**UNITED STATES********SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

### **FORM 10-Q**

 

**x****                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For thequarterly period ended March 31, 2008**

 

**OR**

 

**o****                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For thetransition 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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                              |

 

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 were44,726,295 shares of the registrant’s common stock, $0.001 par value,outstanding.**

 

 

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**LIQUIDMETAL TECHNOLOGIES, INC.FORM 10-QFOR THE QUARTER ENDED****MARCH 31,2008**

 

**FORWARD-LOOKING INFORMATION**

 

Statements in this reportconcerning the future sales, expenses, profitability, financial resources,product mix, market demand, product development and other statements in thisreport concerning the future results of operations, financial condition andbusiness of Liquidmetal Technologies, Inc. are “forward-looking” statementsas defined in the Securities Act of 1933 and Securities Exchange Act of 1934.Investors are cautioned that the Company’s actual results in the future maydiffer materially from those projected in the forward-looking statements due torisks and uncertainties that exist in the Company’s operations and businessenvironment, including competition, need for increased acceptance of products,ability to continue to develop and extend our brand identity, ability toanticipate and adapt to a competitive market, ability to effectively managerapidly expanding operations, amount and timing of operating costs and capitalexpenditures relating to expansion of our business, operations andinfrastructure, ability to provide superior customer service, dependence upon keypersonnel and the like. The Company’s most recent filings with the Securitiesand Exchange Commission, including Form 10-K, contain additionalinformation concerning many of these risk factors, and copies of these filingsare available from the Company upon request and without charge.

 

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**TABLE OFCONTENTS**

 
| **PART I  - Financial Information**   | ** **                                                                                                 |
|--------------------------------------------|------------------------------------------------------------------------------------------------------------|
|                                       |                                                                                                       |   |
|                                       | Item 1 – Financial Statements                                                                         | 4 |
|                                       | Condensed  Consolidated Balance Sheets (unaudited)                                                         | 4 |
|                                       | Condensed  Consolidated Statements of Operations and Comprehensive Income (Loss)  (unaudited)              | 5 |
|                                       | Condensed  Consolidated Statements of Shareholders’ Deficiency (unaudited)                            | 6 |
|                                       | Condensed  Consolidated Statements of Cash Flows (unaudited)                                               | 7 |
|                                       | Notes to  Condensed Consolidated Financial Statements (unaudited)                                          | 9 |
|                                       |                                                                                                       |   |
|                                       | Item 2 –  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 25 |
|                                       |                                                                                                       |   |
|                                       | Item 3 –  Quantitative and Qualitative Disclosures about Market Risk                                  | 29 |
|                                       |                                                                                                       |   |
|                                       | Item 4 – 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                             | 34                                                                                                         |

 

3

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### **PART I**

### **FINANCIAL INFORMATION**

**Item 1 –Financial Statements**

 

**LIQUIDMETAL TECHNOLOGIES, INC.****AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                              | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                              | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **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                                                                                                              |       | 408                |       | 708                   |       |
| Total current  assets                                                                                                                                   |       | 6,931              |       | 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                                                                                                                                            |       | 19,545             |       | 22,513                |       |
|                                                                                                                                                    |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIENCY**                                                                                                      |       |               |       |                  |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                   |       |               |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                                  |       | 7,983              |       | 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                                                                              |       | 5,382              |       | 6,092                 |       |
| Warrant  liabilities                                                                                                                                    |       | 2,477              |       | 2,583                 |       |
| Conversion  feature liabilities                                                                                                                         |       | 1,860              |       | 2,083                 |       |
| Other  liabilities, current portion                                                                                                                     |       | 54                 |       | 398                   |       |
| Total current  liabilities                                                                                                                              |       | 19,805             |       | 21,710                |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Long-term debt,  net of current portion and debt discounts of $7,365 and $9,634                                                                         |       | 16,406             |       | 14,588                |       |
| Other long-term  liabilities, net of current portion                                                                                                    |       | 390                |       | 411                   |       |
| Total  liabilities                                                                                                                                      |       | 36,601             |       | 36,709                |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Minority  interests                                                                                                                                     |       | 532                |       | 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                                                                                                                             |       | 137,461            |       | 137,293               |       |
| Accumulated deficit                                                                                                                                     |       | (157,426           | )          | (154,710              | )          |
| Accumulated  other comprehensive income                                                                                                                 |       | 2,332              |       | 2,792                 |       |
| Total  shareholders’ deficiency                                                                                                                    |       | (17,588            | )          | (14,580               | )          |
|                                                                                                                                                    |       |               |       |                  |       |
| Total  liabilities and shareholders’ deficiency                                                                                                    |       | $                  | 19,545     |                  | $          | 22,513 |   |

 

The accompanying notes are an integral part of thecondensed consolidated financial statements.

 

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**LIQUIDMETAL TECHNOLOGIES, INC.****AND SUBSIDIARIES**

 

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

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

**(unaudited)**

 
| ** **                                             | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                             | ** ** | **March 31,**                                 | ** ** |
| ** **                                             | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| 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                  |       | 1,874                                              |       | 2,532 |   |
| Research and  development                              |       | 258                                                |       | 263 |   |
| Total operating  expenses                              |       | 2,132                                              |       | 2,795 |   |
| Loss from  operations                                  |       | (265                                               | )          | (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                                       |       | (1,741                                             | )          | (2,763 | ) |
| Interest income                                        |       | 2                                                  |       | 61 |   |
|                                                   |       |                                               |       |   |   |
| (Loss) income  before minority interest                |       | (1,676                                             | )          | 517 |   |
|                                                   |       |                                               |       |   |   |
| Minority  interests                                    |       | (149                                               | )          | — |   |
|                                                   |       |                                               |       |   |   |
| (Loss) income  from continuing operations              |       | (1,825                                             | )          | 517 |   |
|                                                   |       |                                               |       |   |   |
| Net (loss)  income                                     |       | (1,825                                             | )          | 517 |   |
|                                                   |       |                                               |       |   |   |
| Other  comprehensive (loss) income:                    |       |                                               |       |   |   |
| Foreign exchange  translation loss                     |       | (460                                               | )          | (222 | ) |
| Comprehensive  (loss) income                           |       | $                                                  | (2,285     | ) | $ | 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 thecondensed consolidated financial statements.

 

5

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**LIQUIDMETAL TECHNOLOGIES, INC.****AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIENCY**

###### **Forthe Three Months Ended March 31, 2008**

**(in thousands, except per sharedata)**

**(unaudited)**

 
| ** **                               | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  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 |       | —             |       | —            |       | —                           |       | (891                     | )          | —                                                    |       | (891      | )          |
| Net loss                                 |       | —             |       | —            |       | —                           |       | (1,825                   | )          | —                                                    |       | (1,825    | )          |
| **Balance,  March 31, 2008**        |       | 44,726,295         |       | $                 | 45         |                             | $          | 137,461                  |       | $                                                         | (157,426   | )         | $          | 2,332 |   | $ | (17,588 | ) |

 

The accompanying notes are an integral part of thecondensed consolidated financial statements.

 

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**LIQUIDMETAL TECHNOLOGIES, INC. ****ANDSUBSIDIARIES**

 

### **CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands, except per sharedata)**

**(unaudited)**

 
| ** **                                                                                              | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| ** **                                                                                              | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| **Operating  activities:**                                                                              | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net (loss)  income                                                                                      |       | $                                                                  | (1,825     | ) | $ | 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                                                |       | 148                                                                |       | — |   |
| Depreciation and  amortization                                                                          |       | 381                                                                |       | 881 |   |
| Loss on  extinguishment of debt                                                                         |       | —                                                             |       | 648 |   |
| Amortization of  debt discount                                                                          |       | 762                                                                |       | 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                                                              |       | 299                                                                |       | (231 | ) |
| Other assets                                                                                            |       | (43                                                                | )          | (1,109 | ) |
| Accounts payable  and accrued expenses                                                                  |       | (62                                                                | )          | (2,314 | ) |
| Deferred revenue                                                                                        |       | (72                                                                | )          | (77 | ) |
| Other  liabilities                                                                                      |       | (366                                                               | )          | 32 |   |
| Net cash  provided by (used in) operating activities                                                    |       | 246                                                                |       | (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                                                                               |       | 7,212                                                              |       | 19,894 |   |
| Repayment of  borrowings                                                                                |       | (7,111                                                             | )          | (9,265 | ) |
| Restricted cash                                                                                         |       | —                                                             |       | (2,083 | ) |
| Cash  distributions                                                                                     |       | (891                                                               | )          | — |   |
| Net cash (used in)  provided by financing activities                                                    |       | (790                                                               | )          | 8,546 |   |
| Effect of  foreign exchange translation                                                                 |       | (271                                                               | )          | (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                                                                                              |       | $                                                                  | —     |   | $ | — |   |

 

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

 

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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 accompanying notes are an integral part of the condensedconsolidated financial statements

 

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### ** **

### **LIQUIDMETAL TECHNOLOGIESAND SUBSIDIARIES**

 

### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

**1.         Basis of Presentation / Description ofBusiness**

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples 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 madefrom amorphous alloys. Liquidmetal Technologies markets and sells Liquidmetal®alloy industrial coatings and also manufactures, markets and sells products andcomponents from bulk Liquidmetal alloys that can be incorporated into thefinished goods of its customers across a variety of industries.   The Company also partners with third-partylicensees and distributors to develop and commercialize Liquidmetal alloyproducts.

 

The Company classifies operations into two reportablesegments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys(see Note 9). Liquidmetal alloy industrial coatings are used primarily as aprotective coating for industrial machinery and equipment, such as drill pipeused by the oil drilling industry and boiler tubes used by coal-burning powerplants. Bulk Liquidmetal alloys include potential market opportunities tomanufacture and sell products and components for electronic devices, medicaldevices, 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.

 

InJuly 2007, the Company transferred substantially all of the assets of itsLiquidmetal alloy industrial coatings business to a newly formed, newlycapitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limitedliability company (“LMC”), and LMC assumed substantially all of the liabilitiesof the coatings business.  The transferincluded the thermal spray coatings assets and liabilities acquired under apurchase agreement with Foster Wheeler Energy Services in June 2007. The Company 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.         Basis of Presentation and RecentAccounting Pronouncements**

 

Translationof Foreign Currency

 

The Company applies **FASB No. 52,Foreign Currency Translation**, for translating foreigncurrency into US dollars in our consolidation of the financialstatements.  Upon consolidation of the Company’s foreign subsidiaries intothe Company’s consolidated financial statements, any balances with thesubsidiaries denominated in the foreign currency are translated at the exchangerate at period-end. The financial statements of Liquidmetal Korea have beentranslated based upon Korean Won as the functional currency. Liquidmetal Korea’sassets and liabilities were translated using the exchange rate at period endand income and expense items were translated at the average exchange rate forthe reporting period. The resulting translation adjustment was included inother comprehensive loss.

 

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### **LIQUIDMETAL TECHNOLOGIESAND SUBSIDIARIES**

 

### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

RecentAccounting Pronouncements

 

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 and reportingstandards 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 orare not believed by management to have a material impact on our company’spresent or future consolidated financial statements.

 

**3.         Liquidity**

 

The Company hasexperienced losses from continuing operations during the last three fiscalyears and has an accumulated deficit of $157,426 as of March 31,2008.  Cash provided by operations for the three months ended March 31,2008 was $246, however, cash flow from operations will likely be negativethroughout fiscal year 2008.  As of March 31, 2008, the Company’sprincipal sources of liquidity are $234 of cash and $4,453 of trade accountsreceivable.  Such conditions raise substantial doubt that the Company willbe able to continue as a going concern.  These operating results occurredwhile the Company was developing and continues to develop, commercialize, andmanufacture products from an entirely new and unique technology.  Thesefactors have placed a significant strain on the financial resources of theCompany.  The ability of the Company to overcome these challenges dependson its ability to correct its production inefficiencies, reduce its operatingcosts, generate higher revenue, achieve positive cash flow from continuingoperations and continued sources of debt and equity financing.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of these uncertainties.

 

10

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### **LIQUIDMETAL TECHNOLOGIESAND SUBSIDIARIES**

 

### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

The Company borrowed $4,679, which was offset by repayments of $5,055,under a factoring, loan, and security agreement executed on April 21, 2005and a revolving loan agreement executed on July 24, 2007, to fund itsworking capital requirements during the three months ended March 31, 2008.

 

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 and are redeemable bythe preferred holders on the fourth anniversary of the issue date

 

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 the BridgeNotes.   Such a default may have material adverse effect on ouroperations, financial condition, and results of operations. The Companyhas not received a formal notice of default and it is currently working toresolve 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 not yetfully repaid the Bridge Notes, it is not in compliance with this covenant andis subject to default under the January 2010 Notes.  Such a defaultmay 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.

 

On July 31, 2008, and atthe end of each month thereafter, the Company will be required to redeem 1/36thof the principal amount of the January 2010 Notes in cash or, at the Company’selection, with shares of the Company’s common stock.  The ability to paythe redemption amounts with shares of common stock will be subject to specifiedconditions.  Under the current conditions, the Company does not have thecapital resources to redeem the January 2010 Notes with cash nor will theCompany meet the specified condition that will enable the Company to redeem theJanuary 2010 Notes with shares of its common stock.  If the Company cannotcommence the scheduled principal payment in July, it will be subject to defaultunder the January 2010 Notes.  Such a default may have material adverseeffect on the Company’s operations, financial condition, and results ofoperations.  The Company is currently in negotiations with holders of theNotes to allow for the Company to delay the repayment of the January 2010notes.

 

**4.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:

 

11

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### **LIQUIDMETAL TECHNOLOGIESAND SUBSIDIARIES**

 

### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 
| ** **         | ** ** | **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 |   |

 

**5. 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 12).

 

**6.   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.

 

**7.  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 wereretired 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.

 

12

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### **LIQUIDMETAL TECHNOLOGIESAND SUBSIDIARIES**

 

### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

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 the three 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 Subordinated Note

 

 On May 17,2006, September 21, 2006, and December 1, 2006, the Company issued 8%unsecured subordinated notes due August 2007 in the aggregate principalamount of $4,584 (the “August 2007 Subordinated Notes”).  The August 2007 Subordinated Notes areunsecured 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 Company is currently in default under the notes.  The Company has notreceived a formal notice of default and is currently working to resolve thismatter with investors holding the August 2007 Subordinated Notes.

 

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 priceof $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.

 

13

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### **LIQUIDMETAL TECHNOLOGIESAND SUBSIDIARIES**

 

### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

Secured Convertible Subordinated Notes

 

On January 3, 2007, the Company completed a private placement of 8%Convertible Subordinated Notes due January 2010 (the “January 2010Notes”).  Under the private placement, as amended, the Company issued$16,300 in principal amount of January 2010 Notes.  The January 2010Notes were issued for aggregate cash in the amount of $12,850, in payment of atotal of $3,377 in principal and accrued but unpaid interest under ourpreviously issued 7% Senior Secured Convertible notes due August 2007 (“August 2007Notes”) and our 8% Unsecured Subordinated notes (the “August 2007Subordinated Notes”), and $73 cash discount.

 

The payment of the previously issued notes was treated as anextinguishment of the debt in accordance with Emerging Issues Task Force No. 96-19,“Debtors Accounting for a Modification or Exchange of Debt Instruments.” The placement resulted in a $648 loss from extinguishment of debt, whichconsisted of write down of $64 of deferred issue costs, $733 of debt discount,and decrease of $149 in conversion feature liability as a result of the changein carrying value of exchanged notes.

 

 The January 2010 Notes were originally convertible into theCompany’s common stock at $1.55 per share.  As a part of the privateplacement, the Company issued warrants to the purchasers of the notes givingthem the right to purchase up to an aggregate of 5,257,921 shares of our commonstock at an exercise price of $1.93 per share. In connection with the privateplacement, the Company also issued to the placement agent for the transactionwarrants to purchase an aggregate of 248,710 shares of our common stock at anexercise price of $1.55 per share.  The warrants will expire on January 3,2012 and are subject to exercise price adjustment for anti-dilution purposes.

 

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

 

The April 2007 Amendment also finalized the schedule of investorsin the Private Placement to show a total of $16,300 in principal amount of Notes;decreased the conversion price of the Notes to $1.10, decreased the warrantexercise price for the warrants issued to $1.55, increased the number of sharessubject to such warrants issued to equal 7,657,591, and the purchasers of theNotes consented to the Company granting a security interest in its South Koreanmanufacturing plant to purchasers of convertible notes in a subsequentoffering, provided a  pari passu  security interest is granted to thepurchasers of the Notes.

 

On December 28, 2007, the Company issued $1,000 of January 2010Notes, together with warrants to purchase up to an aggregate of 909,091 and200,000 of the Company’s common stock to purchasers of the notes and placementagents.  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 twoholders of the January 2010 Notes and Grace Metal, a South Korean companyformed by investor groups including our former Founder and director, JamesKang, and the two holders, whereby Grace Metal would assume the liabilities dueunder the January 2010 Notes, including principal, interest, and fees dueto the two holders totaling $434.  Inconnection with the assumption of the liabilities by Grace Metal, warrants topurchase 179,620 shares of our common stock held by the holders were cancelled(see Note 12).

 

The January 2010 Notes bear interest at 8% per annum with interestpayable quarterly in arrears in cash, or, at our option, in the form ofadditional January 2010 Notes (in which case the interest rate will be 10%per annum). The ability to pay interest with additional January 2010 Notesis subject to specified conditions, including the existence of an effectiveregistration statement covering the resale of the shares issued in payment ofinterest and certain minimum trading volumes in the stock to be issued. Fromand after an event of default under the January 2010 Notes and for so longas the event of default is continuing, the January 2010 Notes will beardefault interest at a rate of 12% per annum (or 15% per annum if we elect topay interest with additional January 2010 Notes).  During 2007, the Company issued $971 ofadditional January 2010 Notes for accrued interest and late registrationfees.

 

14

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### **LIQUIDMETAL TECHNOLOGIESAND SUBSIDIARIES**

 

### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

Beginning July 31, 2008 and at the end of each month thereafter,the Company will be required to redeem 1/36th of the principal amount of the January 2010Notes in cash or, at the Company’s election, with shares of our commonstock.  The January 2010 Notes aresubordinate to certain secured financing from commercial lenders incurred bythe Company in the future.

 

In connection with the January 2007 private placement, the Companyentered into a Registration 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 a timelybasis. The monetary penalties will accrue at the rate of 1% per month of thethen-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 to Statement of Financial Accounting Standards No. 133, “Accountingfor Derivative 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 the fair value of the conversion feature liabilityresulted in a gain of $222 and $3,971 for the three months ended March 31,2008 and 2007, respectively. The fair value of conversion featureoutstanding at March 31, 2008 and December 31, 2007 was $1,860 and$2,083, respectively.   The fair valueconversion feature outstanding at March 31, 2008 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.3 to 1.8 years; (2) volatility of 66%, (3) risk free interest of1.51% to 1.62% and dividend rate of 0%.

 

Pursuant to EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock”, the originalfair values of the warrants of $3,964 have been recorded as warrant liability,which was computed using the Black-Scholes pricing model under the followingassumptions: (1) expected life of 5 years; (2) volatility of 55%; (3) riskfree interest of 4.68% and (4) dividend rate of 0%.  The originalfair values of the warrants of $608 from the additional warrants issued underthe amended Securities Purchase Agreement, have been recorded as additionalwarrant liability, which was computed using the Black-Scholes pricing modelunder the following assumptions: (1) expected life of 4.70 years; (2) volatilityof 50%; (3) risk free interest of 4.51% and (4) dividend rate of 0%.

 

The original fair value of the embedded conversion feature of $7,210 wasrecorded as discounts of the convertible note.  The original fair value ofthe 7,408,881 warrants issued to investors of $4,372, the original fair valueof 248,710 warrants issued to Placement Agents of $200, and $73 cash discountwere recorded as discounts of the convertible note.  In addition, $2,069direct costs incurred relating to issuance of the convertible note was recordedas debt issuance cost in other assets.

 

The Company’s gross outstanding loan balance of the January 2010Notes totaled $17,797 as of March 31, 2008 and December 31,2007.  As of March 31, 2008 and December 31, 2007, un-amortizeddiscounts for conversion feature, warrants, and cash discount totaled $9,821and $10,471, respectively, and other asset debt issuance costs totaled $907 and$967, respectively.  Interest expense for the amortization of debtissuance cost and discount on note was $711 and $382 for the three months endedMarch 31, 2008 and 2007, respectively.  As of March 31, 2008,the effective interest rate of the January 2010 Notes was 65%.

 

15

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### **LIQUIDMETAL TECHNOLOGIESAND SUBSIDIARIES**

 

### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

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 on approvedand 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 heldagainst the 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 presented as short-term debt.   The weighted average rate of interest forborrowings made under the Agreement was 7.76% for the three months ended March 31,2008.  As of March 31, 2008, theCompany’s availability for future borrowing under the agreement is $4,124 whichis contingent on approval of eligible receivables by the financing company.

 

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.

 

16

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### **LIQUIDMETAL TECHNOLOGIESAND SUBSIDIARIES**

 

### **NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

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 maturity dateof July 20, 2011.  The revolving loan allows for borrowings up to$1,500 and has a maturity date of July 20, 2008.  Borrowingavailability under the revolving loan is based in a percentage of LMC’seligible receivables and eligible inventory, and the initial advance under therevolving loan was $1,000 on July 24, 2007.  LMC’s obligations underthe Loan Agreement are secured by a blanket security interest in all of LMC’sassets and the Company’s equity interest in LMC, and pursuant to anintercreditor agreement between the C3 and Midwest.  Midwest’s security interest in the assets issenior to C3’s security interest in the same assets.

 

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 theCapital Loan totaled $41 and $44, respectively, which is presented as shortterm debt on the Company’s consolidated balance sheet.  Interest expense incurred under the term loanand revolving loan totaled $1 for the three months ended March 31, 2008.

 

17

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### **LIQUIDMETAL TECHNOLOGIESAND SUBSIDIARIES**

 

### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

*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 the Subordinated Note totaled$6,590 and $6,557 as of March 31, 2008 and December 31, 2007,respectively.  Interest expense incurred under the Subordinated Notestotaled $197 for three months ended March 31, 2008.

 

*Preferred Units*

 

On February 22,2008, LMC completed a transaction under which it issued and sold $2,500 inpreferred membership units to two minority members of LMC (the “Preferred UnitsTransaction”).  Immediately following the sale of the preferred membershipunits, the subscription proceeds (after a 1% transaction fee) were distributedto LMC’s common unit members, and as a result of such distribution, theCompany received approximately $1,714 in the distribution.  The preferredunits issued by LMC have an accruing priority return of 14% per year andare redeemable by the preferred holders on the fourth anniversary of theissue date, and if LMC fails to redeem the preferred units on or beforethe second anniversary of the issue date, the preferred units will receive anadditional distribution equal to 200 common membership units (equal to 2%of the currently outstanding common units) per quarter until thepreferred units are redeemed in full.

 

As of March 31, 2008, the gross outstanding loan balance under thePreferred Units Transaction totaled $2,500, of which $1,250 is included incurrent portion of long-term debt. Interest expense incurred for the Preferred Units Transaction totaled$37 for the three months ended March 31, 2008.

 

**8.     StockCompensation Plan**

 

Duringthe three months ended March 31, 2008, under the Company’s 2002Non-employee Director Stock Option Plan which provides for the grant of stockoptions to non-employee directors, the Company granted options to purchase70,000, of the Company’s common shares for an average exercise price of$0.70.  Further, all options grantedunder this plan had exercise prices that were equal to the fair market value onthe date of grant.

 

Duringthe three and three months ended March 31, 2008, under the Company’s 2002Equity Incentive Plan which provides for the grant of stock options toofficers, employees, consultants and directors of the Company its subsidiaries,the Company granted options to purchase 200,000 of the Company’s common sharesfor an 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.

 

18

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** **

**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

The Company canceled 396,345options during the three months ended March 31, 2008, for terminatedemployees and options expired.

 

**9.         Segment Reporting and GeographicInformation**

 

SFAS No. 131,*Disclosures about Segments of an Enterprise and Related Information,*requirescompanies to provide certain information about their operating segments.  In April 2002, the Company beganclassifying operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used bycoal burning power plants.  BulkLiquidmetal alloys include market opportunities to manufacture and sell casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment.  Primarily, the expenses incurred by the bulkLiquidmetal alloy segment are research and development costs and selling expensesassociated with identifying and developing market opportunities.  Bulk Liquidmetal alloys products can bedistinguished from Liquidmetal alloy coatings in that the bulk Liquidmetalalloy can have significant thickness, up to approximately one inch, whichallows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.   Revenue and expenses associated 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.

 

Summarized financial information concerning theCompany’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          |       | 12                  |       | 891                     |       |
| Total  identifiable assets at end of period |       | 4,113        |       | 11,828              |       | 15,941                  |       |
|                                        |       |         |       |                |       |                    |       |
| 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                  |       |

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

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         |       | $                                       | 891        |   | $ | (1,949 | ) |
| General and  administrative expenses, excluded                                     |       | (1,156                                  | )          | (2,220 | ) |
|                                                                               |       |                                    |       |   |   |
| Consolidated  loss before interest, other income, income taxes, minority interests |       | (265                                    | )          | (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                                                                   |       | (1,741                                  | )          | (2,763 | ) |
| Interest income                                                                    |       | 2                                       |       | 61 |   |
| Minority  interests                                                                |       | (149                                    | )          | — |   |
| Consolidated net  loss                                                             |       | $                                       | (1,825     | ) | $ | 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.

 

20

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded 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                      |       | $                  | 15,941     |   |
| 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                 |       | $                  | 19,545     |   |

 

Assets excludedfrom segment assets include assets attributable to the Company’s corporateheadquarters.  The Company’s largestassets consist of cash and intangible assets, which consist primarily of theCompany’s patents and trademarks.

 

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

 

Basicearnings per share (“EPS”) is computed by dividing earnings (loss) attributableto common shareholders by the weighted average number of common sharesoutstanding for the periods. Diluted EPS reflects the potential dilution ofsecurities that could share in the earnings.

 

Optionsto purchase 8,070,801 shares of common stock at prices ranging from $0.64 to$15.00 per share were outstanding at March 31, 2008, but were not includedin the computation of diluted EPS for the same period as the inclusion wouldhave been antidilutive.  Warrants topurchase 14,418,183 shares of common stock with prices ranging from $1.55 to$2.07 per share outstanding at March 31, 2008, were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive.  Additionally, 16,179,548 shares ofcommon stock issuable upon conversion of the Company’s convertible notes withconversion prices of $1.10 per share outstanding at March 31, 2008 werenot included in the computation of diluted EPS for the same period because theinclusion would have been antidilutive.

 

Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the Company is required toreport a value of the warrant as a fair value and record the fluctuation to thefair value of the warrant liability to current operations.  The change in the fair value of the warrantsresulted in gains of $106 and $3,692 for the three months ended March 31,2008 and December 31, 2007, respectively. The fair value of warrants outstanding at March 31, 2008 of $2,477was computed using the Black-Scholes model under the following assumptions: (1) expectedlife of 0.96 to 4.74 years; (2) volatility of 66%, (3) risk freeinterest of 1.55% 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%.

 

**11.      Commitments and Contingencies**

 

TheCompany is from time to time a party to certain legal proceedings arising inthe ordinary course of business. Although outcomes cannot be predicted withcertainty, the Company does not believe that any legal proceeding to which itis a party will have a material adverse effect on the Company’s financialposition, results of operations, and cash flows.

 

In August 2006,the United States Department of Justice (“DOJ”) instituted a grand juryproceeding in the Middle District of Florida to investigate, among otherthings, alleged accounting improprieties in relation to certain of the Company’sbusiness transactions and a personal stock transaction by our former chiefexecutive officer.  The grand juryproceeding is based primarily upon the same underlying facts and circumstancesas alleged in the federal class action and shareholder derivative actions.  To date, subpoenas for the production ofdocuments and/or grand jury testimony have been issued to the Company andseveral present and former officers and directors.  The Company is cooperating with the DOJ inits investigation.

 

21

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

On June 26,2006, the Company entered into a joint venture agreement with SAGA, SpA inPadova, Italy, (“SAGA”) a specialist precision parts manufacturer.  Thejoint venture is named Liquidmetal SAGA Italy, Srl (“LSI”).  The Companyalso entered 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.

 

**12.    RelatedParty Transactions**

 

In June 2003, theCompany 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**.**

 

The Company has a licenseagreement with California Institute of Technology (“Caltech”) under which weexclusively license from Caltech certain inventions and technology relating toamorphous alloys.  Professor William Johnson, a member of the Company’sboard of directors, is a professor at Caltech, and substantially all of theamorphous alloy technology licensed to us under the Caltech license agreementwas developed in Professor Johnson’s Caltech laboratory.  Additionally, the Company reimburses Caltech for laboratory expenses incurredby Professor Johnson’s Caltech laboratory, which during the three months ended March 31,2008 and 2007, amounted to $0 respectively.

 

Additionally, theCompany 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 monthsended March 31, 2008 and 2007 the Company incurred $15 and $16 inconsulting fees from Mr. Johnson, respectively.

 

Effective, July 31,2005, Soo Buchanan, the sister of John Kang, the Company’s Chairman, beganproviding 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.

 

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

 

22

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

include Mr. Kang’s private sale of 285,715 shares of his personalLiquidmetal Technologies common stock to Growell Metal Co., Ltd. in February 2002,prior to our initial public offering. They also include Mr. Kang’s subsequent indirect purchase anddisposition of Liquidmetal Technologies common stock in order to satisfy a personalagreement Mr. Kang made to Growell Metal in February 2002 regardingthe guaranteed minimum value of the stock purchased by Growell Metal in February 2002(the purchases and dispositions incident to this agreement occurred in August andNovember 2002, respectively). Lastly, the transactions include open-market purchases of an aggregateof 89,300 shares of the Company’s common stock made by Mr. Kang in August 2002.

 

The Audit Committee ofour Board of Directors conducted an independent inquiry into theabove-described transactions with the aid of independent legal counsel and, asa result of such inquiry, the Audit Committee concluded that the transactionsshould 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, 2008and December 31, 2007, CK Cho, a member of our Board of Directors, held$467 of the convertible subordinated notes for both periods, and held 305,918exercisable warrants for both periods.

 

As of March 31, 2007and 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, the Company entered into a transaction with Grace Metal (“GM”), underwhich (i) GM agreed to purchase from us various equipment (including diecasting machines and vacuum induction melters) used in the Company’s bulkamorphous alloy business segment and (ii) we granted GM a 10-yearexclusive license to manufacture products made from bulk Liquidmetal alloys forcustomers whose principal headquarters or whose major operations are located inSouth Korea.  GM was formed by aninvestor group that includes the former Founder and director of the Company, JamesKang, who is also the brother of John Kang, Chairman of the Board of ourcompany.  Under an equipment purchaseagreement between us and GM, GM agreed to buy the purchased equipment for atotal purchase price of $2,000, of which $577 were received as of March 31,2008.  The equipment purchase agreementprovides that delivery of the equipment can be delayed to accommodate ourcontinuing manufacturing needs, and it also provides that the Company willretain a security interest in the purchased equipment until full payment of thepurchase price.

 

Inconsideration of the license agreement with GM, the Company will be entitled toroyalty of 10% of GM’s net sales of licensed products (unless GM’s margin onthe products falls below specified levels, in which case a new royalty will benegotiated in good faith).  The agreementprovides that the Company may convert the license to a non-exclusive in theevent that the net sales in the second year of the contract or thereafter arenot sufficient to result in royalties of $500 or more per year.  The agreement also provides that GM will berequired to purchase all alloy feedstock from us, and the Company will have theright to continue to manufacture Liquidmetal alloy products for South Koreancustomers until all purchased equipment has been commissioned.

 

Additionally,effective June 1, 2007, the Company discontinued its post-processingoperation in Weihai, China and transferred the manufacturing staff andequipment in Weihai to GM under an amendment to the equipment purchaseagreement with GM.  Further, the Companytransferred certain of its manufacturing staff from our South Korean plant toGM.  As a result, GM assumed $370 ofaccrued severance 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.

 

TheCompany has also changed the name of its South Korean subsidiary to LiquidmetalTechnologies Korea Co., Ltd, which was formerly Liquidmetal Korea Co.,Ltd.  GM assumed the name LiquidmetalKorea to conduct business in South Korea.

 

23

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three MonthsEnded March 31, 2008 and 2007**

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

**(unaudited)**

 

TheCompany purchased production supplies and outsourced production of certain bulkalloy production with GM, Lead Metal, and SDM, which are controlled by JamesKang, a former director and officer of the Company and the brother of ourcurrent Chairman.  The Company purchaseda total of $75 and $141 for the three months ended March 31, 2008 and2007, 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.

 

EffectiveOctober 20, 2006, Mr. Kang began providing services to the Company asa 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.

 

**13.    SubsequentEvent**

 

OnApril 1, 2008, the Company issued $444 of new 8% Convertible Subordinated NotesDue January 2010 (the “New Notes”).  TheNew Notes were issued in satisfaction of accrued interest due under (i) theoriginal 8% Convertible Subordinated Notes issued by the Company in January2007 (the “Original Notes”) and (ii) 8% Convertible Subordinated Notes thatwere subsequently issued by the Company in satisfaction of interest due underthe Original Notes through September 30, 2007 (the “First Interest Notes”).   The Original Notes, First Interest Notes,and New Notes all become due in January 2010, with monthly payments of 1/36thof the principal amount beginning on July 31, 2008.  The New Notes and First Interest Notes (butnot the Original Notes) 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 NewNotes and First Interest Notes (but not the Original Notes), may be redeemed bythe holder if the Company receives financing involving an amount of $25,000 ormore in net proceeds at any time.  TheNew Notes bear interest at 8% per annum with interest payable quarterly inarrears in cash and are subordinate to certain secured financing from commerciallenders 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 the anticipatedoutcomes or results, and undue reliance should not be placed on thesestatements. These risks and uncertainties include, but are not limited to, thematters discussed under the caption “Factors Affecting Future Results” in ourAnnual 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**

 

Weare a materials technology company that develops and commercializes productsmade from amorphous alloys.  OurLiquidmetal® family of alloys consists of a variety of coatings, powders, bulkalloys, and composites 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 aredistinguished by their ability to retain a random atomic structure when theysolidify, in contrast to the crystalline atomic structure that forms inordinary metals and alloys when they solidify. Liquidmetal alloys possess acombination of performance, processing, and cost advantages that we believemakes them preferable to other materials in a variety of applications. Theamorphous atomic structure of our alloys enables them to overcome certainperformance limitations caused by inherent weaknesses in crystalline atomicstructures, thus facilitating performance and processing characteristicssuperior in many ways to those of their crystalline counterparts. For example,our zirconium-titanium Liquidmetal alloys are approximately 250% stronger thancommonly used titanium alloys, such as Ti-6Al-4V, but they have processingcharacteristics similar in many respects to plastics. We believe theseadvantages could result in Liquidmetal alloys supplanting other incumbentmaterials in a wide variety of applications. Moreover, we believe these advantageswill enable the introduction of entirely new products and applications that arenot possible or commercially viable with other materials.

 

Our revenues are derived from three principaloperating segments: Liquidmetal alloy industrial coatings, Liquidmetal coatingsapplication, and bulk Liquidmetal alloy products.  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 incoal-burning power plants. The historical operating information for fiscal year2001 is based substantially on sales of Liquidmetal alloy coatings. In thesecond half of 2002, we began producing bulk Liquidmetal alloy components andproducts for incorporation into our customers’ finished goods. Liquidmetalcoatings application is the service provided for applying Liquidmetal productsas a protective coating.  BulkLiquidmetal alloy segment revenue includes sales of parts or components of electronicdevices, medical products, and sports and leisure goods, tooling and prototypeparts (including demonstration parts and test samples) for customers withproducts in development, product licensing and arrangements, and research anddevelopment revenue relating primarily to defense and medicalapplications.  We expect that thesesources of revenue will continue to significantly change the character of ourrevenue mix.

 

Thecost of sales for our Liquidmetal coatings segment consists primarily of thecosts of outsourcing our manufacturing to third parties. Consistent with ourexpectations, our cost of sales has been increasing over historical results aswe further build our bulk Liquidmetal alloy business. Although we plan tocontinue outsourcing the manufacturing of our coatings, we will internallymanufacture many products derived from our bulk Liquidmetal alloys.

 

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Selling,general, and administrative expenses currently consist primarily of salariesand related benefits, stock-based compensation, travel, consulting andprofessional fees, depreciation and amortization, insurance, office andadministrative expenses, stock-based compensation, and other expenses relatedto our operations.

 

Researchand development expenses represent salaries, related benefits expense,depreciation of research equipment, consulting and contract services, expensesincurred for the design and testing of new processing methods, expenses for thedevelopment of sample and prototype products, and other expenses related to theresearch and development of Liquidmetal alloys. Costs associated with researchand development 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.

 

Ina connection to an equipment purchase agreement entered into with Grace Metal (“GM”),a South Korean 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.

 

OnJuly 24, 2007, we transferred substantially all of the assets of ourLiquidmetal alloy industrial coatings business to a newly formed, newly capitalizedsubsidiary named Liquidmetal Coatings, LLC, a Delaware limited liabilitycompany (“LMC”), and LMC assumed substantially all of the liabilities of thecoatings business.   The transferincluded the thermal spray coatings assets and liabilities acquired under apurchase agreement 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.

 

Thefollowing discussion and analysis of our financial condition and results ofoperations focuses on the historical results of our continuing operations.

** **

**CriticalAccounting Policies and Estimates**

 

Thepreparation of condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States requires us tomake estimates 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 arethe most critical to our condensed consolidated financial statements since thesepolicies require significant judgment or involve complex estimates that areimportant to the portrayal of our financial condition and operating results:

 

·                  Exchange rate fluctuations 

·                  Warranty accrual

·                  Allowance for doubtful accounts

·                  Inventories at lower of cost or net realizablevalue

·                  Deferred tax assets

·                  Valuationof derivatives of warrants and embedded conversion features

 

OurAnnual Report on Form 10-K for the year ended December 31, 2007, contains further discussions on our criticalaccounting policies and estimates.

 

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Thecompany adopted Statement of Financial Accounting Standards No. 123,Share-Based Payment (“SFAS 123R”), on January 1, 2006. This new standardrequires companies to expense the fair value of employee stock options andsimilar awards. The company adopted SFAS 123R using the modified prospectivetransition method. Therefore, stock based compensation expense measured inaccordance with SFAS 123R was recorded during the first quarter of 2006, butthe prior year consolidated statement of income was not restated. The adoptionof SFAS 123R resulted in incremental expense of $0.2 million for both of thethree months period 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.  The cost to manufacture parts from our bulkLiquidmetal alloys is variable and differs based on the unique design of eachproduct.  However, the cost of sales for the products sold by the coatingsbusiness segment is generally consistent because the Liquidmetal coatingsproducts are produced by third parties and sold wholesale to variousindustries.

 

*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 with consultantsto 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.

 

*Change inValue 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.

 

*InterestExpense*. Interest expense was $1.7 million, or 26% 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 $61thousand for the three months ended March 31, 2007 from interest earned oncash deposits.

 

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**Liquidityand Capital Resources**

 

Our cash provided byoperating activities was $0.2 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 deficitincreased from $12.4 million at December 31, 2007 to $12.9 million at March 31,2008.  The Company’s working capital deficit increase of $0.5 million wasprimarily attributable to decrease in cash and cash equivalents of $0.9 millionand decrease in trade account receivables of $0.7 million, and offset by adecrease in short-term debt of $0.4 million and long-term debt, currentportion, of $0.7 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 $0.8 million for the three months ended March 31,2008.  We paid net $0.1 million inborrowings from factoring agreement executed in April 2005.  We have $4.1 million available for futureborrowings under the factoring agreement, which is contingent on approval ofeligible receivables by the financing company.

 

We anticipate thatwe will not have sufficient funds to pursue our current operating plan beyondthe second quarter of 2008 and we will therefore require additional funding. We are actively seeking additional sources of capital and seeking torestructure and/or modify existing indebtedness.  The amount of fundingthat we seek and the timing of such fundraising efforts will depend on theextent to which we are able to increase revenues through obtaining additionalpurchase orders for our products and/or the extent to which we can restructureor modify our debt.  Because we cannot be certain that we will be able toobtain adequate funding from debt, equity, or other traditional financingsources, we are also actively exploring several strategic financing options,including the possible sale of our manufacturing plant in South Korea (whichwould then be replaced with a smaller facility) and additional licensing andoutsourcing 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 atthe end of each month thereafter, we will be required to redeem 1/36th of theprincipal amount of the January 2010 Notes in cash or, at our election, withshares of our common stock.  The ability to pay the redemption amountswith shares of common stock will be subject to specified conditions. Under the current conditions, we do not have the capital resources toredeem the January 2010 Notes with cash nor will we meet the specifiedcondition that will enable us to redeem the January 2010 Notes with shares ofour common stock.  If we cannot commence the scheduled principal paymentin July, we will be subject to default under the January 2010 Notes.  Sucha default may have material adverse effect on our operations, financialcondition, and results of operations.  We are currently in negotiationswith holders of the Notes to allow us to delay the repayment of the January2010 notes.

 

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**ContractualObligations**

 

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)      |       | 12,590                                                             |       | 2,167 |   | 10,423 |   | — |   | — |   |
| 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 |   | — |   | — |   | — |   |
|                                                |       | $                                                                  | 35,650     |   | $ | 10,750 |   | $ | 24,806 |   | $ | 94 |   | $ | — |   |

 

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(1)   Contractual cash obligationsinclude Long-Term Debt comprised of $1,009 of Unsecured Subordinated Notesissued in 2006, $17,797 of Convertible Unsecured Notes issued in 2007, $212 ofKookmin Bank Loan, and $3,500 of Bank Midwest term loan, $6,590 of C3 CapitalPartners Subordinated Notes, and $2,500 of Preferred Membership Units,Short-Term Debt comprised of $876 outstanding advances received underfactoring, loan, and security agreement, $929 of Bank Midwest revolving loan,and future minimum lease payments under capital and operating leases, andpurchase commitments from consultants, payments due from assets purchased fromFoster Wheeler thermal spray coatings business, payments due from ourdiscontinued equipment manufacturing business, and minimum payments due under adistribution agreement.

(2)   Does not include interestpayments of $6,728; and un-amortized cash discount and discounts for conversionfeature and warrants of $9,821 of our convertible notes.

(3)   Does not include minimuminterest and fee payments of $30.

 

**OffBalance Sheet Arrangements**

 

An off-balance sheet arrangement is any transaction,agreement or other contractual arrangement involving an unconsolidated entityunder which a company has (1) made guarantees, (2) a retained or acontingent interest in transferred assets, (3) an obligation underderivative instruments classified as equity, or (4) any obligation arisingout of a material variable interest in an unconsolidated entity that providesfinancing, liquidity, market risk or credit risk support to the company, orthat engages in leasing, hedging, or research and development arrangements withthe company.

 

On June 26, 2006, weentered into a joint venture agreement with SAGA, SpA in Padova, Italy, (‘SAGA”)a specialist precision parts manufacturer.  The joint venture is namedLiquidmetal SAGA Italy, Srl (“LSI”).  We also entered into an exclusivemanufacturing license agreement for the eyewear industry with LSI.  Underthe joint venture agreement, we have the option to buy an ownership interest inLSI, initially, of 19.9% to up to 50%.  In December 2006, wepurchased 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.  Duringthe three months ended March 31, 2008, we recognized revenues of $0 ofLiquidmetal alloys sold to LSI for use in the joint venture.

 

**Item 3 – Quantitative and Qualitative Disclosures aboutMarket 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 derivativefinancial instruments, 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.

 

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*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.

 

**Item4T – 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 IIOTHER INFORMATION**

**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**

 

Therehave been no material changes to the risk factors that are included in ourAnnual Report on Form 10-K for the year ended December 31, 2007 thatcould affect our business, results of operations, or financial condition.

 

**Item 3 -Defaults Upon Senior Securities**

 

Wehave approximately $1.2 million of principal and accrued interest outstandingas of March 31, 2008, under the 8% unsecured subordinated notes (“Notes”),which were due August 17, 2007.  We intend to fully repay the amountsdue under Notes.  However, as of the filing of this report we do not havesufficient funds to repay the Notes.  As a result, we are currentlyin default under the Notes.   Such a default may have materialadverse effect on our operations, financial condition, and results ofoperations.  We have not received aformal notice of default and we are currently working to resolve this matterwith investors holding our Notes.

 

**Item 5 – Other Information**

 

OnApril 1, 2008, the Company issued $0.4 million of new 8% ConvertibleSubordinated Notes Due January 2010 (the “New Notes”).  The New Notes were issued in satisfaction ofaccrued interest due under (i) the original 8% Convertible Subordinated Notesissued by the Company in January 2007 (the “Original Notes”) and (ii) 8%Convertible Subordinated Notes that were subsequently issued by the Company insatisfaction of interest due under the Original Notes through September 30, 2007(the “First Interest Notes”).   TheOriginal Notes, First Interest Notes, and New Notes all become due in January2010, with monthly payments of 1/36th of the principal amount beginning on July31, 2008.  The New Notes and FirstInterest Notes (but not the Original Notes) are subject to acceleratedrepayment in the event of any sale of company assets exceeding $5.0 million(excluding sales of inventory in the ordinary course).  In addition, the New Notes and First InterestNotes (but not the Original Notes), may be redeemed by the holder if theCompany receives financing involving an amount of $25.0 million or more in netproceeds at any time.  The New Notes bearinterest at 8% per annum with interest payable quarterly in arrears in cash andare subordinate to certain secured financing from commercial lenders incurredby the Company in the future.

 

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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 therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 

 
|                          | LIQUIDMETAL  TECHNOLOGIES, INC.               |   |
|--------------------------|-----------------------------------------------|--------|
|                     | (Registrant)                                  |   |
|                     |                                          |   |
| Date:  May 15, 2008 | /s/ Larry Buffington                          |
|                     | Larry Buffington                              |   |
|                     | President and Chief  Executive Officer        |   |
|                     | (Principal Executive  Officer)                |   |
|                     |                                          |   |
|                     |                                          |   |
| Date:  May 15, 2008 | /s/ Gerald Morrow                             |
|                     | Gerald Morrow                                 |   |
|                     | Chief Financial Officer                       |   |
|                     | (Principal Financial  and Accounting Officer) |   |

 

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