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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

### **FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2009**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from         to         **

 

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

** **

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# **LIQUIDMETALTECHNOLOGIES, INC.**

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

 

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

 

**30452 Esperanza**

**Rancho Santa Margarita, CA 92688**

(address of principal executive office, zip code)

 

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

 

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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 periodthat the registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2 of the Act). See the definitions of “large accelerated filer,” “accelerated filer,”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 
| 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

 

#### **As of November 16,2009, there were 47,583,101 shares of the registrant’s common stock, $0.001 parvalue, outstanding.**

 

 

 

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** **

**LIQUIDMETAL TECHNOLOGIES, INC.FORM 10-QFOR THE QUARTER ENDED****SEPTEMBER30, 2009**

 

**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-looking statementsdue to risks and uncertainties that exist in the Company’s operations andbusiness environment, including competition, need for increased acceptance ofproducts, ability to continue to develop and extend our brand identity, abilityto anticipate and adapt to a competitive market, ability to effectively managerapidly expanding operations, amount and timing of operating costs and capitalexpenditures relating to expansion of our business, operations andinfrastructure, ability to provide superior customer service, dependence uponkey personnel and the like. The Company’s most recent filings with theSecurities 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 OFCONTENTS**

 
| **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                                  | 29 |
|                                      |                                                                                                       |   |
|                                      | Item 4T – Controls  and Procedures                                                                    | 29 |
|                                      |                                                                                                       |   |
| **PART II – Other Information** | ** **                                                                                                 |
|                                      |                                                                                                       |   |
|                                      | Item 1 – Legal Proceedings                                                                            | 30 |
|                                      |                                                                                                       |   |
|                                      | Item 1A – Risk Factors                                                                                | 30 |
|                                      |                                                                                                       |   |
|                                      | Item 3 –  Defaults Upon Senior Securities                                                             | 30 |
|                                      |                                                                                                       |   |
|                                      | Item 4 -  Submission of Matters to a Vote of Security Holders                                              | 30 |
|                                      |                                                                                                       |   |
|                                      | Item 5 – Other Information                                                                            | 30 |
|                                      |                                                                                                       |   |
|                                      | Item 6 – Exhibits                                                                                     | 30 |
|                                      |                                                                                                       |   |
| Signatures                                | 31                                                                                                         |
|                                      |                                                                                                       |   |
| Certifications                            |                                                                                                       |
|                                           |                                                                                                            |  |  |

 

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### **PART I**

 

### **FINANCIAL INFORMATION**

 

**Item 1 – Financial Statements**

 

**LIQUIDMETALTECHNOLOGIES, INC.****AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                   | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                   |       |                   |       |                  |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                              |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                    |       | $                      | 121        |                  | $          | 157 |   |
| Trade accounts receivables, net of allowance for  doubtful accounts of $144 and $121                                                                                                         |       | 2,349                  |       | 2,237                 |       |
| Inventories                                                                                                                                                                                  |       | 1,112                  |       | 820                   |       |
| Prepaid expenses and other current assets                                                                                                                                                    |       | 705                    |       | 967                   |       |
| Total current assets                                                                                                                                                                         |       | 4,287                  |       | 4,181                 |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Property, plant and equipment, net                                                                                                                                                           |       | 7,121                  |       | 7,021                 |       |
| Other intangibles, net                                                                                                                                                                       |       | 1,244                  |       | 1,069                 |       |
| Investment in joint venture                                                                                                                                                                  |       | 306                    |       | 306                   |       |
| Other assets                                                                                                                                                                                 |       | 674                    |       | 663                   |       |
| Total assets                                                                                                                                                                                 |       | 13,632                 |       | 13,240                |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  DEFICIENCY**                                                                                                                                           |       |                   |       |                  |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                                         |       |                   |       |                  |       |
| Accounts payable and accrued expenses                                                                                                                                                        |       | 9,193                  |       | 8,563                 |       |
| Deferred revenue                                                                                                                                                                             |       | 51                     |       | 40                    |       |
| Short-term debt                                                                                                                                                                              |       | 1,218                  |       | 1,176                 |       |
| Long-term debt, current portion, net of debt  discounts of $0 and $7,128                                                                                                                     |       | 1,329                  |       | 14,172                |       |
| Warrant liabilities                                                                                                                                                                          |       | 4,981                  |       | 692                   |       |
| Conversion feature liabilities                                                                                                                                                               |       | 795                    |       | 147                   |       |
| Other liabilities, current portion                                                                                                                                                           |       | 141                    |       | 146                   |       |
| Total current liabilities                                                                                                                                                                    |       | 17,708                 |       | 24,936                |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Long-term debt, net of current portion and debt  discounts of $3,691 and $0                                                                                                                  |       | 11,616                 |       | 8,521                 |       |
| Other long-term liabilities, net of current portion                                                                                                                                          |       | 153                    |       | 163                   |       |
| Total liabilities                                                                                                                                                                            |       | 29,477                 |       | 33,620                |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Shareholders’ deficiency:                                                                                                                                                               |       |                   |       |                  |       |
| Liquidmetal Technologies, Inc. shareholders’  deficiency                                                                                                                           |       |                   |       |                  |       |
| Preferred stock, $0.001 par value; 10,000,000  shares authorized; 3,041,125 and 0 shares issued and outstanding at  September 30, 2009 and December 31, 2008, respectively         |       | 3                      |       | —                |       |
| Common stock, $0.001 par value; 100,000,000 shares  authorized; 46,731,694 and 44,825,402 shares issued and outstanding at  September 30, 2009 and December 31, 2008, respectively |       | 47                     |       | 45                    |       |
| Additional paid-in capital                                                                                                                                                                   |       | 142,014                |       | 140,204               |       |
| Accumulated deficit                                                                                                                                                                          |       | (159,844               | )          | (162,307              | )          |
| Accumulated other comprehensive income                                                                                                                                                       |       | 1,343                  |       | 1,027                 |       |
| Total Liquidmetal Technologies, Inc.  shareholders’ deficiency                                                                                                                     |       | (16,437                | )          | (21,031               | )          |
| Noncontrolling interest                                                                                                                                                                      |       | 592                    |       | 651                   |       |
| Total shareholders’ deficiency                                                                                                                                                          |       | (15,845                | )          | (20,380               | )          |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Total liabilities and shareholders’ deficiency                                                                                                                                          |       | $                      | 13,632     |                  | $          | 13,240 |   |

 

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

 

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**LIQUIDMETALTECHNOLOGIES, INC.****AND SUBSIDIARIES**

 

### **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

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

**(unaudited)**

** **
| ** **                                                             | ** ** | **For  the Three Months Ended** | ** ** | **For  the Nine Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                                             | ** ** | **September 30,**          | ** ** | **September 30,**         | ** ** |
| ** **                                                             | ** ** | **2009**                        | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                             | ** ** | ** **                      | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                |       | $                               | 4,209      |                           | $          | 5,041 |   | $ | 11,320 |   | $ | 17,478 |   |
| Cost of sales                                                          |       | 2,909                           |       | 3,791                          |       | 6,945 |   | 13,325 |   |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Gross profit                                                           |       | 1,300                           |       | 1,250                          |       | 4,375 |   | 4,153 |   |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Operating expenses                                                     |       |                            |       |                           |       |   |   |   |   |
| Selling, general, and administrative                                   |       | 1,341                           |       | 1,417                          |       | 4,286 |   | 4,617 |   |
| Research and development                                               |       | 349                             |       | 279                            |       | 897 |   | 815 |   |
| Total operating expenses                                               |       | 1,690                           |       | 1,696                          |       | 5,183 |   | 5,432 |   |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Loss from operations                                                   |       | (390                            | )          | (446                           | )          | (808 | ) | (1,279 | ) |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Loss from extinguishment of debt                                       |       | —                          |       | —                         |       | (1,471 | ) | — |   |
| Change in value of warrants, gain                                      |       | 2,015                           |       | 989                            |       | 8,138 |   | 2,385 |   |
| Change in value of conversion feature, gain                            |       | 474                             |       | 642                            |       | 1,434 |   | 2,104 |   |
| Other expense                                                          |       | —                          |       | —                         |       | — |   | (17 | ) |
| Other income                                                           |       | —                          |       | —                         |       | — |   | 247 |   |
| Interest expense                                                       |       | (1,055                          | )          | (1,860                         | )          | (4,760 | ) | (5,280 | ) |
| Interest income                                                        |       | —                          |       | —                         |       | — |   | 3 |   |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Net income (loss) before income taxes                                  |       | 1,044                           |       | (675                           | )          | 2,533 |   | (1,837 | ) |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Income taxes                                                           |       | (75                             | )          | —                         |       | (120 | ) | — |   |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Net income (loss)                                                      |       | 969                             |       | (675                           | )          | 2,413 |   | (1,837 | ) |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Net loss (income) attributable to noncontrolling  interest             |       | 39                              |       | (115                           | )          | 59 |   | (341 | ) |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Net income (loss) attributable to Liquidmetal  Technologies, Inc. |       | 1,008                           |       | (790                           | )          | 2,472 |   | (2,178 | ) |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Other comprehensive income (loss):                                     |       |                            |       |                           |       |   |   |   |   |
| Foreign exchange translation gain (loss)                               |       | 393                             |       | (729                           | )          | 316 |   | (1,542 | ) |
| Comprehensive income (loss)                                            |       | $                               | 1,401      |                           | $          | (1,519 | ) | $ | 2,788 |   | $ | (3,720 | ) |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Net income (loss) per share basic and diluted:                         |       |                            |       |                           |       |   |   |   |   |
| Net income (loss) attributable to Liquidmetal  Technologies, Inc. |       | $                               | 0.02       |                           | $          | (0.02 | ) | $ | 0.05 |   | $ | (0.05 | ) |
|                                                                   |       |                            |       |                           |       |   |   |   |   |
| Number of weighted average shares - basic and  diluted                 |       | 46,595                          |       | 44,726                         |       | 45,610 |   | 44,726 |   |

 

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

 

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

**CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIENCY**

###### **For the Nine Months Ended September 30, 2009**

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

**(unaudited)**

 
| ** **                                  | ** ** | **Liquidmetal  Technologies, Inc. Shareholders** | ** ** | ** **         | ** ** | ** **           | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **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, 2008**         |       | —                                                |       | 44,825,402         |       | $                    | —     |   | $ | 45 |   | $ | 140,204 |   | $ | (162,307 | ) | $ | 1,027 |   | 651 |   | $ | (20,380 | ) |
| Convertible preferred stocks issued         |       | 3,125,002                                             |       | —             |       | 3                    |       | — |   | 1,550 |   | — |   | — |   | — |   | 1,553 |   |
| Conversion of preferred stocks              |       | (83,877                                               | )          | 1,906,292          |       | —               |       | 2 |   | (2 | ) | — |   | — |   | — |   | — |   |
| Stock-based compensation                    |       | —                                                |       | —             |       | —               |       | — |   | 262 |   | — |   | — |   | — |   | 262 |   |
| Foreign exchange translation gain           |       | —                                                |       | —             |       | —               |       | — |   | — |   | — |   | 316 |   | — |   | 316 |   |
| Cash distribution to preferred unit holders |       | —                                                |       | —             |       | —               |       | — |   | — |   | (9 | ) | — |   | — |   | (9 | ) |
| Net income                                  |       | —                                                |       | —             |       | —               |       | — |   | — |   | 2,472 |   | — |   | (59 | ) | 2,413 |   |
| **Balance, September 30, 2009**        |       | 3,041,125                                             |       | 46,731,694         |       | $                    | 3          |   | $ | 47 |   | $ | 142,014 |   | $ | (159,844 | ) | $ | 1,343 |   | $ | 592 |   | $ | (15,845 | ) |
|                                             |            |                                                       |            |                    |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notesare an integral part of the condensed consolidated financial statements.

 

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

 

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

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

**(unaudited)**

 
| ** **                                                                                                      | ** ** | **For the  Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
|                                                                                                            | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **Operating activities:**                                                                                       | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net income (loss) attributable to Liquidmetal Technologies, Inc.                                           |       | $                                                  | 2,472      |   | $ | (2,178 | ) |
|                                                                                                            |       |                                               |       |   |   |
| Adjustments to reconcile income (loss) from operations to net cash  (used in) provided by operating activities: |       |                                               |       |   |   |
| Gain on disposal of asset                                                                                       |       | —                                             |       | (15 | ) |
| (Loss) income attributable to noncontrolling interest of consolidated  subsidiary                               |       | (59                                                | )          | 341 |   |
| Depreciation and amortization                                                                                   |       | 772                                                |       | 1,009 |   |
| Loss on extinguishment of debt                                                                                  |       | 1,471                                              |       | — |   |
| Amortization of debt discount                                                                                   |       | 2,633                                              |       | 2,704 |   |
| Stock-based compensation                                                                                        |       | 262                                                |       | 469 |   |
| Bad debt expense (recovery)                                                                                     |       | 29                                                 |       | (105 | ) |
| Warranty recovery                                                                                               |       | (92                                                | )          | (68 | ) |
| Gain from change in value of warrants                                                                           |       | (8,138                                             | )          | (2,385 | ) |
| Gain from change in value of conversion feature                                                                 |       | (1,434                                             | )          | (2,104 | ) |
|                                                                                                            |       |                                               |       |   |   |
| Changes in operating assets and liabilities:                                                                    |       |                                               |       |   |   |
| Trade accounts receivable                                                                                       |       | (142                                               | )          | 1,188 |   |
| Inventories                                                                                                     |       | (292                                               | )          | 1,024 |   |
| Prepaid expenses and other current assets                                                                       |       | (240                                               | )          | (350 | ) |
| Other assets                                                                                                    |       | (306                                               | )          | 707 |   |
| Accounts payable and accrued expenses                                                                           |       | 1,213                                              |       | 745 |   |
| Deferred revenue                                                                                                |       | 11                                                 |       | (102 | ) |
| Other liabilities                                                                                               |       | (14                                                | )          | (572 | ) |
| Net cash (used in) provided by operating activities                                                             |       | (1,854                                             | )          | 308 |   |
|                                                                                                            |       |                                               |       |   |   |
| **Investing Activities:**                                                                                       |       |                                               |       |   |   |
| Purchases of property and equipment                                                                             |       | (412                                               | )          | (1,058 | ) |
| Proceeds from the sale of property and equipment                                                                |       | —                                             |       | (17 | ) |
| Investment in patents and trademarks                                                                            |       | (277                                               | )          | (36 | ) |
| Net cash used in investing activities                                                                           |       | (689                                               | )          | (1,111 | ) |
|                                                                                                            |       |                                               |       |   |   |
| **Financing Activities:**                                                                                       |       |                                               |       |   |   |
| Proceeds from borrowings                                                                                        |       | 13,747                                             |       | 13,327 |   |
| Repayment of borrowings                                                                                         |       | (26,520                                            | )          | (15,577 | ) |
| Proceeds from issuance of convertible preferred stocks                                                          |       | 15,328                                             |       | — |   |
| Proceeds from issuance of preferred units of subsidiary                                                         |       | —                                             |       | 2,500 |   |
| Redemption of preferred units of subsidiary                                                                     |       | —                                             |       | (213 | ) |
| Cash distributions                                                                                              |       | (9                                                 | )          | (1,099 | ) |
| Net cash provided by (used in) financing activities                                                             |       | 2,546                                              |       | (1,062 | ) |
| Effect of foreign exchange translation                                                                          |       | (39                                                | )          | 744 |   |
| Net decrease in cash and cash equivalents                                                                       |       | (36                                                | )          | (1,121 | ) |
|                                                                                                            |       |                                               |       |   |   |
| Cash and cash equivalents at beginning of period                                                                |       | 157                                                |       | 1,180 |   |
| Cash and cash equivalents at end of period                                                                      |       | $                                                  | 121        |   | $ | 59 |   |
|                                                                                                            |       |                                               |       |   |   |
| Supplemental cash flow information                                                                              |       |                                               |       |   |   |
| Interest paid                                                                                                   |       | $                                                  | 1,678      |   | $ | 1,608 |   |
| Taxes paid                                                                                                      |       | $                                                  | —     |   | $ | — |   |

 

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

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

**(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 ofmanagement, all adjustments (consisting only of normal recurring accruals)considered necessary for a fair presentation have been included.  All intercompany balances and transactionshave been eliminated.  Operating resultsfor the nine months ended September 30, 2009 are not necessarilyindicative of the results that may be expected for any future periods or theyear ending December 31, 2009.  Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with the Company’s Form 10-K filed with the Securitiesand Exchange Commission on April 15, 2009.

 

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

 

The Company classifies operationsinto two reportable segments: Liquidmetal alloy industrial coatings and bulkLiquidmetal alloys (see Note 9). Liquidmetal alloy industrial coatings are usedprimarily as a protective coating for industrial machinery and equipment, suchas drill pipes used by the oil drilling industry and boiler tubes used bycoal-burning power plants. Bulk Liquidmetal alloys include potential marketopportunities to manufacture and sell products and components for electronicdevices, medical devices, defense applications, and sporting goods.  In addition, the bulk Liquidmetal alloyssegment includes tooling and prototype sampling.  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, the Company transferredsubstantially all of the assets of its Liquidmetal alloy industrial coatingsbusiness to a newly formed, newly capitalized subsidiary named LiquidmetalCoatings, LLC, a Delaware limited liability company (“LMC”), and LMC assumedsubstantially all of the assets and liabilities of the coatings business.  The transfer included the thermal spraycoatings assets and liabilities acquired under a purchase agreement with FosterWheeler Energy Services in June 2007.  The Company holds a 69.25%ownership interest in LMC.  The resultsof operation of LMC are consolidated and comprise our Liquidmetal alloyindustrial coatings segment for financial reporting purposes.

 

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

 

Translation of Foreign Currency

 

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

 

Reclassifications

 

Certain amounts from prior year have been reclassified to conform tocurrent year’s presentation.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

Recent Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements, an amendment ofARB No. 51” (“SFAS 160”). This statement establishes accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. Minority interests will be recharacterized asnoncontrolling interests and classified as a component of shareholders’ equityseparate from the parent’s equity. In addition, SFAS 160 establishes reportingrequirements that provide sufficient disclosures that clearly identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners. This statement is effective prospectively, except forcertain retrospective disclosure requirements, for fiscal years beginning afterDecember 15, 2008. The Company has adopted SFAS 160 as of January 1,2009.

 

In April 2008, the FASB issued FASB StaffPosition No. 142-3, “Determination of the Useful Life of Intangible Assets”(“FSP 142-3”). FSP 142-3 amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.”The intent of FSP 142-3 is to improve the consistency between the useful lifeof a recognized intangible asset under SFAS 142 and the period of expectedcash flows used to measure the fair value of an asset under SFAS 141(R) andother U.S. generally accepted accounting principles FSP 142-3 applies tointangible assets that are acquired individually or with a group of otherassets acquired in business combinations and asset acquisitions. FSP 142-3 alsorequires expanded disclosure related to the determination of intangible assetuseful lives. FSP 142-3 is effective for fiscal years beginning after December 15,2008. The Company has adopted FSP 142-3 as of January 1, 2009.

 

In May 2008, the FASB issued FASB Staff Position No. APB 14-1,“Accounting for Convertible DebtInstruments That May Be Settled in Cash upon Conversion (Including PartialCash Settlement)” (“FSP APB 14-1”) which clarifies that convertible debt instrumentsthat may be settled in cash or other assets upon conversion are not addressedby APB No. 14, “Accounting for Convertible Debt and Debt Issued with StockPurchase Warrants.” Additionally, FSP APB 14-1 requires an entity to separatelyaccount for the liability and equity components of a convertible instrument toreflect an entity’s nonconvertible debt borrowing rate when interest cost isrecognized in subsequent periods. FSP APB 14-1 also expands the disclosurerequirements regarding convertible debt instrument terms and how the instrumentis reflected in an entity’s financial statements. FSP APB 14-1 is effective forfinancial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years. The Company has adoptedAPB 14-1 as of January 1, 2009.

 

In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”).SFAS 162 is intended to improve financial reporting by identifying aconsistent framework, or hierarchy, for selecting accounting principles to beused in preparing financial statements that are presented in conformity withU.S. generally accepted accounting principles for nongovernmental entities.SFAS 162 will become effective 60 days following the SEC’s approvalof the Public Company Accounting Oversight Board Auditing amendments to AU Section 411,“The Meaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples.” The Company has adopted SFAS 162 as of January 1, 2009.

 

In June 2008, the FASB ratified the consensusreached on EITF Issue No. 07-5, “Determining Whether an Instrument (orEmbedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-05”). EITF07-5 clarifies the determination of whether an instrument (or an embeddedfeature) is indexed to an entity’s own stock, which would qualify as a scopeexception under SFAS 133, Accounting for Derivative Instruments and HedgingActivities. EITF 07-5 is effective for financial statements issued for fiscalyears beginning after December 15, 2008. Early adoption for an existinginstrument is not permitted. The Company has adopted EITF 07-5 as of January 1,2009.

 

In June 2008, FASB issued EITF Issue No. 08-4,“Transition Guidance for Conforming Changes to Issue No. 98-5” (“EITF 08-4”).The objective of EITF 08-4 is to provide transition guidance for conformingchanges made to EITF 98-5, “Accounting for Convertible Securities withBeneficial Conversion Features or Contingently Adjustable Conversion Ratios”,that result from EITF 00-27 “Application of Issue No. 98-5 to CertainConvertible Instruments”, and FAS 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity”. This Issue iseffective for financial statements issued for fiscal years ending after December 15,2008. Early application is permitted. The Company has adopted EITF 08-4 as of January 1,2009.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

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

 

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognitionand Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS124-2”), which amends SFAS No. 115, Accounting for Certain Investments inDebt and Equity Securities, and SFAS No. 124, Accounting for CertainInvestments Held by Not-for-Profit Organizations. This FSP amends theother-than-temporary guidance in U.S. GAAP for debt securities to make theguidance more operational and to improve the presentation and disclosure ofother-than-temporary impairments on debt and equity securities. The provisionsof FSP FAS 115-2 and FAS 124-2 that amend SFAS 115 and SFAS 124 are effectivefor interim and annual reporting periods ending after June 15, 2009. Theimplementation of this FSP is not expected to affect the Company’s consolidatedresults of operations or financial condition.

 

In June 2009, the FASB issued SFAS166, “Accounting for Transfers ofFinancial Assets,” which will be effective for us on January 1,2010.  SFAS 166 removes the concept of a qualifying special-purposeentity (QSPE) from SFAS 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities”,* *andremoves the exception from applying FASB Interpretation 46R, “Consolidation of Variable Interest Entities”.This statement also clarifies the requirements for isolation and limitations onportions of financial assets that are eligible for sale accounting. The Companyis currently evaluating the impact of adopting this standard on theconsolidated financial statements.

 

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

 

In June 2009, the FASB issuedSFAS 168, “The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples — a replacement of FASB Statement No. 162,” which willbe effective for us on September 30, 2009.  SFAS 168’s objectiveis to establish the FASB AccountingStandards Codification as the source of authoritative non-governmentalaccounting principles to be applied in the preparation of financial statementsin conformity with US GAAP. Although SFAS 168 does not change GAAP, theadoption of SFAS 168 will impact our consolidated financial statements since allfuture references to authoritative accounting literature will be in accordancewith SFAS 168.

 

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

 

**3.         Liquidity**

 

The Company hasexperienced losses from continuing operations during the last three fiscalyears and has an accumulated deficit of $159,844 as of September 30,2009.  Cash used in operations for the nine months ended September 30,2009 was $1,854; and cash flow from operations will likely be negativethroughout fiscal year 2009.  As of September 30, 2009, the Company’sprincipal sources of liquidity are $121 of cash and $2,349 of trade accountsreceivable.  Such conditions raise substantial doubt that the Company willbe able to continue as a going concern.  These operating results occurredwhile the 

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

Company was developingand continues to develop, commercialize, and manufacture products from anentirely new and unique technology.  These factors have placed asignificant strain on the financial resources of the Company.  The abilityof the Company to overcome these challenges depends on its ability to correctits production inefficiencies, reduce its operating costs, generate higherrevenue, achieve positive cash flow from continuing operations and continued sourcesof debt and equity financing.  The consolidated financial statements donot include any adjustments that might result from the outcome of theseuncertainties.

 

On May 1, 2009, the Companycompleted a financing transaction (the “Transaction”) whereby aggregate cash of$2,500 and principal and accrued interest of $20,625 due under the previouslyissued 8% Convertible Subordinated Notes due January 2010 (the “PriorNotes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7,500 of new 8% Senior Secured Convertible Subordinated Notesdue January 2011 (the “Exchange Notes”). Of the $2,500 aggregate cashpurchase price, approximately $100 remains outstanding and is included prepaidexpenses and other current assets as of September 30, 2009.  The Transaction was consummated pursuant to aSecurities Purchase and Exchange Agreement, dated May 1, 2009 (the “SecuritiesPurchase Agreement”), among the exchanging note holders and investors(collectively, the “Buyers”).  The Securities Purchase Agreement gives theBuyers option to subscribe for an additional 1,000,000 shares of Series A-1Preferred Stock at $5.00 per share at any time prior to six months from theclosing date (the “Series A-1 Option”). (See Note 6)

 

On October 30, 2009, theCompany entered into an agreement with Carlyle Liquid Holdings, LLC, a Buyer inthe Transaction, to issue 180,000 shares of convertible Series A-1Preferred Stock for $900 of cash pursuant to the Series A-1 Option (seeNote 13).

 

The Companyanticipates that it will not have sufficient funds to pursue its currentoperating plan beyond the fourth quarter of 2009 and will therefore requireadditional funding.  Because the Company cannot be certain that it will beable to obtain adequate funding from debt, equity, or other traditionalfinancing sources, it is also actively pursuing several strategic financingoptions, including the intent to sell its manufacturing plant in South Korea(which would then be replaced with a smaller facility) and additional licensingand outsourcing of our manufacturing operations.

 

Additionally, we have approximately $291 of principal and accruedinterest outstanding as of September 30, 2009, under the 8% unsecuredsubordinated notes (the “Bridge Notes”), which were due August 17,2007.  We are working to repay the BridgeNotes with our noteholder.

 

We have $378 of outstanding loan as of September 30,2009 under a factoring, loan, and security agreement with a financingcompany.  In June 2009, the Companyreceived a formal notice of default from the financing company for repayment ofthe outstanding loan balance.  As of the filing of this report, the Company entered into a settlementagreement with the financing company whereby we agreed to repay approximately$100 each month until the outstanding loans and accrued fees have been repaid.  The first $100 monthly payment was made inNovember 2009.

 

We have outstanding liens and judgments onour assets by various creditors for past-due trade payables totaling $1,114which are held by creditors in South Korea, as of September 30, 2009.  We are currently working to resolve thematter with each creditor****by seeking forbearance until we are ableto obtain funding to repay the amounts due, although there is no assurance thatwe will be able to obtain any such funding.  If we cannot repay the amounts due or obtain forbearance, the creditorsmay seek to foreclose on the Company’s assets. Such a foreclosure would have material adverse effect on our operations,financial condition, and results of operations.

 

**4.         Inventories**

 

Inventories are accountedfor using the moving average basis and at standard cost, which approximate coston a first-in, first-out basis and are valued at the lower of cost ormarket.  Inventories were comprised ofthe following:

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 
| ** **        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|------------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **        | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
|              | ** ** | ** **             | ** ** | ** **            | ** ** |
| Raw materials     |       | $                      | 580        |                  | $          | 426 |   |
| Work in process   |       | 32                     |       | 184                   |       |
| Finished goods    |       | 500                    |       | 210                   |       |
| Total inventories |       | $                      | 1,112      |                  | $          | 820 |   |

 

**5.         ProductWarranty**

 

Managementestimates product warranties as a percentage of certain bulk alloy productsales earned during the period.  As of September 30,2009, 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 September 30, 2009the Company used 1% of coatings applications sales as estimates of warrantiesto be claimed.

 

During the threeand nine months ended September 30, 2009, the Company recorded $0 and $92of net gain on warranty, respectively. During the three and nine months ended September 30,2008, the Company recorded $46 and $68 of net gain on warranty, respectively.The warranty accrual balance is included in accounts payable and accruedexpenses.

 

**6.         NotesPayable**

 

Unsecured SubordinatedNotes

 

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 and2008, the Company retired $1,925 and $1,650 of the August 2007Subordinated Notes, respectively.  Duringthe second quarter of 2009, the Company retired $750 of the August 2007Subordinated Notes.

 

As of September 30,2009 and December 31, 2008, the Company’s gross outstanding loan balanceof the August 2007 Subordinated Notes totaled $259 and $1,009,respectively, and is included in current portion of long-term debt.  As of September 30, 2009, the effectiveinterest rate for the August 2007 Subordinated Notes was 8%.

 

Secured Convertible Subordinated Notes

 

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

 

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

 

The Company’sgross outstanding loan balance of the January 2010 Notes totaled $0 and $19,113as of September 30, 2009 and December 31, 2008, respectively. As of September 30, 2009 and December 31, 2008, un-amortizeddiscounts for conversion feature, warrants, and cash discount totaled $0 and$7,128, respectively, and other asset debt issuance costs totaled $0 and $655,respectively.  Interest expense for the amortization of debt issuance costand discount on note was $0 and 

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

$1,816 for thethree and nine months ended September 30, 2009, respectively.  Interest expense for the amortization of debtissuance cost and discount on note was $1,006 and $2,563 for the three and ninemonths ended September 30, 2008, respectively.

 

Pursuant toStatement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities,” the Company is required toreport a value of the conversion liability as a fair value and record thefluctuation to the fair value of the conversion feature liability to currentoperations.  The change in the fair valueof the conversion feature liability resulted in losses of $0 and $1,137 forthree and nine months ended September 30, 2009, respectively.  The change in the fair value of theconversion feature liability resulted in gains of $642 and $2,104 for three andnine months ended September 30, 2008, respectively.  The fair value of conversion featureoutstanding at September 30, 2009 and December 31, 2008 was $0 and$147, 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”).   Of the $2,500 aggregate cash purchase price,approximately $100 remains outstanding and is included prepaid expenses andother current assets as of September 30, 2009.  Transaction was consummated pursuant to a SecuritiesPurchase and Exchange Agreement, dated May 1, 2009 (the “SecuritiesPurchase Agreement”), among the exchanging note holders and investors(collectively, the “Buyers”).  The Securities Purchase Agreementgives the Buyers option to subscribe for an additional 1,000,000 shares ofpreferred stock at $5.00 per share at any time prior to six months from theclosing date.  Additionally, 8,138,352 of previously issued warrantsto purchase common shares held by holders of the January 2010 Notes havebeen 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%).  Thepreferred stocks accrue cumulative dividends at an annual rate of 8%, which ispayable semi-annually. Beginning on the second anniversary of the initialissuance, the dividend will increase to 10%. The dividends are payable in cash or in kind by the issuance of theCompany of additional preferred stock, only when and as declared by the Company’sBoard of Directors.

 

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

 

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

 

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 

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

issuecosts, $5,487 debt discount, $1,306 decrease in conversion feature liability ofthe extinguished notes, $2,347 decrease in warrant liability from the warrantsredeemed from holders of the January 2011 Notes, and $308 write off ofaccrued fees.

 

Pursuant toStatement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities,” EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,” EITF 00-27, “Application of Issue No. 98-5 toCertain Convertible Instruments,” and EITF 05-2 “The Meaning of ‘ConventionalConvertible Debt Instrument’ in EITF Issue No. 00-19,” the original fairvalue of the embedded conversion feature of $3,367 have been recorded asconversion feature liability as the debt is considered nonconventionalconvertible debt. The original fair value was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 1.68 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 inthe fair value of the conversion feature liability resulted in gains of $474and $2,572 for the three and nine months ended September 30, 2009,respectively.  The fair value ofconversion feature outstanding at September 30, 2009 was $795.   The fair value of conversion featureoutstanding at September 30, 2009 was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 1.26 years; (2) volatilityof 174%, (3) risk free interest of 0.4% and dividend rate of 0%.

 

Pursuant to EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the original fair values of thewarrants of $14,773 have been recorded as warrant liability, which was computedusing the Black-Scholes pricing model under the following assumptions: (1) expectedlife of 2.67 years; (2) volatility of 176%; (3) risk free interest of1.39% and (4) dividend rate of 0%.

 

The originalfair value of the embedded conversion feature of $3,367 was recorded asdiscounts on the convertible notes and the original fair value of the warrantsissued to buyers of the January 2011 Notes of $999 was recorded asdiscounts of the convertible notes. The original fair value of warrants issuedto buyers of preferred stocks of $13,774 was recorded as reduction ofadditional paid-in capital. In addition, the Company incurred $440 of directcosts relating to the Transaction, of which $143 of was recorded as debtissuance cost in other assets relating to issuance of the convertible notes and$297 was recorded as reduction of additional paid-in capital relating to theissuance of the preferred stocks.

 

The Company’sgross outstanding loan balance of the January 2011 Notes totaled $7,500 asof September 30, 2009.  As of September 30,2009, un-amortized discounts for conversion feature and warrants totaled$3,691, and other asset debt issuance costs totaled $121.  Interestexpense for the amortization of debt issuance cost and discount on note was$441 and $696 for the three and nine months ended September 30, 2009,respectively.  The effective interest rate of the January 2011 Noteswas 70% as of September 30, 2009.

 

Factoring Agreement

 

The Company entered into aFactoring, Loan, and Security Agreement (the “Agreement”) with a financingcompany on April 21, 2005.  Allborrowings are secured by outstanding receivables specifically assigned to thefinancing company.  Further, pursuant toa Continuing Guaranty Agreement, dated January 5, 2009, the outstandingborrowings are personally guaranteed by John Kang, the Company’s Chairman.Assigned receivables are considered “Approved” or “Non-Approved” by thefinancing company.  Borrowings madeagainst non-approved receivables assigned are limited to $1,000 and totalborrowings made on approved and non-approved receivables assigned are limitedto $5,000.

 

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

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

For the nine months ended September 30, 2009, theCompany borrowed $38 and repaid $239 under the Agreement.  The total outstanding advance made under theagreement is $378 and $580 as of September 30, 2009 and December 31,2008, respectively, which is presented as short-term debt.  The weighted average rate of interest forborrowings made under the Agreement was 7.96% and 6.95% for the nine monthsended September 30, 2009 and 2008, respectively.   In June 2009, the Company received aformal notice of default from the financing company for repayment of theoutstanding loan balance.  As of the filing of this report, the Company entered into a settlementagreement with the financing company whereby the Company agreed to repayapproximately $100 each month until the outstanding loans and accrued fees havebeen repaid.  The first $100 monthlypayment was made in November 2009.

 

KookminNote

 

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

 

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

 

The outstanding loan balancetotaled $0 and $151, as of September 30, 2009 and December 31, 2008,respectively, and are included in current portion of long-term debt.

 

Debt of MajorityOwned Subsidiary

 

On July 24, 2007, the Company completed an $11,500 financingtransaction (the “Transaction”) that provided funding to repay convertiblenotes previously issued by us that were scheduled to become due in July andAugust 2007.  In the Transaction, the Company transferred substantiallyall of the assets of the Company’s Liquidmetal Coatings division to a newlyformed, newly capitalized subsidiary named Liquidmetal Coatings, LLC, aDelaware limited liability company (“LMC”), and LMC assumed substantially allof the liabilities of the division.

 

LMC was capitalized through a $6,500 subordinated debt and equityinvestment by C3 Capital Partners (“C3”) and a $5,000 senior credit facilitywith Bank Midwest, N.A.  This debt and equity resulted in cash proceeds of$11,102 after related debt issuance costs of $398, which proceeds LMC used topurchase all of the assets and liabilities from the Company.  The Company incurred an additional $459 inissuance costs directly related to the debt issuance.  As a result, $857 was recorded as deferred debtissuance costs to be amortized over the life of the debt.  Interest expense for the amortization of debtissuance cost was $42 and $121 for the three and nine months ended September 30,2009, respectively.  Interest expense forthe amortization of debt issuance cost was $41 and $142 for the three and ninemonths ended September 30, 2008, respectively.

 

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

 

*MidwestDebt*

 

In connection with the Transaction, LMC entered into a Loan Agreement(the “Loan Agreement”), dated July 24, 2007, with Bank Midwest, N.A. (“Midwest”). Following the Transaction, the Loan Agreement has been amended to renew andmodify certain terms. The Loan Agreement, as amended, provides for total loanavailability of $5,350, consisting of a $4,000 term loan with an annualinterest rate of 8.48% and a revolving loan of up to $1,350 with a variableinterest equal to prime rate as published in the Wall Street Journal with aminimum interest rate of 6.5%.  Interestpayments are due monthly.  The term loanhas a maturity date of July 20, 2011.  The revolving loan has amaturity date of September 24, 2009, which was extended through June 

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

30, 2010 as of the filing of this report (see Note 13).  Borrowingavailability under the revolving loan is based in a percentage of LMC’seligible receivables and eligible inventory, and the initial advance under therevolving loan was $1,000 on July 24, 2007.

 

LMC’s obligations under the Loan Agreement are secured by a blanketsecurity interest in all of LMC’s assets and the Company’s equity interest inLMC, and pursuant to an intercreditor agreement between the C3 andMidwest.  Midwest’s security interest inthe assets is senior to C3’s security interest in the same assets.

 

LMC is required to make monthly principal payments under the term loanof: $63 during months 1 through 12, $83 during months 13 through 36, and $104during months 37 through 48.  All remaining principal is due and payableon July 20, 2011.  If the term loan is prepaid within the firsttwenty-four (24) months after July 24, 2007, LMC will pay a prepaymentpenalty of 1% of the outstanding principal balance, together with accruedinterest.  After the twenty-four month period has lapsed, LMC will havethe right to prepay the term loan without penalty.

 

As of September 30, 2009 and December 31, 2008, the grossoutstanding loan balance under the term loan totaled $1,979 and $2,729,respectively, and the gross outstanding loan balance under the revolving loantotaled $600 and $597, respectively. The loans are presented as long-term debtand short-term debt on the Company’s consolidated balance sheet,respectively.  Interest expense incurredunder the term loan and revolving loan totaled $54 and $177 for the three andnine months ended September 30, 2009, respectively.   Interest expense incurred under the termloan and revolving loan totaled $63 and $243 for the three and nine monthsended September 30, 2008, respectively.

 

Additionally, LMC entered into Promissory Notes, dated August 29,2007 and October 21, 2008 (the “Capital Loan”), with Midwest to provide for$45 and $105 to be used towards the purchase of a company truck and HVOF sprayequipment with annual interest 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 September 30, 2009 and December 31,2008, the gross outstanding loan balance under the Capital Loan totaled $109and $129, respectively, which is presented as long-term debt on the Company’sconsolidated balance sheet.  Interestexpense incurred under the Capital Loan totaled $2 and $7 for the three andnine months ended September 30, 2009, respectively.  Interest expense incurred under the CapitalLoan totaled $1 and $2 for the three and nine months ended September 30,2008, respectively.

 

*C3 Debt*

 

In the Transaction, LMC also entered into a Securities PurchaseAgreement, dated July 24, 2007 (the “Securities Purchase Agreement”), withC3 Capital Partners, L.P. (“C3”), C3 Capital Partners II, L.P. (“C3 II”,and with C3, the “C3 entities”), and Liquidmetal Coatings Solutions, LLC,a wholly owned subsidiary of LMC that will operate the thermal spray coatingsbusiness (“LMCS”).  Pursuant to the Securities Purchase Agreement, LMCissued to the C3 entities subordinated promissory notes in the aggregateprincipal amount of $6,500 (the “Subordinated Notes”). Under the SecuritiesPurchase Agreement, the C3 entities have the right, beginning on the July 24,2012 (or, if earlier, upon a default by LMC under the Subordinated Notes orSecurities Purchase Agreement) to require LMC to purchase the C3 entities’membership interests in LMC for a purchase price equal to their pro rataportion of the greater 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 have a maturity date of July 20, 2012 withno required principal payments before maturity other than upon specified triggeringevents, such as a change in control of LMC.  Interest accrues at an annualrate of 14%, with 12% interest being payable monthly beginning September 2007and the remaining 2% interest being payable at maturity.  In connectionwith the Securities Purchase Agreement and the Subordinated Notes, the Companyand LMC entered into pledge agreements with the C3 entities in which theCompany pledged its membership interest in LMC to secure the obligations underthe notes and LMC pledged its membership interests in LMCS to secure itsobligations under the notes.  LMC and LMCS also granted to C3 ablanket security interest in all of their assets to secure their obligationsunder the Subordinated Notes.

 

The gross outstanding loan balance including accrued interest payableupon maturity of the Subordinated Note totaled $6,791 and $6,690 as of September 30,2009 and December 31, 2008, respectively.  Interest expense incurredunder the Subordinated Notes totaled $203 and $606 for the three and ninemonths ended September 30, 2009, respectively.  Interest expense incurred under the SubordinatedNotes totaled $199 and $594 for the three and nine months ended September 30,2008, respectively.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

**7.         Stock Compensation Plan**

 

During the nine months ended September 30, 2009, under the Company’s2002 Non-employee Director Stock Option Plan which provides for the grant ofstock options to non-employee directors, the Company granted options topurchase 120,000 of the Company’s common shares for an average exercise priceof $0.21.  Further, all options grantedunder this plan had exercise prices that were equal to the fair market value onthe date of grant.

 

During the nine months ended September 30, 2009, under the Company’s2002 Equity Incentive Plan which provides for the grant of stock options toofficers, employees, consultants and directors of the Company its subsidiaries,the Company granted options to purchase 233,010 of the Company’s common sharesfor an average exercise price of $0.21.   Further, all options granted under this plan had exercise prices thatwere equal to the fair market value on the date of grant.

 

The Company cancelled701,308 options during the nine months ended September 30, 2009, forterminated employees and options expired.

 

**8.         Preferred Units of Subsidiary**

 

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

 

As of September 30, 2009, LMC has redeemed $236 of its preferredunits and distributed $290 in priority return to the preferred unit holders.  The total preferred units outstanding are$2,264 as of September 30, 2009.

 

**9.         Segment Reporting and GeographicInformation**

 

SFAS No. 131,*Disclosures about Segments of an Enterprise andRelated Information,*requires companies to provide certain informationabout their operating segments.  In April 2002,the Company began classifying operations into two reportable segments:Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used bycoal burning power plants.  BulkLiquidmetal alloys include market opportunities to manufacture and sell casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment.  Primarily, the expenses incurred by the bulkLiquidmetal alloy segment are research and development costs and 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 are includedin the bulk Liquidmetal alloy segment. The accounting policies of the reportable segments are the same as thosedescribed in Note 3 to the consolidated financial statements included in theCompany’s Form 10-K filed with the Securities and Exchange Commission on April 15,2009.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

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

 
| ** **                                 | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|--------------------------------------------|------------|--------------|------------|----------------|------------|--------------------|------------|
| Three months ended September 30, 2009 |       |         |       |           |       |               |       |
| Revenue to external customers              |       | $            | 2,041      |           | $          | 2,168              |       | $ | 4,209 |   |
| Gross profit                               |       | 693          |       | 607            |       | 1,300              |       |
| Total segment (loss) income                |       | (124         | )          | 156            |       | 32                 |       |
| Total identifiable assets at end of period |       | 2,534        |       | 9,137          |       | 11,671             |       |
|                                       |       |         |       |           |       |               |       |
| Three months ended September 30, 2008 |       |         |       |           |       |               |       |
| Revenue to external customers              |       | $            | 2,727      |           | $          | 2,314              |       | $ | 5,041 |   |
| Gross profit                               |       | 1,042        |       | 208            |       | 1,250              |       |
| Total segment income (loss)                |       | 300          |       | (289           | )          | 11                 |       |
| Total identifiable assets at end of period |       | 3,166        |       | 10,636         |       | 13,802             |       |
|                                       |       |         |       |           |       |               |       |
| Nine months ended September 30, 2009  |       |         |       |           |       |               |       |
| Revenue to external customers              |       | $            | 6,234      |           | $          | 5,086              |       | $ | 11,320 |   |
| Gross profit                               |       | 2,198        |       | 2,177          |       | 4,375              |       |
| Total segment (loss) income                |       | (271         | )          | 1,013          |       | 742                |       |
| Total identifiable assets at end of period |       | 2,534        |       | 9,137          |       | 11,671             |       |
|                                       |       |         |       |           |       |               |       |
| Nine months ended September 30, 2008  |       |         |       |           |       |               |       |
| Revenue to external customers              |       | $            | 9,025      |           | $          | 8,453              |       | $ | 17,478 |   |
| Gross profit                               |       | 3,124        |       | 1,029          |       | 4,153              |       |
| Total segment income (loss)                |       | 1,034        |       | (296           | )          | 738                |       |
| Total identifiable assets at end of period |       | 3,166        |       | 10,636         |       | 13,802             |       |

 

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

 
| ** **                                                                          | ** ** | **For the Three Months**     | ** ** | **For the Nine Months**      | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| ** **                                                                          | ** ** | **2009**                     | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                |       |                         |       |                         |       |   |   |   |   |
| Total segment income                                                                |       | $                            | 32         |                         | $          | 11 |   | $ | 742 |   | $ | 738 |   |
| General and administrative expenses, excluded                                       |       | (738                         | )          | (786                         | )          | (2,503 | ) | (2,796 | ) |
|                                                                                |       |                         |       |                         |       |   |   |   |   |
| Consolidated loss before interest, income taxes, and noncontrolling  interests      |       | $                            | (706       | )                            | $          | (775 | ) | $ | (1,761 | ) | $ | (2,058 | ) |
|                                                                                |       |                         |       |                         |       |   |   |   |   |
| Loss from extinguishment of debt                                                    |       | —                       |       | —                       |       | (1,471 | ) | — |   |
| Change in value of warrants, gain                                                   |       | 2,015                        |       | 989                          |       | 8,138 |   | 2,385 |   |
| Change in value of conversion feature, gain                                         |       | 474                          |       | 642                          |       | 1,434 |   | 2,104 |   |
| Interest expense                                                                    |       | (739                         | )          | (1,531                       | )          | (3,807 | ) | (4,271 | ) |
| Interest income                                                                     |       | —                       |       | —                       |       | — |   | 3 |   |
| Income taxes                                                                        |       | (75                          | )          | —                       |       | (120 | ) | — |   |
| Loss (income) attributable to noncontrolling interest                               |       | 39                           |       | (115                         | )          | 59 |   | (341 | ) |
| Consolidated net income (loss) attributable to Liquidmetal  Technologies, Inc. |       | $                            | 1,008      |                         | $          | (790 | ) | $ | 2,472 |   | $ | (2,178 | ) |

 

Included in bulkalloy segment income for the nine months ended September 30, 2008 is $247of other income and $17 of other expense. Excluded general and administrativeexpenses are attributable to the Company’s corporate headquarters.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

These expensesprimarily include corporate salaries, consulting, professional fees andfacility costs.  Research and developmentexpenses are included in the operating costs of the segment that performed theresearch and development.

 

Revenues from sales tocompanies in the United States were $1,983 and $3,038 during the three monthsended September 30, 2009 and 2008, respectively.  The revenue related to the United States ofAmerica was earned under defense-related research and development contracts,sales of coatings products, and sales of Liquidmetal bulk alloy products.

 

During the three monthsended September 30, 2009, the Company had revenue from sales to companiesoutside of the United States of $2,226 of which $1,404 represented sales tocompanies located in South Korea.  Duringthe three months ended September 30, 2008, the Company had revenues fromcompanies outside of the United States of $2,003 of which $131 representedsales to companies located in South Korea. The revenue related to sales to companies outside of the United Stateswas from bulk alloy products.

 

Long-lived assets includenet property, plant, and equipment, and net intangible assets. The Company hadlong-lived assets of $1,985 and $1,813 located in the United States at September 30,2009 and December 31, 2008, respectively. The Company had long-livedassets of $6,380 and $6,277 located in South Korea at September 30, 2009and December 31, 2008, respectively.

 

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

 
| ** **                                | ** ** | **September 30,** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **2009**               | ** ** |
|                                      |       |                   |       |
| Total segment assets                      |       | $                      | 11,671     |   |
| Cash and cash equivalents                 |       | 11                     |       |
| Prepaid expenses and other current assets |       | 194                    |       |
| Other property, plant and equipment       |       | 71                     |       |
| Intangibles, net                          |       | 1,226                  |       |
| Other assets                              |       | 459                    |       |
| Total consolidated assets                 |       | $                      | 13,632     |   |

 

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.

 

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

 

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

 

Optionsto purchase 7,627,484 shares of common stock at prices ranging from $0.09 to$15.00 per share were outstanding at September 30, 2009, but were notincluded in the computation of diluted EPS for the same period as the inclusionwould have been antidilutive.  Warrantsto purchase 55,428,242 shares of common stock with prices ranging from $0.50 to$1.55 per share outstanding at September 30, 2009, were not included inthe computation of diluted EPS for the same period as the inclusion would havebeen antidilutive. 12,500,000 shares of commonstock issuable upon conversion of the Company’s convertible notes withconversion prices of $0.60 per share outstanding at September 30, 2009were not included in the computation of diluted EPS for the same period becausethe inclusion would have been antidilutive. Additionally, 82,752,841 shares of common stock issuable upon conversionof the Company’s convertible preferred stocks with conversion prices rangingfrom $0.10 and $0.22 per share outstanding at September 30, 2009 were notincluded in the computation of diluted EPS for the same period because theinclusion would have been antidilutive.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

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 $2,015 and $8,138 for the three and nine months ended September 30,2009, respectively, and gains of $989 and $2,385 for the three and nine monthsended September 30, 2008, respectively. The fair value of warrantsoutstanding at September 30, 2009 of $4,981 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.70 to 3.24 years; (2) volatility of 174%, (3) risk free interest of0.40% to 1.45%, and dividend rate of 0%. The fair value of warrants outstanding at December 31, 2008 of $692was computed using the Black-Scholes model under the following assumptions: (1) expectedlife of 0.21 to 3.99 years; (2) volatility of 113%, (3) risk freeinterest of 0.11% to 1.55%, and dividend rate of 0%.

 

**11.      Commitments and Contingencies**

 

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

 

On June 26, 2006, theCompany entered into a joint venture agreement with SAGA, SpA in Padova, Italy,(“SAGA”) a specialist precision parts manufacturer.  The joint venture isnamed Liquidmetal SAGA Italy, Srl (“LSI”).  The Company also entered intoan exclusive manufacturing license agreement for the eyewear industry withLSI.  Under the joint venture agreement, the Company has option to buyownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006,the Company exercised the 19.9% interest in LSI and will have two years topurchase the additional interest at a nominal price. In January 2007and June 2007, the Company contributed additional $217 and $86,respectively, into LSI as additional investment.  The contribution did notchange the Company’s 19.9% interest in LSI. Under the licensing agreement, at any time following 18 months after theeffective date of the agreement, LSI may exercise its option to sell to theCompany certain business assets including manufacturing equipment acquiredunder the joint venture.  During 2008,2007 and 2006, the Company recognized revenues of $0, $103 and $702,respectively, of Liquidmetal alloys sold to LSI for use in the jointventure.   There were no alloys sold toLSI during the three and nine months ended September 30, 2009.

 

We have outstanding liens and judgments onour assets by various creditors for past-due trade payables totaling $1,114which are held by creditors in South Korea, as of September 30, 2009.  We are currently working to resolve thematter with each creditor****by seeking forbearance until we are ableto obtain funding to repay the amounts due, although there is no assurance thatwe will be able to obtain any such funding.  If we cannot repay the amounts due or obtain forbearance, the creditorsmay seek to foreclose on the Company’s assets. Such a foreclosure would have material adverse effect on our operations,financial condition, and results of operations.

 

**12.      Related Party Transactions**

 

Soo Buchanan, the sisterof John Kang, the Company’s Chairman, provides services to the Company as aconsultant.  During the three and nine monthsended September 30, 2009, the Company incurred $0 for her services as aconsultant.  During the three and ninemonths ended September 30, 2008, the Company incurred $10 and $70,respectively, for her services as a consultant. Additionally, Otis Buchanan,the husband of Ms. Buchanan, was employed by the Company and was paidaggregate compensation of approximately $27 and $82 during each of the threeand nine months ended September 30, 2009 and 2008, respectively.

 

John Kang, Chairman of theCompany, advanced the Company $250 during the three and nine months ended September 30,2009 to fund working capital needs.  TheCompany repaid $85 of the advance and has $165 outstanding as of September 30,2009, 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 6).

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

In May 2009, theCompany completed a transaction in which (i) the holders of our 8%Convertible Subordinated Notes exchanged such notes for a combination of new 8%Senior Secured Convertible Notes and shares of a new series of convertiblepreferred stock designated “Series A-2 Preferred Stock”, together withwarrants thereon, and (ii) certain investors purchased, for an aggregatepurchase price of $2,500, shares of a new series of convertible preferred stockdesignated as “Series A-1 Preferred Stock” (see Note 6).   Thelead investors in this transaction were Carlyle Liquid, LLC and CarlyleLiquid Holdings, LLC (the “Carlyle Entities”), which are two investorentities organized by Abdi Mahemedi and Jack Chitayat.  Mr. Mahemedi becamea director and greater-than-5% beneficial owner of our company by reason of theMay 2009 transaction, and Jack Chitayat is a former director of ourcompany who became a greater-than-5% beneficial owner of our company byreason of the May 2009 transaction.  Mr. Mahemedi 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, a director of our company, is a passive investor in the CarlyleEntities, and James Kang, a greater-than-5% beneficial owner of our company andthe brother of our Chairman John Kang, is also an indirect passiveinvestor in the Carlyle Entities.

 

The Company has anexclusive license agreement with LLPG, Inc. (“LLPG”), a corporation headedby Mr. Chitayat.  Under the terms ofthe agreement, LLPG has the right to commercialize Liquidmetal alloys,particularly precious-metal based compositions, in jewelry and high-end luxuryproduct markets.  The Company, in turn, will receive royalty payments overthe life of the contract on all Liquidmetal products produced and sold byLLPG.    The Company recognizedrevenues from product sales and licensing fees of $0 and $203 from LLPG duringthe three and nine months ended September 30, 2009 and $119 and $290 ofrevenues during the three and nine months ended September 30, 2008,respectively.  Approximately, $52 and $30is included in accounts receivables as of September 30, 2009 and December 31,2008, respectively, for outstanding trade receivables due from LLPG.

 

As of September 30,2009 and December 31, 2008, Ricardo Salas, the Company’s Executive VicePresident, held $0 and $381 of the convertible unsecured subordinated notes,respectively, and $259 of the unsecured subordinated notes for bothperiods.  Mr. Salas advanced theCompany $75 during the three and nine months ended September 30, 2009 tomeet working capital needs and are included in short-term debt.  The $75 advance accrues interest at an annualrate of 10%.

 

On June 1, 2007, theCompany entered into a transaction with Grace Metal (currently LiquidmetalKorea Co., Ltd. “LMK”), under which (i) LMK agreed to purchase variousequipments (including die casting machines and vacuum induction melters) usedin the Company’s bulk amorphous alloy business segment and (ii) theCompany granted LMK a 10-year exclusive license to manufacture products madefrom bulk Liquidmetal alloys for customers whose principal headquarters orwhose major operations are located in South Korea.  LMK was formed by an investor group thatincludes the former director and officer of the Company, James Kang, who isalso the brother of John Kang, Chairman of our 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.

 

In consideration of thelicense agreement with LMK, the Company will be entitled to royalty of 10% ofLMK’s net sales of licensed products (unless LMK’s margin on the products fallsbelow specified levels, in which case a new royalty will be negotiated in goodfaith).  Effective June 1, 2008, theroyalty rate was adjusted to 5%.  Theagreement provides that the Company may convert the license to a non-exclusivein the event that the net sales in the second year of the contract orthereafter are not sufficient to result in royalties of $500 or more peryear.  The agreement also provides thatLMK will be required to purchase all alloy feedstock from the Company, and theCompany will have the right to continue to manufacture Liquidmetal alloyproducts for South Korean customers until all purchased equipment has beencommissioned.

 

The Company purchasedproduction supplies and outsourced production of certain bulk alloy productionwith LMK. In June 2008, the Company began sharing the use of itsmanufacturing facility and production equipment in Pyongtaek, South Korea, withLMK as the Company began significant outsourcing of its bulk alloy partsproduction. The Company incurred expenses for purchase of production suppliesand outsourcing fees of $698 and $1,135 during the three and nine months ended September 30,2009, respectively, and $830 and $1,213 during the three and nine months ended September 30,2008,

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Nine Months EndedSeptember 30, 2009 and 2008**

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

**(unaudited)**

 

respectively.  Approximately, $29 and $0 is included inaccounts payable and accrued expenses as of September 30, 2009 and December 31,2008, respectively, for outstanding trade payables due to LMK.  The Company recognized revenue from sales ofraw materials and royalties for a total of $1,652 and $3,775 during the threeand nine months ended September 30, 2009, respectively, and $296 and$1,628 during the three and nine months ended September 30, 2008,respectively.  Approximately, $942 and$212 is included in accounts receivables as of September 30, 2009 and December 31,2008, respectively, for outstanding trade receivables due from LMK.

 

In November 2009, John Kang, the Company’sChairman, Tony Chung, the Company’s Chief Financial Officer, and Ricardo Salas,the Company’s Executive Vice President, acquired 100,000 shares of the Company’sSeries A-1 Preferred Stock and warrants to purchase 2,500,000 of commonstock held by Carlyle Liquid Holdings, LLC for an aggregate cash price of $500.  The Series A-1 Preferred Stock areconvertible into the Company’s common stock at a conversion price of $0.10 percommon share.  Further, the warrants areissuable into the Company common stock at an exercise price of $0.50 per shareand expire on October 30, 2014.

 

**13.      Subsequent Events**

 

OnOctober 6, 2009, Liquidmetal Coatings, LLC entered into an agreement withBank Midwest, N.A. to amend the terms of a senior credit facility andpromissory notes originally funded between July 2007 and October 2008(the “Loan Modification Amendment”).  TheLoan Modification Agreement adjusts, among other terms, the interest rate ofall outstanding loans to a fixed rate of 9%, certain financial covenants underthe term loan, maturity date of the revolving loan through June 30, 2010,and requires an immediate repayment of $325 of the term note and $325 of therevolving loan.  The members of theLiquidmetal Coatings, LLC (the “Members”) are required to contribute $1,000 inequity to repay the amounts due under the Loan Modification Amendment (the “CapitalCall”).  On October 6, 2009 theMembers contributed $650 to pay down the loans. As a result of the payment, the monthly amortization payments due underthe term loan were reduced to $47 and the maturity date was extended to September 30,2012.  Additionally, the Members arerequired to contribute an additional $350 on or before December 15, 2009to repay the term loan and revolving loan if certain financial convents are notmet.

 

Inconnection with the Loan Modification Agreement, the Company borrowed $450 fromC3 Capital Partners (“C3”) to contribute its share of the Capital Call pursuantto a bridge loan agreement with C3.  Thebridge loan was paid by the Company as of the filing of this report.

 

On October 30, 2009, theCompany entered into an agreement with Carlyle Liquid Holdings, LLC, to issue 180,000shares of convertible Series A-1 Preferred Stock for $900 of cash.  The Series A-1 Preferred Stock areconvertible into the Company’s common stock at a conversion price of $0.10 percommon share.  Further, the Companyissued warrants to purchase 4,500,000 shares of common stock at an exerciseprice of $0.50 per share with an expiration date of October 30, 2014.

 

OnNovember 1, 2009, the Company issued $378 of new 8% SeniorSecured Convertible Notes Due January 2011 (the “New Notes”). The New Notes were issued in satisfaction of accrued interest dueunder the original 8% Senior Secured Convertible Notes issued bythe Company in May 2009 (the “Original Notes”) The Original Notes and NewNotes all become due in January 2011.  The New Notes bear interest at8% per annum with interest payable semi annually in arrears and are subordinateto certain secured financing from commercial lenders incurred by us in thefuture.

 

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**Item 2.    Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*This management’s discussion andanalysis should be read in conjunction with the condensed consolidatedfinancial statements and notes included elsewhere in this report on Form 10-Q.*

 

*This management’s discussion andanalysis, as well as other sections of this report on Form 10-Q, maycontain “forward-looking statements” that involve risks and uncertainties,including statements regarding our plans, future events, objectives,expectations, forecasts, or assumptions. Any statement that is not a statementof historical fact is a forward-looking statement, and in some cases, wordssuch as “believe,” “estimate,” “ project,” “expect,” “intend,” “may,” “anticipate,”“plans,” “seeks,” and similar expressions identify forward-looking statements.These statements involve risks and uncertainties that could cause actualoutcomes and results to differ materially from the anticipated outcomes orresults, and undue reliance should not be placed on these statements. Theserisks and uncertainties include, but are not limited to, the matters discussedunder the caption “Factors Affecting Future Results” in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008 and other risks anduncertainties discussed in filings made with the Securities and ExchangeCommission (including risks described in subsequent reports on Form 10-Q, Form 10-K,Form 8-K, and other filings). Liquidmetal Technologies disclaims anyintention or obligation to update or revise any forward-looking statements,whether as a result of new information, future events, or otherwise.*

 

**Overview**

 

We are a materials technology company thatdevelops and commercializes products made from amorphous alloys.  Our Liquidmetal® family of alloys consists ofa variety of coatings, powders, bulk alloys, and composites that utilize theadvantages offered by amorphous alloy technology.  We develop, manufacture, and sell productsand components from bulk amorphous alloys that are incorporated into thefinished goods of our customers, and we also market and sell amorphous alloyindustrial coatings.  We also partnerwith third-party licensees and distributors to develop and commercialize Liquidmetalalloy products.  We have the exclusiveright to develop, manufacture, and sell what we believe are the onlycommercially 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 coatings applicationis the service provided for applying Liquidmetal products as a protectivecoating.  Bulk Liquidmetal alloy segmentrevenue includes sales of parts or components of electronic devices, medicalproducts, and sports and leisure goods, tooling and prototype parts (includingdemonstration parts and test samples) for customers with products indevelopment, product licensing and arrangements, and research and developmentrevenue relating primarily to defense and medical applications.  We expect that these sources of revenue willcontinue to significantly change the character of our revenue mix.

 

The cost of sales for our Liquidmetal coatingssegment consists primarily of the costs of outsourcing our manufacturing tothird parties. Consistent with our expectations, our cost of sales has beenincreasing over historical results as we further build our bulk Liquidmetalalloy business. Although we plan to continue outsourcing the manufacturing ofour coatings, we will internally manufacture many products derived from ourbulk Liquidmetal alloys.

 

Selling, general, and administrative expensescurrently consist primarily of salaries and related benefits, stock-based

 

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compensation, travel, consulting andprofessional fees, depreciation and amortization, insurance, office andadministrative expenses, and other expenses related to our operations.

 

Research and development expenses representsalaries, related benefits expense, depreciation of research equipment,consulting and contract services, expenses incurred for the design and testingof new processing methods, expenses for the development of sample and prototypeproducts, and other expenses related to the research and development ofLiquidmetal alloys. Costs associated with research and development activitiesare expensed as incurred. We plan to enhance our competitive position byimproving our existing technologies and developing advances in amorphous alloytechnologies. We believe that our research and development efforts will focuson the discovery of new alloy compositions, the development of improvedprocessing technology, and the identification of new applications for ouralloys.

 

On July 24, 2007, we transferredsubstantially all of the assets of our Liquidmetal alloy industrial coatingsbusiness to a newly formed, newly capitalized subsidiary named LiquidmetalCoatings, LLC, a Delaware limited liability company (“LMC”), and LMC assumedsubstantially all of the liabilities of the coatings business.   The transfer included the thermal spraycoatings assets and liabilities acquired under a purchase agreement with FosterWheeler Energy Services in June 2007. We hold a 69.25% ownership interest in LMC.  The results of operation of LMC areconsolidated and comprise our Liquidmetal alloy industrial coatings segment forfinancial reporting purposes.

 

The following discussion and analysis of ourfinancial condition and results of operations focuses on the historical resultsof our continuing operations.

 

**CriticalAccounting Policies and Estimates**

 

The preparation of condensed consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States requires us to make estimates and assumptionsthat affect reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  These estimates and assumptions are based onhistorical experience and various other factors that are believed to bereasonable under the circumstances. Actual results could differ materially from these estimates under differentassumptions or conditions.

 

We believe that thefollowing accounting policies are the most critical to our condensedconsolidated financial statements since these policies require significantjudgment or involve complex estimates that are important to the portrayal ofour financial condition and operating results:

 

·                  Exchange ratefluctuations 

·                  Warranty accrual

·                  Allowance fordoubtful accounts

·                  Inventories atlower of cost or net realizable value

·                  Deferred taxassets

·                  Valuation ofderivatives of warrants and embedded conversion features

 

Our Annual Report on Form 10-K for the year ended December 31,2008, contains further discussions on our critical accounting policies andestimates.

 

**Results of Operations**

 

Comparison of the threemonths ended September 30, 2009 and 2008

 

*Revenue.* Revenue decreased $0.8 million to $4.2million for the three months ended September 30, 2009 from$5.0 million for the three months ended September 30, 2008.  Thedecrease consisted of $0.7 million from the sales of our coating products as aresult decrease in demand in oil drilling applications, a decrease of $0.2million from our research and development contracts, which were offset by a$0.1 million increase in sales and prototyping of parts manufactured from bulkLiquidmetal alloys to consumer electronics customers as a result of increase indemand in electronic casings applications.

 

*Cost of Sales.* Cost of sales decreased to $2.9 million,or 69% of revenue, for the three months ended September 30, 2009 from$3.8 million, or 75% of revenue, for the three months ended September 30,2008.  The decrease was a result of a

 

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continued change in revenue mix during the three months ended September 30,2009. 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.

 

*Selling, General, and AdministrativeExpenses*.Selling, general, and administrative expenses decreased to $1.3 million,or 32% of revenue, for the three months ended September 30, 2009 from$1.4 million, or 28% of revenue, for the three months ended September 30,2008. The decrease was primarily a result of a decrease in salaries and relatedbenefits expense of $0.1 million.

 

*Research and Development Expenses*. Research and development expenses were$0.3 million, or 8% of revenue, for the three months ended September 30,2009 and $0.3 million, or 6% of revenue, for the three months ended September 30,2008.  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 in Value of Warrants. *Change in value of warrantsincreased to a gain of $2.0 million, or 48% of revenue, for the three monthsended September 30, 2009 from a gain of $1.0 million, or 20% of revenue,for the three months ended September 30, 2008.  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 in Value of ConversionFeature.*Change in the value of conversion feature liabilityfrom our convertible notes resulted in a gain of $0.5 million, or 11% ofrevenue, during the three months ended September 30, 2009 from a gain of$0.6 million, or 13% of revenue, for the three months ended September 30,2008, primarily as a result of fluctuations in our stock price.

 

*Interest Expense*. Interest expense was $1.1 million, or25% of revenue, for the three months ended September 30, 2009 and was $1.9million, or 37% of revenue, for the three months ended September 30, 2008.Interest expense consists primarily of debt discount amortization and interestaccrued on outstanding convertible and subordinated notes, borrowings under afactoring, loan, and security agreement, a revolving loan agreement, and theKookmin loan.  The decrease was due tocertain of our convertible and subordinated notes retired during the secondquarter of 2009.

 

Comparison of the ninemonths ended September 30, 2009 and 2008

 

*Revenue.* Revenue decreased $6.2 million to $11.3million for the nine months ended September 30, 2009 from$17.5 million for the nine months ended September 30, 2008.  Thedecrease consisted of $2.6 million decrease in sales and prototyping of partsmanufactured from bulk Liquidmetal alloys to consumer electronics customers asa result of decrease in demand in electronic casings applications, a decreaseof $2.8 million from the sales of our coating products as a result decrease indemand in oil drilling applications, and a decrease of $0.8 million from our researchand development contracts.

 

*Cost of Sales.* Cost of sales decreased to $6.9 million,or 61% of revenue, for the nine months ended September 30, 2009 from$13.3 million, or 76% of revenue, for the nine months ended September 30,2008.  The decrease was a result of a continued change in revenue mixduring the nine months ended September 30, 2009. The cost to manufactureparts from our bulk Liquidmetal alloys is variable and differs based on theunique design of each product.  However, the cost of sales for theproducts sold by the coatings business segment is generally consistent becausethe Liquidmetal coatings products are produced by third parties and soldwholesale to various industries.

 

*Selling, General, and AdministrativeExpenses*.Selling, general, and administrative expenses decreased to $4.3 million,or 38% of revenue, for the nine months ended September 30, 2009 from$4.6 million, or 26% of revenue, for the nine months ended September 30,2008. The decrease was primarily a result of decreases in salaries and relatedbenefits expenses of $0.2 million and professional services expenses of $0.2million.

 

*Research and Development Expenses*. Research and development expenses were$0.9 million, or 8% of revenue, for the nine months ended September 30,2009 and $0.8 million, or 5% of revenue for the nine months ended September 30,2008.  The increase was primarily aresult of an increase in salaries and related benefits expenses of $0.1million.  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.

 

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*Loss from Extinguishment ofDebt. *Loss from extinguishment ofdebt increased to $1.5 million, or 13% of revenue, for the nine months ended September 30,2009 from $0 for the nine months ended September 30, 2008.  The $1.5 million loss was recognized fromextinguishment of certain of our convertible and subordinated notes during thesecond quarter of 2009.

 

*Change in Value of Warrants. *Change in value of warrantsincreased to a gain of $8.1 million, or 72% of revenue, for the nine monthsended September 30, 2009 from a gain of $2.4 million, or 14% of revenue,for the nine months ended September 30, 2008.  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 in Value of ConversionFeature.*Change in the value of conversion feature liabilityfrom our convertible notes resulted in a gain of $1.4 million, or 13% ofrevenue, during the nine months ended September 30, 2009 from a gain of$2.1 million, or 12% of revenue, for the nine months ended September 30,2008, primarily as a result of fluctuations in our stock price.

 

*OtherExpense.* Other expense was $17 thousand for the ninemonths ended September 30, 2008 from costs of issuing shares of preferredunits of our subsidiary.   There was noother expense for the nine months ended September 30, 2009.

 

*OtherIncome.* Other income was $0.2 million, or 1% ofrevenue, for the nine months ended September 30, 2008 from write off ofaccounts payables.   There was no otherincome for the nine months ended September 30, 2009.

 

*Interest Expense*. Interest expense was $4.8 million, or42% of revenue, for the nine months ended September 30, 2009 and was $5.3million, or 30% of revenue, for the nine months ended September 30, 2008.Interest expense consists primarily of debt discount amortization and interestaccrued on outstanding convertible and subordinated notes, borrowings under afactoring, loan, and security agreement, a revolving loan agreement, and theKookmin loan.  The decrease was due to extinguishment of certain of our convertibleand subordinated notes during the second quarter of 2009.

 

*InterestIncome.* Interest income was $3 thousand for the ninemonths ended September 30, 2008 from interest earned on cashdeposits.  There was no interest incomefor the nine months ended September 30, 2009.

 

**Liquidityand Capital Resources**

 

Our cash used inoperating activities was $1.9 million for the nine months ended September 30,2009 and our cash provided by operating activities was $0.3 million for thenine months ended September 30, 2008.  Our working capital deficitdecreased from $20.8 million at December 31, 2008 to $13.4 million at September 30,2009.  The working capital deficit decrease of $7.4 million was primarilyattributable to an increase of accounts receivables of $0.1 million, increaseof inventories of $0.3 million, decrease of long-term debt, current portion,net of discounts of $12.8 million, offset by decrease of prepaid expenses andother current assts of $0.3 million, increase of accounts payable and accruedexpenses of $0.6 million, increase of warrant liabilities of $4.3 million, andincrease of conversion feature liabilities of $0.6 million.

 

Our cash used ininvesting activities was $0.7 million for the nine months ended September 30,2009 for the acquisition of property and equipment and investments in patentsand trademarks.

 

Ourcash provided by financing activities was $2.5 million for the nine monthsended September 30, 2009.  We paidnet $12.8 million in borrowings from a factoring agreement executed in April 2005,a revolving and term loan agreement executed in July 2007, and convertibleand subordinated notes, which were offset by $15.3 million proceeds fromissuance of convertible preferred stocks.

 

On May 1, 2009, we completed afinancing transaction (the “Transaction”) whereby aggregate cash of $2.5million and principal and accrued interest of $20.6 million due under thepreviously issued 8% Convertible Subordinated Notes due January 2010 (the “PriorNotes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7.5 million of new 8% Senior Secured Convertible SubordinatedNotes due January 2011 (the “Exchange Notes”). Of the $2.5 millionaggregate cash purchase price, approximately $0.1 million remains outstandingand is included prepaid expenses and other current assets in the condensedconsolidated balance sheet as of September 30, 2009.  The Transaction was consummated pursuant to aSecurities Purchase and Exchange Agreement, dated May 1, 2009 (the “Securities

 

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Purchase Agreement”), among theexchanging note holders and investors (collectively, the “Buyers”).  TheSecurities Purchase Agreement gives the Buyers option to subscribe for anadditional 1,000,000 shares of Series A-1 Preferred Stock at $5.00 pershare at any time prior to six months from the closing date (the “Series A-1Option”).

 

The Exchange Notes aredue January 3, 2011 and bear annual interest rate of 8% with interestpayable in October and April in cash or, at our company’s option, inthe form of additional notes (in which case the interest rate will be10%).  The preferred stocks accruecumulative dividends at an annual rate of 8%, which is payable semi-annually.Beginning on the second anniversary of the initial issuance, the dividend willincrease to 10%.  The dividends arepayable in cash or in kind by the issuance of the company of additionalpreferred stock, only when and as declared by our Board of Directors.

 

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

 

On October 30, 2009, weentered into an agreement with Carlyle Liquid Holdings, LLC, a Buyer in theTransaction, to issue 180,000 shares of convertible Series A-1 PreferredStock for $0.9 million of cash pursuant to the Series A-1 Option.  Further, we issued warrants to purchase 2,500,000shares of common stock at an exercise price of $0.50 per share with anexpiration date of October 30, 2014.

 

We anticipate thatwe will not have sufficient funds to pursue our current operating plan beyondthe fourth quarter of 2009 and we will therefore require additionalfunding.  Because we cannot be certain that we will be able to obtainadequate funding from debt, equity, or other traditional financing sources, weare also actively exploring several strategic financing options, including thepossible sale of our manufacturing plant in South Korea (which would then bereplaced with a smaller facility) and additional licensing and outsourcing ofour manufacturing operations.

 

Additionally, wehave approximately $0.3 million of principal and accrued interest outstandingas of September 30, 2009, under the 8% unsecured subordinated notes (the “BridgeNotes”), which were due August 17, 2007. We are working to repay theBridge Notes with our noteholder.

 

We have $0.4 million of outstanding loan as of September 30,2009 under a factoring, loan, and security agreement with a financingcompany.  In June 2009, we receiveda formal notice of default from the financing company for repayment of theoutstanding loan balance.  As of the filing of this report, we entered into a settlement agreementwith the financing company whereby the agreed to repay approximately $0.1million each month until the outstanding loans and accrued fees have beenrepaid.  The first $0.1 million monthlypayment was made in November 2009.

 

We have outstanding liens and judgments onour assets by various creditors for past-due trade payables totaling $1.1million, which are held by creditors in South Korea, as of September 30,2009.  We are currently working to resolvethe matter with each creditor****by seeking forbearance until we are ableto obtain funding to repay the amounts due, although there is no assurance thatwe will be able to obtain any such funding.  If we cannot repay the amounts due or obtain forbearance, the creditorsmay seek to foreclose on the Company’s assets. Such a foreclosure would have material adverse effect on our operations,financial condition, and results of operations.

 

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**ContractualObligations**

 

Thefollowing table summarizes the Company’s obligations and commitments as of September 30,2009:

 
| ** **                                    | ** ** | **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)                            |       | $                                         | 7,759      |   | $ | 259 |   | $ | 7,500 |   | $ | — |   | $ | — |   |
| Long-term debt of consolidated subsidiary (2) |       | 8,879                                     |       | 1,071 |   | 7,789 |   | 19 |   | — |   |
| Short-term debt (3)                           |       | 618                                       |       | 618 |   | — |   | — |   | — |   |
| Short-term debt of consolidated subsidiary    |       | 600                                       |       | 600 |   | — |   | — |   | — |   |
| Interest payments (4)                         |       | 3,725                                     |       | 1,698 |   | 2,026 |   | 1 |   | — |   |
| Operating leases and rents                    |       | 818                                       |       | 320 |   | 498 |   | — |   | — |   |
| Consulting services payable                   |       | 9                                         |       | 9 |   | — |   | — |   | — |   |
| Foster Wheeler                                |       | 90                                        |       | 90 |   | — |   | — |   | — |   |
| Dongyang                                      |       | 9                                         |       | 9 |   | — |   | — |   | — |   |
| Nichimen                                      |       | 315                                       |       | 315 |   | — |   | — |   | — |   |
| Totals (1)                                    |       | $                                         | 22,822     |   | $ | 4,989 |   | $ | 17,813 |   | $ | 20 |   | $ | — |   |

 

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(1) Contractual cashobligations include Long-term debt comprised of $259 of Unsecured SubordinatedNotes issued in 2006 and $7,500 of Convertible Notes issued in 2009; Long-termdebt of consolidated subsidiary comprised of $1,979 of Bank Midwest Term Loan,$6,791 of C3 Capital Partners Subordinated Notes, and $109 of Bank MidwestPromissory Notes; Short-term debt comprised of $378 outstanding advancesreceived under factoring, loan, and security agreement, $240 of cash advancesfrom John Kang, Chairman, and Ricardo Salas, Executive Vice President of ourcompany; Short-term debt of consolidated subsidiary comprised of $600 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) Does not includeaccrued and scheduled interest payments of $3,631; and un-amortized discountsfor conversion feature and warrants of $3,691 of our convertible notes.

(3) Does not includeminimum 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 12%.  Interest payments alsoinclude estimated interest on short-term debt and short-term debt of majorityowned subsidiary with annual interest rates between 8.48% to 11.5% withexpected maturity of approximately 1 year.

 

**Off Balance Sheet Arrangements**

 

Anoff-balance sheet arrangement is any transaction, agreement or othercontractual arrangement involving an unconsolidated entity under which acompany has (1) made guarantees, (2) a 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.

 

On June 26, 2006, we entered into a jointventure agreement with SAGA, SpA in Padova, Italy, (‘SAGA”) a specialistprecision parts manufacturer.  The joint venture is named Liquidmetal SAGAItaly, Srl (“LSI”).  We also entered into an exclusive manufacturinglicense agreement for the eyewear industry with LSI.  Under the jointventure agreement, we have the option to buy an ownership interest in LSI,initially, of 19.9% to up to 50%.  In December 2006, we purchased19.9% interest in the joint venture.  Under the licensing agreement, atany time following 18 months after the effective date of the agreement, LSI mayexercise its option to sell us certain business assets including manufacturingequipment acquired under the joint venture.  During the year ended December 31,2007, we recognized revenues of $0.7 million of Liquidmetal alloys sold to SAGAfor use in the joint venture.  During2008, 2007 and 2006, the Company recognized revenues of $0, $0.1 millionand $0.7 million,

 

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respectively, ofLiquidmetal alloys sold to LSI for use in the joint venture.  There were no alloys sold to LSI during thenine months ended September 30, 2009.

 

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

 

We are exposed to various market risks in conductingthe business of the Company, and we anticipate that this exposure will increaseas a result of our planned growth.  In aneffort to mitigate losses associated with these risks, we may at times enterinto derivative financial instruments, although we have not historically doneso.  These may take the form of forwardsales contracts, option contracts, foreign currency exchange contracts, andinterest rate swaps.  We have not, and donot intend to, engage in the practice of trading derivative securities forprofit.

 

*InterestRates.*  We are exposed to market risks relating tochanges in interest rates as our borrowings are subject to the volatility ofinterest rate risk.  Fluctuations ininterest rates may have a negative impact to any future borrowings.

 

*CommodityPrices. *We are exposed to price risk related to anticipatedpurchases of certain commodities used as raw materials by our businesses,including titanium and zirconium. Although we do not currently enter into commodity future, forward, andoption contracts to manage the fluctuations in prices of anticipated purchases,we may enter into such contacts in the future as our business grows and as ourpurchases of these raw materials increase.

 

*ForeignExchange Rates.*  As a result of our operation of amanufacturing facility in South Korea, a substantial portion of our costs willbe denominated in the South Korean won. Consequently, fluctuations in the exchange rates of the South Korean wonto the U.S. dollar will affect our costs of goods sold and operating marginsand could result in exchange losses. Although we do not currently enter into foreign exchange hedgetransactions, we may do so in the future as our business grows.

 

**Item4T — Controls and Procedures**

 

Evaluation ofDisclosure Controls and Procedures.   Based on an evaluation of theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Exchange Act) as of September 30, 2009, the end of the period coveredby this report, our Chief Executive Officer and Chief Financial Officer haveconcluded that the disclosure controls and procedures were effective.

 

Changes inInternal Controls.  Duringthe quarter ended September 30, 2009, there was no change in our internalcontrols over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II**

**OTHERINFORMATION**

 

**Item 1 —Legal Proceedings**

 

None.

 

**Item 1A — Risk Factors**

 

None.

 

**Item 3 - Defaults Upon SeniorSecurities**

 

We have $0.4 million of outstanding loan as of September 30,2009 under a factoring, loan, and security agreement with a financingcompany.  In June 2009, we receiveda formal notice of default from the financing company for repayment of theoutstanding loan balance.  As of the filing of this report, we entered into a settlement agreementwith the financing company whereby we agreed to repay approximately $0.1million each month until the outstanding loans and accrued fees have beenrepaid.  The first $0.1 million monthlypayment was made in November 2009.

 

**Item 4 — Submission of Matters toa Vote of Security Holders**

 

None.

 

**Item 5 — Other Information**

 

None.

 

**Item 6 — Exhibits**

 

The following documents are filed as an exhibit to this Report:

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                       |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                                      |
|        |       |                                                                                                                                                                             |
| 31.1        |       | Certification of the President and Chief Executive  Officer, Larry Buffington, as required by Section 302 of Sarbanes-Oxley  Act of 2002                                    |
|        |       |                                                                                                                                                                             |
| 31.2        |       | Certification of Principal Financial Officer, Tony  Chung, as required by Section 302 of Sarbanes-Oxley Act of 2002                                                         |
|        |       |                                                                                                                                                                             |
| 32.1        |       | Certification of Principal Executive Officer, Larry  Buffington, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of Sarbanes-Oxley Act of 2002 |
|        |       |                                                                                                                                                                             |
| 32.2        |       | Certification of Principal Financial Officer, 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 requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

 

 
|                               | LIQUIDMETAL TECHNOLOGIES, INC.               |
|------------------------------------|----------------------------------------------|
|                               | (Registrant)                                 |
|                               |                                         |
| Date: November 23,  2009 | /s/ Larry E. Buffington                 |
|                               | Larry E. Buffington                          |
|                               | President and Chief Executive Officer        |
|                               | (Principal Executive Officer)                |
|                               |                                         |
|                               |                                         |
| Date: November 23,  2009 | /s/ Tony Chung                          |
|                               | Tony Chung                                   |
|                               | Chief Financial Officer                      |
|                               | (Principal Financial and Accounting Officer) |

 

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