Table of Contents

 

 

 

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

**WASHINGTON, D.C. 20549**

 

### **FORM 10-Q**

 
| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March 31,2009**

 

**OR**

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

 

**For the transition period from         to        **

 

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

 

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**LIQUIDMETALTECHNOLOGIES, INC.**

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

 

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

 

**30452 Esperanza********Rancho Santa Margarita, CA 92688**

(address of principal executive office, zip code)

 

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

 

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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

 

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

 

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 May 8,2009, there were 44,825,402 shares of the registrant’s common stock, $0.001 parvalue, outstanding.

 

 

 

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**LIQUIDMETAL TECHNOLOGIES, INC.FORM 10-QFOR THE QUARTER ENDED****MARCH 31,2009**

 

**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 OF CONTENTS**

 
| **PART I - Financial  Information**                                                                  |   |
|-----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                      |   |
| Item 1 —  Financial Statements                                                                       | 4      |
| Condensed Consolidated  Balance Sheets (unaudited)                                                        | 4      |
| Condensed  Consolidated Statements of Operations and Comprehensive Loss (unaudited)                       | 5      |
| Condensed  Consolidated Statements of Shareholders’ Deficiency (unaudited)                           | 6      |
| Condensed  Consolidated Statements of Cash Flows (unaudited)                                              | 7      |
| Notes to Condensed Consolidated Financial Statements  (unaudited)                                         | 18     |
|                                                                                                      |   |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 22     |
|                                                                                                      |   |
| Item 3 — Quantitative and Qualitative Disclosures  about Market Risk                                 | 27     |
|                                                                                                      |   |
| Item 4T — Controls and Procedures                                                                    | 27     |
|                                                                                                      |   |
| **PART II  — Other Information**                                                                |   |
|                                                                                                      |   |
| Item  1 — Legal Proceedings                                                                          | 28     |
|                                                                                                      |   |
| Item 1A — Risk Factors                                                                               | 28     |
|                                                                                                      |   |
| Item 3 — Defaults Upon Senior Securities                                                             | 28     |
|                                                                                                      |   |
| Item  5 — Other Information                                                                          | 28     |
|                                                                                                      |   |
| Item 6 —  Exhibits                                                                                   | 29     |
|                                                                                                      |   |
| Signatures                                                                                                | 30     |
|                                                                                                      |   |
| Certifications                                                                                            | 31     |

 

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### **PART IFINANCIAL INFORMATION**

**Item 1 — Financial Statements**

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

** **
| ** **                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                              | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                              | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                              |       |               |       |                  |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Current assets:                                                                                                                                         |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                              |       | $                  | 157        |                  | $          | 157 |   |
| Trade accounts  receivables, net of allowance for doubtful accounts of $114 and $121                                                                    |       | 1,872              |       | 2,237                 |       |
| Inventories                                                                                                                                             |       | 996                |       | 820                   |       |
| Prepaid expenses  and other current assets                                                                                                              |       | 806                |       | 967                   |       |
| Total current  assets                                                                                                                                   |       | 3,831              |       | 4,181                 |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Property, plant  and equipment, net                                                                                                                     |       | 6,294              |       | 7,021                 |       |
| Other  intangibles, net                                                                                                                                 |       | 1,249              |       | 1,069                 |       |
| Investment in joint  venture                                                                                                                            |       | 306                |       | 306                   |       |
| Other assets                                                                                                                                            |       | 623                |       | 663                   |       |
| Total assets                                                                                                                                            |       | 12,303             |       | 13,240                |       |
|                                                                                                                                                    |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIENCY**                                                                                                      |       |               |       |                  |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                   |       |               |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                                  |       | 9,332              |       | 8,563                 |       |
| Deferred revenue                                                                                                                                        |       | 55                 |       | 40                    |       |
| Short-term debt                                                                                                                                         |       | 805                |       | 1,176                 |       |
| Long-term debt,  current portion, net of debt discounts of $5,936 and $7,128                                                                            |       | 16,796             |       | 14,172                |       |
| Warrant  liabilities                                                                                                                                    |       | 819                |       | 692                   |       |
| Conversion  feature liabilities                                                                                                                         |       | 139                |       | 147                   |       |
| Other  liabilities, current portion                                                                                                                     |       | 146                |       | 146                   |       |
| Total current liabilities                                                                                                                               |       | 28,092             |       | 24,936                |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Long-term debt                                                                                                                                          |       | 7,574              |       | 8,521                 |       |
| Other long-term  liabilities, net of current portion                                                                                                    |       | 121                |       | 163                   |       |
| Total  liabilities                                                                                                                                      |       | 35,787             |       | 33,620                |       |
|                                                                                                                                                    |       |               |       |                  |       |
| Shareholders’  deficiency:                                                                                                                         |       |               |       |                  |       |
| Liquidmetal  Technologies, Inc. shareholders’ deficiency                                                                                      |       |               |       |                  |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized and 44,825,402 issued and outstanding  at March 31, 2009 and December 31, 2008 |       | 45                 |       | 45                    |       |
| Additional  paid-in capital                                                                                                                             |       | 140,292            |       | 140,204               |       |
| Accumulated  deficit                                                                                                                                    |       | (165,117           | )          | (162,307              | )          |
| Accumulated  other comprehensive income                                                                                                                 |       | 614                |       | 1,027                 |       |
| Total  Liquidmetal Technologies, Inc. shareholders’ deficiency                                                                                |       | (24,166            | )          | (21,031               | )          |
| Noncontrolling  interest                                                                                                                                |       | 682                |       | 651                   |       |
| Total  shareholders’ deficiency                                                                                                                    |       | (23,484            | )          | (20,380               | )          |
|                                                                                                                                                    |       |               |       |                  |       |
| Total  liabilities and shareholders’ deficiency                                                                                                    |       | $                  | 12,303     |                  | $          | 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 LOSS**

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

**(unaudited)**

** **
| ** **                                               | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **March 31,**             | ** ** |
| ** **                                               | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| ** **                                               | ** ** | ** **                     | ** ** | **(restated)** | ** ** |
| ** **                                               | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Revenue                                                  |       | $                              | 3,592      |   | $ | 6,768 |   |
| Cost of sales                                            |       | 2,141                          |       | 4,901 |   |
|                                                     |       |                           |       |   |   |
| Gross profit                                             |       | 1,451                          |       | 1,867 |   |
|                                                     |       |                           |       |   |   |
| Operating  expenses                                      |       |                           |       |   |   |
| Selling,  general, and administrative                    |       | 1,588                          |       | 1,875 |   |
| Research and  development                                |       | 247                            |       | 258 |   |
| Total operating  expenses                                |       | 1,835                          |       | 2,133 |   |
| Loss from  operations                                    |       | (384                           | )          | (266 | ) |
|                                                     |       |                           |       |   |   |
| Change in value  of warrants, (loss) gain                |       | (126                           | )          | 106 |   |
| Change in value  of conversion feature, gain             |       | 30                             |       | 222 |   |
| Other expense                                            |       | —                         |       | (17 | ) |
| Interest expense                                         |       | (2,290                         | )          | (1,703 | ) |
| Interest income                                          |       | —                         |       | 2 |   |
|                                                     |       |                           |       |   |   |
| Net loss                                                 |       | (2,770                         | )          | (1,656 | ) |
|                                                     |       |                           |       |   |   |
| Net income  attributable to noncontrolling interest      |       | (31                            | )          | (160 | ) |
|                                                     |       |                           |       |   |   |
| Net loss  attributable to Liquidmetal Technologies, Inc. |       | (2,801                         | )          | (1,816 | ) |
|                                                     |       |                           |       |   |   |
| Other  comprehensive income (loss):                      |       |                           |       |   |   |
| Foreign exchange  translation loss                       |       | (413                           | )          | (460 | ) |
| Comprehensive  income loss                               |       | $                              | (3,214     | ) | $ | (2,276 | ) |
|                                                     |       |                           |       |   |   |
| Net loss per  share basic and diluted:                   |       |                           |       |   |   |
| Net loss  attributable to Liquidmetal Technologies, Inc. |       | $                              | (0.06      | ) | $ | (0.04 | ) |
|                                                     |       |                           |       |   |   |
| Number of  weighted average shares - basic and diluted   |       | 44,825                         |       | 44,726 |   |

 

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

 

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

**CONDENSED CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ DEFICIENCY**

###### **For the Three Months Ended March 31, 2009**

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

**(unaudited)**

 
| ** **                                   | ** ** | **Liquidmetal Technologies, Inc. Shareholders** | ** ** | ** **        | ** ** | ** **                        | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-------------------|------------|-----------------------------------|------------|
| ** **                                   | ** ** | **Common  Shares**                                   | ** ** | **Common  Stock** | ** ** | **Additional   Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Compre-  hensive  Income (loss)** | ** ** | **Non-  controlling  Interest** | ** ** | **Total** | ** ** |
| **Balance,  December 31, 2008**         |       | 44,825,402                                           |       | $                 | 45         |                              | $          | 140,204 |   | $ | (162,307 | ) | $ | 1,027 |   | 651 |   | $ | (20,380 | ) |
| Stock-based  compensation                    |       | —                                               |       | —            |       | 88                                |       | — |   | — |   | — |   | 88 |   |
| Foreign exchange  translation loss           |       | —                                               |       | —            |       | —                            |       | — |   | (413 | ) | — |   | (413 | ) |
| Cash  distribution to preferred unit holders |       | —                                               |       | —            |       | —                            |       | (9 | ) | — |   | — |   | (9 | ) |
| Net loss                                     |       | —                                               |       | —            |       | —                            |       | (2,801 | ) | — |   | 31 |   | (2,770 | ) |
| **Balance,  March 31, 2009**            |       | 44,825,402                                           |       | $                 | 45         |                              | $          | 140,292 |   | $ | (165,117 | ) | $ | 614 |   | $ | 682 |   | $ | (23,484 | ) |
|                                              |            |                                                      |            |                   |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

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

 

### **CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

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

**(unaudited)**

 
| ** **                                                                                              | ** ** | **For the  Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| ** **                                                                                              | ** ** | ** **                                      | ** ** | **(restated)** | ** ** |
| **Operating  activities:**                                                                              | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Net loss attributable  to Liquidmetal Technologies, Inc.                                                |       | $                                               | (2,801     | ) | $ | (1,816 | ) |
|                                                                                                    |       |                                            |       |   |   |
| Adjustments to  reconcile loss from operations to net cash provided by (used in) operating  activities: |       |                                            |       |   |   |
| Gain on disposal  of asset                                                                              |       | —                                          |       | 21 |   |
| Income  attributable to noncontrolling interest of consolidated subsidiary                              |       | 31                                              |       | 160 |   |
| Depreciation and  amortization                                                                          |       | 232                                             |       | 381 |   |
| Amortization of  debt discount                                                                          |       | 1,364                                           |       | 760 |   |
| Stock-based compensation                                                                                |       | 88                                              |       | 168 |   |
| Bad debt  recovery                                                                                      |       | (4                                              | )          | (15 | ) |
| Warranty  recovery                                                                                      |       | (57                                             | )          | (11 | ) |
| Loss (gain) from  change in value of warrants                                                           |       | 126                                             |       | (106 | ) |
| Gain from change  in value of conversion feature                                                        |       | (30                                             | )          | (222 | ) |
|                                                                                                    |       |                                            |       |   |   |
| Changes in  operating assets and liabilities:                                                           |       |                                            |       |   |   |
| Trade accounts  receivable                                                                              |       | 369                                             |       | 727 |   |
| Inventories                                                                                             |       | (177                                            | )          | 462 |   |
| Prepaid expenses  and other current assets                                                              |       | 162                                             |       | 323 |   |
| Other assets                                                                                            |       | (110                                            | )          | (17 | ) |
| Accounts payable  and accrued expenses                                                                  |       | 826                                             |       | 109 |   |
| Deferred revenue                                                                                        |       | 15                                              |       | (72 | ) |
| Other  liabilities                                                                                      |       | (42                                             | )          | (366 | ) |
| Net cash (used  in) provided by operating activities                                                    |       | (8                                              | )          | 486 |   |
|                                                                                                    |       |                                            |       |   |   |
| **Investing  Activities:**                                                                              |       |                                            |       |   |   |
| Purchases of  property and equipment                                                                    |       | (47                                             | )          | (100 | ) |
| Proceeds from  the sale of property and equipment                                                       |       | —                                          |       | (17 | ) |
| Investment in  patents and trademarks                                                                   |       | (212                                            | )          | (14 | ) |
| Net cash used in  investing activities                                                                  |       | (259                                            | )          | (131 | ) |
|                                                                                                    |       |                                            |       |   |   |
| **Financing  Activities:**                                                                              |       |                                            |       |   |   |
| Proceeds from  borrowings                                                                               |       | 2,932                                           |       | 4,712 |   |
| Repayment of  borrowings                                                                                |       | (2,804                                          | )          | (7,111 | ) |
| Proceeds from  issuance of preferred units of subsidiary                                                |       | —                                          |       | 2,500 |   |
| Redemption of  preferred units of subsidiary                                                            |       | —                                          |       | (171 | ) |
| Cash  distributions                                                                                     |       | (9                                              | )          | (936 | ) |
| Net cash  provided by (used in) financing activities                                                    |       | 119                                             |       | (1,006 | ) |
| Effect of  foreign exchange translation                                                                 |       | 148                                             |       | (295 | ) |
| Net decrease in  cash and cash equivalents                                                              |       | —                                          |       | (946 | ) |
|                                                                                                    |       |                                            |       |   |   |
| Cash and cash  equivalents at beginning of period                                                       |       | 157                                             |       | 1,180 |   |
| Cash and cash  equivalents at end of period                                                             |       | $                                               | 157        |   | $ | 234 |   |
|                                                                                                    |       |                                            |       |   |   |
| Supplemental  cash flow information                                                                     |       |                                            |       |   |   |
| Interest paid                                                                                           |       | $                                               | 281        |   | $ | 906 |   |
| Taxes paid                                                                                              |       | $                                               | —     |   | $ | — |   |
|                                                                                                         |            |                                                 |            |  |  |  |  |  |

 

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

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

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

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“generallyaccepted accounting principles”) for interim financial information and with theinstructions to Form 10-Q. Accordingly, they do not include all of the information and notesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring accruals)considered necessary for a fair presentation have been included.  All intercompany balances and transactionshave been eliminated.  Operating resultsfor the three months ended March 31, 2009 are not necessarily indicativeof the results that may be expected for any future periods or the year ending December 31,2009.  The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withthe Company’s Form 10-K filed with the Securities and Exchange Commissionon April 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.

 

InJuly 2007, the Company transferred substantially all of the assets of itsLiquidmetal alloy industrial coatings business to a newly formed, newlycapitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limitedliability company (“LMC”), and LMC assumed substantially all of the assets andliabilities of the coatings business. The transfer included the thermal spray coatings assets and liabilitiesacquired under a purchase agreement with Foster Wheeler Energy Services in June 2007. The Company holds a 69.25% ownership interest in LMC.  The results of operation of LMC areconsolidated and comprise our Liquidmetal alloy industrial coatings segment forfinancial reporting purposes.

 

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

 

Translationof Foreign Currency

 

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

 

Reclassifications

 

Certain amounts fromprior year have been reclassified to conform to current year’s presentation.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

RecentAccounting Pronouncements

 

In December 2007,the FASB issued SFAS No. 160, Noncontrolling Interests in ConsolidatedFinancial Statements, an amendment of ARB No. 51 (“SFAS 160”). Thisstatement establishes accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. Minorityinterests will be recharacterized as noncontrolling interests and classified asa component of shareholders’ equity separate from the parent’s equity. Inaddition, SFAS 160 establishes reporting requirements that provide sufficientdisclosures that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners. This statement iseffective prospectively, except for certain retrospective disclosurerequirements, for fiscal years beginning after December 15, 2008.Accordingly, the Company will adopt SFAS 160 in 2009. The Company has adoptedSFAS 160 as of January 1, 2009.

 

In April 2008, theFASB issued FASB Staff Position No. 142-3, “Determination of the UsefulLife of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of 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 is currently evaluating the potential impact of FSP 142-3 onits consolidated financial statements.

 

In May 2008, theFASB issued FASB Staff Position No. APB 14-1, “Accountingfor Convertible Debt Instruments That May Be Settled in Cash uponConversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) whichclarifies that convertible debt instruments that may be settled in cash orother assets upon conversion are not addressed by APB No. 14, “Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants.”Additionally, FSP APB 14-1 requires an entity to separately account for theliability and equity components of a convertible instrument to reflect anentity’s nonconvertible debt borrowing rate when interest cost is recognized insubsequent periods. FSP APB 14-1 also expands the disclosure requirementsregarding convertible debt instrument terms and how the instrument is reflectedin an entity’s financial statements. FSP APB 14-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years. The Company is currently evaluatingthe potential impact of FSP APB14-1 on its consolidated financial statements.

 

In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles” (“SFAS 162”). SFAS 162 is intended to improvefinancial reporting by identifying a consistent framework, or hierarchy, forselecting accounting principles to be used in preparing financial statementsthat are presented in conformity with U.S. generally accepted accountingprinciples for nongovernmental entities. SFAS 162 will become effective60 days following the SEC’s approval of the Public Company AccountingOversight Board Auditing amendments to AU Section 411, “The Meaning ofPresent Fairly in Conformity with Generally Accepted Accounting Principles.”The Company is currently evaluating the impact of SFAS 162.

 

In April 2009, theFASB issued FASB Staff Position No. 141(R)-1, “Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination That Arise fromContingencies” (“FSP 141(R)-1”), which amends SFAS No. 141 (Revised 2007),“Business Combinations” (“SFAS 141(R)”). FSP 141(R)-1 applies to all assetsacquired and liabilities assumed in a business combination that arise fromcontingencies that would be within the scope of SFAS No. 5, Accounting forContingencies, if not acquired or assumed in a business combination, except forassets or liabilities arising from contingencies that are subject to specificguidance in SFAS 141(R). The provisions of FSP 141(R)-1 that amend SFAS 141(R) areeffective for the first annual reporting period beginning on or after December 15,2008. The Company adopted FSP 141(R)-1 on January 1, 2009, and the impactof this guidance will depend upon the nature, terms, and size of theacquisitions we consummate.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

In April 2009, theFASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which amendsSFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,and SFAS No. 124, Accounting for Certain Investments Held byNot-for-Profit Organizations. This FSP amends the other-than-temporary guidancein U.S. GAAP for debt securities to make the guidance more operational and toimprove the presentation and disclosure of other-than-temporary impairments ondebt and equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 thatamend SFAS 115 and SFAS 124 are effective for interim and annual reportingperiods ending after June 15, 2009. The implementation of this FSP is notexpected to affect the Company’s consolidated results of operations orfinancial condition.

 

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

 

**3.         Liquidity**

 

The Company hasexperienced losses from continuing operations during the last three fiscalyears and has an accumulated deficit of $165,117 as of March 31,2009.  Cash used in operations for the three months ended March 31,2009 was $8; and cash flow from operations will likely be negative throughoutfiscal year 2009.  As of March 31, 2009, the Company’s principal sourcesof liquidity are $157 of cash and $1,872 of trade accounts receivable. Such conditions raise substantial doubt that the Company will be able tocontinue as a going concern.  These operating results occurred while theCompany was developing and continues to develop, commercialize, and manufactureproducts from an entirely new and unique technology.  These factors haveplaced a significant strain on the financial resources of the Company. The ability of the Company to overcome these challenges depends on its abilityto correct its production inefficiencies, reduce its operating costs, generatehigher revenue, achieve positive cash flow from continuing operations andcontinued sources of debt and equity financing.  The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of these uncertainties.

 

On May 1, 2009, the Company completed a financing transaction (the “Transaction”)whereby aggregate cash of $2,500 and principal and accrued interest of $20,625due under the previously issued 8% Convertible Subordinated Notes due January 2010(the “Prior Notes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7,500 of new 8% Senior Secured Convertible Subordinated Notesdue January 2011 (the “Exchange Notes”). The Transaction was consummatedpursuant to a Securities Purchase and Exchange Agreement, dated May 1,2009 (the “Securities Purchase Agreement”), among the exchanging note holdersand investors (collectively, the “Buyers”).  The Securities PurchaseAgreement gives the Buyers option to subscribe for an additional 1,000,000shares of Series A-1 Preferred Stock at $5.00 per share at any time priorto six months from the closing date (the “Series A-1 Option”). (See Note13)

 

The Companyanticipates that it will not have sufficient funds to pursue its currentoperating plan beyond the second quarter of 2009 and will therefore requireadditional funding.  There is no assurance that the Series A-1 Option willbe exercised to obtain any such funding.  Because the Company cannot becertain that it will be able to obtain adequate funding from debt, equity, orother traditional financing sources, it is also actively pursuing severalstrategic financing options, including the intent to sell its manufacturingplant in South Korea (which would then be replaced with a smaller facility) andadditional licensing and outsourcing of our manufacturing operations.

 

Additionally, we haveapproximately $1,230 of principal and accrued interest outstanding as of March 31,2009, under the 8% unsecured subordinated notes (the “Bridge Notes”), whichwere due August 17, 2007. As of the filing of this report, the Company hasreached an agreement to retire $928 of the principal and interest due under theBridge Notes in exchange for $375 in cash.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

Approximately $174 ofprincipal and accrued interest became due from our Korean subsidiary under aloan from Kookmin Bank of South Korea in August 2008.  However, as of the filing of this report we didnot repay the loan and we have received a formal notice of default.  Kookmin Bank has initiated foreclosureproceedings on the loan collateral, which consists of our manufacturing plantfacility and certain equipment in South Korea. However, we are currently working to resolve this matter with KookminBank by seeking a forbearance until we are able to restructure or obtainfunding to repay this loan.

 

Wehave outstanding liens and judgments on our assets by various creditors forpast-due trade payables totaling $1,315 of which $1,084 is held by creditors inSouth Korea, as of March 31, 2009. We are currently working to resolve the matter with each creditor****by seeking forbearance until we areable to obtain funding to repay the amounts due, although there is no assurancethat we will be able to obtain any such funding.   If we cannot repay the amounts due or obtainforbearance, the creditors may seek to foreclose on the Company’s assets.  Such a foreclosure would have materialadverse effect on our operations, financial condition, and results ofoperations.

 

**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 of thefollowing:

** **
| ** **         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **         | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| ** **         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Raw materials      |       | $                  | 270        |                  | $          | 426 |   |
| Work in process    |       | 174                |       | 184                   |       |
| Finished goods     |       | 552                |       | 210                   |       |
| Total  inventories |       | $                  | 996        |                  | $          | 820 |   |

 

**5.   Product Warranty**

 

Managementestimates product warranties as a percentage of certain bulk alloy productsales earned during the period.  As of March 31,2009, 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 March 31, 2009 theCompany used 1% of coatings applications sales as estimates of warranties to beclaimed.

 

During the threemonths ended March 31, 2009, the Company recorded $57 and $11 of net gainon warranty, respectively. The warranty accrual balance is included in accountspayable and accrued expenses.

 

**6.  Notes Payable**

 

Unsecured Subordinated Notes

 

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

 

During 2007 and 2008, the Company retired$1,925 and $1,650 of the August 2007 Subordinated Notes, respectively.

 

As of March 31, 2009 and December 31,2008, the Company’s gross outstanding loan balance of the August 2007Subordinated Notes totaled $1,009, and is included in current portion oflong-term debt.  As of the filingof this report, the Company has reached an agreement to retire $750 principaldue under the August 2007 Subordinated Notes as well as accrued interest inexchange for $375 in cash.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

As of March 31, 2009, the effectiveinterest rate for the August 2007 Subordinated Notes was 8%.

 

As part of the issuance of the August 2007Subordinated Notes in 2006, the Company issued warrants to the purchasers ofthe notes and placement agents giving them right to purchase up to an aggregateof 972,964 shares of the Company’s common stock.  The warrants had an original exercise priceof $2.58 per share, which is subject to price adjustment for anti-dilutionpurposes.  In October 2007, theCompany reduced the exercise price of warrants to $1.75 and increased theoutstanding warrants with certain holders of the August 2007Subordinated Notes by 30% for an extension of the maturity of the August 2007Subordinated Notes.   As of March 31,2009, the exercise price of the warrants was reduced to $1.72 and $2.07 pershare and total amount of warrants was increased to 1,313,380.  The warrants will expire on May 17,2011.

 

Secured Convertible Subordinated Notes

 

On January 3, 2007, the Company completeda private placement of 8% Convertible Subordinated Notes due January 2010(the “January 2010 Notes”).  Under the private placement, as amended,the Company issued $16,300 in principal amount of January 2010Notes.  The January 2010 Notes were issued for aggregate cash in theamount of $12,850, in payment of a total of $3,377 in principal and accrued butunpaid interest under our previously issued 7% Senior Secured Convertible notesdue August 2007 (“August 2007 Notes”) and our 8% UnsecuredSubordinated notes (the “August 2007 Subordinated Notes”), and $73 cashdiscount.   The January 2010 Notes weresubordinate to certain secured financing from commercial lenders thereafterincurred by the Company.

 

The payment of the previously issued notes wastreated as an extinguishment of the debt in accordance with Emerging IssuesTask Force No. 96-19, “Debtors Accounting for a Modification or Exchangeof Debt Instruments.”  The placement resulted in a $648 loss fromextinguishment of debt, which consisted of write down of $64 of deferred issuecosts, $733 of debt discount, and decrease of $149 in conversion featureliability as a result of the change in carrying value of exchanged notes.

 

The January 2010 Notes were originallyconvertible into the Company’s common stock at $1.55 per share.  As a partof the private placement, the Company issued warrants to the purchasers of thenotes giving them the right to purchase up to an aggregate of 5,257,921 sharesof our common stock at an exercise price of $1.93 per share. In connection withthe private placement, the Company also issued to the placement agent for thetransaction warrants to purchase an aggregate of 248,710 shares of our commonstock at an exercise price of $1.55 per share.  The warrants will expireon January 3, 2012 and are subject to exercise price adjustment foranti-dilution purposes.

 

In April 2007, the Company entered into anamendment to the Securities Purchase Agreement, dated January 3, 2007,between the Company and the purchasers of the January 2010 Notes (“April 2007Amendment”) providing that the Company will have until October 1, 2007 torepay approximately $15,461 of the Company’s outstanding debt under previouslyissued promissory notes, including the August 2007 Subordinated Notes (“DebtSatisfaction Covenant”).  The Company hasnot fully repaid $1,009 principal due under the August 2007 SubordinatedNotes as of March 31, 2009.  As ofthe filing of this report, the Company has reached an agreement to retire $750principal due under the August 2007 Subordinated Notes as well asaccrued interest in exchange for $375 in cash and has retired the January 2010 Notes(see Note 13).

 

The April 2007 Amendment also finalizedthe schedule of investors in the Private Placement to show a total of $16,300in principal amount of Notes; decreased the conversion price of the January 2010Notes to $1.10, decreased the warrant exercise price for the warrants issued to$1.55, increased the number of shares subject to such warrants issued to equal7,657,591, and the purchasers of the Notes consented to the Company granting asecurity interest in its South Korean manufacturing plant to purchasers ofconvertible notes in a subsequent offering, provided a  pari passu security interest is granted to the purchasers of the January 2010 Notes.

 

On December 28, 2007, the Company issued$1,000 of January 2010 Notes, together with warrants to purchase up to anaggregate of 909,091 and 200,000 of the Company’s common stock to purchasers ofthe notes and placement agents.  Thewarrants will expire on December 28, 2012 and are subject to exerciseprice adjustment for anti-dilution purposes.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

In December 2007, the Company entered intoagreements with two holders of the January 2010 Notes and LiquidmetalKorea Co., Ltd. (“LMK”), formerly Grace Metal, a South Korean company formed byinvestor groups including our former Founder and director, James Kang, and thetwo holders, whereby LMK would assume the liabilities due under the January 2010Notes, including principal, interest, and fees due to the two holders totaling$434.  In connection with the assumptionof the liabilities by LMK, warrants to purchase 179,620 shares of our commonstock held by the holders were cancelled.

 

The January 2010 Notes bear interest at 8%per annum with interest payable quarterly in arrears in cash, or, at ouroption, in the form of additional January 2010 Notes (in which case theinterest rate will be 10% per annum). The ability to pay interest with additionalJanuary 2010 Notes is subject to specified conditions, including theexistence of an effective registration statement covering the resale of theshares issued in payment of interest and certain minimum trading volumes in thestock to be issued. From and after an event of default under the January 2010Notes and for so long as the event of default is continuing, the January 2010Notes will bear default interest at a rate of 12% per annum (or 15% per annumif we elect to pay interest with additional January 2010 Notes).  During 2007, the Company issued $971 ofadditional January 2010 Notes for accrued interest and late registrationfees.  During 2008 and 2009, the Companyissued $1,315 and $723 of additional January 2010 Notes for accruedinterest, respectively.

 

The Company was required, beginning September 30,2008 and at the end of each month thereafter, to redeem 1/32nd of the principalamount of the January 2010 Notes in cash or, at the Company’s election,with shares of our common stock pursuant to an agreement with the majority ofthe January 2010 Note holders. An aggregate payment equal to $583 was dueon September 30, 2008.  However, the Company did not have sufficientfunds to make this payment, and, accordingly, the Company is in default underthe January 2010 Notes.  The holdersof the January 2010 Notes are entitled to accelerate all principal andinterest under the January 2010 Notes.  As a result, the outstandingprincipal due under the January 2010 Notes of $19,836 is included incurrent portion of long-term debt as of March 31, 2009. As of the filingof this report, the Company has retired the January 2010 Notes (see Note13).

 

In connection with the January 2007private placement, the Company entered into a Registration Rights Agreementwith the purchasers of the January 2010 Notes under which the Company issubject to monetary penalties up to a maximum amount of 18% of the aggregateamount of Notes sold in the Private Placement if the registration statement isnot filed or does not become effective on a timely basis. The monetarypenalties will accrue at the rate of 1% per month of the then-outstandingprincipal amount of the January 2010 Notes. As of March 31, 2009, anaggregate of $698 in monetary penalties under the Registration Rights Agreementhad already been paid to investors in the form of additional notes, while anadditional $256 in such penalties was accrued but unpaid.

 

Pursuant to Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock,” EITF 00-27, “Applicationof Issue No. 98-5 to Certain Convertible Instruments,” and EITF 05-2 “TheMeaning of ‘Conventional Convertible Debt Instrument’ in EITF Issue No. 00-19,”the original fair value of the embedded conversion feature of $6,205 have beenrecorded as conversion feature liability as the debt is considerednonconventional convertible debt. The original fair value was computed usingthe Black-Scholes model under the following assumptions: (1) expected lifeof 1.6 to 3 years; (2) volatility of 55%; (3) risk free interest of4.69% to 4.76% and dividend rate of 0%.  The original fair value of theadditional embedded conversion feature of $1,005 resulting from reducedconversion price under the amended Securities Purchase Agreement, have beenrecorded as conversion feature liability. The value was computed using theBlack-Scholes model under the following assumptions: (1) expected life of1.3 to 2.7 years; (2) volatility of 55%; (3) risk free interest of4.6% to 4.9% and dividend rate of 0%.  In addition, the Company isrequired to report a value of the conversion liability as a fair value andrecord the fluctuation to the fair value of the conversion feature liability tocurrent operations.

 

The change in the fair value of the conversionfeature liability resulted in gains of $30 and $222 for three months ended March 31,2009 and 2008, respectively.  The fair valueof conversion feature outstanding at March 31, 2009 and December 31,2008 was $139 and $147, respectively.  The fair value conversion feature outstanding at March 31, 2009 wascomputed using the Black-Scholes model under the following assumptions: (1) expectedlife of 0 to 0.76 years; (2) volatility of 145%, (3) risk freeinterest of 0.17% to 0.57% and dividend rate of 0%.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the original fair values of the warrants of $3,964 have been recordedas warrant liability, which was computed using the Black-Scholes pricing modelunder the following assumptions: (1) expected life of 5 years; (2) volatilityof 55%; (3) risk free interest of 4.68% and (4) dividend rate of0%.  The original fair values of the warrants of $608 from the additionalwarrants issued under the amended Securities Purchase Agreement, have beenrecorded as additional warrant liability, which was computed using theBlack-Scholes pricing model under the following assumptions: (1) expectedlife of 4.70 years; (2) volatility of 50%; (3) risk free interest of4.51% and (4) dividend rate of 0%.

 

The original fair value of the embeddedconversion feature of $7,210 was recorded as discounts of the convertiblenote.  The original fair value of the 7,408,881 warrants issued toinvestors of $4,372, the original fair value of 248,710 warrants issued toPlacement Agents of $200, and $73 cash discount were recorded as discounts ofthe convertible note.  In addition, $2,069 direct costs incurred relatingto issuance of the convertible note was recorded as debt issuance cost in otherassets.

 

The Company’s gross outstanding loan balance ofthe January 2010 Notes totaled $19,836 and $19,113 as of March 31,2009 and December 31, 2008, respectively.  As of March 31, 2009and December 31, 2008, un-amortized discounts for conversion feature,warrants, and cash discount totaled $5,936 and $7,128, respectively, and otherasset debt issuance costs totaled $543 and $655, respectively.  Interestexpense for the amortization of debt issuance cost and discount on note was$1,326 and $711 for the three months ended March 31, 2009 and 2008,respectively.  The effective interest rate of the January 2010 Noteswas 65% as of March 31, 2009.

 

Factoring Agreement

 

The Company entered into a Factoring, Loan, and SecurityAgreement (the “Agreement”) with a financing company on April 21,2005.  The agreement will continue until February 1,2008 and will renew annually thereafter. All borrowings are secured by outstanding receivables specificallyassigned to the financing company. Further, pursuant to a Continuing Guaranty Agreement, dated January 5,2009, the outstanding borrowings are personally guaranteed by John Kang, theCompany’s Chairman. Assigned receivables are considered “Approved” or “Non-Approved”by the financing company.  Borrowingsmade against 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.”

 

For the three months ended March 31, 2009, the Companyborrowed $15 and repaid $138 under the Agreement.  The total outstanding advance made under theagreement is $457 and $580 as of March 31, 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 6.5% and 7.76% for the three monthsended March 31, 2009 and 2008, respectively.

 

Kookmin Note

 

On February 4, 2003, the Company’s Korean subsidiaryreceived 6,500,000 in South Korean Won, or approximately $5,488, under a loanfrom Kookmin Bank of South Korea.  Theloan bears interest at an annual rate of 7.1%. In the event of delayed repayment, the interest increases to a maximumof 21%, depending on the length of time the repayment is delayed.  As of March 31, 2009, the interest ratewas increased to 9.2% from delayed interest payments made.  This loan is collateralized by the plantfacilities and certain equipment in South Korea.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

The Company is required to make equal monthly installmentsof principal and interest to repay the loan balance through August 2008.  The outstanding loan balance totaled $137 and$151, as of March 31, 2009 and December 31, 2008, respectively, andare included in current portion of long-term debt.   The Company intends to fully repay the amountsdue under the loan.  However, as of the filing of this report the Company didnot repay the loan and the Company is in default under the loan.  TheCompany has received a formal notice of default and Kookmin Bank has initiatedforeclosure proceedings on the loan collateral, which consists of manufacturingplant facility and certain equipment in South Korea.  However, the Company is currently working toresolve this matter with Kookmin Bank by seeking a forbearance until theCompany is able to restructure or obtain funding to repay this loan.

 

Debt of MajorityOwned Subsidiary

 

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

 

LMC was capitalizedthrough a $6,500 subordinated debt and equity investment by C3 Capital Partners(“C3”) and a $5,000 senior credit facility with Bank Midwest, N.A.  Thisdebt and equity resulted in cash proceeds of $11,102 after related debtissuance costs of $398, which proceeds LMC used to purchase all of the assetsand liabilities from the Company.  TheCompany incurred an additional $459 in issuance costs directly related to thedebt issuance.  As a result, $857 wasrecorded as deferred debt issuance costs to be amortized over the life of thedebt.  Interest expense for theamortization of debt issuance cost was $39 and $50 for the three months ended March 31,2009 and 2008, respectively.

 

The Company retains a69.25% ownership interest in LMC, C3 holds a 19% ownership interest, LarryBuffington, the Company’s President and CEO, (who also serves as the Presidentand CEO of LMC) holds a 10% ownership interest, and CRESO Capital Partners (“CRESO”),the Company’s financial advisor in the Transaction, holds a 1.75% ownershipinterest.  The equity interests acquiredby C3 and issued to CRESO were not considered a discount to debt, as theunconsolidated net assets of LMC were deemed to have an initial value of $0upon closing of the Transaction for financial accounting purposes.  Further, LMC is fully responsible for therepayment of debt obligations.

 

*MidwestDebt*

 

In connection with theTransaction, LMC entered into a Loan Agreement, dated July 24, 2007 (the “LoanAgreement”), with Bank Midwest, N.A. (“Midwest”).  The Loan Agreementprovides for total loan availability of $5,500, consisting of a $4,000 termloan with an annual interest rate of 8.48% and a revolving loan of up to $1,500with a variable interest equal to prime rate as published in the Wall StreetJournal. Interest payments are due monthly. The term loan has a maturity date of July 20, 2011.  Therevolving loan has a maturity date of July 20, 2008.  Borrowingavailability under the revolving loan is based in a percentage of LMC’seligible receivables and eligible inventory, and the initial advance under therevolving loan was $1,000 on July 24, 2007.

 

On September 23,2008, the Loan Agreement was amended to extend the revolving loan maturity to September 24,2009, reduce the revolving loan limit to $1,350, and provided for a minimumrate of interest of 6.5%. LMC’s obligations under the Loan Agreement aresecured by a blanket security interest in all of LMC’s assets and the Company’sequity interest in LMC, and pursuant to an intercreditor agreement between theC3 and Midwest.  Midwest’s securityinterest in the assets is senior to C3’s security interest in the same assets.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

LMC is required to makemonthly principal payments under the term loan of: $63 during months 1 through12, $83 during months 13 through 36, and $104 during months 37 through 48. All remaining principal is due and payable on July 20, 2011. If the term loan is prepaid within the first twenty-four (24) months after July 24,2007, LMC will pay a prepayment penalty of 1% of the outstanding principalbalance, together with accrued interest.  After the twenty-four monthperiod has lapsed, LMC will have the right to prepay the term loan withoutpenalty.

 

As of March 31, 2009and December 31, 2008, the gross outstanding loan balance under the termloan totaled $2,479 and $2,729, respectively, and the gross outstanding loanbalance under the revolving loan totaled $348 and $597, respectively. The loansare presented as long-term debt and short-term debt on the Company’sconsolidated balance sheet, respectively. Interest expense incurred under the term loan and revolving loan totaled$54 and $8 for the three months ended March 31, 2009, respectively.   Interest expense incurred under the termloan and revolving loan totaled $76 and $13 for the three months ended March 31,2008, respectively.

 

Additionally, LMC enteredinto Promissory Notes, dated August 29, 2007 and October 21, 2008(the “Capital Loan”), with Midwest to provide for $45 and $105 to be usedtowards the purchase of a company truck and HVOF spray equipment, respectively,with annual interest rate of 8.25%.  TheCapital Loan has maturity dates of September 1, 2012 and November 1,2013.  LMC is required to make monthlyprincipal and interest payments of $3 per month.  As of March 31, 2009 and December 31,2008, the gross outstanding loan balance under the Capital Loan totaled $123and $129, respectively, which is presented as long-term debt on the Company’sconsolidated balance sheet.  Interestexpense incurred under the Capital Loan totaled $3 and $1 for the three monthsended March 31, 2009 and 2008, respectively.

 

*C3 Debt*

 

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

 

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

 

The gross outstandingloan balance including accrued interest payable upon maturity of theSubordinated Note totaled $6,723 and $6,690 as of March 31, 2009 and December 31,2008, respectively.  Interest expense incurred under the SubordinatedNotes totaled $201 and $197 for the three months ended March 31, 2009 and2008, respectively.

 

**7.     StockCompensation Plan**

 

During the three monthsended March 31, 2009, under the Company’s 2002 Non-employee Director StockOption Plan which provides for the grant of stock options to non-employeedirectors, the Company granted options to purchase 70,000 of the Company’scommon shares for an average exercise price of $0.23, respectively.  Further, all options granted under this planhad exercise prices that were equal to the fair market value on the date ofgrant.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

During the three monthsended March 31, 2009, under the Company’s 2002 Equity Incentive Plan whichprovides for the grant of stock options to officers, employees, consultants anddirectors of the Company its subsidiaries, there were no option grants.  Further, all options granted under this planhad exercise prices that were equal to the fair market value on the date ofgrant.

 

The Company canceled 94,000 options during the threemonths ended March 31, 2009, for terminated employees and options expired.

 

**8.         PreferredUnits of Subsidiary**

 

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

 

As of March 31,2009, LMC has redeemed $236 of its preferred units and distributed $290 inpriority return to the preferred unit holders. The total preferred units outstanding are $2,264 as of March 31,2009.

 

**9.         SegmentReporting and Geographic Information**

 

SFAS No. 131,*Disclosures about Segments of an Enterprise andRelated Information,*requires companies to provide certaininformation about their operating segments. In April 2002, the Company began classifying operations into tworeportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetalalloys.  The Liquidmetal alloy industrialcoatings are used primarily as a protective coating for industrial machineryand equipment, such as drill pipe used by the oil drilling industry and boilertubes used by coal burning power plants. Bulk Liquidmetal alloys include market opportunities to manufacture andsell casing components for electronic devices, medical devices, sporting goods,tooling, prototype sampling, defense applications and metal processingequipment.  Primarily, the expensesincurred by the bulk Liquidmetal alloy segment are research and developmentcosts and selling expenses associated with identifying and developing marketopportunities.  Bulk Liquidmetal alloysproducts can be distinguished from Liquidmetal alloy coatings in that the bulkLiquidmetal alloy can have significant thickness, up to approximately one inch,which allows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.   Revenue and expenses associated withresearch and development services and product licensing arrangements areincluded in the bulk Liquidmetal alloy segment. The accounting policies of the reportable segments are the same as thosedescribed in Note 3 to the consolidated financial statements included in theCompany’s Form 10-K filed with the Securities and Exchange Commission on April 15,2009.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

 

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

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

 
| ** **                                  | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|---------------------------------------------|------------|--------------|------------|----------------|------------|--------------------|------------|
| Three months  ended March 31, 2009     |       |         |       |           |       |               |       |
| Revenue to  external customers              |       | $            | 2,487      |           | $          | 1,105              |       | $ | 3,592 |   |
| Gross profit                                |       | 913          |       | 538            |       | 1,451              |       |
| Total segment  income                       |       | 22           |       | 216            |       | 238                |       |
| Total  identifiable assets at end of period |       | 2,707        |       | 7,257          |       | 9,964              |       |
|                                        |       |         |       |           |       |               |       |
| Three months  ended March 31, 2008     |       |         |       |           |       |               |       |
| Revenue to  external customers              |       | $            | 3,615      |           | $          | 3,153              |       | $ | 6,768 |   |
| Gross profit                                |       | 1,233        |       | 634            |       | 1,867              |       |
| Total segment  income                       |       | 522          |       | 12             |       | 534                |       |
| Total  identifiable assets at end of period |       | 4,113        |       | 11,805         |       | 15,918             |       |

 

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

 
| ** **                                                                                               | ** ** | **For the Three Months** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                               | ** ** | **Ended March 31,** | ** ** |
| ** **                                                                                               | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| ** **                                                                                               | ** ** | ** **               | ** ** | ** ** | ** ** |
| Total segment  income before minority interest                                                           |       | $                        | 238        |   | $ | 534 |   |
| General and  administrative expenses, excluded                                                           |       | (939                     | )          | (1,174 | ) |
|                                                                                                     |       |                     |       |   |   |
| Consolidated  loss before interest, other expense, other income, income taxes, noncontrolling  interests |       | (701                     | )          | (640 | ) |
| Change in value  of warrants, (loss) gain                                                                |       | (126                     | )          | 106 |   |
| Change in value  of conversion feature, gain                                                             |       | 30                       |       | 222 |   |
| Interest expense                                                                                         |       | (1,973                   | )          | (1,346 | ) |
| Interest income                                                                                          |       | —                   |       | 2 |   |
| Income  attributable to noncontrolling interest                                                          |       | (31                      | )          | (160 | ) |
| Consolidated net  loss attributable to Liquidmetal Technologies, Inc.                                    |       | $                        | (2,801     | ) | $ | (1,816 | ) |

 

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

 

Revenues from sales tocompanies in the United States were $2,731 and $3,797 during the three monthsended March 31, 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 March 31, 2009, the Company had revenue from sales to companiesoutside of the United States of $860 of which $432 represented sales tocompanies located in South Korea.  Duringthe three months ended March 31, 2008, the Company had revenues fromcompanies outside of the United States of $2,967 of which $938 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 $1,992 and $1,813 located in the United States at March 31,2009 and December 31, 2008, respectively. The Company had long-livedassets of $5,551 and $6,277 located in South Korea at March 31, 2009 and December 31,2008, respectively.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

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

** **
| ** **                                 | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2009**           | ** ** |
|                                       |       |               |       |
| Total segment  assets                      |       | $                  | 9,964      |   |
| Cash and cash  equivalents                 |       | 13                 |       |
| Prepaid expenses  and other current assets |       | 687                |       |
| Other property,  plant and equipment       |       | 89                 |       |
| Intangibles, net                           |       | 1,230              |       |
| Other assets                               |       | 320                |       |
| Total  consolidated assets                 |       | $                  | 12,303     |   |

 

Assetsexcluded from segment assets include assets attributable to the Company’scorporate headquarters.  The Company’s largestassets consist of cash and intangible assets, which consist primarily of theCompany’s patents and trademarks.

 

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

 

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

 

Optionsto purchase 7,951,782 shares of common stock at prices ranging from $0.09 to$15.00 per share were outstanding at March 31, 2009, but were not includedin the computation of diluted EPS for the same period as the inclusion wouldhave been antidilutive.  Warrants topurchase 14,443,183 shares of common stock with prices ranging from $1.55 to$2.07 per share outstanding at March 31, 2009, were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive.  Additionally, 18,032,663 shares ofcommon stock issuable upon conversion of the Company’s convertible notes withconversion prices of $1.10 per share outstanding at March 31, 2009 werenot included in the computation of diluted EPS for the same period because theinclusion would have been antidilutive.

 

Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the Company is required toreport a value of the warrant as a fair value and record the fluctuation to thefair value of the warrant liability to current operations.  The change in the fair value of the warrantsresulted in loss of $126 and gain of $106 for the three months ended March 31,2009 and 2008, respectively. The fair value of warrants outstanding at March 31,2009 of $819 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 1.34 to 3.75 years; (2) volatilityof 145%, (3) risk free interest of 0.81% to 1.67%, and dividend rate of0%.  The fair value of warrantsoutstanding at December 31, 2008 of $692 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.21 to 3.99 years; (2) volatility of 113%, (3) risk free interest of0.11% to 1.55%, and dividend rate of 0%.

 

**11.      Commitments and Contingencies**

 

The Company is from time to time a party to certain legalproceedings arising in the ordinary course of business. Although outcomescannot be predicted with certainty, the Company does not believe that any legalproceeding to which it is a party will have a material adverse effect on theCompany’s financial position, results of operations, and cash flows.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

On June 26, 2006, the Company 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”).  The Company also entered into an exclusivemanufacturing license agreement for the eyewear industry with LSI.  Underthe joint venture agreement, the Company has option to buy ownership interestin LSI, initially, of 19.9% to up to 50%.  In December 2006, theCompany exercised the 19.9% interest in LSI and will have two years to purchasethe additional interest at a nominal price. In January 2007 and June 2007,the Company contributed additional $217 and $86, respectively, into LSI asadditional investment.  The contribution did not change the Company’s19.9% interest in LSI.  Under thelicensing agreement, at any time following 18 months after the effective dateof the agreement, LSI may exercise its option to sell to the Company certainbusiness assets including manufacturing equipment acquired under the jointventure.  During 2008, 2007 and 2006, theCompany recognized revenues of $0, $103 and $702, respectively, of Liquidmetalalloys sold to LSI for use in the joint venture.   There were no alloys sold to LSI during thethree months ended March 31, 2009.

 

The Company has outstanding liens and judgments on its assetsby various creditors for past-due trade payables totaling approximately $1,315,of which approximately $1,084 is held by creditors in South Korea, as of March 31,2009.  The Company is currently workingto resolve the matter with each creditor by seeking a forbearance until we areable to obtain funding to repay the amounts due, although there is no assurancethat we will be able to obtain any such funding.   If the Company cannot repay the amounts dueor obtain forbearance, the creditors may seek to foreclose on the Company’sassets.  Such a foreclosure would havematerial adverse effect on the Company’s operations, financial condition, andresults of operations.

 

**12.    Related Party Transactions**

 

The Company is a party to a consulting agreement with WilliamJohnson, a former member of the Company’s Board of Directors, on amonth-to-month basis starting from 2005. During the three months ended March 31, 2009 and 2008, the Companyincurred $5 and $0 in consulting fees from Mr. Johnson, respectively.

 

Soo Buchanan, the sister of John Kang, the Company’sChairman, provides services to the Company as a consultant.  During the three months ended March 31,2009 and 2008, the Company incurred $0 and $30, respectively, for her servicesas a consultant.  Additionally, OtisBuchanan, the husband of Ms. Buchanan, was employed by the Company and waspaid aggregate compensation of approximately $28 during each of the threemonths ended March 31, 2009 and 2008.

 

On December 23, 2008, John Kang advanced the Company$200 to be used to repay the Company’s outstanding borrowings made under theFactoring, Loan and Security Agreement (the “Factoring Agreement”), dated April 21,2005, with a financing company.  Further,Mr. Kang entered into a Continuing Guarantee Agreement, dated January 5,2009, with the financing company to personally guarantee repayment of theoutstanding borrowings made under the Factoring Agreement (see Note 22).  In January 2009, the $200 advance wasoffset with $178 outstanding receivable from Mr. Kang arising fromliabilities incurred from certain stock transactions in August 2002 and$22 of the advance was paid to Mr. Kang.

 

As of March 31, 2009 and December 31, 2008, CKCho, a member of the Company’s Board of Directors, held $522 and $503 of theconvertible subordinated notes, respectively, and held 305,918 exercisablewarrants for both periods.

 

As of March 31, 2009 and December 31, 2008,Ricardo Salas, the Company’s Executive Vice President, held $395 and $381 ofthe convertible unsecured subordinated notes, respectively, and $259 of theunsecured subordinated notes for both periods. Mr. Salas also held a total of 377,691 of exercisable warrants asof March 31, 2009 and December 31, 2008.

 

On June 1, 2007, the Company entered into atransaction with Grace Metal (currently Liquidmetal Korea Co., Ltd. “LMK”),under which (i) LMK agreed to purchase various equipments (including diecasting machines and vacuum induction melters) used in the Company’s bulkamorphous alloy business segment and (ii) the Company granted LMK a10-year exclusive license to manufacture products made from bulk Liquidmetalalloys for customers whose principal headquarters or whose major operations arelocated in South Korea.  LMK was formedby an investor group that includes the former director and officer of theCompany, James Kang, who is also the brother of John Kang, Chairman of ourcompany.  Under an equipment purchaseagreement between the Company and LMK, LMK agreed to buy the purchased equipmentfor a total purchase price of $2,000, of which $759 were received as of March 31,2009.  The equipment purchase agreementprovides that delivery of the equipment can be delayed to accommodate theCompany’s continuing manufacturing needs, and it also provides that the Companywill retain a security interest in the purchased equipment until full paymentof the purchase price.

 

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March 31,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

In consideration of the license agreement with LMK, theCompany will be entitled to royalty of 10% of LMK’s net sales of licensedproducts (unless LMK’s margin on the products falls below specified levels, inwhich case a new royalty will be negotiated in good faith).  Effective June 1, 2008, the royalty ratewas adjusted to 5%.  The agreementprovides that the Company may convert the license to a non-exclusive in theevent that the net sales in the second year of the contract or thereafter arenot sufficient to result in royalties of $500 or more per year.  The agreement also provides that LMK will berequired to purchase all alloy feedstock from the Company, and the Company willhave the right to continue to manufacture Liquidmetal alloy products for SouthKorean customers until all purchased equipment has been commissioned.

 

The Company purchased production supplies and outsourcedproduction of certain bulk alloy production with LMK. In June 2008, theCompany began sharing the use of its manufacturing facility and productionequipment in Pyongtaek, South Korea, with LMK as the Company began significantoutsourcing of its bulk alloy parts production. The Company incurred expensesfor purchase of production supplies and outsourcing fees of $181 and $75 duringthe three months ended March 31, 2009 and 2008, respectively.  Approximately, $207 and $0 is included inaccounts payables as of March 31, 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 $623 and $629 during the threemonths ended March 31, 2009 and 2008, respectively.  Approximately, $514 and $212 is included inaccounts receivables as of March 31, 2009 and December 31, 2008,respectively for outstanding trade receivables due from LMK.

 

**13.    Subsequent Event**

 

OnMay 1, 2009, the Company completed a financing transaction (the “Transaction”)whereby aggregate cash of $2,500 and principal and accrued interest of $20,625due under the previously issued 8% Convertible Subordinated Notes due January 2010(the “Prior Notes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7,500 of new 8% Senior Secured Convertible Subordinated Notesdue January 2011 (the “Exchange Notes”).  Transactionwas consummated pursuant to a Securities Purchase and Exchange Agreement, datedMay 1, 2009 (the “Securities Purchase Agreement”), among the exchangingnote holders and investors (collectively, the “Buyers”).  The SecuritiesPurchase Agreement gives the Buyers option to subscribe for an additional1,000,000 shares of preferred stock at $5.00 per share at any time prior to sixmonths from the closing date.

 

TheExchange Notes are due January 3, 2011 and bear annual interest rate of 8%with interest payable in October and April in cash or, at the Company’soption, in the form of additional notes (in which case the interest rate willbe 10%).  The preferred stocks accrue cumulativedividends at an annual rate of 8%, which is payable semi-annually. Beginning onthe second anniversary of the initial issuance, the dividend will increase to10%.  The dividends are payable in cashor in kind by the issuance of the Company of additional preferred stock, onlywhen and as declared by the Company’s 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.  The Company issued warrants to purchase3,125,007 shares and 42,329,407 shares of the Company’s common stock at anexercise of $0.60 and $0.50 per share to the buyers of the Exchange Notes andpreferred stocks, respectively.  Thewarrants will expire in January 2012. The conversion prices and the number of common stock issuable under thepreferred stocks, Exchange Notes and warrants are subject to adjustments forant-dilution purposes.

 

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

 

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

 

*Thismanagement’s discussion and analysis, as well as other sections of this reporton Form 10-Q, may contain “forward-looking statements” that involve risksand uncertainties, including statements regarding our plans, future events,objectives, expectations, forecasts, or assumptions. Any statement that is nota statement of historical fact is a forward-looking statement, and in somecases, words such as “believe,” “estimate,” “ project,” “expect,” “intend,” “may,”“anticipate,” “plans,” “seeks,” and similar expressions identifyforward-looking statements. These statements involve risks and uncertaintiesthat could cause actual outcomes and results to differ materially from theanticipated outcomes or results, and undue reliance should not be placed onthese statements. These risks and uncertainties include, but are not limitedto, the matters discussed under the caption “Factors Affecting Future Results”in our Annual Report on Form 10-K for the fiscal year ended December 31,2008 and other risks and uncertainties discussed in filings made with theSecurities and Exchange Commission (including risks described in subsequent reportson Form 10-Q, Form 10-K, Form 8-K, and other filings).Liquidmetal Technologies disclaims any intention or obligation to update orrevise any forward-looking statements, whether as a result of new information,future events, or otherwise.*

 

**Overview**

 

Weare a materials technology company that develops and commercializes productsmade from amorphous alloys.  OurLiquidmetal® family of alloys consists of a variety of coatings, powders, bulkalloys, and composites that utilize the advantages offered by amorphous alloytechnology.  We develop, manufacture, andsell products and components from bulk amorphous alloys that are incorporatedinto the finished goods of our customers, and we also market and sell amorphousalloy industrial coatings.  We also partnerwith third-party licensees and distributors to develop and commercializeLiquidmetal alloy products.  We have theexclusive right to develop, manufacture, and sell what we believe are the onlycommercially viable bulk amorphous alloys.

 

Amorphous alloys are unique materials that aredistinguished by their ability to retain a random atomic structure when theysolidify, in contrast to the crystalline atomic structure that forms inordinary metals and alloys when they solidify. Liquidmetal alloys possess acombination of performance, processing, and cost advantages that we believemakes them preferable to other materials in a variety of applications. Theamorphous atomic structure of our alloys enables them to overcome certainperformance limitations caused by inherent weaknesses in crystalline atomicstructures, thus facilitating performance and processing characteristicssuperior in many ways to those of their crystalline counterparts. For example,our zirconium-titanium Liquidmetal alloys are approximately 250% stronger thancommonly used titanium alloys, such as Ti-6Al-4V, but they have processingcharacteristics similar in many respects to plastics. We believe theseadvantages could result in Liquidmetal alloys supplanting other incumbentmaterials in a wide variety of applications. Moreover, we believe theseadvantages will enable the introduction of entirely new products andapplications that are not possible or commercially viable with other materials.

 

Our revenues are derived from three principal operatingsegments: Liquidmetal alloy industrial coatings, Liquidmetal coatingsapplication, and bulk Liquidmetal alloy products.  Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used incoal-burning power plants. The historical operating information for fiscal year2001 is based substantially on sales of Liquidmetal alloy coatings. In thesecond half of 2002, we began producing bulk Liquidmetal alloy components andproducts for incorporation into our customers’ finished goods. Liquidmetalcoatings application is the service provided for applying Liquidmetal productsas a protective coating.  BulkLiquidmetal alloy segment revenue includes sales of parts or components ofelectronic devices, medical products, and sports and leisure goods, tooling andprototype parts (including demonstration parts and test samples) for customerswith products in development, product licensing and arrangements, and researchand development revenue relating primarily to defense and medicalapplications.  We expect that thesesources of revenue will continue to significantly change the character of ourrevenue mix.

 

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

 

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

 

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

 

OnJuly 24, 2007, we transferred substantially all of the assets of ourLiquidmetal alloy industrial coatings business to a newly formed, newlycapitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limitedliability company (“LMC”), and LMC assumed substantially all of the liabilitiesof the coatings business.   Thetransfer included the thermal spray coatings assets and liabilities acquiredunder a purchase agreement with Foster Wheeler Energy Services in June 2007.  We hold a 69.25% ownership interest inLMC.  The results of operation of LMC areconsolidated and comprise our Liquidmetal alloy industrial coatings segment forfinancial reporting purposes.

 

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

** **

**CriticalAccounting Policies and Estimates**

 

Thepreparation of condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States requires us tomake estimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates and assumptions are based on historical experience and various otherfactors that are believed to be reasonable under the circumstances.  Actual results could differ materially fromthese estimates under different assumptions or conditions.

 

We believe that the following accounting policies arethe most critical to our condensed consolidated financial statements sincethese policies require significant judgment or involve complex estimates thatare important to the portrayal of our financial condition and operatingresults:

 
| · |   | Exchange  rate fluctuations                                            |
|--------|--------|------------------------------------------------------------------------|
| · |   | Warranty  accrual                                                      |
| · |   | Allowance  for doubtful accounts                                       |
| · |   | Inventories  at lower of cost or net realizable value                  |
| · |   | Deferred  tax assets                                                   |
| · |   | Valuation  of derivatives of warrants and embedded conversion features |

 

Our Annual Report on Form 10-K for theyear ended December 31, 2008, contains furtherdiscussions on our critical accounting policies and estimates.

 

**Resultsof Operations**

 

Comparison of the threemonths ended March 31, 2009 and 2008

 

*Revenue.* Revenue decreased $3.2 million to $3.6million for the three months ended March 31, 2009 from $6.8 millionfor the three months ended March 31, 2008.  The decrease consisted of$1.8 million decrease in sales and prototyping of parts manufactured from bulkLiquidmetal alloys to consumer electronics customers as a result of decrease indemand in electronic casings applications, a decrease of $1.1 million from thesales of our coating products as a result decrease in demand in oil drillingapplications, and a decrease of $0.3 million from our research and developmentcontracts.

 

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*Cost ofSales.* Cost ofsales decreased to $2.1 million, or 60% of revenue, for the three months ended March 31,2009 from $4.9 million, or 72% of revenue, for the three months ended March 31,2008.  The decrease was a result of a continued change in revenue mixduring the three months ended March 31, 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 Administrative Expenses*. Selling, general, and administrative expensesdecreased to $1.6 million, or 44% of revenue, for the three months ended March 31,2008 from $1.9 million, or 28% of revenue, for the three months ended March 31,2008. The decrease was primarily a result of decreases in professional fees of$0.2 million and in wages and expenses of $0.1 million.

 

*Researchand Development Expenses*. Research and development expenses decreased to $0.2 million, or7% of revenue, for the three months ended March 31, 2009 from $0.3 millionor 4% of revenue for the three months ended March 31, 2008.  Company continues to perform research anddevelopment of new Liquidmetal alloys and related processing capabilities,develop new manufacturing techniques, and contract with consultants to advancethe development of Liquidmetal alloys.

 

*Changein Value of Warrants. *Change invalue of warrants decreased to a loss of $0.1 million, or 4% of revenue, forthe three months ended March 31, 2009 from a gain of $0.1 million, or 2%of revenue, for the three months ended March 31, 2008.  The change in value of warrants consisted ofwarrants issued from convertible notes and subordinated notes funded between2004 and 2007 primarily as a result of fluctuations in our stock price.

 

*Changein Value of Conversion Feature.*Change in the value of ourconversion feature liability from our convertible notes funded in 2007 resultedin a gain of $30 thousand, or 1% of revenue, during the three months ended March 31,2009 from a gain of $0.2 million, or 3% of revenue, for the three months ended March 31,2008, primarily as a result of fluctuations in our stock price.

 

*InterestExpense*. Interestexpense was $2.3 million, or 64% of revenue, for the three months ended March 31,2009 and was $1.7 million, or 25% of revenue, for the three months ended March 31,2008. Interest expense consists primarily of debt amortization and interestaccrued on outstanding convertible and subordinated notes, borrowings under theApril 2005 factoring, loan, and security agreement, and the Kookminloan.  The increase was due to increaseddebt discount amortization and higher interest rates used on our convertiblenotes during the three months ended March 31, 2009.

 

*InterestIncome.* Interest income was $2 thousand for the threemonths ended March 31, 2008 from interest earned on cash deposits.  There was no interest income for the threemonths ended March 31, 2009.

 

**Liquidityand Capital Resources**

 

Our cash used inoperating activities was $8 thousand for the three months ended March 31,2009 and our cash provided by operating activities was $0.5 million for thethree months ended March 31, 2008.  Our working capital deficitincreased from $20.8 million at December 31, 2008 to $24.3 million at March 31,2009.  The working capital deficit increase of $3.5 million was primarilyattributable to decrease of trade account receivables of $0.4 million, increaseof accounts payable and accrued expenses of $0.8 million, increase of long-termdebt, current portion, net of discounts of $2.6 million offset by a decrease ofshort-term debt of $0.4 million.

 

Our cash used ininvesting activities was $0.3 million for the three months ended March 31,2009 for the acquisition of property and equipment and investments in patentsand trademarks.

 

Our cash provided by financing activities was $0.1 million for the threemonths ended March 31, 2009.  Wepaid net $0.4 million in borrowings from factoring agreement executed in April 2005and a revolving loan agreement executed in July 2007, which was offset bya net $0.5 million in borrowings made primarily from issuance of additionalconvertible subordinated notes as payment for quarterly accrued interest due.

 

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

 

TheExchange Notes are due January 3, 2011 and bear annual interest rate of 8% withinterest payable in October and April in cash or, at the 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 the Company’s Board of Directors.

 

TheSeries A-1 Preferred 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.  The Company issued warrants to purchase3,125,007 shares and 42,329,407 shares of the Company’s common stock at anexercise of $0.60 and $0.50 per share to the buyers of the Exchange Notes andpreferred stocks, respectively.  Thewarrants will expire in January 2012. The conversion prices and the number of common stock issuable under thepreferred stocks, Exchange Notes and warrants are subject to adjustments forant-dilution purposes.

 

We anticipate thatwe will not have sufficient funds to pursue our current operating plan beyondthe second quarter of 2009 and we will therefore require additionalfunding.  There is no assurance that the Series A-1 Option will beexercised to obtain any such funding.  Because we cannot be certain thatwe will be able to obtain adequate funding from debt, equity, or othertraditional financing sources, we are also actively exploring several strategicfinancing options, including the possible sale of our manufacturing plant inSouth Korea (which would then be replaced with a smaller facility) andadditional licensing and outsourcing of our manufacturing operations.

 

Additionally, wehave approximately $1.2 million of principal and accrued interest outstandingas of March 31, 2009, under the 8% unsecured subordinated notes (the “BridgeNotes”), which were due August 17, 2007. As of the filing of this report,we have reached an agreement to retire $0.9 million of the principal andinterest due under the Bridge Notes in exchange for $0.4 million cash.

 

Approximately $0.2million of principal and accrued interest became due from our Korean subsidiaryunder a loan from Kookmin Bank of South Korea in August 2008.  However, as of the filing of this report we did not repay the loan and we have received a formal notice of default.  Kookmin Bank has initiated foreclosureproceedings on the loan collateral, which consists of our manufacturing plantfacility and certain equipment in South Korea. However, we are currently working to resolve this matter with KookminBank by seeking a forbearance until we are able to restructure or obtainfunding to repay this loan.

 

Wehave outstanding liens and judgments on our assets by various creditors forpast-due trade payables totaling $1.3 million, of which $1.1 million is held bycreditors in South Korea, as of March 31, 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.

 

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**ContractualObligations**

 

The following table summarizes the Company’sobligations and commitments as of March 31, 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)                            |       | $          | 20,982     |                                      | $          | 20,982 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt  of consolidated subsidiary (2) |       | 9,325      |       | 1,028                                     |       | 1,543 |   | 6,754 |   | — |   |
| Short-term debt  (3)                           |       | 457        |       | 457                                       |       | — |   | — |   | — |   |
| Short-term debt  of consolidated subsidiary    |       | 348        |       | 348                                       |       | — |   | — |   | — |   |
| Interest  payments (4)                         |       | 6,601      |       | 4,066                                     |       | 1,777 |   | 758 |   | — |   |
| Operating leases  and rents                    |       | 978        |       | 323                                       |       | 614 |   | 41 |   | — |   |
| Consulting  services payable                   |       | 87         |       | 87                                        |       | — |   | — |   | — |   |
| Foster Wheeler                                 |       | 150        |       | 150                                       |       | — |   | — |   | — |   |
| Dongyang                                       |       | 8          |       | 8                                         |       | — |   | — |   | — |   |
| Nichimen                                       |       | 315        |       | 315                                       |       | — |   | — |   | — |   |
| Totals (1)                                     |       | $          | 39,251     |                                      | $          | 27,764 |   | $ | 3,934 |   | $ | 7,553 |   | $ | — |   |

 

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(1) Contractualcash obligations include Long-term debt comprised of $1,009 of UnsecuredSubordinated Notes issued in 2006, $19,836 of Convertible Unsecured Notesoriginally issued in 2007, and $137 of Kookmin Bank Loan; Long-term debt ofconsolidated subsidiary comprised of $2,479 of Bank Midwest Term Loan, $6,723of C3 Capital Partners Subordinated Notes, and $123 of Bank Midwest PromissoryNotes; Short-term debt comprised of $457 outstanding advances received underfactoring, loan, and security agreement; Short-term debt of consolidatedsubsidiary comprised of $348 of Bank Midwest revolving loan; future minimumlease payments under capital and operating leases; purchase commitments fromconsultants; payments due from assets purchased from Foster Wheeler thermalspray coatings business; payments due from our discontinued equipmentmanufacturing business; and minimum payments due under a distributionagreement.

(2) Doesnot include accrued and scheduled interest payments of $6,601; and un-amortizedcash discount and discounts for conversion feature and warrants of $5,936 ofour convertible notes.

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

(4) Interestpayments include accrued and scheduled payments due on long-term debt andlong-term debt of consolidated subsidiary with annual interest rates between 8%to 12%.  Interest payments also includeestimated interest on short-term debt and short-term debt of majority ownedsubsidiary with annual interest rates between 6.5% to 8.48% with expectedmaturity of approximately 1 year.

 

**OffBalance Sheet Arrangements**

 

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

 

On June 26,2006, we entered into a joint venture agreement with SAGA, SpA in Padova,Italy, (‘SAGA”) a specialist precision parts manufacturer.  The jointventure is named Liquidmetal SAGA Italy, Srl (“LSI”).  We also enteredinto an exclusive manufacturing license agreement for the eyewear industry withLSI.  Under the joint venture agreement, we have the option to buy anownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006,we purchased 19.9% interest in the joint venture.  Under the licensingagreement, at any time following 18 months after the effective date of theagreement, LSI may exercise its option to sell us certain business assetsincluding manufacturing equipment acquired under the joint venture.  Duringthe year ended December 31, 2007, we recognized revenues of $0.7 millionof Liquidmetal alloys sold to SAGA for use in the joint venture.  During 2008, 2007 and 2006, the Company recognized revenues of $0, $0.1million and $0.7 million, respectively, of Liquidmetal alloys sold to LSI foruse in the joint venture.   There were noalloys sold to LSI during the three months ended March 31, 2009.

 

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

 

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

 

*InterestRates.*  We are exposed to market risks relating tochanges in interest rates as our borrowings are subject to the volatility ofinterest rate risk.  Although we do notcurrently have any borrowings with variable interest rates, 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 of DisclosureControls and Procedures.   Based on an evaluation of the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) underthe Exchange Act) as of March 31, 2009, the end of the period covered bythis report, our Chief Executive Officer and Chief Financial Officer haveconcluded that the disclosure controls and procedures were effective.

 

Changes in InternalControls.  Duringthe quarter ended March 31, 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 IIOTHER INFORMATION**

**Item1 — Legal Proceedings**

 

None.

 

**Item 1A — Risk Factors**

 

None.

 

**Item 3 -Defaults Upon Senior Securities**

 

Approximately $0.2million of principal and accrued interest became due from our Korean subsidiaryunder a loan from Kookmin Bank of South Korea in August 2008.  However, as of the filing of this report we did not repay the loan and we have received a formal notice ofdefault.  Kookmin Bank has initiatedforeclosure proceedings on the loan collateral, which consists of ourmanufacturing plant facility and certain equipment in South Korea.  However, we are currently working to resolvethis matter with Kookmin Bank by seeking a forbearance until we are able toobtain funding to restructure or repay this loan.

 

**Item 5 — Other Information**

 

On January 1,2009, the company issued $0.7 million of new 8% ConvertibleSubordinated Notes Due January 2010 (the “New Notes”).  The NewNotes were issued in satisfaction of accrued interest due under (i) the original 8%Convertible Subordinated Notes issued by the Company in January 2007(the “Original Notes”) and (ii) 8% Convertible SubordinatedNotes that were subsequently issued by the Company insatisfaction of interest due under the Original Notes through October 1,2008 (the “Interest Notes”).   The Original Notes, InterestNotes, and New Notes (collectively the “Notes”) were extinguished on May 1,2009 as part of a financing transaction whereby the noteholders exchanged theNotes and accrued interest due under the Notes for new Series A PreferredStocks and new 8% Senior Secured Convertible Notes due January 2013pursuant to a Securities Purchase Agreement, dated May 1, 2009.  The offers and sales of securities in thistransaction were made pursuant to the exemption from registration provided bySection 4(2) of the Securities Act of 1933, as amended, including pursuant toRule 506 thereunder.  Such offers andsales were made solely to “accredited investors” under Rule 506 and were madewithout any form of general solicitation and with full access to anyinformation requested by the investors regarding the Company or the securitiesoffered in the transaction.

 

On March 31, 2009,William Johnson and Patrick Caruana resigned as directors of the company.  The resignations of Mr. Johnson and Mr. Caruanawere not the result of any disagreement with the company known to an executiveofficer of the company on any matter relating to the company’s operations,policies, or practices.

 

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**Item 6 — Exhibits**

 

The following documentsare filed as an exhibit to this Report:

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                       |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                              |
| 31.1                |       | Certification  of the President and Chief Executive Officer, Larry Buffington, as required  by Section 302 of Sarbanes-Oxley Act of 2002                                     |
|                |       |                                                                                                                                                                              |
| 31.2                |       | Certification  of Principal Financial Officer, 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 requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned hereunto duly authorized.

 

 
|                     |   | LIQUIDMETAL  TECHNOLOGIES, INC.               |
|--------------------------|--------|-----------------------------------------------|
|                     |   | (Registrant)                                  |
|                     |   |                                          |
| Date:  May 20, 2009 |   | /s/ Larry Buffington                          |
|                     |   | Larry Buffington                              |
|                     |   | President and Chief  Executive Officer        |
|                     |   | (Principal Executive  Officer)                |
|                     |   |                                          |
|                     |   |                                          |
| Date:  May 20, 2009 |   | /s/ Tony Chung                                |
|                     |   | Tony Chung                                    |
|                     |   | Chief Financial Officer                       |
|                     |   | (Principal Financial  and Accounting Officer) |

 

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