loss)                            |       | 1,697                                                              |       | 2,015 |   | 6,249 |   | (126 | ) |
| Change in value of conversion feature, gain                         |       | 393                                                                |       | 474 |   | 930 |   | 30 |   |
| Other expense                                                       |       | (308                                                               | )          | — |   | — |   | — |   |
| Other income                                                        |       | —                                                             |       | — |   | — |   | — |   |
| Interest expense                                                    |       | (1,102                                                             | )          | (1,055 | ) | (1,415 | ) | (2,290 | ) |
| Interest income                                                     |       | —                                                             |       | — |   | — |   | — |   |
|                                                                |       |                                                               |       |   |   |   |   |   |   |
| (Loss) income before income taxes                                   |       | (2,183                                                             | )          | 1,044 |   | 4,259 |   | (2,770 | ) |
|                                                                |       |                                                               |       |   |   |   |   |   |   |
| Income Taxes                                                        |       | (48                                                                | )          | (75 | ) | (45 | ) |   |   |
|                                                                |       |                                                               |       |   |   |   |   |   |   |
| Net (loss) income                                                   |       | (2,231                                                             | )          | 969 |   | 4,214 |   | (2,770 | ) |
|                                                                |       |                                                               |       |   |   |   |   |   |   |
| Net loss (income) attributable to noncontrolling  interest          |       | 10                                                                 |       | 39 |   | 51 |   | (31 | ) |
|                                                                |       |                                                               |       |   |   |   |   |   |   |
| Net (loss) income attributable to Liquidmetal Technologies,  Inc.   |       | (2,221                                                             | )          | 1,008 |   | 4,265 |   | (2,801 | ) |
|                                                                |       |                                                               |       |   |   |   |   |   |   |
| Other comprhensive income (loss):                                   |       |                                                               |       |   |   |   |   |   |   |
| Foreign exhange translation gain (loss)                             |       | 98                                                                 |       | 393 |   | 336 |   | (413 | ) |
| Comprehensive (loss) income                                         |       | $                                                                  | (2,123     | ) | $ | 1,401 |   | $ | 4,601 |   | $ | (3,214 | ) |
|                                                                |       |                                                               |       |   |   |   |   |   |   |
| Net (loss) income per share basic and diluted:                      |       |                                                               |       |   |   |   |   |   |   |
| Net income (loss) attributable to Liquidmetal Technologies,  Inc.   |       | $                                                                  | (0.05      | ) | $ | 0.02 |   | $ | 0.09 |   | $ | (0.06 | ) |
|                                                                |       |                                                               |       |   |   |   |   |   |   |
| Number of weighted average shares - basic and  diluted              |       | 47,507                                                             |       | 46,595 |   | 45,408 |   | 44,825 |   |

 

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| ** **                                                                                                             | ** ** | **For the Three Months Ended**                 | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Consolidated Statements of Operations Data:**                                                    | ** ** | **12/31/08**                                                       | ** ** | **09/30/08** | ** ** | **06/30/08** | ** ** | **03/31/08** | ** ** |
| ** **                                                                                                             | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                                                                                             | ** ** | **(Unaudited)**                                                    | ** ** |
| Revenue                                                                                                                |       | $                                                                  | 4,605      |   | $ | 5,041 |   | $ | 5,669 |   | $ | 6,768 |   |
| Cost of sales                                                                                                          |       | 3,806                                                              |       | 3,791 |   | 4,633 |   | 4,901 |   |
| Gross profit                                                                                                           |       | 799                                                                |       | 1,250 |   | 1,036 |   | 1,867 |   |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Operating expenses                                                                                                     |       |                                                               |       |   |   |   |   |   |   |
| Selling, general, and administrative                                                                                   |       | 1,912                                                              |       | 1,417 |   | 1,326 |   | 1,874 |   |
| Research and development                                                                                               |       | 207                                                                |       | 279 |   | 278 |   | 258 |   |
| Impairment of long-lived assets                                                                                        |       | 132                                                                |       | — |   | — |   | — |   |
| Total operating expenses                                                                                               |       | 2,251                                                              |       | 1,696 |   | 1,604 |   | 2,132 |   |
| Loss from operations                                                                                                   |       | (1,452                                                             | )          | (446 | ) | (568 | ) | (265 | ) |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Change in value of warrants, (loss) gain                                                                               |       | (495                                                               | )          | 989 |   | 1,290 |   | 106 |   |
| Change in value of conversion feature, (loss) gain                                                                     |       | (117                                                               | )          | 642 |   | 1,240 |   | 222 |   |
| Other expense                                                                                                          |       | —                                                             |       | — |   | — |   | (17 | ) |
| Other income                                                                                                           |       | 182                                                                |       | — |   | 247 |   | — |   |
| Interest expense                                                                                                       |       | (2,432                                                             | )          | (1,860 | ) | (1,717 | ) | (1,703 | ) |
| Interest income                                                                                                        |       | —                                                             |       | — |   | 1 |   | 2 |   |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| (Loss) income before minority interests                                                                                |       | (4,314                                                             | )          | (675 | ) | 493 |   | (1,655 | ) |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Minority interests                                                                                                     |       | (80                                                                | )          | (115 | ) | (65 | ) | (161 | ) |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| (Loss) income from operations before income taxes                                                                      |       | (4,394                                                             | )          | (790 | ) | 428 |   | (1,816 | ) |
| Income taxes                                                                                                           |       | —                                                             |       | — |   | — |   | — |   |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Net (loss) income                                                                                                      |       | (4,394                                                             | )          | (790 | ) | 428 |   | (1,816 | ) |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Net (loss) income per share from continuing operations  - basic and diluted                                            |       | $                                                                  | (0.10      | ) | $ | (0.02 | ) | $ | 0.01 |   | $ | (0.04 | ) |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Weighted average common shares used to compute (loss)  income per share from continuing operations - basic and diluted |       | 44,759                                                             |       | 44,726 |   | 44,726 |   | 44,726 |   |

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

Since our inception, wehave funded our operations through the sale of equity securities in privateplacements and our initial public offering, the sale of convertible notes andwarrants in private placements, debt financing, and cash generated fromoperations.

 

Our cash (used in)provided by operating activities was ($3.4) million and $0.4 million for theyears ended December 31, 2009 and 2008, respectively.  Our working capital deficit decreased from$20.8 million at December 31, 2008 to $13.1 million at December 31,2009.  Our working capital deficitdecrease of $7.7 million was primarily attributable to a decrease in currentportion of long-term debt of $12.8 million, offset by a decrease in tradeaccount receivables, net, of $1.1 million, a decrease in prepaid expenses andother current assets of $0.4 million, an increase of accounts payable andaccrued expenses of $0.5 million and an increase in warrant liabilities of $3.3million.

 

Our cash used ininvesting activities was $0.5 million for the year ended December 31, 2009primarily from purchase of property and equipment and investments in patentsand trademarks.

 

Our cash provided byfinancing activities was $4.0 million for the year ended December 31,2009.  We paid net $29.0 million inborrowings from a factoring agreement executed in April 2005, a revolvingand term loan agreement executed in July 2007, and convertible andsubordinated notes, which were offset by $16.6 million proceeds from issuanceof convertible subordinated notes, $16.2 million proceeds from issuance ofconvertible preferred stocks and $0.2 million of contribution to noncontrollinginterest.

 

On May 1, 2009, wecompleted a financing transaction (the “Transaction”) whereby aggregate cash of$2.5 million and principal and accrued interest of $20.6 million due under thepreviously issued 8% Convertible Subordinated Notes due January 2010 (the “PriorNotes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares of Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7.5 million of new 8% Senior Secured Convertible SubordinatedNotes due January 2011 (the “Exchange Notes”). Of the $2.5 millionaggregate cash purchase price, approximately $0.1 million remains outstandingand is included prepaid expenses and other current assets in the condensedconsolidated balance sheet as of December 31, 2009.  The Transaction was consummated pursuant to aSecurities Purchase and Exchange Agreement, dated May 1, 2009 (the “SecuritiesPurchase Agreement”), among the exchanging note holders and investors(collectively, the “Buyers”).  TheSecurities Purchase Agreement gives the Buyers option to subscribe for anadditional 1,000,000 shares of Series A-1 Preferred Stock at $5.00 pershare at any time prior to six months from the closing date (the “Series A-1Option”).  On November 1, 2009, theCompany issued $0.4 million of additional Exchange Notes for accrued interestdue under the notes in lieu of cash payment.

 

The Exchange Notes aredue January 3, 2011 and bear annual interest rate of 8% with interestpayable in October and April in cash or, at our company’s option, inthe form of additional notes (in which case the interest rate will be10%).  The preferred stocks accruecumulative dividends at an annual rate of 8%, which is payable semi-annually.Beginning on the second anniversary of the initial issuance, the dividend willincrease to 10%.  As of December 31,2009, we have accrued dividends of $0.7 million included in accounts payableand other accrued expenses.  Thedividends are payable in cash or in kind by the issuance of the company ofadditional preferred stock, only when and as declared by our Board ofDirectors.  On August 5, 2010, werepaid in full all principal and interest on the Exchange Notes in the amountof $8.2 million and all security interests on our assets securing suchobligations were released and terminated.

 

The Series A-1Preferred Stock, Series A-2 Preferred Stock, and Exchange Notes areconvertible into the company’s common stock at conversion price of $0.10,$0.22, and $0.60 per common share, respectively.  We issued warrants to purchase 3,125,007shares and 42,329,407 shares of our company’s common stock at an exercise of$0.60 and $0.50 per share to the buyers of the Exchange Notes and preferredstocks, respectively.  The warrants willexpire in January 2012.  Theconversion prices and the number of common stock issuable under the preferredstocks, Exchange Notes and warrants are subject to adjustments foranti-dilution purposes.

 

On October 30,2009, we entered into an agreement with various investors to issue 180,000shares of convertible Series A-1 Preferred Stock for $0.9 million of cashpursuant to the Series A-1 Option. Further, we issued warrants to purchase 2,500,000 shares of common stockat an exercise price of $0.50 per share with an expiration date of January 3,2012.

 

On May 28, 2010,we issued $2.0 million of 13% Subordinated Promissory Note (“January 2011Subordinated Note”) due on the earlier date of January 3, 2011 or the dateon which all outstanding amounts are due under the Company’s 8% January 2011Notes.  Following the due date, theinterest on the January 2011 Subordinated Note shall be 15%.  The January 2011 Subordinated Note maybe repaid in whole or in part at any time without penalty or premium, but issubordinate in right of payment to the January 2011 Notes and may not bepaid until after the January 2011 Notes are paid in full.  We may, at our sole discretion, elect to payall or any portion of the outstanding principal or accrued interest in cash orthe Company’s common stock or any combination thereof, at a value equal to thelower of $0.26 per share or the average market price per share for the 10previous trading days immediately prior to the date the payment is made. As acondition for the January 2011 Subordinated Note, 

 

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Carlyle LiquidHoldings, LLC, a current stockholder of the Company granted the holder of the January 2011Subordinated Note a warrant to purchase up to 7,700,000 shares of the Company’scommon stock at a price equal to $0.26 per share, which warrant is exercisablefor a period of 90-days beginning on the date in which we repay the January 2011Subordinated Note in cash (if we repay in cash).  On August 5, 2010, we repaid in full allprincipal and interest on the January 2011 Subordinated Notes in theamount of $2.0 million.  In connection with the repayment, on August 10, 2010,we entered into a Subscription Agreement pursuant to which the Company issued7,870,307 shares of the Company’s common stock for an aggregate price of $2.0million.

 

Our capitalrequirements during the next twelve months will depend on numerousfactors, including the success of existing products either in manufacturing ordevelopment, the development of new applications for Liquidmetal alloys, theresources we devote to develop and support our Liquidmetal alloy products, thesuccess of pursuing strategic licensing and funded product developmentrelationships with external partners.

 

We have experiencedsignificant cumulative operating losses since our inception. Our net income forthe fiscal year ended December 31, 2009 was $0.3 million, while our netloss for the fiscal years ended December 31, 2008 and 2007 was $6.6million and $5.6 million, respectively.  In the audit report on our financialstatements for our fiscal years ended December 31, 2008 our auditorsincluded a going-concern qualification indicating that our significantoperating losses and working capital deficit cause substantial doubt about ourability to continue as a going concern.

 

Wehave approximately $0.3 million of principal and accrued interest outstanding asof December 31, 2009, under the 8% unsecured subordinated notes (the “BridgeNotes”), which were due August 17, 2007. On August 5,2010, we repaid in full all principal and interest on the Bridge Notes in the amount of $0.3million.

 

Wehave $0.3 million of outstanding loan as of December 31, 2009 under afactoring, loan, and security agreement with a financing company.  In June 2009, the Company received aformal notice of default from the financing company for repayment of theoutstanding loan balance and has entered into a settlement agreement with thefinancing company whereby it agreed to repay approximately $0.1 million eachmonth until the outstanding loans and accrued fees have been repaid.   Asof December 31, 2009, we were unable to pay the $0.1 million monthlypayments and were in discussions with the financing company to either extend orenter into another settlement agreement. On August 5, 2010, we repaid in full all principal, interest and feeson the factoring loan in the amount of $0.3 million and all security interests on our assetssecuring such obligation was released and terminated.

 

We have outstanding liens on assets by our SouthKorean subsidiary by various creditors for past-due trade payables totaling$1.3 million, of which $1.1 million is held by creditors in South Korea, as of December 31,2009.  We are currently working toresolve the matter with each creditor****by seeking aforbearance or compromise.  If we cannotrepay the amounts due or obtain a forbearance or compromise, the creditors mayseek to foreclose on the Company’s assets located in South Korea.  Such a foreclosure would have materialadverse effect on our operations, financial condition, and results ofoperations.

 

**Initial PublicOffering Proceeds**

 

Pursuantto our Registration Statement on Form S-1 (Registration No. 333-73716),as amended, initially filed with the Securities and Exchange Commission onNovember 20, 2001 and declared effective May 21, 2002, we closed aninitial public offering of 5,000,000 shares of common stock on May 28,2002, plus an additional 229,000 shares on June 10, 2002 pursuant to anover allotment option, at a price of $15.00 per share (which sale is referredto herein as the “Offering”). The Offering generated aggregate cash proceedsduring the second quarter 2002 of $78.4 million. The net proceeds were$70.7 million after deducting underwriting commissions of $5.5 million andother transaction fees of $2.2 million. As of December 31, 2003, weused $70.7 million of net proceeds from the Offering.

 

**Private Placements of Convertible Notes and Bridge Notes**

 

The following privateplacement of convertible notes and bridge notes are outstanding as of December 31,2009.

 

On May 17, 2006, September 21,2006, and December 1, 2006, we completed a private placement of 8%Unsecured Subordinated Notes in the aggregate principal amount of $4.6 million(the “Bridge Notes”), together with warrants to purchase up to an aggregate of973,064 shares of our common stock.  TheBridge Notes were unsecured and were scheduled to become due on the earlier of August 17,2007 or the consummation of a follow-on equity or debt offering pursuant towhich we receive gross proceeds of at least $6.0 million, but in no event willthe Bridge Notes become due any earlier than the payment in full of thepreviously issued promissory notes, including 7% Senior Secured Notes Due August 2007(the “August 2007 Notes”) and 6% Senior Secured Notes Due July 2007(the “July 2007 Notes”).  As a partof the private placement of the Bridge Notes, we issued warrants to thepurchasers of the Bridge Notes giving them the right to purchase up to anaggregate of 890,990 shares of our common stock, and warrants to purchase82,074 shares of our common stock were issued to the placement agent in thetransaction. The warrants have an exercise price of $2.58 per share and willexpire on May 17, 2011.

 

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On May 1, 2009, wecompleted a financing transaction (the “Transaction”) whereby aggregate cash of$2.5 million and principal and accrued interest of $20.6 million due under thepreviously issued 8% Convertible Subordinated Notes due January 2010 (the “PriorNotes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7.5 million of new 8% Senior Secured Convertible SubordinatedNotes due January 3, 2011 (the “January 2011 Notes”).  The Transaction was consummated pursuant to aSecurities Purchase and Exchange Agreement, dated May 1, 2009 (the “SecuritiesPurchase Agreement”), among the exchanging note holders and investors(collectively, the “Buyers”).  TheSecurities Purchase Agreement gives the Buyers option to subscribe for anadditional 1,000,000 shares of Series A-1 Preferred Stock at $5.00 pershare at any time prior to six months from the closing date (the “Series A-1Option”).

 

The January 2011Notes are convertible at any time at the option of the holder into shares ofour common stock at a conversion price of $0.60 per share, subject toadjustment for stock splits, stock dividends, and the like.  The January 2011 Notes bear annualinterest rate of 8% with interest payable in October and April incash or, at our option, in the form of additional notes (in which case theinterest rate will be 10%).  Thepreferred stocks accrue cumulative dividends at an annual rate of 8%, which ispayable semi-annually. Beginning on the second anniversary of the initialissuance, the dividend will increase to 10%. As of December 31, 2009, wehave accrued dividends of $0.7 million included in accounts payable and other accruedexpenses.  The dividends are payable incash or in kind by the issuance of the company of additional preferred stock,only when and as declared by our Board of Directors.  On August 5, 2010, we repaid in full allprincipal and interest on the Exchange Notes in the amount of $8.2 million andall security interests on our assets securing such obligations were releasedand terminated.

 

The Series A-1Preferred Stock and Series A-2 Preferred Stock are convertible into thecompany’s common stock at conversion price of $0.10 and $0.22 per common share,respectively.  As part of theTransaction, we issued warrants to purchase 3,125,007 shares and 42,329,407shares of our company’s common stock at an exercise of $0.60 and $0.50 pershare to the buyers of the January 2011 Notes and preferred stocks,respectively.  The warrants will expirein January 2012.  The conversionprices and the number of common stock issuable under the preferred stocks,Exchange Notes and warrants are subject to adjustments for anti-dilutionpurposes.

 

In connection with theTransaction, the Company and the Buyers entered into a Registration RightsAgreement under which the Company is required, upon the written request of theholders of more than fifty percent (50%) of the securities underlying the January 2011Notes, warrants, and preferred stocks, after 180 days of the closing of the Transaction, to file a registrationstatement with the SEC covering the resale of the shares of Company’s commonstock issuable pursuant to the January 2011 Notes, the warrants and thepreferred stocks and to use its best efforts to have the registration declaredeffective at the earliest date (but in no event later than 60 days after filingif there is no SEC review of the registration statement, or 120 days if thereis an SEC review).  The Company may berequired to pay liquidated damages as set forth in the Registration RightsAgreement, if the registration statement is not filed or does not becomeeffective on a timely basis.

 

On October 30,2009, we entered into an agreement with various investors, to issue 180,000shares of convertible Series A-1 Preferred Stock for $0.9 million of cashpursuant to the Series A-1 Option. Further, we issued warrants to purchase 2,500,000 shares of common stockat an exercise price of $0.50 per share with an expiration date of January 3,2012.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

An off-balance sheetarrangement is any transaction, agreement or other contractual arrangementinvolving an unconsolidated entity under which a company has (1) madeguarantees, (2) a retained or a contingent interest in transferred assets,(3) an obligation under derivative instruments classified as equity, or (4) anyobligation arising out of a material variable interest in an unconsolidatedentity that provides financing, liquidity, market risk or credit risk supportto our company, or that engages in leasing, hedging, or research anddevelopment arrangements with our company.

 

On June 26, 2006,we entered into a joint venture agreement with SAGA, SpA in Padova, Italy,(“SAGA”) a specialist precision parts manufacturer.  The joint venture is named Liquidmetal SAGAItaly, Srl (“LSI”).  We also entered intoan exclusive manufacturing license agreement for the eyewear industry with LSI. Under the joint venture agreement, wehave the option to buy ownership interest in LSI, initially, of 19.9% to up to50%.  In December 2006, we purchaseda 19.9% interest in the joint venture.  During the years ended December 31, 2009,2008 and 2007, we recognized revenues of $0, $0 and $0.1 million, respectively,of Liquidmetal alloys sold to SAGA for use in the joint venture.  Duringthe fourth quarter of the year ended December 31, 2009, the Companywrote-off its investment of $0.3 million in the joint venture due to slowerthan anticipated growth in the eyewear industry.

 

On August 6, 2010, SAGA fileda litigation case against us claiming damages of $3.2 million for payment on aloan and for breach of contract in connection with the formation of LSI.  We are in the process of responding to theclaim and working with SAGA to resolve the matter.

 

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**CONTRACTUAL OBLIGATIONS**

 

Thefollowing table summarizes our company’s obligations and commitments as of December 31,2009:

 
| ** **                                      | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual  Cash Obligations**               | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5 Years** | ** ** |
|                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt (2)                              |       | $                                         | 8,137      |   | $ | 259 |   | $ | 7,878 |   | $ | — |   | $ | — |   |
| Long-term debt of majority owned subsidiary (2) |       | 16,353                                    |       | 1,134 |   | 7,997 |   | 13 |   | — |   |
| Short-term debt (3)                             |       | 589                                       |       | 589 |   | — |   | — |   | — |   |
| Short-term debt of consolidated subsidiary      |       | 307                                       |       | 307 |   | — |   | — |   | — |   |
| Interest payments (4)                           |       | 4,455                                     |       | 1,785 |   | 1,723 |   | 947 |   | — |   |
| Operating leases and rents                      |       | 855                                       |       | 365 |   | 490 |   | — |   | — |   |
| Foster Wheeler                                  |       | 53                                        |       | 53 |   | — |   | — |   | — |   |
| Dongyang                                        |       | 9                                         |       | 9 |   | — |   | — |   | — |   |
| Nichimen                                        |       | 315                                       |       | 315 |   | — |   | — |   | — |   |
| Totals (1)                                      |       | $                                         | 31,073     |   | $ | 4,816 |   | $ | 18,088 |   | $ | 960 |   | $ | — |   |

 

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(1) Contractual cash obligations includeLong-term debt comprised of $259 of Unsecured Subordinated Notes issued in 2006and $7,878 of Convertible Unsecured Notes originally issued in 2009; Long-termdebt of consolidated subsidiary comprised of $1,430 of Bank Midwest Term Loan,$7,613 of C3 Capital Partners Subordinated Notes, and $102 of Bank MidwestPromissory Notes; Short-term debt comprised of $284 outstanding advancesreceived under factoring, loan, and security agreement, $130 of outstandingadvances from John Kang, our former Chairman and $175 of outstanding advancesfrom Ricardo Salas, our Executive Vice President; Short-term debt ofconsolidated subsidiary comprised of $307 of Bank Midwest revolving loan;future minimum lease payments under capital and operating leases; purchasecommitments from consultants; payments due from assets purchased from FosterWheeler thermal spray coatings business; payments due from our discontinuedequipment manufacturing business; and minimum payments due under a distributionagreement.

(2) Does not include accrued and scheduledinterest payments of $3,509; and un-amortized cash discount and discounts forconversion feature and warrants of $3,227 of our convertible notes.

(3) Does not include minimum interest and feepayments of $30.

(4) Interest payments include accrued andscheduled payments due on long-term debt and long-term debt of consolidatedsubsidiary with annual interest rates between 7.43% to 14.00%.  Interest payments also include estimatedinterest on short-term debt and short-term debt of majority owned subsidiarywith annual interest rates between 8.48% to 10.00% with expected maturity ofapproximately 1 year.

** **

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires us to makeestimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. These estimates and assumptions are based onhistorical experience and various other factors that are believed to bereasonable under the circumstances. Actual results could differ materially fromthese estimates under different assumptions or conditions.

 

Webelieve that the following accounting policies are the most critical to ourconsolidated financial statements since these policies require significantjudgment or involve complex estimates that are important to the portrayal ofour financial condition and operating results:

 
|   | · | Our  earnings and cash flows are subject to fluctuations due to changes in  non-U.S. currency exchange rates. We are exposed to non-U.S. exchange rate  fluctuations as the financial results of non-U.S. subsidiary in Korea are  translated into U.S. dollars. As exchange rates vary, those results, when  translated, may vary from expectations and adversely impact overall expected  profitability. The cumulative translation effects for subsidiaries using  functional currencies other than the U.S. dollar are included in accumulated  foreign exchange translation in stockholders’ equity. Movements in non-U.S.  currency exchange rates may affect our competitive position, as exchange rate  changes may affect business practices and/or pricing strategies of non-U.S.  based competitors. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | We  record an accrual for potential product warranty costs. Due to the lack of  historical information for warranty expense related to bulk alloy products,  management estimates product warranties as a percentage of bulk alloy product  sales earned during the period. In the event in future periods the actual  product warranty costs consistently exceed the estimate for product warranty  costs, an adjustment would be made and income would decrease in the period of  such determination. Likewise, in the event we determine that actual product  warranty costs are consistently lower than the estimate for product warranty  costs, an adjustment would be made and income would increase in the period of  such determination.                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | · | We  record an allowance for doubtful accounts as a contra-asset to our trade  receivables for estimated uncollectible accounts. Management estimates the  amount of potentially uncollectible accounts by reviewing significantly past  due customer balances relative to historical information available for those  customers. In the event, in future periods, actual uncollectible accounts  exceed the estimate for uncollectible accounts, an adjustment would be made  and income would decrease in the period of such determination. Likewise, in  the event, in future periods, actual uncollectible accounts are lower than  the estimate for uncollectible accounts, an adjustment would be made and  income would increase in the period of such determination. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | · | We  value inventories at lower of cost or net realizable value. Management has  determined net realizable value to be equal to the selling price of the  products to be produced and sold less the cost of disposal. In the event, in  future periods, the actual selling prices exceed the estimate for selling  prices less cost to sell, an adjustment would be made and income would  increase in the period of such determination. Likewise, in the event, in  future periods, actual selling prices are lower than the estimate for selling  prices, an adjustment would be made and income would decrease in the period  of such determination.                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | · | We  value our assets at lower of cost or fair market value. Management has  determined fair market to be equal to the selling price of the assets to be  sold less the cost of disposal. In the event, in future periods, actual  selling prices are lower than the estimate for selling prices, an adjustment  would be made and income would decrease in the period of such determination.                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | · | We  record valuation allowances to reduce the deferred tax assets to the amounts  estimated to be realized. While we consider taxable income in assessing the  need for a valuation allowance, in the event we determine we would be able to  realize our deferred tax assets in the future in excess of the net recorded  amount, an adjustment would be made and income increased in the period of  such determination. Likewise, in the event we determine we would not be able  to realize all or part of our deferred tax assets in the future, an  adjustment would be made and charged to income in the period of such  determination.                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | · | We  account for the warrants and the embedded conversion feature of our senior  convertible notes as derivatives in accordance with Statement of Financial  Accounting Standards No. 133, Accounting for Derivative Instruments  and Hedging Activities, and Emerging Issues Task Force Issue No. 00-19,  Accounting for Derivative Financial Instruments Indexed to, and Potentially  Settled in, a Company’s Own Stock. Fair values of warrants and embedded  conversion features are measured at each period end using Black-Scholes  pricing models and changes in fair value during the period are reported in  our earnings                                                                                                                       |

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

InDecember 2007, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 160, Noncontrolling Interests in Consolidated FinancialStatements, an amendment of ARB No. 51 (“SFAS 160”). This statementestablishes accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. Minority interestswill be recharacterized as noncontrolling interests and classified as acomponent of shareholders’ equity separate from the parent’s equity. Inaddition, SFAS 160 establishes reporting requirements that provide sufficientdisclosures that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners. This statement iseffective prospectively, except for certain retrospective disclosurerequirements, for fiscal years beginning after December 15, 2008.Accordingly, we will adopt SFAS 160 in 2009. The presentation and disclosurerequirements of this standard must be applied retrospectively for all periodspresented and will impact how we present and disclose noncontrolling interestsand income from noncontrolling interests in our company’s consolidatedfinancial statements.

 

InApril 2008, the FASB issued FASB Staff Position No. 142-3, “Determinationof the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwill andOther Intangible Assets.” The intent of FSP 142-3 is to improve theconsistency between the useful life of a recognized intangible asset underSFAS 142 and

 

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theperiod of expected cash flows used to measure the fair value of an asset underSFAS 141(R) and other U.S. generally accepted accounting principlesFSP 142-3 applies to intangible assets that are acquired individually or with agroup of other assets acquired in business combinations and asset acquisitions.FSP 142-3 also requires expanded disclosure related to the determination ofintangible asset useful lives. FSP 142-3 is effective for fiscal yearsbeginning after December 15, 2008. We have adopted SFP 142-3 as of January 1, 2009

 

In May 2008, the FASBissued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May BeSettled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB14-1”) which clarifies that convertible debt instruments that may be settledin cash or other assets upon conversion are not addressed by APB No. 14, “Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants.”Additionally, FSP APB 14-1 requires an entity to separately account for theliability and equity components of a convertible instrument to reflect anentity’s nonconvertible debt borrowing rate when interest cost is recognized insubsequent periods. FSP APB 14-1 also expands the disclosure requirementsregarding convertible debt instrument terms and how the instrument is reflectedin an entity’s financial statements. FSP APB 14-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years. We have adopted APB 14-1 as of January 1,2009.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy ofGenerally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 isintended to improve financial reporting by identifying a consistent framework,or hierarchy, for selecting accounting principles to be used in preparingfinancial statements that are presented in conformity with U.S. generallyaccepted accounting principles for nongovernmental entities. SFAS 162 willbecome effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board Auditing amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples.” We have adopted SFAS 162 as of January 1, 2009.

 

InJune 2008, the FASB ratified the consensus reached on EITF Issue No. 07-5,“Determining Whether an Instrument (or Embedded Feature) Is Indexed to anEntity’s Own Stock” (“EITF 07-05”). EITF 07-5 clarifies the determination ofwhether an instrument (or an embedded feature) is indexed to an entity’s ownstock, which would qualify as a scope exception under SFAS 133, Accounting forDerivative Instruments and Hedging Activities. EITF 07-5 is effective forfinancial statements issued for fiscal years beginning after December 15,2008. Early adoption for an existing instrument is not permitted. We haveadopted EITF 07-5 as of January 1, 2009.

 

InJune 2008, FASB issued EITF Issue No. 08-4, “Transition Guidance forConforming Changes to Issue No. 98-5” (“EITF 08-4”). The objective of EITF08-4 is to provide transition guidance for conforming changes made to EITF98-5, “Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Ratios”, that result from EITF00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”,and FAS 150, “Accounting for Certain Financial Instruments with Characteristicsof both Liabilities and Equity”. This Issue is effective for financialstatements issued for fiscal years ending after December 15, 2008. Earlyapplication is permitted. We have adopted EITF 08-4 as of January 1, 2009.

 

InApril 2009, the FASB issued FASB Staff Position No. 141(R)-1, “Accountingfor Assets Acquired and Liabilities Assumed in a Business Combination ThatArise from Contingencies” (“FSP 141(R)-1”), which amends SFAS No. 141(Revised 2007), “Business Combinations” (“SFAS 141(R)”). FSP 141(R)-1 appliesto all assets acquired and liabilities assumed in a business combination thatarise from contingencies that would be within the scope of SFAS No. 5,Accounting for Contingencies, if not acquired or assumed in a businesscombination, except for assets or liabilities arising from contingencies thatare subject to specific guidance in SFAS 141(R). The provisions of FSP 141(R)-1that amend SFAS 141(R) are effective for the first annual reporting periodbeginning on or after December 15, 2008. We adopted FSP 141(R)-1 on January 1,2009, and the impact of this guidance will depend upon the nature, terms, andsize of the acquisitions we consummate.

 

InApril 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”),which amends SFAS No. 115, Accounting for Certain Investments in Debt andEquity Securities, and SFAS No. 124, Accounting for Certain InvestmentsHeld by Not-for-Profit Organizations. This FSP amends the other-than-temporaryguidance in U.S. GAAP for debt securities to make the guidance more operationaland to improve the presentation and disclosure of other-than-temporary impairmentson debt and equity securities. The provisions of FSP FAS 115-2 and FAS 124-2that amend SFAS 115 and SFAS 124 are effective for interim and annual reportingperiods ending after June 15, 2009. The implementation of this FSP is notexpected to affect our consolidated results of operations or financialcondition.

 

InJune 2009, the FASB issued SFAS 166, “Accounting for Transfers ofFinancial Assets,” which will be effective for us on January 1,2010.  SFAS 166 removes the concept of a qualifying special-purposeentity (QSPE) from SFAS 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishment of Liabilities”, and removes theexception from applying FASB Interpretation 46R, “Consolidation of VariableInterest Entities”. This statement also clarifies the requirements forisolation and limitations on portions of financial assets that are eligible forsale accounting. We are currently evaluating the impact of adopting thisstandard on the consolidated financial statements.

 

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InJune 2009, the FASB issued SFAS 167, “Amendments to FASBInterpretation No. 46R,” which will be effective for us on January 1,2010. SFAS 167 requires an analysis to determine whether a variable interestgives the entity a controlling financial interest in a variable interestentity. This statement requires an ongoing reassessment and eliminates thequantitative approach previously required for determining whether an entity isthe primary beneficiary. We do not expect a material effect from the adoptionof this standard on our consolidated financial statements.

 

InJune 2009, the FASB issued SFAS 168, “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles — areplacement of FASB Statement No. 162,” which was effective for us on September 30,2009.  SFAS 168’s objective is to establish the FASB AccountingStandards Codification as the source of authoritative non-governmentalaccounting principles to be applied in the preparation of financial statementsin conformity with US GAAP. Although SFAS 168 does not change GAAP, theadoption of SFAS 168 will impact the Company’s consolidated financialstatements since all future references to authoritative accounting literaturewill be in accordance with SFAS 168.

 

InAugust 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, *Fair Value Measurements and Disclosures (Topic 820)*-*Measuring Liabilities at Fair Value*.ASU 2009-05 provides clarification that in**circumstancesin which a quoted price in an active market for the identical liability is notavailable, a reporting entity**isrequired to measure fair value of such liability using one or more of thetechniques prescribed by the update. The**adoptionof this guidance is not expected to have a material impact on the Company’sconsolidated financial statements.

 

Otherrecent accounting pronouncements issued by the FASB (including its EmergingIssues Task Force), the AICPA and the SEC did not or are not believed bymanagement to have a material impact on our company’s present or futureconsolidated financial statements.

 

 

**Item 7A.Quantitative and Qualitative Disclosures About Market Risks**

 

We are exposed to various marketrisks in conducting the business of the company, and we anticipate that thisexposure will increase as a result of our planned growth. In an effort tomitigate losses associated with these risks, we may at times enter intoderivative financial instruments, although we have not historically done so.These may take the form of forward sales contracts, option contracts, foreigncurrency exchange contracts, and interest rate swaps. We have not, and do notintend to, engage in the practice of trading derivative securities for profit.

 

*Interest Rates.*We are exposed to market risks relating to changes ininterest rates.  Although we do notcurrently have any borrowings with variable interest rates, fluctuations in interestrates may have a negative impact to any future borrowings.

 

*Commodity Prices.*We are exposed to price riskrelated to anticipated purchases of certain commodities used as raw materialsby our businesses, including titanium and zirconium. Although we do notcurrently enter into commodity future, forward, and option contracts to managethe fluctuations in prices of anticipated purchases, we may enter into suchcontacts in the future as our business grows and as our purchases of these rawmaterials increases.

 

*Foreign ExchangeRates.*As a result of ourmanufacturing presence in South Korea, a substantial portion of our costs willbe denominated in South Korean won. Consequently, fluctuations in the exchangerates of the South Korean won to the U.S. dollar will affect our costs of goodssold and operating margins and could result in exchange losses. Although we donot currently enter into foreign exchange hedge transactions, we may do so inthe future as our business grows. Fluctuations in exchange rates resulted inforeign currency translation (loss) gains of $0.4 million, ($1.8) million and$0.2 million for the years ended December 31, 2009, 2008 and 2007,respectively.

 

**Item 8.Financial Statements and Supplementary Data**

 

The financial statements requiredby this item are located in Consolidated Financial Statements in Item 15 ofthis report. The supplementary financial information required by this item islocated under the caption “QUARTERLY RESULTS” in Item 7 of this report.

 

**Item 9.Changes in and Disagreements with Accountants on Accounting and FinancialDisclosures**

 

None.

 

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**Item 9A(T).Controls and Procedures**

 

Evaluation of Disclosure Controlsand Procedures.  Basedon an evaluation of our disclosure controls and procedures (as defined inRule 13a-15(e) under the Exchange Act) as of December 31, 2009,the end of the period covered by this report, our Chief Executive Officer(Principal Executive officer) and Chief Financial Officer (Principal FinancialOfficer) have concluded that our disclosure controls and procedures wereeffective.

 

Changes in Internal Controls.  During the quarter ended December 31,2009, there was no change in our internal controls over financial reporting (asdefined in Rule 13a-15(f) under the Exchange Act) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

Management’s Report on InternalControl over Financial Reporting.  Thecompany’s management is responsible for establishing and maintaining adequateinternal control over financial reporting. Internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsin accordance with generally accepted accounting principles and includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the company’s assets, (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat the company’s receipts and expenditures are being made only in accordancewith authorizations of the company’s management and directors, and(3) provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use, or disposition of the company’s assets thatcould have a material effect on the financial statements.

 

As required by Section 404 ofthe Sarbanes-Oxley Act of 2002 and the related rule of the SEC, managementassessed the effectiveness of the company’s internal control over financialreporting using the Internal Control-Integrated Framework developed by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

Based on this assessment,management concluded that the company’s internal control over financialreporting was effective as of December 31, 2009. Management has notidentified any material weaknesses in the company’s internal control overfinancial reporting as of December 31, 2009.

 

This annual report does not includean attestation report of the Company’s registered public accounting firmregarding internal control over financial reporting. Management’s report wasnot subject to attestation by the Company’s registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the Company to provide only management’s report in this annual report.

** **

**Item 9B. Other Information**

 

None.

 

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**PART III**

 

**Item 10.Directors and Executive Officers of the Registrant**

 

Setforth below is a table identifying our directors and executive officers as of April6, 2010:

 
| **Name**          | ** ** | **Age** | ** ** | **Position**                                  |
|-------------------|------------|---------|------------|-----------------------------------------------|
|              |       |    |       |                                          |
| Larry  Buffington |       | 63      |       | Former  President and Chief Executive Officer |
|              |       |    |       |                                          |
| Tony  Chung       |       | 40      |       | Chief  Financial Officer                      |
|              |       |    |       |                                          |
| Ricardo  Salas    |       | 46      |       | Executive  Vice-President                     |
|              |       |    |       |                                          |
| Abdi  Mahamedi    |       | 48      |       | Chairman  of the Board                        |
|              |       |    |       |                                          |
| Martin  Weinstein |       | 75      |       | Vice  Chairman of the Board                   |
|              |       |    |       |                                          |
| Robert  Biehl     |       | 64      |       | Director                                      |
|              |       |    |       |                                          |
| Iraj  Azarm       |       | 70      |       | Director                                      |

 

*LarryBuffington* was elected by our Board of Directors to serve asthe President and Chief Executive Officer in October 2006.  Mr. Buffington has been serving as full-timeconsultant to the Company since July 2006. He is also the president of Buffington Consulting, a consulting firmthat Mr. Buffington started in 1997 focusing on the assessment and turnaroundof manufacturing operations.  Prior tostarting Buffington Consulting, Mr. Buffington was the General Manager of theCommunications Products Business Unit of Augat, Inc., a public company withworldwide manufacturing operations in communication, automotive and electronicproducts.  Mr. Buffington received abachelor’s degree in Industrial Engineering from Pennsylvania State Universityin 1969.  On August 5, 2010, Mr. Buffingtonceased to serve as the Company’s President and Chief Executive Officer,although Mr. Buffington will continue to serve as the Chief Executive Officerof the our majority-owned Liquidmetal Coatings subsidiary.

 

*TonyChung* was elected by our Board of Directors to serve as the Chief FinancialOfficer in December 2008.  Mr. Chung mostrecently served as Chief Financial Officer at BETEK Corporation, a real estateand investment subsidiary of SK Engineering and Construction, and as ChiefFinancial Officer of Solarcity, a company providing advanced solar technologyand installation services.  Mr. Chung isa Certified Public Accountant and served eight years at KPMG as an Audit andConsulting Manager for several large multinational companies.  He received his B.S. degree in BusinessAdministration from University of California Berkeley’s Haas School of Businessin 1992.  Mr. Chung is also an Attorneyat Law and received his J. D. degree from Pacific Coast University School ofLaw in 2006.

 

*RicardoSalas* began serving as our Executive Vice President on December 1, 2008.  He previously served as our Chief ExecutiveOfficer and President from December 30, 2005 through October 8, 2006.  Mr. Salas also served as a Board member of theCompany from April 1995 to May 2003.  From January 2000 through June 2005, Mr. Salasserved as Chief Executive Officer of iLIANT Corporation, an informationtechnology and outsourcing service firm in the health care industry.  He currently serves as a director ofVillageEDOCS, a technology company providing software-as-a-service to thefinancial services, healthcare and various industries.  Mr. Salas received a B.A. degree in Economicsfrom Harvard College in 1986.

 

*AbdiMahamedi* has served as a director since May 2009 and becameChairman of the Board in March 2010. Since 1987, Mr. Mahamedi has served as the President and Chief ExecutiveOfficer of Carlyle Development Group of Companies (“CDG”), which develops andmanages residential and commercial properties in the United States on behalf ofinvestors worldwide.  At CDG, Mr. Mahamedievaluates and supervises all of the investment activities and management personnel. Prior to joining CDG, Mr. Mahamedifounded Emanuel Land Company, a subsidiary of Emanuel & Company, a WallStreet investment banking firm, and served as a managing director for EmanuelLand Company from 1986 to 1987.  In 1983,Mr. Mahamedi received his B.S.E. degree in Civil and Structural Engineeringfrom the University of Pennsylvania, and in 1984 he received his M.S.E. degreein Civil and Structural Engineering from the University of Pennsylvania.

 

*MartinWeinstein* has served as Vice-Chairman since March 2010.  Dr. Weinstein served as the Chairman andChief Executive Officer of Sequa Corporation, New York, and Chairman ofChromalloy Gas Turbine Corporation, San Antonio, Texas. Chromalloy Gas TurbineCorporation, with sales of approximately $1.3 billion and six thousandemployees worldwide, is the world’s largest supplier of advanced metallurgicaland manufacturing services to the global gas turbine and jet engineindustry.  He was also a foundingstockholder of Tyco Labs, which then became Tyco Corporation, where he servedas head of Tyco’s

 

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MaterialSciences Department.  In December of2008, Martin Weinstein retired as Vice-Chairman and CEO of Sequa and Chairmanof Chromalloy Gas Turbine Corporation where he remains a senior consultant tothe company. He is currently the founder/owner of Sheffield Scientific, acompany formed to pursue developments in advanced materials and energy.  Dr. Weinstein received his ScD in metallurgyfrom Massachusetts Institute of Technology.

 

*Robert Biehl* was re-elected as adirector in November 2007. Mr. Biehl has served as a director since 2005.  Mr. Biehl founded the Masterplanning GroupInternational and as President, personally consulted over 400 clients andmentored over 2,500 executives and world leaders.  Prior to starting Masterplanning Group, Mr. Biehlwas an executive staff of World Vision International where he designed anddeveloped the Love Loaf Program, which has raised millions of dollarsworldwide.  He has also published manybooks in the area of personal and organizational development.  Mr. Biehl received his B.A. degree inPsychology and a Masters Degree in Counseling from Michigan State University.

 

*IrajAzarm* has served as director since April 2009. Since 1987, Mr. Azarm hasserved as the Comptroller of CDG, where he directs the day to day activities ofthe company and acts as the liaison for investors and the firm’s institutionallenders. In 1963, Mr. Azarm received degrees in Mechanical Engineering andEconomics from the University of California at Berkeley.

 

**Changein Directors**

 

InMarch 2010, Mr. John Kang voluntarily resigned as our company’s Chairman of theBoard and Director.  Mr. Kang served asour Chairman and Director since August 2003.

 

InMarch, 2010, Mr. William Scott voluntarily resigned as our company’sDirector.  Mr. Scott served as a Directorof our company since May 2009

 

InMarch 2010, Mr. Martin Weinstein joined our company’s Board as Vice-Chairman.

 

**Changein Principal Financial Officer**

 

OnDecember 1, 2008 Gerald Morrow ceased to be our company’s Chief FinancialOfficer upon appointment of Tony Chung as our Chief Financial Officer by ourBoard of Directors.  Mr. Morrow waspreviously elected to serve as our Chief Financial Officer on January 13, 2008by our Board of Directors.  Additionalinformation regarding Mr. Chung is set forth above in this Item 10.

 

On August 5, 2010, the Companyappointed Thomas Steipp to serve as the Company’s President and Chief ExecutiveOfficer.  Mr. Steipp was also appointedas a member of the Company’s Board of Directors.  Upon Mr. Steipp’s appointment as the Company’sPresident and Chief Executive Officer, Larry Buffington ceased to serve as theCompany’s President and Chief Executive Officer, although Mr. Buffington willcontinue to serve as the Chief Executive Officer of the Company’smajority-owned Liquidmetal Coatings subsidiary.

 

**BOARD OF DIRECTORS**

 

**Terms of Directors**

 

Each director serves a term of one-year until the next ensuing annualstockholder meeting or until his successor is duly elected or his earlierresignation or removal.

 

**Audit Committee**

 

Ourboard of directors has an Audit Committee that is currently comprised of Mr. Biehl. The Audit Committee is responsible forreviewing the independence, qualifications, and activities of our independentcertified accountants and our financial policies, control procedures, andaccounting staff.  The Audit Committee isalso responsible for the review of transactions between us and any officer,director, or entity in which an officer or director of our company has amaterial interest.  We do not have an “auditcommittee financial expert” as defined by the regulations of the Securities andExchange Commission.   The Board ofDirectors will consider and appoint a financial expert to the Audit Committeein the near future.  However, our boardof directors has determined that Mr. Biehl is an “independent” director withinthe meaning of Rule 10A-3(b)(i) under the Securities Exchange Act of 1934.  The Audit Committee is governed by a writtencharter approved by the board of directors.

 

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**Code of Ethics**

 

Our board of directors hasadopted a Code of Ethics that is applicable to our principal executive officer,principal financial officer, principal accounting officer or controller, andpersons performing similar functions. The Code of Ethics is attached as Exhibit 14 to our Annual Report on Form10-K filed on November 10, 2004.  Inaddition, we intend to promptly disclose (1) the nature of any amendment to ourCode that applies to our principal executive officer, principal financialofficer, principal accounting officer or controller, or persons performingsimilar functions and (2) the nature of any waiver, including an implicitwaiver, from a provision of our Code that is granted to one of these specifiedofficers, the name of such person who is granted the waiver and the date of thewaiver on our website at www.liquidmetal.com in the future. You may alsorequest a copy of the Code by sending the request to information@liquidmetal.com.

 

**Item 11.  Executive Compensation**

 

**Executive Benefits and Perquisites**

 

Setforth below is information regarding compensation earned by or paid or awardedto the following executive officers of the company during the year ended December31, 2009: (i) Larry Buffington, our former President and Chief ExecutiveOfficer; (ii) Tony Chung, our Chief Financial Officer; (iii) Rick Salas, ourExecutive Vice-President and (iv) John Kang, our former Chairman of theBoard.  These persons are hereafterreferred to as our “named executive officers.” The identification of such named executive officers is determined basedon the individual’s total compensation for the year ended December 31, 2009, asreported below in the Summary Compensation Table.

 

**Summary Compensation Table**

 

The following table setsforth for each of the named executive officers: (i) the dollar value of basesalary and bonus earned during the years ended December 31, 2009 and 2008; (ii)the aggregate grant date fair value of stock and option awards granted during2009 and 2008, computed in accordance with FASB Accounting StandardsCodification (“ASC”) Topic 718 (R); (iii) the dollar value of earnings forservices pursuant to awards granted during 2009 and 2008 under non-equityincentive plans; (iv) non-qualified deferred compensation earnings during 2009and 2008; (v) all other compensation for 2009 and 2008; and, finally, (vi) thedollar value of total compensation for 2009 and 2008.

 
| **Name and  Principal  Position** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Stock  Awards** | ** ** | **Option  Awards  (1)** | ** ** | **Non-Equity  Incentive Plan  Compensation** | ** ** | **Change in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|----------|------------|------------|------------|-----------|------------|-------------------|------------|-------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------|------------|
| Larry  Buffington                 |       | 2009     |       | $          | 250,000    |      | —     |              | —     |                    | —     |                                         | —     |                                                                              | —     |                        | $          | 11,436    | (1)        | $ | 264,436 |   |
|                              |       | 2008     |       | $          | 250,000    |      | —     |              | —     |                    | —     |                                         | —     |                                                                              | —     |                        | $          | 9,600     | (2)        | $ | 259,600 |   |
|                              |       |     |       |       |       |      |       |              |       |                    |       |                                         |       |                                                                              |       |                        |       |      |       |
| Tony  Chung                       |       | 2009     |       | $          | 160,000    |      | —     |              | —     |                    | —     |                                         | —     |                                                                              | —     |                        | —     |      | $          | 160,000 |   |
|                              |       | 2008     |       | $          | 12,500     |      | —     |              | —     |                    | $          | 9,027                                        |       | —                                                                            |       | —                      |       | —    |       | $ | 21,527 |   |
|                              |       |     |       |       |       |      |       |              |       |                    |       |                                         |       |                                                                              |       |                        |       |      |       |
| Ricardo  Salas                    |       | 2009     |       | 240,000    |       | —    |       | —            |       | —                  |       | —                                       |       | —                                                                            |       | —                      |       | $         | 240,000    |   |
|                              |       | 2008     |       | $          | 20,000     |      | —     |              | —     |                    | —     |                                         | —     |                                                                              | —     |                        | $          | 220,000   | (3)        | $ | 240,000 |   |
|                                   |            |          |            |            |            |           |            |                   |            |                         |            |                                              |            |                                                                                   |            |                             |            |           |            |  |  |  |  |

 

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(1) Amount represents the fair value of stockoptions granted in 2008 under FASB ASC Topic 718 as discussed in Note 13, “StockCompensation Plan” to our financial statement included elsewhere in this annualreport on Form 10-K.

 

(2) Amount represents automobile lease payments onuse of a company car as well as reimbursements for insurance premiums.

 

(3) Amount represents compensation earned forconsulting services provided to the company from January 2008 through November 2008.

 

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For a description of thematerial terms of employment agreements with our named executive officers, see “—EmploymentAgreements.”

 

**Outstanding Equity Awards at 2009 Fiscal Year-End**

 

The following table setsforth information on outstanding option and stock awards held by the namedexecutive officers at December 31, 2009, including the number of sharesunderlying both exercisable and unexercisable portions of each stock option aswell as the exercise price and expiration date of each outstanding option.

 
| ** **        | ** ** | **Option  Awards**                                                          | ** ** | **Stock  Awards**                                                             | ** ** |
|-------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | **Number of  Securities  Underlying   Unexercised   Options   Exercisable** | ** ** | **Number of  Securities   Underlying  Unexercised   Options   Unexercisable** | ** ** | **Equity  Incentive  Plan   Awards  Number of  Securities  Underlying  Unexercised  Unearned  Options** | ** ** | **Option  Exercise  Price** | ** ** | **Option  Expiration  Date** | ** ** | **Vesting  Commencement  Date** | ** ** | **Number  of Shares  or Units  of Stock  That  Have Not  Vested** | ** ** | **Market  Value of  Shares or  Units of  Stock  That  Have Not  Vested** | ** ** | **Equity  Incentive  Plan  Awards:  Number  of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested** | ** ** | **Equity  Incentive  Plan  Awards:  Market or  Payout  Value of  Unearned  Shares,  Units or  Other  Rights  That Have  Not Vested** | ** ** |
|              |       |                                                                        |       |                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Larry  Buffington |       | 200,000                                                                     |       | 300,000                                                                       |       | — |   | $ | 0.772 |   | 09/19/2017 |   | 09/20/2008(1) |   | — |   | — |   | — |   | — |   |
|              |       |                                                                        |       |                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tony  Chung       |       | 40,000                                                                      |       | 160,000                                                                       |       | — |   | $ | 0.086 |   | 11/30/2018 |   | 12/01/2009(1) |   | — |   | — |   | — |   | — |   |
|              |       |                                                                        |       |                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ricardo  Salas    |       | —                                                                      |       | —                                                                        |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |

 

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(1)                                  The shares underlying this option vest 20% per yearstarting with the vesting commencement date and thereafter.

 

**Employment Agreements**

 

Wehave entered into the following employment agreements with the named executiveofficers identified above.

 

***Larry Buffington***. On October 8, 2006 weelected Larry Buffington as our President and Chief Executive Officer whoreceived an initial base salary of $200,000 for serving as President and ChiefExecutive Officer of our company. Effective January 1, 2007, the Compensation Committee approved anincrease in the base salary to $250,000. On July 24, 2007, we transferred substantially all of the assets of itsLiquidmetal alloy industrial coatings business to a newly formed, newlycapitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limitedliability company (“LMC”), and LMC assumed substantially all of the liabilitiesof the coatings business, in which we hold a 69.25% ownership interest.  In conjunction to the transfer, LMC enteredinto an employment agreement with Mr. Buffington as its President and ChiefExecutive Officer.  The employmentagreement has an initial 5-year term (“Initial Term”), provides for an annualbase salary of $250,000 per year with an opportunity for an annual performancebonus of up to 50% of his salary based on meeting certain target goals.  In addition, Mr. Buffington has a 10%ownership in LMC which vests evenly over five years.  Mr. Buffington’s employment will terminateupon the earlier of his death, resignation, disability, or termination by theboard of directors for any reason, provided that if his employment isterminated without cause, he will continue to receive the Employee’s basesalary (as then in effect) through the later of one year after the date of thetermination or the end of the Initial Term.

 

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He will also forfeit theunvested portion of his interest in LMC if he terminates prior to thecompletion of his five years of employment with LMC.  On August 5, 2010, Mr. Buffington ceased toserve as the Company’s President and Chief Executive Officer, although Mr. Buffingtonwill continue to serve as the Chief Executive Officer of LMC.

 

***Tony Chung***, who was elected as our Chief Financial Officer on December 1, 2008,receives a base salary of $160,000.  Inconnection with the commencement of his employment, Mr. Chung was granted anoption to purchase up to 200,000 shares of Company common stock under theCompany’s 2002 Equity Incentive plan. The option was granted at an exercise price equalto $0.09 per share, which was the fair market value of the Company’s commonstock on the option grant date, and the option vests to the extent of 40,000shares on each anniversary of the option grant date beginning in 2009.  We andMr. Chung have not entered into an employment agreement relating to Mr. Chung’semployment with us, but we may determine to do so in the future.

 

***Ricardo Salas,*** who previously served as our Chief Executive Officer and President from December30, 2005 through October 8, 2006, began serving as our Executive Vice Presidenton December 1, 2008.  Mr. Salas willreceive an initial base salary of $240,000.  We and Mr. Salas have not entered into anemployment agreement relating to Mr. Salas’ employment with us, but we maydetermine to do so in the future.

 

**401(k) Savings Plan**

 

We have adopted atax-qualified employee savings and retirement plan, or 401(k) plan that coversall of our employees. Pursuant to our 401(k) plan, participants may elect toreduce their current compensation, on a pre-tax basis, by up to 15% of theirtaxable compensation or of the statutorily prescribed annual limit, whicheveris lower, and have the amount of the reduction contributed to the 401(k) plan.The 401(k) plan permits us, in our sole discretion, to make additional employercontributions to the 401(k) plan. However, we do not currently make employercontributions to the 401(k) plan and may not do so in the future. As such,contributions by employees or by us to the 401(k) plan, and the income earnedon plan contributions, are not taxable to employees until withdrawn from the401(k) plan, and we can deduct our contributions, if any, at the time they aremade.

 

**Pension Benefits**

 

Wedo not sponsor any qualified or non-qualified defined benefit plans.

 

**Nonqualified Deferred Compensation**

 

Wedo not maintain any non-qualified defined contribution or deferred compensationplans. The compensation committee, which is comprised solely of “outsidedirectors” as defined for purposes of Section 162(m) of the Code, may elect toprovide our officers and other employees with non-qualified definedcontribution or deferred compensation benefits if the compensation committeedetermines that doing so is in our best interests. We sponsor a tax qualifieddefined contribution 401(k) savings plan.

 

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**PotentialPayments upon Termination or Change in Control**

 

Potentialpayments payable to our executive officers upon termination of employmentfollowing a change in control of us is discussed under “—Employment Agreements”.The compensation committee of our board of directors may, at their discretion,amend or add benefits to these arrangements as they deem advisable.

 

Thetable below presents estimate presents estimates of the amounts of compensationpayable to each named executive officer upon a change in control andtermination of the executive.  Theamounts shown assume that such a change in control and termination were botheffective as of December 31, 2009.  Theactual amounts to be paid can only be determined at the time of a change incontrol or executive’s termination.

 
| ** **                                                 | ** ** | **Larry Buffington**    | ** ** | **Tony Chung**  | ** **  | **Ricardo Salas**           | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-----------------|-------------|-----------------------------|------------|
| **Benefit**                                                | ** ** | **Change  in  Control** | ** ** | **Termination** | ** **  | **Change in  Control** | ** ** | **Termination** | ** ** | **Change in  Control** | ** ** | **Termination** | ** ** |
| UNEARNED COMPENSATION (payment contingent on  termination) |       |                    |       |            |        |                        |       |   |   |   |   |   |   |
| Cash Severance (a)                                         |       | —                  |       | $               | 896,000     |                        | —     |   | — |   | — |   | — |   |
| Equity                                                     |       |                    |       |            |        |                        |       |   |   |   |   |   |   |
| Unexercisable Options                                      |       | —                  |       | —          |        | —                      |       | — |   | — |   | — |   |
| Benefits                                                   |       |                    |       |            |        |                        |       |   |   |   |   |   |   |
| Health                                                     |       | —                  |       | $               | 11,593      |                        | —     |   | — |   | — |   | — |   |
| **Total**                                                  | ** ** | **—**              | ** ** | **$**           | **907,593** | ** **                  | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |

 

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(a)          For Mr. Buffington, reflectsapproximately 3.6 times his annual base pay for a termination.  Mr. Buffington will receive annual basesalary through the later of one year or his initial 5 year term.  For Mr. Kang, reflects two times his annualbase pay for a change of control or termination.

 

**Director Compensation**

 

Thefollowing table sets forth information regarding the compensation received byeach of our directors during the year ended December 31, 2009;

 
| **Name**         | ** ** | **Fees  Earned or  Paid in  Cash** | ** ** | **Stock  Awards** | ** ** | **Option  Awards  (1)** | ** ** | **Non-Equity  Incentive Plan  Compensation** | ** ** | **Change in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|------------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Abdi Mahamedi    |       | —                                       |       | —            |       | —                  |       | —                                            |       | —                                                                                      |       | —                           |       | —    |       |
|             |       |                                         |       |              |       |                    |       |                                              |       |                                                                                        |       |                             |       |      |       |
| Martin Weinstein |       | —                                       |       | —            |       | —                  |       | —                                            |       | —                                                                                      |       | —                           |       | —    |       |
|             |       |                                         |       |              |       |                    |       |                                              |       |                                                                                        |       |                             |       |      |       |
| Robert Biehl     |       | $                                            | 48,000     | (2)               | —     |                    | $          | 28,676                                            | (3)        | —                                                                                      |       | —                           |       | —    |       | $ | 76,676 |   |
|             |       |                                         |       |              |       |                    |       |                                              |       |                                                                                        |       |                             |       |      |       |
| Iraj Azarm       |       | —                                       |       | —            |       | —                  |       | —                                            |       | —                                                                                      |       | —                           |       | —    |       |
|                  |            |                                              |            |                   |            |                         |            |                                                   |            |                                                                                             |            |                                  |            |           |            |  |  |  |

 

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(1)                                  Amount represent the fairvalue of stock options granted in 2009 under FASB ASC Topic 718 as discussed inNote 12, “Stock Compensation Plan”, to our consolidated financial statementsincluded in this report on Form 10K.

 

(2)                                  Amount of fees earned werereinvested into the Company as preferred stocks under a private placement ofconvertible notes in May, 2009 as discussed in Note 10, “Notes Payable” andNote 19, “Related Party Transactions”, to our consolidated financial statementsincluded in this report on Form 10K.

 

(3)                                  551,041 shares of optionswere outstanding as of December 31, 2009. Amount includes fair value of stock options issued for consultingservices provided during 2009 totaling $27,509.

 

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Our non-employee directorsare entitled to receive certain compensation for their services and arereimbursed for expenses incurred in attending board and committee meetings, asdetermined by the board of directors.

 

We also have a 2002Non-Employee Director Stock Option Plan pursuant to which our non-employeedirectors are entitled to receive stock options.  All options granted under the plan have anexercise price equal to the fair market value of our common stock on the dateof the grant.  These stock options have a10-year term, vest, and are exercisable pursuant to an equal 5-year vestingschedule, and remain exercisable for certain periods of time after a person is nolonger a director.

 

No director who is anemployee will receive separate compensation for services rendered as adirector.  However, our employeedirectors are eligible to participate in our 2002 Equity Incentive Plan.

 

**Item 12. Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters**

 

The following table setsforth certain information regarding the beneficial ownership of our commonstock as of April 9, 2010 by:

 

·                  each person known by us to be a beneficialowner of more than 5.0% of our outstanding common stock;

·                  each of our directors;

·                  each of our named executive officers; and

·                  all directors and executive officers as agroup.

 

Thenumber and percentage of shares beneficially owned is determined under rules ofthe SEC and the information is not necessarily indicative of beneficialownership for any other purpose. Under such rules, beneficial ownershipincludes any shares as to which the individual has sole or shared voting poweror investment power and also any shares which the individual has the right toacquire beneficial ownership of within 60 days of April 9, 2010 through theexercise of any stock option or other right. Unless otherwise indicated in thefootnotes, each person has sole voting and investment power with respect to theshares shown as beneficially owned. A total of 47,583,102 shares of our commonstock were issued and outstanding as of April 9, 2010.  Unless otherwise indicated, the address ofall directors and named executive officers is 30452 Esperanza, Rancho SantaMargarita, CA 92688.

 
| **Name of Beneficial Owner**                                                     | ** ** | **Amount and  Nature of  Beneficial  Ownership** | ** ** | **Percent of Class** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------|------------|
| **5% Stockholders**                                                              | ** ** | ** **                                       | ** ** | ** **           | ** ** |
| Carlyle Liquid Holdings, LLC  2 Gannett Drive, Suite 201  White Plains, NY 10604 |       | 67,798,048                                       |       | 58.8                 | %          |
| Carlyle Liquid, LLC  2 Gannett Drive, Suite 201  White Plains, NY 10604          |       | 15,941,309                                       |       | 25.1                 | %          |
| Carlyle Holdings, LLC  2 Gannett Drive, Suite 201  White Plains, NY 10604        |       | 3,328,645                                        |       | 6.7                  | %          |
| Jack Chitayat  1836 Camino Del Teatro  La Jolla, CA 92037                        |       | 88,364,591                                       | (1)        | 66.2                 | %          |
| Tjoa Thian Song  16 Raffles Quay #B1-14A  Hong Leong Building  Singapore 0101    |       | 8,508,523                                        | (2)        | 16.3                 | %          |
| John Kang  23211 Pradera Road  Coto de Caza, Ca 92679                            |       | 6,744,973                                        | (3)        | 13.2                 | %          |

 

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| **Directors and Named Executive  Officers**                  |   |        |   |   |   |
|--------------------------------------------------------------|--------|-------------|--------|--------|--------|
| ** **                                                   |   |        |   |   |   |
| Robert Biehl                                                 |   | 751,518     | (4)    | 1.6    | %      |
| Iraj Azarm                                                   |   | 20,000      | (5)    | *      |   |
| Abdi Mahamedi                                                |   | 92,567,869  | (6)    | 67     | %      |
| Larry Buffington                                             |   | 330,000     | (7)    | *      |   |
| Tony Chung                                                   |   | 790,000     | (8)    | 1.6    | %      |
| Ricardo Salas                                                |   | 7,879,111   | (9)    | 14.5   | %      |
| All directors and executive officers as a group (6  persons) |   | 102,338,498 |   | 69.8   | %      |

 

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*  Less than one percent.

 

(1)          Includes:

 

(a)          660,309 shares issuablepursuant to currently exercisable warrants and 1,320,636 shares issuablepursuant to currently convertible preferred stocks held of record by AtlanticRealty Group, Inc.  Mr. Chitayat has thepower to direct the voting and disposition of such shares as the president anda sole shareholder of Atlantic Realty Group, Inc.;

 

(b)         5,313,764 shares issuablepursuant to currently exercisable warrants and 10,627,545 shares issuablepursuant to currently convertible preferred stocks held of record by CarlyleLiquid, LLC.  Mr. Chitayat has sharedpower to direct the voting and disposition of such shares as the soleshareholder of Atlantic Realty Group, Inc., which is a managing member ofCarlyle Liquid, LLC.  Mr. Chitayatdisclaims beneficial ownership of these shares except to the extent of hispecuniary interest in Carlyle Liquid, LLC;

 

(c)          22,599,343 shares issuablepursuant to currently exercisable warrants and 45,198,705 shares issuablepursuant to currently convertible preferred stocks held of record by CarlyleLiquid Holdings, LLC.  Mr. Chitayat hasshared power to direct the voting and disposition of such shares as the soleshareholder of Atlantic Realty Group, Inc., which is a managing member ofCarlyle Liquid Holdings, LLC.  Mr. Chitayatdisclaims beneficial ownership of these shares except to the extent of hispecuniary interest in Carlyle Liquid Holdings, LLC;

 

(d)         100,000 shares issuablepursuant to currently exercisable warrants and held of record by Mr. Chitayat;and

 

(e)          91,792 shares held of recordby a trust established by Mr. Chitayat for his minor children.  Mr. Chitayat continues to beneficially ownall such shares.

 

(2)          Includes:

 

(a)          1,500,000 shares issuablepursuant to currently exercisable warrants and 3,000,000 shares issuablepursuant to currently convertible preferred stocks held of record by Mr. Song;and

 

(b)         3,874,585 of these sharesare held of record by a revocable grantor trust established by Mr. Song forhimself and his family members.  Mr. Songcontinues to beneficially own all such shares.

 

(3)          Includes:

 

(a)          500,000 shares issuablepursuant to currently exercisable warrants and 1,000,000 shares issuablepursuant to currently convertible preferred stocks held of record by Mr. Kang;

 

(b)         1,862,904 shares issuablepursuant to outstanding stock options that are exercisable currently or within60 days of April 9, 2010.  Does notinclude 300,000 shares that are issuable pursuant to outstanding stock optionsthat are not exercisable currently or within 60 days of April 9, 2010; and

 

(c)          182,400 shares held by Mr. Kang’sminor children.

 

(4)          Includes 531,041 sharesissuable pursuant to outstanding stock options that are exercisable currentlyor within 60 days of April 9, 2010.  Doesnot include 20,000 shares that are issuable pursuant to outstanding stockoptions that are not exercisable currently or within 60 days of April 9, 2010.

 

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(5)          Does notinclude 5,313,764 shares issuable pursuant to currently exercisable warrantsand 10,627,545 shares issuable pursuant to currently convertible preferredstocks held of record by Carlyle Liquid, LLC. Mr. Azarm is a 7% shareholder of Carlyle Liquid, LLC and do notpossess voting or dispositive power over such shares.

 

(6)          Includes:

 

(a)          1,347,700shares held of record by Carlyle Holdings, LLC. Mr. Mahamedi has the power to direct the voting and disposition ofsuch shares as the president and a sole shareholder of Carlyle DevelopmentGroup, Inc, which is a managing member and shareholder of CarlyleHoldings, LLC;

 

(b)         660,309 sharesissuable pursuant to currently exercisable warrants and 1,320,636 sharesissuable pursuant to currently convertible preferred stocks held of record byCarlyle Holdings, LLC.  Mr. Mahamedihas the power to direct the voting and disposition of such shares as thepresident and a sole shareholder of Carlyle Development Group, Inc, whichis a managing member and shareholder of Carlyle Holdings, LLC;

 

(c)          5,313,764shares issuable pursuant to currently exercisable warrants and 10,627,545shares issuable pursuant to currently convertible preferred stocks held ofrecord by Carlyle Liquid, LLC.  Mr. Mahamedihas shared power to direct the voting and disposition of such shares as thesole shareholder of Carlyle Development Group, Inc., which is a managingmember of Carlyle Liquid, LLC.  Mr. Mahamedidisclaims beneficial ownership of these shares except to the extent of hispecuniary interest in Carlyle Liquid, LLC;

 

(d)         22,599,343shares issuable pursuant to currently exercisable warrants and 45,198,705shares issuable pursuant to currently convertible preferred stocks held ofrecord by Carlyle Liquid Holdings, LLC.  Mr. Mahamedihas shared power to direct the voting and disposition of such shares as thesole shareholder of Carlyle Development Group, Inc., which is a managingmember of Carlyle Liquid Holdings, LLC.  Mr. Mahamedidisclaims beneficial ownership of these shares except to the extent of hispecuniary interest in Carlyle Liquid Holdings, LLC; and

 

(e)          1,670,617shares issuable pursuant to currently exercisable warrants and 3,141,250 sharesissuable pursuant to currently convertible preferred stocks held of record by Mr. Mahamedi.

 

(7)          Includes200,000 shares issuable pursuant to outstanding stock options that areexercisable currently or within 60 days of April 9, 2010.  Does not include 300,000 shares issuablepursuant to outstanding stock options that are not exercisable currently orwithin 60 days of April 9, 2010.

 

(8)          Includes:

 

(a)          250,000 sharesissuable pursuant to currently exercisable warrants and 500,000 shares issuablepursuant to currently convertible preferred stocks held of record by Mr. Chung;

 

(b)         Does notinclude 160,000 shares issuable pursuant to outstanding stock options that arenot exercisable currently or within 60 days of April 9, 2010.

 

(9)          Includes:

 

(a)          2,557,844shares issuable pursuant to currently exercisable warrants and 4,371,205 sharesissuable pursuant to currently convertible preferred stocks held of record by Mr. Salas;

 

(b)         Does notinclude 3,480,299 shares issuable pursuant to currently exercisable warrantsand 6,960,601 shares issuable pursuant to currently convertible preferredstocks held of record by Carlyle Liquid Holdings, LLC.  Mr. Salas is a 100% shareholder ofSilver Lake Group, LLC which holds a 15.4% share interest in Carlyle LiquidHoldings, LLC.  Silver Lake Group, LLCdoes not possess voting or dispositive power over such shares, and Mr. Salasdisclaims beneficial ownership of these shares except to the extent of hispecuniary interest in Silver Lake Group, LLC;

 

**Equity Incentive / Equity Compensation Plans**

 

Ourexecutive officers, directors, and all of our employees are allowed toparticipate in our equity incentive plans. We believe that providing them with the ability to participate in suchplans provides them with a further incentive towards ensuring our success andaccomplishing our corporate goals.

 

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Securities authorized for issuance under equitycompensation plans as of December 31, 2009 were as follows:

 
| **Plan  Category**                                      | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants, and rights********[a]** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants, and rights********[b]** | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column [a])********[c]** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by stockholders     |       | 4,389,882                                                                                                       |       | $                                                                                              | 2.57       |                                                                                                                                                            | 8,258,477  |   |
| Equity  compensation plans not approved by stockholders |       | 59,928,242                                                                                                      |       | $                                                                                              | 0.60       |                                                                                                                                                            | —     |   |
| Total                                                   |       | 64,318,124                                                                                                      |       |                                                                                           |       | 8,258,477                                                                                                                                                       |       |

 

Equitycompensation plans not approved by stockholders consist of:

 

·                  Warrants topurchase up to 1,702,403 shares issued on June 13, 2005 with an exerciseprice of $1.05 per share and an expiration date of June 13, 2010;

 

·                  Warrants topurchase up to 5,493,355 shares issued on August 2, 2005 with an exerciseprice of $1.05 per share and an expiration date of August 2, 2010;

 

·                  Warrants topurchase up to 25,000 shares issued on May 17, 2006 with an exercise priceof $1.75 per share and an expiration date of May 17, 2009;

 

·                  Warrants topurchase up to 741,829 shares issued between May 17, 2006 and December 1,2006 with an exercise price of $1.05 per share and an expiration date of May 17,2011;

 

·                  Warrants topurchase up to 1,562,531 shares issued between May 17, 2006 and December 1,2006 with an exercise price of $1.14 per share and an expiration date of May 17,2011;

 

·                  Warrants topurchase up to 42,578,117 shares issued on January 3, 2007 with anexercise price of $0.60 per share and an expiration date of January 3,2012;

 

·                  Warrants topurchase up to 3,125,007 shares issued on January 3, 2007 with an exerciseprice of $0.50 per share and an expiration date of January 3, 2012;

 

·                  Warrants topurchase up to 200,000 shares issued on December 28, 2007 with an exerciseprice of $0.50 per share and an expiration date of December 28, 2012;

 

·                  Warrants topurchase up to 4,500,000 shares issued on October 30, 2009 with anexercise price of $0.50 per share and an expiration date of January 3,2012.

 

Thenumber of securities and type of plans available for future issuance of stockoptions as of December 31, 2009 were as follows:

 
| ** **                                    | ** ** | **Options and Warrants for Common Shares** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| **Plan Name**                                 | ** ** | **Authorized**                             | ** ** | **Exercised** | ** ** | **Outstanding** | ** ** | **Available** | ** ** |
| 1996 Stock Option Plan                        |       | 12,903,226                                 |       | 1,974,365 |   | 56,960 |   | — |   |
| 2002 Equity Incentive Plan                    |       | 10,000,000                                 |       | — |   | 2,601,523 |   | 7,398,477 |   |
| 2002 Non-employee Director  Stock Option Plan |       | 1,000,000                                  |       | — |   | 140,000 |   | 860,000 |   |
| Total Stock Options                           |       | 23,903,226                                 |       | 1,974,365 |   | 2,798,483 |   | 8,258,477 |   |

 

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**1996 Stock Option Plan**

 

Our1996 Stock Option Plan provides for the grant of stock options to employees,directors, and consultants of our company and its affiliates. The purpose ofthe plan is to retain the services of existing employees, directors, andconsultants; to secure and retain the services of new employees, directors, andconsultants; and to provide incentives for such persons to exert maximumefforts for our success. The plan provides for the granting to employees ofincentive stock options within the meaning of Section 422 of the InternalRevenue Code of 1986, as amended, and for the granting to employees andconsultants of nonstatutory stock options. Our board of directors terminatedthe 1996 Stock Option Plan on April 4, 2002. The termination will notaffect any outstanding options under the plan, and all such options willcontinue to remain outstanding and be governed by the plan.

 

Optionsgranted under the 1996 Stock Option Plan are generally not transferable by theoptionee except by will or the laws of descent and distribution, and eachoption is exercisable, during the lifetime of the optionee, only by theoptionee. Options generally must be exercised within 90 days after the optionee’stermination for cause, three months following the end of the optionee’s statusas an employee or consultant, other than for cause or for death or disability,or within six months after the optionee’s termination by disability or twelvemonths following the optionee’s termination by death. However, in no event mayan option be exercised later than the earlier of the expiration of the term ofthe option or ten years from the date of the grant of the option or, where anoptionee owns stock representing more than 10% of the voting power, five yearsfrom the date of the grant of the option in the case of incentive stockoptions.

 

Asof December 31, 2009, options to purchase 56,960 shares of common stockwere outstanding at a weighted average price of $7.02 per share under the 1996Stock Option Plan. As of December 31, 2009, options to purchase 1,974,365shares had been issued upon exercise of options under the plan. There were56,960 options exercisable under the 1996 Stock Option Plan as of December 31,2009.

 

**2002 Equity Incentive Plan**

 

Our2002 Equity Incentive Plan, which was adopted by our board of directors andapproved by our stockholders in April 2002, provides for the grant ofstock options to officers, employees, consultants, and directors of our companyand its subsidiaries. The purpose of the plan is to advance the interests ofour stockholders by enhancing our ability to attract, retain, and motivatepersons who make or are expected to make important contributions to our companyand its subsidiaries by providing such persons with equity ownershipopportunities and performance-based incentives, thereby better aligning theirinterests with those of our stockholders. The plan provides for the granting toemployees of incentive stock options within the meaning of Section 422 ofthe Internal Revenue Code of 1986, as amended, and for the granting toemployees and consultants of nonstatutory stock options. In addition, the planpermits the granting of stock appreciation rights, or SARs, with orindependently of options, as well as stock bonuses and rights to purchaserestricted stock. A total of ten million shares of our common stock may begranted under the plan.

 

Theplan is administered by our board of directors or a committee appointed by ourboard of directors. All members of such a committee must be a non-employeedirector and an outside director, as defined in the plan. Subject to thelimitations set forth in the plan, the administrator has the authority toselect the persons to whom grants are to be made, to designate the number ofshares to be covered by each stock award, to determine whether an option is tobe an incentive stock option or a nonstatutory stock option, to establishvesting schedules, to specify the option exercise price and the type of considerationto be paid upon exercise, and, subject to some restrictions, to specify otherterms of stock awards.

 

Theadministrator establishes the option exercise price, which in the case ofincentive stock options, must be at least the fair market value of the commonstock on the date of the grant or, with respect to optionees who own at least10% of our outstanding common stock, 110% of fair market value. If our commonstock is listed and traded on a registered national or regional securitiesexchange, or quoted on the National Association of Securities Dealers’Automated Quotation System, fair market value is the average closing price of ashare of our common stock on such exchange or quotation system for the fivetrading days prior to the date of grant. If our common stock is not traded on aregistered securities exchange or quoted in such a quotation system, fairmarket value is determined in good faith by the administrator.

 

Optionsgranted under the plan are generally not transferable by the optionee except bywill or the laws of descent and distribution, and to certain relatedindividuals with the consent of the administrator. Options generally must beexercised within three months after the optionee’s termination of employmentfor any reason other than disability or death, or within 12 months after theoptionee’s termination by disability. Options granted under the plan vest atthe rate specified in the option agreement. However, in no event may an optionbe exercised later than the earlier of the expiration of the term of the optionor 10 years from the date of the grant of the option, or when an optionee ownsstock representing more than 10% of the voting power, five years from the dateof the grant of the option in the case of incentive stock options.

 

Anyincentive stock options granted to an optionee which, when combined with allother incentive stock options becoming exercisable for the first time in anycalendar year that are held by that person, would have an aggregate fair marketvalue in excess of $0.1 million, shall automatically be treated as nonstatutorystock options.

 

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Theplan may be amended, altered, suspended or terminated by our board of directorsat any time, but no such amendment, alteration, suspension or termination mayadversely affect the terms of any option previously granted without the consentof the affected optionee. Unless terminated sooner, the plan will terminateautomatically in September 2012.  Asof December 31, 2009, there were 2,601,523 outstanding options or stockawards at a weighted average price of $1.28 under the plan.  There were 1,664,023 options exercisableunder the 2002 Equity Incentive Plan as of December 31, 2009.

 

**2002 Non-employee DirectorStock Option Plan**

 

Our2002 Non-employee Director Stock Option Plan was adopted by our board ofdirectors and by our stockholders in April 2002. We have reserved a totalof one million shares of our common stock for issuance under the plan. Theoption grants under the plan are automatic and nondiscretionary, and theexercise price of the options is equal to 100% of the fair market value of ourcommon stock on the grant date.

 

Onlynon-employee directors are eligible for grants under the plan. The plan willprovide for an initial grant to a new non-employee director of an option topurchase 50,000 shares of our common stock. Subsequent to the initial grants,each non-employee director will be automatically granted on the first businessday of January commencing January 1, 2003, an option to purchase10,000 shares of our common stock.

 

Theterm of the options granted under the plan is 10 years, but the options expire12 months after the termination of the optionee’s status as a director or threemonths if the termination is due to the voluntary resignation of the optionee.The option grants will vest and become exercisable as to one-fifth of theshares on the date that is one year after the date of grant and an additionalone-fifth of the shares subject to the option on a cumulative basis will vestand become exercisable annually thereafter.

 

Asof December 31, 2009, options to purchase 140,000 shares of common stockwere outstanding at a weighted average price of $1.13 per share under the 2002Non-employee Director Stock Option Plan. There were 52,000 options exercisableunder the 2002 Non-employee Director Stock Option Plan as of December 31,2009.

 

Theplan will terminate in October 2012, unless our board of directorsterminates it sooner.

 

**Item 13.Certain Relationships and RelatedTransactions, and Director Independence**

 

SooBuchanan, the sister of John Kang, the Company’s former Chairman, occasionallyprovides services to us as a consultant. During the years ended December 31, 2009, 2008 and 2007, theCompany incurred $0, $0.1 million and $0, respectively, for her services as aconsultant.  Additionally, Otis Buchanan,the husband of Ms. Buchanan, is employed by us and was paid aggregatecompensation of approximately $0.1 million during each of the years ended December 31,2009, 2008 and 2007.

 

Duringthe year ended December 31, 2009, John Kang, our former Chairman, advancedus $0.2 million to fund working capital needs. We repaid $0.1 million of the advance and have $0.1 million outstandingas of December 31, 2009, which is included in short-term debt.  Further, Mr. Kang entered into aContinuing Guarantee Agreement, dated January 5, 2009, to personallyguarantee repayment of our outstanding borrowings made under a FactoringAgreement.

 

InMay 2009, we completed a transaction in which (i) the holders ofour 8% Convertible Subordinated Notes exchanged such notes for a combination ofnew 8% Senior Secured Convertible Notes and shares of a new series ofconvertible preferred stock designated “Series A-2 Preferred Stock”,together with warrants thereon, and (ii) certain investors purchased, foran aggregate purchase price of $2,500, shares of a new series of convertiblepreferred stock designated as “Series A-1 Preferred Stock”.  The lead investors in this transactionwere Carlyle Liquid, LLC and Carlyle Liquid Holdings, LLC (the “CarlyleEntities”), which are two investor entities organized by Abdi Mahamedi andJack Chitayat.  Mr. Mahamedi became a director andgreater-than-5% beneficial owner of our company by reason of the May 2009transaction, and Jack Chitayat is a former director of our companywho became a greater-than-5% beneficial owner of our company by reason ofthe May 2009 transaction.  Mr. Mahamedi and Mr. Chitayathave shared voting and investment control over the shares held by theCarlyle Entities due to the fact that other entities owned by them are themanaging members of these two Carlyle entities.  Additionally, Mr. IrajAzarm and Mr. Robert Biehl, directors of our company, are passiveinvestors in the Carlyle Entities.

 

We have an exclusive licenseagreement with LLPG, Inc. (“LLPG”), a corporation headed by Mr. Chitayat.  Under the terms of the agreement, LLPG hasthe right to commercialize Liquidmetal alloys, particularly precious-metalbased compositions, in jewelry and high-end luxury product markets.  We,in turn, will receive royalty payments over the life of the contract on allLiquidmetal products produced and sold by LLPG. We recognized revenues from product sales and licensing fees of $0.2million and $0.3 million from LLPG during the years ended December 31,2009 and 2008, respectively. Approximately, $0 and $30 thousand is included in accounts receivablesas of December 31, 2009 and 2008, respectively, for outstanding tradereceivables due from LLPG.

 

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Asof December 31, 2009 and 2008, Ricardo Salas, our Executive VicePresident, held $0 and $0.4 million of the convertible unsecured subordinatednotes, respectively, and $0.3 million of the unsecured subordinated notes forboth periods.  Mr. Salas advanced us$0.2 million during the year ended December 31, 2009 to meet workingcapital needs and are included in short-term debt.  The $0.2 million advance accrues interest atan annual rate of 10%.

 

On June 1, 2007, we enteredinto a transaction with Grace Metal (currently Liquidmetal Korea Co., Ltd.“LMK”), under which (i) LMK agreed to purchase various equipments(including die casting machines and vacuum induction melters) used in our bulkamorphous alloy business segment and (ii) we granted LMK a 10-yearexclusive license to manufacture products made from bulk Liquidmetal alloys forcustomers whose principal headquarters or whose major operations are located inSouth Korea.  LMK was formed by aninvestor group that includes the former director and officer of our Company,James Kang, who is also the brother of John Kang, former Chairman of ourcompany.  Under an equipment purchaseagreement between us and LMK, LMK agreed to buy the purchased equipment for atotal purchase price of $2 million.  Theequipment purchase agreement provides that delivery of the equipment can bedelayed to accommodate our continuing manufacturing needs, and it also providesthat we will retain a security interest in the purchased equipment until fullpayment of the purchase price.

 

In consideration of the licenseagreement with LMK, we will be entitled to royalty of 10% of LMK’s net sales oflicensed products (unless LMK’s margin on the products falls below specifiedlevels, in which case a new royalty will be negotiated in good faith).  Effective June 1, 2008, the royalty ratewas adjusted to 5%.  The agreementprovides that we may convert the license to a non-exclusive in the event thatthe net sales in the second year of the contract or thereafter are notsufficient to result in royalties of $0.5 million or more per year.  The agreement also provides that LMK will berequired to purchase all alloy feedstock from us, and we will have the right tocontinue to manufacture Liquidmetal alloy products for South Korean customersuntil all purchased equipment has been commissioned.  Subsequent to December 31,2009, the license agreement with LMK was terminated on June 15, 2010.

 

We purchased production suppliesand outsourced production of certain bulk alloy production with LMK. In June 2008,we began sharing the use of its manufacturing facility and production equipmentin Pyongtaek, South Korea, with LMK as we began significant outsourcing of itsbulk alloy parts production. We incurred expenses for purchase of productionsupplies and outsourcing fees of $1.3 million, $2.1 million and $0.7 millionduring the years ended December 31, 2009, 2008 and 2007,respectively.  There is $0 included inaccounts payable and accrued expenses for both December 31, 2009 and 2008,for outstanding trade payables due to LMK. We recognized revenue from sales of raw materials and royalties for atotal of $4.5 million, $2.0 million and $3.4 million during the years ended December 31,2009 and 2008, respectively. Approximately, $0 and $0.2 million is included in accounts receivables asof December 31, 2009 and 2008, respectively, for outstanding tradereceivables due from LMK.

 

InOctober 2009, John Kang, our Company’s former Chairman, Tony Chung, ourCompany’s Chief Financial Officer, and Ricardo Salas, our Company’s ExecutiveVice President, acquired 80,000 shares of our Company’s Series A-1Preferred Stock and 2,000,000 warrants for an aggregate cash price of $0.4million.  The Series A-1 PreferredStock are convertible into our Company’s common stock at a conversion price of$0.10 per common share.  Further, thewarrants are issuable into our Company’s common stock at an exercise price of$0.50 per share and expire on January 3, 2012.

 

**Item 14.Principal Accountant Fees andServices**

 

Choi,Kim & Park, LLP

 

Thefollowing table summarizes the aggregate fees billed to the Company by Choi,Kim & Park, LLP for professional services:

 
| **Fees**       | ** ** | **2008** | ** ** | **2009** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Audit Fees (1) |       | $        | 297,000    |     | $          | 188,000 |   |
|                |            |          |            |          |            |  |  |

 

----

(1) *Audit Fees.*

 

Feesfor audit services billed in 2009 consisted of:

·                  Audit of theCompany’s financial statements for 2008; and

·                  Review of theCompany’s quarterly financial statements for 2009

 

Feesfor audit services billed in 2008 consisted of:

·                  Audit of theCompany’s financial statements for 2007;

·                  Review of theCompany’s quarterly financial statements for 2008; and

·                  Review of theCompany’s internal controls in accordance with Section 404 of theSarbanes-Oxley Act of 2002 for 2007.

 

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**PART IV**

 

**Item 15.Exhibits and Financial StatementSchedules**

 

(a)  The following documentsare filed as a part of this report:

 

1.*Financial Statements*.

 

2.*Financial Statement Schedules*.See the last page of Consolidated Financial Statements.

 

3.*Exhibits*. See Item 15(c) below.

 

(b) *Exhibits*. The exhibits listed onthe Exhibit Index, which appears at the end of this Item 15, arefiled as part of, or incorporated by reference into, this report.

 

(c)  *FinancialStatement Schedules*.See Item 15(a)(2) above.

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1                 |       | Certificate  of Incorporation *(incorporated by  reference to Exhibit 3.1 to the Form 10-Q filed on August 14,  2003).*                                                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2                 |       | Bylaws  *(incorporated by reference to  Exhibit 3.2 to the Form 10-Q filed on August 14, 2003).*                                                                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.3                 |       | Certificate  of Amendment to the Certificate of Incorporation *(incorporated  by reference to Exhibit 3.1 to the Form 8-K filed on August 6,  2009).*                                                                                                                                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1                 |       | Reference  is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2                 |       | Form of  Common Stock Certificate *(incorporated by  reference to Exhibit 4.2 to the Form 10-Q filed on August 14,  2003).*                                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1                |       | Amended  and Restated License Agreement, dated September 1, 2001, between  Liquidmetal Technologies, Inc. and California Institute of Technology *(incorporated by reference to Exhibit 10.1 to  the Registration Statement on Form S-1 filed on November 20, 2001  (Registration No. 333-73716)).*                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2*               |       | 1996  Stock Option Plan, as amended, together with form of Stock Option Agreement *(incorporated by reference to Exhibit 10.7 to  the Registration Statement on Form S-1 filed on November 20, 2001  (Registration No. 333-73716)).*                                                                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3*               |       | 2002  Equity Incentive Plan *(incorporated by  reference to Exhibit 10.23 to the Registration Statement on  Form S-1 (Amendment No. 2) filed on April 5, 2002  (Registration No. 333-73716)).*                                                                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4*               |       | 2002  Non-Employee Director Stock Option Plan *(incorporated  by reference to Exhibit 10.24 to the Registration Statement on  Form S-1 (Amendment No. 2) filed on April 5, 2002  (Registration No. 333-73716)).*                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5*               |       | Employment  Agreement, dated December 31, 2000, between Liquidmetal  Technologies, Inc. and John Kang, as amended by Amendment No. 1 to  Employment Agreement, dated June 28, 2001 *(incorporated by reference to Exhibit 10.8 to the Registration  Statement on Form S-1 filed on November 20, 2001 (Registration  No. 333-73716)).*                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6                |       | Non-Qualified  Stock Option Agreement, dated January 1, 2001, between Liquidmetal  Technologies, Inc. and Paul Azinger *(incorporated  by reference to Exhibit 10.19 to the Registration Statement on  Form S-1 filed on November 20, 2001 (Registration  No. 333-73716)).*                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7                |       | Foreign  Corporation Lease Zone Occupancy (Lease) Agreement, dated March 5, 2002,  between Kyonggi Local Corporation and Liquidmetal Korea Co., Ltd. *(incorporated by reference to Exhibit 10.22 to  the Registration Statement on Form S-1 (Amendment No. 2) filed by  Liquidmetal Technologies on April 5, 2002 (Registration  No. 333-73716)).*                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8                |       | Credit  Service Agreement, dated February 2003, between Liquidmetal Korea  Co., Ltd. and Kookmin Bank *(incorporated  by reference to Exhibit 10.20 to the Form 10-K filed on  March 31, 2003).*                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.9                |       | Form of  Common Stock Purchase Warrant, dated August 2, 2005 (*incorporated by reference from Exhibit 10.3 of  the Registrant’s 10-Q/A filed on 08/30/05)*                                                                                                                                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.10               |       | Form of  Common Stock Purchase Warrant, dated June 13, 2005 (*incorporated by reference from Exhibit 99.3 of  the Registrant’s 8-K filed on 06/16/05)*                                                                                                                                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11               |       | Agreement,  dated November 3, 2004, between Liquidmetal Technologies, Inc. and  John Kang relating to liability under Section 16(b) *(incorporated by reference from Exhibit 10.58  to the Form 10-K filed on March 16, 2006).*                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12               |       | Form of  Indemnity Agreement between Liquidmetal Technologies, Inc. and directors  and executive officers*(incorporated by  reference from Exhibit 10.59 to the Form 10-K filed on  March 16, 2006).*                                                                                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.13               |       | Factoring,  Loan, and Security Agreement, dated April 21, 2005, between Liquidmetal  Technologies, Inc. and Hana Financial, Inc. and Amendment  No. 1 to Factoring, Loan, and Security Agreement, dated January 27,  2006, between Liquidmetal Technologies, Inc. and Hana Financial, Inc.  *(incorporated by reference to  Exhibit 10.60 to the Registration Statement on Form S-1 (Amendment  No. 1) filed on April 20, 2006 (Registration No. 333-130251)).* |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14               |       | Warrant  for Purchase of Shares of Common Stock, dated March 17, 2006, granted by  Liquidmetal Technologies, Inc. to Atlantic Realty Group, Inc.*(incorporated by reference to Exhibit 10.62  to the Registration Statement on Form S-1 (Amendment No. 1) filed  on April 20, 2006 (Registration No. 333-130251)).*                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.15               |       | Consulting  Agreement, dated April 12, 2006, between Liquidmetal  Technologies, Inc. and William Johnson*(incorporated by reference to Exhibit 10.65 to the Registration  Statement on Form S-1 (Amendment No. 1) filed on April 20,  2006 (Registration No. 333-130251)).*                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.16               |       | Securities  Purchase Agreement, dated May 17, 2006, among Liquidmetal  Technologies, Inc. and the parties identified as “Purchasers” therein *(incorporated by reference to Exhibit 10.66 to  the Registration Statement on Form S-1 (Amendment*                                                                                                                                                                                                                                              |

 

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| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
|                |       | *No. 2) filed on July 20, 2006 (Registration  No. 333-130251)).*                                                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.17               |       | Form of  8% Unsecured Subordinated Note due August 2007 *(incorporated by reference to Exhibit 10.67 to  the Registration Statement on Form S-1 (Amendment No. 2) filed on  July 20, 2006 (Registration No. 333-130251)).*                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.18               |       | Form of  Common Stock Purchase Warrant, dated May 17, 2006 *(incorporated by reference to Exhibit 10.68 to  the Registration Statement on Form S-1 (Amendment No. 2) filed on  July 20, 2006 (Registration No. 333-130251)).*                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.19               |       | Registration  Rights Agreement, dated May 17, 2006, among Liquidmetal  Technologies, Inc. and the parties identified as “Purchasers” therein *(incorporated by reference to Exhibit 10.69 to  the Registration Statement on Form S-1 (Amendment No. 2) filed on  July 20, 2006 (Registration No. 333-130251)).*                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.20               |       | Securities Purchase  Agreement, dated January 3, 2007 (the “Securities Purchase Agreement”),  among Liquidmetal Technologies, Inc. (the “Company”) and the investors  listed on the Schedule of Buyers attached thereto (the “Buyers”) *(incorporated by reference from Exhibit 10.1 to the  Form 8-K filed on January 4, 2007).* |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.21               |       | Form of  Convertible Subordinated Note issued pursuant to Securities Purchase  Agreement *(incorporated by reference from  Exhibit 10.2 to the Form 8-K filed on January 4, 2007).*                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.22               |       | Form of  Common Stock Purchase Warrant issued pursuant to Securities Purchase  Agreement *(incorporated by reference from  Exhibit 10.3 to the Form 8-K filed on January 4, 2007).*                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.23               |       | Registration  Rights Agreement, dated January 3, 2007, among the Company and the  Buyers *(incorporated by reference from  Exhibit 10.4 to the Form 8-K filed on January 4, 2007).*                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.24               |       | Amendment  No. 2 to Factoring, Loan & Security Agreement, dated  January 23, 2007, between Liquidmetal Technologies Inc. and Hana  Financial, Inc. *(incorporated by  reference from Exhibit 10.76 to the Form 10-K filed on  March 16, 2007).*                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.25               |       | Amendment No. 1  to the Securities Purchase Agreement and Convertible Subordinated Notes,  dated April 23, 2007, by and between Liquidmetal Technologies, Inc.  and the investors listed on the Schedule of Buyers attached thereto *(incorporated by reference from Exhibit 10.1  to the Form 8-K filed on April 27, 2007).*                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.26               |       | Standard Industrial /  Commercial Single-Tenant Lease, dated February 13, 2007, between  Liquidmetal Technologies, Inc. and 30452 Esperanza LLC *(incorporated by reference from Exhibit 10.1  to the Form 10-Q filed on May 15, 2007).*                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.27               |       | Lease, dated  March 19, 2007, between Liquidmetal Technologies, Inc. and Larry  Ruffino and Roland Ruffino *(incorporated  by reference from Exhibit 10.1 to the Form 10-Q filed on  May 15, 2007).*                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.28               |       | Principles of  Agreement and Security Agreement, dated June 1, 2007, between  Liquidmetal Technologies, Inc. and Foster Wheeler Energy  Services, Inc.*(incorporated by  reference from Exhibit 10.64**to the  Registration Statement on Form S-1 (Amendment No. 1) filed on  July 2, 2007 (Registration No. *333-142442*)).*                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.29               |       | Equipment Purchase  Agreement and Licensing Agreement, dated June 1, 2007, between Liquidmetal  Technologies, Inc. and Gracemetal, as amended *(incorporated by reference from Exhibit 10.65**to the Registration Statement on Form S-1 (Amendment No. 1)  filed on July 2, 2007 (Registration No. *333-142442*)).*                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.30               |       | Asset Purchase and  Contribution Agreement, dated July 24, 2007 between Company and  Liquidmetal Coatings, LLC. (includes Liquidmetal Coatings, LLC Operating  Agreement) *(incorporated by reference from  Exhibit 2.1 to the Form 8-K filed on July 27, 2007).*                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.31               |       | Loan Agreement, dated  July 24, 2007 by and among Liquidmetal Coatings, LLC, Liquidmetal  Coatings Solutions, LLC and Bank Midwest, N.A. *(incorporated by reference from Exhibit 2.2 to the Form 8-K  filed on July 27, 2007).*                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.32               |       | Securities Purchase  Agreement, dated July 24, 2007, by and among Liquidmetal Coatings, LLC,  C3 Capital Partners, L.P., C3 Capital Partners II, L.P. and  Liquidmetal Coatings Solutions, LLC. *(incorporated  by reference from Exhibit 2.3 to the Form 8-K filed on  July 27, 2007).*                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.33               |       | First Amended and Restated  Operating Agreement of Liquidmetal Coatings, LLC, dated February 22,  2008 *(incorporated by reference from  Exhibit 2.1 to the Form 8-K filed on February 28, 2008).*                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.34               |       | Form of  Convertible Subordinated Note, dated October 1, 2007 *(incorporated by reference from Exhibit 10.34  to the Form 10-K filed on April 3, 2008)**.*                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.35               |       | Form of  Convertible Subordinated Note, dated December 28, 2007*(incorporated by reference from Exhibit 10.35  to the Form 10-K filed on April 3, 2008)**.*                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.36               |       | Form of  Common Stock Purchase Warrant, dated December 28, 2007*(incorporated by reference  from Exhibit 10.36 to the Form 10-K filed on April 3, 2008)**.*                                                                                                                                                                                                     |

 

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| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                               |
| 10.37               |       | Form of  Letter dated, October 31, 2007, to extend 8% Unsecured Subordinated Note  due date *(incorporated by reference from Exhibit 10.37 to  the Form 10-K filed on April 3, 2008)**.*                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.38               |       | First  Amended and Restated Operating Agreement of Liquidmetal Coatings, LLC, dated  February 22, 2008 *(incorporated by reference from Exhibit 2.1 to the  Form 8-K filed on February 22, 2008)**.*                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.39               |       | Form of  Convertible Subordinated Note, dated April 1, 2008 *(incorporated by reference from Exhibit 10.1  to the Form 10-Q filed on August 19, 2008)**.*                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.40               |       | Form of  Convertible Subordinated Note, dated July 1, 2008*(incorporated  by reference from Exhibit 10.2 to the Form 10-Q filed on August 19,  2008)**.*                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.41               |       | Form of  letter dated, July 31, 2008, to extend to change the first redemption  date and amount of the Convertible Subordinated Notes due January 2010 *(incorporated by reference  from Exhibit 10.3 to the Form 10-Q filed on August 19, 2008)**.*                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.42               |       | Promissory Note,  dated October 21, 2008, between Liquidmetal Coatings, LLC and Bank  Midwest N.A. *(incorporated by reference from  Exhibit 10.42 to the Form 10-K filed on April 15, 2009).*                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.43               |       | Form of  Convertible Subordinated Note, dated October 1, 2008 *(incorporated by reference from Exhibit 10.43 to the  Form 10-K filed on April 15, 2009)*.                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.44               |       | Form of  Convertible Subordinated Note, dated January 1, 2009 *(incorporated by reference from Exhibit 10.44 to the  Form 10-K filed on April 15, 2009)*.                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.45               |       | Continuing  Guarantee Agreement, dated January 5, 2009, between John Kang and Hana  Financial, Inc. *(incorporated  by reference from Exhibit 10.45 to the Form 10-K filed on  April 15, 2009).*                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.46               |       | Securities  Purchase Agreement, dated May 1, 2009 (“the Securities Purchase  Agreement”) among Liquidmetal Technologies, Inc. (the “Company) and the  investors listed on the Schedule of Buyers attached hereto (the “Buyers”) *(incorporated by reference from Exhibit 10.1 to the  Form 8-K filed on May 7, 2009).* |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.47               |       | Form of  8% Senior Secured Convertible Subordinated Note issued pursuant to Securities  Purchase Agreement *(incorporated by  reference from Exhibit 10.2 to the Form 8-K filed on May 7,  2009).*                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.48               |       | Form of  Common Stock Purchase Warrant issued in connection with the 8% Senior Secured  Convertible Subordinated Notes *(incorporated by  reference from Exhibit 10.3 to the Form 8-K filed on May 7,  2009).*                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.49               |       | Form of  Common Stock Purchase Warrant issued in connection with the Series A  Preferred Stock *(incorporated by reference from  Exhibit 10.4 to the Form 8-K filed on May 7, 2009).*                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.50               |       | Registration  Rights Agreement, dated May 1, 2009, among the Company and the Buyers *(incorporated by reference from Exhibit 10.5 to the  Form 8-K filed on May 7, 2009)*.                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.51               |       | Security  Agreement, dated May 1, 2009, among the Company and the Buyers *(incorporated by reference from Exhibit 10.6 to the  Form 8-K filed on May 7, 2009).*                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.52               |       | Form of  Convertible Subordinated Note, dated November 1, 2009.                                                                                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 14                  |       | Code  of Ethics for Chief Executive Officer and Senior Financial and Accounting  Officers (*incorporated by reference to Exhibit 14 to  the Form 10-K filed on November 10, 2004*).                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 21                  |       | Subsidiaries  of the Registrant. *(incorporated by  reference from Exhibit 21 to the Form 10-K filed on  November 10, 2004).*                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1                |       | Consent  of Registered Independent Public Accounting Firm, Choi, Kim & Park,  LLP.                                                                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 24.1                |       | Power  of Attorney relating to subsequent amendments (included on the signature  page(s) of this report)                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1                |       | Certification  of Principal Executive Officer pursuant to Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2                |       | Certification  of Principal Financial Officer pursuant to Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1                |       | Certification  pursuant to 18 U.S.C. 1350.                                                                                                                                                                                                                                                                                                                               |

 

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*          Denotes a managementcontract or compensatory plan or arrangement required to be filed as an exhibitthis Form 10-K.

 

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** **

**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                        |   | Liquidmetal Technologies, Inc.                                                  |
|-----------------------------|--------|--------------------------------------------------------------------------------------|
|                        |   |
|                        |   |
|                        | By:    | /s/  Thomas Steipp                                                                   |
|                        |   |
|                        |   | Thomas  Steipp  President and Chief Executive Officer  (Principal Executive officer) |
|                        |   |
| Date:  August 20, 2010 |   |
|                        |   |
|                        | By:    | /s/  Tony Chung                                                                      |
|                        |   |
|                        |   | Tony  Chung  Chief Financial Officer  (Principal Financial and Accounting Officer)   |
|                        |   |
| Date:  August 20, 2010 |   |

 

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**POWER OFATTORNEY**

 

KNOW ALL THESE PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Thomas Steipp and Tony Chung and each of them, jointly and severally,his attorneys-in-fact, each with full power of substitution, for him in any andall capacities, to sign any and all amendments to this Report onForm 10-K, and to file the same, with exhibits thereto and other documentsin connection therewith, with the Securities and Exchange Commission, herebyratifying and confirming all that each said attorneys-in-fact or his substituteor substitutes, may do or cause to be done by virtue hereof.

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this Report on Form 10-K has been signedbelow by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated:

 
| **Signature**       | ** ** | **Title**                                | ** ** | **Date**        |
|---------------------|------------|------------------------------------------|------------|-----------------|
|                |       |                                     |       |            |
| /s/ Abdi Mahamedi   |       | Chairman of the Board and  Director      |       | August 20, 2010 |
| Abdi Mahamedi       |       |                                     |       |            |
|                |       |                                     |       |            |
|                |       |                                     |       |            |
| /s/ Marty Weinstein |       | Vice Chairman of the Board and  Director |       | August 20, 2010 |
| Marty Weinstein     |       |                                     |       |            |
|                |       |                                     |       |            |
| /s/ Robert Biehl    |       | Director                                 |       | August 20, 2010 |
| Robert Biehl        |       |                                     |       |            |
|                |       |                                     |       |            |
| /s/ Iraj Azarm      |       | Director                                 |       | August 20, 2010 |
| Iraj Azarm          |       |                                     |       |            |

 

Certificationsprovided as Exhibits.

 

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** **

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                             | ** ** | **Page** |
|------------------------------------------------------------------------|------------|----------|
|                                                                   |       |     |
| Report  of Independent Registered Public Accounting Firm               |       | 62       |
| Consolidated  Financial Statements:                                    |       |     |
| Consolidated Balance Sheets                                            |       | 63       |
| Consolidated Statements of Operations and  Comprehensive Income (Loss) |       | 64       |
| Consolidated Statements of Shareholders’ Equity  (Deficiency)     |       | 65       |
| Consolidated Statements of Cash Flows                                  |       | 66       |
| Notes to Consolidated Financial Statements                             |       | 68       |

 

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** **

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholders of Liquidmetal Technologies, Inc.

 

Wehave audited the accompanying consolidated balance sheets of LiquidmetalTechnologies, Inc. and subsidiaries (the “Company”) as of December 31,2009 and 2008, and the related consolidated statements of operations andcomprehensive loss, shareholders’ deficiency, and cash flows for the yearsended December 31, 2009, 2008, and 2007. Our audits also included thefinancial statement schedules listed at index in Item 15(a) as of and forthe years ended December 31, 2009, 2008, and 2007. Our responsibility isto express an opinion on the financial statements and financial statementschedules based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Liquidmetal Technologies, Inc.and subsidiaries as of December 31, 2009 and 2008, and the results oftheir operations and cash flows for the years ended December 31, 2009,2008, and 2007, in conformity with accounting principles generally accepted inthe United States of America. Also, in our opinion, such financial statementschedules, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 2 tothe consolidated financial statements, the Company’s significant operatinglosses and working capital deficit raise substantial doubt about its ability tocontinue as a going concern. Management’s plans regarding those matters alsoare described in Note 2. The consolidated financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

 

 

/s/Choi, Kim & Park LLP

 

LosAngeles, California

CertifiedPublic Accountants

 

August 6,2010

 

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands, except share data)**

 
| ** **                                                                                                                                                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                            | ** ** | ** **            | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                            |       |                  |       |                  |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Current assets:                                                                                                                                                       |       |                  |       |                  |       |
| Cash and cash equivalents                                                                                                                                             |       | $                     | 151        |                  | $          | 157 |   |
| Trade accounts receivables, net of allowance for  doubtful accounts of $1,314 and $121                                                                                |       | 1,180                 |       | 2,237                 |       |
| Inventories                                                                                                                                                           |       | 982                   |       | 820                   |       |
| Prepaid expenses and other current assets                                                                                                                             |       | 594                   |       | 967                   |       |
| Total current assets                                                                                                                                                  |       | 2,907                 |       | 4,181                 |       |
| Property, plant and equipment, net                                                                                                                                    |       | 5,668                 |       | 7,021                 |       |
| Other intangibles, net                                                                                                                                                |       | 1,232                 |       | 1,069                 |       |
| Investment in joint venture                                                                                                                                           |       | —                |       | 306                   |       |
| Other assets                                                                                                                                                          |       | 633                   |       | 663                   |       |
| Total assets                                                                                                                                                          |       | 10,440                |       | 13,240                |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  DEFICIENCY**                                                                                                                    |       |                  |       |                  |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Current liabilities:                                                                                                                                                  |       |                  |       |                  |       |
| Accounts payable and accrued expenses                                                                                                                                 |       | 9,111                 |       | 8,563                 |       |
| Deferred revenue                                                                                                                                                      |       | 31                    |       | 40                    |       |
| Short-term debt                                                                                                                                                       |       | 896                   |       | 1,176                 |       |
| Long-term debt, current portion, net of debt  discounts of $0 and $7,128                                                                                              |       | 1,393                 |       | 14,172                |       |
| Warrant liabilities                                                                                                                                                   |       | 3,975                 |       | 692                   |       |
| Conversion feature liabilities                                                                                                                                        |       | 444                   |       | 147                   |       |
| Other liabilities, current portion                                                                                                                                    |       | 141                   |       | 146                   |       |
| Total current liabilities                                                                                                                                             |       | 15,991                |       | 24,936                |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Long-term debt, net of current portion and debt  discounts of $3,227 and $0                                                                                           |       | 12,661                |       | 8,521                 |       |
| Other long-term liabilities, net of current  portion                                                                                                                  |       | 155                   |       | 163                   |       |
| Total liabilities                                                                                                                                                     |       | 28,807                |       | 33,620                |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Shareholders’ deficiency:                                                                                                                                        |       |                  |       |                  |       |
| Liquidmetal Technologies, Inc. shareholders’  deficiency                                                                                                    |       |                  |       |                  |       |
| Preferred stock, $0.001 par value; 10,000,000  shares authorized; 3,183,663 and 0 shares issued and outstanding at  December 31, 2009 and 2008, respectively     |       | 4                     |       | —                |       |
| Common stock, $0.001 par value; 300,000,000 shares  authorized and 47,583,102 and 44,825,402 issued and outstanding at  December 31, 2009 and 2008, respectively |       | 48                    |       | 45                    |       |
| Additional paid-in capital                                                                                                                                            |       | 142,135               |       | 140,204               |       |
| Accumulated deficit                                                                                                                                                   |       | (162,777              | )          | (162,307              | )          |
| Accumulated other comprehensive income                                                                                                                                |       | 1,441                 |       | 1,027                 |       |
| Total Liquidmetal Technologies, Inc.  shareholders’ deficiency                                                                                              |       | (19,149               | )          | (21,031               | )          |
| Noncontrolling interest                                                                                                                                               |       | 782                   |       | 651                   |       |
| Total shareholders’ deficiency                                                                                                                                   |       | (18,367               | )          | (20,380               | )          |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Total liabilities and shareholders’ deficiency                                                                                                                   |       | $                     | 10,440     |                  | $          | 13,240 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

**(in thousands, except per share data)**

 
| ** **                                                                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                      | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                      | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                         |       | $                                 | 14,720     |   | $ | 22,083 |   | $ | 29,022 |   |
| Cost of sales                                                                   |       | 9,097                             |       | 17,131 |   | 26,459 |   |
|                                                                            |       |                              |       |   |   |   |   |
| Gross profit                                                                    |       | 5,623                             |       | 4,952 |   | 2,563 |   |
|                                                                            |       |                              |       |   |   |   |   |
| Operating expenses                                                              |       |                              |       |   |   |   |   |
| Selling, general, and administrative                                            |       | 6,740                             |       | 6,529 |   | 8,921 |   |
| Research and development                                                        |       | 1,173                             |       | 1,022 |   | 1,123 |   |
| Impairment of long-lived assets                                                 |       | 1,381                             |       | 132 |   | — |   |
| Total operating expenses                                                        |       | 9,294                             |       | 7,683 |   | 10,044 |   |
|                                                                            |       |                              |       |   |   |   |   |
| Loss before interest, other income, income taxes,  and non-controlling interest |       | (3,671                            | )          | (2,731 | ) | (7,481 | ) |
|                                                                            |       |                              |       |   |   |   |   |
| Loss from extinguishments of debt                                               |       | (1,471                            | )          | — |   | (648 | ) |
| Change in value of warrants, gain                                               |       | 9,835                             |       | 1,890 |   | 4,923 |   |
| Change in value of conversion feature, gain                                     |       | 1,827                             |       | 1,987 |   | 6,965 |   |
| Other expense                                                                   |       | (308                              | )          | (17 | ) | — |   |
| Other income                                                                    |       | —                            |       | 429 |   | 226 |   |
| Interest expense                                                                |       | (5,862                            | )          | (7,712 | ) | (9,364 | ) |
| Interest income                                                                 |       | —                            |       | 3 |   | 123 |   |
|                                                                            |       |                              |       |   |   |   |   |
| Gain (loss) before income taxes and noncontrolling  interest                    |       | 350                               |       | (6,151 | ) | (5,256 | ) |
|                                                                            |       |                              |       |   |   |   |   |
| Income taxes                                                                    |       | (168                              | )          | — |   | — |   |
|                                                                            |       |                              |       |   |   |   |   |
| Loss before noncontrolling interest                                             |       | 182                               |       | (6,151 | ) | (5,256 | ) |
|                                                                            |       |                              |       |   |   |   |   |
| Noncontrolling interest loss (income)                                           |       | 69                                |       | (421 | ) | (384 | ) |
|                                                                            |       |                              |       |   |   |   |   |
| Income (loss) from continuing operations                                        |       | 251                               |       | (6,572 | ) | (5,640 | ) |
|                                                                            |       |                              |       |   |   |   |   |
| Net Income (loss)                                                               |       | 251                               |       | (6,572 | ) | (5,640 | ) |
|                                                                            |       |                              |       |   |   |   |   |
| Other comprehensive income (loss):                                              |       |                              |       |   |   |   |   |
| Foreign exchange translation gain (loss) during  the period                     |       | 414                               |       | (1,765 | ) | 183 |   |
| Comprehensive income (loss)                                                     |       | $                                 | 665        |   | $ | (8,337 | ) | $ | (5,457 | ) |
|                                                                            |       |                              |       |   |   |   |   |
| Per common share basic and diluted:                                             |       |                              |       |   |   |   |   |
|                                                                            |       |                              |       |   |   |   |   |
| Income (loss) per share - basic                                                 |       | $                                 | 0.01       |   | $ | (0.15 | ) | $ | (0.13 | ) |
| Loss per share - diluted                                                        |       | $                                 | 0.00       |   | $ | (0.15 | ) | $ | (0.13 | ) |
|                                                                            |       |                              |       |   |   |   |   |
| Number of weighted average shares - basic                                       |       | 46,084                            |       | 44,735 |   | 44,730 |   |
| Number of weighted average shares - diluted                                     |       | 214,429                           |       | 44,735 |   | 44,730 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIENCY)**

**(in thousands, except share data)**

 
| ** **                                      | ** ** | **Preferred  Shares** | ** ** | **Common  Shares** | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Non- controlling  Interest** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|--------------------|------------|----------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------|------------|-----------|------------|
| **Balance, December 31, 2006**             |       | —                |       | 44,311,768         |       | $                    | —     |              | $          | 44                               |       | $                        | 136,032    |                                                      | $          | (149,047                            | )          | $         | 2,609      |   | $ | — |   | $ | (10,363 | ) |
| Conversion of notes payable                     |       | —                |       | 365,455            |       | —               |       | 1                 |       | 578                              |       | —                   |       | —                                                    |       | —                              |       | 579       |       |
| Common stocks issued as director’s fees    |       | —                |       | 49,072             |       | —               |       | —            |       | 42                               |       | —                   |       | —                                                    |       | —                              |       | 42        |       |
| Stock-based compensation                        |       | —                |       | —             |       | —               |       | —            |       | 642                              |       | —                   |       | —                                                    |       | —                              |       | 642       |       |
| Foreign exchange translation gain               |       | —                |       | —             |       | —               |       | —            |       | —                           |       | —                   |       | 183                                                       |       | —                              |       | 183       |       |
| Cash distribution to minority interests         |       | —                |       | —             |       | —               |       | —            |       | —                           |       | (23                      | )          | —                                                    |       | —                              |       | (23       | )          |
| Net loss                                        |       | —                |       | —             |       | —               |       | —            |       | —                           |       | (5,640                   | )          | —                                                    |       | —                              |       | (5,640    | )          |
| **Balance, December 31, 2007**             |       | —                |       | 44,726,295         |       | $                    | —     |              | $          | 45                               |       | $                        | 137,293    |                                                      | $          | (154,710                            | )          | $         | 2,792      |   | $ | — |   | $ | (14,580 | ) |
| Common stock issued in lieu of cash             |       | —                |       | 99,107             |       | —               |       | —            |       | 69                               |       | —                   |       | —                                                    |       | —                              |       | 69        |       |
| Stock-based compensation                        |       | —                |       | —             |       | —               |       | —            |       | 578                              |       | —                   |       | —                                                    |       | —                              |       | 578       |       |
| Foreign exchange translation loss               |       | —                |       | —             |       | —               |       | —            |       | —                           |       | —                   |       | (1,765                                                    | )          | —                              |       | (1,765    | )          |
| Cash distribution to minority interests         |       | —                |       | —             |       | —               |       | —            |       | —                           |       | (1,025                   | )          | —                                                    |       | —                              |       | (1,025    | )          |
| Preferred Units capital account of subsidiary   |       | —                |       | —             |       | —               |       | —            |       | 2,264                            |       | —                   |       | —                                                    |       | —                              |       | 2,264     |       |
| Net (loss) income                               |       | —                |       | —             |       | —               |       | —            |       | —                           |       | (6,572                   | )          | —                                                    |       | 651                                 |       | (5,921    | )          |
| **Balance, December 31, 2008**             |       | —                |       | 44,825,402         |       | $                    | —     |              | $          | 45                               |       | $                        | 140,204    |                                                      | $          | (162,307                            | )          | $         | 1,027      |   | $ | 651 |   | $ | (20,380 | ) |
| Convertible preferred stocks issued             |       | 3,305,002             |       |               |       | 4                    |       | —            |       | 1,758                            |       | —                   |       | —                                                    |       | —                              |       | 1,762     |       |
| Conversion of preferred stocks                  |       | (121,339              | )          | 2,757,700          |       | —               |       | 3                 |       | (3                               | )          | —                   |       | —                                                    |       | —                              |       | —    |       |
| Dividends                                       |       | —                |       | —             |       | —               |       | —            |       | —                           |       | (707                     | )          | —                                                    |       | —                              |       | (707      | )          |
| Stock-based compensation                        |       | —                |       | —             |       | —               |       | —            |       | 176                              |       | —                   |       | —                                                    |       | —                              |       | 176       |       |
| Foreign exchange translation gain               |       | —                |       | —             |       | —               |       | —            |       | —                           |       | —                   |       | $                                                         | 414        |                                | —     |      | 414        |   |
| Cash contribution from noncontrolling interests |       | —                |       | —             |       | —               |       | —            |       | —                           |       | —                   |       | —                                                    |       | 200                                 |       | 200       |       |
| Cash distribution to noncontrolling interests   |       | —                |       | —             |       | —               |       | —            |       | —                           |       | $                        | (14        | )                                                         | —     |                                | —     |      | (14        | ) |
| Preferred Units capital account of subsidiary   |       | —                |       | —             |       | —               |       | —            |       | —                           |       | —                   |       | —                                                    |       | —                              |       | —    |       |
| Net income                                      |       | —                |       | —             |       | —               |       | —            |       | —                           |       | $                        | 251        |                                                      | —     |                                | (69        | )         | 182        |   |
| **Balance, December 31, 2009**             |       | 3,183,663             |       | 47,583,102         |       | 4                    |       | $                 | 48         |                             | $          | 142,135                  |       | $                                                         | (162,777   | )                                   | $          | 1,441     |       | $ | 782 |   | $ | (18,367 | ) |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands, exceptshare data)**

 
| ** **                                                                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating activities:**                                                                 | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                                         |       | $                                           | 251        |   | $ | (6,572 | ) | $ | (5,640 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| Adjustments to reconcile loss from operations to  net cash used for operating activities: |       |                                        |       |   |   |   |   |
| Impairment of long-lived assets                                                           |       | 1,381                                       |       | 132 |   | — |   |
| Gain on disposal of asset                                                                 |       | —                                      |       | (15 | ) | (226 | ) |
| (Loss) income attributable to noncontrolling  interest of consolidated subsidiary         |       | (69                                         | )          | 421 |   | 384 |   |
| Depreciation and amortization                                                             |       | 1,055                                       |       | 1,275 |   | 3,102 |   |
| Loss on extinguishment of debt                                                            |       | 2,452                                       |       | — |   | 648 |   |
| Amortization of debt discount                                                             |       | 2,488                                       |       | 3,883 |   | 5,350 |   |
| Stock-based compensation                                                                  |       | 176                                         |       | 578 |   | 642 |   |
| Bad debt expense (recovery)                                                               |       | 1,204                                       |       | (83 | ) | 7 |   |
| Warranty (recovery) expense                                                               |       | (66                                         | )          | 184 |   | 169 |   |
| Gain from change in value of warrants                                                     |       | (9,835                                      | )          | (1,890 | ) | (4,923 | ) |
| Gain from change in value of conversion feature                                           |       | (1,827                                      | )          | (1,987 | ) | (6,965 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| Changes in operating assets and liabilities:                                              |       |                                        |       |   |   |   |   |
| Trade accounts receivable                                                                 |       | (147                                        | )          | 3,012 |   | (1,061 | ) |
| Inventories                                                                               |       | (163                                        | )          | 1,479 |   | 1,467 |   |
| Prepaid expenses and other current assets                                                 |       | (129                                        | )          | (259 | ) | (1 | ) |
| Other assets                                                                              |       | 385                                         |       | 654 |   | (2,211 | ) |
| Accounts payable and accrued expenses                                                     |       | (583                                        | )          | 393 |   | (1,545 | ) |
| Deferred revenue                                                                          |       | (9                                          | )          | (276 | ) | 114 |   |
| Other liabilities                                                                         |       | (13                                         | )          | (501 | ) | 450 |   |
| Net cash (used in) provided by operating  activities                                      |       | (3,449                                      | )          | 428 |   | (10,239 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| **Investing Activities:**                                                                 |       |                                        |       |   |   |   |   |
| Purchases of property and equipment                                                       |       | (458                                        | )          | (1,087 | ) | (1,171 | ) |
| Proceeds from the sale of property and equipment                                          |       | —                                      |       | (17 | ) | 400 |   |
| Investment in patents and trademarks                                                      |       | (300                                        | )          | (51 | ) | (103 | ) |
| Investment in joint venture                                                               |       | 306                                         |       | — |   | (303 | ) |
| Net cash used in investing activities                                                     |       | (452                                        | )          | (1,155 | ) | (1,177 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| **Financing Activities:**                                                                 |       |                                        |       |   |   |   |   |
| Proceeds from borrowings                                                                  |       | 16,627                                      |       | 16,438 |   | 45,863 |   |
| Repayment of borrowings                                                                   |       | (29,078                                     | )          | (18,707 | ) | (33,166 | ) |
| Proceeds from issuance of convertible preferred  stocks                                   |       | 16,228                                      |       | — |   | — |   |
| Proceeds from issuance of preferred units of  subsidiary                                  |       | —                                      |       | 2,500 |   | — |   |
| Redemption of preferred units of subsidiary                                               |       | —                                      |       | (237 | ) | — |   |
| Cash contribution to noncontrolling interest of  consolidated subsidiary                  |       | 200                                         |       | — |   | — |   |
| Cash distributions to holders of noncontrolling  interest of consolidated subsidiary      |       | (14                                         | )          | (1,178 | ) | (23 | ) |
| Net cash provided by (used for) financing  activities                                     |       | 3,963                                       |       | (1,184 | ) | 12,674 |   |
| Effect of foreign exchange translation                                                    |       | (68                                         | )          | 888 |   | (222 | ) |
| Net (decrease) increase in cash and cash  equivalents                                     |       | (6                                          | )          | (1,023 | ) | 1,036 |   |
|                                                                                      |       |                                        |       |   |   |   |   |
| Cash and cash equivalents at beginning of period                                          |       | 157                                         |       | 1,180 |   | 144 |   |
| Cash and cash equivalents at end of period                                                |       | $                                           | 151        |   | $ | 157 |   | $ | 1,180 |   |
|                                                                                      |       |                                        |       |   |   |   |   |
| Supplemental cash flow information                                                        |       |                                        |       |   |   |   |   |
| Interest paid                                                                             |       | $                                           | 1,994      |   | $ | 2,007 |   | $ | 2,874 |   |
| Taxes paid                                                                                |       | $                                           | —     |   | $ | — |   | $ | — |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)**

**(inthousands, except share data)**

 

In 2007, $400 of the Company’s 7%senior convertible notes due July 2007 was converted into 320,000 sharesof the Company’s common stock at a conversion price of $1.25 per share.

 

In 2007, $50 of the Company’s 8%convertible subordinate notes due January 2010 was converted into 45,455shares of the Company’s common stock at a conversion price of $1.10 per share.

 

The accompanying notes arean integral part of the consolidated financial statements.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

**1. Description ofBusiness**

 

Liquidmetal Technologies, Inc.(“Liquidmetal Technologies”) and its subsidiaries (collectively “the Company”)are in the business of developing, manufacturing, and marketing products madefrom amorphous alloys. Liquidmetal Technologies markets and sells Liquidmetal®alloy industrial coatings and also manufactures, markets and sells products andcomponents from bulk Liquidmetal alloys that can be incorporated into thefinished goods of its customers across a variety of industries.   The Company also partners with third-partylicensees and distributors to develop and commercialize Liquidmetal alloyproducts.

 

The Company classifies operationsinto two reportable segments: Liquidmetal alloy industrial coatings and bulkLiquidmetal alloys. Liquidmetal alloy industrial coatings are used primarily asa protective coating for industrial machinery and equipment, such as drill pipeused by the oil drilling industry and boiler tubes used by coal-burning powerplants. Bulk Liquidmetal alloys include potential market opportunities to manufactureand sell products and components for electronic devices, medical devices,defense applications, and sporting goods. In addition, such alloys are used to generate research and developmentservices revenue for developing uses related primarily to defense and medicalapplications as well as potential license fees, royalties, and othercompensation from strategic partnering transactions.

 

On July 24, 2007, the Companytransferred substantially all of the assets of its Liquidmetal alloy industrialcoatings business to a newly formed, newly capitalized subsidiary namedLiquidmetal Coatings, LLC, a Delaware limited liability company (“LMC”), andLMC assumed substantially all of the liabilities of the coatings business.  The transfer included the thermal spraycoatings assets and liabilities acquired under a purchase agreement with FosterWheeler Energy Services in June 2007.  The Company holds a 69.25%ownership interest in LMC.  The resultsof operation of LMC are consolidated and comprise our Liquidmetal alloyindustrial coatings segment for financial reporting purposes.

 

**2. Liquidity**

 

TheCompany has experienced losses from continuing operations during the last threefiscal years and has an accumulated deficit of $162,777 as of December 31,2009.  Net cash used in continuingoperations for the year ended December 31, 2009 was $3,449.  At December 31, 2009, working capital deficitwas $13,084.  As of December 31,2009, the Company’s principal source of liquidity is $151 of cash and $1,180 oftrade accounts receivable.  Suchconditions raise substantial doubt that the Company will be able to continue asa going concern. (see Note 20)

 

OnMay 1, 2009, the Company completed a financing transaction (the “Transaction”)whereby aggregate cash of $2,500 and principal and accrued interest of $20,625due under the previously issued 8% Convertible Subordinated Notes due January 2010(the “Prior Notes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7,500 of new 8% Senior Secured Convertible Subordinated Notesdue January 2011 (the “Exchange Notes”). The Transaction was consummated pursuant to a Securities Purchase andExchange Agreement, dated May 1, 2009 (the “Securities Purchase Agreement”),among the exchanging note holders and investors (collectively, the “Buyers”).  The Securities Purchase Agreement gives theBuyers option to subscribe for an additional 1,000,000 shares of Series A-1Preferred Stock at $5.00 per share at any time prior to six months from theclosing date (the “Series A-1 Option”). On August 5, 2010, the Companyrepaid in full all principal and interest on the Exchange Notes.  All security interests in Company assetssecuring such obligations under the Exchange Notes were released andterminated. (see Note 11 and Note 20)

 

On October 30,2009, the Company entered into an agreement with various investors, to issue180,000 shares of convertible Series A-1 Preferred Stock for $900 of cashpursuant to the Series A-1 Option. (see Note 11)

 

On May 28, 2010,the Company issued $2,000,000 of 13% Subordinated Promissory Note (“January 2011Subordinated Note”) due on the earlier date of January 3, 2011 or the dateon which all outstanding amounts are due under the Company’s 8% January 2011Notes.  Following the due date, theinterest on the Subordinated Note shall be 15%. The January 2011 Subordinated Note may be repaid in whole or inpart at any time without penalty or premium, but is subordinate in right ofpayment to the January 2011 Notes and may not be paid until after the January 2011Notes are paid in full.  The company may,in its sole discretion, elect to pay all or any portion of the outstandingprincipal or accrued interest in cash or the Company’s common stock or anycombination thereof, at a value equal to the lower of $0.26 per share or theaverage market price per share for the 10 previous trading days immediatelyprior to the date the payment is made. As a condition for the January 2011Subordinated Note, Carlyle Liquid Holdings, LLC, a current stockholder of theCompany granted the holder of the January 2011 Subordinated Note a warrantto purchase up to 7,700,000 shares of the Company’s common stock at a priceequal to $0.26 per share, which warrant is

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

exercisable for aperiod of 90-days beginning on the date in which the Company repays the January 2011Subordinated Note in cash (if it repays in cash).  OnAugust 5, 2010, the Company repaid in full all principal and accruedinterest of $2,046 on the January 2011 Subordinated Note.  In connection with the repayment, on August 10,2010, the Company entered into a Subscription Agreement pursuant to which theCompany issued 7,870,307 shares of the Company’s common stock for an aggregateprice of $2,046. (see Note 20)

 

Additionally, theCompany has approximately $298 of principal and accrued interest outstanding asof December 31, 2009, under the 8% unsecured subordinated notes (the “BridgeNotes”), which were due August 17, 2007. On August 5, 2010, the Company repaid in full all principal andaccrued interest of $314 on the Bridge Notes. (see Note 20)

 

The Company has$284 of outstanding loan as of December 31, 2009 under a factoring, loan,and security agreement with a financing company.  In June 2009, the Company received aformal notice of default from the financing company for repayment of the outstanding loan balance and has entered into a settlementagreement with the financing company whereby it agreed to repay approximately$100 each month until the outstanding loans and accrued fees have beenrepaid.   As of December 31, 2009,the Company was unable to pay the $100 monthly payments and is in discussionswith the financing company to either extend or enter into another settlementagreement. On August 5, 2010, the Company repaid in full all principal,accrued interest and fees of $309 on the factoring loan.  All security interests in Company assetssecuring such obligations under the factoring loan were released andterminated. (see Note 20)

 

The Company has outstanding liens on assets by ourSouth Korean subsidiary by various creditors for past-due trade payables totaling$1,347, of which $1,072 is held by creditors in South Korea, as of December 31,2009.  The Company is currently workingto resolve the matter with each creditor****by seeking aforbearance or compromise.  If theCompany cannot repay the amounts due or obtain a forbearance or compromise, thecreditors may seek to foreclose on the Company’s assets located in SouthKorea.  Such a foreclosure would havematerial adverse effect on its operations, financial condition, and results ofoperations.

 

**3. Summary ofSignificant Accounting Policies**

 

*Principles ofConsolidation.*Theconsolidated financial statements include the accounts of LiquidmetalTechnologies, Inc. and its wholly-owned subsidiaries, LiquidmetalTechnologies Co., Ltd., formerly Liquidmetal Korea Co., Ltd., (“LMTKorea”), located in South Korea, Liquidmetal Golf and its subsidiaries, whichincluded the retail golf segment, now accounted for as a discontinuedoperations, and its majority-owned subsidiary, Liquidmetal Coatings, LLC,located in Texas. All intercompany balances and transactions have beeneliminated.

 

*RevenueRecognition.*Revenueis recognized pursuant to applicable accounting standards including Securitiesand Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) Topic 13, *“Revenue Recognition”*, and *SAB 104, Revenue Recognition*. SAB 101 asamended and SAB 104 summarize certain points of the SEC staff’s views inapplying generally accepted accounting principles to revenue recognition infinancial statements and provide guidance on revenue recognition issues in theabsence of authoritative literature addressing a specific arrangement or aspecific industry.  The Company’s revenuerecognition policy complies with the requirements of SAB 101 and SAB 104.Revenue is recognized at the time the Company ships its products, as this iswhen title passes to the customer and all other incidences of a sale haveoccurred. Revenue is deferred and included in liabilities when the Companyreceives cash in advance for services not yet performed or goods not yetdelivered.

 

The Company applies the percentageof completion method to recognize revenue earned from government contracts thathave cost-plus-fixed-fee arrangements. These arrangements provide the Company with full reimbursement on theactual cost incurred, plus a fixed fee that the Company is entitled to.  These arrangements are covered by theAmerican Institute of Certified Public Accountants Statement of Position 81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts* (SOP 81-1) and Accounting ResearchBulletin No. 45, *Long-termConstruction-Type Contracts* (ARB 45). In addition, cost-reimbursablecontracts are also specifically covered by Accounting Research Bulletin No. 43,Chapter 11, Section A, *GovernmentContracts, Cost-Plus-Fixed Fee Contracts*(ARB 43). Substantially allof our cost-reimbursable and time and material contracts are with the U.S.Government, primarily with the Department of Defense.  Revenues recognized under cost-plus-fixed feeare consistent with percentage of completion method and are consistent with ARB43.

 

Sales on cost-reimbursable plusfixed fee type contracts are recognized as allowable costs are incurred on thecontract and become billable to the customer, at an amount equal to theallowable costs plus the estimated profit on those costs.  The estimated profit on a cost-reimbursablecontract is generally fixed or variable based on the contract fee arrangement.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

*Cash and CashEquivalents.*TheCompany considers all highly liquid investments with maturity dates of threemonths or less when purchased to be cash equivalents. The Company limits theamount of credit exposure to each individual financial institution and placesits temporary cash into investments of high credit quality. There are nosignificant concentrations of credit risk to the Company associated with cashand cash equivalents.

 

*Restricted Cash.* The Company considers all cash and cash equivalents heldunder restrictive accounts as restricted cash.

 

*MarketableSecurities.*TheCompany follows Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) 320 *Accountingfor Certain Investments in Debt and Equity Securities*, and classifiesall of its investment securities as available -for-sale. Available-for-salesecurities are carried at fair value, with the unrealized gains and lossesreported in Shareholders’ Equity (Deficiency) under the caption “AccumulatedOther Comprehensive Income.”

 

*Trade AccountsReceivables.*TheCompany grants credit to its customers generally in the form of short-termtrade accounts receivable. The creditworthiness of customers is evaluated priorto the sale of inventory.  As of December 31,2009, one customer represented 21%, or $250, of the total outstanding tradeaccounts receivable.  As of December 31,2008, one customer represented 18%, or $411, of the total outstanding tradeaccounts receivable.

 

The allowance for doubtful accountsreflects management’s best estimate of probable losses inherent in the tradeaccounts receivable.  Management primarily determines the allowance basedon the aging of accounts receivable balances, historical write-off experience,customer concentrations, customer creditworthiness and current industry andeconomic trends.  The Company’s provisions for uncollectible receivablesare included in selling, general and administrative expense in the accompanyingconsolidated statements of operations and comprehensive loss.

 

*Inventories.*Inventories are accounted for using the moving averagebasis and reported at the lower of cost or market. Inventories consist of rawmaterials, work in process, and finished goods. The Company records write-offsfor inventory obsolescence when it is deemed that there is impairment of thevalue of the inventories on hand.

 

*Property, Plantand Equipment.*Property,plant and equipment are stated at cost less accumulated depreciation andamortization. Additions and major renewals are capitalized. Repairs andmaintenance are charged to expense as incurred. Upon disposal, the related costand accumulated depreciation are removed from the accounts, with the resultinggain or loss included in operating income. Depreciation is provided principallyon the straight-line method over the estimated useful lives of the assets,which range from two to twenty years.

 

Leased property meeting certaincriteria is capitalized and the present value of the related lease payments isrecorded as a liability. Amortization of capitalized leased assets is providedon the straight-line method over the estimated useful lives of the assets,which is five years.

 

*IntangibleAssets.*Intangibleassets consist of the costs incurred to purchase patent rights and costsincurred to internally develop patents and trademarks. Intangible assets arereported net of accumulated amortization. Patents and trademarks are amortizedusing the straight-line method over a period based on their contractual livesranging from ten to seventeen years.

 

*Goodwill. *BeginningJanuary 1, 2002, the Company adopted FASB ASC. 350, *Goodwill*. According to this statement,goodwill and other intangible assets are no longer subject to amortization, butinstead must be reviewed annually for impairment by applying a fair value-basedtest.

 

*Impairment ofLong-lived Assets*. The Company reviews long-lived assets to be heldand used in operations for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may be impaired. Animpairment loss is recognized when the estimated fair value of the assets isless than the carrying value of the assets. The Company recognized $1,381, $132, and $0 during the years ended December 31,2009, 2008 and 2007, respectively, for impairment of long-lived assets.

 

*Fair Value ofFinancial Instruments.*Theestimated fair values of amounts reported in the consolidated financialstatements have been determined using available market information andvaluation methodologies, as applicable. The carrying amount of cash and cashequivalents, accounts receivable, accounts payable, and all other currentassets and liabilities approximate their fair value because of their short termmaturities at December 31, 2009 and 2008, unless otherwise stated. Thefair value of non-current assets and liabilities approximate their carryingvalue unless otherwise stated.  The fairvalue of the Company’s long-term debt is based on interest rates that would beavailable to the Company for the issuance of debt with similar terms.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

*Research andDevelopment Expenses.*Researchand development expenses represent salaries, related benefits expense, expensesincurred for the design and testing of new processing methods and otherexpenses related to the research and development of Liquidmetal alloys.Development costs incurred in research and development activities are expensedas incurred.

 

*Advertising andPromotion Expenses.*Advertisingand promotion expenses are expensed when incurred. Advertising and promotionexpenses were $38, $22, and $1, for the years ended December 31, 2009,2008 and 2007, respectively.

 

*Legal Costs.* Legal costs areexpensed as incurred.

 

*Debt DiscountAmortization.*Debtdiscounts for notes payable are amortized to interest expense, using a method thatapproximates the interest method over the term of the related debt instruments.

 

*Stock-BasedCompensation*.  The Company accounts for share-basedcompensation in accordance with the fair value recognition provisions of FASBASC 718, *Share-based Payment*,which requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the consolidated financialstatements based on their fair values. The fair value of stock options iscalculated by using the Black-Scholes option pricing formula that requiresestimates for expected volatility, expected dividends, the risk-free interestrate and the term of the option. If any of the assumptions used in theBlack-Scholes model change significantly, share-based compensation expense maydiffer materially in the future from that recorded in the current period. Seeadditional information related to share-based compensation in Note 13.

 

*Income Taxes.*Income taxes are provided under the asset and liabilitymethod as required by FASB ASC 740, *Accountingfor Income Taxes*. Under this method, deferred income taxes arerecognized for the tax consequences of “temporary differences” by applyingenacted statutory tax rates applicable to future years to differences betweenthe financial statement carrying amounts and the tax basis of existing assetsand liabilities. The effect of a tax rate change on deferred taxes isrecognized in operations in the period that the change in the rate is enacted.Valuation allowances are established when necessary to reduce net deferred taxassets to the amount expected to be realized.

 

The Company adopted the provisionsof Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*, an interpretation of the FASBStatement No. 109 (“FIN 48”) on January 1, 2007. At the adoptiondate and as of December 31, 2007, the Company had no material unrecognizedtax benefits and no adjustments to liabilities or operations were required. TheCompany recognizes interest and penalties related to uncertain tax positions inincome tax expense. There was no expense related to interest and penalties forthe year ended December 31, 2009.

 

*Translation ofForeign Currency*.The Company applies FASB ASC 830*Foreign Currency*, for translating foreign currency into USdollars in our consolidation of the financial statements.  Upon consolidation of the Company’s foreignsubsidiaries into the Company’s consolidated financial statements, any balanceswith the subsidiaries denominated in the foreign currency are translated at theexchange rate at year end. The financial statements of LMT Korea have beentranslated based upon Korean Won as the functional currency.  LMT Korea’s assets and liabilities weretranslated using the exchange rate at period end and income and expense itemswere translated at the average exchange rate for the periods reported. Theresulting translation adjustment was included in other comprehensive income(loss).

 

*Earnings PerShare.*Basic earnings per share (“EPS”)is computed by dividing earnings (losses) attributable to commonshareholders by the weighted average number of common shares outstanding forthe periods. Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock.

 

*Use of Estimates.*The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reported periods.Actual results could differ from those estimates. These management estimatesare primarily related to impairment of long-lived assets, inventory valuation,product warranty, and the allowance for bad debt account balances.

 

*SubsequentEvents.*  In May 2009, the FASBissued a new accounting standard which established general accounting standardsand disclosure for subsequent events.  Inaccordance with this standard, the Company evaluated subsequent events through August 20,2010, the date the company filed this Annual Report on Form 10-K with theSEC.

 

*Reclassifications.* Certain amounts from prior years have been reclassified toconform to the current year’s presentation.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

*NewAccounting Pronouncements.*

 

InApril 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”),which amends SFAS No. 115, Accounting for Certain Investments in Debt andEquity Securities, and SFAS No. 124, Accounting for Certain InvestmentsHeld by Not-for-Profit Organizations. This FSP amends the other-than-temporaryguidance in U.S. GAAP for debt securities to make the guidance more operationaland to improve the presentation and disclosure of other-than-temporaryimpairments on debt and equity securities. The provisions of FSP FAS 115-2 andFAS 124-2 that amend SFAS 115 and SFAS 124 are effective for interim and annualreporting periods ending after June 15, 2009. The implementation of thisFSP is not expected to affect the Company’s consolidated results of operationsor financial condition.

 

InMay 2009, the FASB issued authoritative guidance establishing generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued.  This guidance, which was incorporated intothe Accounting Standards Codification (“ASC”) Topic 85, “Subsequent Events”,was effective for interim or annual periods ended after June 15, 2009 andthe adoption did not have any impact on the Company’s financial statements.

 

InJune 2009, the FASB issued SFAS 166, “Accounting for Transfers ofFinancial Assets,” which will be effective for us on January 1,2010.  SFAS 166 removes the concept of a qualifying special-purposeentity (QSPE) from SFAS 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishment of Liabilities”, and removes theexception from applying FASB Interpretation 46R, “Consolidation of VariableInterest Entities”. This statement also clarifies the requirements forisolation and limitations on portions of financial assets that are eligible forsale accounting. The Company is currently evaluating the impact of adoptingthis standard on the consolidated financial statements.

 

InJune 2009, the FASB issued SFAS 167, “Amendments to FASBInterpretation No. 46R,” which will be effective for us on January 1,2010. SFAS 167 requires an analysis to determine whether a variable interestgives the entity a controlling financial interest in a variable interestentity. This statement requires an ongoing reassessment and eliminates thequantitative approach previously required for determining whether an entity isthe primary beneficiary. The Company does not expect a material effect from theadoption of this standard on our consolidated financial statements.

 

InJune 2009, the FASB issued SFAS 168, “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles — areplacement of FASB Statement No. 162,” which was effective for us on September 30,2009.  SFAS 168’s objective is to establish the FASB AccountingStandards Codification as the source of authoritative non-governmentalaccounting principles to be applied in the preparation of financial statementsin conformity with US GAAP. Although SFAS 168 does not change GAAP, theadoption of SFAS 168 will impact the Company’s consolidated financialstatements since all future references to authoritative accounting literaturewill be in accordance with SFAS 168.

 

In August 2009, theFASB issued Accounting Standards Update (ASU) 2009-05, *Fair Value Measurements and Disclosures (Topic 820)*-*Measuring Liabilities at Fair Value*.ASU 2009-05 provides clarification that in**circumstancesin which a quoted price in an active market for the identical liability is notavailable, a reporting entity**isrequired to measure fair value of such liability using one or more of thetechniques prescribed by the update. The**adoptionof this guidance is not expected to have a material impact on the Company’sconsolidated financial statements.

 

Otherrecent accounting pronouncements issued by the FASB (including its EmergingIssues  Task Force), the AICPA and theSEC did not or are not believed by management to have a material impact on theCompany’s present or future consolidated financial statements.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

**4. Trade accountsreceivable**

 

Trade accounts receivables fromcontinuing operations were comprised of the following:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Trade accounts receivable             |       | $                     | 2,494      |   | $ | 2,358 |   |
| Less: Allowance for doubtful accounts |       | (1,314                | )          | (121 | ) |
| Trade accounts receivable, net        |       | $                     | 1,180      |   | $ | 2,237 |   |

 

Asof December 31, 2009,  $1,256 isincluded in the allowance for doubtful accounts for reserves on accountsreceivable from Liquidmetal Korea Co., Ltd. (“LMK”).  There were no such reserves as of 12/31/08.

 

**5. Inventories**

 

Inventories were comprised of thefollowing:  

 
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Raw materials     |       | $                     | 675        |   | $ | 426 |   |
| Work in process   |       | 94                    |       | 184 |   |
| Finished goods    |       | 213                   |       | 210 |   |
| Total inventories |       | $                     | 982        |   | $ | 820 |   |

 

TheCompany analyzes inventory held for any excess or obsolescence issues.  Any amounts considered excess or obsolete arewritten off.  Further, as significantamount of sales of Liquidmetal bulk alloy parts are used primarily in consumerelectronics components, our inventory is subject to fluctuations in demand forthose consumer electronics goods. Accordingly, the Company reduces the carryingvalue of raw materials held by its subsidiaries, by the amounts considered tobe excess or obsolete.  During the yearsended December 31, 2009 and 2008, total write downs of excess or obsoleteinventory included in “Cost of sales” in the accompanying Statement ofOperations and Comprehensive Loss was $836 and $199, respectively, primarilyfrom discontinued Liquidmetal bulk alloy parts used in our customer’s certaincell phone models.  There were no suchwrite downs as of December 31, 2007.

 

**6. Property, Plantand Equipment**

 

Property, plant and equipmentconsist of the following:

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                            |       |                  |       |   |   |
| Machinery and equipment                         |       | $                     | 12,909     |   | $ | 11,719 |   |
| Computer equipment                              |       | 779                   |       | 750 |   |
| Office equipment, furnishings, and improvements |       | 1,165                 |       | 1,002 |   |
| Buildings                                       |       | 7,345                 |       | 8,042 |   |
| Total                                           |       | 22,198                |       | 21,513 |   |
| Accumulated depreciation                        |       | (16,530               | )          | (14,492 | ) |
| Total property, plant and equipment, net        |       | $                     | 5,668      |   | $ | 7,021 |   |

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

Depreciation expense is classifiedas follows:

 
| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                              |       |   |   |   |   |
| Cost of sales                       |       | $                                 | 869        |   | $ | 1,065 |   | $ | 2,831 |   |
| Selling, general and administrative |       | 46                                |       | 86 |   | 153 |   |
| Research and development            |       | 3                                 |       | 1 |   | — |   |
| Total depreciation expense          |       | $                                 | 918        |   | $ | 1,152 |   | $ | 2,984 |   |

 

**7. OtherIntangible Assets**

 

Intangible assets consist of the following:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                 |       |                  |       |   |   |
| Purchased and licensed patent rights |       | $                     | 566        |   | $ | 566 |   |
| Internally developed patents         |       | 1,657                 |       | 1,357 |   |
| Trademarks                           |       | 91                    |       | 91 |   |
| Total                                |       | 2,314                 |       | 2,014 |   |
| Accumulated amortization             |       | $                     | (1,082     | ) | $ | (945 | ) |
| Total intangible assets, net         |       | $                     | 1,232      |   | $ | 1,069 |   |

 

Amortization expense was $137,$123, and $123 for the years ended December 31, 2009, 2008 and 2007,respectively.  The estimated aggregateamortization expense for each of the five succeeding years is as follows:

 
| **December 31,** | ** ** | **Aggregate Amortization Expense** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|
| 2010                  |       |                                         | 138        |   |
| 2011                  |       |                                         | 137        |   |
| 2012                  |       |                                         | 126        |   |
| 2013                  |       |                                         | 115        |   |
| 2014                  |       |                                         | 97         |   |

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                 |       |                  |       |   |   |
| Purchased and licensed patent rights |       | $                     | (359       | ) | $ | (324 | ) |
| Internally developed patents         |       | (660                  | )          | (567 | ) |
| Trademarks                           |       | (63                   | )          | (54 | ) |
| Total                                |       | $                     | (1,082     | ) | $ | (945 | ) |

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

The weighted average amortizationperiods for each of the years ended December 31, 2009, 2008, 2007, is asfollows:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchased  and licensed patent right |       | 17                    |       | 17 |   | 17 |   |
| Internally  developed patents        |       | 17                    |       | 17 |   | 17 |   |
| Trademarks                           |       | 10                    |       | 10 |   | 10 |   |

 

Purchased patent rights representthe exclusive right to commercialize the bulk amorphous alloy and otheramorphous alloy technology acquired from California Institute of Technology (“Caltech”),a shareholder, through a license agreement with Caltech and other institutions.All fees and other amounts payable by the Company for these rights and licenseshave been paid or accrued in full, and no further royalties, license fees orother amounts will be payable in the future under the License Agreements.

 

In addition to the purchased andlicensed patents, the Company has internally developed patents. Internallydeveloped patents include legal and registration costs incurred to obtain therespective patents. The Company currently holds various patents and numerouspending patent applications in the United States, as well as numerous foreigncounterparts to these patents outside of the United States.

 

**8. OtherLiabilities**

 

The other liabilities balanceconsists of accrued severance and operating lease costs associated with theCompany’s cost reduction measures for the Tampa, Florida executive offices.

 
| Accrued severance                                 |   | $      | 242    |   | $      | 255 |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|-----|--------|
| Accrued operating lease costs                     |   | 54     |   | 54     |   |
| Accrued capital lease costs                       |   | — |   | — |   |
| Total                                             |   | 296    |   | 309    |   |
| Less current portion                              |   | (141   | )      | (146   | )      |
| Other long term liabilities, less current portion |   | $      | 155    |   | $      | 163 |   |

 

During2003, the Company initiated activities to substantially reduce the number ofemployees and consolidate manufacturing and administrative facilities toimprove operational effectiveness and efficiency and reduce expenses.  Certain relocating expenses associated withthe move have been recorded and total liability accrued from the relocation andterminations in 2003, including the severance and lease accruals, were $54 asof both December 31, 2009 and 2008.

 

All leases with an initial termgreater than one year are accounted for under FASB ASC 840 *Leases.*These leases are classified aseither capital leases or operating leases, as appropriate.  Assets under capital leases are capitalizedusing interest rates appropriate at the inception of each lease.  At December 31, 2009, the cost recordedfor SEM Microscope and the JSM 6360 Electron Microscope under the capital leasewas $47 and $320, respectively, and the accumulated depreciation was $46 and$320, respectively.  At December 31,2008, the cost recorded for SEM Microscope and the JSM 6360 Electron Microscopeunder the capital lease was $47 and $320, respectively, and the accumulateddepreciation was $41 and $320, respectively.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

**9. ProductWarranty**

 

Management estimates productwarranties as a percentage of certain bulk alloy product sales earned duringthe period. As of December 31, 2009 and 2008, the Company used 5% of bulkalloy product sales as an estimate of warranties to be claimed.  As of December 31, 2009, the Companyused 1% of coatings applications sales as estimate of warranties to beclaimed.  During the years ended December 31,2009 and 2008, the Company’s product warranty accrual balance had the followingactivity:

 
| Balance, December 31, 2007 |   | $    | 631    |   |
|---------------------------------|--------|------|--------|--------|
| Accrual reduction               |   | 26   |   |
| Warranty charges                |   | (343 | )      |
| Balance, December 31, 2008 |   | $    | 314    |   |
| Expense accrual                 |   | 0    |   |
| Warranty charges                |   | (30  | )      |
| Balance, December 31, 2009 |   | $    | 284    |   |

 

The product warranty accrualbalance was included in accounts payable and accrued expenses at December 31,2009 and December 31, 2008.

 

**10. Notes Payable**

 

Unsecured Subordinated Note

 

On May 17, 2006, September 21,2006, and December 1, 2006, the Company issued 8% Unsecured SubordinatedNotes due August 2007 in the aggregate principal amount of $4,584 (the “August 2007Subordinated Notes”).  The August 2007Subordinated Notes are unsecured and became due August 2007.

 

During 2007 and 2008,the Company retired $1,925 and $1,650 of the August 2007 SubordinatedNotes, respectively.  During the second quarterof 2009, the Company retired $750 of the August 2007 Subordinated Notes.

 

As of December 31,2009 and 2008, the Company’s gross outstanding loan balance of the August 2007Subordinated Notes totaled $259 and $1,009, respectively, and is included in currentportion of long-term debt.  As of December 31,2009, the effective interest rate for the August 2007 Subordinated Noteswas 8%.  (see Note 20)

 

Secured Convertible SubordinatedNotes

 

On January 3, 2007and December 28, 2007, the Company issued 8% Convertible SubordinatedNotes due January 2010 in the aggregate principal amount of $17,300 (the “January 2010Notes”).  Additionally, during 2007, 2008 and 2009, the Company issued$971, $1,315, and $723 of additional January 2010 Notes for accrued interest,respectively.  The January 2010Notes were convertible into the Company’s common stock at $1.10 per share.

 

On May 1, 2009,the January 2010 Notes were retired as part of a financing transaction(see Senior Secured Convertible Notes below).

 

The Company’s grossoutstanding loan balance of the January 2010 Notes totaled $0 and $19,113as of December 31, 2009 and 2008, respectively.  As of December 31,2009 and 2008, un-amortized discounts for conversion feature, warrants, andcash discount totaled $0 and $7,128, respectively, and other asset debtissuance costs totaled $0 and $655, respectively.  Interest expense forthe amortization of debt issuance cost and discount on note was $1,816 and$3,707 for the years ended December 31, 2009 and 2008, respectively.

 

Pursuant to FASB ASC815, *Derivatives and Hedging,*  the Company is required to report a value ofthe conversion liability as a fair value and record the fluctuation to the fairvalue of the conversion feature liability to current operations.  The change in the fair value of theconversion feature liability resulted in losses of $1,137 and $1,987 for yearsended December 31, 2009 and 2008, respectively.

 

Senior SecuredConvertible Notes

 

On May 1, 2009,the Company completed a financing transaction (the “Transaction”) wherebyaggregate cash of $2,500 and principal and accrued interest of $20,625 dueunder the previously issued 8% Convertible Subordinated Notes due January 2010(the “January 2010 Notes”) were exchanged for 500,000 shares ofconvertible Series A-1 Preferred Stock with an original issue price of$5.00 per share, 2,625,002 shares Series A-2 Preferred Stock with anoriginal issue price of $5.00 per share, and $7,500of new 8% Senior Secured Convertible Notes due January 2011 (the “January 2011Notes”).  Transaction was consummatedpursuant to a Securities Purchase and Exchange Agreement, dated May 1,2009 (the “Securities Purchase Agreement”), among the exchanging note holdersand investors (collectively, the “Buyers”).  The Securities PurchaseAgreement gives the Buyers

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

option to subscribe for anadditional 1,000,000 shares of preferred stock at $5.00 per share at any timeprior to six months from the closing date. Additionally, 8,138,352 of previously issued warrants to purchase commonshares held by holders of the January 2010 Notes have been cancelled inthe Transaction.

 

The January 2011 Notes are dueJanuary 3, 2011 and bear annual interest rate of 8% with interest payablein October and April in cash or, at the Company’s option, in the formof additional notes (in which case the interest rate will be 10%). (see Note20)  The preferred stocks accruecumulative dividends at an annual rate of 8%, which is payable semi-annually.Beginning on the second anniversary of the initial issuance, the dividend willincrease to 10%.  As of December 31, 2009, the Company hasaccrued dividends of $707 included in accounts payable and other accruedexpenses.  Thedividends are payable in cash or in kind by the issuance of the Company ofadditional preferred stock, only when and as declared by the Company’s Board ofDirectors.

 

The Series A-1 PreferredStock, Series A-2 Preferred Stock, and January 2011 Notes areconvertible into the Company’s common stock at conversion price of $0.10,$0.22, and $0.60 per common share, respectively.  The Company issued warrants to purchase3,125,007 shares and 42,329,407 shares of the Company’s common stock at anexercise of $0.60 and $0.50 per share to the buyers of the January 2011Notes and preferred stocks, respectively. The warrants will expire on January 3, 2012.  The conversion prices and the number ofcommon stock issuable under the preferred stocks, January 2011 Notes andwarrants are subject to adjustments for anti-dilution purposes.

 

In connection with the Transaction,the Company and the Buyers entered into a Registration Rights Agreement underwhich the Company is required, upon the written request of the holders of morethan fifty percent (50%) of the securities underlying the January 2011Notes, warrants, and preferred stocks, after 180 days of the closing of theTransaction, to file a registration statement with the SEC covering the resaleof the shares of Company’s common stock issuable pursuant to the January 2011Notes, the warrants and the preferred stocks and to use its best efforts tohave the registration declared effective at the earliest date (but in no eventlater than 60 days after filing if there is no SEC review of the registrationstatement, or 120 days if there is an SEC review).   The Company maybe required to pay liquidated damages as set forth in the Registration RightsAgreement, if the registration statement is not filed or does not becomeeffective on a timely basis.

 

The redemption of the previouslyissued January 2010 Notes was treated as an extinguishment of debt inaccordance with Emerging Issues Task Force No. 96-19, “Debtors Accountingfor a Modification or Exchange of Debt Instruments.”  The Transaction resulted in a $2,029 lossfrom extinguishment of debt, which consisted of write down of $503 other assetdeferred issue costs, $5,487 debt discount, $1,306 decrease in conversionfeature liability of the extinguished notes, $2,347 decrease in warrantliability from the warrants redeemed from holders of the January 2011Notes, and $308 write off of accrued fees.

 

On November 1, 2009, theCompany issued $378 of additional January 2011 Notes for accrued interestdue under the notes in lieu of cash payments.

 

Pursuant to Statement of FinancialAccounting Standards No. 133, “Accounting for Derivative Instruments andHedging Activities,” EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock,”EITF 00-27, “Application of Issue No. 98-5 to Certain ConvertibleInstruments,” and EITF 05-2 “The Meaning of ‘Conventional Convertible DebtInstrument’ in EITF Issue No. 00-19,” the original fair value of theembedded conversion feature of $3,367 have been recorded as conversion featureliability as the debt is considered nonconventional convertible debt. Theoriginal fair value was computed using the Black-Scholes model under thefollowing assumptions: (1) expected life of 1.68 years; (2) volatilityof 176%; (3) risk free interest of 0.92% and dividend rate of 0%. Inaddition, the Company is required to report a value of the conversion liabilityas a fair value and record the fluctuation to the fair value of the conversionfeature liability to current operations.

 

The change in the fair value of theconversion feature liability resulted in gains of $1,827 for the year ended December 31,2009.  The fair value of conversionfeature outstanding at December 31, 2009 was $444.  The fair value of conversion featureoutstanding at December 31, 2009 was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 1.01 years; (2) volatilityof 152%, (3) risk free interest of 0.5% and dividend rate of 0%.

 

Pursuant to FASB ASC 815 *Derivaties and Hedging*, the original fair values of thewarrants of $14,773 have been recorded as warrant liability, which was computedusing the Black-Scholes pricing model under the following assumptions: (1) expectedlife of 2.67 years; (2) volatility of 176%; (3) risk free interest of1.39% and (4) dividend rate of 0%.

 

The original fair value of the embeddedconversion feature of $3,367 was recorded as discounts on the convertible notesand the original fair value of the warrants issued to buyers of the January 2011Notes of $999 was recorded as discounts of the convertible notes. The originalfair value of warrants issued to buyers of preferred stocks of $13,774 wasrecorded as reduction of additional paid-in capital. In addition, the Companyincurred $440 of direct costs relating to the Transaction, of which $143 of wasrecorded as debt issuance cost in other assets relating to issuance of theconvertible notes and $297 was recorded as reduction of additional paid-incapital relating to the issuance of the preferred stocks.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

The Company’s gross outstandingloan balance of the January 2011 Notes totaled $7,878 as of December 31,2009.  As of December 31, 2009,un-amortized discounts for conversion feature and warrants totaled $3,227, andother asset debt issuance costs totaled $104.  Interest expense for theamortization of debt issuance cost and discount on note was $1,219 for the yearended December 31, 2009.  The effective interest rate of the January 2011Notes was 67% as of December 31, 2009.

 

The following is a repaymentschedule of the January 2011 based on maturity date of the notes:

 
| **January 2011  Notes** | ** ** | ** **   | ** ** |
|------------------------------|------------|--------------|------------|
| **Repayment  Schedule**      | ** ** | **Minimum**  | ** ** |
| **December 31,**        | ** ** | **Payments** | ** ** |
|                         |       |         |       |
| 2010                         |       | $            | —     |   |
| 2011                         |       | 7,878        |       |
|                         |       |         |       |
| Total                        |       | $            | 7,878      |   |

 

Factoring Agreement

 

The Company entered into aFactoring, Loan, and Security Agreement (the “Agreement”) with a financingcompany on April 21, 2005.  Theagreement will continue until February 1, 2008 and will renew annuallythereafter.  All borrowings are securedby outstanding receivables specifically assigned to the financing company.  Further, pursuant to a Continuing GuarantyAgreement, dated January 5, 2009, the outstanding borrowings arepersonally guaranteed by John Kang, the Company’s formerChairman.  Assigned receivables areconsidered “Approved” or “Non-Approved” by the financing company.  Borrowings made against non-approvedreceivables assigned are limited to $1,000 and total borrowings made onapproved and non-approved receivables assigned are limited to $5,000.

 

Payments on assignedreceivables are received directly by the financing company, and applied tooutstanding advances.  All outstandingadvances and uncollected assigned receivables are subject to fees and interestcharges ranging from 0.55% to 1.5% plus prime rate as published by the WallStreet Journal, with a minimum annual fee of $30. All receivables assigned andadvances made are subject to return and recall by the financing company,respectively.  As such, the advances havebeen classified as short-term secured borrowings in accordance with FASB ASC860, *Transfers and Servicing.*

 

In June 2009, the Company received a formal notice of default fromthe financing company for repayment of the outstanding loan balance and enteredinto a settlement agreement with the financing company whereby it agreed torepay approximately $100 each month until the outstanding loans and accruedfees have been repaid.   As of December 31, 2009, the company wasunable to pay the $100 monthly payments. (see Note 20)

 

For the year ended December 31,2009, the Company borrowed $48 and repaid $344 under the Agreement.  The total outstanding advance made under theagreement is $284 and $580 as of December 31, 2009 and 2008, respectively,which is presented as short-term debt.  The weighted average rate of interest for borrowings made under theAgreement was 8.72% and 6.85% for the years ended December 31, 2009 and2008, respectively.

 

Kookmin Note

 

On February 4, 2003,the Company’s Korean subsidiary received 6,500,000 in South Korean Won, orapproximately $5,488, under a loan from Kookmin Bank of South Korea.  This loan is collateralized by the plantfacilities and certain equipment in South Korea.

 

On September 16, 2009, theCompany retired the loan and paid $219 in outstanding principal and interest.

 

The outstanding loan balancetotaled $0 and $151, as of December 31, 2009 and 2008, respectively, andare included in current portion of long-term debt.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

Debtof Majority Owned Subsidiary

 

OnJuly 24, 2007, the Company completed an $11,500 financing transaction (the“Transaction”) that provided funding to repay convertible notes previouslyissued by us that were scheduled to become due in July and August 2007. In the Transaction, the Company transferred substantially all of the assets ofthe Company’s Liquidmetal Coatings division to a newly formed, newlycapitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limitedliability company (“LMC”), and LMC assumed substantially all of the liabilitiesof the division.

 

LMCwas capitalized through a $6,500 subordinated debt and equity investment by C3Capital Partners (“C3”) and a $5,000 senior credit facility with Bank Midwest,N.A.  This debt and equity resulted in cash proceeds of $11,102 afterrelated debt issuance costs of $398, which proceeds LMC used to purchase all ofthe assets and liabilities from the Company. The Company incurred an additional $459 in issuance costs directlyrelated to the debt issuance.  As aresult, $857 was recorded as deferred debt issuance costs to be amortized overthe life of the debt.  Interest expensefor the amortization of debt issuance cost was $164 and $176 for the yearsended December 31, 2009 and 2008, respectively.

 

TheCompany retains a 69.25% ownership interest in LMC, C3 holds a 19% ownershipinterest, Larry Buffington, the Company’s former President and CEO, (who alsoserves as the President and CEO of LMC) holds a 10% ownership interest, andCRESO Capital Partners (“CRESO”), the Company’s financial advisor in theTransaction, holds a 1.75% ownership interest. The equity interests acquired by C3 and issued to CRESO were notconsidered a discount to debt, as the unconsolidated net assets of LMC weredeemed to have an initial value of $0 upon closing of the Transaction forfinancial accounting purposes.  Further,LMC is fully responsible for the repayment of debt obligations.

 

*MidwestDebt*

 

Inconnection with the Transaction, LMC entered into a Loan Agreement (the “LoanAgreement”), dated July 24, 2007, with Bank Midwest, N.A. (“Midwest”). Following the Transaction, the Loan Agreement has been amended to renew andmodify certain terms. The Loan Agreement, as amended on October 6, 2009(the “Loan Amendment”), provides for total loan availability of $5,025,consisting of a $4,000 term loan and a revolving loan of up to $1,025 based ona percentage of LMC’s eligible receivable and inventory.  The Loan Amendment adjusted, among otherterms, the interest rate of all outstanding loans to a fixed rate of 9%,certain financial covenants under the Loan Agreement, maturity date of therevolving loan through June 30, 2010 with monthly interest payments, andrequired an immediate repayment of $325 of the term loan and $325 of therevolving loan.  The members of theLiquidmetal Coatings, LLC (the “Members”) were required to contribute $650 inequity to repay the amounts due under the Loan Agreement (the “Capital Call”).  On October 6, 2009 the Company paid $450which represented its portion of the Capital Call and the remaining Memberspaid $150.  As a result of the payment,the monthly amortization payments due under the term loan were reduced to $47and the maturity date was extended to September 30, 2012.

 

Inconnection with the Loan Amendment, the Company borrowed $450 from C3 CapitalPartners (“C3”) to contribute its share of the Capital Call pursuant to abridge loan agreement with C3.  TheCompany paid down the bridge loan in November 2009.

 

LMC’sobligations under the Loan Agreement are secured by a blanket security interestin all of LMC’s assets and the Company’s equity interest in LMC, and pursuantto an intercreditor agreement between the C3 and Midwest.  Midwest’s security interest in the assets issenior to C3’s security interest in the same assets.

 

Asof December 31, 2009 and 2008, the gross outstanding loan balance underthe term loan totaled $1,430 and $2,729, respectively, and the grossoutstanding loan balance under the revolving loan totaled $307 and $597,respectively. The loans are presented as long-term debt and short-term debt onthe Company’s consolidated balance sheet, respectively.  Interest expense incurred under the term loanand revolving loan totaled $184 and $42 for the years ended December 31,2009, respectively.    Interest expenseincurred under the term loan and revolving loan totaled $276 and $52 for theyears ended December 31, 2008, respectively. (see Note 20)

 
| **Midwest  Debt Term Loan** | ** ** | ** **   | ** ** |
|-----------------------------|------------|--------------|------------|
| **Repayment  Schedule**     | ** ** | **Minimum**  | ** ** |
| **December 31,**       | ** ** | **Payments** | ** ** |
|                        |       |         |       |
| 2010                        |       | $            | 1,104      |   |
| 2011                        |       | 326          |       |
| Total                       |       | $            | 1,430      |   |

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

Additionally,LMC entered into Promissory Notes, dated August 29, 2007 and October 21,2008 (the “Capital Loan”), with Midwest to provide for $45 and $105 to be usedtowards the purchase of a company truck and HVOF spray equipment with an annualfixed interest rate of 9% for both loans,. The Capital Loan has maturity dates of September 1, 2012 and November 1,2013.  LMC is required to make monthlyprincipal and interest payments of $3 per month.  As of December 31, 2009 and 2008, thegross outstanding loan balance under the Capital Loan totaled $102 and $129,respectively, which is presented as long-term debt on the Company’sconsolidated balance sheet.  Interestexpense incurred under the Capital Loan totaled $10 and $6 for the years ended December 31,2009 and 2008, respectively.  (see Note20)

 
| **Capital  Loan**       | ** ** | ** **   | ** ** |
|-------------------------|------------|--------------|------------|
| **Repayment  Schedule** | ** ** | **Minimum**  | ** ** |
| **December 31,**   | ** ** | **Payments** | ** ** |
|                    |       |         |       |
| 2010                    |       | $            | 30         |   |
| 2011                    |       | 32           |       |
| 2012                    |       | 26           |       |
| 2013                    |       | 14           |       |
| Total                   |       | $            | 102        |   |

 

*C3 Debt*

 

In the Transaction, LMC alsoentered into a Securities Purchase Agreement, dated July 24, 2007 (the “SecuritiesPurchase Agreement”), with C3 Capital Partners, L.P. (“C3”),C3 Capital Partners II, L.P. (“C3 II”, and with C3, the “C3 entities”),and Liquidmetal Coatings Solutions, LLC, a wholly owned subsidiary of LMC thatwill operate the thermal spray coatings business (“LMCS”).  Pursuant tothe Securities Purchase Agreement, LMC issued to the C3 entitiessubordinated promissory notes in the aggregate principal amount of $6,500 (the “SubordinatedNotes”). Under the Securities Purchase Agreement, the C3 entities have theright, beginning on the July 24, 2012 (or, if earlier, upon a default byLMC under the Subordinated Notes or Securities Purchase Agreement) to requireLMC to purchase the C3 entities’ membership interests in LMC for a purchaseprice equal to their pro rata portion of the greater of (i) the appraisedfair market value of LMC or (ii) six times LMC’s trailing 12-monthearnings before interest taxes, depreciation, and amortization, less fundeddebt.

 

The Subordinated Notes have amaturity date of July 20, 2012 with no required principal payments beforematurity other than upon specified triggering events, such as a change incontrol of LMC.  Interest accrues at an annual rate of 14%, with 12%interest being payable monthly beginning September 2007 and the remaining2% interest being payable at maturity.  In connection with the SecuritiesPurchase Agreement and the Subordinated Notes, the Company and LMC entered intopledge agreements with the C3 entities in which the Company pledged itsmembership interest in LMC to secure the obligations under the notes and LMCpledged its membership interests in LMCS to secure its obligations under thenotes.  LMC and LMCS also granted to C3 a blanket security interestin all of their assets to secure their obligations under the SubordinatedNotes.

 

The gross outstanding loan balance including accrued interest payable upon maturity of theSubordinated Note totaled $7,613 and $6,690 as of December 31, 2009 and2008, respectively.  Interest expense incurred under the SubordinatedNotes totaled $810 and $926 for the years ended December 31, 2009 and2008, respectively.

 
| **C3 Notes**            | ** ** | ** **   | ** ** |
|-------------------------|------------|--------------|------------|
| **Repayment  Schedule** | ** ** | **Minimum**  | ** ** |
| **December 31,**   | ** ** | **Payments** | ** ** |
|                    |       |         |       |
| 2010                    |       | $            | —     |   |
| 2011                    |       | —       |       |
| 2012                    |       | 7,613        |       |
| Total                   |       | $            | 7,613      |   |

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

**11. Shareholders’Equity (Deficiency)**

 

*Initial PublicOffering.*Pursuantto the Company’s Registration Statement (Registration No. 333-73716) onForm S-1, as amended, initially filed with the Securities and ExchangeCommission on November 20, 2001 and declared effective May 21, 2002,the Company closed an initial public offering of 5,000,000 registered shares ofcommon stock on May 28, 2002, plus an additional 229,000 shares onJune 10, 2002 pursuant to an over allotment option, at a price of $15.00per share (which sale is referred to herein as the “Offering”). The Offeringgenerated net cash proceeds for the Company during the second quarter 2002 ofapproximately $70,721, net of underwriting commissions of $5,490 and othertransaction fees of approximately $2,224.

 

*Stock Split.*On June 29, 2001 the Company declared a ten-for-onestock split to its common shareholders of record on June 29, 2001. Thisstock split was effected in the form of a stock dividend. On April 4,2002, the Company declared a one-for-3.1 reverse stock split to its commonshareholders of record on April 4, 2002. The consolidated financialstatements and accompanying notes have been retroactively adjusted to reflectthe effects of the split and reverse split.

 

*Reincorporation*.  On May 21,2003, the Company completed a reincorporation by transitioning from aCalifornia corporation to a Delaware corporation. The reincorporation waseffected though the merger of the former California entity into its newlycreated wholly owned Delaware subsidiary. In connection with thereincorporation, the number of authorized common shares was reduced from200,000,000 to 100,000,000. Additionally, the par value of the common stock waschanged from no par value common stock to common stock with a par value of$0.001 per share. For purposes of these notes, the term “Company” refers to theformer California entity with respect to periods prior to May 21, 2003.

 

*Preferred Stock.*On December 31, 2001,the Company received net proceeds of $5,577 from the sale of the preferredstock at a per share price of $12.40, as adjusted for the revised stock split.Upon the completion of the Offering, each share of preferred stock wasconverted automatically into one share of Class A common stock pursuant tothe terms of the preferred stock issued. On May 1, 2009, pursuant to a Securities Purchase and ExchangeAgreement (the “Securities Purchase Agreement), the Company issued 500,000shares of convertible Series A-1 Preferred Stock with an original issueprice of $5.00 per share, 2,625,000 shares Series A-2 Preferred Stock withan original issue price of $5.00 as part of a financing transaction.  The Series A-1 Preferred Stock and Series A-2Preferred Stock are convertible into the Company’s common stock at conversionprice of $0.10 and $0.22 per common share, respectively.  In connection with the A-1 and A-1 PreferredStock issuance, the Company issued warrants to purchase 42,329,407 shares ofthe Company’s common stock at an exercise of $0.50 per share (See Note10).  In October 2009, the Companyentered into an agreement with various investors to issue 180,000 shares ofconvertible Series A-1 Preferred Stock with an original issue price of$5.00 per share which are convertible into the Company’s common stock at aconversion price of $.01 per common share. In connection with this issuance, the Company issued warrants topurchase up to 4,500,000 shares of common stock with an exercise price of $0.50per share and an expiration date of January 3, 2012.

 

Warrants

 

As of December 31, 2009,outstanding warrants to acquire shares of the Company’s common stock are asfollows:

 
| **Number of Shares** | ** ** | **Exercise Price** | ** ** | **Expiration Date**     | ** **          |
|----------------------|------------|--------------------|------------|-------------------------|---------------------|
|                 |       |               |       |                    |                |
| 1,702,403            |       | $                  | 1.05       |                    | June 13,  2010 |   |
| 5,493,355            |       | 1.05               |       | August 2,  2010    |                |
| 25,000               |       | 1.75               |       | May 17,  2011      |                |
| 741,829              |       | 1.05               |       | May 17,  2011      |                |
| 1,562,531            |       | 1.14               |       | May 17,  2011      |                |
| 248,710              |       | 0.50               |       | January 3,  2012   |                |
| 42,329,407           |       | 0.50               |       | January 3,  2012   |                |
| 3,125,007            |       | 0.60               |       | January 3,  2012   |                |
| 200,000              |       | 0.50               |       | December 28,  2012 |                |
| 4,500,000            |       | 0.50               |       | October 30,  2014  |                |
| 59,928,242           |       |               |       |                    |                |
|                      |            |                    |            |                         |                     |  |

 

Pursuant to EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the Company is required to report a value of the warrantas a fair value and record the fluctuation to the fair value of the warrantliability to current operations.  Thechange in the fair value of the warrants resulted in gains of $9,835, $1,890,and $4,923 for the years ended December 31, 2009, 2008 and 2007.  The fair value of warrants outstanding at December 31,2009 of $3,975 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 0.45 to 4.83 years; (2) volatilityof 152%, (3) risk free interest of 0.20% to 2.69%, and dividend rate of0%.  The fair value of warrantsoutstanding at December 31, 2008 of $692 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.21 to 3.99 years; (2) volatility of 113%, (3) risk free interest of0.11% to 1.55%, and dividend rate of 0%.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

**12. StockCompensation Plan**

 

Under the Company’s 1996 StockOption Plan (“1996 Company Plan”) the Company could grant to employees,directors or consultants options to purchase up to 12,903,226 shares of commonstock as adjusted for the reverse stock split. The stock options areexercisable over a period determined by the Board of Directors or theCompensation Committee, but no longer than 10 years.

 

On April 4, 2002, ourshareholders and board of directors adopted the 2002 Equity Incentive Plan (“2002Equity Plan”). The 2002 Equity Plan provides for the grant of stock options toofficers, employees, consultants and directors of the Company and itssubsidiaries. In addition, the plan permits the granting of stock appreciationrights with, or independently of, options, as well as stock bonuses and rightsto purchase restricted stock. A total of 10,000,000 shares of our common stockmay be granted under the 2002 Equity Plan. As of December 31, 2009, there are 2,601,523 options outstandingunder the 2002 Equity Plan.

 

Certain of our current and formernon-employee directors and our former Chief Executive Officer were given theopportunity to receive stock under the 2002 Equity Pan in lieu of past-duedirector and consulting fees that were due to them.  During 2009, 2008, and 2007, the Companyissued 0, 99,107, and 49,072 shares of stock, respectively, at prices rangingfrom $0.70 to $1.50 per share under the 2002 Equity Plan for such fees thatwere due to them.

 

Prior to the approval of the 2002Equity Plan, options were primarily granted under the Company’s 1996 StockOption Plan (“1996 Company Plan”). On April 4, 2002, our board ofdirectors terminated the 1996 Company Plan. The termination will not affect anyoutstanding options under the 1996 Company Plan and all such options willcontinue to remain outstanding and be governed by the Plan. No additionaloptions may be granted under the 1996 Company Plan. As of December 31,2009, there were 56,960 options outstanding under the 1996 Company Plan.

 

On April 4, 2002, ourshareholders and board of directors adopted the 2002 Non-employee DirectorStock Option Plan (“2002 Director Plan”). Only non-employee directors areeligible for grants under the 2002 Director Plan. A total of 1,000,000 sharesof the Company’s Common Stock may be granted under the 2002 Director Plan.There are 140,000 options outstanding under the 2002 Director Plan as of December 31,2009.

 

Additionally, the Company has1,591,399 options outstanding at December 31, 2009 which were grantedoutside the 1996 Company Plan, 2002 Equity Plan and 2002 Director Plan.

 

The Company previously appliedAccounting Principles Board (“APB”) Opinion No. 25 for options when theexercise price of options granted to employees is less than the fair value ofthe underlying stock on the date of grant. As permitted, the Company had previously elected to adopt provisions ofFASB ASC 718 *Compensation-Stock Compensation*for options granted to non-employees who perform services for the Company andthe disclosure-only provisions of options granted to employees.

 

In December 2004, the FASBissued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”),which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS 123”)and supersedes APB Opinion No. 25, Accounting for Stock Issued toEmployees, (“APB 25”). SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values. Under SFAS 123R, the Companyis required to measure the cost of employee services received in exchange forstock options and similar awards based on the grant-date fair value of theaward and recognize this cost in the income statement over the period duringwhich an employee is required to provide service in exchange for the award. Thepro forma disclosures previously permitted under SFAS 123 are no longer analternative to financial statement recognition. The Company adopted SFAS 123R on January 1, 2006 using themodified prospective method and recorded $176, $578 and $643 for the yearsended December 31, 2009, 2008 and 2007, respectively, of non-cash chargesfor stock compensation related to amortization of the fair value of restrictedstock and unvested stock options representing a $1,397, or $0.03 per share,increase from the stock compensation that would have been recorded under APB 25and SFAS 123. Under this method, the Company will recognize compensation cost,on a prospective basis, for the portion of outstanding awards for which therequisite service has not yet been rendered as of January 1, 2006 and anynew grants, based upon the grant-date fair value of those awards calculatedunder SFAS 123 for pro forma disclosure purposes.  Accordingly, we have not restated priorperiod amounts.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

The fair value of each option grantis estimated on the date of the grant using the Black-Scholes option-pricingmodel with the assumptions noted in the following table.  Expected volatilities are based on historicalvolatility expected over the expected life of the options.  The Company uses historical data to estimateoption exercise and employee termination within the valuation model. Theexpected term of options granted is represents the period of time that optionsgranted are expected to be outstanding. Actual forfeitures were used for years ended December 31, 2009,2008 and 2007.  The risk free rate forperiod within the expected life of the options is based on U.S. Treasury ratesin effect at the time of grant.

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                     |       |                  |       |   |   |   |   |
| Expected volatility      |       | 119% - 184%           |       | 63% - 94% |   | 58% - 100% |   |
| Expected dividends       |       | —                |       | — |   | — |   |
| Expected term (in years) |       | 6                     |       | 6 |   | 5 - 6 |   |
| Risk-free rate           |       | 2.07% - 3.14%         |       | 2.13% - 3.54% |   | 3.84% - 4.68% |   |

 

Thefollowing table summarizes the Company’s stock option transactions for thethree years ended December 31, 2009:

 
| ** **                                                    | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | ** **            | ** ** | ** **                            | ** ** | ** **                                          | ** ** | **(in  thousands)**            | ** ** |
| Options outstanding at December 31, 2006                 |       | 7,792,591             |       | $                                     | 4.35       |                                                |       |                           |       |   |
| Granted                                                       |       | 1,334,565             |       | 0.08                                  |       |                                                |       |                           |       |
| Exercised                                                     |       | —                |       | —                                |       |                                                |       |                           |       |
| Forfeited                                                     |       | (930,010              | )          | 2.00                                  |       |                                                |       |                           |       |
| Options outstanding at December 31, 2007                 |       | 8,197,146             |       | 4.04                                  |       |                                                |       |                           |       |
| Granted                                                       |       | 673,966               |       | 0.50                                  |       |                                                |       |                           |       |
| Exercised                                                     |       | —                |       | —                                |       |                                                |       |                           |       |
| Forfeited                                                     |       | (895,330              | )          | 3.41                                  |       |                                                |       |                           |       |
| Options outstanding at December 31, 2008                 |       | 7,975,782             |       | 3.81                                  |       |                                                |       |                           |       |
| Granted                                                       |       | 353,010               |       | 0.21                                  |       |                                                |       |                           |       |
| Exercised                                                     |       | —                |       | —                                |       |                                                |       |                           |       |
| Forfeited                                                     |       | (3,938,910            | )          | 4.87                                  |       |                                                |       |                           |       |
| Options outstanding at December 31, 2009                 |       | 4,389,882             |       | $                                     | 2.57       |                                                | 4.8        |                           | $          | — |   |
| Options vested or expected to vest at  December 31, 2009 |       | 4,222,944             |       | $                                     | 3.25       |                                                | 5.0        |                           | $          | — |   |
| Options exercisable at December 31, 2009                 |       | 3,364,382             |       | $                                     | 3.13       |                                                | 3.2        |                           | $          | — |   |

** **

The weighted average fair value ofoptions granted during the years ended December 31, 2009, 2008 and 2007was $0.21, $0.50, and $0.81 respectively. There were 3,364,382 options with a weighted average exercise price of$3.13 exercisable at December 31, 2009 and there were 6,303,382 optionswith a weighted average exercise price of $4.57 exercisable at December 31,2008.

 

Includedin the above tables are certain options granted where their exercise priceswere below the fair market value of the common stock at the grant date(measurement date).  Such optionstotaling 358,582 with a weighted average fair value of $11.22 and 734,927 witha weighted average fair value of $7.56 at December 31, 2008 and 2007,respectively, were canceled as of December 31, 2009.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

The following table summarizes theCompany’s stock options outstanding and exercisable by ranges of option pricesas of December 31, 2009:

 
| **Options  Outstanding**      | ** ** | **Options Exercisable**              | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Numbers of  options  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Options  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|                          |       |                                 |       |   |   |   |   |   |   |   |   |
| $0.00 - $1.55                 |       |                                 | 2,130,071  |   | 7.80 |   | $ | 0.70 |   | 1,152,571 |   | $ | 0.73 |   |
| 1.56 - 3.10                   |       |                                 | 555,000    |   | 4.50 |   | 2.35 |   | 507,000 |   | 2.36 |   |
| 3.11 - 4.65                   |       |                                 | 1,644,163  |   | 1.00 |   | 4.65 |   | 1,644,163 |   | 4.65 |   |
| 4.66 - 6.20                   |       |                                 | —     |   | 0.00 |   | 0.00 |   | — |   | — |   |
| 6.21 - 7.75                   |       |                                 | —     |   | — |   | — |   | — |   | — |   |
| 7.76 - 9.30                   |       |                                 | —     |   | — |   | — |   | — |   | — |   |
| 9.31 - 10.85                  |       |                                 | 10,000     |   | 3.00 |   | 9.81 |   | 10,000 |   | 9.81 |   |
| 10.86 - 12.40                 |       |                                 | 4,518      |   | 1.60 |   | 12.40 |   | 4,518 |   | 12.40 |   |
| 12.41 - 13.95                 |       |                                 | —     |   | — |   | — |   | — |   | — |   |
| 13.96 - 15.50                 |       |                                 | 46,130     |   | 2.30 |   | 15.00 |   | 46,130 |   | 15.00 |   |
| Total                         |       | 4,389,882                            |       |   |   |   |   | 3,364,382 |   |   |   |
|                               |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

**13.      PreferredUnits of Subsidiary**

 

OnFebruary 22, 2008, LMC completed a transaction under which it issued andsold $2,500 in preferred membership units to two minority members of LMC (the “PreferredUnits Transaction”).  Immediately following the sale of the preferredmembership units, the subscription proceeds (after a 1% transaction fee) weredistributed to LMC’s common unit members, and as a result of suchdistribution, the Company received approximately $1,714 in thedistribution.  The preferred units issued by LMC have an accruingpriority return of 14% per year that are priority over any distribution made byLMC and may be redeemed at any time within four years of issuance through cashpayment or distribution in excess of the 14% priority return.  If LMC fails to redeem the preferredunits on or before the second anniversary of the issue date, the preferredunits will receive an additional 200 common membership units (equal to 2%of the currently outstanding common units) per quarter until thepreferred units are redeemed in full.

 

As of December 31, 2009, LMC has redeemed $236 of its preferredunits and distributed $290 in priority return to the preferred unitholders.  The total preferred unitsoutstanding are $2,264 as of both December 31, 2009 and 2008.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

**14. Income Taxes**

 

Significant components of deferredtax assets are as follows:

 
| ** **                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2009**                          | ** ** | **2008** | ** ** |
|                          |       |                              |       |   |   |
| Loss carry forwards           |       | $                                 | 40,675     |   | $ | 43,359 |   |
|                          |       |                              |       |   |   |
| Other                         |       | 2,893                             |       | 1,117 |   |
| Total deferred tax asset      |       | 43,568                            |       | 44,476 |   |
|                          |       |                              |       |   |   |
| Valuation allowance           |       | (43,568                           | )          | (44,476 | ) |
| Total deferred tax asset, net |       | $                                 | —     |   | $ | — |   |

 

The following table accounts forthe differences between the expected federal tax benefit (based on thestatutory U.S. federal income tax rate of 34%) and the actual tax provision:

 
| ** **                                              | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                              | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                    |       |                              |       |   |   |   |   |
| Expected federal tax benefit                            |       | (34                               | )%         | (34 | )% | (34 | )% |
|                                                    |       |                              |       |   |   |   |   |
| State tax expense, net of expected federal tax  benefit |       | (56                               | )%         | 3 | % | (0 | )% |
| Foreign loss not subject to U.S. federal income  tax    |       | (301                              | )%         | 12 | % | 33 | % |
| Net operating loss utilized or expired                  |       | (915                              | )%         | (38 | )% | 88 | % |
| Other                                                   |       | 0                                 | %          | 0 | % | 0 | % |
| Increase (decrease) in valuation allowance              |       | 1,305                             | %          | 63 | % | (87 | )% |
|                                                    |       |                              |       |   |   |   |   |
| Total tax provision                                     |       | 0                                 | %          | 0 | % | 0 | % |

 

As of December 31, 2009, theCompany had approximately $112 of net operating loss (“NOL”) carryforwards forU.S. federal income tax purposes expiring in 2009 through 2029. In addition,the Company has California state NOL carryforwards of approximately $51expiring in 2009 through 2019. The Company and Liquidmetal Golf filed on aseparate company basis for federal income tax purposes. Accordingly, thefederal NOL carryforwards of one legal entity are not available to offsetfederal taxable income of the other. As of December 31, 2009, LiquidmetalTechnologies, Inc. had approximately $75 in federal NOL carryforwards,expiring in 2009 through 2029 and Liquidmetal Golf, Inc. had approximately$38 in federal NOL carryforwards, expiring in 2013 through 2028.

 

As of December 31, 2009, theCompany had approximately $246 of Research & Development (“R&D”)credit carryforwards for U.S. federal income tax purposes expiring in 2021through 2029.  In addition, the Companyhas California R&D credit carryforwards of approximately $304, which do notexpire under current California law.

 

Section 382 of the InternalRevenue Code (“IRC”) imposes limitations on the use of NOL’s and creditsfollowing changes in ownership as defined in the IRC. The limitation couldreduce the amount of benefits that would be available to offset future taxableincome each year, starting with the year of an ownership change. The Companyhas not completed the complex analysis required by the IRC to determine if anownership change has occurred.

 

The ability to realize the taxbenefits associated with deferred tax assets, which includes benefits relatedto NOL’s, is principally dependent upon the Company’s ability to generatefuture taxable income from operations. The Company has provided a full valuation allowance for its net deferredtax assets due to the Company’s net operating losses.

 

The Company adopted the provisionsof FIN 48 on January 1, 2007. At the adoption date and as of December 31,2009, the Company had no material unrecognized tax benefits and no adjustmentsto liabilities or operations were required. The Company recognizes interest andpenalties related to uncertain tax positions in income tax expense which were$0 for the year ended December 31, 2009.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

Tax years 2005 through 2009 and1998 through 2009 are subject to examination by the federal and state taxingauthorities, respectively. There are no income tax examinations currently inprocess.

 

**15. SegmentReporting and Geographic Information**

 

FASB ASC 280*,**Segment Reporting,  *requires companies toprovide certain information about their operating segments.  In April 2002, the Company beganclassifying operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used bycoal burning power plants.  BulkLiquidmetal alloys include market opportunities to manufacture and sell casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment.  Primarily, the expenses incurred by the bulkLiquidmetal alloy segment are manufacturing, research and development costs,and selling expenses associated with identifying and developing marketopportunities.  Bulk Liquidmetal alloyproducts can be distinguished from Liquidmetal alloy coatings in that the bulkLiquidmetal alloy can have significant thickness, up to approximately one inch,which allows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.   Revenue and expenses associated withresearch and development services are included in the bulk Liquidmetal alloysegment.  The accounting policies of thereportable segments are the same as those described in Note 3 above.

 

Summarized financial informationconcerning the Company’s reportable segments is shown in the followingtables:  

 
| ** **                                 | ** ** | **Coatings** | ** **   | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|--------------------------------------------|------------|--------------|--------------|----------------|------------|--------------------|------------|
|                                       |       |         |         |           |       |               |       |
| Year ended December 31, 2009:         | ** ** | ** **   | ** **   | ** **     | ** ** |               | ** ** |
| Revenue to external customers              |       | $            |  8,656  |           | $          | 6,064              |       | $ | 14,720 |   |
| Gross profit                               |       | 3,129        |         | 2,494          |       | 5,623              |       |
| Total segment loss                         |       | (304         | )            | (1,737         | )          | (2,041             | )          |
| Total identifiable assets at end of period |       | 2,485        |         | 6,134          |       | 8,619              |       |
|                                       |       |         |         |           |       |               |       |
| Year ended December 31, 2008:         | ** ** | ** **   | ** **   | ** **     | ** ** |               | ** ** |
| Revenue to external customers              |       | $            |  12,508 |           | $          | 9,575              |       | $ | 22,083 |   |
| Gross profit                               |       | 4,451        |         | 501            |       | 4,952              |       |
| Total segment income (loss)                |       | 1,374        |         | (1,347         | )          | 27                 |       |
| Total identifiable assets at end of period |       | 2,931        |         | 7,837          |       | 10,768             |       |
|                                       |       |         |         |           |       |               |       |
| Year ended December 31, 2007:         |       |         |         |           |       |               |       |
| Revenue to external customers              |       | $            |  14,393 |           | $          | 14,629             |       | $ | 29,022 |   |
| Gross profit (loss)                        |       | 5,638        |         | (3,075         | )          | 2,563              |       |
| Total segment income (loss)                |       | 3,337        |         | (3,310         | )          | 27                 |       |
| Total identifiable assets at end of period |       | 4,441        |         | 6,327          |       | 10,768             |       |

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

Reconciling information for thestatements of operations between reportable segments and the Company’sconsolidated totals is shown in the following table:

 
| ** **                                                                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                             |       |                              |       |   |   |   |   |
| Total segment income (loss) before interest  expense and discontinued operations |       | $                                 | (2,041     | ) | $ | 27 |   | $ | (1,523 | ) |
| General and administrative expenses, excluded                                    |       | (3,247                            | )          | (3,765 | ) | (6,349 | ) |
| Loss before interest, other income, income taxes,  and discontinued operations   |       | (5,288                            | )          | (3,738 | ) | (7,872 | ) |
| Loss from extinguishment of debt                                                 |       | (1,471                            | )          | — |   | (648 | ) |
| Change in value of warrants, gain                                                |       | 9,835                             |       | 1,890 |   | 4,923 |   |
| Change in value of conversion feature, gain                                      |       | 1,827                             |       | 1,987 |   | 6,965 |   |
| Interest expense                                                                 |       | (4,553                            | )          | (6,293 | ) | (8,747 | ) |
| Interest income                                                                  |       | —                            |       | 3 |   | 123 |   |
| Income taxes                                                                     |       | (168                              | )          | — |   | — |   |
| Loss (income) attributable to noncontrolling  interest                           |       | 69                                |       | (421 | ) | (384 | ) |
| Consolidated net income (loss)                                                   |       | $                                 | 251        |   | $ | (6,572 | ) | $ | (5,640 | ) |

 

Included in bulk alloy segmentincome for the year ended December 31, 2008 is $429 of other incomerecognized from $182 deferred gain on disposal of assets in connection with a2007 equipment purchase agreement with Liquidmetal Korea (see Note 19) and $247gain from accounts payables write off, and $17 of other expense recognized fromloss from disposal of assets. Included in bulk alloy segment income for theyear ended December 31, 2007 is $226 of other income recognized from gainon disposal of assets in connection with the equipment purchase agreement andtransfer agreement of the Weihei operations to Liquidmetal Korea (see Note 19).

 

Excluded general and administrativeexpenses are attributable to the Company’s corporate headquarters.  These expenses primarily include corporatesalaries, consulting, professional fees and facility costs.  Research and development expenses areincluded in the operating costs of the segment that performed the research anddevelopment.

 

Reconciling information for thebalance sheets between reportable segments and the Company’s consolidatedtotals is shown in the following table: 

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                      |       |                  |       |   |   |
| Total segment assets                      |       | $                     | 8,619      |   | $ | 10,768 |   |
| Cash and cash equivalents                 |       | 64                    |       | 56 |   |
| Prepaid expenses and other current assets |       | 62                    |       | 866 |   |
| Other property, plant and equipment       |       | 62                    |       | 97 |   |
| Intangibles, net                          |       | 1,214                 |       | 1,049 |   |
| Other assets                              |       | 419                   |       | 404 |   |
| Total consolidated assets                 |       | $                     | 10,440     |   | $ | 13,240 |   |

 

Assets excluded from segments include assets attributable to theCompany’s corporate headquarters. The largest asset represents the Company’sintangible assets, consisting primarily of the Company’s patents and trademarks.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

Certain customers accounted formore than 10% of revenues from continuing operations as follows:

 
| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                            |       |                              |       |   |   |   |   |
| Grant Prideco                   |       | 8                                 | %          | 10 | % | 10 | % |
| Liquidmetal Korea (Grace Metal) |       | 31                                | %          | 9 | % | 12 | % |

 

Revenues from sales tocompanies in the United States were $8,579, $13,374 and $15,003 during theyears ended December 31, 2009, 2008 and 2007, respectively.  The revenue related to the United States ofAmerica was earned under defense-related research and development contracts,sales of coatings products, and sales of Liquidmetal bulk alloy products.

 

During the years ended December 31,2009, 2008 and 2007 the Company had revenue on sales to companies outside ofthe United States of $6,141, $8,709 and $14,019, respectively, of which $4,573,$1,067 and $7,850 represented sales to companies located in South Korea,respectively.

 

Long-lived assets include netproperty, plant, and equipment and net intangible assets. The Company hadlong-lived assets of $1,968 and $1,813 located in the United States at December 31,2009 and 2008, respectively. The Company had long-lived assets of $4,931 and$6,277 located in South Korea at December 31, 2009 and 2008, respectively.

 

**16. Income (Loss)Per Common Share**

 

Basic EPS is computed by dividingearnings (loss) attributable to common shareholders by the weightedaverage number of common shares outstanding for the periods. Diluted EPSreflects the potential dilution of securities that could share in the earnings.A reconciliation of the number of common shares used in calculation of basicand diluted EPS is presented below:

 
| ** **                      | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|                            |       |                                      |       |   |   |   |   |
| Weighted average basic shares   |       | 46,083,970                                |       | 44,734,554 |   | 44,730,091 |   |
| Effect of dilutive securities:  |       |                                      |       |   |   |   |   |
| Stock options                   |       | 4,385,256                                 |       | — |   | — |   |
| Warrants                        |       | 59,928,242                                |       |   |   |   |   |
| Conversion of preferred stocks  |       | 13,130,137                                |       |   |   |   |   |
| Conversion of notes payable     |       | 90,901,432                                |       | — |   | — |   |
| Weighted average diluted shares |       | 214,429,037                               |       | 44,734,554 |   | 44,730,091 |   |

 

Options to purchase 7,975,782shares of common stock at prices ranging from $0.09 to $15.00 per share wereoutstanding at December 31, 2008, but were not included in the computationof diluted EPS for the same period as the inclusion would have beenantidilutive.  Options to purchase8,197,146 shares of common stock at prices ranging from $0.75 to $15.00 pershare were outstanding at December 31, 2007, but were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive.

 

Warrants to purchase 14,443,183shares of common stock between $1.55 and $2.07 per share outstanding at December 31,2008 were not included in the computation of diluted EPS for the same period asthe inclusion would have been antidilutive. Warrants to purchase 14,418,183 shares of common stock between $1.55 and$2.07 per share outstanding at December 31, 2007 were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive.

 

17,375,707 shares of common stockissuable upon conversion of the Company’s senior convertible notes withconversion prices of $1.10 per share outstanding at December 31, 2008 werenot included in the computation of diluted EPS for the period as the inclusionwould have been antidilutive.  16,179,548shares of common stock issuable upon conversion of the Company’s seniorconvertible notes with conversion prices of $1.10 per share outstanding at December 31,2007 were not included in the computation of diluted EPS for the period as theinclusion would have been antidilutive.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

**17. Commitmentsand Contingencies**

 

The Company is from time to time aparty to certain legal proceedings arising in the ordinary course of business.Although outcomes cannot be predicted with certainty, the Company does notbelieve that any legal proceeding to which it is a party will have a materialadverse effect on the Company’s financial position, results of operations, andcash flows.

 

On June 26, 2006, the Companyentered into a joint venture agreement with SAGA, SpA in Padova, Italy, (“SAGA”)a specialist precision parts manufacture. The joint venture is named Liquidmetal SAGA Italy, Srl (“LSI”). The Company also entered into an exclusive manufacturing license agreement forthe eyewear industry with LSI.  Under the joint venture agreement, theCompany has option to buy ownership interest in LSI, initially, of 19.9% to upto 50%.  In December 2006, the Company exercised the 19.9% interestin LSI and will have two years to purchase the additional interest at a nominalprice. In January 2007 and June 2007, the Company contributedadditional $217 and $86, respectively, into LSI as additional investment. The contribution did not change the Company’s 19.9% interest in LSI.  Under the licensing agreement, at any timefollowing 18 months after the effective date of the agreement, LSI may exerciseits option to sell to the Company certain business assets includingmanufacturing equipment acquired under the joint venture.  During the fourth quarter of the year ended December 31,2009, the Company wrote-off its investment of $306 in the joint venture due tolower than anticipated growth in the eye wear industry.  During the years ended December 31,2009, 2008 and 2007, the Company recognized revenues of $0, $0, and $103,respectively, of Liquidmetal alloys sold to LSI for use in the jointventure.  (see Note 20)

 

TheCompany has outstanding liens on assets located in our South Korean subsidiary byvarious creditors for past-due trade payables totaling approximately $1,347, ofwhich $1,072 are held by creditors in South Korea, as of December 31,2009.  The Company is currently workingto resolve the matter with each creditor****by seeking aforbearance or compromise.  If theCompany cannot repay the amounts due or obtain a forbearance or compromise, thecreditors may seek to foreclose on the Company’s assets located in SouthKorea.  Such a foreclosure would havematerial adverse effect on the Company’s operations, financial condition, andresults of operations.

 

***OperatingLeases***

 

The Company leases its offices andwarehouse facilities under various lease agreements, certain of which aresubject to escalations based upon increases in specified operating expenses orincreases in the Consumer Price Index. Future minimum lease payments undernon-cancelable operating leases during subsequent years are as follows:

 
| ** **            | ** ** | **Minimum**  | ** ** |
|-----------------------|------------|--------------|------------|
| **December 31,** | ** ** | **Payments** | ** ** |
|                  |       |         |       |
| 2010                  |       | 365          |       |
| 2011                  |       | 349          |       |
| 2012                  |       | 141          |       |
| 2013                  |       |         |       |
| 2014                  |       | —       |       |
| Total                 |       | $            | 855        |   |
|                       |            |              |            |  |

 

Rent expense was $364, $322 and$464 for the years ended December 31, 2009, 2008, and 2007, respectively.

 

**18.     401(k) SavingsPlan**

 

The Company has a tax-qualifiedemployee savings and retirement plan, or 401(k) plan, which covers all ofits United States-based employees. Our Korean employees are covered under agovernment sponsored pension program and do not participate in the U.S. based401(k) program.

 

Under the U.S. based 401 (k) plan,participants may elect to reduce their current compensation, on a pre-taxbasis, by up to 15% of their taxable compensation or of the statutorilyprescribed annual limit, whichever is lower, and have the amount of thereduction contributed to the 401(k) plan. The 401(k) plan permits theCompany, in its sole discretion, to make additional employer contributions tothe 401(k) plan. However, the Company did not make employer contributionsto the 401(k) plan during any of the periods presented in the accompanyingconsolidated financial statements.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

**19. Related PartyTransactions**

 

SooBuchanan, the sister of John Kang, the Company’s former Chairman, provides servicesto the Company as a consultant.  Duringthe years ended December 31, 2009, 2008 and 2007, the Company incurred $0,$70 and $0, respectively, for her services as a consultant.  Additionally, Otis Buchanan, the husband of Ms. Buchanan,is employed by the Company and was paid aggregate compensation of approximately$110 during each of the years ended December 31, 2009, 2008 and 2007.

 

Duringthe year ended December 31, 2009, John Kang, former Chairman of theCompany, advanced the Company $250 to fund working capital needs.  The Company repaid $120 of the advance andhas $130 outstanding as of December 31, 2009, which is included inshort-term debt.  Further, Mr. Kangentered into a Continuing Guarantee Agreement, dated January 5, 2009, topersonally guarantee repayment of the Company’s outstanding borrowings madeunder a Factoring Agreement. (see Note 10)

 

InMay 2009, the Company completed a transaction in which (i) theholders of our 8% Convertible Subordinated Notes exchanged such notes for acombination of new 8% Senior Secured Convertible Notes and shares of a newseries of convertible preferred stock designated “Series A-2 PreferredStock”, together with warrants thereon, and (ii) certain investorspurchased, for an aggregate purchase price of $2,500, shares of a new series ofconvertible preferred stock designated as “Series A-1 Preferred Stock”(see Note 10).   The lead investors in this transactionwere Carlyle Liquid, LLC and Carlyle Liquid Holdings, LLC (the “CarlyleEntities”), which are two investor entities organized by Abdi Mahamedi andJack Chitayat.  Mr. Mahamedi became a director andgreater-than-5% beneficial owner of the company by reason of the May 2009transaction, and Jack Chitayat is a former director of the Companywho became a greater-than-5% beneficial owner of our company by reason ofthe May 2009 transaction.  Mr. Mahamedi and Mr. Chitayathave shared voting and investment control over the shares held by theCarlyle Entities due to the fact that other entities owned by them are themanaging members of these two Carlyle entities.  Additionally, Mr. IrajAzarm and Mr. Robert Biehl, directors of the Company, are passiveinvestors in the Carlyle Entities.

 

The Company has an exclusivelicense agreement with LLPG, Inc. (“LLPG”), a corporation headed by Mr. Chitayat. Under the terms of the agreement, LLPGhas the right to commercialize Liquidmetal alloys, particularly precious-metalbased compositions, in jewelry and high-end luxury product markets.  TheCompany, in turn, will receive royalty payments over the life of the contracton all Liquidmetal products produced and sold by LLPG.    The Company recognized revenues from productsales and licensing fees of $203 and $287 from LLPG during the years ended December 31,2009 and 2008, respectively. Approximately, $0 and $30 is included in accounts receivables as of December 31,2009 and 2008, respectively, for outstanding trade receivables due from LLPG.

 

Asof December 31, 2009 and 2008, Ricardo Salas, the Company’s Executive VicePresident, held $0 and $381 of the convertible unsecured subordinated notes,respectively, and $259 of the unsecured subordinated notes for bothperiods.  Mr. Salas advanced theCompany $175 during the year ended December 31, 2009 to meet workingcapital needs and are included in short-term debt.  The $175 advance accrues interest at anannual rate of 10%.

 

On June 1, 2007, the Companyentered into a transaction with Grace Metal (currently Liquidmetal Korea Co., Ltd.“LMK”), under which (i) LMK agreed to purchase various equipments(including die casting machines and vacuum induction melters) used in theCompany’s bulk amorphous alloy business segment and (ii) the Companygranted LMK a 10-year exclusive license to manufacture products made from bulkLiquidmetal alloys for customers whose principal headquarters or whose majoroperations are located in South Korea. LMK was formed by an investor group that includes the former directorand officer of the Company, James Kang, who is also the brother of John Kang,former Chairman of the company.  Under anequipment purchase agreement between the Company and LMK, LMK agreed to buy thepurchased equipment for a total purchase price of $2,000.  The equipment purchase agreement providesthat delivery of the equipment can be delayed to accommodate the Company’scontinuing manufacturing needs, and it also provides that the Company willretain a security interest in the purchased equipment until full payment of thepurchase price.

 

In consideration of the licenseagreement with LMK, the Company will be entitled to royalty of 10% of LMK’s netsales of licensed products (unless LMK’s margin on the products falls belowspecified levels, in which case a new royalty will be negotiated in goodfaith).  Effective June 1, 2008, theroyalty rate was adjusted to 5%.  The agreementprovides that the Company may convert the license to a non-exclusive in theevent that the net sales in the second year of the contract or thereafter arenot sufficient to result in royalties of $500 or more per year.  The agreement also provides that LMK will berequired to purchase all alloy feedstock from the Company, and the Company willhave the right to continue to manufacture Liquidmetal alloy products for SouthKorean customers until all purchased equipment has been commissioned.  Subsequent to December 31, 2009, the licenseagreement with LMK was terminated on June 15, 2010.

 

The Company purchased productionsupplies and outsourced production of certain bulk alloy production with LMK.In June 2008, the Company began sharing the use of its manufacturingfacility and production equipment in Pyongtaek, South Korea, with LMK as theCompany began significant outsourcing of its bulk alloy parts production. TheCompany incurred expenses for purchase of production supplies and outsourcingfees of $1,252, $2,053 and $650 during the years ended December 31, 2009,2008 and 2007, respectively.  There is $0included in accounts payable and accrued expenses for both December 31,2009 and 2008, for outstanding trade payables due to LMK.  The Company recognized revenue from sales ofraw materials and royalties for a total of $4,540, $2,000 and $3,392 during theyears ended December 31, 2009, 2008 and 2007, respectively.  Approximately, $0 and $212 is included in netaccounts receivables as of December 31, 2009 and 2008, respectively, foroutstanding trade receivables due from LMK.

 

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**For theYears Ended December 31, 2009, 2008, and 2007**

**(inthousands, except share data)**

 

InOctober 2009, John Kang, the Company’s former Chairman, Tony Chung, theCompany’s Chief Financial Officer, and Ricardo Salas, the Company’s ExecutiveVice President, acquired 80,000 shares of the Company’s Series A-1Preferred Stock and 2,000,000 warrants for an aggregate cash price of$400.  The Series A-1 PreferredStock are convertible into the Company’s common stock at a conversion price of$0.10 per common share.  Further, thewarrants are issuable into the Company’s common stock at an exercise price of$0.50 per share and expire on January 3, 2012.

 

**20. SubsequentEvents**

 

On May 28, 2010, the Companyissued $2,000,000 of 13% Subordinated Promissory Note (“January 2011Subordinated Note”) due on the earlier date of January 3, 2011 or the dateon which all outstanding amounts are due under the Company’s 8% January 2011Notes.  Following the due date, theinterest on the January 2011 Subordinated Note shall be 15%.  The January 2011Subordinated Note may berepaid in whole or in part at any time without penalty or premium, but issubordinate in right of payment to the January 2011 Notes and may not bepaid until after the January 2011 Notes are paid in full.  The company may, in its sole discretion,elect to pay all or any portion of the outstanding principal or accruedinterest in cash or the Company’s common stock or any combination thereof, at avalue equal to the lower of $0.26 per share or the average market price pershare for the 10 previous trading days immediately prior to the date thepayment is made. As a condition for the January 2011 Subordinated Note,Carlyle Liquid Holdings, LLC, a current stockholder of the Company granted theholder of the January 2011 Subordinated Note a warrant to purchase up to7,700,000 shares of the Company’s common stock at a price equal to $0.26 pershare, which warrant is exercisable for a period of 90-days beginning on the datein which the Company repays the January 2011 Subordinated Note in cash (ifit repays in cash).

 

On June 25, 2010, LMC enteredinto a Credit Agreement (“Credit Agreement”) with Enterprise Bank &Trust (“Enterprise”) and retired its loan agreements with Bank Midwest,N.A.  The Credit Agreement provides for atotal loan availability of $3,700, consisting of $1,500 million term loan (“TermNote”), a revolving loan of up to $2,000 (Revolving Note”), and equipment loans(“Equipment Note”) of up to $200.  The TermNote of $1,500 has a maturity date of June 25, 2013 and bears an interestrate of 7% per annum.  Borrowingavailability under the Revolving Note is based on a percentage of LMC’seligible receivables and inventory and accrues interest at the rate of thegreater of libor plus 3.75% or 6%.  LMCwill make monthly interest payments on the Revolving Note until June 24,2011, at which point all remaining principal and interests are due.  LMC has the right to prepay the Term Note andthe Revolving Note and the Equipment Note, in whole or in part, at any timewith our penalty or premium.

 

On August 5, 2010, the Companyentered into a Master Transaction Agreement with Apple Inc. (“Apple”), pursuantto which (i) Liquidmetal contributed substantially all of its intellectualproperty assets to a newly organized special-purpose, wholly-owned subsidiary(the “IP Company”), (ii) the IP Company granted to Apple a perpetual,worldwide, fully-paid, exclusive license to commercialize such intellectualproperty in the field of consumer electronic products in exchange for a licensefee, and (iii) the IP Company granted back to Liquidmetal a perpetual,worldwide, fully-paid, exclusive license to commercialize such intellectualproperty in all other fields of use.

 

On August 5, 2010, the Companyrepaid in full all principal and interest on (i) the January 2011Notes in the amount of $8,242, (ii) the secured debt under the factoringloan in the amount of $309, and (iii) the Bridge Notes in the amount of$314.  All security interests in Companyassets securing such obligations under the January 2011 Notes andfactoring loan were released and terminated.

 

On August 5, 2010, the Companyrepaid in full all principal and accrued interest of $2,046 on the January 2011Subordinated Note.  In connection withthe repayment, on August 10, 2010, the Company entered into a SubscriptionAgreement pursuant to which the Company issued 7,870,307 shares of the Company’scommon stock for an aggregate price of $2,046.

 

On August 5, 2010, the Companyappointed Thomas Steipp to serve as the Company’s President and Chief ExecutiveOfficer.   Mr. Steipp was alsoappointed as a member of the Company’s Board of Directors.  Upon Mr. Steipp’s appointment as theCompany’s President and Chief Executive Officer, Larry Buffington ceased toserve as the Company’s President and Chief Executive Officer, although Mr. Buffingtonwill continue to serve as the Chief Executive Officer of the Company’smajority-owned Liquidmetal Coatings subsidiary.

 

On August 6, 2010, SAGA fileda litigation case against the Company claiming damages of $3,220 for payment ona loan and for breach of contract in connection with the formation of LSI, ajoint venture between the Company and SAGA. The Company is in the process of responding to the claim and workingwith SAGA to resolve the matter.

 

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**Schedule II — Valuation and Qualifying Accounts**

 
| **Schedule II - Valuation and Qualifying Accounts** | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged to  Expenses** | ** ** | **Write-offs  and  Payments** | ** ** | **Balance at  End of  Period** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
|                                                |       |                                 |       |                                |       |                          |       |                           |       |
| Allowance for doubful accounts                      |       |                                 |       |                                |       |                          |       |                           |       |
|                                                |       |                                 |       |                                |       |                          |       |                           |       |
| Year ended December 31, 2009                   |       | $                                    | 121        |                                | $          | 1,193                         |       | $                              | —     |   | $ | 1,314 |   |
| Year ended December 31, 2008                   |       | 89                                   |       | 32                                  |       | —                        |       | 121                            |       |
| Year ended December 31, 2007                   |       | 82                                   |       | 7                                   |       | —                        |       | 89                             |       |
|                                                |       |                                 |       |                                |       |                          |       |                           |       |
| Product warranty accrual                            |       |                                 |       |                                |       |                          |       |                           |       |
| Year ended December 31, 2009                   |       | $                                    | 314        |                                |       |                          | $          | (30                            | )          | $ | 284 |   |
| Year ended December 31, 2008                   |       | 631                                  |       | 26                                  |       | (343                          | )          | 314                            |       |
| Year ended December 31, 2007                   |       | 738                                  |       | —                              |       | (107                          | )          | 631                            |       |
|                                                |       |                                 |       |                                |       |                          |       |                           |       |
| Deferred tax asset valuation allowance *            |       |                                 |       |                                |       |                          |       |                           |       |
| Year ended December 31, 2009                   |       | $                                    | 44,476     |                                | $          | (908                          | )          | $                              | —     |   | $ | 43,568 |   |
| Year ended December 31, 2008                   |       | 38,804                               |       | 5,672                               |       | $                             | —     |                           | 44,476     |   |
| Year ended December 31, 2007                   |       | 43,134                               |       | —                              |       | (4,330                        | )          | 38,804                         |       |

 

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*     Thedeferred tax asset valuation allowance represents a 100% reserve against thedeferred tax asset accounts at December 31, 2009, 2008 and 2007,respectively.

 

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