** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

### **FORM10-Q**

 

**x****                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 30, 2007**

 

**OR**

 

**o****                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from         to        **

 

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

 

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**LIQUIDMETALTECHNOLOGIES, INC.**

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

 

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

 

**30452 Esperanza**

**Rancho Santa Margarita, CA 92688**

(address of principal executive office, zip code)

 

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

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for atleast the past 90 days.

 

Yes  x    No  o

 

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

 

Large accelerated filer o             Acceleratedfiler x             Non-acceleratedfiler o

 

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

 

#### **As of September 30, 2007, there were 44,662,643 sharesof the registrant’s common stock, $0.001 par value, outstanding.**

 

 

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**LIQUIDMETAL TECHNOLOGIES, INC.FORM 10-QFOR THE QUARTER ENDED****SEPTEMBER30, 2007**

 

**FORWARD-LOOKING INFORMATION**

 

Statements in this reportconcerning the future sales, expenses, profitability, financial resources,product mix, market demand, product development and other statements in this reportconcerning the future results of operations, financial condition and businessof Liquidmetal Technologies, Inc. are “forward-looking” statements as definedin the Securities Act of 1933 and Securities Exchange Act of 1934. Investorsare cautioned that the Company’s actual results in the future may differmaterially from those projected in the forward-looking statements due to risksand uncertainties that exist in the Company’s operations and businessenvironment, including competition, need for increased acceptance of products,ability to continue to develop and extend our brand identity, ability toanticipate and adapt to a competitive market, ability to effectively managerapidly expanding operations, amount and timing of operating costs and capital expendituresrelating to expansion of our business, operations and infrastructure, abilityto provide superior customer service, dependence upon key personnel and thelike. The Company’s most recent filings with the Securities and ExchangeCommission, including Form 10-K, contain additional information concerning manyof these risk factors, and copies of these filings are available from theCompany upon request and without charge.

 

2

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**TABLEOF CONTENTS**

 
| **PART I - Financial Information**                                                                         | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                       |       |
| Item 1 – Financial Statements                                                                         |       |
| Condensed Consolidated Balance  Sheets (unaudited)                                                         |       |
| Condensed Consolidated  Statements of Operations and Comprehensive Income (Loss) (unaudited)               |       |
| Condensed Consolidated  Statements of Shareholders’ Deficiency (unaudited)                            |       |
| Condensed Consolidated  Statements of Cash Flows (unaudited)                                               |       |
| Notes to  Condensed Consolidated Financial Statements (unaudited)                                          |       |
|                                                                                                       |       |
| Item 2 –  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |       |
|                                                                                                       |       |
| Item 3 –  Quantitative and Qualitative Disclosures about Market Risk                                  |       |
|                                                                                                       |       |
| Item 4 – Controls and  Procedures                                                                     |       |
|                                                                                                       |       |
| **PART II – Other  Information**                                                                      | ** ** |
|                                                                                                       |       |
| Item 1 – Legal Proceedings                                                                            |       |
|                                                                                                       |       |
| Item 1A – Risk Factors                                                                                |       |
|                                                                                                       |       |
| Item 3 –  Defaults Upon Senior Securities                                                             |       |
|                                                                                                       |       |
| Item 5 – Other Information                                                                            |       |
|                                                                                                       |       |
| Item 6 – Exhibits                                                                                     |       |
|                                                                                                       |       |
| Signatures                                                                                                 |       |
|                                                                                                       |       |
| Certifications                                                                                             |       |

 

3

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**PART IFINANCIAL INFORMATION**

### ** **

**Item 1 – Financial Statements**

 

**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

 
| ** **                                                                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                              | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                              |       |                   |       |                  |       |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                         |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                              |       | $                      | 715        |                  | $          | 144 |   |
| Trade accounts  receivables, net of allowance for doubtful accounts of $173 and $82                                                                                                     |       | 5,191                  |       | 3,934                 |       |
| Inventories                                                                                                                                                                             |       | 2,565                  |       | 3,765                 |       |
| Prepaid expenses  and other current assets                                                                                                                                              |       | 792                    |       | 830                   |       |
| Total current  assets                                                                                                                                                                   |       | 9,263                  |       | 8,673                 |       |
| Property, plant  and equipment, net                                                                                                                                                     |       | 10,378                 |       | 12,095                |       |
| Idle equipment                                                                                                                                                                          |       | 156                    |       | 194                   |       |
| Other  intangibles, net                                                                                                                                                                 |       | 1,156                  |       | 1,170                 |       |
| Investment in  joint venture                                                                                                                                                            |       | 306                    |       | 3                     |       |
| Other assets                                                                                                                                                                            |       | 1,920                  |       | 109                   |       |
| Total assets                                                                                                                                                                            |       | 23,179                 |       | 22,244                |       |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIENCY**                                                                                                                                      |       |                   |       |                  |       |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                                   |       |                   |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                                                                  |       | 8,464                  |       | 9,802                 |       |
| Deferred revenue                                                                                                                                                                        |       | 250                    |       | 202                   |       |
| Short-term debt                                                                                                                                                                         |       | 2,035                  |       | 2,669                 |       |
| Long-term debt,  current portion, net of debt discounts of $861 and $3,636                                                                                                              |       | 4,662                  |       | 14,480                |       |
| Warrant  liabilities                                                                                                                                                                    |       | 2,758                  |       | 2,662                 |       |
| Conversion  feature liabilities                                                                                                                                                         |       | 2,645                  |       | 1,838                 |       |
| Other  liabilities, current portion                                                                                                                                                     |       | 75                     |       | 177                   |       |
| Total current  liabilities                                                                                                                                                              |       | 20,889                 |       | 31,830                |       |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Long-term debt,  net of current portion and debt discounts of $9,899 and $0                                                                                                             |       | 14,650                 |       | 225                   |       |
| Other long-term  liabilities, net of current portion                                                                                                                                    |       | 387                    |       | 552                   |       |
| Total  liabilities                                                                                                                                                                      |       | 35,926                 |       | 32,607                |       |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Minority  interests                                                                                                                                                                     |       | 66                     |       | —                |       |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Shareholders’  deficiency:                                                                                                                                                         |       |                   |       |                  |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized and 44,662,643 issued and outstanding  at September 30, 2007 and 44,311,768 issued and outstanding at December 31,  2006 |       | 45                     |       | 44                    |       |
| Additional  paid-in capital                                                                                                                                                             |       | 137,150                |       | 136,031               |       |
| Accumulated  deficit                                                                                                                                                                    |       | (153,016               | )          | (149,047              | )          |
| Accumulated  other comprehensive income                                                                                                                                                 |       | 3,008                  |       | 2,609                 |       |
| Total  shareholders’ deficiency                                                                                                                                                    |       | (12,813                | )          | (10,363               | )          |
|                                                                                                                                                                                    |       |                   |       |                  |       |
| Total  liabilities and shareholders’ deficiency                                                                                                                                    |       | $                      | 23,179     |                  | $          | 22,244 |   |
|                                                                                                                                                                                    |       |                   |       |                  |       |

 

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

 

4

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

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

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

**(unaudited)**

 
| ** **                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                             | ** ** | **2007**                                           | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                |       | $                                                  | 7,106      |                                              | $          | 8,040 |   | $ | 20,504 |   | $ | 21,685 |   |
| Cost of sales                                          |       | 5,194                                              |       | 6,449                                             |       | 19,321 |   | 17,337 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Gross profit                                           |       | 1,912                                              |       | 1,591                                             |       | 1,183 |   | 4,348 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Operating  expenses                                    |       |                                               |       |                                              |       |   |   |   |   |
| Selling,  general, and administrative                  |       | 1,853                                              |       | 2,290                                             |       | 6,880 |   | 7,363 |   |
| Research and  development                              |       | 331                                                |       | 269                                               |       | 887 |   | 753 |   |
| Total operating  expenses                              |       | 2,184                                              |       | 2,559                                             |       | 7,767 |   | 8,116 |   |
| Loss from  operations                                  |       | (272                                               | )          | (968                                              | )          | (6,584 | ) | (3,768 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Loss from  extinguishments of debt                     |       | —                                             |       | —                                            |       | (648 | ) | — |   |
| Change in value  of warrants, gain (loss)              |       | 220                                                |       | 1,361                                             |       | 4,476 |   | (1,354 | ) |
| Change in value  of conversion feature, gain (loss)    |       | 625                                                |       | 1,987                                             |       | 6,137 |   | (1,933 | ) |
| Other income                                           |       | —                                             |       | —                                            |       | 49 |   | 572 |   |
| Interest expense                                       |       | (1,991                                             | )          | (2,302                                            | )          | (7,454 | ) | (7,361 | ) |
| Interest income                                        |       | 14                                                 |       | 8                                                 |       | 121 |   | 17 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| (Loss) income  before minority interest                |       | (1,404                                             | )          | 86                                                |       | (3,903 | ) | (13,827 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Minority  interests                                    |       | (66                                                | )          | —                                            |       | (66 | ) | — |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| (Loss) income  from continuing operations              |       | (1,470                                             | )          | 86                                                |       | (3,969 | ) | (13,827 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Net (loss)  income                                     |       | (1,470                                             | )          | 86                                                |       | (3,969 | ) | (13,827 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Other  comprehensive (loss) income:                    |       |                                               |       |                                              |       |   |   |   |   |
| Foreign exchange  translation gain                     |       | 122                                                |       | 56                                                |       | 399 |   | 183 |   |
| Comprehensive (loss)  income                           |       | $                                                  | (1,348     | )                                                 | $          | 142 |   | $ | (3,570 | ) | $ | (13,644 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Net loss per  share basic and diluted:                 |       |                                               |       |                                              |       |   |   |   |   |
| Loss per share  basic and diluted                      |       | $                                                  | (0.03      | )                                                 | $          | 0.00 |   | $ | (0.09 | ) | $ | (0.32 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Number of  weighted average shares - basic and diluted |       | 44,652                                             |       | 44,100                                            |       | 44,736 |   | 43,664 |   |

 

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

 

5

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ DEFICIENCY**

###### **Forthe Nine Months Ended September 30, 2007**

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

**(unaudited)**

 
| ** **                                    | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumu-  lated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total**  | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | ** **         | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **                  | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| **Balance,  December 31, 2006**               |       | 44,311,768         |       | $                 | 44         |                             | $          | 136,031                     |       | $                                             | (149,047   | )          | $          | 2,609 |   | (10,363 | ) |
| Conversion of  notes payable                  |       | 320,000            |       | 1                 |       | 516                              |       | —                      |       | —                                        |       | 517        |       |
| Common stocks  issued as director’s fees |       | 30,875             |       | —            |       | 28                               |       | —                      |       | —                                        |       | 28         |       |
| Stock-based  compensation                     |       | —             |       | —            |       | 575                              |       | —                      |       | —                                        |       | 575        |       |
| Foreign exchange  translation gain            |       | —             |       | —            |       | —                           |       | —                      |       | 399                                           |       | 399        |       |
| Net loss                                      |       | —             |       | —            |       | —                           |       | (3,969                      | )          | —                                        |       | (3,969     | )          |
| **Balance,  September 30, 2007**              |       | 44,662,643         |       | $                 | 45         |                             | $          | 137,150                     |       | $                                             | (153,016   | )          | $          | 3,008 |   | $ | (12,813 | ) |
|                                               |            |                    |            |                   |            |                                  |            |                             |            |                                               |            |            |            |  |  |  |  |  |

 

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

 

6

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

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

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

**(unaudited)**

 
| ** **                                                                                | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| ** **                                                                                | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| **Operating  activities:**                                                                | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Net loss                                                                                  |       | $                                                                     | (3,969     | ) | $ | (13,827 | ) |
|                                                                                      |       |                                                                  |       |   |   |
| Adjustments to  reconcile loss from operations to net cash used for operating activities: |       |                                                                  |       |   |   |
| Gain on disposal  of asset                                                                |       | (49                                                                   | )          | — |   |
| Minority  interests in income of consolidated subsidiary                                  |       | 66                                                                    |       | — |   |
| Depreciation and  amortization                                                            |       | 2,499                                                                 |       | 2,658 |   |
| Loss on  extinguishment of debt                                                           |       | 648                                                                   |       | — |   |
| Amortization of  debt discount                                                            |       | 4,385                                                                 |       | 4,517 |   |
| Stock-based compensation                                                                  |       | 575                                                                   |       | 831 |   |
| Bad debt expense                                                                          |       | 97                                                                    |       | 60 |   |
| Warranty expense                                                                          |       | 141                                                                   |       | 71 |   |
| (Gain) loss from  change in value of warrants                                             |       | (4,476                                                                | )          | 1,354 |   |
| (Gain) loss from  change in value of conversion feature                                   |       | (6,137                                                                | )          | 1,933 |   |
|                                                                                      |       |                                                                  |       |   |   |
| Changes in  operating assets and liabilities:                                             |       |                                                                  |       |   |   |
| Trade accounts  receivable                                                                |       | (1,355                                                                | )          | (2,799 | ) |
| Inventories                                                                               |       | 1,200                                                                 |       | (470 | ) |
| Prepaid expenses  and other current assets                                                |       | (86                                                                   | )          | (1,026 | ) |
| Other assets                                                                              |       | (2,198                                                                | )          | 237 |   |
| Accounts payable  and accrued expenses                                                    |       | (1,123                                                                | )          | 2,381 |   |
| Deferred revenue                                                                          |       | 48                                                                    |       | (1,229 | ) |
| Other  liabilities                                                                        |       | 102                                                                   |       | (178 | ) |
| Net cash used  for operating activities                                                   |       | (9,632                                                                | )          | (5,487 | ) |
|                                                                                      |       |                                                                  |       |   |   |
| **Investing  Activities:**                                                                |       |                                                                  |       |   |   |
| Purchases of  property and equipment                                                      |       | (1,022                                                                | )          | (665 | ) |
| Proceeds from  the sale of property and equipment                                         |       | 400                                                                   |       | 104 |   |
| Investment in  patents and trademarks                                                     |       | (78                                                                   | )          | (102 | ) |
| Investment in  joint venture                                                              |       | (303                                                                  | )          | — |   |
| Net cash used  for investing activities                                                   |       | (1,003                                                                | )          | (663 | ) |
|                                                                                      |       |                                                                  |       |   |   |
| **Financing  Activities:**                                                                |       |                                                                  |       |   |   |
| Proceeds from  borrowings                                                                 |       | 39,784                                                                |       | 18,241 |   |
| Repayment of  borrowings                                                                  |       | (28,375                                                               | )          | (12,421 | ) |
| Repayment of  other liabilities                                                           |       | —                                                                |       | 63 |   |
| Net cash provided by  financing activities                                                |       | 11,409                                                                |       | 5,883 |   |
| Effect of  foreign exchange translation                                                   |       | (203                                                                  | )          | (562 | ) |
| Net increase  (decrease) in cash and cash equivalents                                     |       | 571                                                                   |       | (829 | ) |
|                                                                                      |       |                                                                  |       |   |   |
| Cash and cash  equivalents at beginning of period                                         |       | 144                                                                   |       | 1,392 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                                                     | 715        |   | $ | 563 |   |
|                                                                                      |       |                                                                  |       |   |   |
| Supplemental  cash flow information                                                       |       |                                                                  |       |   |   |
| Interest paid                                                                             |       | $                                                                     | 2,522      |   | $ | 1,664 |   |
| Taxes paid                                                                                |       | $                                                                     | —     |   | $ | — |   |

 

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

 

7

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During the nine monthsended September 30, 2007, $400 of the Company’s 7% senior convertible notes dueJuly 2007 was converted into 320,000 shares of the Company’s common stock at aconversion price of $1.25 per share.

 

 

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

 

8

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

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

**Forthe Nine Months Ended September 30, 2007 and 2006**

**(inthousands, except share data)**

**(unaudited)**

 

**1.             Basis of Presentation / Descriptionof Business**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America (“generally accepted accounting principles”)for interim financial information and with the instructions to Form 10-Q. Accordingly,they do not include all of the information and notes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments (consisting only of normal recurringaccruals) considered necessary for a fair presentation have been included. Allintercompany balances and transactions have been eliminated. Operating resultsfor the three and nine months ended September 30, 2007 are not necessarily indicativeof the results that may be expected for any future periods or the year endingDecember 31, 2007. The accompanying unaudited condensed consolidated financialstatements should be read in conjunction with the Company’s Form 10-K filedwith the Securities and Exchange Commission on March 16, 2007.

 

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 partners with third-party licensees anddistributors to develop and commercialize Liquidmetal alloy products.

 

The Company classifies operations into two reportable segments:Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys (see Note 9).Liquidmetal alloy industrial coatings are used primarily as a protectivecoating for industrial machinery and equipment, such as drill pipe used by theoil drilling industry and boiler tubes used by coal-burning power plants. BulkLiquidmetal alloys include potential market opportunities to manufacture andsell products and components for electronic devices, medical devices, defenseapplications, and sporting goods. In addition, the bulk Liquidmetal alloyssegment includes tooling and prototype sampling. In addition, such alloys areused to generate research and development services revenue for developing usesrelated primarily to defense and medical applications as well as potentiallicense fees, royalties, and other compensation from strategic partneringtransactions.

 

On July 24, 2007, the Company transferredsubstantially all of the assets of its Liquidmetal alloy industrial coatingsbusiness to a newly formed, newly capitalized subsidiary named LiquidmetalCoatings, LLC, a Delaware limited liability company (“LMC”), and LMC assumedsubstantially all of the liabilities of the coatings business. The transferincluded the thermal spray coatings assets and liabilities acquired under apurchase agreement with Foster Wheeler Energy Services in June 2007.  TheCompany holds a 69.25% ownership interest in LMC. The results of operation of LMCare consolidated and comprise our Liquidmetal alloy industrial coatings segmentfor financial reporting purposes.

 

Stock-based compensation

 

The Company previouslyapplied Accounting Principles Board (“APB”) Opinion No. 25 for optionswhen the exercise price of options granted to employees is less than the fairvalue of the underlying stock on the date of grant. As permitted, the Companyhad previously elected to adopt provisions of Statement of Financial AccountingStandard (“SFAS”) No. 123, *Accountingfor Stock-Based Compensation*foroptions granted to non-employees who perform services for the Company and thedisclosure-only provisions of options granted to employees.

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”), which replaces SFASNo. 123, *Accounting for Stock-BasedCompensation*, (“SFAS 123”) and supersedes APB OpinionNo. 25, *Accounting for Stock Issued toEmployees*, (“APB 25”). SFAS 123R requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values. Under SFAS123R, the Company is required to measure the cost of employee services receivedin exchange for stock options and similar awards based on the grant-date fairvalue of the award and recognize this cost in the income statement over theperiod during which an employee is required to provide service in exchange forthe award. The pro forma disclosures previously permitted under SFAS 123are no longer an alternative to financial statement recognition. The Companyadopted SFAS 123R on

 

9

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January 1, 2006using the modified prospective method and recorded $173 and $575 for the threeand nine months ended September 30, 2007, respectively, and $296 and $831 forthe three and nine months ended September 30, 2006, respectively, of non-cashcharges for stock compensation related to amortization of the fair value ofrestricted stock and unvested stock options representing an increase from thestock compensation that would have been recorded under APB 25 and SFAS 123.Under this method, the Company will recognize compensation cost, on aprospective basis, for the portion of outstanding awards for which therequisite service has not yet been rendered as of January 1, 2006 and anynew grants, based upon the grant-date fair value of those awards calculatedunder SFAS 123 for pro forma disclosure purposes. Accordingly, we have notrestated prior period amounts.

 

The fair value of each option grant is estimated on the date of thegrant using the Black-Scholes option-pricing model with the following weighted-averageassumptions used for grants for the nine months ended September 30, 2007 and2006, respectively: expected volatility of approximately 100% and 58%; dividendyield of 0% for all periods; expected option life of approximately 5 yearsand 6 years; and a risk-free interest rate ranging from 2.57% to 6.22%.

 

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

 

Translation of Foreign Currency

 

The Company applies **FASB No. 52, Foreign Currency Translation**,for translating foreign currency into US dollars in ourconsolidation of the financial statements.  Upon consolidation of theCompany’s foreign subsidiaries into the Company’s consolidated financialstatements, any balances with the subsidiaries denominated in the foreigncurrency are translated at the exchange rate at period-end. The financialstatements of Liquidmetal Korea have been translated based upon Korean Won asthe functional currency. Liquidmetal Korea’s assets and liabilities weretranslated using the exchange rate at period end and income and expense itemswere translated at the average exchange rate for the reporting period. Theresulting translation adjustment was included in other comprehensive income(loss).

 

Recent Accounting Pronouncements

 

In February 2007, the FASB issued SFAS 159, “The Fair Value Option forFinancial Assets and Financial Liabilities Including an amendment of FASBStatement No. 115 (SFAS 159),” which permits entities to choose to measuremany financial instruments and certain other items at fair value. The effectivedate of SFAS 159 will be the first quarter of 2008. The Company is currentlyevaluating the provisions of SFAS 159 and does not expect the adoption of thisnew standard to have a material impact on its consolidated financialstatements.

 

Other recent accounting pronouncements issued by the FASB (includingits Emerging Issues  Task Force), theAICPA and the SEC did not or are not believed by management to have a materialimpact on our company’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 $153,016 as of September 30,2007.  Cash used for operations for the nine months ended September 30,2007 was $9,632 and cash flow from operations will likely be negativethroughout fiscal year 2007.  As of September 30, 2007, the Company’sprincipal sources of liquidity are $715 of cash and $5,191 of trade accountsreceivable.  Such conditions raise substantial doubt that the Company willbe able to continue as a going concern.  These operating results occurredwhile the Company was developing and continues to develop, commercialize, andmanufacture products from an entirely new and unique technology.  Thesefactors have placed a significant strain on the financial resources of theCompany.  The ability of the Company to overcome these challenges dependson its ability to correct its production inefficiencies, reduce its operatingcosts, generate higher revenue, achieve positive cash flow from continuingoperations and continued sources of debt and equity financing.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of these uncertainties.

 

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TheCompany borrowed $10,130, which was offset by repayments of $10,852, under afactoring, loan, and security agreement executed on April 21, 2005 to fund itsworking capital requirements during the nine months ended September 30, 2007.

 

On January 3,2007, the Company completed a private placement of $16,300 in principal amountof 8% Convertible Subordinated Notes due January 2010 (the “January 2010 Notes”).The January 2010 Notes were issued for aggregate cash in the amount of $12,850,in payment of a total of $3,377 in principal and accrued but unpaid interestunder our previously issued 7% Senior Secured Convertible Notes due August 2007and our  8% Unsecured Subordinated Notes, and $73 cash discount (see Note7).

 

In June 2007, weentered into an equipment sale and licensing agreement with Grace Metal, aSouth Korean corporation, providing for $2,000 in exchange for die castingmachines and vacuum induction melters, and a 10-year exclusive license tomanufacture Liquidmetal alloys for customers whose principal headquarters ormajor operations are based in South Korea. The principal purpose of thetransactions with Grace Metal was to raise capital for the next-generationcasting equipment and to shift the cost and burden of our manufacturingoperations to a third party.  Grace Metal was formed by an investor groupthat includes the former Founder and director of our company, James Kang, whois also the brother of John Kang, Chairman of the Board of our company (seeNote 12).

 

In July 2007, wecompleted an $11,500 financing transaction that provided funding to repaysenior convertible notes previously issued were scheduled to become due in Julyand August 2007.  We transferred substantially all of the assets andliabilities of Liquidmetal alloy industrial coatings business to a newlyformed, newly capitalized subsidiary named Liquidmetal Coatings, LLC, aDelaware limited liability company (“LMC”), and LMC assumed substantially allof the liabilities of the Division (the “Assumed Liabilities”).  LMC wascapitalized through a $6,500 subordinated debt and equity investment by C3Capital Partners and a $5,000 senior credit facility with Bank Midwest, N.A. (seeNote 7).

 

We anticipate thatwe will not have sufficient funds to pursue our current operating plan throughthe fourth quarter of 2007 and we will therefore require additionalfunding.  We are actively seeking additional sources of capital andseeking to restructure and/or modify existing indebtedness.  The amount offunding that we seek and the timing of such fundraising efforts will depend onthe extent to which we are able to increase revenues through obtainingadditional purchase orders for our products and/or the extent to which we canrestructure or modify our debt.  Because we cannot be certain that we willbe able to obtain adequate funding from debt, equity, or other traditionalfinancing sources, we are also actively exploring several strategic financingoptions, including the possible sale of our manufacturing plant in South Korea(which would then be replaced with a smaller facility) and additional licensingand outsourcing of our manufacturing operations.

 

Additionally, we have approximately $3,000 of principal and accruedinterest outstanding as of September 30, 2007, under the 8% unsecuredsubordinated notes (“Notes”), which were due August 17, 2007.  We intendto fully repay the amounts due under Notes. However, as of the filing of thisreport we do not have sufficient funds to repay the Notes.  As a result,we are currently in default under the Notes. Such a default may havematerial adverse effect on our operations, financial condition, and results ofoperations. We have not received a formal notice of default and we arecurrently working to resolve this matter with investors holding our Notes. 

 

We cannotguarantee that adequate funds will be available when needed, and if we do notreceive sufficient capital, we may be required to alter or reduce the scope ofour operations.

 

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**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 or market. Inventorieswere comprised of the following:

 
| ** **         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|------------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **         | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| ** **         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Raw materials      |       | $                      | 1,205      |                  | $          | 966 |   |
| Work in process    |       | 345                    |       | 1,729                 |       |
| Finished goods     |       | 1,015                  |       | 1,070                 |       |
| Total  inventories |       | $                      | 2,565      |                  | $          | 3,765 |   |

 

**5.Idle Equipment**

 

Idle equipment consistsof certain equipment held by the Company for use in expansion of bulk alloyparts manufacturing.  While the equipment may be used internally to meetfuture capacity requirements, considering our current revenue and foreseeableproduction requirements, the Company does not anticipate utilizing thisequipment internally in the near future. Total amount of idle equipmentremaining was $156 as of September 30, 2007 and $194 as of December 31, 2006.

 

During the nine monthsended September 30, 2007, the Company disposed of $7 of its idle equipment aspart of the equipment purchase agreement and transfer agreement regardingWeihai operations with Grace Metal (see Note 12). During the nine months endedSeptember 30, 2006, the Company disposed of $12 of its idle equipment forproceeds of $104. The resulting gain of $92 is included in other income.

 

**6. Product Warranty**

 

Management estimatesproduct warranties as a percentage of certain bulk alloy product sales earnedduring the period. As of September 30, 2007, the Company used 5% of bulk alloyproduct sales as an estimate of warranties to be claimed. The percentage isbased on industry averages and historical information. The Company recorded a$120 of net gain from expired warranty and $141 of warranty expense during thethree and nine months ended September 30, 2007, respectively. The Companyrecorded $34 of net gain from expired warranty and $71 of warranty expenseduring the three and nine months ended September 30, 2006, respectively. Theproduct warranty accrual balances is included in accounts payable and accruedexpenses.

 

**7. Notes Payable**

 

Senior Convertible Note

 

On March 3, 2004, theCompany issued $9,924 of 6% senior convertible notes due 2007 (the “March Notes”)with a conversion price of $3.00 per share. During 2004, the Company redeemed$4,465 of the outstanding note balance in cash and exchanged approximately$5,460 in aggregate principal amount of the March Notes have been exchanged foran aggregate of (i) $2,730 of 6% Senior Secured Notes Due 2007 (the “July 2007Notes”) and (ii) $2,730 of 10% Senior Secured Notes Due 2005 (the “July 2005Notes”), collectively referred to as “Exchange Notes.”  In connection with the private exchangeoffer, the Company issued $250 of private placement notes to certain PlacementAgents as issuance costs. Of the $250 notes issued,

 

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$125 was paid in the formof long-term notes which is due in 2007 with interest rate of 6% per annum(July 2007 Notes) and $125 was paid in the form of short-term notes which isdue in 2005 with interest rate of 10% per annum (July 2005 Notes). The July2005 and July 2007 Notes are convertible into Common Stock at $2.00 and $1.00,respectively

 

In connection with theMarch Notes, the Company issued warrants to purchase an aggregate amount forapproximately 1.2 million shares of common stock, exercisable at $3.00 pershare for varying periods, all of which have expired as of September 30, 2007.

 

During the year endedDecember 31, 2006, $286 of the July 2007 Notes were converted into 285,750 ofthe Company’s common stock at a conversion price of $1.00 per share. During thenine months ended September 30, 2007, $400 of the Company’s 7% seniorconvertible notes due July 2007 was converted into 320,000 shares of theCompany’s common stock at a conversion price of $1.25 per share.

 

The Company redeemed alloutstanding notes and interest during the quarter ended September 30, 2007.

 

Pursuant to Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities,” the Company is required to report a value of theconversion liability as a fair value and record the fluctuation to the fairvalue of the conversion feature liability to current operations. The change inthe fair value of the conversion feature liability resulted in a gain of $23and $1,218 for the three and nine months ended September 30, 2007,respectively, and a gain of $676 and a loss $1,072 for the three and ninemonths ended September 30, 2006, respectively. The fair value of conversionfeatures outstanding at September 30, 2007 and December 31, 2006 was $0 and$1,218, respectively. The fair value of conversion features of outstanding atDecember 31, 2006 was computed using the Black-Scholes model under thefollowing assumptions: (1) 0.57 years; (2) volatility of 55%; (3) risk freeinterest of 5.00% and (4) dividend rate of 0%.

 

Pursuant to EITF 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the Company is required to report a value of the warrantliability as a fair value and record the fluctuation to the fair value of thewarrant liability to current operations. The change in fair value of warrantsresulted in a gain of $11 and a loss of $7 for the three and nine months ended September 30, 2006. The warranthas expired as of December 31, 2006.

 

As of December 31, 2006,the Company’s gross outstanding loan balance of the July 2007 Notes totaled$2,083. As of December 31, 2006, un-amortized discounts for conversion featureand warrants totaled $39, and other asset debt issuance costs totaled $14. Interestexpense for the amortization of debt issuance cost and discount on note was $58and $405 for the three and nine months ended September 30, 2007, respectively,$190 and $606 for the three and nine months ended September 30, 2006,respectively. As of September 30, 2007, the effective interest rate of the July2007 Notes was 34.5%.

 

Convertible Notes

 

On June 13, 2005, the Company completed a private placement (the “June2005 Private Placement”) of 10% Convertible Unsecured Notes Due June 13, 2006in the aggregate principal amount of $3,250 (the “June 2006 Notes”), togetherwith warrants to purchase up to an aggregate of 893,750 shares of the Company’scommon stock (the “Warrants”).  The warrants have an original exerciseprice of $2.00 per share. The warrants will expire on June 13, 2010 andare subject to exercise price adjustment for anti-dilution purposes. Theexercise price of the warrants was reduced to $1.75 per share and total numberof warrants was increased to 1,021,434 as of September 30, 2007 as a result ofour January 2007 private placement (see Convertible Subordinated Notes below).

 

On August 9, 2005, the June 2006 Notes were redeemed in cash andexchanged for 7% Convertible Secured Promissory Notes due August 2007 (see 2005Senior Convertible Notes below).

 

Pursuant to EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, theCompany is required to report a value of the warrant liability as a fair valueand record the fluctuation to the fair value of the warrant liability tocurrent operations. The change in the fair value of the warrants resulted in again of $29 and $345 for the three and nine months ended September 30, 2007,respectively. The change in the fair value of the warrants resulted in a gainof $257 and a loss of $366 for the three and nine months ended September 30,2006, respectively. The fair

 

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value of warrants outstanding at September 30, 2007 and December 31,2006 was $142 and $487, respectively. The fair value of warrants outstanding atSeptember 30, 2007 was computed using the Black-Scholes model under thefollowing assumptions: (1) expected life of 2.70 years; (2) volatility of 58%,(3) risk free interest of 4.03% and (4) dividend rate of 0%.

 

2005 SeniorConvertible Notes

 

On August 9, 2005, the Company completed a privateplacement (the “August 2005 Private Placement”) of $9,878 in principal amountof new 7% Convertible Secured Promissory Notes due August 2007 (the “August2007 Notes”). The issuance consisted of $5,000 cash, exchange of $1,284 inprincipal amount of the July 2005 Notes, the exchange of $2,996 in principalamount of the June 2006 Notes, satisfaction of accrued interest and lateregistration fees in the amount of $589 on the July 2005 Notes, andsatisfaction of accrued interest of $9 on the June 2006 Notes. The August 2007Notes are convertible into shares of the Company’s common stock at $2.00 pershare.

 

The Company also issued warrants to the purchasersof the August 2007 Notes and placement agents giving them the right to purchaseup to 2,469,470 and 414,495 shares of Company common stock, respectively, withan exercise price of  $2.00 per share,which is subject to price adjustment for anti-dilution purposes. As ofSeptember 30, 2007, the exercise price of the warrants was reduced to $1.75 pershare and total number of warrants was increased to 3,295,975. The warrantswill expire on August 2, 2010.

 

The Company redeemed alloutstanding notes and interest during the quarter ended September 30, 2007.

 

Pursuant to Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” the Company is required to report a value of the conversionliability as a fair value and record the fluctuation to the fair value of theconversion feature liability to current operations. The change in the fairvalue of the conversion feature liability resulted in a gain of $0 and $354 forthe three and nine months ended September 30, 2007, respectively. The change inthe fair value of the conversion feature liability resulted in a gain of $1,311and a loss of $860 for the three and nine months ended September 30, 2006. Thefair value of conversion features outstanding at September 30, 2007 andDecember 31, 2006 was $0 and $619, respectively.

 

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, is required to report a value of the warrant liability as a fair valueand record the fluctuation to the fair value of the warrant liability tocurrent operations. The change in the fair value of the warrants resulted in aloss of $52 and a gain of $1,127 for the three and nine months ended September30, 2007, respectively. The change in the fair value of the warrants resultedin a gain of $830 and $1,202 for the three and nine months ended September 30,2006, respectively. The fair value of warrants outstanding at September 30,2007 and December 31, 2006 was $485 and $1,612, respectively. The fair value ofthe warrants outstanding at September 30, 2007 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of 2.84years; (2) volatility of 58%; (3) risk free interest of 4.03% and dividend rateof 0%.

 

As of December 31, 2006,our gross outstanding loan balance of the August 2007 Notes totaled $7,188. Asof December 31, 2006, un-amortized discounts for embedded conversion featureand warrants totaled $2,441, other asset debt issuance costs totaled $139, andcontra liability debt issuance cost totaled $172. Interest expense for theamortization of debt issuance cost and discount on note was $302 and $2,114 forthe three and nine months ended September 30, 2007, respectively. Interestexpense for the amortization of debt issuance cost and discount on note was$1,036 and $3,250 for the three and nine months ended September 30, 2006,respectively. As of September 30, 2007, the effective interest rate for theAugust 2007 Notes was 17.5%.

 

Subordinated Promissory Note

 

On March 17, 2006, the Company issued a $1,000 10%subordinated promissory note due October 16, 2006 (the “October 2006 Note”) toAtlantic Realty Group, Inc., a company controlled by Jack Chitayat, a formerdirector of the Company. In connection with the October 2006 Note, the Companyissued warrants to purchase an aggregate amount of up to 125,000 shares ofcommon stock, exercisable at $2.00 per share.  The warrants will expire onMarch 17, 2009, and include price adjustment provisions for anti-dilutionpurposes.  As of September 30, 2007, the Company reduced the exercise priceof the warrants to $1.55 per share. There are no registration rights of theshares issuable from the exercise of the warrants.  Further, cashlessexercise of the warrants is permitted.

 

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During the quarter ended March 31, 2007, $1,000 ofOctober 2006 Note was redeemed in cash (see Convertible Subordinated Notesbelow).

 

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock,” the Company is required to report a value of the warrant liability as afair value and record the fluctuation to the fair value of the warrantliability to current operations. The change in the fair value of the warrantsresulted in a loss of $2 and a gain of $40 for the three and nine months endedSeptember 30, 2007.  The change in the fair value of the warrants resultedin a gain of $35 and a loss $5 for the three and nine months ended September30, 2006, respectively. The fair value of warrants outstanding at September 30,2007 and December 31, 2006 was $10 and $50, respectively. The fair value ofwarrants outstanding at September 30, 2007 was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 1.46 years; (2)volatility of 58%, (3) risk free interest of 3.97% and dividend rate of 0%.

 

Interest expense for the amortization of discount onthe note was $0 for the three and nine months ended September 30, 2007,respectively, and interest expense for the amortization of discount on the notewas $ 29 and $69 for the three and nine months ended September 30, 2006,respectively.

 

Unsecured Subordinated Notes

 

The Company completed aprivate placement of 8% unsecured subordinated notes (the “May 2006 PrivatePlacement”) in the aggregate principal amount of $4,584 (the “August 2007Subordinated Notes”) between May and December 2006. The August 2007Subordinated Notes are unsecured and became due on of August 17, 2007. Intereston the unpaid principal balance of each August 2007 Subordinated Note accruesat the rate of 8% per annum until maturity date. The August 2007 SubordinatedNotes is subordinate in right of payment and in all other respects to the July2007 Notes, the August 2007 Notes, and any other notes that may be issued by theCompany after May 17, 2006 in exchange for or in satisfaction of any July 2007Notes or August 2007 Notes (collectively, the “Senior Notes”).

 

As part of the May 2006Private Placement, the Company issued warrants to the purchasers of the Notesgiving them right to purchase up to an aggregate of 892,247 shares of theCompany’s common stock. In addition, warrants to purchase 80,717 shares of theCompany’s common stock were issued to the placement agent in the transaction. Thewarrants have an exercise price of $2.58 per share, which is subject to priceadjustment for anti-dilution purposes. The exercise price of the warrants wasreduced to $2.13 per share and total amount of warrants was increased to1,178,651 as of September 30, 2007. The warrants will expire on May 17, 2011.

 

Pursuant to EITF 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,” the Company is required to report a value of the warrantliability as a fair value and record the fluctuation to the fair value of thewarrant liability to current operations. The change in the fair value of thewarrants resulted in a loss of $30 and a gain of $327 for the three and ninemonths ended September 30, 2007, respectively. The change in the fair value ofthe warrants resulted in a loss of $228 and $226 for the three and nine monthsended September 30, 2006. The fair value of warrants outstanding at September30, 2007 and December 31, 2006 was $187 and $513. The fair value of thewarrants outstanding at September 30, 2007 was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 3.63 years; (2)volatility of 58%; (3) risk free interest of 4.23% and dividend rate of 0%.

 

On January 3, 2007 aspart of a private placement offer, as amended, $925 of August Subordinated 2007Notes and $45 of accrued interest  wereexchanged for 8% Convertible Subordinated Notes due January 2010 (seeConvertible Subordinated Notes below). Additionally, $900 of August Subordinated2007 Notes and $46 of accrued interest were redeemed in cash as of September30, 2007.

 

Our gross outstandingloan balance of the August 2007 Subordinated Notes totaled $2,759 and $4,585 asof September 30, 2007 and December 31, 2006, respectively. As of September 30,2007, un-amortized discounts for warrants and other asset deferred issuancecosts was $0. Interest expense for the amortization of discount on the note anddeferred issuance cost was $172 and $630 for the three and nine months endedSeptember 30, 2007, respectively. Interest expense for the amortization ofdiscount on the note and deferred issuance cost was $150 and $248 for the threeand nine months ended September 30, 2006, respectively. As of September 30,2007, the effective interest rate for the August 2007 Subordinated Notes was37.6%.

 

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ConvertibleSubordinated Notes

 

On January 3, 2007, the Company completed a private placement of 8%Convertible Subordinated Notes due January 2010 (the “January 2010 Notes”). As a result of an April 2007 amendment to this transaction, the Companyultimately issued $16,300 in principal amount of January 2010 Notes.  TheJanuary 2010 Notes were issued for aggregate cash in the amount of $12,850, inpayment of a total of $3,377 in principal and accrued but unpaid interest underour previously issued 7% Senior Secured Convertible notes due August 2007 (“August2007 Notes”) and our 8% Unsecured Subordinated notes (the “August 2007Subordinated Notes”), and $73 cash discount.

 

The payment of thepreviously issued notes was treated as an extinguishment of the debt inaccordance with Emerging Issues Task Force No. 96-19, “Debtors Accounting for aModification or Exchange of Debt Instruments.”  The placement resulted ina $648 loss from extinguishment of debt, which consisted of write down of $64of deferred issue costs, $733 of debt discount, and decrease of $149 inconversion feature liability as a result of the change in carrying value ofexchanged notes.

 

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

 

The January 2010 Notes were issued pursuant to a Securities PurchaseAgreement, dated January 3, 2007, between the Company and the purchasers of theJanuary 2010 Notes (the “January Purchase Agreement”).  Under the terms ofthe January Purchase Agreement, the Company agreed to repay, within 5 daysafter the closing of the private placement, approximately $15,461 of theCompany’s outstanding debt under previously issued promissory notes, includingthe August 2007 Notes, the October 2006 Note, and August 2007 SubordinatedNotes (the “Debt Satisfaction Covenant”).  The Company originally agreedto this covenant based on assurances that a substantial number of holders ofthe August 2007 Notes would elect to convert their August 2007 Notes at areduced conversion price following the private placement under a noteconversion agreement proposed by the Company, but most of such holdersultimately elected not to proceed with such conversion.  Accordingly, inApril 2007, the Company entered into an amendment to the January PurchaseAgreement (“April 2007 Amendment”) providing that the Company will have untilOctober 1, 2007 (or such earlier date on which the indebtedness to be repaid isdue) to comply with the Debt Satisfaction Covenant.

 

The April 2007Amendment also finalized the schedule of investors in the Private Placement toshow a total of $16,300 in principal amount of Notes; decreased the conversionprice of the Notes from $1.55 to $1.10, decreased the warrant exercise pricefor the warrants issued from $1.93 to $1.55, increased the number of sharessubject to such warrants issued to equal 50% of the principal amount of Notespurchased divided by 1.10, and the purchasers of the Notes consented to theCompany granting a security interest in its South Korean manufacturing plant topurchasers of convertible notes in a subsequent offering, provided a  paripassu  security interest is granted to the purchasers of the Notes.

 

Pursuant toStatement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock,” EITF 00-27, “Application of Issue No. 98-5 to Certain ConvertibleInstruments,” and EITF 05-2 “The Meaning of ‘Conventional Convertible DebtInstrument’ in EITF Issue No. 00-19,” the original fair value of the embeddedconversion feature of $6,205 have been recorded as conversion feature liabilityas the debt is considered nonconventional convertible debt. The original fairvalue was computed using the Black-Scholes model under the following assumptions:(1) expected life of 1.6 to 3 years; (2) volatility of 55%; (3) risk freeinterest of 4.69% to 4.76% and dividend rate of 0%.  The original fairvalue of the additional embedded conversion feature of $1,005 resulting fromreduced conversion price under the amended Securities Purchase Agreement, havebeen recorded as conversion feature liability. The value was computed using theBlack-Scholes model under the following assumptions: (1) expected life of 1.3to 2.7 years; (2) volatility of 55%; (3) risk free interest of 4.6% to 4.9% anddividend rate of 0%.  In addition, the Company is required to report avalue of the conversion liability as a fair value and record the fluctuation tothe fair value of the conversion feature liability to current operations.

 

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The change in thefair value of the conversion feature liability resulted in a gain of $602 and$4,565 for the three and nine months ended September 30, 2007,respectively.  The fair value of conversion feature outstanding atSeptember 30, 2007 of $2,645 was computed using the Black-Scholes model underthe following assumptions: (1) expected life of 0.8 to 2.3 years; (2)volatility of 58%, (3) risk free interest of 3.97% to 4.05% and dividend rateof 0%.

 

Pursuant to EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the original fair values of thewarrants of $3,964 have been recorded as warrant liability, which was computedusing the Black-Scholes pricing model under the following assumptions: (1)expected life of 5 years; (2) volatility of 55%; (3) risk free interest of4.68% and (4) dividend rate of 0%.  The original fair values of thewarrants of $608 from the additional warrants issued under the amendedSecurities Purchase Agreement, have been recorded as additional warrantliability, which was computed using the Black-Scholes pricing model under thefollowing assumptions: (1) expected life of 4.70 years; (2) volatility of 50%;(3) risk free interest of 4.51% and (4) dividend rate of 0%.

 

In addition, theCompany is required to report a value of the warrant as a fair value and recordthe fluctuation to the fair value of the warrant liability to currentoperations.  The change in the fair value of the warrants resulted in again of $275 and $2,637 for the three and nine months ended September 30, 2007,respectively.  The fair value of the warrants outstanding at September 30,2007 of $1,934 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 4.26 years; (2) volatility of 58%; (3) riskfree interest of 4.23% and dividend rate of 0%.

 

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

 

The January 2010Notes bear interest at 8% per annum with interest payable quarterly in arrearsin cash, or, at our option, in the form of additional January 2010 Notes (inwhich case the interest rate will be 10% per annum). The ability to payinterest with additional January 2010 Notes is subject to specified conditions,including the existence of an effective registration statement covering theresale of the shares issued in payment of interest and certain minimum tradingvolumes in the stock to be issued. From and after an event of default under theJanuary 2010 Notes and for so long as the event of default is continuing, theJanuary 2010 Notes will bear default interest at a rate of 12% per annum (or15% per annum if we elect to pay interest with additional January 2010 Notes).

 

Beginning July 31,2008 and at the end of each month thereafter, the Company will be required toredeem 1/36th of the principal amount of the January 2010 Notes in cash or, atthe Company’s election, with shares of our common stock. The ability to pay theredemption amounts with shares of common stock will be subject to specifiedconditions, including the existence of an effective registration statementcovering the resale of the shares issued in payment of the redemption amountand certain minimum trading volumes in the stock to be issued. Any unconvertedJanuary 2010 Notes will become due on December 31, 2009, although the Companywill have the right at any time after 18 months following the issuance of theJanuary 2010 Notes to redeem the January 2010 Notes in whole or in part for acash redemption price of 105% of the portion of the principal amount beingredeemed plus all accrued and unpaid interest thereon. The January 2010 Notesare unsecured and are subordinate to the July 2007 Notes and to certain securedfinancing from commercial lenders incurred by the Company in the future. The terms of the 2010 Notes also provide that the Company will be required tomaintain a sufficient bank balance to provide for the timely repayment of ourJuly 2007 Notes.

 

In connection withthe January 2007 private placement, the Company entered into a Registration RightsAgreement with the purchasers of the January 2010 Notes under which the Companyis required, on or before 45 days after the closing of the private placement,to use commercially reasonable efforts to file a registration statement withthe SEC covering the resale of the shares of the common stock issuable pursuantto the January 2010 Notes and warrants and to use commercially reasonableefforts to have the registration declared effective at the earliest date (butin no event later than 90 days after filing if there is no SEC review of theregistration statement, or 120 days if there is an SEC review).  TheCompany will be subject to monetary penalties up to a maximum amount of 18% ofthe aggregate amount of Notes sold in the Private Placement if the

 

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registrationstatement is not filed or does not become effective on a timely basis. Themonetary penalties will accrue at the rate of 1% per month of thethen-outstanding principal amount of the January 2010 Notes. In the event thatthe Company is unable to include in the registration statement all shares ofour common stock issuable pursuant to the January 2010 Notes and warrants, thenwe will be required to file up to two additional registration statements toregister the resale of any shares excluded from the originally filedregistration statement and to pay the foregoing monetary penalties on theJanuary 2010 Notes convertible into the excluded shares until the resale ofsuch excluded shares is covered by an effective registration statement or untilsuch shares can be sold under SEC Rule 144.  As of September 30, 2007, anaggregate of $178 in monetary penalties under the Registration Rights Agreementhad already been paid to investors, while an additional $721 in such penaltieswere accrued but unpaid.

 

The Company’sgross outstanding loan balance of the January 2010 Notes totaled $16,300 as ofSeptember 30, 2007.  As of September 30, 2007, un-amortized discounts forconversion feature, warrants, and cash discount totaled $10,760, and otherasset debt issuance costs totaled $1,046.  Interest expense for theamortization of debt issuance cost and discount on note was $446 and $1,200 forthe three and nine months ended September 30, 2007, respectively.  As ofSeptember 30, 2007, the effective interest rate of the January 2010 Notes was74%.

 

Factoring Agreement

 

The Company entered intoa Factoring, Loan, and Security Agreement (the “Agreement”) with a financingcompany on April 21, 2005, which allows for borrowings of up to $1,500. TheAgreement expires on April 21, 2006, and automatically renews annuallythereafter. All borrowings are secured by outstanding receivables specificallyassigned to the financing company. Assigned receivables are considered “Approved”or “Non-Approved” by the financing company. In January 2007, the Companyentered into a second amendment to the Agreement to provide for increasedborrowings against non-approved receivables assigned of 80%. Borrowings madeagainst non-approved receivables assigned are limited to $1,000 and totalborrowings made on approved and non-approved receivables assigned are limitedto $5,000. Further, the amendment provides for interest charges of 0.5% plusprime rate of interest less 2%. The agreement will continue until February 1,2008 and will renew annually thereafter. In February 2007, the Company enteredinto an agreement to deposit cash of $2,083 with a rate of prime rate ofinterest less 2% with the financing company. The agreement is effective untilJuly 27, 2007 and the cash deposit will be used to pay down principal amount ofthe July 2007 Notes. Additionally, the financing company reserves the right tooffset outstanding advances against the cash deposit. In July 2007, the Companyentered into a third amendment to exclude intellectual property transferred toLMC as collateral and to release security interest in receivables previouslyassigned in consideration of full repayment of the outstanding advances. TheCompany paid $628 and the financing company applied the $2,083 cash depositheld against the outstanding advance of $2,711 on July 23, 2007. Additionally,the financing company reduced the borrowings against non-approved receivablesassigned to 50% of the receivable value.

 

Payments on assigned receivablesare received directly by the financing company, and applied to outstandingadvances. All outstanding advances and uncollected assigned receivables aresubject to fees and interest charges ranging from 0.55% to 1.5% plus prime rateas published by the Wall Street Journal, with a minimum annual fee of $30. Allreceivables assigned and advances made are subject to return and recall by thefinancing company, respectively. As such, the advances have been classified asshort-term secured borrowings in accordance with SFAS No. 140 “Accounting forTransfer and Servicing of Financial Assets and Extinguishments of Liabilities.”

 

For the nine months endedSeptember 30, 2007, the Company borrowed $10,130 and repaid $10,852 under theAgreement. The total outstanding advance made under the agreement is $946 and$1,669 as of September 30, 2007 and December 31, 2006, respectively, which ispresented as short-term debt. The weighted average rate of interest forborrowings made under the Agreement was 8.87% for the nine months endedSeptember 30, 2007. As of September 30, 2007, the Company’s availability forfuture borrowing under the agreement is $4,054 which is contingent on approvalof eligible receivables by the financing company.

 

18

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Kookmin Note

 

On February 4,2003, our Korean subsidiary received 6,500,000 in South Korean Won, orapproximately $5,488, under a loan from Kookmin Bank of South Korea. The loanbears interest at an annual rate of 7.1%. In the event of delayed repayment,the interest increases to a maximum of 21%, depending on the length of time therepayment is delayed. As of September 30, 2007, the interest rate was increasedto 9.2% from delayed interest payments made. This loan is collateralized by theplant facilities and certain equipment in South Korea. During the firsteighteen months from the origination date, interest was payable on a monthlybasis. In October 2003, the Company paid $873 of principal at the request ofKookmin Bank due to the sale of machines that had been part of the collateralon the loan. Subsequent to October 31, 2003, Kookmin Bank requested that theCompany pay an additional $866 of principal by February 2004 due to the Company’scurrent credit rating. The Company made two payments on the requestedadditional loan pay down in November and December 2003 of $320 and $205,respectively. The remaining payment of $341 was subsequently made in February2004. Beginning in September 2004, the Company is required to make equalmonthly installments of principal and interest to repay the remaining balancethrough February 2008. Principal payments made to Kookmin Bank totaled $1,236for the nine months ended September 30, 2007, which includes $16 of foreignexchange translation loss. The outstanding loan balance totaled $576 and$1,796, of which $576 and $225 is included in current portion of long-termdebt, as of September 30, 2007 and December 31, 2006, respectively.

 

Debt of Majority Owned Subsidiary

 

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

 

LMC was capitalized through a $6,500 subordinated debt and equityinvestment by C3 Capital Partners and a $5,000 senior credit facility with BankMidwest, N.A. This debt and equity resulted in cash proceeds of $11,102 afterrelated debt issuance costs of $398, which proceeds LMC used to purchase all ofthe assets and liabilities from the Company. The Company incurred an additional$459 in issuance costs directly related to the debt issuance. As a result, $857was recorded as deferred debt issuance costs to be amortized over the life ofthe debt. Interest expense for the amortization of debt issuance cost was $35for the three and nine months ended September 30, 2007.

 

The Company retains a 69.25% ownership interest in LMC, C3 Capital Partners (“C3”) holds a 19% ownership interest, Larry Buffington,the Company’s President and CEO, (who also serves as the President and CEO ofLMC) holds a 10% ownership interest, and CRESO Capital Partners (the Company's financialadvisor in the Transaction) holds a 1.75% ownership interest. The equityinterests acquired by C3 and issued to CRESO were not considered a discount todebt, as the unconsolidated net assets of LMC were deemed to have an initialvalue of $0 upon closing of the Transaction for financial accounting purposes. Further,LMC is fully responsible for the repayment of debt obligations.

 

*Midwest Debt*

 

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 dateof July 20, 2011.  The revolving loan allows for borrowings up to $1,500and has a maturity date of July 20, 2008.  Borrowing availability underthe revolving loan is based in a percentage of LMC’s eligible receivables andeligible inventory, and the initial advance under the revolving loan was $1,000on July 24, 2007.  LMC’s obligations under the Loan Agreement are securedby a blanket security interest in all of LMC’s assets and the Company's equityinterest in LMC, and pursuant to an intercreditor agreement between theC3 and Midwest, Midwest’s security interest in the assets is senior to C3’ssecurity interest in the same assets.

 

19

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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 theterm 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 September 30, 2007,the gross outstanding loan balance under the term loan and revolving loantotaled $3,913 and $1,088, respectively, which are presented as long term debtand short term debt of consolidated subsidiary on the Company’s condensedconsolidated balance sheet, respectively. Interest expense incurred under theterm loan and revolving loan totaled $63 and $16, respectively, for the threemonths ended September 30, 2007.

 

*C3 Debt*

 

In the Transaction, LMCalso entered into a Securities Purchase Agreement, dated July 24, 2006 (the “SecuritiesPurchase 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 by LMCunder the Subordinated Notes or Securities Purchase Agreement) to require LMCto purchase the C3 entities’ membership interests in LMC for a purchase priceequal to their pro rata portion of the greater of (i) the appraised fair marketvalue of LMC or (ii) six times LMC’s trailing 12-month earnings before interesttaxes, depreciation, and amortization, less funded debt.

 

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 under at an annual rate of 14%, with12% 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 Subordinated Notes.

 

The grossoutstanding loan balance including accrued interest payable upon maturity of theSubordinated Note totaled $6,524 as of September 30, 2007.  Interestexpense incurred under the Subordinated Notes totaled $172 for the three andnine months ended September 30, 2007.

 

**8.     StockCompensation Plan**

 

During the three and nine months ended September 30, 2007, under theCompany’s 2002 Non-employee Director Stock Option Plan which provides for thegrant of stock options to non-employee directors, the Company  granted options to purchase 0 and 70,000,respectively, of the Company’s common shares for an average exercise price of $0and $1.53, respectively. Further, all options granted under this plan hadexercise prices that were equal to the fair market value on the date of grant.

 

During the three and nine months ended September 30, 2007, under theCompany’s 2002 Equity Incentive Plan which provides for the grant of stockoptions to officers, employees, consultants and directors of the Company itssubsidiaries, the Company granted options to purchase 1,235,500 of the Company’scommon shares for an average exercise price of $0.77. Further, all optionsgranted under this plan had exercise prices that were equal to the fair marketvalue on the date of grant.

 

In August 2007, two of the non-employee directors of our company weregiven the opportunity to receive shares of stock under the 2002 EquityIncentive Plan in lieu of past-due director and committee fess that were due tothem for periods through June 30, 2007. Such shares were issuable to them at anaverage price of $0.97 and $0.85 per share. As of September 30, 2007, a totalof 30,875 shares were issued to non-employee directors in lieu of thesepast-due fees.

 

The Company canceled257,474 and 687,627 options during the three and nine months ended September30, 2007, respectively, for terminated employees and options expired.

 

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**9.             Segment Reporting and GeographicInformation**

 

SFAS No. 131,*Disclosures aboutSegments of an Enterprise and Related Information,*requirescompanies to provide certain information about their operating segments. In April2002, the Company began classifying operations into two reportable segments:Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys. TheLiquidmetal alloy industrial coatings are used primarily as a protectivecoating for industrial machinery and equipment, such as drill pipe used by theoil drilling industry and boiler tubes used by coal burning power plants. BulkLiquidmetal alloys include market opportunities to manufacture and sell casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment. Primarily,the expenses incurred by the bulk Liquidmetal alloy segment are research anddevelopment costs and selling expenses associated with identifying anddeveloping market opportunities. Bulk Liquidmetal alloys products can bedistinguished from Liquidmetal alloy coatings in that the bulk Liquidmetalalloy can have significant thickness, up to approximately one inch, whichallows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment. Revenue and expensesassociated with research and development services and product licensingarrangements are included in the bulk Liquidmetal alloy segment. The accountingpolicies of the reportable segments are the same as those described in Note 4to the consolidated financial statements included in the Company’s Form 10-Kfiled with the Securities and Exchange Commission on March 16, 2007.

 

Summarized financial information concerning the Company’s reportablesegments is shown in the following tables:

 
| ** **                                                         | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|-------------------------|------------|
| Three Months  Ended September 30, 2007                             |       |         |       |                |       |                    |       |
| Revenue to  external customers                                     |       | $            | 3,505      |                | $          | 3,601                   |       | $ | 7,106 |   |
| Gross profit  (loss)                                               |       | 1,115        |       | 797                 |       | 1,912                   |       |
| Income (loss)  before interest expense and discontinued operations |       | 2,229        |       | (1,308              | )          | 921                     |       |
| Total  identifiable assets at end of period                        |       | 2,942        |       | 17,708              |       | 20,650                  |       |
|                                                               |       |         |       |                |       |                    |       |
| Three Months  Ended September 30, 2006                             |       |         |       |                |       |                    |       |
| Revenue to  external customers                                     |       | $            | 2,589      |                | $          | 5,451                   |       | $ | 8,040 |   |
| Gross profit                                                       |       | 1,110        |       | 481                 |       | 1,591                   |       |
| Income (loss)  before interest expense and discontinued operations |       | 905          |       | (506                | )          | 399                     |       |
| Total  identifiable assets at end of period                        |       | 1,515        |       | 18,971              |       | 20,486                  |       |
|                                                               |       |         |       |                |       |                    |       |
| Nine Months  Ended September 30, 2007                              |       |         |       |                |       |                    |       |
| Revenue to  external customers                                     |       | $            | 9,293      |                | $          | 11,211                  |       | $ | 20,504 |   |
| Gross profit                                                       |       | 3,667        |       | (2,484              | )          | 1,183                   |       |
| Income (loss)  before interest expense and discontinued operations |       | 2,229        |       | (3,594              | )          | (1,365                  | )          |
| Total  identifiable assets at end of period                        |       | 2,942        |       | 17,708              |       | 20,650                  |       |
|                                                               |       |         |       |                |       |                    |       |
| Nine Months  Ended September 30, 2006                              |       |         |       |                |       |                    |       |
| Revenue to  external customers                                     |       | $            | 6,716      |                | $          | 14,969                  |       | $ | 21,685 |   |
| Gross profit  (loss)                                               |       | 2,774        |       | 1,574               |       | 4,348                   |       |
| Income (loss)  before interest expense and discontinued operations |       | 2,187        |       | (860                | )          | 1,327                   |       |
| Total  identifiable assets at end of period                        |       | 1,515        |       | 18,971              |       | 20,486                  |       |

 

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

 
| ** **                                                                         | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,**      | ** ** |
| ** **                                                                         | ** ** | **2007**                                | ** ** | **2006**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Total segment  (loss) income before minority interest, interest expense            |       | $                                       | 921        |                                   | $          | 399 |   | $ | (1,365 | ) | $ | 1,327 |   |
| General and  administrative expenses, excluded                                     |       | (1,193                                  | )          | (1,367                                 | )          | (5,170 | ) | (4,523 | ) |
|                                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Consolidated  loss before interest, other income, income taxes, minority interests |       | (272                                    | )          | (968                                   | )          | (6,535 | ) | (3,196 | ) |
| Loss from  extinguishments of debt                                                 |       | —                                  |       | —                                 |       | (648 | ) | — |   |
| Change in value  of warrants, net                                                  |       | 220                                     |       | 1,361                                  |       | 4,476 |   | (1,354 | ) |
| Change in value  of conversion feature                                             |       | 625                                     |       | 1,987                                  |       | 6,137 |   | (1,933 | ) |
| Interest expense                                                                   |       | (1,991                                  | )          | (2,302                                 | )          | (7,454 | ) | (7,361 | ) |
| Interest income                                                                    |       | 14                                      |       | 8                                      |       | 121 |   | 17 |   |
| Minority  interests                                                                |       | (66                                     | )          | —                                 |       | (66 | ) | — |   |
| Consolidated net  loss                                                             |       | $                                       | (1,470     | )                                      | $          | 86 |   | $ | (3,969 | ) | $ | (13,827 | ) |

 

Included in bulk alloysegment income for both the three and nine months ended September 30, 2007 is $0and $49, respectively, of other income from gain on disposal of assets inconnection with the equipment purchase agreement and transfer agreement of theWeihai operations to Grace Metal (see Note 12). Included in bulk alloy segmentincome for the three and nine months ended September 30, 2006 is $0 and $572 ofother income, respectively, recognized from $480 gain on termination of adistribution agreement in March 2006 and $92 gain on disposal of idle equipmentin June 2006.

 

Excluded general and administrativeexpenses are attributable to the Company’s corporate headquarters. Theseexpenses primarily include corporate salaries, consulting, professional feesand facility costs. Research and development expenses are included in theoperating costs of the segment that performed the research and development.

 

Revenues from sales tocompanies in the United States were $4,311 and $3,212 during the three monthsended September 30, 2007 and 2006, respectively. The revenue related to theUnited States of America was earned under defense-related research anddevelopment contracts, sales of coatings products, and sales of Liquidmetalbulk alloy products.

 

During the three monthsended September 30, 2007, the Company had revenue from sales to companiesoutside of the United States of $2,795 of which $1,839 represented sales tocompanies located in South Korea. During the three months ended September 30,2006, the Company had revenues from companies outside of the United States of$4,828 of which $362 represented sales to companies located in South Korea. Therevenue related to sales to companies outside of the United States was frombulk alloy products.

 

Long-lived assets includenet property, plant, and equipment, and net intangible assets. The Company hadlong-lived assets of $2,713 and $1,439 located in the United States atSeptember 30, 2007 and December 31, 2006, respectively. The Company hadlong-lived assets of $9,405 and $11,799 located in South Korea at September 30,2007 and December 31, 2006, respectively.

 

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Reconciling informationbetween reportable segments and the Company’s consolidated totals is shown inthe following table:

 
| ** **                                 | ** ** | **September 30,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2007**               | ** ** |
|                                       |       |                   |       |
| Total segment  assets                      |       | $                      | 20,650     |   |
| Cash and cash  equivalents                 |       | 408                    |       |
| Prepaid expenses  and other current assets |       | 783                    |       |
| Other property,  plant and equipment       |       | 112                    |       |
| Intangibles, net                           |       | 1,135                  |       |
| Other assets                               |       | 91                     |       |
| Total  consolidated assets                 |       | $                      | 23,179     |   |

 

Assets excluded from segment assets include assets attributable to theCompany’s corporate headquarters. The Company’s largest assets consist of cashand intangible assets, which consist primarily of the Company’s patents andtrademarks.

 

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

 

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

 

Optionsto purchase 8,411,464 shares of common stock at prices ranging from $0.77 to$15.00 per share were outstanding at June 30, 2007, but were not included inthe computation of diluted EPS for the same period as the inclusion would havebeen antidilutive. Warrants to purchase 13,278,651 shares of common stock withprices ranging from $1.55 to $2.13 per share outstanding at September 30, 2007,were not included in the computation of diluted EPS for the same period as theinclusion would have been antidilutive. Additionally, 14,817,751 shares of common stockissuable upon conversion of the Company’s convertible notes with conversionprices of $1.10 per share outstanding at September 30, 2007 were not includedin the computation of diluted EPS for the same period because the inclusionwould have been antidilutive.

 

**11.          Commitmentsand Contingencies**

 

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

 

In April 2006, we reached agreements-in-principle to settle our previously-disclosedconsolidated securities class action and shareholder derivative actions for atotal of $7,500; $7,025 for the class action and $475 for the derivativeactions. In addition, we will commit to maintain or implement various corporategovernance measures in connection with the settlement of the derivativeactions.

 

The consolidated class action arose from a number of lawsuits filed in2004 against our company and certain of our former and current directors andofficers on behalf of persons who purchased our common stock betweenMay 21, 2002 and May 13, 2004.  These actions, which werebrought under the federal securities laws, alleged that the Prospectusissued in connection with our initial public offering in May 2002contained material misrepresentations and omissions regarding our historicalfinancial condition and regarding a personal stock transaction by our formerchief executive officer.  They also alleged that our company and certainof our present and former officers and directors engaged in improper revenuerecognition with respect to certain of our business transactions, failed tomaintain adequate internal controls, and knowingly disclosed unrealistic butfavorable information about market demand for and commercial viability of our productsto artificially inflate

 

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the value of our stock. On October 19, 2006, the presiding judgeentered an Order giving final approval of the class action settlement. Inconnection with the settlement, our directors and officers’ liability insurerscontributed $7,025 to a settlement fund, from which approved claims of eligibleclass members will be paid in accordance with a court-approved plan ofallocation. Taking into account the insurance contribution, the net cost of thesettlement to our company is approximately $475, which is the insurancedeductible we paid over several quarters ending in the third quarter of 2005,and which was previously recorded as a charge.

 

In addition, in May 2004, two shareholder derivative actions werefiled in the Superior Court of Orange County, California and laterconsolidated.  Shortly thereafter, one additional shareholder derivativeaction was filed in the United States District Court for the Middle District ofFlorida, Tampa Division.  These derivative actions were brought by certainshareholders against certain of our present and former officers and directorsas well as the company (as a nominal defendant).  The suits alleged thatthe defendants breached various fiduciary duties and otherwise violated statelaw based primarily upon the same facts and circumstances underlying thefederal securities class action.  In early April 2006, thecompany's counsel and the derivative plaintiffs' counsel participate in amediation conference, which resulted in an agreement-in-principle to settleboth derivative actions.  On August 2,2006, plaintiffs’ counsel in the California derivative action filed a Notice ofSettlement in the Superior Court.  OnJuly 13, 2007, the settlement was approved by the court. 

 

In August 2006, the United States Department of Justice (“DOJ”)instituted a grand jury proceeding in the Middle District of Florida toinvestigate, among other things, alleged accounting improprieties in relationto certain of our business transactions and a personal stock transaction by ourformer chief executive officer. The grand jury proceeding is based primarilyupon the same underlying facts and circumstances as alleged in the federalclass action and shareholder derivative actions. To date, subpoenas for theproduction of documents and/or grand jury testimony have been issued to ourcompany and several present and former officers and directors. We arecooperating with the DOJ in its investigation.

 

On June 26, 2006, the Company entered into a joint ventureagreement with SAGA, SpA in Padova, Italy, (“SAGA”) a specialist precisionparts manufacturer.  The joint venture is named Liquidmetal SAGA Italy,Srl (“LSI”).  The Company also entered into an exclusive manufacturinglicense agreement for the eyewear industry with LSI.  Under the jointventure agreement, the Company has option to buy ownership interest in LSI,initially, of 19.9% to up to 50%.  In December 2006, the Company exercisedthe 19.9% interest in LSI and will have two years to purchase the additionalinterest at a nominal price. In January 2007 and June 2007, the Company contributedadditional $217 and $86, respectively, into LSI as additional investment. The contribution did not change the Company’s 19.9% interest in LSI. Underthe licensing agreement, at any time following 18 months after the effectivedate of the agreement, LSI may exercise its option to sell to the Companycertain business assets including manufacturing equipment acquired under thejoint venture. Duringyear ended December 31, 2006, the Company recognized revenues of $702 ofLiquidmetal alloys sold to SAGA for use in the joint venture. Companyanticipates the alloys to be fully utilized by the joint venture prior to the18 month period. During the nine months ended September 30, 2007, the Companyrecognized revenues of $103 of Liquidmetal alloys sold to LSI for use in thejoint venture.

 

On July 24, 2007, the Company transferred all theassets of its Liquidmetal alloy industrial coatings business to a newly formed,newly capitalized subsidiary named Liquidmetal Coatings, LLC, a Delawarelimited liability company (“LMC”), and LMC assumed substantially all of theliabilities of the coatings business. Larry Buffington, the Company’s Presidentand CEO, (who also serves as the President and CEO of LMC) holds 10% ownershipinterest in LMC. Under the Operating Agreement dated July 24, 2007, upontermination of Mr. Buffington’s employment, LMC may repurchase Mr. Buffington’s ownership interest, within 6 monthsof termination , at 20% of the fair market value if termination occurs in thefirst anniversary of the transfer; 40% of the fair market value if terminationoccurs in the second anniversary of the transfer; 60% of the fair market valueif termination occurs in the third anniversary of the transfer, 80% of the fairmarket value if termination occurs in the fourth anniversary of the transfer,and 100% of the fair market value if termination occurs after the fifthanniversary of the transfer.

 

Under a Securities Purchase Agreement, dated July 24,2007, C3 Capital Partners has the right, beginning on July 24, 2012 (or, ifearlier, upon a default by LMC under the Subordinated Notes or SecuritiesPurchase Agreement) to require LMC to purchase the C3 entities’ membershipinterests in LMC for a purchase price equal to their pro rata portion of thegreater of (i) the appraised fair market value of LMC or (ii) six times LMC’strailing 12-month earnings before interest taxes, depreciation, andamortization, less funded debt (see Note 7).

 

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**12.          Related Party Transactions**

 

In June 2003, the Company entered into an exclusive,ten-year license agreement with LLPG, Inc. (“LLPG”), a corporation controlledby Jack Chitayat, a former director of the Company.  Under the terms ofthe agreement, LLPG has the right to commercialize Liquidmetal alloys,particularly precious-metal based compositions, in jewelry and high-end luxuryproduct markets.  The Company, in turn, will receive royalty payments overthe life of the contract on all Liquidmetal products produced and sold byLLPG.  In conjunction with its technology licensing contract, LLPGpurchased two proprietary Liquidmetal alloy melting machines and threeproprietary Liquidmetal alloy casting machines for a total purchase price of$2,000.

 

In December 2006, the Company entered into anamended license agreement with LLPG, which extended the license agreement tofifteen years at reduced royalty rates.  Additionally, the amended licenseagreement includes a $400 amendment fee to be paid out in quarterlyinstallments in 2007.  The amendment fee will be recognized as revenuewhen received in 2007. The Company recognized $0 and $25 of revenue as minimumroyalty fees under the licensing agreement during the three and nine monthsended September 30, 2007, respectively.

 

In July 2007, Carlyle Liquid, LLC, assumed $2,000 of8% Convertible Subordinated Notes due January 2010 with related accruedinterest and warrants that were previously held by Whitebox IntermarketPartners, LP. Mr. Chitayat is a managing member of Carlyle Liquid, LLC.

 

The Company has a license agreement with CaliforniaInstitute of Technology (“Caltech”) under which we exclusively license fromCaltech certain inventions and technology relating to amorphous alloys. Professor William Johnson, a member of the Company’s board of directors, is aprofessor at Caltech, and substantially all of the amorphous alloy technologylicensed to us under the Caltech license agreement was developed in ProfessorJohnson’s Caltech laboratory.   Additionally, the Company reimbursesCaltech for laboratory expenses incurred by Professor Johnson’s Caltechlaboratory, which during the three and nine months ended June 30, 2007 amountedto $30 and $60, respectively. The laboratory expenses incurred by ProfessorJohnson’s Caltech laboratory during the three and nine months ended September30, 2006 amounted to $15 and $45, respectively.

 

Additionally, the Company is a party to a consultingagreement with Mr. Johnson. Under this agreement, Mr. Johnson providesconsulting services on an as-needed basis through 2004 as it relates tomarketing and development of Liquidmetal alloys. During 2005, the agreementcontinued on a month-to-month basis. In April 2006, the Company entered into anagreement with Mr. Johnson effective from January 1, 2006 through December 31,2006. During the three and nine months ended September 30, 2007 the Companyincurred $15 and $45 in consulting fees from Mr. Johnson, respectively. Duringthe three and nine months ended September 30, 2006, the Company incurred $15and $45 in consulting fees from Mr. Johnson, respectively.

 

In November 2004, the Company entered into anagreement with John Kang, our Chairman, President, and Chief Executive Officer,in which Mr. Kang agreed that certain stock transactions by him in 2002involving our common stock should have resulted in a liability under Section16(b) of the Securities Exchange Act of 1934, as amended (“Section 16(b)”). Thesetransactions include Mr. Kang’s private sale of 285,715 shares of his personalLiquidmetal Technologies common stock to Growell Metal Co., Ltd. in February2002, prior to our initial public offering. They also include Mr. Kang’ssubsequent indirect purchase and disposition of Liquidmetal Technologies commonstock in order to satisfy a personal agreement Mr. Kang made to Growell Metalin February 2002 regarding the guaranteed minimum value of the stock purchasedby Growell Metal in February 2002 (the purchases and dispositions incident tothis agreement occurred in August and November 2002, respectively). Lastly, thetransactions include open-market purchases of an aggregate of 89,300 shares ofour common stock made by Mr. Kang in August 2002. The Audit Committee of theCompany’s Board of Directors conducted an independent inquiry into thesetransactions with the aid of independent legal counsel and, as a result of suchinquiry, the Audit Committee concluded that the transactions should haveresulted in a liability to the Company under Section 16(b) in the amount of$302. Mr. Kang has acknowledged this liability, and in an agreement negotiatedbetween Mr. Kang and the Audit Committee and approved by the full Board, Mr.Kang will pay this liability through periodic installments in 2005 and 2007. Asa result, the Company accrued for the $302 receivable in other assets and otherincome as of December 31, 2004. The above-described transactions involvingGrowell Metal were reported on a new Form 4 filed by Mr. Kang onNovember 15, 2004, and the open-market purchases were previously reported on atimely basis in August 2002. As of September 30, 2007, the outstanding amountof the receivable was $178, which is included in prepaid and other currentassets.

 

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On June 1, 2007, theCompany entered into a transaction with Grace Metal (“GM”), under which (i) GMagreed to purchase from us various equipment (including die casting machinesand vacuum induction melters) used in the Company’s bulk amorphous alloybusiness segment and (ii) we granted GM a 10-year exclusive license tomanufacture products made from bulk Liquidmetal alloys for customers whoseprincipal headquarters or whose major operations are located in South Korea. GMwas formed by an investor group that includes the former founder and directorof our Company, James Kang, who is also the brother of John Kang, Chairman ofthe Board of our Company. Under an equipment purchase agreement between us andGM, GM agreed to buy the purchased equipment for a total purchase price of$2,000, of which $400 were received as of September 30, 2007. The equipmentpurchase agreement provides that delivery of the equipment can be delayed toaccommodate our continuing manufacturing needs, and it also provides that wewill retain a security interest in the purchased equipment until full paymentof the purchase price.

 

In consideration of thelicense agreement with GM, we will be entitled to royalty of 10% of GM’s netsales of licensed products (unless GM’s margin on the products falls belowspecified levels, in which case a new royalty will be negotiated in good faith).The agreement provides that we may convert the license to a non-exclusive inthe event that the net sales in the second year of the contract or thereafterare not sufficient to result in royalties of $500 or more per year. Theagreement also provides that GM will be required to purchase all alloyfeedstock from us, and we will have the right to continue to manufactureLiquidmetal alloy products for South Korean customers until all purchasedequipment has been commissioned.

 

Additionally, effectiveJune 1, 2007, we discontinued our post-processing operation in Weihai, Chinaand transferred our manufacturing staff and equipment in Weihai to GM under anamendment to the equipment purchase agreement with GM. Further, we transferredcertain of our manufacturing staff from our South Korean plant to GM. As aresult, GM assumed $370 of accrued severance liability for the transferredemployee. The equipment purchase agreement and the transfer agreement regardingour Weihai operations resulted in a total net gain of $143, which is recordedas other income.

 

We have also changed thename of our South Korean subsidiary to Liquidmetal Technologies Korea Co., Ltd,which was formerly Liquidmetal Korea Co., Ltd. GM will assume the nameLiquidmetal Korea to conduct business in South Korea.

 

The Company purchasedproduction supplies and molds from Grace Metal, Lead Metal, and SDM, which arecontrolled by James Kang, a former director and officer of the Company and thebrother of our current Chairman. The Company purchased a total of $167 and $411for the three and nine months ended September 30, 2007, of which $170 isincluded in accounts payable and accrued liabilities at September 30, 2007. TheCompany purchased a total of $466 for the year ended December 31, 2006, ofwhich, $10 is included in accounts payable and accrued liabilities at December31, 2006. The Company recognized revenue from sales of materials and royaltiesfor a total of $1,279 and $3,199 for the three and nine months ended September30, 2007, of which $2,086 is included in accounts receivable. Effective October20, 2006, Mr. Kang began providing services to the Company as a consultant,which will continue thru December 31, 2009. Additionally, for the three andnine months ended September 30, 2007, the Company incurred $50 and $150,respectively, for his services as consultant.

 

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

** **

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

 

*This management’s discussion andanalysis, as well as other sections of this report on Form 10-Q, maycontain “forward-looking statements” that involve risks and uncertainties,including statements regarding our plans, future events, objectives,expectations, forecasts, or assumptions. Any statement that is not a statementof historical fact is a forward-looking statement, and in some cases, wordssuch as “believe,” “estimate,” “ project,” “expect,” “intend,” “may,” “anticipate,”“plans,” “seeks,” and similar expressions identify forward-looking statements.These statements involve risks and uncertainties that could cause actualoutcomes and results to differ materially from the anticipated outcomes orresults, and undue reliance should not be placed on these statements. Theserisks and uncertainties include, but are not limited to, the matters discussedunder the caption “Factors Affecting Future Results” in our Annual Report onForm 10-K for the fiscal year ended December 31, 2006 and other risks anduncertainties discussed in filings made with the Securities and ExchangeCommission (including risks described in subsequent reports on Form 10-Q,Form 10-K, Form 8-K, and other filings). Liquidmetal Technologiesdisclaims any intention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events, orotherwise.*

 

**Overview**

 

We are a materials technology company thatdevelops and commercializes products made from amorphous alloys. OurLiquidmetal® family of alloys consists of a variety of coatings, powders, bulk alloys,and composites that utilize the advantages offered by amorphous alloytechnology. We develop, manufacture, and sell products and components from bulkamorphous alloys that are incorporated into the finished goods of ourcustomers, and we also market and sell amorphous alloy industrial coatings. Wealso partner with third-party licensees and distributors to develop andcommercialize Liquidmetal alloy products. We have the exclusive right todevelop, manufacture, and sell what we believe are the only commercially viablebulk amorphous alloys.

 

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

 

Ourrevenues are derived from three principal operating segments: Liquidmetal alloyindustrial coatings, Liquidmetal coatings application, and bulk Liquidmetalalloy products. Liquidmetal alloy industrial coatings are used primarily as aprotective coating for industrial machinery and equipment, such as drill pipeused by the oil drilling industry and boiler tubes used in coal-burning powerplants. The historical operating information for fiscal year 2001 is basedsubstantially on sales of Liquidmetal alloy coatings. In the second half of2002, we began producing bulk Liquidmetal alloy components and products forincorporation into our customers’ finished goods. Liquidmetal coatingsapplication is the service provided for applying Liquidmetal products as aprotective coating. Bulk Liquidmetal alloy segment revenue includes sales ofparts or components of electronic devices, medical products, and sports andleisure goods, tooling and prototype parts (including demonstration parts andtest samples) for customers with products in development, product licensing andarrangements, and research and development revenue relating primarily todefense and medical applications. We expect that these sources of revenue willcontinue to significantly change the character of our revenue mix.

 

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

 

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Selling, general, and administrative expensescurrently consist primarily of salaries and related benefits, stock-basedcompensation, severance costs, travel, consulting and professional fees,depreciation and amortization, insurance, office and administrative expenses,and other expenses related to our operations.

 

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

 

In a connection to an equipment purchaseagreement entered into with Grace Metal (“GM”), a South Korean corporation,effective June 1, 2007, we discontinued our post-processing operation inWeihai, China and transferred our manufacturing staff and equipment in Weihaito GM under an amendment to the equipment purchase agreement with GM. Further,we transferred certain of our manufacturing staff from our South Korean plantto GM. GM was formed by an investor group that includes the former Founder anddirector of our company, James Kang, who is also the brother of John Kang,Chairman of the Board of our company. We have also changed the name of ourSouth Korean subsidiary to Liquidmetal Technologies Korea Co., Ltd, which wasformerly Liquidmetal Korea Co., Ltd. GM will assume the name of LiquidmetalKorea to conduct business in South Korea.

 

On July 24, 2007, we transferred substantiallyall of the assets of our Liquidmetal alloy industrial coatings business to anewly formed, newly capitalized subsidiary named Liquidmetal Coatings, LLC, aDelaware limited liability company (“LMC”), and LMC assumed substantially allof the liabilities of the coatings business.   The transfer included the thermal spraycoatings assets and liabilities acquired under a purchase agreement with FosterWheeler Energy Services in June 2007. We hold a 69.25% ownership interest inLMC. The results of operation of LMC are consolidated and comprise ourLiquidmetal alloy industrial coatings segment for financial reporting purposes.

 

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

 

**CriticalAccounting Policies and Estimates**

** **

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

 

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

 

•      Exchangerate fluctuations

•      Warrantyaccrual

•      Allowancefor doubtful accounts

•      Inventoriesat lower of cost or net realizable value

•      Deferredtax assets

•      Valuationof derivatives of warrants and embedded conversion features

 

Our Annual Report on Form 10-K for theyear ended December 31, 2006,contains further discussions on our critical accounting policies and estimates.

 

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The company adopted Statement of FinancialAccounting Standards No. 123, Share-Based Payment (“SFAS 123R”), onJanuary 1, 2006. This new standard requires companies to expense the fairvalue of employee stock options and similar awards. The company adopted SFAS123R using the modified prospective transition method. Therefore, stock basedcompensation expense measured in accordance with SFAS 123R was recorded duringthe first quarter of 2006, but the prior year consolidated statement of incomewas not restated. The adoption of SFAS 123R resulted in incremental expense of$0.2 and $0.6 million for the three and nine months ended September 30, 2007,respectively, and $0.3 and $0.8 million for the three and nine months endedSeptember 30, 2006, respectively.

 

**Results of Operations**

 

Comparison of the threemonths ended September 30, 2007 and 2006

 

*Revenue.*Revenue decreased $0.9 million to $7.1 million for the three months endedSeptember 30, 2007 from $8.0 million for the three months ended September30, 2006.  The decrease consisted of a decrease of $1.8 million of salesand prototyping of parts manufactured from bulk Liquidmetal alloys to consumerelectronics customers as a result of increased reliance on licensees tomanufacture and sell bulk Liquidmetal alloy parts to customers based in SouthKorea, offset by an increase of $0.9 million from the sales of our coatingproducts as a result of increase in demand from oil drilling applications.

 

*Cost of Sales.*Cost of sales decreased to $5.2 million, or 73% of revenue, for the threemonths ended September 30, 2007 from $6.4 million, or 80% of revenue, forthe three months ended September 30, 2006.  The decreases were a result ofa change in revenue mix during the three months ended September 30, 2006, primarilyfrom increased royalty revenues.  We also believe that highermanufacturing volumes and greater mix of higher-margin products in the futurewill cause the gross profit to improve over time.  The cost to manufactureparts from our bulk Liquidmetal alloys is variable and differs based on theunique design of each product.  However, the cost of sales for theproducts sold by the coatings business segment is generally consistent becausethe Liquidmetal coatings products are produced by third parties and soldwholesale to various industries.

 

*Selling, General, and AdministrativeExpenses*. Selling, general, and administrative expensesdecreased to $1.9 million, or 26% of revenue, for the three months endedSeptember 30, 2007 from $2.3 million, or 28% of revenue, for the threemonths ended September 30, 2006. This decrease was primarily a result ofdecreases in wages and expenses of $0.3 million and a decrease in productwarranty expense of $0.1 million.

 

*Research and Development Expenses*.Research and development expenses remained at $0.3 million, or 5% ofrevenue, for the three months ended September 30, 2007 versus $0.3 million or3% of revenue for the three months ended September 30, 2006. The Companycontinues to perform research and development of new Liquidmetal alloys andrelated processing capabilities, develop new manufacturing techniques, andcontract with consultants to advance the development of Liquidmetal alloys.

 

*Change in Value of Warrants.*Change in value of warrants decreased to again of $0.2 million, or 3% of revenue, for the three months ended September30, 2007 from a gain of $1.4 million, or 17% of revenue, for the three monthsended September 30, 2006. The change in value of warrants consisted of warrantsissued from convertible notes and subordinated notes funded between 2004 and2007 primarily as a result of fluctuations in our stock price.

 

*Change in Value of ConversionFeature.*Change inthe value of our conversion feature liability from our convertible notes fundedbetween 2004 and 2007 resulted in a gain of $0.6 million, or 9% of revenue,during the three months ended September 30, 2007 from a gain of $2.0 million,or 25% of revenue, for the three months ended September 30, 2006, primarily asa result of fluctuations in our stock price.

 

*Interest Expense*.Interest expense was $2.0 million, or 28% of revenue, for the three monthsended September 30, 2007 and was $2.3 million, or 29% of revenue, for the threemonths ended September 30, 2006. Interest expense consists primarily of debtamortization and interest accrued on outstanding convertible and subordinatednotes, borrowings under the April 2005 factoring, loan, and security agreement,and the Kookmin loan. The decrease was due to decreased debt discountamortization during the three months ended September 30, 2007.

 

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*Interest Income.*Interestincome was $14 thousand for the three months ended September 30, 2007 and was$8 thousand for the three months ended September 30, 2006 from interest earnedon cash deposits.

 

Comparison of the ninemonths ended September 30, 2007 and 2006

 

*Revenue.* Revenue decreased $1.2 million to$20.5 million for the nine months ended September 30, 2007 from $21.7 millionfor the nine months ended September 30, 2006.  The decrease included $3.8million decrease in sales and prototyping of parts manufactured from bulkLiquidmetal alloys to consumer electronics customers as a result of increasedreliance on licensees to manufacture and sell bulk Liquidmetal alloy parts tocustomers based in South Korea, offset by an increase of $2.6 million from salesof our coating products as a result of increase in demand from oil drillingapplications.

 

*Costof Sales.* Costof sales increased to $19.3 million, or 94% of revenue, for the nine monthsended September 30, 2007 from $17.3 million, or 80% of revenue, for thenine months ended September 30, 2006.  The increases were a result ofincreases in our Liquidmetal coatings business and higher manufacturing costsof new production items in our Liquidmetal bulk alloy business during the firsttwo quarter of 2007.  We believe that higher manufacturing volumes andgreater mix of higher-margin products in the future will cause the gross profitto improve over time. The cost to manufacture parts from our bulk Liquidmetalalloys is variable and differs based on the unique design of eachproduct.  However, the cost of sales for the products sold by the coatingsbusiness segment is generally consistent because the Liquidmetal coatingsproducts are produced by third parties and sold wholesale to variousindustries.

 

*Selling, General, and AdministrativeExpenses*. Selling, general, and administrative expensesdecreased to $6.9 million, or 34% of revenue, for the nine months endedSeptember 30, 2007 from $7.4 million, or 34% of revenue, for the ninemonths ended September 30, 2006. This increase was primarily a result ofdecreases in wages and expenses of $0.8 million, decreases in travel expensesof $0.1 million, and decreases in depreciation expenses of $0.1 million, offsetby increases in professional and consulting fees of $0.5 million.

 

*Research and Development Expenses*.Research and development expenses increased to $0.9 million, or 4% of revenue,for the nine months ended September 30, 2007 from $0.8 million, or 4% ofrevenue, for the nine months ended September 30, 2006. The increase wasprimarily due to increase in professional fees. The Company continues toperform research and development of new Liquidmetal alloys and relatedprocessing capabilities, develop new manufacturing techniques, and contractwith consultants to advance the development of Liquidmetal alloys.

 

*Loss from Extinguishments of Debts*.Loss from extinguishments of debt increased to $0.6 million, or 5% of revenue,for the nine months ended September 30, 2007 from $0 for the nine months endedSeptember 30, 2006. The $0.6 million loss was recognized from theextinguishment of certain of our convertible and subordinated notes in January2007.

 

*Change in Value of Warrants.*Changein value of warrants increased to a gain of $4.5 million, or 22% of revenue,during the nine months ended September 30, 2007 from a loss of $1.4 million, or6% of revenue, during the nine months ended September 30, 2006. The change invalue of warrants consisted of warrants issued from convertible notes andsubordinated notes funded between 2004 and 2007 primarily as a result of fluctuations in our stock price.

 

*Change in Value of Conversion Feature*.Change in the value of our conversion feature liability from our convertiblenotes funded between 2004 and 2007 resulted in gain of $6.1 million, or 30% ofrevenue, during the nine months ended September 30, 2007 from a loss of $1.9million, or 9% of revenue, during the nine months ended September 30, 2006primarily as a result of fluctuation in our stock prices.

 

*Other Income.*Other income was $49 thousand for the ninemonths ended September 30, 2007, primarily from gain recognized from disposalof assets, from $0.6 million, or 4% of revenue, for the nine months endedSeptember 30, 2006 from  $0.1 milliongain recognized from disposal of idle equipment and $0.5 million gainrecognized from termination of a distribution agreement with a Japanesesporting goods distributor originally entered into in March 1996.

 

*Interest Expense*.Interest expense was $7.5 million, or 36% of revenue, for the nine months endedSeptember 30, 2007 and was $7.4 million, or 34% of revenue, for the nine monthsended September 30, 2006. Interest expense consists primarily of debtamortization and interest accrued on outstanding convertible and subordinatednotes, borrowings under the April 2005 factoring, loan, and security agreement,the Kookmin loan and late registration and late filing fee penalties.

 

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*Interest Income.*Interestincome was $0.1 million for the nine months ended September 30, 2007 and $17thousand for the nine months ended September 30, 2006, from interest earned oncash deposits.

 

**Liquidityand Capital Resources**

** **

Our cash used foroperating activities was $9.6 million for the nine months ended September 30,2007 and $5.5 million for the nine months ended September 30, 2006. Our working capital deficit decreased from $23.2 million at December 31, 2006to $11.6 million at September 30, 2007.  The Company’s working capitaldeficit decrease of $11.5 million was primarily attributable to decrease inlong-term debt, current portion, of $10.6 million, and decrease in short termdebt of $1.7 million, and offset by an increase in long-term debt ofconsolidated subsidiary of $0.8 million.

 

Our cash used ininvesting activities was $1.0 million for the nine months ended September 30,2007 for the acquisition of property and equipment and investments in patentsand trademarks.

 

Our cash provided byfinancing activities was $11.4 million for the nine months ended September 30,2007. We received net $1.8 million in borrowings from factoring agreementexecuted in April 2005. The proceeds from borrowings have been used to meetworking capital requirements. We have $4.1 million available for futureborrowings under the factoring agreement, which is contingent on approval ofeligible receivables by the financing company.

 

On January 3, 2007, wecompleted a private placement of $16.3 million in principal amount of 8%Convertible Subordinated Notes due January 2010 (the “January 2010 Notes”). TheJanuary 2010 Notes were issued for aggregate cash in the amount of $12.9million, in payment of a total of $3.4 million in principal and accrued butunpaid interest under our previously issued 7% Senior Secured Convertible Notesdue August 2007 and our  8% Unsecured Subordinated Notes, and $0.1 millioncash discount.

 

In June 2007, weentered into an equipment sale and licensing agreement with Grace Metal, aSouth Korean corporation, providing for $2 million in exchange for die castingmachines and vacuum induction melters, and a 10-year exclusive license tomanufacture Liquidmetal alloys for customers whose principal headquarters ormajor operations are based in South Korea. The principal purpose of thetransactions with Grace Metal was to raise capital for the next-generationcasting equipment and to shift the cost and burden of our manufacturingoperations to a third party.  Grace Metal was formed by an investor groupthat includes the former Founder and director of our company, James Kang, whois also the brother of John Kang, Chairman of the Board of our company.

 

In July 2007, wecompleted an $11.5 million financing transaction that provided funding to repaysenior convertible notes previously issued were scheduled to become due in Julyand August 2007.  We transferred substantially all of the assets ofLiquidmetal Coatings business (the “Division) to a newly formed, newlycapitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limitedliability company (“LMC”), and LMC assumed substantially all of the liabilitiesof the Division. LMC was capitalized through a $6.5 million subordinated debtand equity investment by C3 Capital Partners and a $5.0 million seniorcredit facility with Bank Midwest, N.A. The transaction resulted in net cashproceeds of $10.6 million after related debt issuance costs of $0.9 millionincurred by LMC and us. We will retain a 69.25% interest in LMC, and theremaining 30.75% of the equity of LMC will be held by C3 Capital Partners,Larry Buffington (who will serve as the President and CEO of LMC), and CRESOCapital Partners (the financial advisor in the transaction).

 

We anticipate thatwe will not have sufficient funds to pursue our current operating plan throughthe fourth quarter of 2007 and we will therefore require additionalfunding.  We are actively seeking additional sources of capital andseeking to restructure and/or modify existing indebtedness.  The amount offunding that we seek and the timing of such fundraising efforts will depend onthe extent to which we are able to increase revenues through obtainingadditional purchase orders for our products and/or the extent to which we canrestructure or modify our debt.  Because we cannot be certain that we willbe able to obtain adequate funding from debt, equity, or other traditionalfinancing sources, we are also actively exploring several strategic financingoptions, including the possible sale of our manufacturing plant in South Korea(which would then be replaced with a smaller facility) and additional licensingand outsourcing of our manufacturing operations.

 

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Additionally, as of September 30, 2007, we had approximately $3.0million of principal and accrued interest outstanding under the 8% unsecuredsubordinated notes (“Notes”), which were due August 17, 2007.  We intendto fully repay the amounts due under Notes.  However, as of the filing ofthis report we do not have sufficient funds to repay the Notes.  As aresult, we are currently in default with the holders of the Notes.  Such a default may have material adverse effect on our operations, financialcondition, and results of operations. We have not received a formal notice ofdefault and we are currently working to resolve this matter with the investorsholding our Notes.

 

We cannotguarantee that adequate funds will be available when needed, and if we do notreceive sufficient capital, we may be required to alter or reduce the scope ofour operations.

 

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**ContractualObligations**

** **

The following table summarizes the Company’sobligations and commitments as of September 30, 2007:

 
| ** **                                          | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Contractual Cash Obligations (1)** | ** ** | **Total**                                                          | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Thereafter** | ** ** |
|                                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Long-term debt  (2)                                 |       | $                                                                  | 30,072     |   | $ | 5,524 |   | $ | 18,023 |   | $ | 6,525 |   | $ | — |   |
| Short-term debt  (3)                                |       | 2,034                                                              |       | 2,034 |   | — |   | — |   | — |   |
| Operating leases  and rents                         |       | 1,306                                                              |       | 374 |   | 798 |   | 134 |   | — |   |
| Consulting  services payable                        |       | 666                                                                |       | 367 |   | 299 |   | — |   | — |   |
| Foster Wheeler                                      |       | 450                                                                |       | 300 |   | 150 |   |   |   |   |   |
| Dongyang                                            |       | 12                                                                 |       | 12 |   | — |   | — |   | — |   |
| Nichimen                                            |       | 315                                                                |       | 315 |   | — |   | — |   | — |   |
|                                                |       | $                                                                  | 34,855     |   | $ | 8,926 |   | $ | 19,270 |   | $ | 6,659 |   | $ | — |   |

 

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(1) Contractual cashobligations include Long-Term Debt comprised of $2,758 of UnsecuredSubordinated Notes issued in 2006, $16,300 of Convertible Unsecured Notesissued in 2007, $576 of Kookmin Bank Loan, and $3,913 of Bank Midwest termloan, and $6,525 of C3 Capital Partners Subordinated Notes, Short-Term Debtcomprised of $946 outstanding advances received under factoring, loan, andsecurity agreement, $1,088 of Bank Midwest revolving loan, and future minimumlease payments under capital and operating leases, and purchase commitmentsfrom consultants, payments due from assets purchased from Foster Wheelerthermal spray coatings business, payments due from our discontinued equipmentmanufacturing business (Dongyang), and minimum payments due under adistribution agreement (Nichimen).

(2) Does not includeinterest payments of $7,758; and un-amortized cash discount and discounts forconversion feature and warrants of $10,760 of our convertible notes.

(3) Does not includeminimum interest and fee payments of $30.

 

**Off Balance Sheet Arrangements**

 

Anoff-balance sheet arrangement is any transaction, agreement or othercontractual arrangement involving an unconsolidated entity under which acompany has (1) made guarantees, (2) a retained or a contingent interest intransferred assets, (3) an obligation under derivative instruments classifiedas equity, or (4) any obligation arising out of a material variable interest inan unconsolidated entity that provides financing, liquidity, market risk orcredit risk support to the company, or that engages in leasing, hedging, orresearch and development arrangements with the company.

 

On June 26, 2006, we entered into a joint ventureagreement with SAGA, SpA in Padova, Italy, (‘SAGA”) a specialist precisionparts manufacturer.  The joint venture is named Liquidmetal SAGA Italy,Srl (“LSI”).  We also entered into an exclusive manufacturing licenseagreement for the eyewear industry with LSI.  Under the joint ventureagreement, we have the option to buy an ownership interest in LSI, initially,of 19.9% to up to 50%.  In December 2006, we purchased 19.9% interest inthe joint venture.  Under the licensing agreement, at any time following18 months after the effective date of the agreement, LSI may exercise itsoption to sell us certain business assets including manufacturing equipmentacquired under the joint venture.  During the year ended December 31,2006, we recognized revenues of $0.7 million of Liquidmetal alloys sold to SAGAfor use in the joint venture.  We anticipate the alloys to be fullyutilized by the joint venture prior to the 18 month period. During the nine months ended September 30, 2007, werecognized revenues of $0.1 million of Liquidmetal alloys sold to LSI for usein the joint venture.

 

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

 

We are exposed to various market risks in conductingthe business of the Company, and we anticipate that this exposure will increaseas a result of our planned growth. In an effort to mitigate losses associatedwith these risks, we may at times enter into derivative financial instruments,although we have not historically done so. These may take the form of forwardsales contracts, option contracts, foreign currency exchange contracts, andinterest rate swaps. We have not, and do not intend to, engage in the practiceof trading derivative securities for profit.

 

*InterestRates.*We are exposed to market risks relating to changes ininterest rates as our borrowings are subject to the volatility of interest raterisk.

 

*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 intocommodity future, forward, and option contracts to manage the fluctuations inprices of anticipated purchases, we may enter into such contacts in the futureas our business grows and as our purchases of these raw materials increase.

 

*ForeignExchange Rates.*As a 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 theexchange rates of the South Korean won to the U.S. dollar will affect our costsof goods sold and operating margins and could result in exchange losses. Althoughwe do not currently enter into foreign exchange hedge transactions, we may doso in the future as our business grows.

 

**Item4 – Controls and Procedures**

** **

Evaluation ofDisclosure Controls and Procedures.  Based on an evaluation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the ExchangeAct) as of September 30, 2007, the end of the period covered by this report,our Chief Executive Officer and Vice President of Finance have concluded thatthe disclosure controls and procedures were effective.

 

Changes inInternal Controls.  Duringthe quarter ended September 30, 2007, there was no change in our internalcontrols over financial reporting (as defined in Rule 13a-15(f) under theExchange Act) that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART IIOTHER INFORMATION**

 

**Item 1 –LegalProceedings**

 

Securities Class Action and Shareholder DerivativeActions

 

In April 2006, we reached agreements-in-principle to settle ourpreviously-disclosed consolidated securities class action and shareholderderivative actions for a total of $7,500; $7,025 for the class action and $475for the derivative actions.  In addition,we will commit to maintain or implement various corporate governance measuresin connection with the settlement of the derivative actions.

 

The consolidated class action arose from a number of lawsuits filed in2004 against our company and certain of our former and current directors andofficers on behalf of persons who purchased our common stock between May 21,2002 and May 13, 2004.  These actions,which were brought under the federal securities laws, alleged that the Prospectusissued in connection with our initial public offering in May 2002 containedmaterial misrepresentations and omissions regarding our historical financialcondition and regarding a personal stock transaction by our former chiefexecutive officer.  They also allegedthat our company and certain of our present and former officers and directorsengaged in improper revenue recognition with respect to certain of our businesstransactions, failed to maintain adequate internal controls, and knowinglydisclosed unrealistic but favorable information about market demand for andcommercial viability of our products to artificially inflate the value of ourstock.  On October 19, 2006, thepresiding judge entered an Order giving final approval of the class action settlement.  In connection with the settlement, ourdirectors and officers’ liability insurers contributed $7,025 to a settlementfund, from which approved claims of eligible class members will be paid inaccordance with a court-approved plan of allocation.  Taking into account the insurancecontribution, the net cost of the settlement to our company is approximately$475, which is the insurance deductible we paid over several quarters ending inthe third quarter of 2005, and which was previously recorded as a charge. 

 

In addition, in May 2004, two shareholder derivative actions were filedin the Superior Court of Orange County, California and later consolidated.  Shortly thereafter, one additionalshareholder derivative action was filed in the United States District Court forthe Middle District of Florida, Tampa Division. These derivative actions were brought by certain shareholders againstcertain of our present and former officers and directors as well as the company(as a nominal defendant).  The suits allegedthat the defendants breached various fiduciary duties and otherwise violatedstate law based primarily upon the same facts and circumstances underlying thefederal securities class action.  Inearly April 2006, the company's counsel and the derivative plaintiffs' counselparticipate in a mediation conference, which resulted in anagreement-in-principle to settle both derivative actions.  On August 2, 2006, plaintiffs’ counsel in theCalifornia derivative action filed a Notice of Settlement in the SuperiorCourt.  On July 13, 2007, the settlementwas approved by the court.

 

Department of Justice Investigation

 

In August 2006, the United States Department of Justice (“DOJ”)instituted a grand jury proceeding in the Middle District of Florida toinvestigate, among other things, alleged accounting improprieties in relationto certain of our business transactions and a personal stock transaction by ourformer chief executive officer. The grand jury proceeding is based primarilyupon the same underlying facts and circumstances as alleged in the federalclass action and shareholder derivative actions. To date, subpoenas for theproduction of documents and/or grand jury testimony have been issued to ourcompany and several present and former officers and directors. We arecooperating with the DOJ in its investigation.

 

**Item 1A –Risk Factors**

 

In addition to the risk factors included in ourAnnual Report on Form 10-K for the year ended December 31, 2006, thefollowing is an additional risk factor that could adversely affect ourbusiness, results of operations or financial condition.

 

***We are in default under our 8% unsecured subordinated notes due August17, 2007.***

 

We have approximately $3.0 million of principal and accrued interestoutstanding as of September 30, 2007, under the 8% unsecured subordinated notes(“Notes”), which were due August 17, 2007.  We intend to fully repay theamounts due under Notes.  However, as of the filing of this report we donot have sufficient funds to repay the Notes.  As a result, we arecurrently in default under the Notes.   Such a default may havematerial adverse effect on our operations, financial condition, and results ofoperations. We have not received a formal notice of default and we arecurrently working to resolve this matter with the investors holding our Notes.

 

**Item 3 - Defaults Upon SeniorSecurities**

 

We have approximately $3.0 million of principal andaccrued interest outstanding as of September 30, 2007, under the 8% unsecuredsubordinated notes (“Notes”), which were due August 17, 2007.  We intend to fully repay the amounts dueunder Notes.  However, as of the filingof this report we do not have sufficient funds to repay the Notes.  As a result, we are currently in defaultunder the Notes.   Such a default mayhave material adverse effect on our operations, financial condition, andresults of operations.  We have notreceived a formal notice of default and we are currently working to resolvethis matter with investors holding our Notes.

 

**Item 5 –Other Information**

 

There were nomatters required to be disclosed in a current report on Form 8-K during thefiscal quarter covered by this report that were not so disclosed.

 

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**Item 6 –Exhibits**

 

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

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

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

 

 
|                    | LIQUIDMETAL TECHNOLOGIES, INC.               |   |
|-------------------------|----------------------------------------------|--------|
|                    | (Registrant)                                 |   |
|                    |                                         |   |
| Date: November 14, 2007 | /s/ Larry Buffington                         |   |
|                    | Larry Buffington                             |   |
|                    | President and Chief Executive Officer        |   |
|                    | (Principal Executive Officer)                |   |
|                    |                                         |   |
|                    |                                         |   |
| Date: November 14, 2007 | /s/ Won Chung                                |   |
|                    | Won Chung                                    |   |
|                    | Vice President of Finance                    |   |
|                    | (Principal Financial and Accounting Officer) |   |

 

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