Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q/A**

 

**AmendmentNo. 1**

 
| **x**                                                                                                                                    | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                               | ** ** | ** **                                                                                               |
| **For the quarterly period ended  March 31, 2008**                                                                                  |
|                                                                                                                                     |       |                                                                                                     |
| **OR**                                                                                                                                   |
|                                                                                                                                     |       |                                                                                                     |
| **o**                                                                                                                                    | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                     |       |                                                                                                     |
| **For the transition period from           to         ** |

 

**Commission File No. ****001-31332**

 

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**LIQUIDMETALTECHNOLOGIES, INC.**

**(**Exact name of Registrant as specified in its charter**)**

 

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

 

**30452 Esperanza**

**Rancho Santa Margarita, CA 92688**

(address of principal executive office, zip code)

 

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

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for atleast the past 90 days.

 

Yes  x    No  o

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b 2 of theExchange Act).  Yes   o    No  x

 

As of May 1, 2008,there were 44,726,295 shares of the registrant’s common stock, $0.001 parvalue, outstanding.

 

 

 

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**LIQUIDMETALTECHNOLOGIES, INC.**

**AMENDMENTNO. 1 TO FORM 10-Q**

**FORTHE QUARTER ENDED****MARCH 31,2008**

 

**EXPLANATORYNOTE**

 

Weare filing this Amendment No. 1 to our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2008, as filed with the U.S. Securitiesand Exchange Commission (SEC) on May 15, 2008, to restate our financialstatements to properly account for the preferred units transaction made by oursubsidiary, Liquidmetal Coatings, LLC (“LMC”) in February 2008 (See Note10 to the condensed consolidated financial statements).  Additionally, reclassifcations to ourfinancial statements have been made for consistent presentation of our prepaidexpenses and other current assets, accounts payable and accrued expenses, longterm debt, other expense, and interest expense. The amendment does not reflect events occurring after the filing of theoriginally filed Form 10-Q, and except for the foregoing, no other changeswere made to the originally filed Form 10-Q.

 

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**FORWARD-LOOKINGINFORMATION**

 

Statements in this report concerning the futuresales, expenses, profitability, financial resources, product mix, marketdemand, product development and other statements in this report concerning thefuture results of operations, financial condition and business of LiquidmetalTechnologies, Inc. are “forward-looking” statements as defined in theSecurities Act of 1933 and Securities Exchange Act of 1934. Investors arecautioned that the Company’s actual results in the future may differ materiallyfrom those projected in the forward-looking statements due to risks anduncertainties that exist in the Company’s operations and business environment,including competition, need for increased acceptance of products, ability tocontinue to develop and extend our brand identity, ability to anticipate andadapt to a competitive market, ability to effectively manage rapidly expandingoperations, amount and timing of operating costs and capital expendituresrelating to expansion of our business, operations and infrastructure, abilityto provide superior customer service, dependence upon key personnel and thelike. The Company’s most recent filings with the Securities and ExchangeCommission, including Form 10-K, contain additional information concerningmany of these risk factors, and copies of these filings are available from theCompany upon request and without charge.

 

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**TABLEOF CONTENTS**

 
| **PART I – Financial Information** | ** **                                                                                                | ** **                                                                                    |
|----------------------------------------------|-----------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                         |                                                                                                      |                                                                                          |   |
|                                         | Item 1 –  Financial Statements                                                                       |                                                                                          | 5 |
|                                         |                                                                                                      | Condensed  Consolidated Balance Sheets (unaudited)                                            |   |   |
|                                         |                                                                                                      | Condensed  Consolidated Statements of Operations and Comprehensive Income (Loss)  (unaudited) |   |   |
|                                         |                                                                                                      | Condensed  Consolidated Statements of Shareholders’ Deficiency (unaudited)               |   |   |
|                                         |                                                                                                      | Condensed  Consolidated Statements of Cash Flows (unaudited)                                  |   |   |
|                                         |                                                                                                      | Notes to Condensed Consolidated Financial Statements  (unaudited)                             |   |   |
|                                         |                                                                                                      |                                                                                          |   |
|                                         | Item 2 – Management’s Discussion and Analysis of  Financial Condition and Results of Operations |                                                                                          | 25 |
|                                         |                                                                                                      |                                                                                          |   |
|                                         | Item 3 – Quantitative and Qualitative Disclosures  about Market Risk                                 |                                                                                          | 30 |
|                                         |                                                                                                      |                                                                                          |   |
|                                         | Item 4T – Controls and Procedures                                                                    |                                                                                          | 30 |
|                                         |                                                                                                      |                                                                                          |   |
| **PART II –  Other Information**   | ** **                                                                                                | ** **                                                                                    |
|                                         |                                                                                                      |                                                                                          |   |
|                                         | Item  1 – Legal Proceedings                                                                          |                                                                                          | 31 |
|                                         |                                                                                                      |                                                                                          |   |
|                                         | Item  1A – Risk Factors                                                                              |                                                                                          | 31 |
|                                         |                                                                                                      |                                                                                          |   |
|                                         | Item 3 – Defaults Upon Senior Securities                                                             |                                                                                          | 31 |
|                                         |                                                                                                      |                                                                                          |   |
|                                         | Item  5 – Other Information                                                                          |                                                                                          | 31 |
|                                         |                                                                                                      |                                                                                          |   |
|                                         | Item 6 –  Exhibits                                                                                   |                                                                                          | 32 |
|                                         |                                                                                                      |                                                                                          |   |
| Signatures                                   |                                                                                                      | 33                                                                                            |
|                                         |                                                                                                      |                                                                                          |
| Certifications                               |                                                                                                      |                                                                                          |

 

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**PART IFINANCIAL INFORMATION**

 

**Item 1 –Financial Statements**

 

**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

** **
| ** **                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                              | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                              | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| ** **                                                                                                                                              | ** ** | **(restated)**     | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                              |       |               |       |                  |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Current assets:                                                                                                                                         |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                              |       | $                  | 234        |                  | $          | 1,180 |   |
| Trade accounts  receivables, net of allowance for doubtful accounts of $217 and $89                                                                     |       | 4,453              |       | 5,165                 |       |
| Inventories                                                                                                                                             |       | 1,836              |       | 2,298                 |       |
| Prepaid expenses  and other current assets                                                                                                              |       | 385                |       | 708                   |       |
| Total current  assets                                                                                                                                   |       | 6,908              |       | 9,351                 |       |
| Property, plant  and equipment, net                                                                                                                     |       | 9,321              |       | 9,730                 |       |
| Idle equipment                                                                                                                                          |       | 168                |       | 178                   |       |
| Other  intangibles, net                                                                                                                                 |       | 1,105              |       | 1,142                 |       |
| Investment in  joint venture                                                                                                                            |       | 306                |       | 306                   |       |
| Other assets                                                                                                                                            |       | 1,714              |       | 1,806                 |       |
| Total assets                                                                                                                                            |       | 19,522             |       | 22,513                |       |
|                                                                                                                                                    |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIENCY**                                                                                                      |       |               |       |                  |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                   |       |               |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                                  |       | 8,155              |       | 8,056                 |       |
| Deferred revenue                                                                                                                                        |       | 244                |       | 316                   |       |
| Short-term debt                                                                                                                                         |       | 1,805              |       | 2,182                 |       |
| Long-term debt,  current portion, net of debt discounts of $2,455 and $838                                                                              |       | 4,132              |       | 6,092                 |       |
| Warrant  liabilities                                                                                                                                    |       | 2,477              |       | 2,583                 |       |
| Conversion  feature liabilities                                                                                                                         |       | 1,860              |       | 2,083                 |       |
| Other  liabilities, current portion                                                                                                                     |       | 54                 |       | 398                   |       |
| Total current  liabilities                                                                                                                              |       | 18,727             |       | 21,710                |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Long-term debt,  net of current portion and debt discounts of $7,365 and $9,634                                                                         |       | 15,156             |       | 14,588                |       |
| Other long-term  liabilities, net of current portion                                                                                                    |       | 390                |       | 411                   |       |
| Total  liabilities                                                                                                                                      |       | 34,273             |       | 36,709                |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Minority  interests                                                                                                                                     |       | 544                |       | 384                   |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Shareholders’  deficiency:                                                                                                                         |       |               |       |                  |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized and 44,726,295 issued and outstanding  at March 31, 2008 and December 31, 2007 |       | 45                 |       | 45                    |       |
| Additional  paid-in capital                                                                                                                             |       | 139,790            |       | 137,293               |       |
| Accumulated  deficit                                                                                                                                    |       | (157,462           | )          | (154,710              | )          |
| Accumulated  other comprehensive income                                                                                                                 |       | 2,332              |       | 2,792                 |       |
| Total  shareholders’ deficiency                                                                                                                    |       | (15,295            | )          | (14,580               | )          |
|                                                                                                                                                    |       |               |       |                  |       |
| Total  liabilities and shareholders’ deficiency                                                                                                    |       | $                  | 19,522     |                  | $          | 22,513 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME (LOSS)**

**(inthousands, except per share data)**

**(unaudited)**

 
| ** **                                             | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                             | ** ** | **March 31,**                                 | ** ** |
| ** **                                             | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **(restated)**                                     | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Revenue                                                |       | $                                                  | 6,768      |   | $ | 5,067 |   |
| Cost of sales                                          |       | 4,901                                              |       | 6,441 |   |
|                                                   |       |                                               |       |   |   |
| Gross profit  (loss)                                   |       | 1,867                                              |       | (1,374 | ) |
|                                                   |       |                                               |       |   |   |
| Operating  expenses                                    |       |                                               |       |   |   |
| Selling, general,  and administrative                  |       | 1,875                                              |       | 2,532 |   |
| Research and  development                              |       | 258                                                |       | 263 |   |
| Total operating  expenses                              |       | 2,133                                              |       | 2,795 |   |
| Loss from  operations                                  |       | (266                                               | )          | (4,169 | ) |
|                                                   |       |                                               |       |   |   |
| Loss from  extinguishments of debt                     |       | —                                             |       | (648 | ) |
| Change in value  of warrants, gain                     |       | 106                                                |       | 3,692 |   |
| Change in value  of conversion feature, gain           |       | 222                                                |       | 4,344 |   |
| Otther expense                                         |       | (17                                                | )          | — |   |
| Interest expense                                       |       | (1,703                                             | )          | (2,763 | ) |
| Interest income                                        |       | 2                                                  |       | 61 |   |
|                                                   |       |                                               |       |   |   |
| (Loss) income  before minority interest                |       | (1,656                                             | )          | 517 |   |
|                                                   |       |                                               |       |   |   |
| Minority interests                                     |       | (160                                               | )          | — |   |
|                                                   |       |                                               |       |   |   |
| (Loss) income  from continuing operations              |       | (1,816                                             | )          | 517 |   |
|                                                   |       |                                               |       |   |   |
| Net (loss)  income                                     |       | (1,816                                             | )          | 517 |   |
|                                                   |       |                                               |       |   |   |
| Other  comprehensive (loss) income:                    |       |                                               |       |   |   |
| Foreign exchange  translation loss                     |       | (460                                               | )          | (222 | ) |
| Comprehensive  (loss) income                           |       | $                                                  | (2,276     | ) | $ | 295 |   |
|                                                   |       |                                               |       |   |   |
| Net (loss)  income per share basic and diluted:        |       |                                               |       |   |   |
| (Loss) income  per share basic and diluted             |       | $                                                  | (0.04      | ) | $ | 0.01 |   |
|                                                   |       |                                               |       |   |   |
| Number of  weighted average shares - basic and diluted |       | 44,726                                             |       | 44,925 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ DEFICIENCY**

**For theThree Months Ended March 31, 2008**

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

 
| ** **                                     | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Compre-  hensive  Income (loss)** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|--------------------------------------------------------------|------------|-----------|------------|
|                                           |       |               |       |              |       |                             |       |                     |       |                                                         |       |      |       |
| **Balance,  December 31, 2007**           |       | 44,726,295         |       | $                 | 45         |                             | $          | 137,293                  |       | $                                                            | (154,710   | )         | $          | 2,792 |   | $ | (14,580 | ) |
| Stock-based  compensation                      |       | —             |       | —            |       | 168                              |       | —                   |       | —                                                       |       | 168       |       |
| Foreign exchange  translation gain             |       | —             |       | —            |       | —                           |       | —                   |       | (460                                                         | )          | (460      | )          |
| Cash  distribution to minority interests       |       | —             |       | —            |       | —                           |       | (936                     | )          | —                                                       |       | (936      | )          |
| Preferred Units  capital account of subsidiary |       | —             |       | —            |       | 2,329                            |       | —                   |       | —                                                       |       | 2,329     |       |
| Net loss                                       |       | —             |       | —            |       | —                           |       | (1,816                   | )          | —                                                       |       | (1,816    | )          |
| **Balance,  March 31, 2008 (unaudited)**  |       | 44,726,295         |       | $                 | 45         |                             | $          | 139,790                  |       | $                                                            | (157,462   | )         | $          | 2,332 |   | $ | (15,295 | ) |
| **(unaudited)  (as restated)**                 |       |               |       |              |       |                             |       |                     |       |                                                         |       |      |       |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

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** **

**LIQUIDMETALTECHNOLOGIES, INC.  ANDSUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

**(unaudited)**

 
| ** **                                                                                              | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| ** **                                                                                              | ** ** | **(restated)**                                                     | ** ** | ** ** | ** ** |
| ** **                                                                                              | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| **Operating  activities:**                                                                              | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net (loss)  income                                                                                      |       | $                                                                  | (1,816     | ) | $ | 517 |   |
|                                                                                                    |       |                                                               |       |   |   |
| Adjustments to  reconcile loss from operations to net cash provided by (used in) operating  activities: |       |                                                               |       |   |   |
| Gain on disposal  of asset                                                                              |       | 21                                                                 |       | 1 |   |
| Minority  interests in income of consolidated subsidiary                                                |       | 160                                                                |       | — |   |
| Depreciation and  amortization                                                                          |       | 381                                                                |       | 881 |   |
| Loss on  extinguishment of debt                                                                         |       | —                                                             |       | 648 |   |
| Amortization of  debt discount                                                                          |       | 760                                                                |       | 1,735 |   |
| Stock-based compensation                                                                                |       | 168                                                                |       | 229 |   |
| Bad debt expense                                                                                        |       | (15                                                                | )          | (17 | ) |
| Warranty expense                                                                                        |       | (11                                                                | )          | 207 |   |
| Gain from change  in value of warrants                                                                  |       | (106                                                               | )          | (3,692 | ) |
| Gain from change  in value of conversion feature                                                        |       | (222                                                               | )          | (4,344 | ) |
|                                                                                                    |       |                                                               |       |   |   |
| Changes in  operating assets and liabilities:                                                           |       |                                                               |       |   |   |
| Trade accounts  receivable                                                                              |       | 727                                                                |       | 865 |   |
| Inventories                                                                                             |       | 462                                                                |       | 1,224 |   |
| Prepaid expenses  and other current assets                                                              |       | 323                                                                |       | (231 | ) |
| Other assets                                                                                            |       | (17                                                                | )          | (1,109 | ) |
| Accounts payable  and accrued expenses                                                                  |       | 109                                                                |       | (2,314 | ) |
| Deferred revenue                                                                                        |       | (72                                                                | )          | (77 | ) |
| Other  liabilities                                                                                      |       | (366                                                               | )          | 32 |   |
| Net cash  provided by (used in) operating activities                                                    |       | 486                                                                |       | (5,445 | ) |
|                                                                                                    |       |                                                               |       |   |   |
| **Investing  Activities:**                                                                              |       |                                                               |       |   |   |
| Purchases of  property and equipment                                                                    |       | (100                                                               | )          | (5 | ) |
| Proceeds from  the sale of property and equipment                                                       |       | (17                                                                | )          | 10 |   |
| Investment in  patents and trademarks                                                                   |       | (14                                                                | )          | (16 | ) |
| Investment in  joint venture                                                                            |       | —                                                             |       | (217 | ) |
| Net cash used in  investing activities                                                                  |       | (131                                                               | )          | (228 | ) |
|                                                                                                    |       |                                                               |       |   |   |
| **Financing  Activities:**                                                                              |       |                                                               |       |   |   |
| Proceeds from  borrowings                                                                               |       | 4,712                                                              |       | 19,894 |   |
| Repayment of  borrowings                                                                                |       | (7,111                                                             | )          | (9,265 | ) |
| Proceeds from  issuance of preferred units of subsidiary, net of issuance costs                         |       | 2,329                                                              |       | — |   |
| Restricted cash                                                                                         |       | —                                                             |       | (2,083 | ) |
| Cash  distributions                                                                                     |       | (936                                                               | )          | — |   |
| Net cash (used  in) provided by financing activities                                                    |       | (1,006                                                             | )          | 8,546 |   |
| Effect of foreign  exchange translation                                                                 |       | (295                                                               | )          | (80 | ) |
| Net (decrease)  increase in cash and cash equivalents                                                   |       | (946                                                               | )          | 2,793 |   |
|                                                                                                    |       |                                                               |       |   |   |
| Cash and cash  equivalents at beginning of period                                                       |       | 1,180                                                              |       | 144 |   |
| Cash and cash  equivalents at end of period                                                             |       | $                                                                  | 234        |   | $ | 2,937 |   |
|                                                                                                    |       |                                                               |       |   |   |
| Supplemental  cash flow information                                                                     |       |                                                               |       |   |   |
| Interest paid                                                                                           |       | $                                                                  | 906        |   | $ | 354 |   |
| Taxes paid                                                                                              |       | $                                                                  | —     |   | $ | — |   |

 

During the three months ended March 31, 2007,$400 of the Company’s 7% senior convertible notes due July 2007 wasconverted into 320,000 shares of the Company’s common stock at a conversionprice of $1.25 per share.

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements

 

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**LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**For the Three Months Ended March 31,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

**1.         Basisof Presentation / Description of Business**

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“generallyaccepted accounting principles”) for interim financial information and with theinstructions to Form 10-Q. Accordingly, they do not include all of the information and notesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring accruals)considered necessary for a fair presentation have been included.  All intercompany balances and transactionshave been eliminated.  Operating resultsfor the three months ended March 31, 2008 are not necessarily indicativeof the results that may be expected for any future periods or the year ending December 31,2008.  The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withthe Company’s Form 10-K filed with the Securities and Exchange Commissionon April 3, 2008.

 

Liquidmetal Technologies, Inc. (“Liquidmetal Technologies”) and its subsidiaries(collectively “the Company”) are in the business of developing, manufacturing,and marketing products made from amorphous alloys. Liquidmetal Technologiesmarkets and sells Liquidmetal® alloy industrial coatings and also manufactures,markets and sells products and components from bulk Liquidmetal alloys that canbe incorporated into the finished goods of its customers across a variety ofindustries.   The Company also partnerswith third-party licensees and distributors to develop and commercializeLiquidmetal alloy products.

 

The Company classifies operationsinto two reportable segments: Liquidmetal alloy industrial coatings and bulkLiquidmetal alloys (see Note 11). 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. Bulk Liquidmetal alloys include potential marketopportunities to manufacture and sell products and components for electronicdevices, medical devices, defense applications, and sporting goods.  In addition, the bulk Liquidmetal alloyssegment includes tooling and prototype sampling.  In addition, such alloys are used to generateresearch and development services revenue for developing uses related primarilyto defense and medical applications as well as potential license fees,royalties, and other compensation from strategic partnering transactions.

 

In July 2007, theCompany transferred substantially all of the assets of its 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 coatingsbusiness.  The transfer included thethermal spray coatings assets and liabilities acquired under a purchaseagreement with Foster Wheeler Energy Services in June 2007.  TheCompany holds a 69.25% ownership interest in LMC.  The results of operation of LMC areconsolidated and comprise our Liquidmetal alloy industrial coatings segment forfinancial reporting purposes.

 

**2.         Restatement**

 

*Preferred Units of subsidiary, LiquidmetalCoatings, LLC*

 

As a part of the accompanying consolidated financialsand the notes thereto, the Company has restated certain previously issuedfinancial statements due to a reclassification related to the Company’saccounting for the preferred units of its subsidiary, Liquidmetal Coatings,LLC, issued in February 2008 in accordance with Statement of FinancialAccounting Standard No. 150 “Accounting for Certain Financial Instrumentwith Characteristics of both Liabilities and Equity”, (SFAS 150).  The Company reclassed the preferred unitsfrom liabilities into equity and reversed the previously record interestexpense of $38, which also increased the Company’s minority interest expensefor the three months ended March 31, 2008. For further discussion of the preferred units transaction, please referto Note 10.

 

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**LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

**3.         Basisof Presentation and Recent Accounting Pronouncements**

 

Translation of ForeignCurrency

 

The Company applies **FASB No. 52,Foreign Currency Translation**, for translating foreigncurrency into US dollars in our consolidation of the financial statements. Upon consolidation of the Company’s foreign subsidiaries into the Company’sconsolidated financial statements, any balances with the subsidiariesdenominated in the foreign currency are translated at the exchange rate atperiod-end. The financial statements of Liquidmetal Korea have been translatedbased upon Korean Won as the functional currency. Liquidmetal Korea’s assetsand liabilities were translated using the exchange rate at period end andincome and expense items were translated at the average exchange rate for thereporting period. The resulting translation adjustment was included in othercomprehensive (loss) income.

 

Recent AccountingPronouncements

 

In February 2007,the FASB issued SFAS 159, “The Fair Value Option for Financial Assets andFinancial Liabilities including an amendment of FASB Statement No. 115” (“SFAS159”), which permits entities to voluntarily choose to measure many financialinstruments and certain other items at fair value.  SFAS 159 was effective for the Company on January 1,2008.  The Company’s management did notelect to report its financial assets or liabilities at fair value upon adoptionof SFAS 159 and, therefore, SFAS 159 did not have an impact on the Company’sconsolidated financial statement.

 

In December 2007,the FASB issued SFAS 141R, “Business Combinations” (“SFAS 141R”). SFAS 141Ramends the requirements for accounting for business combinations.  SFAS141R will be effective for financial statements issued for fiscal yearsbeginning after December 15, 2008.  The Company is currentlyevaluating the potential impact of the adoption of SFAS 141R on the Company’sconsolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements” (“SFAS 160”). SFAS 160 establishes new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It clarifies that a noncontrolling interest ina subsidiary (minority interest) is an ownership interest in the consolidatedentity that should be reported as equity in the Consolidated FinancialStatements and separate from the parent company’s equity. Among otherrequirements, this statement requires consolidated net income to be reported atamounts that include the amounts attributable to both the parent and thenoncontrolling interest. It also requires disclosure, on the face of theConsolidated Statement of Operations, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest. SFAS 160 will beeffective on January 1, 2009. The Company is currently evaluating thepotential impact of the adoption of SFAS 160 on the Company’s consolidatedfinancial statements.

 

In March 2008, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 161, “Disclosures about DerivativeInstruments and Hedging Activities — An Amendment of SFAS No. 133” (“SFAS161”). SFAS 161 seeks to improve financial reporting for derivative instrumentsand hedging activities by requiring enhanced disclosures regarding the impacton financial position, financial performance, and cash flows. SFAS 161 will beeffective on January 1, 2009. The Company is currently evaluating thepotential impact of the adoption of SFAS 161 on the Company’s consolidatedfinancial statements.

 

Other recent accountingpronouncements issued by the FASB (including its Emerging Issues Task Force),the AICPA and the SEC did not or are not believed by management to have amaterial impact on our company’s present or future consolidated financialstatements.

 

**4.         Liquidity**

 

The Company hasexperienced losses from continuing operations during the last three fiscalyears and has an accumulated deficit of $157,462 as of March 31,2008.  Cash provided by operations for the three months ended March 31,2008 was

 

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**LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

$486, however, cash flowfrom operations will likely be negative throughout fiscal year 2008.  Asof March 31, 2008, the Company’s principal sources of liquidity are $234of cash and $4,453 of trade accounts receivable.  Such conditions raisesubstantial doubt that the Company will be able to continue as a goingconcern.  These operating results occurred while the Company wasdeveloping and continues to develop, commercialize, and manufacture productsfrom an entirely new and unique technology.  These factors have placed asignificant strain on the financial resources of the Company.  The abilityof the Company to overcome these challenges depends on its ability to correctits production inefficiencies, reduce its operating costs, generate higherrevenue, achieve positive cash flow from continuing operations and continuedsources of debt and equity financing.  The consolidated financialstatements do not include any adjustments that might result from the outcome ofthese uncertainties.

 

The Company borrowed$4,679, which was offset by repayments of $5,055, under a factoring, loan, andsecurity agreement executed on April 21, 2005 and a revolving loanagreement executed on July 24, 2007, to fund its working capitalrequirements during the three months ended March 31, 2008.  TheCompany has $4,124 available for future borrowings under the factoringagreement, which is contingent on approval of eligible receivables by thefinancing company and it has $613 available for future borrowing under therevolving loan agreement.

 

On February 22,2008, the Company received $1,714 distribution from its majority ownedsubsidiary, Liquidmetal Coatings, LLC (“LMC”) from which it issued and sold$2,500 in preferred membership units to two existing holders ofLMC common membership units.  The preferred units issued byLMC have an accruing priority return of 14% per year that are priorityover any distribution made by LMC and may be redeemed at any time within fouryears of issuance.  LMC has redeemed $175of the preferred units and distributed $118 in priority return as of June 30,2008.

 

The Companyanticipates that it will not have sufficient funds to pursue its currentoperating plan beyond the second quarter of 2008 and will therefore requireadditional funding.  The Company is actively seeking additional sources ofcapital and seeking to restructure and/or modify existing indebtedness. The amount of funding that the Company seeks and the timing of such fundraisingefforts will depend on the extent to which The Company is able to increaserevenues through obtaining additional purchase orders for its products and/orthe extent to which The Company can restructure or modify its debt. Because the Company cannot be certain that it will be able to obtain adequatefunding from debt, equity, or other traditional financing sources, it is alsoactively exploring several strategic financing options, including the possiblesale of its manufacturing plant in South Korea (which would then be replacedwith a smaller facility) and additional licensing and outsourcing of ourmanufacturing operations.

 

TheCompany cannot guarantee that adequate funds will be available when needed, andif it does not receive sufficient capital, the Company may be required to alteror reduce the scope of our operations.

 

Additionally, theCompany has approximately $1,152 of principal and accrued interest outstandingas of March 31, 2008, under the 8% unsecured subordinated notes (the “BridgeNotes”), which were due August 17, 2007.  The Company intends tofully repay the amounts due under the Bridge Notes.  However, as of thefiling of this report it does not have sufficient funds to repay the BridgeNotes.  As a result, the Company is currently in default under theBridge Notes.   Such a default may have material adverse effect onour operations, financial condition, and results of operations. TheCompany has not received a formal notice of default and it is currently workingto resolve this matter with investors holding our Bridge Notes.

 

The Company wasrequired under its amended Security Purchase Agreement, dated April 23,2007, between the Company and holders of the 8% convertible subordinated notesdue January 2010 (the “January 2010 Notes”), to repay outstandingdebt under previously issued promissory notes, including the Bridge Notes (“DebtSatisfaction Covenant”) by October 1, 2007.  As the Company has notyet fully repaid the Bridge Notes, it is not in compliance with this covenantand is subject to default under the January 2010 Notes.  Such adefault may have material adverse effect on the Company’s operations, financialcondition, and results of operations. The Company have not received a formalnotice of default under this covenant and are currently working to resolve thismatter.

 

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**LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

On July 31,2008, and at the end of each month thereafter, the Company will be required toredeem 1/36th of the principal amount of the January 2010 Notes in cashor, at the Company’s election, with shares of the Company’s common stock. The ability to pay the redemption amounts with shares of common stock will besubject to specified conditions.  Under the current conditions, theCompany does not have the capital resources to redeem the January 2010Notes with cash nor will the Company meet the specified condition that will enablethe Company to redeem the January 2010 Notes with shares of its commonstock.  If the Company cannot commence the scheduled principal payment inJuly, it will be subject to default under the January 2010 Notes. Such a default may have material adverse effect on the Company’s operations,financial condition, and results of operations.  The Company is currentlyin negotiations with holders of the Notes to allow for the Company to delay therepayment of the January 2010 notes.

 

**5.Inventories**

 

Inventories are accountedfor using the moving average basis and at standard cost, which approximate coston a first-in, first-out basis and are valued at the lower of cost ormarket.  Inventories were comprised ofthe following:
| ** **         | ** ** | ** **         | ** ** | ** **            | ** ** |
|--------------------|------------|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **         | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **         | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| ** **         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Raw materials      |       | $                  | 924        |                  | $          | 1,216 |   |
| Work in process    |       | 298                |       | 536                   |       |
| Finished goods     |       | 614                |       | 546                   |       |
| Total  inventories |       | $                  | 1,836      |                  | $          | 2,298 |   |

 

**6. IdleEquipment**

 

Idle equipment consistsof certain equipment held by the Company for use in expansion of bulk alloyparts manufacturing.  While the equipment may be used internally to meetfuture capacity requirements, considering our current revenue and foreseeableproduction requirements, the Company does not anticipate utilizing thisequipment internally in the near future. Total amount of idle equipment remaining was $168 as of March 31,2008 and $178 as of December 31, 2007.

 

During the three monthsended March 31, 2007, the Company disposed of $7 of its idle equipment aspart of the equipment purchase agreement and transfer agreement regardingWeihai operations with Grace Metal (see Note 14).

 

**7.   Product Warranty**

 

Managementestimates product warranties as a percentage of certain bulk alloy productsales earned during the period.  As of March 31,2008, the Company used 5% of bulk alloy product sales as an estimate ofwarranties to be claimed.  The percentageis based on industry averages and historical information.  During the three months ended March 31,2008 and 2007, the Company recorded $18 of net gain and $207 of warrantyexpense, respectively.

 

Additionally, asof March 31, 2008 the Company used 1% of coatings applications sales asestimates of warranties to be claimed and recorded $7 of warranty expense.  The warranty accrual balance is included inaccounts payable and accrued expenses.

 

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**LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

**8.  Notes Payable**

 

Secured Senior Convertible Note

 

On August 19, 2004, the Company issued$2,855 of 6% Senior Secured Notes Due 2007 (the “July 2007 Notes”) and $2,855of 10% Senior Secured Notes Due 2005 (the “July 2005 Notes”) in exchangefor previously issued 6% Senior Convertible Notes due 2007 including placement agent costs.  The July 2005 and July 2007 Notesare convertible into Common Stock at $2.00 and $1.00, respectively.

 

In August 2005,the July 2005 Notes were retired and exchanged for 7% Convertible SecuredPromissory Notes Due August 2007. Additionally, the July 2007 Notes were retired in July 2007.

 

The Company’sgross outstanding loan balance of the July 2007 Notes totaled $0 as of March 31,2008 and December 31, 2007.  As of March 31,2008 and December 31, 2007, un-amortized discounts for conversion featureand warrants and other asset debt issuance costs totaled $0.  Interest expense for the amortization of debtissuance cost and discount on note was $0 and $174 for the three months ended March 31,2007 and 2006, respectively.

 

On August 9,2005, the Company issued $9,878 in principal amount of new 7% ConvertibleSecured Promissory Notes due August 2007 (the “August 2007 Notes”).  The issuance consisted of $5,000 cash,exchange of $1,284 in principal amount of the previously issued July 2005Notes, the exchange of $2,996 in principal amount of the 10% ConvertibleUnsecured Notes Due June 2006 (the “June 2006 Notes”), satisfactionof accrued interest and late registration fees in the amount of $589 on the July 2005Notes, and satisfaction of accrued interest of $9 on the June 2006 Notes.The August 2007 Notes were convertible into shares of the Company’s commonstock at $2.00 per share.

 

In July 2007,the August 2007 Notes were retired.

 

Asof March 31, 2008 and December 31, 2007, our gross outstanding loanbalance of the August 2007 Notes totaled $0.  As of March 31, 2008 and December 31,2007, un-amortized discounts for beneficial conversion feature and warrants,other asset debt issuance costs, and contra liability debt issuance costtotaled $0.  Interest expense for theamortization of debt issuance cost and discount on note was $0 and $962 for thethree months ended March 31, 2008 and 2007, respectively.

 

Pursuant to Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities,” the Company isrequired to report a value of the conversion liability as a fair value andrecord the fluctuation to the fair value of the conversion feature liability tocurrent operations.  The change in thefair value of the conversion feature liability resulted in a gain of $0 and$373 for the three months ended March 31, 2008 and 2007 respectively.  The fair value of conversion featureoutstanding at March 31, 2007 of $12 was computed using the Black-Scholesmodel under the following assumptions: (1) 0.34 year; (2) volatilityof 55%, (3) risk free interest of 5.04% and dividend rate of 0%.

 

Unsecured SubordinatedNote

 

 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.

 

In January 2007, $900 of August Subordinated2007 Notes and $46 of accrued interest was retired as of December 31,2007.

 

Further, as part of a private placement offerin January 2007, $925 of August Subordinated 2007 Notes and $45 ofaccrued interest was exchanged for 8% Convertible Subordinated Notes due January 2010(see Secured Convertible Subordinated Notes below).

 

As of March 31, 2008 and December 31,2007, the Company’s gross outstanding loan balance of the August 2007Subordinated Notes totaled $1,009 and $2,659, respectively.  The Company intends to fully repay theamounts due under Notes.  However, as of the filing of this report theCompany does not have sufficient funds to repay the Notes.  As a result,the

 

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**LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

Company is currently in default under thenotes.  TheCompany has not received a formal notice of default and is currently working toresolve this matter with investors holding the August 2007 SubordinatedNotes.

 

As of March 31, 2008 and December 31,2007, un-amortized discounts for warrants totaled $0.  Interest expense for the amortization ofdiscount on the note was $0 and $218 for the three months ended March 31,2007 and 2006, respectively.  As of March 31,2008 and 2007, the effective interest rate for the August 2007Subordinated Notes was 8% and 37.6%, respectively.

 

As part of the issuance of the August 2007Subordinated Notes in 2006, the Company issued warrants to the purchasers ofthe notes and placement agents giving them right to purchase up to an aggregateof 972,964 shares of the Company’s common stock.  The warrants had an original exercise price of$2.58 per share, which is subject to price adjustment for anti-dilutionpurposes.  In October 2007, theCompany reduced the exercise price of warrants to $1.75 and increased theoutstanding warrantswith certain holders of the August 2007 Subordinated Notes by 30% for anextension of the maturity of the August 2007 Subordinated Notes.   As of March 31, 2008, the exerciseprice of the warrants was reduced to $1.72 and $2.07 per share and total amountof warrants was increased to 1,313,380. The warrants will expire on May 17, 2011.

 

Secured Convertible Subordinated Notes

 

On January 3,2007, the Company completed a private placement of 8% Convertible SubordinatedNotes due January 2010 (the “January 2010 Notes”).  Under theprivate placement, as amended, the Company issued $16,300 in principal amountof January 2010 Notes.  The January 2010 Notes were issued foraggregate cash in the amount of $12,850, in payment of a total of $3,377 inprincipal and accrued but unpaid interest under our previously issued 7% SeniorSecured Convertible notes due August 2007 (“August 2007 Notes”) andour 8% Unsecured Subordinated notes (the “August 2007 Subordinated Notes”),and $73 cash discount.

 

The payment of thepreviously issued notes was treated as an extinguishment of the debt inaccordance with Emerging Issues Task Force No. 96-19, “Debtors Accountingfor a Modification or Exchange of Debt Instruments.”  The placementresulted in a $648 loss from extinguishment of debt, which consisted of writedown of $64 of deferred issue costs, $733 of debt discount, and decrease of$149 in conversion feature liability as a result of the change in carryingvalue of exchanged notes.

 

The January 2010Notes were originally convertible into the Company’s common stock at $1.55 pershare.  As a part of the private placement, the Company issued warrants tothe purchasers of the notes giving them the right to purchase up to anaggregate of 5,257,921 shares of our common stock at an exercise price of $1.93per share. In connection with the private placement, the Company also issued tothe placement agent for the transaction warrants to purchase an aggregate of248,710 shares of our common stock at an exercise price of $1.55 pershare.  The warrants will expire on January 3, 2012 and are subjectto exercise price adjustment for anti-dilution purposes.

 

In April 2007,the Company entered into an amendment to the Securities Purchase Agreement,dated January 3, 2007, between the Company and the purchasers of the January 2010Notes (“April 2007 Amendment”) providing that the Company will have until October 1,2007 to repay approximately $15,461 of the Company’s outstanding debt underpreviously issued promissory notes, including the August 2007 SubordinatedNotes (“Debt Satisfaction Covenant”). The Company has not fully repaid $1,009 principal due under the August 2007Subordinated Notes as of March 31, 2008. As a result, the Company is not in compliance with the Debt SatisfactionCovenant and are subject to default under the January 2010Notes.  We have not received a formal notice of default under this covenant and weare currently working to resolve this matter.

 

The April 2007Amendment also finalized the schedule of investors in the Private Placement toshow a total of $16,300 in principal amount of Notes; decreased the conversionprice of the Notes to $1.10, decreased the warrant exercise price for thewarrants issued to $1.55, increased the number of shares subject to suchwarrants issued to equal 7,657,591, and the purchasers of the Notes consentedto the Company granting a security interest in its South Korean manufacturingplant to purchasers of convertible notes in a subsequent offering, provideda pari passu security interest is granted to the purchasers of theNotes.

 

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**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

On December 28,2007, the Company issued $1,000 of January 2010 Notes, together withwarrants to purchase up to an aggregate of 909,091 and 200,000 of the Company’scommon stock to purchasers of the notes and placement agents.  The warrants will expire on December 28,2012 and are subject to exercise price adjustment for anti-dilution purposes.

 

In December 2007,the Company entered into agreements with two holders of the January 2010Notes and Grace Metal, a South Korean company formed by investor groupsincluding our former Founder and director, James Kang, and the two holders,whereby Grace Metal would assume the liabilities due under the January 2010Notes, including principal, interest, and fees due to the two holders totaling$434.  In connection with the assumptionof the liabilities by Grace Metal, warrants to purchase 179,620 shares of ourcommon stock held by the holders were cancelled (see Note 14).

 

The January 2010Notes bear interest at 8% per annum with interest payable quarterly in arrearsin cash, or, at our option, in the form of additional January 2010 Notes(in which case the interest rate will be 10% per annum). The ability to pay interestwith additional January 2010 Notes is subject to specified conditions,including the existence of an effective registration statement covering theresale of the shares issued in payment of interest and certain minimum tradingvolumes in the stock to be issued. From and after an event of default under theJanuary 2010 Notes and for so long as the event of default is continuing,the January 2010 Notes will bear default interest at a rate of 12% perannum (or 15% per annum if we elect to pay interest with additional January 2010Notes).  During 2007, the Company issued$971 of additional January 2010 Notes for accrued interest and lateregistration fees.

 

Beginning July 31,2008 and at the end of each month thereafter, the Company will be required toredeem 1/36th of the principal amount of the January 2010 Notes in cashor, at the Company’s election, with shares of our common stock.  The January 2010 Notes are subordinateto certain secured financing from commercial lenders incurred by the Company inthe future.

 

In connection withthe January 2007 private placement, the Company entered into aRegistration Rights Agreement with the purchasers of the January 2010Notes under which the Company is subject to monetary penalties up to a maximumamount of 18% of the aggregate amount of Notes sold in the Private Placement ifthe registration statement is not filed or does not become effective on atimely basis. The monetary penalties will accrue at the rate of 1% per month ofthe then-outstanding principal amount of the January 2010 Notes. As of March 31,2008, an aggregate of $682 in monetary penalties under the Registration RightsAgreement had already been paid to investors in the form of additional notes,while an additional $273 in such penalties was accrued but unpaid.

 

Pursuant toStatement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities,” EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,” EITF 00-27, “Application of Issue No. 98-5 toCertain Convertible Instruments,” and EITF 05-2 “The Meaning of ‘ConventionalConvertible Debt Instrument’ in EITF Issue No. 00-19,” the original fairvalue of the embedded conversion feature of $6,205 have been recorded asconversion feature liability as the debt is considered nonconventionalconvertible debt. The original fair value was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 1.6 to 3years; (2) volatility of 55%; (3) risk free interest of 4.69% to4.76% and dividend rate of 0%.  The original fair value of the additionalembedded conversion feature of $1,005 resulting from reduced conversion priceunder the amended Securities Purchase Agreement, have been recorded asconversion feature liability. The value was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 1.3 to 2.7years; (2) volatility of 55%; (3) risk free interest of 4.6% to 4.9%and dividend rate of 0%.  In addition, the Company is required to report avalue of the conversion liability as a fair value and record the fluctuation tothe fair value of the conversion feature liability to current operations.

 

The change in thefair value of the conversion feature liability resulted in a gain of $222 and$3,971 for the three months ended March 31, 2008 and 2007,respectively. The fair value of conversion feature outstanding at March 31,2008 and December 31,  2007 was$1,860 and $2,083, respectively.   The fairvalue conversion feature outstanding at March 31, 2008 was computed usingthe Black-Scholes model under the following assumptions: (1) expected lifeof 0.3 to 1.8 years; (2) volatility of 66%, (3) risk free interest of1.51% to 1.62% and dividend rate of 0%.

 

Pursuant to EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the original fair values of thewarrants of $3,964 have been recorded as warrant liability, which was computedusing 

 

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**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

the Black-Scholespricing model under the following assumptions: (1) expected life of 5years; (2) volatility of 55%; (3) risk free interest of 4.68% and (4) dividendrate of 0%.  The original fair values of the warrants of $608 from theadditional warrants issued under the amended Securities Purchase Agreement,have been recorded as additional warrant liability, which was computed usingthe Black-Scholes pricing model under the following assumptions: (1) expectedlife of 4.70 years; (2) volatility of 50%; (3) risk free interest of4.51% and (4) dividend rate of 0%.

 

The original fairvalue of the embedded conversion feature of $7,210 was recorded as discounts ofthe convertible note.  The original fair value of the 7,408,881 warrantsissued to investors of $4,372, the original fair value of 248,710 warrantsissued to Placement Agents of $200, and $73 cash discount were recorded asdiscounts of the convertible note.  In addition, $2,069 direct costsincurred relating to issuance of the convertible note was recorded as debtissuance cost in other assets.

 

The Company’sgross outstanding loan balance of the January 2010 Notes totaled $17,797as of March 31, 2008 and December 31, 2007.  As of March 31,2008 and December 31, 2007, un-amortized discounts for conversion feature,warrants, and cash discount totaled $9,821 and $10,471, respectively, and otherasset debt issuance costs totaled $907 and $967, respectively.  Interestexpense for the amortization of debt issuance cost and discount on note was$711 and $382 for the three months ended March 31, 2008 and 2007,respectively.  As of March 31, 2008, the effective interest rate ofthe January 2010 Notes was 65%.

 

Factoring Agreement

 

The Company entered into a Factoring, Loan, and SecurityAgreement (the “Agreement”) with a financing company on April 21, 2005,which allows for borrowings of up to $1,500. The Agreement expires on April 21, 2006, and automatically renewsannually thereafter. All borrowings are secured by outstanding receivablesspecifically assigned to the financing company. Assigned receivables are considered “Approved” or “Non-Approved” by thefinancing company.  In January 2007,the Company entered into a second amendment to the Agreement to provide forincreased borrowings against non-approved receivables assigned of 80%.  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.  Further, the amendment provides for interestcharges of 0.5% plus prime rate of interest less 2%.  The agreement will continue until February 1,2008 and will renew annually thereafter. In February 2007, the Company entered into an agreement to depositcash of $2,083 with a rate of prime rate of interest less 2% with the financingcompany.  The agreement is effectiveuntil July 27, 2007 and the cash deposit will be used to pay downprincipal amount of the July 2007 Notes. Additionally, the financing company reserves the right to offsetoutstanding advances against the cash deposit. In July 2007, the Company entered into a third amendment to excludeintellectual property transferred to LMC as collateral and to release securityinterest in receivables previously assigned in consideration of full repaymentof the outstanding advances.  The Companypaid $628 and the financing company applied the $2,083 cash deposit held againstthe outstanding advance of $2,711 on July 23, 2007.  Additionally, the financing company reducedthe borrowings against non-approved receivables assigned to 50% of thereceivable value.

 

Payments on assigned receivables are received directly bythe financing company, and applied to outstanding advances.  All outstanding advances and uncollectedassigned receivables are subject to fees and interest charges ranging from0.55% to 1.5% plus prime rate as published by the Wall Street Journal, with aminimum annual fee of $30. All receivables assigned and advances made aresubject to return and recall by the financing company, respectively.  As such, the advances have been classified asshort-term secured borrowings in accordance with SFAS No. 140 “Accountingfor Transfer and Servicing of Financial Assets and Extinguishments ofLiabilities.”

 

For the three months ended March 31, 2008, the Companyborrowed $1,676 and repaid $1,807 under the Agreement.  The total outstanding advance made under theagreement is $876 and $1,008 as of March 31, 2008 and December 31,2007,  respectively, which is presentedas short-term debt.   The weightedaverage rate of interest for borrowings made under the Agreement was 7.76% forthe three months ended March 31, 2008. As of March 31, 2008, the Company’s availability for futureborrowing under the agreement is $4,124 which is contingent on approval ofeligible receivables by the financing company.

 

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**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

Kookmin Note

 

On February 4, 2003, the Company’s Korean subsidiaryreceived 6,500,000 in South Korean Won, or approximately $5,488, under a loanfrom Kookmin Bank of South Korea.  Theloan bears interest at an annual rate of 7.1%. In the event of delayed repayment, the interest increases to a maximumof 21%, depending on the length of time the repayment is delayed.  As of March 31, 2008, the interest ratewas increased to 9.2% from delayed interest payments made.  This loan is collateralized by the plantfacilities and certain equipment in South Korea.  During the first eighteen months from theorigination date, interest was payable on a monthly basis.  In October 2003, the Company paid $873of principal at the request of Kookmin Bank due to the sale of machines thathad been part of the collateral on the loan. Subsequent to October 31, 2003, Kookmin Bank requested that theCompany pay an additional $866 of principal by February 2004 due to theCompany’s current credit rating.  TheCompany made two payments on the requested additional loan pay down in November andDecember 2003 of $320 and $205, respectively.  The remaining payment of $341 wassubsequently made in February 2004. Beginning in September 2004, the Company is required to make equalmonthly installments of principal and interest to repay the remaining balancethrough April 2008.  Principalpayments made to Kookmin Bank totaled $218 and $556 for the three months ended March 31,2008 and 2007, respectively, which includes $20 and $23 of foreign exchangetranslation loss.  The outstanding loanbalance totaled $212 and $451, as of March 31, 2008 and December 31,2007, respectively and are included in current portion of long-term debt, as ofMarch 31, 2008 and December 31, 2007, respectively.

 

Debt of MajorityOwned Subsidiary

 

On July 24,2007, the Company completed an $11,500 financing transaction (the “Transaction”)that provided funding to repay convertible notes previously issued by us thatwere scheduled to become due in July and August 2007.  In theTransaction, the Company transferred substantially all of the assets of theCompany’s Liquidmetal Coatings division to a newly formed, newly capitalizedsubsidiary named Liquidmetal Coatings, LLC, a Delaware limited liabilitycompany (“LMC”), and LMC assumed substantially all of the liabilities of thedivision.

 

LMC wascapitalized through a $6,500 subordinated debt and equity investment by C3Capital Partners 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 $50 for the three months ended March 31,2008.

 

The Companyretains a 69.25% ownership interest in LMC, C3  Capital Partners (“C3”)holds a 19% ownership interest, Larry Buffington, the Company’s President andCEO, (who also serves as the President and CEO of LMC) holds a 10% ownershipinterest, and CRESO Capital Partners (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*

 

In connection with the Transaction, LMC entered into a LoanAgreement, dated July 24, 2007 (the “Loan Agreement”), with Bank Midwest,N.A. (“Midwest”).  The Loan Agreement provides for total loan availabilityof $5,500, consisting of a $4,000 term loan with an annual interest rate of8.48% and a revolving loan of up to $1,500 with a variable interest equal toprime rate as published in the Wall Street Journal. Interest payments are duemonthly.  The term loan has a maturitydate of July 20,  2011.  Therevolving loan allows for borrowings up to $1,500 and has a maturity date of July 20,2008.  Borrowing availability under the revolving loan is based in apercentage of LMC’s eligible receivables and eligible inventory, and theinitial advance under the revolving loan was $1,000 on July 24,2007.  LMC’s obligations under the Loan Agreement are secured by a blanketsecurity interest in all of LMC’s assets and the Company’s equity interest inLMC, and pursuant to an intercreditor agreement between the C3 andMidwest.  Midwest’s security interest inthe assets is senior to C3’s security interest in the same assets.

 

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**LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2008 and 2007**

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

**(unaudited)**

 

LMC is required to make monthly principal payments underthe term loan of: $63 during months 1 through 12, $83 during months 13 through36, and $104 during months 37 through 48.  All remaining principal is dueand payable on July 20, 2011.  If the term loan is prepaid within thefirst twenty-four (24) months after July 24, 2007, LMC will pay aprepayment penalty of 1% of the outstanding principal balance, together withaccrued interest.  After the twenty-four month period has lapsed, LMC willhave the right to prepay the term loan without penalty.

 

As of March 31, 2008 and December 31, 2007, thegross outstanding loan balance under the term loan totaled $3,500 and $3,688,respectively, and the gross outstanding loan balance under the revolving loantotaled $887 and $1,130, respectively. The loans are presented as long termdebt and short term debt on the Company’s consolidated balance sheet,respectively.  Interest expense incurredunder the term loan and revolving loan totaled $94 for the three months ended March 31,2008.

 

Additionally, LMC entered into a Promissory Note, dated August 29,2007 (the “Capital Loan”), with Midwest to provide for $49 with an annualinterest of 8.25% to be used towards the purchase of a company truck.  The Capital Loan has a maturity date of September 1,2012.  LMC is required to make monthlyprincipal and interest payments of $1 per month.  As of March 31, 2008 and December 31,2007, the gross outstanding loan balance under the Capital Loan totaled $41 and$44, respectively, which is presented as short term debt on the Company’sconsolidated balance sheet.  Interestexpense incurred under the term loan and revolving loan totaled $1 for thethree months ended March 31, 2008.

 

*C3 Debt*

* *

In the Transaction, LMC also entered into a SecuritiesPurchase Agreement, dated July 24, 2007 (the “Securities PurchaseAgreement”), with C3 Capital Partners, L.P. (“C3”), C3 CapitalPartners II, L.P. (“C3 II”, and with C3, the “C3 entities”), andLiquidmetal Coatings Solutions, LLC, a wholly owned subsidiary of LMC that willoperate the thermal spray coatings business (“LMCS”).  Pursuant to theSecurities Purchase Agreement, LMC issued to the C3 entities subordinatedpromissory 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 a maturity date of July 20,2012 with no required principal payments before maturity other than uponspecified triggering events, such as a change in control of LMC.  Interestaccrues under at an annual rate of 14%, with 12% interest being payable monthlybeginning September 2007 and the remaining 2% interest being payable atmaturity.  In connection with the Securities Purchase Agreement and theSubordinated Notes, the Company and LMC entered into pledge agreements with theC3 entities in which the Company pledged its membership interest in LMC tosecure the obligations under the notes and LMC pledged its membership interestsin LMCS to secure its obligations under the notes.  LMC and LMCS alsogranted to C3 a blanket security interest in all of their assets to securetheir obligations under the Subordinated Notes.

 

The grossoutstanding loan balance including accrued interest payable upon maturity of theSubordinated Note totaled $6,590 and $6,557 as of March 31, 2008 and December 31,2007, respectively.  Interest expense incurred under the SubordinatedNotes totaled $197 for three months ended March 31, 2008.

 

**9.****                          StockCompensation Plan**

 

During the three monthsended March 31, 2008, under the Company’s 2002 Non-employee Director StockOption Plan which provides for the grant of stock options to non-employeedirectors, the Company granted options to purchase 70,000, of the Company’scommon shares for an average exercise price of $0.70.  Further, all options granted under this planhad exercise prices that were equal to the fair market value on the date ofgrant.

 

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**LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2008 and 2007**

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

**(unaudited)**

 

During the three andthree months ended March 31, 2008, under the Company’s 2002 EquityIncentive Plan which provides for the grant of stock options to officers,employees, consultants and directors of the Company its subsidiaries, theCompany granted options to purchase 200,000 of the Company’s common shares foran average exercise price of $0.64. Further, all options granted under this plan had exercise prices thatwere equal to the fair market value on the date of grant.

 

The Company canceled 396,345 options during the threemonths ended March 31, 2008, for terminated employees and options expired.

 

**10.****                   Preferred Unitsof Subsidiary**

** **

 On February 22, 2008, LMC completed atransaction under which it issued and sold $2,500 in preferred membership unitsto two minority members of LMC (the “Preferred Units Transaction”). Immediately following the sale of the preferred membership units, thesubscription proceeds (after a 1% transaction fee) were distributed to LMC’scommon unit members, and as a result of such distribution, the Companyreceived approximately $1,714 in the distribution.  The preferred unitsissued by LMC have an accruing priority return of 14% per year that arepriority over any distribution made by LMC and may be redeemed at any timewithin four years of issuance through cash payment or distribution in excess ofthe 14% priority return.  If LMCfails to redeem the preferred units on or before the second anniversary of theissue date, the preferred units will receive an additional 200 commonmembership units (equal to 2% of the currently outstanding commonunits) per quarter until the preferred units are redeemed infull.

 

As of June 30,2008, LMC has redeemed $175 of its preferred units and distributed $118 inpriority return to the preferred unit holders. The total preferred units outstanding are $2,325 as of June 30,2008

 

**11.      SegmentReporting and Geographic Information**

** **

SFAS No. 131,*Disclosures about Segments of an Enterprise andRelated Information,*requires companies to provide certaininformation about their operating segments. In April 2002, the Company began classifying operations into tworeportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetalalloys.  The Liquidmetal alloy industrialcoatings are used primarily as a protective coating for industrial machineryand equipment, such as drill pipe used by the oil drilling industry and boilertubes used by coal burning power plants. Bulk Liquidmetal alloys include market opportunities to manufacture andsell casing components for electronic devices, medical devices, sporting goods,tooling, prototype sampling, defense applications and metal processingequipment.  Primarily, the expensesincurred by the bulk Liquidmetal alloy segment are research and developmentcosts and selling expenses associated with identifying and developing marketopportunities.  Bulk Liquidmetal alloysproducts 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 and product licensing arrangements areincluded in the bulk Liquidmetal alloy segment. The accounting policies of the reportable segments are the same as thosedescribed in Note 3 to the consolidated financial statements included in theCompany’s Form 10-K filed with the Securities and Exchange Commission on April 3,2008.

 

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**LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2008 and 2007**

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

**(unaudited)**

 

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

 
| ** **                                  | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|---------------------------------------------|------------|--------------|------------|---------------------|------------|-------------------------|------------|
| Three months  ended March 31, 2008     |       |         |       |                |       |                    |       |
| Revenue to  external customers              |       | $            | 3,615      |                | $          | 3,153                   |       | $ | 6,768 |   |
| Gross profit                                |       | 1,233        |       | 634                 |       | 1,867                   |       |
| Income before  interest expense             |       | 879          |       | (6                  | )          | 873                     |       |
| Total  identifiable assets at end of period |       | 4,113        |       | 11,805              |       | 15,918                  |       |
|                                        |       |         |       |                |       |                    |       |
| Three months  ended March 31, 2007     |       |         |       |                |       |                    |       |
| Revenue to  external customers              |       | $            | 2,724      |                | $          | 2,343                   |       | $ | 5,067 |   |
| Gross profit  (loss)                        |       | 1,259        |       | (2,633              | )          | (1,374                  | )          |
| Income (loss)  before interest expense      |       | 795          |       | (2,744              | )          | (1,949                  | )          |
| Total  identifiable assets at end of period |       | 1,552        |       | 15,813              |       | 17,365                  |       |

 

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

 
| ** **                                                                                         | ** ** | **For the Three Months** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                         | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                                                         | ** ** | **2008**                                | ** ** | **2007** | ** ** |
|                                                                                               |       |                                    |       |   |   |
| Total segment  income (loss) before minority interest and interest expense                         |       | $                                       | 873        |   | $ | (1,949 | ) |
| General and  administrative expenses, excluded                                                     |       | (1,156                                  | )          | (2,220 | ) |
|                                                                                               |       |                                    |       |   |   |
| Consolidated  loss before interest, other expense, other income, income taxes, minority  interests |       | (283                                    | )          | (4,169 | ) |
| Loss from  extinguishments of debt                                                                 |       | —                                  |       | (648 | ) |
| Change in value  of warrants, gain                                                                 |       | 106                                     |       | 3,692 |   |
| Change in value  of conversion feature, gain                                                       |       | 222                                     |       | 4,344 |   |
| Interest expense                                                                                   |       | (1,703                                  | )          | (2,763 | ) |
| Interest income                                                                                    |       | 2                                       |       | 61 |   |
| Minority  interests                                                                                |       | (160                                    | )          | — |   |
| Consolidated net  loss                                                                             |       | $                                       | (1,816     | ) | $ | 517 |   |

 

Excluded generaland administrative expenses are attributable to the Company’s corporateheadquarters.  These expenses primarilyinclude corporate salaries, consulting, professional fees and facilitycosts.  Research and development expensesare included in the operating costs of the segment that performed the researchand development.

 

Revenues from sales tocompanies in the United States were $3,797 and $2,928 during the three monthsended March 31, 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 three monthsended March 31, 2008, the Company had revenue from sales to companiesoutside of the United States of $2,967 of which $938 represented sales tocompanies located in South Korea.  Duringthe three months ended March 31, 2007, the Company had revenues fromcompanies outside of the United States of $2,139 of which $554 representedsales to companies located in South Korea. The revenue related to sales to companies outside of the United Stateswas from bulk alloy products.

 

Long-lived assets includenet property, plant, and equipment, and net intangible assets. The Company hadlong-lived assets of $2,474 and $1,613 located in the United States at March 31,2008 and December 31, 2007, respectively. The Company had long-livedassets of $8,145 and $8,935 located in South Korea at March 31, 2008 and December 31,2007, respectively.

 

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**LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2008 and 2007**

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

**(unaudited)**

 

Reconcilinginformation between reportable segments and the Company’s consolidated totalsis shown in the following table:

 

| ** **                                 | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2008**           | ** ** |
|                                       |       |               |       |
| Total segment  assets                      |       | $                  | 15,918     |   |
| Cash and cash  equivalents                 |       | 58                 |       |
| Prepaid expenses  and other current assets |       | 958                |       |
| Other property,  plant and equipment       |       | 103                |       |
| Intangibles, net                           |       | 1,104              |       |
| Other assets                               |       | 1,381              |       |
| Total  consolidated assets                 |       | $                  | 19,522     |   |

 

Assets excluded from segment assets include assets attributable to theCompany’s corporate headquarters.  TheCompany’s largest assets consist of cash and intangible assets, which consistprimarily of the Company’s patents and trademarks.

 

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

** **

Basic earnings per share(“EPS”) is computed by dividing earnings (loss) attributable to commonshareholders by the weighted average number of common shares outstanding forthe periods. Diluted EPS reflects the potential dilution of securities thatcould share in the earnings.

 

Options to purchase8,070,801 shares of common stock at prices ranging from $0.64 to $15.00 pershare were outstanding at March 31, 2008, but were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive.  Warrants to purchase14,418,183 shares of common stock with prices ranging from $1.55 to $2.07 pershare outstanding at March 31, 2008, were not included in the computationof diluted EPS for the same period as the inclusion would have beenantidilutive.  Additionally, 16,179,548shares of common stock issuable upon conversion of the Company’s convertiblenotes with conversion prices of $1.10 per share outstanding at March 31,2008 were not included in the computation of diluted EPS for the same periodbecause the inclusion would have been antidilutive.

 

Pursuant to EITF 00-19, “Accountingfor Derivative 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 $106 and $3,692for the three months ended March 31, 2008 and December 31, 2007,respectively.  The fair value of warrantsoutstanding at March 31, 2008 of $2,477 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.96 to 4.74 years; (2) volatility of 66%, (3) risk free interest of1.55% to 2.46%, and dividend rate of 0%. The fair value of warrants outstanding at December 31, 2007 of$2,583 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 1.21 to 4.99 years; (2) volatilityof 63%, (3) risk free interest of 3.07% to 3.45%, and dividend rate of 0%.

 

**13.      Commitments and Contingencies**

 

The Company is from timeto time a party to certain legal proceedings arising in the ordinary course ofbusiness. Although outcomes cannot be predicted with certainty, the Companydoes not believe that any legal proceeding to which it is a party will have amaterial adverse effect on the Company’s financial position, results ofoperations, and cash flows.

 

In August 2006, theUnited States Department of Justice (“DOJ”) instituted a grand jury proceedingin the Middle District of Florida to investigate, among other things, allegedaccounting improprieties in relation to certain of the Company’s businesstransactions and a personal stock transaction by our former chief executiveofficer.  The grand jury proceeding isbased primarily

 

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**LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2008 and 2007**

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

**(unaudited)**

 

upon the same underlyingfacts and circumstances as alleged in the federal class action and shareholderderivative actions.  To date, subpoenasfor the production of documents and/or grand jury testimony have been issued tothe Company and several present and former officers and directors.  The Company is cooperating with the DOJ inits investigation.

 

On June 26, 2006,the Company entered into a joint venture agreement with SAGA, SpA in Padova,Italy, (“SAGA”) a specialist precision parts manufacturer.  The jointventure is named Liquidmetal SAGA Italy, Srl (“LSI”).  The Company alsoentered into an exclusive manufacturing license agreement for the eyewearindustry with LSI.  Under the joint venture agreement, the Company hasoption to buy ownership interest in LSI, initially, of 19.9% to up to 50%. In December 2006, the Company exercised the 19.9% interest in LSI and willhave two years to purchase the additional interest at a nominal price. In January 2007and June 2007, the Company contributed additional $217 and $86,respectively, into LSI as additional investment.  The contribution did notchange the Company’s 19.9% interest in LSI. Under the licensing agreement, at any time following 18 months after theeffective date of the agreement, LSI may exercise its option to sell to theCompany certain business assets including manufacturing equipment acquiredunder the joint venture.  There were norevenues recognized from the joint venture for the three-months ended March 31,2008 and 2007.

 

**14.    Related Party Transactions**

** **

In June 2003,the Company entered into an exclusive, ten-year license agreement with LLPG, Inc.(“LLPG”), a corporation headed by, Jack Chitayat, a former director of theCompany.  Under the terms of the agreement, LLPG has the right tocommercialize Liquidmetal alloys, particularly precious-metal basedcompositions, 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.  In conjunctionwith its technology licensing contract, LLPG purchased two proprietaryLiquidmetal alloy melting machines and three proprietary Liquidmetal alloycasting machines for a total purchase price of $2,000.  The Companyrecognized $125 of revenues as minimum royalty fees under the license agreementduring the year ended December 31, 2006.

 

In December 2006,the Company entered into an amended license agreement with LLPG, which extendsthe license agreement to fifteen years at reduced royalty rates. Additionally, the amended license agreement includes a $400 terminationfee.  The Company recognized $0 ofrevenue as minimum royalty fees under the licensing agreement during both ofthe three months ended March 31, 2008 and 2007.

 

As of December 31,2007, Mr. Chitayat held interests in $2,500 of 8% Convertible SubordinatedNotes due January 2010 and held a total of 906,819 exercisable warrantsthrough entities related to Mr. Chitayat**.**

** **

TheCompany has a license agreement with California Institute of Technology (“Caltech”)under which we exclusively license from Caltech certain inventions andtechnology relating to amorphous alloys.  Professor William Johnson, amember of the Company’s board of directors, is a professor at Caltech, andsubstantially all of the amorphous alloy technology licensed to us under theCaltech license agreement was developed in Professor Johnson’s Caltechlaboratory.   Additionally, the Company reimburses Caltech forlaboratory expenses incurred by Professor Johnson’s Caltech laboratory, whichduring the three months ended March 31, 2008 and 2007, amounted to $0respectively.

 

Additionally, the Company is a party to a consulting agreement with Mr. Johnson.  Under this agreement, Mr. Johnsonprovides consulting services on an as-needed basis through 2004 as it relatesto marketing and development of Liquidmetal alloy.  During 2005, the agreement continued on amonth to month basis.  In April 2006,the Company entered into an agreement with Mr. Johnson effective from January 1,2006 through December 31, 2006. During the three months ended March 31, 2008 and 2007 the Companyincurred $15 and $16 in consulting fees from Mr. Johnson, respectively.

 

Effective,July 31, 2005, Soo Buchanan, the sister of John Kang, the Company’sChairman, began providing services to the Company as a consultant.  During the three months ended March 31,2008 and 2007 Company incurred $30 and $4 respectively, for her services as aconsultant. Additionally, Otis Buchanan, the husband of Ms. Buchanan, wasemployed by the Company and was paid aggregate compensation of approximately$28 for both of the three months period ending March 31, 2008 and 2007.

 

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**LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2008 and 2007**

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

**(unaudited)**

 

In November 2004, the Company entered into an agreement with JohnKang, our Chairman of the Board, in which Mr. Kang agreed that certainstock transactions by him in 2002 involving the Company’s common stock shouldhave resulted in a liability under Section 16(b) of the SecuritiesExchange Act of 1934, as amended (“Section 16(b)”).  These transactions include Mr. Kang’sprivate sale of 285,715 shares of his personal Liquidmetal Technologies commonstock to Growell Metal Co., Ltd. in February 2002, prior to our initialpublic offering.  They also include Mr. Kang’ssubsequent indirect purchase and disposition of Liquidmetal Technologies commonstock in order to satisfy a personal agreement Mr. Kang made to GrowellMetal in February 2002 regarding the guaranteed minimum value of the stockpurchased by Growell Metal in February 2002 (the purchases anddispositions incident to this agreement occurred in August and November 2002,respectively).  Lastly, the transactionsinclude open-market purchases of an aggregate of 89,300 shares of the Company’scommon stock made by Mr. Kang in August 2002.

 

TheAudit Committee of our Board of Directors conducted an independent inquiry intothe above-described transactions with the aid of independent legal counsel and,as a result of such inquiry, the Audit Committee concluded that thetransactions should have resulted in a liability to the Company under Section 16(b) inthe amount of $302.  Mr. Kang hasacknowledged this liability, and in an agreement negotiated between Mr. Kangand the Audit Committee and approved by the full Board, Mr. Kang will paythis liability through periodic installments in 2005 and 2006.  As a result, the Company accrued for the $302receivable in other assets and other income as of December 31, 2004.  The above-described transactions involvingGrowell Metal was reported on a new Form 4 filed by Mr. Kang onNovember 15, 2004, and the open-market purchases were previously reportedon a timely basis in August 2002. As of March 31, 2008 and December 31, 2007, the outstandingamount of the receivable was $178 for both periods.

 

As of March 31,2008 and December 31, 2007, CK Cho, a member of our Board of Directors,held $467 of the convertible subordinated notes for both periods, and held305,918 exercisable warrants for both periods.

 

As of March 31,2007 and December 31, 2007, Ricardo. Salas, the Company’s former ChiefExecutive Officer, held $354 of the unsecured subordinated notes for bothperiods and $259 of the unsecured subordinated notes for both periods.  He also held a total of 377,891 ofexercisable warrants as of both March 31, 2008 and December 31, 2007.

 

On June 1, 2007, theCompany entered into a transaction with Grace Metal (“GM”), under which (i) GMagreed to purchase from us various equipment (including die casting machinesand vacuum induction melters) used in the Company’s bulk amorphous alloybusiness segment and (ii) we granted GM a 10-year exclusive license tomanufacture products made from bulk Liquidmetal alloys for customers whoseprincipal headquarters or whose major operations are located in South Korea.  GM was formed by an investor group thatincludes the former Founder and director of the Company, James Kang, who isalso the brother of John Kang, Chairman of the Board of our company.  Under an equipment purchase agreement betweenus and GM, GM agreed to buy the purchased equipment for a total purchase priceof $2,000, of which $577 were received as of March 31, 2008.  The equipment purchase agreement providesthat delivery of the equipment can be delayed to accommodate our continuingmanufacturing needs, and it also provides that the Company will retain asecurity interest in the purchased equipment until full payment of the purchaseprice.

 

In consideration of thelicense agreement with GM, the Company will be entitled to royalty of 10% of GM’snet sales of licensed products (unless GM’s margin on the products falls belowspecified levels, in which case a new royalty will be negotiated in goodfaith).  The agreement provides that theCompany may convert the license to a non-exclusive in the event that the netsales in the second year of the contract or thereafter are not sufficient toresult in royalties of $500 or more per year. The agreement also provides that GM will be required to purchase allalloy feedstock from us, and the Company will have the right to continue tomanufacture Liquidmetal alloy products for South Korean customers until allpurchased equipment has been commissioned.

 

Additionally, effective June 1,2007, the Company discontinued its post-processing operation in Weihai, Chinaand transferred the manufacturing staff and equipment in Weihai to GM under anamendment to the equipment purchase agreement with GM.  Further, the Company transferred certain ofits manufacturing staff from our South Korean plant to GM.  As a result, GM assumed $370 of accruedseverance liability for the transferred employee.  The equipment purchase agreement and thetransfer agreement regarding our Weihai operations resulted in a total net gainof $226, which is recorded as other income.

 

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**LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2008 and 2007**

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

**(unaudited)**

 

The Company has alsochanged the name of its South Korean subsidiary to Liquidmetal TechnologiesKorea Co., Ltd, which was formerly Liquidmetal Korea Co., Ltd.  GM assumed the name Liquidmetal Korea toconduct business in South Korea.

 

The Company purchasedproduction supplies and outsourced production of certain bulk alloy productionwith GM, Lead Metal, and SDM, which are controlled by James Kang, a formerdirector and officer of the Company and the brother of our currentChairman.  The Company purchased a totalof $75 and $141 for the three months ended March 31, 2008 and 2007,respectively, of which $75 is included in accounts payable and accruedliabilities at March 31, 2008.  TheCompany recognized revenue from sales of raw materials and royalties for atotal of $629 and $0 for the three months March 31, 2008 and 2007,respectively, of which $595 is included in accounts receivable as of March 31,2008.

 

Effective October 20,2006, Mr. Kang began providing services to the Company as a consultant,which would have continued through December 31, 2009.  On December 31, 2007, the terms of theconsulting agreement were accelerated whereby the remaining two years of Mr. Kang’sconsulting fees were settled for $435. The company incurred $0 and $50 in consulting fees from Mr. Kangfor the three months ended March 31, 2008 and 2007, respectively, of which$0 is included in accounts receivable at March 31, 2008.

 

In December 2007,the Company entered into agreements with two holders of our convertiblesubordinated notes (the “January 2010 Notes”) and GM, a South Koreancompany formed by investor groups including our former Founder and director,James Kang, and the two holders, whereby GM would assume the liabilities dueunder the January 2010 Notes, including principal, interest, and fees dueby our company to the two holders totaling $434 and the Company releasedobligations due from GM for outstanding trade accounts receivables.  In connection with the assumption of theliabilities by Grace Metal, warrants to purchase 179,620 shares of our commonstock held by the holders were cancelled.

 

**15.    Subsequent Event**

** **

On April 1,2008, the Company issued $444 of new 8% Convertible SubordinatedNotes Due January 2010 (the “New Notes”).  The New Notes wereissued in satisfaction of accrued interest due under (i) the original 8%Convertible Subordinated Notes issued by the Company in January 2007(the “Original Notes”) and (ii) 8% Convertible SubordinatedNotes that were subsequently issued by the Company insatisfaction of interest due under the Original Notes through September 31,2007 (the “First Interest Notes”).   The Original Notes,First Interest Notes, and New Notes all become due in January 2010, withmonthly payments of 1/36th of the principal amount beginning on July 31,2008.  The New Notes and First Interest Notes (but not the OriginalNotes) are subject to accelerated repayment in the event of anysale of company assets exceeding $5,000 (excluding sales of inventory in theordinary course).  In addition, the New Notes and First Interest Notes(but not the Original Notes), may be redeemed by the holder if the Companyreceives financing involving an amount of $25,000 or more in net proceeds atany time.  The New Notes bear interest at 8% per annum with interestpayable quarterly in arrears in cash and are subordinate to certain securedfinancing from commercial lenders incurred by us in the future.

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

** **

*Thismanagement’s discussion and analysis should be read in conjunction with thecondensed consolidated financial statements and notes included elsewhere inthis report on Form 10-Q.*

 

*Thismanagement’s discussion and analysis, as well as other sections of this reporton Form 10-Q, may contain “forward-looking statements” that involve risksand uncertainties, including statements regarding our plans, future events,objectives, expectations, forecasts, or assumptions. Any statement that is nota statement of historical fact is a forward-looking statement, and in somecases, words such as “believe,” “estimate,” “ project,” “expect,” “intend,” “may,”“anticipate,” “plans,” “seeks,” and similar expressions identifyforward-looking statements. These statements involve risks and uncertaintiesthat could cause actual outcomes and results to differ materially from theanticipated outcomes or results, and undue reliance should not be placed onthese statements. These risks and uncertainties include, but are not limitedto, the matters discussed under the caption “Factors Affecting Future Results”in our Annual Report on Form 10-K for the fiscal year ended December 31,2007 and other risks and uncertainties discussed in filings made with theSecurities and Exchange Commission (including risks described in subsequentreports on Form 10-Q, Form 10-K, Form 8-K, and other filings).Liquidmetal Technologies disclaims any intention or obligation to update orrevise any forward-looking statements, whether as a result of new information,future events, or otherwise.*

 

**Overview**

** **

We are a materialstechnology company that develops and commercializes products made fromamorphous alloys.  Our Liquidmetal®family of alloys consists of a variety of coatings, powders, bulk alloys, andcomposites that utilize the advantages offered by amorphous alloytechnology.  We develop, manufacture, andsell products and components from bulk amorphous alloys that are incorporatedinto the finished goods of our customers, and we also market and sell amorphousalloy industrial coatings.  We alsopartner with third-party licensees and distributors to develop andcommercialize Liquidmetal alloy products. We have the exclusive right to develop, manufacture, and sell what webelieve are the only commercially viable bulk amorphous alloys.

 

Amorphous alloys are unique materials that are distinguished by theirability to retain a random atomic structure when they solidify, in contrast tothe crystalline atomic structure that forms in ordinary metals and alloys whenthey solidify. Liquidmetal alloys possess a combination of performance, processing,and cost advantages that we believe makes them preferable to other materials ina variety 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 have processing characteristics similar in many respects toplastics. We believe these advantages could result in Liquidmetal alloyssupplanting other incumbent materials in a wide variety of applications. Moreover,we believe these advantages will enable the introduction of entirely newproducts and applications that are not possible or commercially viable withother materials.

 

Our revenues are derived from three principal operating segments:Liquidmetal alloy industrial coatings, Liquidmetal coatings application, andbulk Liquidmetal alloy products. Liquidmetal alloy industrial coatings are used primarily as a protectivecoating for industrial machinery and equipment, such as drill pipe used by theoil drilling industry and boiler tubes used in coal-burning power plants. Thehistorical operating information for fiscal year 2001 is based substantially onsales of Liquidmetal alloy coatings. In the second half of 2002, we beganproducing bulk Liquidmetal alloy components and products for incorporation intoour customers’ finished goods. Liquidmetal coatings application is the serviceprovided for applying Liquidmetal products as a protective coating.  Bulk Liquidmetal alloy segment revenueincludes sales of parts or components of electronic devices, medical products,and sports and leisure goods, tooling and prototype parts (includingdemonstration parts and test samples) for customers with products indevelopment, product licensing and arrangements, and research and developmentrevenue relating primarily 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 for ourLiquidmetal coatings segment consists primarily of the costs of outsourcing ourmanufacturing to third parties. Consistent with our expectations, our cost ofsales has been increasing over historical results as we further build our bulkLiquidmetal alloy business. Although we plan to continue outsourcing themanufacturing of our coatings, we will internally manufacture many productsderived from our bulk Liquidmetal alloys.

 

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Selling, general, andadministrative expenses currently consist primarily of salaries and relatedbenefits, stock-based compensation, travel, consulting and professional fees,depreciation and amortization, insurance, office and administrative expenses,stock-based compensation, and other expenses related to our operations.

 

Research and developmentexpenses represent salaries, related benefits expense, depreciation of researchequipment, consulting and contract services, expenses incurred for the designand testing of new processing methods, expenses for the development of sampleand prototype products, and other expenses related to the research anddevelopment of Liquidmetal alloys. Costs associated with research anddevelopment activities are expensed as incurred. We plan to enhance ourcompetitive position by improving our existing technologies and developingadvances in amorphous alloy technologies. We believe that our research anddevelopment efforts will focus on the discovery of new alloy compositions, thedevelopment of improved processing technology, and the identification of newapplications for our alloys.

 

In a connection to anequipment purchase agreement entered into with Grace Metal (“GM”), a SouthKorean corporation, effective June 1, 2007, we discontinued ourpost-processing operation in Weihai, China and transferred our manufacturingstaff and equipment in Weihai to GM under an amendment to the equipmentpurchase agreement with GM.  Further, wetransferred certain of our manufacturing staff from our South Korean plant toGM.  GM was formed by an investor groupthat includes the former Founder and director of our company, James Kang, whois also the brother of John Kang, Chairman of the Board of our company.  We have also changed the name of our SouthKorean subsidiary to Liquidmetal Technologies Korea Co., Ltd, which wasformerly Liquidmetal Korea Co., Ltd.  GMwill assume the name of Liquidmetal Korea to conduct business in South Korea.

 

On July 24, 2007, wetransferred substantially all of the assets of our 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 coatingsbusiness.   The transfer includedthe thermal spray coatings assets and liabilities acquired under a purchaseagreement with Foster Wheeler Energy Services in June 2007.  We hold a 69.25% ownership interest inLMC.  The results of operation of LMC areconsolidated and comprise our Liquidmetal alloy industrial coatings segment forfinancial reporting purposes.

 

The following discussionand analysis of our financial condition and results of operations focuses onthe historical results of our continuing operations.

 

**Critical Accounting Policies andEstimates**

** **

The preparation ofcondensed 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.  Theseestimates and assumptions are based on historical experience and various otherfactors that are believed to be reasonable under the circumstances.  Actual results could differ materially fromthese estimates under different assumptions or conditions.

 

We believe that the following accounting policies are the most critical toour condensed consolidated financial statements since these policies requiresignificant judgment or involve complex estimates that are important to theportrayal of our financial condition and operating results:

 

·      Exchangerate fluctuations

·      Warrantyaccrual

·      Allowancefor doubtful accounts

·      Inventoriesat lower of cost or net realizable value

·      Deferredtax assets

·      Valuationof derivatives of warrants and embedded conversion features

 

Our Annual Report on Form 10-Kfor the year ended December 31, 2007, contains further discussions on ourcritical accounting policies and estimates.

 

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The company adoptedStatement of Financial Accounting Standards No. 123, Share-BasedPayment (“SFAS 123R”), on January 1, 2006. This new standard requirescompanies to expense the fair value of employee stock options and similarawards. The company adopted SFAS 123R using the modified prospective transitionmethod. Therefore, stock based compensation expense measured in accordance withSFAS 123R was recorded during the first quarter of 2006, but the prior yearconsolidated statement of income was not restated. The adoption of SFAS 123Rresulted in incremental expense of $0.2 million for both of the three monthsperiod ended March 31, 2008 and 2007, respectively.

 

**Resultsof Operations**

 

Comparison of the threemonths ended March 31, 2008 and 2007

 

*Revenue.*Revenue increased $1.7 million to $6.8 million for the three months ended March 31,2008 from $5.1 million for the three months ended March 31,2007.  The increase consisted of an increase of $0.8 million of sales andprototyping of parts manufactured from bulk Liquidmetal alloys to consumerelectronics customers and royalties on products sold by our licensees, and anincrease of $0.9 million from the sales of our coating products as a result ofincrease in demand from oil drilling applications and our new Liquidmetalcoatings application business.

 

*Cost ofSales.* Cost of sales decreased to $4.9 million, or 72% ofrevenue, for the three months ended March 31, 2008 from $6.4 million,or 127% of revenue, for the three months ended March 31, 2007.  Thedecreases were a result of a change in revenue mix during the three monthsended March 31, 2008, primarily from increased royalty revenues.  Thecost to manufacture parts from our bulk Liquidmetal alloys is variable anddiffers based on the unique design of 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, andadministrative expenses decreased to $1.9 million, or 28% of revenue, forthe three months ended March 31, 2008 from $2.5 million, or 50% ofrevenue, for the three months ended March 31, 2007. This decrease wasprimarily a result of decreases in wages and expenses of $0.3 million, adecrease in bad debt expense of $0.2 million and a decrease in professionalfees expense of $0.1 million.

 

*Researchand Development Expenses*. Research and development expensesremained at $0.3 million, or 4% of revenue, for the three months ended March 31,2008 versus $0.3 million or 5% of revenue for the three months ended March 31,2007.  The Company continues to performresearch and development of new Liquidmetal alloys and related processingcapabilities, develop new manufacturing techniques, and contract withconsultants to advance the development of Liquidmetal alloys.

 

*Changein Value of Warrants. *Change in value of warrants decreased to again of $0.1 million, or 2% of revenue, for the three months ended March 31,2008 from a gain of $3.7 million, or 73% of revenue, for the three months endedMarch 31, 2007.  The change in valueof warrants consisted of warrants issued from convertible notes andsubordinated notes funded between 2004 and 2007 primarily as a result offluctuations in our stock price.

* *

*Changein Value of Conversion Feature.*Change in the value of our conversion feature liability from ourconvertible notes funded between 2004 and 2007 resulted in a gain of $0.2million, or 3% of revenue, during the three months ended March 31, 2008from a gain of $4.3 million, or 86% of revenue, for the three months ended March 31,2007, primarily as a result of fluctuations in our stock price.

* *

*Other expense. *Other expense increased to $17 thousand during the three months ended March 31,2008 for costs of issuing shares of preferred units of our subsidiary.

 

*InterestExpense*. Interest expense was $1.7 million, or 25% ofrevenue, for the three months ended March 31, 2008 and was $2.8 million,or 55% of revenue, for the three months ended March 31, 2007. Interestexpense consists primarily of debt amortization and interest accrued onoutstanding convertible and subordinated notes, borrowings under the April 2005factoring, loan, and security agreement, and the Kookmin loan.  The decrease was due to decreased debtdiscount amortization during the three months ended March 31, 2008.

* *

*InterestIncome.* Interestincome was $2 thousand for the three months ended March 31, 2008 and was$61 thousand for the three months ended March 31, 2007 from interestearned on cash deposits.

 

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**Liquidity and Capital Resources**

 

Our cash provided byoperating activities was $0.5 million for the three months ended March 31,2008 and our cash used for operating activities was $5.4 million for thethree months ended March 31, 2007.  Our working capital deficitdecreased from $12.4 million at December 31, 2007 to $11.8 million at March 31,2008.  The Company’s working capital deficit decrease of $0.5 million wasprimarily attributable to decrease in cash and cash equivalents of $0.9million, decrease in trade account receivables of $0.7 million, decrease ofinventories of $0.5 million, decrease in prepaid expenses and other currentassets of $0.3 million, and decrease of accounts payable and accrued expensesof $0.1 million, and offset by a decrease in long-term debt, current portion,of $2.0 million.

 

Our cash used ininvesting activities was $0.1 million for the three months ended March 31,2008 for the acquisition of property and equipment and investments in patentsand trademarks.

 

Our cash used forfinancing activities was $1.0 million for the three months ended March 31,2008.  We paid net $0.4 million inborrowings from factoring agreement executed in April 2005 a revolvingloan agreement executed on July 24, 2007. We have $4.1 million available for future borrowings under the factoringagreement, which is contingent on approval of eligible receivables by thefinancing company and we have $0.6 million available for future borrowing underthe revolving loan agreement.

 

We anticipate thatwe will not have sufficient funds to pursue our current operating plan beyondthe second quarter of 2008 and we will therefore require additionalfunding.  We are actively seeking additional sources of capital andseeking to restructure and/or modify existing indebtedness.  The amount offunding that we seek and the timing of such fundraising efforts will depend onthe extent to which we are able to increase revenues through obtainingadditional purchase orders for our products and/or the extent to which we canrestructure or modify our debt.  Because we cannot be certain that we willbe able to obtain adequate funding from debt, equity, or other traditionalfinancing sources, we are also actively exploring several strategic financingoptions, including the possible sale of our manufacturing plant in South Korea(which would then be replaced with a smaller facility) and additional licensingand outsourcing of our manufacturing operations.

 

Wecannot guarantee that adequate funds will be available when needed, and if wedo not receive sufficient capital, we may be required to alter or reduce thescope of our operations.

 

Additionally, wehave approximately $1.2 million of principal and accrued interest outstandingas of March 31, 2008, under the 8% unsecured subordinated notes (the “BridgeNotes”), which were due August 17, 2007.  We intend to fully repaythe amounts due under the Bridge Notes.  However, as of the filing of thisreport we do not have sufficient funds to repay the Bridge Notes.  As aresult, we are currently in default under the Bridge Notes.  Such a default may have material adverse effect on our operations, financialcondition, and results of operations. We have not received a formal noticeof default and we are currently working to resolve this matter with investorsholding our Bridge Notes.

 

We were requiredunder our amended Security Purchase Agreement, dated April 23, 2007,between our company and holders of our 8% convertible subordinated notes due January 2010(the “January 2010 Notes”), to repay outstanding debt under previouslyissued promissory notes, including the Bridge Notes (“Debt SatisfactionCovenant”) by October 1, 2007.  As we have not yet fully repaid ourBridge Notes, we are not in compliance with this covenant and are subject todefault under the January 2010 Notes.  Such a default may havematerial adverse effect on our operations, financial condition, and results ofoperations. We have not received a formal notice of default under this covenantand we are currently working to resolve this matter.

 

On July 31,2008, and at the end of each month thereafter, we will be required to redeem1/36th of the principal amount of the January 2010 Notes in cash or, atour election, with shares of our common stock.  The ability to pay theredemption amounts with shares of common stock will be subject to specifiedconditions.  Under the current conditions, we do not have the capitalresources to redeem the January 2010 Notes with cash nor will we meet thespecified condition that will enable us to redeem the January 2010 Noteswith shares of our common stock.  If we cannot commence the scheduledprincipal payment in July, we will be subject to default under the January 2010Notes.  Such a default may have material adverse effect on our operations,financial condition, and results of operations.  We are currently innegotiations with holders of the Notes to allow us to delay the repayment ofthe January 2010 notes.

 

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**Contractual Obligations**

** **

The following table summarizes the Company’sobligations and commitments as of March 31, 2008:

 
| ** **                                          | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Contractual Cash Obligations (1)** | ** ** | **Total**                                                          | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Thereafter** | ** ** |
|                                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Long-term debt  (2)                                 |       | $                                                                  | 19,018     |   | $ | 5,670 |   | $ | 13,348 |   | $ | — |   | $ | — |   |
| Long-term debt  of consolidated subsidiary (2)      |       | 10,090                                                             |       | 917 |   | 9,173 |   | — |   | — |   |
| Short-term debt  (3)                                |       | 876                                                                |       | 876 |   | — |   | — |   | — |   |
| Short-term debt  of consolidated subisidiary (3)    |       | 929                                                                |       | 929 |   | — |   | — |   | — |   |
| Operating leases  and rents                         |       | 1,078                                                              |       | 225 |   | 759 |   | 94 |   | — |   |
| Consulting  services payable                        |       | 583                                                                |       | 457 |   | 126 |   | — |   | — |   |
| Foster Wheeler                                      |       | 250                                                                |       | 100 |   | 150 |   |   |   |   |   |
| Dongyang                                            |       | 11                                                                 |       | 11 |   | — |   | — |   | — |   |
| Nichimen                                            |       | 315                                                                |       | 315 |   | — |   | — |   | — |   |
|                                                |       | $                                                                  | 33,150     |   | $ | 9,500 |   | $ | 23,556 |   | $ | 94 |   | $ | — |   |

 

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(1) Contractualcash obligations include Long-Term Debt comprised of $1,009 of UnsecuredSubordinated Notes issued in 2006, $17,797 of Convertible Unsecured Notes issuedin 2007, $212 of Kookmin Bank Loan, and $3,500 of Bank Midwest term loan, and$6,590 of C3 Capital Partners Subordinated Notes,  Short-Term Debt comprised of $876 outstandingadvances received under factoring, loan, and security agreement, $929 of Bank Midwestrevolving loan, and future minimum lease payments under capital and operatingleases, and purchase commitments from consultants, payments due from assetspurchased from Foster Wheeler thermal spray coatings business, payments duefrom our discontinued equipment manufacturing business, and minimum paymentsdue under a distribution agreement.

(2) Doesnot include interest payments of $6,728; and un-amortized cash discount anddiscounts for conversion feature and warrants of $9,821 of our convertible notes.

(3) Doesnot include minimum interest and fee payments of $30.

 

**OffBalance Sheet Arrangements**

 

An off-balance sheet arrangement is any transaction, agreement or othercontractual arrangement involving an unconsolidated entity under which acompany has (1) made guarantees, (2) a retained or a contingentinterest in transferred assets, (3) an obligation under derivativeinstruments classified as equity, or (4) any obligation arising out of amaterial variable interest in an unconsolidated entity that provides financing,liquidity, market risk or credit risk support to the company, or that engagesin leasing, hedging, or research and development arrangements with the 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 jointventure is named Liquidmetal SAGA Italy, Srl (“LSI”).  We also enteredinto an exclusive manufacturing license agreement for the eyewear industry withLSI.  Under the joint venture agreement, we have the option to buy anownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006,we purchased 19.9% interest in the joint venture.  Under the licensingagreement, at any time following 18 months after the effective date of theagreement, LSI may exercise its option to sell us certain business assetsincluding manufacturing equipment acquired under the joint venture. During the year ended December 31, 2007, we recognized revenues of $0.7million of Liquidmetal alloys sold to SAGA for use in the joint venture. We anticipate the alloys to be fully utilized by the joint venture prior to the18 month period.  During the three months ended March 31, 2008, werecognized revenues of $0 of Liquidmetal alloys sold to LSI for use in thejoint venture.

 

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**Item3 – Quantitative and Qualitative Disclosures about Market Risk**

** **

We are exposed to various market risks in conducting the business of theCompany, and we anticipate that this exposure will increase as a result of ourplanned growth.  In an effort to mitigatelosses associated with these risks, we may at times enter into derivative financialinstruments, although we have not historically done so.  These may take the form of forward salescontracts, option contracts, foreign currency exchange contracts, and interestrate swaps.  We have not, and do notintend to, engage in the practice of trading derivative securities for profit.

 

*InterestRates.*  We are exposedto market risks relating to changes in interest rates as our borrowings aresubject to the volatility of interest rate risk.  Although we do not currently have anyborrowings with variable interest rates, fluctuations in interest rates mayhave a negative impact to any future borrowings.

 

*CommodityPrices. *We are exposedto price risk related to anticipated purchases of certain commodities used asraw materials by our businesses, including titanium and zirconium.  Although we do not currently enter intocommodity future, forward, and option contracts to manage the fluctuations inprices of anticipated purchases, we may enter into such contacts in the futureas our business grows and as our purchases of these raw materials increase.

 

*ForeignExchange Rates.*  As aresult of our operation of a manufacturing facility in South Korea, asubstantial portion of our costs will be denominated in the South Koreanwon.  Consequently, fluctuations in theexchange rates of the South Korean won to the U.S. dollar will affect our costsof goods sold and operating margins and could result in exchange losses.  Although we do not currently enter intoforeign exchange hedge transactions, we may do so in the future as our businessgrows.

 

**Item 4T –Controls and Procedures**

** **

Evaluation of DisclosureControls and Procedures.  Based on an evaluation of the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) underthe Exchange Act) as of March 31, 2008, the end of the period covered bythis report, our Chief Executive Officer and Chief Financial Officer haveconcluded that the disclosure controls and procedures were effective.

 

Changes in InternalControls.  Duringthe quarter ended March 31, 2008, there was no change in our internalcontrols over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II**

**OTHERINFORMATION**

 

**Item1 – Legal Proceedings**

** **

Department of JusticeInvestigation

 

In August 2006, theUnited States Department of Justice (“DOJ”) instituted a grand jury proceedingin the Middle District of Florida to investigate, among other things, allegedaccounting improprieties in relation to certain of our business transactionsand a personal stock transaction by our former chief executive officer.  The grand jury proceeding is based primarilyupon the same underlying facts and circumstances as alleged in the federalclass action and shareholder derivative actions.  To date, subpoenas for the production ofdocuments and/or grand jury testimony have been issued to our company andseveral present and former officers and directors.  We are cooperating with the DOJ in itsinvestigation.

 

**Item 1A – Risk Factors**

** **

There have been nomaterial changes to the risk factors that are included in our Annual Report on Form 10-Kfor the year ended December 31, 2007 that could affect our business,results of operations, or financial condition.

 

**Item 3 -Defaults Upon Senior Securities**

** **

We have approximately$1.2 million of principal and accrued interest outstanding as of March 31,2008, under the 8% unsecured subordinated notes (“Notes”), which were due August 17,2007.  We intend to fully repay the amounts due under Notes. However, as of the filing of this report we do not have sufficient funds torepay the Notes.  As a result, we are currently in default under theNotes.   Such a default may have material adverse effect on ouroperations, financial condition, and results of operations.  We have not received a formal notice ofdefault and we are currently working to resolve this matter with investorsholding our Notes.

 

**Item 5 – Other Information**

** **

On April 1,2008, the Company issued $0.4 million of new 8% ConvertibleSubordinated Notes Due January 2010 (the “New Notes”).  The NewNotes were issued in satisfaction of accrued interest due under (i) the original 8%Convertible Subordinated Notes issued by the Company in January 2007(the “Original Notes”) and (ii) 8% Convertible SubordinatedNotes that were subsequently issued by the Company insatisfaction of interest due under the Original Notes through September 31,2007 (the “First Interest Notes”).   The Original Notes,First Interest Notes, and New Notes all become due in January 2010, withmonthly payments of 1/36th of the principal amount beginning on July 31,2008.  The New Notes and First Interest Notes (but not the OriginalNotes) are subject to accelerated repayment in the event of anysale of company assets exceeding $5.0 million (excluding sales of inventory inthe ordinary course).  In addition, the New Notes and First Interest Notes(but not the Original Notes), may be redeemed by the holder if the Companyreceives financing involving an amount of $25.0 million or more in net proceedsat any time.  The New Notes bear interest at 8% per annum withinterest payable quarterly in arrears in cash and are subordinate to certainsecured financing from commercial lenders incurred by the Company in thefuture.

 

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**Item 6 – Exhibits**

** **

The following documentsare filed as an exhibit to this Report:

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                             |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of the  President and Chief Executive Officer, Larry Buffington, as required by  Section 302 of Sarbanes-Oxley Act of 2002                                     |
|                |       |                                                                                                                                                                              |
| 31.2                |       | Certification of  Principal Financial Officer, Gerald Morrow, as required by Section 302  of Sarbanes-Oxley Act of 2002                                                      |
|                |       |                                                                                                                                                                              |
| 32.1                |       | Certification of  Principal Executive Officer, Larry Buffington, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley  Act of 2002 |
|                |       |                                                                                                                                                                              |
| 32.2                |       | Certification of  Principal Financial Officer, Gerald Morrow, pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002     |

 

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**SIGNATURES**

** **

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned hereunto duly authorized.

 

 
|                        |   | LIQUIDMETAL  TECHNOLOGIES, INC.               |
|-----------------------------|--------|-----------------------------------------------|
|                        |   | (Registrant)                                  |
|                        |   |                                          |
| Date:  August 19, 2008 |   | /s/ Larry Buffington                          |
|                        |   | Larry Buffington                              |
|                        |   | President and Chief  Executive Officer        |
|                        |   | (Principal Executive  Officer)                |
|                        |   |                                          |
|                        |   |                                          |
| Date:  August 19, 2008 |   | /s/ Gerald Morrow                             |
|                        |   | Gerald Morrow                                 |
|                        |   | Chief Financial Officer                       |
|                        |   | (Principal Financial  and Accounting Officer) |

 

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