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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2010**

 

**OR**

 

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

 

**For the transition period from        to        **

 

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

 

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**LIQUIDMETALTECHNOLOGIES, INC.**

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

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting 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 |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act). Yes  o  No  x

 

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

 

 

 

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**LIQUIDMETAL TECHNOLOGIES, INC.FORM 10-QFOR THE QUARTER ENDED****MARCH 31,2010**

** **

**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”statements as defined in the Securities Act of 1933 and Securities Exchange Actof 1934. Investors are cautioned that the Company’s actual results in thefuture may differ materially from those projected in the forward-lookingstatements due to risks and uncertainties that exist in the Company’soperations and business environment, including competition, need for increasedacceptance of products, ability to continue to develop and extend our brandidentity, ability to anticipate and adapt to a competitive market, ability toeffectively manage rapidly expanding operations, amount and timing of operatingcosts and capital expenditures relating to expansion of our business,operations and infrastructure, ability to provide superior customer service,dependence upon key personnel and the like. The Company’s most recent filingswith the Securities and Exchange Commission, including Form 10-K, containadditional information concerning many of these risk factors, and copies ofthese filings are available from the Company upon request and without charge.

 

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**TABLE OF CONTENTS**

 
| **PART I - Financial  Information**                                                                  |   |
|-----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                      |   |
| Item  1 — Financial Statements                                                                       | 4      |
| Condensed Consolidated Balance Sheets (unaudited)                                                         |   |
| Condensed Consolidated Statements of Operations and  Comprehensive Income (Loss) (unaudited)              |   |
| Condensed Consolidated Statements of Shareholders’  Deficiency (unaudited)                           |   |
| Condensed Consolidated Statements of Cash Flows  (unaudited)                                              |   |
| Notes to Condensed Consolidated Financial Statements  (unaudited)                                         |   |
|                                                                                                      |   |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 23     |
|                                                                                                      |   |
| Item 3 — Quantitative and Qualitative Disclosures  about Market Risk                                 | 28     |
|                                                                                                      |   |
| Item 4T — Controls and Procedures                                                                    | 28     |
|                                                                                                      |   |
| **PART II —  Other Information**                                                                |   |
|                                                                                                      |   |
| Item  1 — Legal Proceedings                                                                          | 29     |
|                                                                                                      |   |
| Item 1A — Risk Factors                                                                               | 29     |
|                                                                                                      |   |
| Item 3 — Defaults Upon Senior Securities                                                             | 29     |
|                                                                                                      |   |
| Item 4 - Submission of Matters to a Vote of Security  Holders                                             | 29     |
|                                                                                                      |   |
| Item 5 — Other Information                                                                           | 29     |
|                                                                                                      |   |
| Item 6 —  Exhibits                                                                                   | 29     |
|                                                                                                      |   |
| Signatures                                                                                                | 30     |
|                                                                                                      |   |
| Certifications                                                                                            | 31     |

 

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** **

**PART I**

**FINANCIAL INFORMATION**

 

**Item 1 —Financial Statements**

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                            | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                            |       |               |       |                  |       |
|                                                                                                                                                                  |       |               |       |                  |       |
| Current  assets:                                                                                                                                                      |       |               |       |                  |       |
| Cash  and cash equivalents                                                                                                                                            |       | $                  | —     |                  | $          | 151 |   |
| Trade  accounts receivables, net of allowance for doubtful accounts of $1,348 and  $1,314                                                                             |       | 1,167              |       | 1,180                 |       |
| Inventories                                                                                                                                                           |       | 981                |       | 982                   |       |
| Prepaid  expenses and other current assets                                                                                                                            |       | 641                |       | 594                   |       |
| Total  current assets                                                                                                                                                 |       | 2,789              |       | 2,907                 |       |
|                                                                                                                                                                  |       |               |       |                  |       |
| Property,  plant and equipment, net                                                                                                                                   |       | 5,710              |       | 5,668                 |       |
| Other  intangibles, net                                                                                                                                               |       | 1,217              |       | 1,232                 |       |
| Investment  in joint venture                                                                                                                                          |       | —             |       | —                |       |
| Other  assets                                                                                                                                                         |       | 533                |       | 633                   |       |
| Total  assets                                                                                                                                                         |       | 10,249             |       | 10,440                |       |
|                                                                                                                                                                  |       |               |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIENCY**                                                                                                                     |       |               |       |                  |       |
|                                                                                                                                                                  |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                                 |       |               |       |                  |       |
| Accounts  payable and accrued expenses                                                                                                                                |       | 9,853              |       | 9,111                 |       |
| Deferred  revenue                                                                                                                                                     |       | 50                 |       | 31                    |       |
| Short-term  debt                                                                                                                                                      |       | 1,282              |       | 896                   |       |
| Long-term  debt, current portion, net of debt discounts of $2,608 and $0                                                                                              |       | 6,124              |       | 1,393                 |       |
| Warrant  liabilities                                                                                                                                                  |       | 2,191              |       | 3,975                 |       |
| Conversion  feature liabilities                                                                                                                                       |       | 126                |       | 444                   |       |
| Other  liabilities, current portion                                                                                                                                   |       | 141                |       | 141                   |       |
| Total  current liabilities                                                                                                                                            |       | 19,767             |       | 15,991                |       |
|                                                                                                                                                                  |       |               |       |                  |       |
| Long-term  debt, net of current portion and debt discounts of $85 and $0                                                                                              |       | 8,670              |       | 12,661                |       |
| Other  long-term liabilities, net of current portion                                                                                                                  |       | 134                |       | 155                   |       |
| Total  liabilities                                                                                                                                                    |       | 28,571             |       | 28,807                |       |
|                                                                                                                                                                  |       |               |       |                  |       |
| Shareholders’  deficiency:                                                                                                                                       |       |               |       |                  |       |
| Liquidmetal  Technologies, Inc. shareholders’ deficiency                                                                                                    |       |               |       |                  |       |
| Preferred  stock, $0.001 par value; 10,000,000 shares authorized; 3,183,663 shares  issued and outstanding as of both March 31, 2010 and December 31,  2009 |       | 4                  |       | 4                     |       |
| Common  stock, $0.001 par value; 300,000,000 shares authorized; 47,583,102 shares issued  and outstanding as of both March 31, 2010 and December 31, 2009   |       | 48                 |       | 48                    |       |
| Additional  paid-in capital                                                                                                                                           |       | 142,177            |       | 142,135               |       |
| Accumulated  deficit                                                                                                                                                  |       | (162,807           | )          | (162,777              | )          |
| Accumulated  other comprehensive income                                                                                                                               |       | 1,516              |       | 1,441                 |       |
| Total  Liquidmetal Technologies, Inc. shareholders’ deficiency                                                                                              |       | (19,062            | )          | (19,149               | )          |
| Noncontrolling  interest                                                                                                                                              |       | 740                |       | 782                   |       |
| Total  shareholders’ deficiency                                                                                                                                  |       | (18,322            | )          | (18,367               | )          |
|                                                                                                                                                                  |       |               |       |                  |       |
| Total  liabilities and shareholders’ deficiency                                                                                                                  |       | $                  | 10,249     |                  | $          | 10,440 |   |

** **

Theaccompanying notes are an integral part of the condensed consolidated financialstatements.

 

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

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME (LOSS)**

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

**(unaudited)**

 
| ** **                                                    | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **March 31,**             | ** ** |
| ** **                                                    | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| ** **                                                    | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Revenue                                                       |       | $                              | 2,703      |   | $ | 3,592 |   |
| Cost  of sales                                                |       | 2,156                          |       | 2,141 |   |
| Gross  profit                                                 |       | 547                            |       | 1,451 |   |
|                                                          |       |                           |       |   |   |
| Operating  expenses                                           |       |                           |       |   |   |
| Selling,  general, and administrative                         |       | 1,312                          |       | 1,588 |   |
| Research  and development                                     |       | 247                            |       | 247 |   |
| Total  operating expenses                                     |       | 1,559                          |       | 1,835 |   |
|                                                          |       |                           |       |   |   |
| Loss  from operations                                         |       | (1,012                         | )          | (384 | ) |
|                                                          |       |                           |       |   |   |
| Change  in value of warrants, gain (loss)                     |       | 1,785                          |       | (126 | ) |
| Change  in value of conversion feature, gain                  |       | 318                            |       | 30 |   |
| Other  income                                                 |       | 1                              |       | — |   |
| Interest  expense                                             |       | (1,164                         | )          | (2,290 | ) |
| Interest  income                                              |       | —                         |       | — |   |
|                                                          |       |                           |       |   |   |
| Net  loss                                                     |       | (72                            | )          | (2,770 | ) |
|                                                          |       |                           |       |   |   |
| Net  loss (income) attributable to noncontrolling interest    |       | 42                             |       | (31 | ) |
|                                                          |       |                           |       |   |   |
| Net  loss attributable to Liquidmetal Technologies, Inc. |       | (30                            | )          | (2,801 | ) |
|                                                          |       |                           |       |   |   |
| Other  comprehensive income (loss):                           |       |                           |       |   |   |
| Foreign  exchange translation gain (loss)                     |       | 75                             |       | (413 | ) |
| Comprehensive  income (loss)                                  |       | $                              | 45         |   | $ | (3,214 | ) |
|                                                          |       |                           |       |   |   |
| Net  loss per share basic and diluted:                        |       |                           |       |   |   |
| Net  loss attributable to Liquidmetal Technologies, Inc. |       | $                              | (0.00      | ) | $ | (0.06 | ) |
|                                                          |       |                           |       |   |   |
| Number  of weighted average shares - basic and diluted        |       | 47,583                         |       | 44,825 |   |

 

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

 

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

**CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’DEFICIENCY**

**For the Three Months Ended March 31, 2010**

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

**(unaudited)**

 
| ** **                                | ** ** | **Preferred  Shares** | ** ** | **Common  Shares** | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Non-  controlling  Interest** | ** ** | **Total**   | ** ** |
|-------------------------------------------|------------|-----------------------|------------|--------------------|------------|----------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|-------------|------------|
|                                      |       |                  |       |               |       |                 |       |              |       |                             |       |                     |       |                                                 |       |                            |       |        |       |
| **Balance, December 31, 2009**            |       | 3,183,663             |       | 47,583,102         |       | 4                    |       | 48                |       | 142,135                          |       | (162,777                 | )          | 1,441                                                |       | 782                             |       | (18,367     | )          |
| Stock-based  compensation                 | ** ** | **—**            | ** ** | **—**         | ** ** | **—**           | ** ** | **—**        |       | 42                               | ** ** | **—**               | ** ** | **—**                                           | ** ** | **—**                      |       | 42          |       |
| Foreign  exchange translation gain (loss) | ** ** | **—**            | ** ** | **—**         | ** ** | **—**           | ** ** | **—**        | ** ** | **—**                       | ** ** | **—**               |       | 75                                                   | ** ** | **—**                      |       | 75          |       |
| Net  (loss)                               | ** ** | **—**            | ** ** | **—**         | ** ** | **—**           | ** ** | **—**        | ** ** | **—**                       |       | (30                      | )          | **—**                                           |       | (42                             | )          | (72         | )          |
| **Balance, March 31, 2010**               | ** ** | **3,183,663**         | ** ** | **47,583,102**     | ** ** | **4**                | ** ** | **48**            | ** ** | **142,177**                      | ** ** | **(162,807**             | **)**      | **1,516**                                            | ** ** | **740**                         | ** ** | **(18,322** | **)**      |

 

Theaccompanying notes are an integral part of the condensed consolidated financialstatements.

 

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

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

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

**(unaudited)**

 
| ** **                                                                                              | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| ** **                                                                                              | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| **Operating activities:**                                                                               | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Net  loss attributable to Liquidmetal Technologies, Inc.                                           |       | $                                              | (30        | ) | $ | (2,801 | ) |
|                                                                                                    |       |                                           |       |   |   |
| Adjustments  to reconcile loss from operations to net cash provided by (used in) operating  activities: |       |                                           |       |   |   |
| Gain  on disposal of asset                                                                              |       | 2                                              |       | — |   |
| (Loss)  income attributable to noncontrolling interest of consolidated subsidiary                       |       | (42                                            | )          | 31 |   |
| Depreciation  and amortization                                                                          |       | 243                                            |       | 232 |   |
| Loss  on extinguishment of debt                                                                         |       | —                                         |       | — |   |
| Amortization  of debt discount                                                                          |       | 684                                            |       | 1,364 |   |
| Stock-based  compensation                                                                               |       | 42                                             |       | 88 |   |
| Bad  debt expense (recovery)                                                                            |       | 20                                             |       | (4 | ) |
| Warranty  recovery                                                                                      |       | (13                                            | )          | (57 | ) |
| Gain  (loss) from change in value of warrants                                                           |       | (1,785                                         | )          | 126 |   |
| Gain  from change in value of conversion feature                                                        |       | (318                                           | )          | (30 | ) |
|                                                                                                    |       |                                           |       |   |   |
| Changes  in operating assets and liabilities:                                                           |       |                                           |       |   |   |
| Trade  accounts receivable                                                                              |       | (8                                             | )          | 369 |   |
| Inventories                                                                                             |       | 2                                              |       | (177 | ) |
| Prepaid  expenses and other current assets                                                              |       | (47                                            | )          | 162 |   |
| Other  assets                                                                                           |       | 36                                             |       | (110 | ) |
| Accounts  payable and accrued expenses                                                                  |       | 1,461                                          |       | 826 |   |
| Deferred  revenue                                                                                       |       | 19                                             |       | 15 |   |
| Other  liabilities                                                                                      |       | (20                                            | )          | (42 | ) |
| Net  cash provided by (used in) operating activities                                                    |       | 246                                            |       | (8 | ) |
|                                                                                                    |       |                                           |       |   |   |
| **Investing Activities:**                                                                               |       |                                           |       |   |   |
| Purchases  of property and equipment                                                                    |       | (159                                           | )          | (47 | ) |
| Proceeds  from the sale of property and equipment                                                       |       | —                                         |       | — |   |
| Investment  in patents and trademarks                                                                   |       | (20                                            | )          | (212 | ) |
| Net  cash used in investing activities                                                                  |       | (179                                           | )          | (259 | ) |
|                                                                                                    |       |                                           |       |   |   |
| **Financing Activities:**                                                                               |       |                                           |       |   |   |
| Proceeds  from borrowings                                                                               |       | 2,038                                          |       | 2,932 |   |
| Repayment  of borrowings                                                                                |       | (1,530                                         | )          | (2,804 | ) |
| Proceeds  from issuance of convertible preferred stocks                                                 |       | —                                         |       | — |   |
| Proceeds  from issuance of preferred units of subsidiary                                                |       | —                                         |       | — |   |
| Redemption  of preferred units of subsidiary                                                            |       | —                                         |       | — |   |
| Cash  distributions                                                                                     |       | —                                         |       | (9 | ) |
| Net  cash provided by financing activities                                                              |       | 508                                            |       | 119 |   |
| Effect  of foreign exchange translation                                                                 |       | (726                                           | )          | 148 |   |
| Net  increase (decrease) in cash and cash equivalents                                                   |       | (151                                           | )          | — |   |
|                                                                                                    |       |                                           |       |   |   |
| Cash  and cash equivalents at beginning of period                                                       |       | 151                                            |       | 157 |   |
| Cash  and cash equivalents at end of period                                                             |       | $                                              | —     |   | $ | 157 |   |
|                                                                                                    |       |                                           |       |   |   |
| Supplemental  cash flow information                                                                     |       |                                           |       |   |   |
| Interest  paid                                                                                          |       | $                                              | 29         |   | $ | 281 |   |
| Taxes  paid                                                                                             |       | $                                              | —     |   | $ | — |   |

 

Theaccompanying notes are an integral part of the condensed consolidated financialstatements.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

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

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“generallyaccepted accounting principles”) for interim financial information and with theinstructions to Form 10-Q. Accordingly, they do not include all of the information and notesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion of management,all adjustments (consisting only of normal recurring accruals) considerednecessary for a fair presentation have been included.  All intercompany balances and transactionshave been eliminated.  Operating resultsfor the three months ended March 31, 2010 are not necessarily indicativeof the results that may be expected for any future periods or the year ending December 31,2010.  The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withthe Company’s Form 10-K filed with the Securities and Exchange Commissionon August 20, 2010.

 

Liquidmetal Technologies, Inc. (“LiquidmetalTechnologies”) and its subsidiaries (collectively “the Company”) are in thebusiness of developing, manufacturing, and marketing products made fromamorphous alloys. Liquidmetal Technologies markets and sells Liquidmetal® alloyindustrial 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 classifiesoperations into two reportable segments: Liquidmetal alloy industrial coatingsand bulk Liquidmetal alloys (see Note 10). Liquidmetal alloy industrialcoatings are used primarily as a protective coating for industrial machineryand equipment, such as drill pipes used by the oil drilling industry and boilertubes used by coal-burning power plants. Bulk Liquidmetal alloys includepotential market opportunities to manufacture and sell products and componentsfor electronic devices, medical devices, defense applications, and sportinggoods.  In addition, the bulk Liquidmetalalloys segment includes tooling and prototype sampling.  Furthermore, such alloys are used to generateresearch and development services revenue for developing uses related primarilyto defense and medical applications as well as potential license fees,royalties, and other compensation from strategic partnering transactions.

 

In July 2007, theCompany transferred substantially all of the assets of its Liquidmetal alloyindustrial coatings business to a newly formed, newly capitalized subsidiarynamed Liquidmetal Coatings, LLC, a Delaware limited liability company (“LMC”),and LMC assumed substantially all of the assets and liabilities of the coatingsbusiness.  The transfer included thethermal spray coatings assets and liabilities acquired under a purchaseagreement with Foster Wheeler Energy Services in June 2007.  TheCompany holds a 69.25% ownership interest in LMC.  The results of operation of LMC areconsolidated and comprise our Liquidmetal alloy industrial coatings segment forfinancial reporting purposes.

 

**2.         Basis of Presentation and RecentAccounting Pronouncements**

 

Translationof Foreign Currency

 

The Company appliesFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 830*, Foreign Currency,*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 Technologies Koreahave been translated based upon Korean Won as the functional currency.Liquidmetal Technologies Korea’s assets and liabilities were translated usingthe exchange rate at period end and income and expense items were translated atthe average exchange rate for the reporting period. The resulting translationadjustment was included in other comprehensive income (loss).

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

RecentAccounting Pronouncements

 

In June 2009,the FASB issued and subsequently codified Accounting Standards Update No. 2009-16,Transfer and Servicing (Topic 860) — Accounting for Transfers of FinancialAssets (ASU 2009-16).  ASU 2009-16 removes the concept of aqualifying special-purpose entity (QSPE) from SFAS 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishment of Liabilities”,* *and removes the exception fromapplying FASB Interpretation 46R, “Consolidationof Variable Interest Entities”. This statement also clarifies therequirements for isolation and limitations on portions of financial assets thatare eligible for sale accounting. The Company is currently evaluating theimpact of adopting this standard on the consolidated financial statements.

 

In June 2009,the FASB issued and subsequently codified Accounting Standards Update No. 2009-17,Consolidations (Topic 810) — Improvements to Financial Reporting by EnterprisesInvolved with Variable Interest Entities (ASU 2009-17).  ASU 2009-17 requires an analysis to determinewhether a variable interest gives the entity a controlling financial interestin a variable interest entity. This statement requires an ongoing reassessmentand eliminates the quantitative approach previously required for determiningwhether an entity is the primary beneficiary. The Company does not expect amaterial effect from the adoption of this standard on our consolidated financialstatements.

 

In June 2009,the FASB issued SFAS 168, “TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162,”which will be effective for us on March 31, 2010.  SFAS 168’sobjective is to establish the FASBAccounting Standards Codification as the source of authoritativenon-governmental accounting principles to be applied in the preparation offinancial statements in conformity with US GAAP. Although SFAS 168 does notchange GAAP, the adoption of SFAS 168 will impact our consolidated financialstatements since all future references to authoritative accounting literaturewill be in accordance with SFAS 168.

 

In January 2010, theFASB issued Accounting Standards Update No. 2010-06, *Improving Disclosures about Fair Values Measurements (Topic 820) — FairValue Measurements and Disclosures (ASU 2010-06)* to add additionaldisclosures for fair value measurements including the following: (1) amountstransferred in and out of Level 1 and 2 fair value measurements, which iseffective for interim and annual reporting periods beginning after December 15,2009 (“Part I”), and (2) activities in Level 3 fair valuemeasurements including purchases, sales, issuances and settlements, which iseffective for interim and annual reporting periods beginning after December 15,2010 (“Part II”). The Company adopted Part I of the revised guidancefor fair value measurements disclosures, which did not have a significanteffect on our unaudited Condensed Consolidated Financial Statements, as of thebeginning of fiscal 2010.

 

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

 

**3.         Liquidity**

 

The Company has experiencedlosses from continuing operations during the last three fiscal years and has anaccumulated deficit of $162,807 as of March 31, 2010.  Cash providedby operations for the three months ended March 31, 2010 was $246.  Asof March 31, 2010, the Company’s principal source of liquidity is $1,167of trade accounts receivable.  Such conditions raise substantial doubtthat the Company will be able to continue as a going concern.  (see Note 14)

 

OnMay 1, 2009, the Company completed a financing transaction (the “Transaction”)whereby aggregate cash of $2,500 and principal and accrued interest of $20,625due under the previously issued 8% Convertible Subordinated Notes due January 2010(the “Prior Notes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7,500 of new 8% Senior Secured Convertible Subordinated Notesdue January 2011 (the “Exchange Notes”). The 

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

Transactionwas consummated pursuant to a Securities Purchase and Exchange Agreement, datedMay 1, 2009 (the “Securities Purchase Agreement”), among the exchangingnote holders and investors (collectively, the “Buyers”).  The SecuritiesPurchase Agreement gives the Buyers option to subscribe for an additional1,000,000 shares of Series A-1 Preferred Stock at $5.00 per share at anytime prior to six months from the closing date (the “Series A-1 Option”).  On August 5, 2010, the Company repaid infull all principal and interest on the Exchange Notes.  All security interests in Company assetssecuring such obligations under the Exchange Notes were released andterminated.  (See Note 7 and Note 14)

 

OnMay 28, 2010, the Company issued $2,000 of 13% Subordinated PromissoryNote (“January 2011 Subordinated Note”) due on the earlier date of January 3,2011 or the date on which all outstanding amounts are due under the Company’s8% January 2011 Notes.  Followingthe due date, the interest on the Subordinated Note shall be 15%.  The January 2011 Subordinated Note maybe repaid in whole or in part at any time without penalty or premium, but issubordinate in right of payment to the January 2011 Notes and may not bepaid until after the January 2011 Notes are paid in full.  The company may, in its sole discretion,elect to pay all or any portion of the outstanding principal or accruedinterest in cash or the Company’s common stock or any combination thereof, at avalue equal to the lower of $0.26 per share or the average market price pershare for the 10 previous trading days immediately prior to the date thepayment is made. As a condition for the January 2011 Subordinated Note,Carlyle Liquid Holdings, LLC, a current stockholder of the Company granted theholder of the January 2011 Subordinated Note a warrant to purchase up to7,700,000 shares of the Company’s common stock at a price equal to $0.26 pershare, which warrant is exercisable for a period of 90-days beginning on thedate in which the Company repays the January 2011 Subordinated Note in cash(if it repays in cash).  On August 5,2010, the Company repaid in full all principal and accrued interest of $2,046on the January 2011 Subordinated Note. In connection with the repayment, on August 10, 2010, the Companyentered into a Subscription Agreement pursuant to which the Company issued7,870,307 shares of the Company’s common stock for an aggregate price of$2,046.  (see Note 14)

 

Additionally, the Companyhas approximately $305 of principal and accrued interest outstanding as of March 31,2010, under the 8% unsecured subordinated notes (the “Bridge Notes”), whichwere due August 17, 2007. On August 5, 2010, the Company repaid infull all principal and accrued interest of $314 on the Bridge Notes.  (see Note 14)

 

The Company has $287 of outstandingloan as of March 31, 2010 under a factoring, loan and security agreementwith a financing company.  In June 2009,the Company received a formal notice of default from the financing company forrepayment of the outstanding loan balance and has entered into a settlementagreement with the financing company whereby it agreed to repay approximately$100 each month until the outstanding loans and accrued fees have beenrepaid.   As of March 31, 2010, theCompany was unable to pay the $100 monthly payments.  On August 5, 2010, theCompany repaid in full all principal, accrued interest and fees of $309 on thefactoring loan.  All security interestsin Company assets securing such obligations under the factoring loan werereleased and terminated.  (see Note 14)

 

TheCompany has outstanding liens on assets by our South Korean subsidiary byvarious creditors for past-due trade payables totaling $1,378, of which $1,103are held by creditors in South Korea, as of March 31, 2010.  The Company is currently working to resolvethe matter with each creditor****by seeking aforbearance or compromise. If it cannot repay the amounts due or obtainforbearance or compromise, the creditors may seek to foreclose on the Company’sassets located in Korea.  Such aforeclosure would have material adverse effect on its operations, financialcondition, and results of operations.

 

**4.  Fair Value of Financial Instruments**

 

Thefair value of cash and cash equivalents and trade receivables approximates itscarrying value due to its short maturity. The estimated fair value of long-term debt was determined by discountingfuture cash flows using rates currently available to us for debt with similarterms and remaining maturities.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

Fairvalue is defined as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. Entities are required tomaximize the use of observable inputs and minimize the use of unobservableinputs when measuring fair value based upon the following fair value hierarchy:

 

| *Level 1 —* |   | Quoted  prices in active markets for identical assets or liabilities;                                                                                                                                                                                                                                          |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                           |
| *Level 2 —* |   | Observable  inputs other than Level 1 prices, such as quoted prices for similar assets or  liabilities; quoted prices in markets that are not active; or other inputs  that are observable or can be corroborated by observable market data for  substantially the full term of the assets or liabilities; and |
|             |   |                                                                                                                                                                                                                                                                                                           |
| *Level 3 —* |   | Unobservable  inputs that are supported by little or no market activity and that are  significant to the fair value of the assets or liabilities.                                                                                                                                                              |

 

Thefollowing table summarizes the financial liabilities measured at fair value ona recurring basis as of March 31, 2010 and December 31. 2009:

 
| ** **                      | ** ** | **Level** | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------|------------|-----------|------------|-------------------------|------------|----------------------------|------------|
| Warrant  Liabilities            |       | 2         |       | $                       | 2,191      |                       | $          | 3,975 |   |
| Conversion  Feature Liabilities |       | 2         |       | 126                     |       | 444                        |       |
|                                 |            |           |            |                         |            |                            |            |  |  |

 

The warrant liabilities and conversion featureliabilities are recorded at fair value based on upon valuation models withutilize relevant factors such as expected life, volatility of the Company’sstock prices, risk free interest and dividend rate.

 

The Company calculated that the estimated fair valueof the long term debt is not significantly different than the carrying value ofthe debt.

 

**5. Inventories**

 

Inventoriesare accounted for using the moving average basis and at standard cost, whichapproximate cost on a first-in, first-out basis and are valued at the lower ofcost or market.  Inventories werecomprised of the following:

 
| ** **         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **         | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| ** **         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Raw  materials     |       | $                  | 697        |                  | $          | 675 |   |
| Work  in process   |       | 92                 |       | 94                    |       |
| Finished  goods    |       | 192                |       | 213                   |       |
| Total  inventories |       | $                  | 981        |                  | $          | 982 |   |

 

**6.   Product Warranty**

 

Managementestimates product warranties as a percentage of certain bulk alloy productsales earned during the period.  As of March 31,2010, 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.  Additionally, as of March 31, 2010 theCompany used 1% of coatings applications sales as estimates of warranties to beclaimed.

 

Duringthe three months ended March 31, 2010 and 2009, the Company recorded $13and $57 of net gain on warranty, respectively. The warranty accrual balance isincluded in accounts payable and accrued expenses.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

**7.  Notes Payable**

 

Unsecured Subordinated Notes

 

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

 

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

 

As of both March 31, 2010 and December 31,2009, the Company’s gross outstanding loan balance of the August 2007Subordinated Notes totaled $259, and is included in current portion oflong-term debt.  As of March 31,2010, the effective interest rate for the August 2007 Subordinated Noteswas 8%. (see Note 14)

 

Secured Convertible SubordinatedNotes

 

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

 

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

 

The Company’s gross outstanding loan balance of the January 2010Notes totaled $0 as of both March 31, 2010 and December 31,2009.  As of both March 31, 2010 and December 31, 2009,un-amortized discounts for conversion feature, warrants, and cash discounttotaled $0, and other asset debt issuance costs totaled $0.  Interestexpense for the amortization of debt issuance cost and discount on note was $0and $1,326 for the three months ended March 31, 2010 and 2009,respectively.

 

Pursuant to FASB ASC 815*,Derivatives and Hedging,* the Company is required to report a valueof the conversion liability as a fair value and record the fluctuation to thefair value of the conversion feature liability to current operations.  The change in the fair value of theconversion feature liability resulted in gains of $0 and $30 for three monthsended March 31, 2010 and 2009, respectively.

 

Senior Secured Convertible Notes

 

OnMay 1, 2009, the Company completed a financing transaction (the “Transaction”)whereby aggregate cash of $2,500 and principal and accrued interest of $20,625due under the previously issued 8% Convertible Subordinated Notes due January 2010(the “January 2010 Notes”) were exchanged for 500,000 shares ofconvertible Series A-1 Preferred Stock with an original issue price of$5.00 per share, 2,625,002 shares Series A-2 Preferred Stock with anoriginal issue price of $5.00 per share, and $7,500 of new 8% Senior SecuredConvertible Notes due January 2011 (the “January 2011 Notes”).  Transaction was consummated pursuant to aSecurities Purchase and Exchange Agreement, dated May 1, 2009 (the “SecuritiesPurchase Agreement”), among the exchanging note holders and investors(collectively, the “Buyers”).  The Securities Purchase Agreement gives theBuyers option to subscribe for an additional 1,000,000 shares of preferredstock at $5.00 per share at any time prior to six months from the closingdate.  Additionally, 8,138,352 ofpreviously issued warrants to purchase common shares held by holders of the January 2010Notes have been cancelled in the Transaction.

 

TheJanuary 2011 Notes are due January 3, 2011 and bear annual interestrate of 8% with interest payable in October and April in cash or, atthe Company’s option, in the form of additional notes (in which case theinterest rate will be 10%).  (see Note14) The preferred stocks accrue cumulative dividends at an annual rate of 8%,which is payable semi-annually. 

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

Beginningon the second anniversary of the initial issuance, the dividend will increaseto 10%.  As of March 31, 2010, the Company has accrueddividends of $0.7 million included in accounts payable and other accruedexpenses.  The dividends are payable incash or in kind by the issuance of the Company of additional preferred stock,only when and as declared by the Company’s Board of Directors.

 

TheSeries A-1 Preferred Stock, Series A-2 Preferred Stock, and January 2011Notes are convertible into the Company’s common stock at conversion price of $0.10, $0.22, and$0.60 per common share, respectively.  The Companyissued warrants to purchase 3,125,007 shares and 42,329,407 shares of theCompany’s common stock at an exercise of $0.60 and $0.50 per share to the buyersof the January 2011 Notes and preferred stocks, respectively.  The warrants will expire on January 3,2012.  The conversion prices and thenumber of common stock issuable under the preferred stocks, January 2011Notes and warrants are subject to adjustments for anti-dilution purposes.

 

Inconnection with the Transaction, the Company and the Buyers entered into aRegistration Rights Agreement under which the Company is required, upon thewritten request of the holders of more than fifty percent (50%) of thesecurities underlying the January 2011 Notes, warrants, and preferredstocks, on or before 180 days after the closing of the Transaction, to file aregistration statement with the SEC covering the resale of the shares ofCompany’s common stock issuable pursuant to the January 2011 Notes, thewarrants and the preferred stocks and to use its best efforts to have theregistration declared effective at the earliest date (but in no event laterthan 60 days after filing if there is no SEC review of the registrationstatement, or 120 days if there is an SEC review).   The Company maybe required to pay liquidated damages as set forth in the Registration RightsAgreement, if the registration statement is not filed or does not becomeeffective on a timely basis.

 

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

 

In November 1,2009 the Company issued $378 of additional January 2011 Notes for accruedinterest due under the notes in lieu of cash payments.

 

Pursuant to Accounting Standards Codification No. 815,“Accounting for Derivative Instruments and Hedging Activities,” EITF 00-19, “Accountingfor Derivative 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 $3,367 have been recorded as conversionfeature liability as the debt is considered nonconventional convertible debt.The original fair value was computed using the Black-Scholes model under thefollowing assumptions: (1) expected life of 1.68 years; (2) volatilityof 176%; (3) risk free interest of 0.92% and dividend rate of 0%. Inaddition, the Company is required to report a value of the conversion liabilityas a fair value and record the fluctuation to the fair value of the conversionfeature liability to current operations.

 

The change in the fair value of the conversion featureliability resulted in gains of $318 and $0 for the three months ended March 31,2010 and 2009, respectively.  The fairvalue of conversion feature outstanding at March 31, 2010 and December 31,2009 was $126 and $444, respectively.  The fair value of conversion feature outstanding at March 31, 2010was computed using the Black-Scholes model under the following assumptions: (1) expectedlife of 0.8 years; (2) volatility of 130%, (3) risk free interest of0.41% and dividend rate of 0%.  The fairvalue of conversion feature outstanding at December 31, 2009 was computedusing the Black-Scholes model under the following assumptions: (1) expectedlife of 1.01 years; (2) volatility of 152%, (3) risk free interest of0.5% and dividend rate of 0%.

 

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the original fair values of the warrants of $14,773 have been recordedas warrant liability, which was computed using the Black-Scholes pricing modelunder the following assumptions: (1) expected life of 2.67 years;(2) volatility of 176%; (3) risk free interest of 1.39% and(4) dividend rate of 0%.

 

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

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

 

The Company’s gross outstanding loan balance of the January 2011Notes totaled $7,878 as of both March 31, 2010 and December 31,2009.  As of March 31, 2010 and December 31,2009, un-amortized discounts for conversion feature and warrants totaled $2,608and $3,227, respectively, and other asset debt issuance costs totaled $85 and$104, respectively.  Interest expense for the amortization of debtissuance cost and discount on note was $450 and $0 for the three months ended March 31,2010 and 2009, respectively.  The effective interest rate of the January 2011Notes was 67% as of March 31, 2010.

 

Factoring Agreement

 

TheCompany entered into a Factoring, Loan, and Security Agreement (the “Agreement”)with a financing company on April 21, 2005.  All borrowings are secured by outstandingreceivables specifically assigned to the financing company.  Further, pursuant to a Continuing GuarantyAgreement, dated January 5, 2009, the outstanding borrowings arepersonally guaranteed by John Kang, the Company’s Chairman. Assignedreceivables are considered “Approved” or “Non-Approved” by the financingcompany.  Borrowings made againstnon-approved receivables assigned are limited to $1,000 and total borrowingsmade on approved and non-approved receivables assigned are limited to $5,000.

 

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

 

For the three months ended March 31,2010, the Company borrowed $3 and repaid $0 under the Agreement.  The total outstanding advance made under theagreement is $287 and $284 as of March 31, 2010 and December 31,2009, respectively, which is presented as short-term debt.  The weighted average rate of interest forborrowings made under the Agreement was 6.5% for both the three months ended March 31,2010 and 2009.   In June 2009, theCompany received a formal notice of default from the financing company forrepayment of the outstanding loan balance and has entered into a settlementagreement with the financing company whereby it agreed to repay approximately$100 each month until the outstanding loans and accrued fees have beenrepaid.   As of March 31, 2010, theCompany was unable to pay the $100 monthly payments.  (see Note 14).

 

Debtof Majority Owned Subsidiary

 

On July 24, 2007, theCompany completed an $11,500 financing transaction (the “Transaction”) thatprovided funding to repay convertible notes previously issued by us that werescheduled 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 was capitalized througha $6,500 subordinated debt and equity investment by C3 Capital Partners (“C3”)and a $5,000 senior credit facility with Bank Midwest, N.A.  This debt andequity resulted in cash proceeds of $11,102 after related debt issuance costsof $398, which proceeds LMC used to purchase all of the assets and liabilitiesfrom the Company.  The Company incurredan additional $459 in issuance costs directly related to the debtissuance.  As a result, $857 was recordedas deferred debt issuance costs to be amortized over the life of the debt.  Interest expense for the amortization of debtissuance cost was $44 and $39 for the three months ended March 31, 2010and 2009, respectively.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

The Company retains a 69.25%ownership interest in LMC, C3 holds a 19% ownership interest, Larry Buffington,the Company’s former President and CEO, (who also serves as the President andCEO of LMC) holds a 10% ownership interest, and CRESO Capital Partners (“CRESO”),the Company’s financial advisor in the Transaction, holds a 1.75% ownershipinterest.  The equity interests acquiredby C3 and issued to CRESO were not considered a discount to debt, as theunconsolidated net assets of LMC were deemed to have an initial value of $0upon closing of the Transaction for financial accounting purposes.  Further, LMC is fully responsible for therepayment of debt obligations.

 

*MidwestDebt*

 

In connection with theTransaction, LMC entered into a Loan Agreement (the “Loan Agreement”), dated July 24,2007, with Bank Midwest, N.A. (“Midwest”).  Following the Transaction, theLoan Agreement has been amended to renew and modify certain terms. The LoanAgreement, as amended on October 6, 2009 (the “Loan Amendment”), providesfor total loan availability of $5,025, consisting of a $4,000 term loan and arevolving loan of up to $1,025 based on a percentage of LMC’s eligiblereceivable and inventory.  The LoanAmendment adjusted, among other terms, the interest rate of all outstandingloans to a fixed rate of 9%, certain financial covenants under the LoanAgreement, maturity date of the revolving loan through June 30, 2010 withmonthly interest payments, and required an immediate repayment of $325 of theterm loan and $325 of the revolving loan. The members of the Liquidmetal Coatings, LLC (the “Members”) wererequired to contribute $650 in equity to repay the amounts due under the LoanAgreement (the “Capital Call”).  On October 6,2009 the Company paid $450 which represented its portion of the Capital Calland the remaining Members paid $150.  Asa result of the payment, the monthly amortization payments due under the termloan were reduced to $47 and the maturity date was extended to September 30,2012.  The term loan has a maturity dateof July 20, 2011.  (see Note 14)

 

In connection with the LoanAmendment, the Company borrowed $450 from C3 Capital Partners (“C3”) tocontribute its share of the Capital Call pursuant to a bridge loan agreementwith C3.  The Company paid down the bridgeloan in November 2009.

 

LMC’s obligations under theLoan 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.

 

As of March 31, 2010and December 31, 2009, the gross outstanding loan balance under the termloan totaled $1,289 and $1,430, respectively, and the gross outstanding loanbalance under the revolving loan totaled $450 and $307, respectively. The loansare presented as long-term debt and short-term debt on the Company’sconsolidated balance sheet, respectively. Interest expense incurred under the term loan and revolving loan totaled$20 and $6 for the three months ended March 31, 2010 respectively.   Interest expense incurred under the termloan and revolving loan totaled $54 and $8 for the three months ended March 31,2009, respectively.  (see Note 14)

 

Additionally, LMC enteredinto Promissory Notes, dated August 29, 2007 and October 21, 2008(the “Capital Loan”), with Midwest to provide for $45 and $105 to be usedtowards the purchase of a company truck and HVOF spray equipment with annualinterest rates of 7.43% and 8.25%, respectively.  The Capital Loan has maturity dates of September 1,2012 and November 1, 2013.  LMC isrequired to make monthly principal and interest payments of $3 per month.  As of March 31, 2010 and December 31,2009, the gross outstanding loan balance under the Capital Loan totaled $94 and$102, respectively, which is presented as long-term debt on the Company’sconsolidated balance sheet.  Interestexpense incurred under the Capital Loan totaled $2 and $3 for the three monthsended March 31, 2010 and 2009, respectively.   (see Note 14)

 

*C3 Debt*

 

In the Transaction, LMC alsoentered into a Securities Purchase Agreement, dated July 24, 2007 (the“Securities Purchase Agreement”), with C3 Capital Partners, L.P. (“C3”),C3 Capital Partners II, L.P. (“C3 II”, and with C3, the“C3 entities”), and Liquidmetal Coatings Solutions, LLC, a wholly ownedsubsidiary of LMC that will operate the thermal spray coatings business(“LMCS”).  Pursuant to the Securities Purchase Agreement, LMC issued tothe C3 entities subordinated promissory notes in the 

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

aggregate principal amountof $6,500 (the “Subordinated Notes”). Under the Securities Purchase Agreement,the C3 entities have the right, beginning on the July 24, 2012 (or, ifearlier, upon a default by LMC under the Subordinated Notes or SecuritiesPurchase Agreement) to require LMC to purchase the C3 entities’ membershipinterests in LMC for a purchase price equal to their pro rata portion of thegreater of (i) the appraised fair market value of LMC or (ii) sixtimes LMC’s trailing 12-month earnings before interest, taxes, depreciation,and amortization, less funded debt.

 

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

 

The gross outstanding loanbalance including accrued interest payable upon maturity of the SubordinatedNote totaled $7,882 and $7,613 as of March 31, 2010 and December 31,2009, respectively.  Interest expense incurred under the SubordinatedNotes totaled $231 and $201 for the three months ended March 31, 2010 and2009, respectively.

 

**8.     StockCompensation Plan**

 

During the three monthsended March 31, 2010, there were no options granted under the Company’s2002 Non-employee Director Stock Option Plan which provides for the grant ofstock options to non-employee directors. Further, all options granted under this plan had exercise prices thatwere equal to the fair market value on the date of grant.

 

During the three months endedMarch 31, 2010, there were no options granted under the Company’s 2002Equity Incentive Plan which provides for the grant of stock options toofficers, employees, consultants and directors of the Company itssubsidiaries.    Further, all optionsgranted under this plan had exercise prices that were equal to the fair marketvalue on the date of grant.

 

The Company cancelled 85,756options during the three months ended March 31, 2010, for terminatedemployees and options expired.

 

**9.         Preferred Units of Subsidiary**

 

On February 22, 2008,LMC completed a transaction under which it issued and sold $2,500 in preferredmembership 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 thatare priority over any distribution made by LMC and may be redeemed at any timewithin four years of issuance through cash payment or distribution in excess ofthe 14% priority return.  If LMCfails to redeem the preferred units on or before the second anniversary of theissue date, the preferred units will receive an additional 200 commonmembership units (equal to 2% of the currently outstanding commonunits) per quarter until the preferred units are redeemed in full.

 

As of March 31, 2010,LMC has redeemed $236 of its preferred units and distributed $294 in priorityreturn to the preferred unit holders. The total preferred units outstanding are $2,264 as of March 31,2010.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

**10.      Segment Reporting and GeographicInformation**

 

ASC 280,*Segment Reporting,*requires companies toprovide certain information about their operating segments.  In April 2002, the Company beganclassifying operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment, suchas drill pipe used by the oil drilling industry and boiler tubes used by coalburning power plants.  Bulk Liquidmetalalloys include market opportunities to manufacture and sell casing componentsfor electronic devices, medical devices, sporting goods, tooling, prototypesampling, defense applications and metal processing equipment.  Primarily, the expenses incurred by the bulkLiquidmetal alloy segment are research and development costs and sellingexpenses associated 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 August 20,2010.

 

Summarized financialinformation concerning the Company’s reportable segments is shown in thefollowing tables:

 
| ** **                                  | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|---------------------------------------------|------------|--------------|------------|----------------|------------|--------------------|------------|
| Three  months ended March 31, 2010     |       |         |       |           |       |               |       |
| Revenue  to external customers              |       | $            | 2,546      |           | $          | 157                |       | $ | 2,703 |   |
| Gross  profit                               |       | 817          |       | (270           | )          | 547                |       |
| Total  segment loss                         |       | (136         | )          | (560           | )          | (696               | )          |
| Total  identifiable assets at end of period |       | 2,562        |       | 5,984          |       | 8,546              |       |
|                                        |       |         |       |           |       |               |       |
| Three  months ended March 31, 2009     |       |         |       |           |       |               |       |
| Revenue  to external customers              |       | $            | 2,487      |           | $          | 1,105              |       | $ | 3,592 |   |
| Gross  profit                               |       | 913          |       | 538            |       | 1,451              |       |
| Total  segment income                       |       | 22           |       | 214            |       | 236                |       |
| Total  identifiable assets at end of period |       | 2,707        |       | 7,257          |       | 9,964              |       |

 

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

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 
| ** **                                                                     | ** ** | **For the Three Months** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                     | ** ** | **Ended March 31,** | ** ** |
| ** **                                                                     | ** ** | **2010**                 | ** ** | **2009** | ** ** |
| ** **                                                                     | ** ** | ** **               | ** ** | ** ** | ** ** |
| Total  segment income                                                          |       | $                        | (696       | ) | $ | 238 |   |
| General  and administrative expenses, excluded                                 |       | (643                     | )          | (939 | ) |
|                                                                           |       |                     |       |   |   |
| Consolidated  loss before interest, income taxes, and noncontrolling interests |       | $                        | (1,339     | ) | $ | (701 | ) |
|                                                                           |       |                     |       |   |   |
| Change  in value of warrants, gain                                             |       | 1,785                    |       | (126 | ) |
| Change  in value of conversion feature, gain                                   |       | 318                      |       | 30 |   |
| Interest  expense                                                              |       | (836                     | )          | (1,973 | ) |
| Interest  income                                                               |       | —                   |       | — |   |
| Income  taxes                                                                  |       | —                   |       | — |   |
| Loss  (income) attributable to noncontrolling interest                         |       | 42                       |       | (31 | ) |
| Consolidated  net loss attributable to Liquidmetal Technologies, Inc.     |       | $                        | (30        | ) | $ | (2,801 | ) |

 

Excludedgeneral and 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.

 

Revenuesfrom sales to companies in the United States were $2,187 and $2,731 during thethree months ended March 31, 2010 and 2009, 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.

 

Duringthe three months ended March 31, 2010, the Company had revenue from salesto companies outside of the United States of $516, of which $1 representedsales to companies located in South Korea. During the three months ended March 31, 2009, the Company hadrevenues from companies outside of the United States of $860 of which $432represented sales to companies located in South Korea.  The revenue related to sales to companiesoutside of the United States was from coating materials.

 

Long-livedassets include net property, plant, and equipment, and net intangible assets.The Company had long-lived assets of $2,051 and $1,968 located in the UnitedStates at March 31, 2010 and December 31, 2009, respectively. The Companyhad long-lived assets of $4,875 and $4,931 located in South Korea at March 31,2010 and December 31, 2009, respectively.

 

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

 
| ** **                                 | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2010**           | ** ** |
|                                       |       |               |       |
| Total  segment assets                      |       | $                  | 8,546      |   |
| Cash  and cash equivalents                 |       | 8                  |       |
| Prepaid  expenses and other current assets |       | 67                 |       |
| Other  property, plant and equipment       |       | 53                 |       |
| Intangibles,  net                          |       | 1,199              |       |
| Other  assets                              |       | 376                |       |
| Total  consolidated assets                 |       | $                  | 10,249     |   |

 

Assetsexcluded from segment assets include assets attributable to the Company’scorporate headquarters.  The Company’slargest corporate assets consist of intangible assets, which consist primarilyof the Company’s patents and trademarks.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

**11.      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 4,304,126 shares of common stock at prices ranging from $0.09 to$15.00 per share were outstanding at March 31, 2010, but were not includedin the computation of diluted EPS for the same period as the inclusion wouldhave been antidilutive.  Warrants topurchase 59,928,242 shares of common stock with prices ranging from $0.50 to$1.75 per share outstanding at March 31, 2010, were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive. 13,130,137 shares of common stock issuable upon conversion of theCompany’s convertible notes with conversion prices of $0.60 per shareoutstanding at March 31, 2010 were not included in the computation ofdiluted EPS for the same period because the inclusion would have beenantidilutive.  Additionally, 90,901,432shares of common stock issuable upon conversion of the Company’s convertiblepreferred stocks with conversion prices ranging from $0.10 and $0.22 per shareoutstanding at March 31, 2010 were not included in the computation ofdiluted EPS for the same period because the inclusion would have beenantidilutive.

 

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 $1,785 for the three months ended March 31, 2010, andlosses of $126 for the three months ended March 31, 2009. The fair valueof warrants outstanding at March 31, 2010 of $2,191 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.20 to 4.58 years; (2) volatility of 130%, (3) risk free interest of0.16% to 2.55%, and dividend rate of 0%. The fair value of warrants outstanding at December 31, 2009 of$3,975 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 0.45 to 4.83 years; (2) volatilityof 152%, (3) risk free interest of 0.20% to 2.69%, and dividend rate of0%.

 

**12.      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.

 

On June 26, 2006, theCompany entered into a joint venture agreement with SAGA, SpA in Padova, Italy,(“SAGA”) a specialist precision parts manufacturer (See Note 14).  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 to50%.  In December 2006, the Company exercised the 19.9% interest inLSI and will have two years to purchase the additional interest at a nominalprice. In January 2007 and June 2007, the Company contributedadditional $217 and $86, respectively, into LSI as additional investment. The contribution did not change the Company’s 19.9% interest in LSI.  Under the licensing agreement, at any timefollowing 18 months after the effective date of the agreement, LSI may exerciseits option to sell to the Company certain business assets includingmanufacturing equipment acquired under the joint venture.  During the fourth quarter of the year ended December 31,2009, the Company wrote-off its investment of $306 in the joint venture due tolower than anticipated growth in the eye wear industry.  During 2009, 2008 and 2007, the Companyrecognized revenues of $0, $0, and $103, respectively, of Liquidmetal alloyssold to LSI for use in the joint venture. There were no alloys sold to LSI during the three months ended March 31,2010. (see Note 14)

 

TheCompany has outstanding liens on assets by our South Korean subsidiary byvarious creditors for past-due trade payables totaling $1,378, of which $1,103are held by creditors in South Korea, as of March 31, 2010.  We are currently working to resolve thematter with each creditor****by seeking aforbearance or compromise.   If we cannotrepay the amounts due or obtain forbearance or compromise, the creditors mayseek to foreclose on the Company’s assets located in Korea.  Such a foreclosure would have materialadverse effect on our operations, financial condition, and results ofoperations.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

**13.    Related PartyTransactions**

 

During2009, John Kang, former Chairman of the Company, advanced the Company $250 tofund working capital needs.  The Companyrepaid $120 of the advance and has $130 outstanding as of March 31, 2010,which is included in short-term debt. Further, Mr. Kang entered into a Continuing Guarantee Agreement,dated January 5, 2009, to personally guarantee repayment of the Company’soutstanding borrowings made under a Factoring Agreement (see Note 7).

 

InMay 2009, the Company completed a transaction in which (i) theholders of our 8% Convertible Subordinated Notes exchanged such notes for acombination of new 8% Senior Secured Convertible Notes (the “January 2011”Notes) and shares of a new series of convertible preferred stock designated “Series A-2Preferred Stock”, together with warrants thereon, and (ii) certaininvestors purchased, for an aggregate purchase price of $2,500, shares of a newseries of convertible preferred stock designated as “Series A-1 PreferredStock” (see Note 7).   The lead investors in this transactionwere Carlyle Liquid, LLC and Carlyle Liquid Holdings, LLC (the “CarlyleEntities”), which are two investor entities organized by Abdi Mahamedi andJack Chitayat.  Mr. Mahamedi became a director andgreater-than-5% beneficial owner of the company by reason of the May 2009transaction, and Jack Chitayat is a former director of the Companywho became a greater-than-5% beneficial owner of our company by reason ofthe May 2009 transaction.  Mr. Mahamedi and Mr. Chitayathave shared voting and investment control over the shares held by theCarlyle Entities due to the fact that other entities owned by them are themanaging members of these two Carlyle entities.  Additionally, Mr. IrajAzarm and Mr. Robert Biehl, directors of the Company, are passiveinvestors in the Carlyle Entities.

 

TheCompany has an exclusive license agreement with LLPG, Inc. (“LLPG”), acorporation headed by Mr. Chitayat. Under the terms of the agreement, LLPG has the right to commercializeLiquidmetal alloys, particularly precious-metal based compositions, in jewelryand high-end luxury product markets.  The Company, in turn, will receiveroyalty payments over the life of the contract on all Liquidmetal productsproduced and sold by LLPG.    TheCompany recognized revenues from product sales and licensing fees of $0 and$195 from LLPG during the three months ended March 31, 2010 and 2009,respectively.  There are no accountsreceivable from LLPG outstanding as of March 31, 2010 and December 31,2009.

 

Asof March 31, 2010 and December 31, 2009, Ricardo Salas, the Company’sExecutive Vice President, held $259 of the unsecured subordinated notes forboth periods.  Mr. Salas advancedthe Company $210 and $175 during 2010 and 2009, respectively, to meet workingcapital needs and accrues interest at an annual rate of 10%.  As of March 31, 2010 $385 is outstandingand is included in short-term debt.

 

OnJune 1, 2007, the Company entered into a transaction with Grace Metal(currently Liquidmetal Korea Co., Ltd. “LMK”), under which (i) LMKagreed to purchase various equipments (including die casting machines andvacuum induction melters) used in the Company’s bulk amorphous alloy businesssegment and (ii) the Company granted LMK a 10-year exclusive license tomanufacture products made from bulk Liquidmetal alloys for customers whoseprincipal headquarters or whose major operations are located in SouthKorea.  LMK was formed by an investorgroup that includes the former director and officer of the Company, James Kang,who is also the brother of John Kang, former Chairman of the company.  Under an equipment purchase agreement betweenthe Company and LMK, LMK agreed to buy the purchased equipment for a totalpurchase price of $2,000.  The equipmentpurchase agreement provides that delivery of the equipment can be delayed toaccommodate the Company’s continuing manufacturing needs, and it also providesthat the Company will retain a security interest in the purchased equipmentuntil full payment of the purchase price.

 

Inconsideration of the license agreement with LMK, the Company will be entitledto royalty of 10% of LMK’s net sales of licensed products (unless LMK’s marginon the products falls below specified levels, in which case a new royalty willbe negotiated in good faith).  Effective June 1,2008, the royalty rate was adjusted to 5%. The agreement provides that the Company may convert the license to anon-exclusive in the event that the net sales in the second year of thecontract or thereafter are not sufficient to result in royalties of $500 ormore per year.  The agreement alsoprovides that LMK will be required to purchase all alloy feedstock from theCompany, and the Company will have the right to continue to manufactureLiquidmetal alloy products for South Korean customers until all purchasedequipment has been commissioned. Subsequent to March 31, 2010, the licensing agreement with LMK wasterminated on June 15, 2010.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

TheCompany purchased production supplies and outsourced production of certain bulkalloy production with LMK. In June 2008, the Company began sharing the useof its manufacturing facility and production equipment in Pyongtaek, SouthKorea, with LMK as the Company began significant outsourcing of its bulk alloyparts production. The Company incurred expenses for purchase of productionsupplies and outsourcing fees of $0 and $181 during the three months ended March 31,2010 and 2009, respectively.  There are$0 included in accounts payable and accrued expenses for both March 31,2010 and December 31, 2009 for outstanding trade payables due to LMK.  The Company recognized revenue from sales ofraw materials and royalties for a total of $0 and $623 during the three monthsended March 31, 2010, and 2009, respectively.  There are $0 included in net accountsreceivables as of both March 31, 2010 and December 31, 2009, foroutstanding trade receivables due from LMK.

 

InOctober 2009, John Kang, the Company’s former Chairman, Tony Chung, theCompany’s Chief Financial Officer, and Ricardo Salas, the Company’s ExecutiveVice President, acquired 80,000 shares of the Company’s Series A-1Preferred Stock and 2,000,000 warrants for an aggregate cash price of$400.  The Series A-1 PreferredStock are convertible into the Company’s common stock at a conversion price of$0.10 per common share.  Further, thewarrants are issuable into the Company’s common stock at an exercise price of$0.50 per share and expire on October 30, 2014.

 

**14. Subsequent Events**

 

OnMay 28, 2010, the Company issued $2,000 of 13% Subordinated PromissoryNote (“January 2011 Subordinated Note”) due on the earlier date of January 3,2011 or the date on which all outstanding amounts are due under the Company’s8% January 2011 Notes.  Followingthe due date, the interest on the January 2011 Subordinated Note shall be15%.  The January 2011 SubordinatedNote may be repaid in whole or in part at any time without penalty or premium,but is subordinate in right of payment to the January 2011 Notes and maynot be paid until after the January 2011 Notes are paid in full.  The company may, in its sole discretion,elect to pay all or any portion of the outstanding principal or accruedinterest in cash or the Company’s common stock or any combination thereof, at avalue equal to the lower of $0.26 per share or the average market price pershare for the 10 previous trading days immediately prior to the date thepayment is made. As a condition for the January 2011 Subordinated Note,Carlyle Liquid Holdings, LLC, a current stockholder of the Company granted theholder of the January 2011 Subordinated Note a warrant to purchase up to7,700,000 shares of the Company’s common stock at a price equal to $0.26 pershare, which warrant is exercisable for a period of 90-days beginning on thedate in which the Company repays the January 2011 Subordinated Note incash (if it repays in cash).

 

OnJune 25, 2010, LMC entered into a Credit Agreement (“Credit Agreement”)with Enterprise Bank & Trust (“Enterprise”) and retired its loanagreements with Bank Midwest, N.A.  TheCredit Agreement provides for a total loan availability of $3,700, consistingof $1,500 million term loan (“Term Note”), a revolving loan of up to $2,000(Revolving Note”), and equipment loans (“Equipment Note”) of up to $200.  The Term Note of $1,500 has a maturity dateof June 25, 2013 and bears an interest rate of 7% per annum.  Borrowing availability under the RevolvingNote is based on a percentage of LMC’s eligible receivables and inventory andaccrues interest at the rate of the greater of libor plus 3.75% or 6%.  LMC will make monthly interest payments onthe Revolving Note until June 24, 2011, at which point all remaining principaland interests are due.  LMC has the rightto prepay the Term Note and the Revolving Note and the Equipment Note, in wholeor in part, at any time without penalty or premium.

 

On August 5, 2010, theCompany entered into a Master Transaction Agreement with Apple Inc.(“Apple”),pursuant to which (i) Liquidmetal contributed substantially all of itsintellectual property assets to a newly organized special-purpose, wholly-ownedsubsidiary (the “IP Company”), (ii) the IP Company granted to Apple aperpetual, worldwide, fully-paid, exclusive license to commercialize suchintellectual property in the field of consumer electronic products in exchangefor a license fee, and (iii) the IP Company granted back to Liquidmetal aperpetual, worldwide, fully-paid, exclusive license to commercialize suchintellectual property in all other fields of use.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Three Months Ended March 31, 2010 and2009**

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

**(unaudited)**

 

OnAugust 5, 2010, the Company repaid in full all principal and interest on (i) theJanuary 2011 Notes in the amount of $8,242, (ii) the secured debtunder the factoring loan in the amount of $309, and (iii) the Bridge Notesin the amount of $314. All security interests in Company assets securing suchobligations under the January 2011 Notes and factoring loan were releasedand terminated.

 

OnAugust 5, 2010 the Company repaid in full all principal and accruedinterest of $2,046 on the January 2011 Subordinated Note.  In connection with the repayment, on August 10,2010, the Company entered into a Subscription Agreement pursuant to which theCompany issued 7,870,307 shares of the Company’s common stock for an aggregateprice of $2,046.

 

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

 

On August 6, 2010, SAGA fileda litigation case against the Company claiming damages of $3,200 for payment ona loan and for breach of contract in connection with the formation of LSI, ajoint venture between the Company and SAGA. The Company is in the process of responding to the claim and workingwith SAGA to resolve the matter.

 

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

 

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

 

*Thismanagement’s discussion and analysis, as well as other sections of this reporton Form 10-Q, may contain “forward-looking statements” that involve risksand uncertainties, including statements regarding our plans, future events,objectives, expectations, forecasts, or assumptions. Any statement that is nota statement of historical fact is a forward-looking statement, and in somecases, words such as “believe,” “estimate,” “ project,” “expect,” “intend,” “may,”“anticipate,” “plans,” “seeks,” and similar expressions identifyforward-looking statements. These statements involve risks and uncertaintiesthat could cause actual outcomes and results to differ materially from theanticipated outcomes or results, and undue reliance should not be placed onthese statements. These risks and uncertainties include, but are not limitedto, the matters discussed under the caption “Factors Affecting Future Results”in our Annual Report on Form 10-K for the fiscal year ended December 31,2009 and other risks and uncertainties discussed in filings made with theSecurities and Exchange Commission (including risks described in subsequentreports on Form 10-Q, Form 10-K, Form 8-K, and other filings).Liquidmetal Technologies disclaims any intention or obligation to update orrevise any forward-looking statements, whether as a result of new information,future events, or otherwise.*

 

**Overview**

 

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

 

Amorphousalloys are unique materials that are distinguished by their ability to retain arandom atomic structure when they solidify, in contrast to the crystallineatomic structure that forms in ordinary metals and alloys when they solidify.Liquidmetal alloys possess a combination of performance, processing, and costadvantages that we believe makes them preferable to other materials in avariety of applications. The amorphous atomic structure of our alloys enablesthem to overcome certain performance limitations caused by inherent weaknessesin crystalline atomic structures, thus facilitating performance and processingcharacteristics superior in many ways to those of their crystallinecounterparts. For example, our zirconium-titanium Liquidmetal alloys areapproximately 250% stronger than commonly used titanium alloys, such asTi-6Al-4V, but they have processing characteristics similar in many respects toplastics. We believe these advantages could result in Liquidmetal alloyssupplanting other incumbent materials in a wide variety of applications.Moreover, we believe these advantages will enable the introduction of entirelynew products and applications that are not possible or commercially viable withother materials.

 

Ourrevenues are derived from three principal operating segments: Liquidmetal alloyindustrial coatings, Liquidmetal coatings application, and bulk Liquidmetalalloy products.  Liquidmetal alloyindustrial coatings are used primarily as a protective coating for industrialmachinery and equipment, such as drill pipe used by the oil drilling industryand boiler tubes used in coal-burning power plants. Liquidmetal coatingsapplication is the service provided for applying Liquidmetal products as aprotective coating.  Bulk Liquidmetalalloy 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.

 

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

 

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

 

Research and developmentexpenses represent salaries, related benefits expense, depreciation of researchequipment, consulting and contract services, expenses incurred for the designand testing of new processing methods, expenses for the development of sampleand prototype products, and other expenses related to the research anddevelopment of Liquidmetal alloys. Costs associated with research and developmentactivities are expensed as incurred. We plan to enhance our competitiveposition by improving our existing technologies and developing advances inamorphous alloy technologies. We believe that our research and developmentefforts will focus on the discovery of new alloy compositions, the developmentof improved processing technology, and the identification of new applicationsfor our alloys.

 

On July 24, 2007, wetransferred substantially all of the assets of our Liquidmetal alloy industrialcoatings business to a newly formed, newly capitalized subsidiary namedLiquidmetal Coatings, LLC, a Delaware limited liability company (“LMC”), andLMC assumed substantially all of the liabilities of the coatingsbusiness.   The transfer includedthe thermal spray coatings assets and liabilities acquired under a purchaseagreement with Foster Wheeler Energy Services in June 2007.  We hold a 69.25% ownership interest inLMC.  The results of operation of LMC areconsolidated and comprise our Liquidmetal alloy industrial coatings segment forfinancial reporting purposes.

 

The following discussion andanalysis of our financial condition and results of operations focuses on thehistorical results of our continuing operations.

 

**CriticalAccounting Policies and Estimates**

 

The preparation of condensedconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires us to make estimates andassumptions that affect reported amounts of assets and liabilities and disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reportingperiod.  These estimates and assumptionsare based on historical experience and various other factors that are believedto be reasonable under the circumstances. Actual results could differ materially from these estimates underdifferent assumptions or conditions.

 

We believe that thefollowing accounting policies are the most critical to our condensed consolidatedfinancial statements since these policies require significant judgment orinvolve complex estimates that are important to the portrayal of our financialcondition and operating results:

 

·                  Exchange rate fluctuations

·                  Warranty accrual

·                  Allowance for doubtful accounts

·                  Inventories at lower of cost or netrealizable value

·                  Deferred tax assets

·                  Valuation of derivatives of warrants andembedded conversion features

 

Our Annual Report on Form 10-Kfor the year ended December 31, 2009, contains further discussions on ourcritical accounting policies and estimates.

 

**Results ofOperations**

 

Comparison of the threemonths ended March 31, 2010 and 2009

 

*Revenue.* Revenue decreased $0.9million to $2.7 million for the three months ended March 31, 2010 from $3.6 millionfor the three months ended March 31, 2009.  The decrease consisted of$0.8 million from the sales and prototyping of parts manufacture from bulkLiquidmetal alloys to consumer electronic customers as a result of decrease indemand in electronic castings applications and a decrease of $0.1 million fromour research and development contracts.

 

*Cost ofSales.* Cost of sales increased to $2.2 million, or 80% of revenue, for thethree months ended March 31, 2010 from $2.1 million, or 60% ofrevenue, for the three months ended March 31, 2009.  The decrease wasa result of a continued change in revenue mix during the three months ended March 31,2010. The cost to manufacture parts from our bulk Liquidmetal alloys isvariable and differs based on the unique design of each product.  However,the cost of sales for the products sold by the coatings business segment isgenerally consistent because the Liquidmetal coatings products are produced bythird parties and sold wholesale to various industries.

 

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*Selling,General, and Administrative Expenses*. Selling, general, andadministrative expenses decreased to $1.3 million, or 49% of revenue, forthe three months ended March 31, 2010 from $1.6 million, or 44% ofrevenue, for the three months ended March 31, 2009. The decrease wasprimarily a result of a decrease in professional consulting and contractservices expense of $0.3 million.

 

*Researchand Development Expenses*. Research and development expenses were$0.2 million, or 9% of revenue, for the three months ended March 31,2010 and $0.2 million, or 7% of revenue, for the three months ended March 312009.  We continue to perform researchand development of new Liquidmetal alloys and related processing capabilities,develop new manufacturing techniques, and contract with consultants to advancethe development of Liquidmetal alloys.

 

*Change inValue of Warrants. *Change in value of warrants increased to a gain of $1.8 million, or 66%of revenue, for the three months ended March 31, 2010 from a loss of $0.1million, or 4% of revenue, for the three months ended March 31, 2009.  The change in value of warrants consisted ofwarrants issued from convertible and subordinated notes and convertiblepreferred stocks issued between 2004 and 2009 primarily as a result offluctuations in our stock price.

 

*Change inValue of Conversion Feature.*Changein the value of conversion feature liability from our convertible notesresulted in a gain of $0.3 million, or 12% of revenue, during the three monthsended March 31, 2010 from a gain of 30 thousand dollars, or 1% of revenue,for the three months ended March 31, 2009, primarily as a result of fluctuationsin our stock price.

 

*InterestExpense*. Interest expense was $1.2 million, or 43% of revenue, for the threemonths ended March 31, 2010 and was $2.3 million, or 64% of revenue, forthe three months ended March 31, 2009. Interest expense consists primarilyof debt discount amortization and interest accrued on outstanding convertibleand subordinated notes, borrowings under a factoring, loan, and securityagreement, a revolving loan agreement, and the Kookmin loan.  The decrease was due to certain of ourconvertible and subordinated notes retired during the second quarter of 2009.

 

**Liquidityand Capital Resources**

 

Ourcash provided by operating activities was $0.2 million for the three monthsended March 31, 2010.  Our working capital deficit increased from$13.1 million at December 31, 2009 to $17.0 million at March 31,2010.  The working capital deficit increase of $3.9 million was primarilyattributable to decrease of cash and cash equivalents of $0.2 million, increaseof long term debt, current portion, of $4.7 million, increase of accountspayable and accrued expenses of $0.7 million, and increase of short-term debtof $0.4 million, offset by decrease of warrant liabilities of $1.8 million anddecrease of conversion feature liabilities of $0.3 million.

 

Ourcash used in investing activities was $0.2 million for the three months ended March 31,2010 for the acquisition of property and equipment and investments in patentsand trademarks.

 

Ourcash provided by financing activities was $0.5 million for the three monthsended March 31, 2010.  We paid net$1.5 million in borrowings mainly for a revolving loan agreement executed in July 2007,which were offset by $2.0 million in borrowings mainly from additional termloan as payment for monthly accrued interest due.

 

OnMay 1, 2009, we completed a financing transaction (the “Transaction”)whereby aggregate cash of $2.5 million and principal and accrued interest of$20.6 million due under the previously issued 8% Convertible Subordinated Notesdue January 2010 (the “Prior Notes”) were exchanged for 500,000 shares ofconvertible Series A-1 Preferred Stock with an original issue price of$5.00 per share, 2,625,002 shares Series A-2 Preferred Stock with anoriginal issue price of $5.00 per share, and $7.5 million of new 8% SeniorSecured Convertible Subordinated Notes due January 2011 (the “ExchangeNotes”). Of the $2.5 million aggregate cash purchase price.  The Transaction was consummated pursuant to aSecurities Purchase and Exchange Agreement, dated May 1, 2009 (the “SecuritiesPurchase Agreement”), among the exchanging note holders and investors (collectively,the “Buyers”).  The Securities Purchase Agreement gives the Buyers optionto subscribe for an additional 1,000,000 shares of Series A-1 PreferredStock at $5.00 per share at any time prior to six months from the closing date(the “Series A-1 Option”).

 

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TheExchange Notes are due January 3, 2011 and bear annual interest rate of 8%with interest payable in October and April in cash or, at our company’soption, in the form of additional notes (in which case the interest rate willbe 10%).  The preferred stocks accruecumulative dividends at an annual rate of 8%, which is payable semi-annually.Beginning on the second anniversary of the initial issuance, the dividend willincrease to 10%.  As of March 31, 2010, we have accrueddividends of $0.7 million included in accounts payable and other accruedexpenses.  The dividends are payable incash or in kind by the issuance of the company of additional preferred stock,only when and as declared by our Board of Directors.  On August 5, 2010, we repaid in full allprincipal and interest on the Exchange Notes in the amount of $8.2 million, andall security interests on our assets securing such obligations were releasedand terminated.

 

TheSeries A-1 Preferred Stock, Series A-2 Preferred Stock, and ExchangeNotes are convertible into the company’s common stock at conversion price of $0.10, $0.22, and$0.60 per common share, respectively.  We issuedwarrants to purchase 3,125,007 shares and 42,329,407 shares of our company’scommon stock at an exercise of $0.60 and $0.50 per share to the buyers of theExchange Notes and preferred stocks, respectively.  The warrants will expire in January 2012.  The conversion prices and the number ofcommon stock issuable under the preferred stocks, Exchange Notes and warrantsare subject to adjustments for anti-dilution purposes.

 

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

 

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

 

We have $0.3 million of outstandingloan as of March 31, 2010 under a factoring, loan, and security agreementwith a financing company.  In June 2009,we received a formal notice of default from the financing company for repaymentof the outstanding loan balance and have entered into a settlement agreementwith the financing company whereby it agreed to repay approximately $100 eachmonth until the outstanding loans and accrued fees have been repaid.   As of March 31, 2010, we have not beenable to pay the $100 monthly payments. On August 5, 2010, we repaid in full all principal, interest and feeson the factoring loan in the amount of $0.3 million, and all security interestson our assets securing such obligation was released and terminated.

 

Wehave outstanding liens on assets by our South Korean subsidiary by variouscreditors for past-due trade payables totaling $1,378 million, of which $1,103are held by creditors in South Korea, as of March 31, 2010.  We are currently working to resolve thematter with each creditor****by seeking aforbearance or compromise.   If we cannotrepay the amounts due or obtain forbearance or compromise, the creditors mayseek to foreclose on the Company’s assets located in Korea.  Such a foreclosure would have materialadverse effect on our operations, financial condition, and results ofoperations.

 

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**ContractualObligations**

 

The following table summarizes the Company’s obligations andcommitments as of March 31, 2010:

 
| ** **                                     | ** ** | ** ** | ** ** | **Payments Due by Period (in thousands)** | ** ** | ** **     | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|----------------|------------|
| **Contractual Cash Obligations**               | ** ** | **Total**  | ** ** | **Less  Than  1 Year**                    | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **Thereafter** | ** ** |
|                                           |       |       |       |                                      |       |           |       |   |   |   |   |
| Long-term  debt (2)                            |       | $          | 8,137      |                                      | $          | 8,137          |       | $ | — |   | $ | — |   | $ | — |   |
| Long-term  debt of consolidated subsidiary (2) |       | 9,265      |       | 595                                       |       | 8,619          |       | 51 |   | — |   |
| Short-term  debt (3)                           |       | 832        |       | 832                                       |       | —         |       | — |   | — |   |
| Short-term  debt of consolidated subsidiary    |       | 450        |       | 450                                       |       | —         |       | — |   | — |   |
| Interest  payments (4)                         |       | 3,364      |       | 1,723                                     |       | 1,641          |       | — |   | — |   |
| Operating  leases and rents                    |       | 754        |       | 374                                       |       | 380            |       | — |   | — |   |
| Dongyang                                       |       | 9          |       | 9                                         |       | —         |       | — |   | — |   |
| Nichimen                                       |       | 315        |       | 315                                       |       | —         |       | — |   | — |   |
| Totals  (1)                                    |       | $          | 23,126     |                                      | $          | 12,435         |       | $ | 10,640 |   | $ | 51 |   | $ | — |   |

 

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(1) Contractualcash obligations include Long-term debt comprised of $259 of UnsecuredSubordinated Notes issued in 2006 and $7,878 of Convertible Notes issued in2009; Long-term debt of consolidated subsidiary comprised of $1,289 of BankMidwest Term Loan, $7,882 of C3 Capital Partners Subordinated Notes, and $94 ofBank Midwest Promissory Notes; Short-term debt comprised of $287 outstandingadvances received under factoring, loan, and security agreement, $545 of cashadvances from John Kang, our former Chairman, Ricardo Salas, Executive VicePresident of our company, and Abdi Mahamedi, a member for our Board ofDirectors; Short-term debt of consolidated subsidiary comprised of $450 of BankMidwest revolving loan; future minimum lease payments under capital andoperating leases; purchase commitments from consultants; payments due fromassets purchased from Foster Wheeler thermal spray coatings business; paymentsdue from our discontinued equipment manufacturing business; and minimumpayments due under a distribution agreement.

(2) Doesnot include accrued and scheduled interest payments of $3,364; and un-amortizeddiscounts for conversion feature and warrants of $2,608 of our convertiblenotes.

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

(4) Interestpayments include accrued and scheduled payments due on long-term debt andlong-term debt of consolidated subsidiary with annual interest rates between7.43% to 14%.  Interest payments alsoinclude estimated interest on short-term debt and short-term debt of majorityowned subsidiary with annual interest rates between 8.48% to 10% with expectedmaturity of approximately 1 year.

 

**Off BalanceSheet Arrangements**

 

Anoff-balance sheet arrangement is any transaction, agreement or othercontractual arrangement involving an unconsolidated entity under which acompany has (1) made guarantees, (2) retained a contingent interestin transferred assets, (3) an obligation under derivative instrumentsclassified as equity, or (4) any obligation arising out of a materialvariable interest in an unconsolidated entity that provides financing,liquidity, market risk or credit risk support to the company, or that engagesin leasing, hedging, or research and development arrangements with the company.

 

OnJune 26, 2006, we entered into a joint venture agreement with SAGA, SpA inPadova, Italy, (‘SAGA”) a specialist precision parts manufacturer. The joint venture is named Liquidmetal SAGA Italy, Srl (“LSI”).  We alsoentered into an exclusive manufacturing license agreement for the eyewearindustry with LSI.  Under the joint venture agreement, we have the optionto buy ownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006,we have purchased 19.9% interest in the joint venture.  In January 2007 and June 2007, wecontributed additional $0.2 million and $0.1 million, respectively, into LSI asadditional investment.  The contribution did not change our 19.9% interestin LSI.  Under the licensing agreement,at any time following 18 months after the effective date of the agreement, LSImay exercise its option to sell to us certain business assets includingmanufacturing equipment acquired under the joint venture.  During the fourth quarter of the year ended December 31,2009, we wrote-off its investment of $0.3 million in the joint venture due toslower than anticipated growth in the eyewear industry.  During 2009, 2008 and 2007, we recognizedrevenues of $0, $0 and $0.1 million, respectively, of Liquidmetal alloys soldto SAGA for use in the joint venture. There were no alloys sold to LSI during the three months ended March 31,2010.

 

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OnAugust 6, 2010, SAGA filed a litigation case against us claiming damagesof $3.2 million for payment on a loan and for breach of contract in connectionwith the formation of LSI.  We are in theprocess of responding to the claim and working with SAGA to resolve the matter.

 

**Item 3 —Quantitative and Qualitative Disclosures about Market Risk**

 

We are exposed to variousmarket risks in conducting the business of the Company, and we anticipate thatthis exposure will increase as a result of our planned growth.  In an effort to mitigate losses associatedwith these risks, we may at times enter into derivative financial instruments,although we have not historically done so. These may take the form of forward sales contracts, option contracts,foreign currency exchange contracts, and interest rate swaps.  We have not, and do not intend to, engage inthe practice of trading derivative securities for profit.

 

*InterestRates.*  We are exposed to market risksrelating to changes in interest rates as our borrowings are subject to thevolatility of interest rate risk. Fluctuations in interest rates may have a negative impact to any futureborrowings.

 

*CommodityPrices. *We are exposed to price riskrelated to anticipated purchases of certain commodities used as raw materialsby our businesses, including titanium and zirconium.  Although we do 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 a resultof our operation of a manufacturing facility in South Korea, a substantialportion of our costs will be denominated in the South Korean won.  Consequently, fluctuations in the exchangerates of the South Korean won to the U.S. dollar will affect our costs of goodssold and operating margins and could result in exchange losses.  Although we do not currently enter intoforeign exchange hedge transactions, we may do so in the future as our businessgrows.

 

 

**Item 4T —Controls and Procedures**

 

Evaluationof Disclosure Controls and Procedures.   Based on anevaluation of the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Exchange Act) as of March 31,2010, the end of the period covered by this report, our Chief Executive Officerand Chief Financial Officer have concluded that the disclosure controls andprocedures were effective.

 

Changesin Internal Controls.  During the quarter ended March 31,2010, there was no change in our internal controls over financial reporting (asdefined in Rule 13a-15(f) under the Exchange Act) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

**Item 1 —Legal Proceedings**

 

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

 

**Item 1A — Risk Factors**

 

None.

 

**Item 3 - Defaults Upon Senior Securities**

 

We have $0.3 million of outstandingloan as of March 31, 2010 under a factoring, loan, and security agreementwith a financing company.  In June 2009,we received a formal notice of default from the financing company for repaymentof the outstanding loan balance.  As ofthe date of this report, we entered into a settlement agreement with thefinancing company whereby we agreed to repay approximately $0.1 million eachmonth until the outstanding loans and accrued fees have been repaid.  As of March 31, 2010, we were unable topay the $100 monthly payments.  On August 5,2010, we repaid in full all principal and interest on the factoring loan in theamount of $0.3 million.  All securityinterests in our assets securing such obligation under the factoring loan werereleased and terminated.

 

**Item 4 — Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5 — Other Information**

 

None.

 

**Item 6 — Exhibits**

 

The following documents arefiled as an exhibit to this Report:

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

 

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**SIGNATURES**

 

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

 

 
|                       |   | LIQUIDMETAL  TECHNOLOGIES, INC.          |
|----------------------------|--------|-----------------------------------------------|
|                       |   | (Registrant)                                  |
|                       |   |                                          |
| Date: August 20, 2010 |   | /s/ Thomas Steipp                             |
|                       |   | Thomas Steipp                                 |
|                       |   | President and Chief  Executive Officer        |
|                       |   | (Principal Executive  Officer)                |
|                       |   |                                          |
|                       |   |                                          |
| Date: August 20, 2010 |   | /s/ Tony Chung                                |
|                       |   | Tony Chung                                    |
|                       |   | Chief Financial Officer                       |
|                       |   | (Principal Financial and  Accounting Officer) |

 

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