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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

### **FORM 10-Q**

 

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

 

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

 

**OR**

 

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

 

**For the transition period from         to        **

 

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

 

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# **LIQUIDMETALTECHNOLOGIES, INC.**

(Exact name of Registrant as specified in its charter)

 

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

 

**30452 Esperanza**

**Rancho Santa Margarita, CA 92688**

(address of principal executive office, zip code)

 

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

 

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

 

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

 

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

 

| Large accelerated filer o |   | Accelerated filer o         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-accelerated filer o   |   | Smaller reporting company x |

 

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

 

#### **As of August 14, 2009, there were 46,731,693 shares ofthe registrant’s common stock, $0.001 par value, outstanding.**

 

 

 

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**LIQUIDMETAL TECHNOLOGIES, INC.FORM 10-QFOR THE QUARTER ENDED****JUNE 30,2009**

 

**FORWARD-LOOKING INFORMATION**

 

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

 

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Table of Contents

 

**TABLEOF CONTENTS**

 
| **PART I -  Financial Information**                                                                  | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|
|                                                                                                      |       |
| Item 1 — Financial Statements                                                                        | 4          |
| Condensed Consolidated Balance Sheets (unaudited)                                                         |       |
| Condensed Consolidated Statements of Operations and  Comprehensive Income (Loss) (unaudited)              |       |
| Condensed Consolidated Statements of Shareholders’  Deficiency (unaudited)                           |       |
| Condensed Consolidated Statements of Cash Flows  (unaudited)                                              |       |
| Notes to Condensed Consolidated Financial Statements  (unaudited)                                         |       |
|                                                                                                      |       |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 22         |
|                                                                                                      |       |
| Item 3 — Quantitative and Qualitative Disclosures  about Market Risk                                 | 28         |
|                                                                                                      |       |
| Item 4T — Controls and Procedures                                                                    | 28         |
|                                                                                                      |       |
| **PART II —  Other Information**                                                                | ** ** |
|                                                                                                      |       |
| Item  1 — Legal Proceedings                                                                          | 29         |
|                                                                                                      |       |
| Item 1A — Risk Factors                                                                               | 29         |
|                                                                                                      |       |
| Item 3 — Defaults Upon Senior Securities                                                             | 29         |
|                                                                                                      |       |
| Item 4 - Submission of Matters to a Vote of Security  Holders                                             | 29         |
|                                                                                                      |       |
| Item  5 — Other Information                                                                          | 30         |
|                                                                                                      |       |
| Item 6 —  Exhibits                                                                                   | 30         |
|                                                                                                      |       |
| Signatures                                                                                                | 31         |
|                                                                                                      |       |
| Certifications                                                                                            | 32         |

 

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### **Table of Contents**

 

### **PART I**

### ** **

### **FINANCIAL INFORMATION**

### ** **

**Item 1 – Financial Statements**

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

** **
| ** **                                                                                                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                              | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                              |       |              |       |                  |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Current assets:                                                                                                                                                                         |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                               |       | $                 | 155        |                  | $          | 157 |   |
| Trade accounts receivables, net of allowance for  doubtful accounts of $151 and $121                                                                                                    |       | 2,560             |       | 2,237                 |       |
| Inventories                                                                                                                                                                             |       | 796               |       | 820                   |       |
| Prepaid expenses and other current assets                                                                                                                                               |       | 714               |       | 967                   |       |
| Total current assets                                                                                                                                                                    |       | 4,225             |       | 4,181                 |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Property, plant and equipment, net                                                                                                                                                      |       | 6,688             |       | 7,021                 |       |
| Other intangibles, net                                                                                                                                                                  |       | 1,255             |       | 1,069                 |       |
| Investment in joint venture                                                                                                                                                             |       | 306               |       | 306                   |       |
| Other assets                                                                                                                                                                            |       | 727               |       | 663                   |       |
| Total assets                                                                                                                                                                            |       | 13,201            |       | 13,240                |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  DEFICIENCY**                                                                                                                                      |       |              |       |                  |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                    |       |              |       |                  |       |
| Accounts payable and accrued expenses                                                                                                                                                   |       | 8,080             |       | 8,563                 |       |
| Deferred revenue                                                                                                                                                                        |       | 53                |       | 40                    |       |
| Short-term debt                                                                                                                                                                         |       | 888               |       | 1,176                 |       |
| Long-term debt, current portion, net of debt  discounts of $0 and $7,128                                                                                                                |       | 1,436             |       | 14,172                |       |
| Warrant liabilities                                                                                                                                                                     |       | 6,996             |       | 692                   |       |
| Conversion feature liabilities                                                                                                                                                          |       | 1,269             |       | 147                   |       |
| Other liabilities, current portion                                                                                                                                                      |       | 141               |       | 146                   |       |
| Total current liabilities                                                                                                                                                               |       | 18,863            |       | 24,936                |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Long-term debt, net of current portion and debt  discounts of $4,118 and $0                                                                                                             |       | 11,455            |       | 8,521                 |       |
| Other long-term liabilities, net of current portion                                                                                                                                     |       | 160               |       | 163                   |       |
| Total liabilities                                                                                                                                                                       |       | 30,478            |       | 33,620                |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Shareholders’ deficiency:                                                                                                                                                          |       |              |       |                  |       |
| Liquidmetal Technologies, Inc. shareholders’  deficiency                                                                                                                      |       |              |       |                  |       |
| Preferred stock, $0.001 par value; 10,000,000  shares authorized; 3,072,125 and 0 shares issued and outstanding at  June 30, 2009 and December 31, 2008, respectively         |       | 3                 |       | —                |       |
| Common stock, $0.001 par value; 100,000,000 shares  authorized; 46,027,149 and 44,825,402 shares issued and outstanding at  June 30, 2009 and December 31, 2008, respectively |       | 46                |       | 45                    |       |
| Additional paid-in capital                                                                                                                                                              |       | 141,945           |       | 140,204               |       |
| Accumulated deficit                                                                                                                                                                     |       | (160,852          | )          | (162,307              | )          |
| Accumulated other comprehensive income                                                                                                                                                  |       | 950               |       | 1,027                 |       |
| Total Liquidmetal Technologies, Inc.  shareholders’ deficiency                                                                                                                |       | (17,908           | )          | (21,031               | )          |
| Noncontrolling interest                                                                                                                                                                 |       | 631               |       | 651                   |       |
| Total shareholders’ deficiency                                                                                                                                                     |       | (17,277           | )          | (20,380               | )          |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Total liabilities and shareholders’ deficiency                                                                                                                                     |       | $                 | 13,201     |                  | $          | 13,240 |   |

 

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

 

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

 

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

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

**(unaudited)**

** **
| ** **                                                             | ** ** | **For  the Three Months Ended** | ** ** | **For  the Six Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                             | ** ** | **June 30,**               | ** ** | **June 30,**             | ** ** |
| ** **                                                             | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                             | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                |       | $                               | 3,519      |                          | $          | 5,669 |   | $ | 7,111 |   | $ | 12,437 |   |
| Cost of sales                                                          |       | 1,895                           |       | 4,633                         |       | 4,036 |   | 9,534 |   |
| Gross profit                                                           |       | 1,624                           |       | 1,036                         |       | 3,075 |   | 2,903 |   |
|                                                                   |       |                            |       |                          |       |   |   |   |   |
| Operating expenses                                                     |       |                            |       |                          |       |   |   |   |   |
| Selling, general, and administrative                                   |       | 1,357                           |       | 1,326                         |       | 2,945 |   | 3,200 |   |
| Research and development                                               |       | 301                             |       | 278                           |       | 548 |   | 536 |   |
| Total operating expenses                                               |       | 1,658                           |       | 1,604                         |       | 3,493 |   | 3,736 |   |
| Loss from operations                                                   |       | (34                             | )          | (568                          | )          | (418 | ) | (833 | ) |
|                                                                   |       |                            |       |                          |       |   |   |   |   |
| Loss from extinguishment of debt                                       |       | (1,471                          | )          | —                        |       | (1,471 | ) | — |   |
| Change in value of warrants, gain                                      |       | 6,249                           |       | 1,290                         |       | 6,123 |   | 1,396 |   |
| Change in value of conversion feature, gain                            |       | 930                             |       | 1,240                         |       | 960 |   | 1,462 |   |
| Other expense                                                          |       | —                          |       | —                        |       | — |   | (17 | ) |
| Other income                                                           |       | —                          |       | 247                           |       | — |   | 247 |   |
| Interest expense                                                       |       | (1,415                          | )          | (1,717                        | )          | (3,705 | ) | (3,420 | ) |
| Interest income                                                        |       | —                          |       | 1                             |       | — |   | 3 |   |
|                                                                   |       |                            |       |                          |       |   |   |   |   |
| Net income (loss) before income taxes                                  |       | 4,259                           |       | 493                           |       | 1,489 |   | (1,162 | ) |
|                                                                   |       |                            |       |                          |       |   |   |   |   |
| Income taxes                                                           |       | (45                             | )          | —                        |       | (45 | ) | — |   |
|                                                                   |       |                            |       |                          |       |   |   |   |   |
| Net income (loss)                                                      |       | 4,214                           |       | 493                           |       | 1,444 |   | (1,162 | ) |
|                                                                   |       |                            |       |                          |       |   |   |   |   |
| Net loss (income) attributable to noncontrolling  interest             |       | 51                              |       | (65                           | )          | 20 |   | (226 | ) |
|                                                                   |       |                            |       |                          |       |   |   |   |   |
| Net income (loss) attributable to Liquidmetal  Technologies, Inc. |       | 4,265                           |       | 428                           |       | 1,464 |   | (1,388 | ) |
|                                                                   |       |                            |       |                          |       |   |   |   |   |
| Other comprehensive income (loss):                                     |       |                            |       |                          |       |   |   |   |   |
| Foreign exchange translation gain (loss)                               |       | 336                             |       | (353                          | )          | (77 | ) | (813 | ) |
| Comprehensive income (loss)                                            |       | $                               | 4,601      |                          | $          | 75 |   | $ | 1,387 |   | $ | (2,201 | ) |
|                                                                   |       |                            |       |                          |       |   |   |   |   |
| Net income (loss) per share basic and diluted:                         |       |                            |       |                          |       |   |   |   |   |
| Net income (loss) attributable to Liquidmetal  Technologies, Inc. |       | $                               | 0.09       |                          | $          | 0.01 |   | $ | 0.03 |   | $ | (0.03 | ) |
|                                                                   |       |                            |       |                          |       |   |   |   |   |
| Number of weighted average shares - basic and  diluted                 |       | 45,408                          |       | 44,726                        |       | 45,117 |   | 44,726 |   |

 

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

 

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

**CONDENSED CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ DEFICIENCY**

###### **For the Six Months Ended June 30, 2009**

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

**(unaudited)**

 
| ** **                                  | ** ** | **Liquidmetal Technologies, Inc. Shareholders** | ** ** | ** **         | ** ** | ** **            | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **Preferred   Shares**                               | ** ** | **Common  Shares** | ** ** | **Preferred   Stock** | ** ** | **Common  Stock** | ** ** | **Additional   Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Non-  controlling  Interest** | ** ** | **Total** | ** ** |
| **Balance, December 31, 2008**         |       | —                                               |       | 44,825,402         |       | $                     | —     |   | $ | 45 |   | $ | 140,204 |   | $ | (162,307 | ) | $ | 1,027 |   | 651 |   | $ | (20,380 | ) |
| Convertible preferred stocks issued         |       | 3,125,002                                            |       | —             |       | 3                     |       | — |   | 1,550 |   | — |   | — |   | — |   | 1,553 |   |
| Conversion of preferred stocks              |       | (52,877                                              | )          | 1,201,747          |       | —                |       | 1 |   | (1 | ) | — |   | — |   | — |   | — |   |
| Stock-based compensation                    |       | —                                               |       | —             |       |                  |       | — |   | 192 |   | — |   | — |   | — |   | 192 |   |
| Foreign exchange translation loss           |       | —                                               |       | —             |       |                  |       | — |   | — |   | — |   | (77 | ) | — |   | (77 | ) |
| Cash distribution to preferred unit holders |       | —                                               |       | —             |       |                  |       | — |   | — |   | (9 | ) | — |   | — |   | (9 | ) |
| Net income                                  |       | —                                               |       | —             |       |                  |       | — |   | — |   | 1,464 |   | — |   | (20 | ) | 1,444 |   |
| **Balance, June 30, 2009**             |       | 3,072,125                                            |       | 46,027,149         |       | 3                     |       | $ | 46 |   | $ | 141,945 |   | $ | (160,852 | ) | $ | 950 |   | $ | 631 |   | $ | (17,277 | ) |
|                                             |            |                                                      |            |                    |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

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

 

### **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

** (unaudited)**

 
| ** **                                                                                                      | ** ** | **For  the Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
| ** **                                                                                                      | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| **Operating activities:**                                                                                       | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Net income (loss) attributable to Liquidmetal  Technologies, Inc.                                          |       | $                                            | 1,464      |   | $ | (1,388 | ) |
|                                                                                                            |       |                                         |       |   |   |
| Adjustments to reconcile income (loss) from  operations to net cash provided by (used in) operating activities: |       |                                         |       |   |   |
| Gain on disposal of asset                                                                                       |       | —                                       |       | (17 | ) |
| (Loss) income attributable to noncontrolling  interest of consolidated subsidiary                               |       | (20                                          | )          | 226 |   |
| Depreciation and amortization                                                                                   |       | 497                                          |       | 709 |   |
| Loss on extinguishment of debt                                                                                  |       | 1,471                                        |       | — |   |
| Amortization of debt discount                                                                                   |       | 2,151                                        |       | 1,657 |   |
| Stock-based compensation                                                                                        |       | 192                                          |       | 324 |   |
| Bad debt expense (recovery)                                                                                     |       | 31                                           |       | (139 | ) |
| Warranty recovery                                                                                               |       | (91                                          | )          | (22 | ) |
| Gain from change in value of warrants                                                                           |       | (6,123                                       | )          | (1,396 | ) |
| Gain from change in value of conversion feature                                                                 |       | (960                                         | )          | (1,463 | ) |
|                                                                                                            |       |                                         |       |   |   |
| Changes in operating assets and liabilities:                                                                    |       |                                         |       |   |   |
| Trade accounts receivable                                                                                       |       | (354                                         | )          | 1,103 |   |
| Inventories                                                                                                     |       | 23                                           |       | 954 |   |
| Prepaid expenses and other current assets                                                                       |       | (249                                         | )          | 234 |   |
| Other assets                                                                                                    |       | (304                                         | )          | (7 | ) |
| Accounts payable and accrued expenses                                                                           |       | 99                                           |       | 105 |   |
| Deferred revenue                                                                                                |       | 13                                           |       | (29 | ) |
| Other liabilities                                                                                               |       | (8                                           | )          | (465 | ) |
| Net cash (used in) provided by operating activities                                                             |       | (2,168                                       | )          | 386 |   |
|                                                                                                            |       |                                         |       |   |   |
| **Investing Activities:**                                                                                       |       |                                         |       |   |   |
| Purchases of property and equipment                                                                             |       | (209                                         | )          | (886 | ) |
| Proceeds from the sale of property and equipment                                                                |       | —                                       |       | (17 | ) |
| Investment in patents and trademarks                                                                            |       | (251                                         | )          | (36 | ) |
| Net cash used in investing activities                                                                           |       | (460                                         | )          | (939 | ) |
|                                                                                                            |       |                                         |       |   |   |
| **Financing Activities:**                                                                                       |       |                                         |       |   |   |
| Proceeds from borrowings                                                                                        |       | 12,131                                       |       | 9,603 |   |
| Repayment of borrowings                                                                                         |       | (24,853                                      | )          | (11,803 | ) |
| Proceeds from issuance of convertible preferred  stocks                                                         |       | 15,328                                       |       | — |   |
| Proceeds from issuance of preferred units of  subsidiary                                                        |       | —                                       |       | 2,500 |   |
| Redemption of preferred units of subsidiary                                                                     |       | —                                       |       | (175 | ) |
| Cash distributions                                                                                              |       | (9                                           | )          | (1,017 | ) |
| Net cash provided by (used in) financing activities                                                             |       | 2,597                                        |       | (892 | ) |
| Effect of foreign exchange translation                                                                          |       | 29                                           |       | 479 |   |
| Net decrease in cash and cash equivalents                                                                       |       | (2                                           | )          | (966 | ) |
|                                                                                                            |       |                                         |       |   |   |
| Cash and cash equivalents at beginning of period                                                                |       | 157                                          |       | 1,180 |   |
| Cash and cash equivalents at end of period                                                                      |       | $                                            | 155        |   | $ | 214 |   |
|                                                                                                            |       |                                         |       |   |   |
| Supplemental cash flow information                                                                              |       |                                         |       |   |   |
| Interest paid                                                                                                   |       | $                                            | 1,341      |   | $ | 1,269 |   |
| Taxes paid                                                                                                      |       | $                                            | —     |   | $ | — |   |

 

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

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

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

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“generallyaccepted accounting principles”) for interim financial information and with theinstructions to Form 10-Q. Accordingly, they do not include all of the information and notesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring accruals)considered necessary for a fair presentation have been included.  All intercompany balances and transactionshave been eliminated.  Operating resultsfor the six months ended June 30, 2009 are not necessarily indicative ofthe results that may be expected for any future periods or the year ending December 31,2009.  The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withthe Company’s Form 10-K filed with the Securities and Exchange Commissionon April 15, 2009.

 

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

 

The Company classifies operationsinto two reportable segments: Liquidmetal alloy industrial coatings and bulkLiquidmetal alloys (see Note 9). Liquidmetal alloy industrial coatings are usedprimarily as a protective coating for industrial machinery and equipment, suchas drill pipes used by the oil drilling industry and boiler tubes used bycoal-burning power plants. Bulk Liquidmetal alloys include potential marketopportunities to manufacture and sell products and components for electronicdevices, medical devices, defense applications, and sporting goods.  In addition, the bulk Liquidmetal alloyssegment includes tooling and prototype sampling.  Furthermore, such alloys are used to generateresearch and development services revenue for developing uses related primarilyto defense and medical applications as well as potential license fees,royalties, and other compensation from strategic partnering transactions.

 

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

 

**2.****                         ****Basis of Presentationand Recent Accounting Pronouncements**

 

Translationof Foreign Currency

 

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

 

Reclassifications

 

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

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

RecentAccounting Pronouncements

 

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

 

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

 

In May 2008, theFASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May BeSettled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB14-1”) whichclarifies that convertible debt instruments that may be settled in cash orother assets upon conversion are not addressed by APB No. 14, “Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants.”Additionally, FSP APB 14-1 requires an entity to separately account for theliability and equity components of a convertible instrument to reflect anentity’s nonconvertible debt borrowing rate when interest cost is recognized insubsequent periods. FSP APB 14-1 also expands the disclosure requirementsregarding convertible debt instrument terms and how the instrument is reflectedin an entity’s financial statements. FSP APB 14-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years. The Company has adopted APB 14-1 asof January 1, 2009.

 

In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles” (“SFAS 162”). SFAS 162 is intended to improvefinancial reporting by identifying a consistent framework, or hierarchy, forselecting accounting principles to be used in preparing financial statementsthat are presented in conformity with U.S. generally accepted accountingprinciples for nongovernmental entities. SFAS 162 will become effective60 days following the SEC’s approval of the Public Company AccountingOversight Board Auditing amendments to AU Section 411, “The Meaning ofPresent Fairly in Conformity with Generally Accepted Accounting Principles.”The Company has adopted SFAS 162 as of January 1, 2009.

 

In June 2008, theFASB ratified the consensus reached on EITF Issue No. 07-5, “DeterminingWhether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”(“EITF 07-05”). EITF 07-5 clarifies the determination of whether an instrument(or an embedded feature) is indexed to an entity’s own stock, which wouldqualify as a scope exception under SFAS 133, Accounting for DerivativeInstruments and Hedging Activities. EITF 07-5 is effective for financialstatements issued for fiscal years beginning after December 15, 2008.Early adoption for an existing instrument is not permitted. The Company hasadopted EITF 07-5 as of January 1, 2009.

 

In June 2008, FASBissued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes toIssue No. 98-5” (“EITF 08-4”). The objective of EITF 08-4 is to providetransition guidance for conforming changes made to EITF 98-5, “Accounting forConvertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios”, that result from EITF 00-27 “Application ofIssue No. 98-5 to Certain Convertible Instruments”, and FAS 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”. This Issue is effective for financial statements issued for fiscalyears ending after December 15, 2008. Early application is permitted. TheCompany has adopted EITF 08-4 as of January 1, 2009.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

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

 

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

 

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

 

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

 

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

 

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

 

**3.****                         ****Liquidity**

 

The Company hasexperienced losses from continuing operations during the last three fiscalyears and has an accumulated deficit of $160,852 as of June 30,2009.  Cash used in operations for the six months ended June 30, 2009was $2,168; and cash flow from operations will likely be negative throughoutfiscal year 2009.  As of June 30, 2009, the Company’s principalsources of liquidity are $155 of cash and $2,560 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 

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

and continues to develop,commercialize, and manufacture products from an entirely new and uniquetechnology.  These factors have placed a significant strain on thefinancial resources of the Company.  The ability of the Company toovercome these challenges depends on its ability to correct its productioninefficiencies, reduce its operating costs, generate higher revenue, achievepositive cash flow from continuing operations and continued sources of debt andequity financing.  The consolidated financial statements do not includeany adjustments that might result from the outcome of these uncertainties.

 

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

 

The Companyanticipates that it will not have sufficient funds to pursue its currentoperating plan beyond the third quarter of 2009 and will therefore requireadditional funding.  There is no assurance that the Series A-1 Optionwill be exercised to obtain any such funding. Because the Company cannot be certain that it will be able to obtainadequate funding from debt, equity, or other traditional financing sources, itis also actively pursuing several strategic financing options, including theintent to sell its manufacturing plant in South Korea (which would then bereplaced with a smaller facility) and additional licensing and outsourcing ofour manufacturing operations.

 

Additionally, we haveapproximately $287 of principal and accrued interest outstanding as of June 30,2009, under the 8% unsecured subordinated notes (the “Bridge Notes”), whichwere due August 17, 2007.  We areworking to repay the Bridge Notes with our noteholder.

 

We have $361 of outstanding loan as of June 30, 2009under a factoring, loan, and security agreement with a financing company.  In June 2009, the Company received aformal notice of default from the financing company for repayment of theoutstanding loan balance.  The Company intends to fully repay the amounts due under the loan. However, as of the filing of this report, the Company did not repay the loan.The Company is currently working to resolve the matter with the financingcompany by seeking aforbearance until the Company is able to restructure or obtain funding to repaythis loan.

 

Approximately $189 ofprincipal and accrued interest became due from our Korean subsidiary under aloan from Kookmin Bank of South Korea in August 2008.  However, as of the filing of this report we did not repay the loan and we have received a formal notice ofdefault.  Kookmin Bank has initiatedforeclosure proceedings on the loan collateral, which consists of ourmanufacturing plant facility and certain equipment in South Korea.  However, we are currently working to resolvethis matter with Kookmin Bank by seeking a forbearance until we are able torestructure or obtain funding to repay this loan.

 

Wehave outstanding liens and judgments on our assets by various creditors forpast-due trade payables totaling $1,218 which are held by creditors in SouthKorea, as of June 30, 2009.  We arecurrently working to resolve the matter with each creditor****by seeking forbearance until we are able to obtainfunding to repay the amounts due, although there is no assurance that we willbe able to obtain any such funding.   Ifwe cannot repay the amounts due or obtain forbearance, the creditors may seekto foreclose on the Company’s assets. Such a foreclosure would have material adverse effect on our operations,financial condition, and results of operations.

 

**4.Inventories**

 

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

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 
| ** **        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **        | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| ** **        | ** ** | ** **        | ** ** | ** **            | ** ** |
| Raw materials     |       | $                 | 261        |                  | $          | 426 |   |
| Work in process   |       | 51                |       | 184                   |       |
| Finished goods    |       | 484               |       | 210                   |       |
| Total inventories |       | $                 | 796        |                  | $          | 820 |   |

 

**5.   Product Warranty**

 

Managementestimates product warranties as a percentage of certain bulk alloy productsales earned during the period.  As of June 30,2009, the Company used 5% of bulk alloy product sales as an estimate ofwarranties to be claimed.  The percentageis based on industry averages and historical information.  Additionally, as of June 30, 2009 theCompany used 1% of coatings applications sales as estimates of warranties to beclaimed.

 

During the threeand six months ended June 30, 2009, the Company recorded $51 and $91 ofnet gain on warranty, respectively. During the three and six months ended June 30,2008, the Company recorded $12 and $22 of net gain on warranty, respectively.The warranty accrual balance is included in accounts payable and accruedexpenses.

 

**6.  Notes Payable**

 

Unsecured SubordinatedNotes

 

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

 

During 2007 and 2008, the Company retired$1,925 and $1,650 of the August 2007 Subordinated Notes,respectively.  During the three monthsended June 30, 2009, the Company retired $750 of the August 2007Subordinated Notes.

 

As of June 30, 2009 and December 31,2008, the Company’s gross outstanding loan balance of the August 2007Subordinated Notes totaled $259 and $1,009, respectively, and is included incurrent portion of long-term debt.  As ofJune 30, 2009, the effective interest rate for the August 2007Subordinated Notes was 8%.

 

Secured Convertible Subordinated Notes

 

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

 

On May 1, 2009, the January 2010Notes were retired as part of a financing transaction (see Senior SecuredConvertible Notes below).

 

The Company’s gross outstanding loan balance ofthe January 2010 Notes totaled $0 and $19,113 as of June 30, 2009 andDecember 31, 2008, respectively.  As of June 30, 2009 and December 31,2008, un-amortized discounts for conversion feature, warrants, and cash discounttotaled $0 and $7,128, respectively, and other asset debt issuance coststotaled $0 and $655, respectively.  Interest expense for the amortizationof debt issuance cost and discount on note was $491 and $1,816 for 

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

the three and six months ended June 30,2009, respectively.  Interest expense forthe amortization of debt issuance cost and discount on note was $846 and $1,557for the three and six months ended June 30, 2008, respectively.

 

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 fair value of theconversion feature liability resulted in losses of $1,167 and $1,137 for threeand six months ended June 30, 2009, respectively.  The change in the fair value of theconversion feature liability resulted in gains of $1,240 and $1,462 for threeand six months ended June 30, 2008, respectively.  The fair value of conversion featureoutstanding at June 30, 2009 and December 31, 2008 was $0 and $147,respectively.

 

Senior Secured Convertible Notes

 

On May 1, 2009, theCompany completed a financing transaction (the “Transaction”) whereby aggregatecash of $2,500 and principal and accrued interest of $20,625 due under thepreviously issued 8% Convertible Subordinated Notes due January 2010 (the “January 2010Notes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7,500 of new 8% Senior Secured Convertible Notes due January 2011(the “January 2011 Notes”).  Of the$2,500 aggregate cash purchase price, approximately $100 remains outstandingand is included prepaid expenses and other current assets as of June 30,2009.  Transaction was consummatedpursuant to a Securities Purchase and Exchange Agreement, dated May 1,2009 (the “Securities Purchase Agreement”), among the exchanging note holdersand investors (collectively, the “Buyers”).  The Securities PurchaseAgreement gives the Buyers option to subscribe for an additional 1,000,000shares of preferred stock at $5.00 per share at any time prior to six monthsfrom the closing date.  Additionally,8,138,352 of previously issued warrants to purchase common shares held byholders of the January 2010 Notes have been cancelled in the Transaction.

 

TheJanuary 2011 Notes are due January 3, 2011 and bear annual interestrate of 8% with interest payable in October and April in cash or, atthe Company’s option, in the form of additional notes (in which case theinterest rate will be 10%).  Thepreferred stocks accrue cumulative dividends at an annual rate of 8%, which ispayable semi-annually. Beginning on the second anniversary of the initialissuance, the dividend will increase to 10%. The dividends are payable in cash or in kind by the issuance of theCompany of additional preferred stock, only when and as declared by the Company’sBoard of Directors.

 

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

 

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

 

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

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

Pursuant toStatement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities,” EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,” EITF 00-27, “Application of Issue No. 98-5 toCertain Convertible Instruments,” and EITF 05-2 “The Meaning of ‘ConventionalConvertible Debt Instrument’ in EITF Issue No. 00-19,” the original fairvalue of the embedded conversion feature of $3,367 have been recorded asconversion feature liability as the debt is considered nonconventionalconvertible debt. The original fair value was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 1.68 years; (2) volatilityof 176%; (3) risk free interest of 0.92% and dividend rate of 0%. Inaddition, the Company is required to report a value of the conversion liabilityas a fair value and record the fluctuation to the fair value of the conversionfeature liability to current operations.

 

The change in the fair value of the conversionfeature liability resulted in gains of $2,097 for the three and six monthsended June 30, 2009.  The fair valueof conversion feature outstanding at June 30, 2009 was $1,269.   The fair value of conversion featureoutstanding at June 30, 2009 was computed using the Black-Scholes modelunder the following assumptions: (1) expected life of 1.51 years; (2) volatilityof 183%, (3) risk free interest of 1.11% and dividend rate of 0%.

 

Pursuant to EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the original fair values of the warrants of $14,773 havebeen recorded as warrant liability, which was computed using the Black-Scholespricing model under the following assumptions: (1) expected life of 2.67years; (2) volatility of 176%; (3) risk free interest of 1.39% and (4) dividendrate of 0%.

 

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

 

The Company’s gross outstanding loan balance ofthe January 2011 Notes totaled $7,500 as of June 30, 2009.  As of June 30, 2009, un-amortizeddiscounts for conversion feature and warrants totaled $4,118, and other assetdebt issuance costs totaled $135.  Interest expense for the amortizationof debt issuance cost and discount on note was $255 for the three and sixmonths ended June 30, 2009.  The effective interest rate of the January 2011Notes was 70% as of June 30, 2009.

 

Factoring Agreement

 

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

 

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

 

For the six months ended June 30, 2009, the Companyborrowed $20 and repaid $238 under the Agreement.  The total outstanding advance made under theagreement is $361 and $580 as of June 30, 2009 and December 31, 2008,respectively, which is presented as short-term debt.  The weighted average rate of interest forborrowings made under the Agreement was 6.5% and 7.2% for the six months ended June 30,2009 and 2008, respectively.   In June 2009,the Company received a formal notice of default from the financing company forrepayment of the outstanding loan balance. The Company intends to 

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

fully repay the amounts due under theloan.  However, as of the filing of this report the Company did not repaythe loan. The Company is currently working to resolve the matter with the financingcompany by seeking aforbearance until the Company is able to restructure or obtain funding to repaythis loan.

 

Kookmin Note

 

On February 4, 2003, the Company’s Korean subsidiaryreceived 6,500,000 in South Korean Won, or approximately $5,488, under a loanfrom Kookmin Bank of South Korea.  Theloan bears interest at an annual rate of 7.1%. In the event of delayed repayment, the interest increases to a maximumof 21%, depending on the length of time the repayment is delayed.  As of June 30, 2009, the interest ratewas increased to 9.2% from delayed interest payments made.  This loan is collateralized by the plantfacilities and certain equipment in South Korea.

 

The Company is required to make equal monthly installmentsof principal and interest to repay the loan balance through August 2008.  The outstanding loan balance totaled $149 and$151, as of June 30, 2009 and December 31, 2008, respectively, andare included in current portion of long-term debt.   The Company intends to fully repay the amounts due under the loan. However, as of the filing of this report the Company did not repay the loan andthe Company is in default under the loan.  The Company has received a formal noticeof default and Kookmin Bank has initiated foreclosure proceedings on the loancollateral, which consists of manufacturing plant facility and certainequipment in South Korea.  However, theCompany is currently working to resolve this matter with Kookmin Bank byseeking a forbearance until the Company is able to restructure or obtainfunding to repay this loan.

 

Debt of MajorityOwned Subsidiary

 

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

 

LMC was capitalizedthrough a $6,500 subordinated debt and equity investment by C3 Capital Partners(“C3”) and a $5,000 senior credit facility with Bank Midwest, N.A.  Thisdebt and equity resulted in cash proceeds of $11,102 after related debtissuance costs of $398, which proceeds LMC used to purchase all of the assetsand liabilities from the Company.  TheCompany incurred an additional $459 in issuance costs directly related to thedebt issuance.  As a result, $857 wasrecorded as deferred debt issuance costs to be amortized over the life of thedebt.  Interest expense for theamortization of debt issuance cost was $40 and $80 for the three and six monthsended June 30, 2009, respectively. Interest expense for the amortization of debt issuance cost was $51 and$101 for the three and six months ended June 30, 2008, respectively.

 

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

 

*MidwestDebt*

 

In connection with theTransaction, LMC entered into a Loan Agreement, dated July 24, 2007 (the “LoanAgreement”), with Bank Midwest, N.A. (“Midwest”).  The Loan Agreementprovides for total loan availability of $5,500, consisting of a $4,000 termloan with an annual interest rate of 8.48% and a revolving loan of up to $1,500with a variable interest equal to prime rate as published in the Wall Street Journal.Interest payments are due monthly.  Theterm loan has a maturity date of July 20, 2011.  The revolving loanhas 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.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

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

 

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

 

As of June 30, 2009and December 31, 2008, the gross outstanding loan balance under the termloan totaled $2,229 and $2,729, respectively, and the gross outstanding loanbalance under the revolving loan totaled $527 and $597, respectively. The loansare presented as long-term debt and short-term debt on the Company’sconsolidated balance sheet, respectively. Interest expense incurred under the term loan and revolving loan totaled$60 and $122 for the three and six months ended June 30, 2009,respectively.   Interest expense incurredunder the term loan and revolving loan totaled $85 and $179 for the three andsix months ended June 30, 2008, respectively.

 

Additionally, LMC enteredinto Promissory Notes, dated August 29, 2007 and October 21, 2008(the “Capital Loan”), with Midwest to provide for $45 and $105 to be usedtowards the purchase of a company truck and HVOF spray equipment with annualinterest rates of 7.43% and 8.25%, respectively.  The Capital Loan has maturity dates of September 1,2012 and November 1, 2013.  LMC isrequired to make monthly principal and interest payments of $3 per month.  As of June 30, 2009 and December 31,2008, the gross outstanding loan balance under the Capital Loan totaled $116and $129, respectively, which is presented as long-term debt on the Company’sconsolidated balance sheet.  Interestexpense incurred under the Capital Loan totaled $2 and $5 for the three and sixmonths ended June 30, 2009, respectively. Interest expense incurred under the Capital Loan totaled $1 and $2 forthe three and six months ended June 30, 2008, respectively.

 

*C3 Debt*

 

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

 

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

 

The gross outstandingloan balance including accrued interest payable upon maturity of theSubordinated Note totaled $6,757 and $6,690 as of June 30, 2009 and December 31,2008, respectively.  Interest expense incurred under the SubordinatedNotes totaled $202 and $403 for the three and six months ended June 30,2009, respectively. Interest expense incurred under the Subordinated Notestotaled $198 and $395 for the three and six months ended June 30, 2008,respectively.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2009 and 2008**

**(inthousands, except share data)**

**(unaudited)**

 

**7.     StockCompensation Plan**

 

During the six monthsended June 30, 2009, under the Company’s 2002 Non-employee Director StockOption Plan which provides for the grant of stock options to non-employeedirectors, the Company granted options to purchase 70,000 of the Company’scommon shares for an average exercise price of $0.23.  Further, all options granted under this planhad exercise prices that were equal to the fair market value on the date ofgrant.

 

During the six monthsended June 30, 2009, under the Company’s 2002 Equity Incentive Plan whichprovides for the grant of stock options to officers, employees, consultants anddirectors of the Company its subsidiaries, the Company granted options topurchase 233,010 of the Company’s common shares for an average exercise priceof $0.21.    Further, all options grantedunder this plan had exercise prices that were equal to the fair market value onthe date of grant.

 

The Company canceled 418,500 options during the sixmonths ended June 30, 2009, for terminated employees and options expired.

 

**8.****                         ****Preferred Units ofSubsidiary**

 

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

 

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

 

**9.****                         ****Segment Reporting andGeographic Information**

 

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

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Six Months Ended June 30, 2009 and 2008**

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

**(unaudited)**

 

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

 
| ** **                                  | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|---------------------------------------------|------------|--------------|------------|----------------|------------|--------------------|------------|
| Three months ended June 30, 2009       |       |         |       |           |       |               |       |
| Revenue to external customers               |       | $            | 1,706      |           | $          | 1,813              |       | $ | 3,519 |   |
| Gross profit                                |       | 592          |       | 1,032          |       | 1,624              |       |
| Total segment (loss) income                 |       | (168         | )          | 640            |       | 472                |       |
| Total identifiable assets at end of period  |       | 2,224        |       | 8,500          |       | 10,724             |       |
|                                        |       |         |       |           |       |               |       |
| Three months ended June 30, 2008       |       |         |       |           |       |               |       |
| Revenue to external customers               |       | $            | 2,683      |           | $          | 2,986              |       | $ | 5,669 |   |
| Gross profit                                |       | 938          |       | 98             |       | 1,036              |       |
| Total segment income (loss)                 |       | 212          |       | (1             | )          | 211                |       |
| Total identifiable assets at end of period  |       | 3,114        |       | 12,155         |       | 15,269             |       |
|                                        |       |         |       |           |       |               |       |
| Six months ended  June 30, 2009        |       |         |       |           |       |               |       |
| Revenue to external  customers              |       | $            | 4,193      |           | $          | 2,918              |       | $ | 7,111 |   |
| Gross profit                                |       | 1,506        |       | 1,569          |       | 3,075              |       |
| Total segment (loss) income                 |       | (147         | )          | 854            |       | 707                |       |
| Total identifiable assets  at end of period |       | 2,224        |       | 8,500          |       | 10,724             |       |
|                                        |       |         |       |           |       |               |       |
| Six months ended  June 30, 2008        |       |         |       |           |       |               |       |
| Revenue to external  customers              |       | $            | 6,298      |           | $          | 6,139              |       | $ | 12,437 |   |
| Gross profit                                |       | 2,171        |       | 732            |       | 2,903              |       |
| Total segment income (loss)                 |       | 734          |       | (6             | )          | 728                |       |
| Total identifiable assets  at end of period |       | 3,114        |       | 12,155         |       | 15,269             |       |

 

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

 
| ** **                                                                     | ** ** | **For the Three Months** | ** ** | **For the Six Months**  | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                     | ** ** | **Ended June 30,**  | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                     | ** ** | **2009**                 | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                           |       |                     |       |                    |       |   |   |   |   |
| Total segment income                                                           |       | $                        | 472        |                    | $          | 211 |   | $ | 707 |   | $ | 728 |   |
| General and administrative expenses, excluded                                  |       | (826                     | )          | (854                    | )          | (1,763 | ) | (2,010 | ) |
|                                                                           |       |                     |       |                    |       |   |   |   |   |
| Consolidated loss before interest, income taxes,  and noncontrolling interests |       | $                        | (354       | )                       | $          | (643 | ) | $ | (1,056 | ) | $ | (1,282 | ) |
| Loss from extinguishment of debt                                               |       | (1,471                   | )          | —                  |       | (1,471 | ) | — |   |
| Change in value of warrants, gain                                              |       | 6,249                    |       | 1,290                   |       | 6,123 |   | 1,396 |   |
| Change in value of conversion feature, gain                                    |       | 930                      |       | 1,240                   |       | 960 |   | 1,462 |   |
| Interest expense                                                               |       | (1,095                   | )          | (1,395                  | )          | (3,067 | ) | (2,741 | ) |
| Interest income                                                                |       | —                   |       | 1                       |       | — |   | 3 |   |
| Income taxes                                                                   |       | (45                      | )          | —                  |       | (45 | ) | — |   |
| Loss (income) attributable to noncontrolling  interest                         |       | 51                       |       | (65                     | )          | 20 |   | (226 | ) |
| Consolidated net loss attributable to Liquidmetal  Technologies, Inc.     |       | $                        | 4,265      |                    | $          | 428 |   | 1,464 |   | $ | (1,388 | ) |

 

Included in bulkalloy segment income for the three and six months ended June 30, 2008 is$247 of other income and $17 of other expense. Excluded general andadministrative expenses are attributable to the Company’s corporateheadquarters.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Six Months Ended June 30, 2009 and 2008**

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

**(unaudited)**

 

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

 

Revenues from sales tocompanies in the United States were $1,628 and $2,913 during the three monthsended June 30, 2009 and 2008, respectively.  The revenue related to the United States ofAmerica was earned under defense-related research and development contracts,sales of coatings products, and sales of Liquidmetal bulk alloy products.

 

During the three monthsended June 30, 2009, the Company had revenue from sales to companiesoutside of the United States of $1,891 of which $1,328 represented sales tocompanies located in South Korea.  Duringthe three months ended June 30, 2008, the Company had revenues fromcompanies outside of the United States of $2,756 of which $55 represented salesto 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 $1,985 and $1,813 located in the United States at June 30,2009 and December 31, 2008, respectively. The Company had long-livedassets of $5,958 and $6,277 located in South Korea at June 30, 2009 and December 31,2008, respectively.

 

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

** **
| ** **                                | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2009**          | ** ** |
|                                      |       |              |       |
| Total segment assets                      |       | $                 | 10,724     |   |
| Cash and cash equivalents                 |       | 23                |       |
| Prepaid expenses and other current assets |       | 337               |       |
| Other property, plant and equipment       |       | 80                |       |
| Intangibles, net                          |       | 1,236             |       |
| Other assets                              |       | 801               |       |
| Total consolidated assets                 |       | $                 | 13,201     |   |

 

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

 

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

 

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

 

Optionsto purchase 7,860,292 shares of common stock at prices ranging from $0.09 to$15.00 per share were outstanding at June 30, 2009, but were not includedin the computation of diluted EPS for the same period as the inclusion wouldhave been antidilutive.  Warrants topurchase 55,428,242 shares of common stock with prices ranging from $0.50 to$1.55 per share outstanding at June 30, 2009, were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive. 12,500,000 shares ofcommon stock issuable upon conversion of the Company’s convertible notes withconversion prices of $0.60 per share outstanding at June 30, 2009 were notincluded in the computation of diluted EPS for the same period because theinclusion would have been antidilutive. Additionally, 83,457,386 shares of common stock issuable upon conversionof the Company’s convertible preferred stocks with conversion prices rangingfrom $0.10 and $0.22 per share outstanding at June 30, 2009 were notincluded in the computation of diluted EPS for the same period because theinclusion would have been antidilutive.

 

Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the Company is required toreport a value of the warrant as a fair value and record the fluctuation to thefair 

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Six Months Ended June 30, 2009 and 2008**

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

**(unaudited)**

 

valueof the warrant liability to current operations. The change in the fair value of the warrants resulted in gains of $6,249and $6,123 for the three and six months ended June 30, 2009, respectively,and gains of $1,290 and $1,396 for the three and six months ended June 30,2008, respectively. The fair value of warrants outstanding at June 30,2009 of $6,996 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 0.95 to 3.50 years; (2) volatilityof 183%, (3) risk free interest of 0.56% to 1.64%, and dividend rate of0%.  The fair value of warrantsoutstanding at December 31, 2008 of $692 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.21 to 3.99 years; (2) volatility of 113%, (3) risk free interest of0.11% to 1.55%, and dividend rate of 0%.

 

**11.      Commitments and Contingencies**

 

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

 

On June 26, 2006, the Company entered into a jointventure agreement with SAGA, SpA in Padova, Italy, (“SAGA”) a specialistprecision parts manufacturer.  The joint venture is named Liquidmetal SAGAItaly, Srl (“LSI”).  The Company also entered into an exclusivemanufacturing license agreement for the eyewear industry with LSI.  Underthe joint venture agreement, the Company has option to buy ownership interestin LSI, initially, of 19.9% to up to 50%.  In December 2006, theCompany exercised the 19.9% interest in LSI and will have two years to purchasethe additional interest at a nominal price. In January 2007 and June 2007,the Company contributed additional $217 and $86, respectively, into LSI asadditional investment.  The contribution did not change the Company’s19.9% interest in LSI.  Under thelicensing agreement, at any time following 18 months after the effective dateof the agreement, LSI may exercise its option to sell to the Company certainbusiness assets including manufacturing equipment acquired under the jointventure.  During 2008, 2007 and 2006, theCompany recognized revenues of $0, $103 and $702, respectively, of Liquidmetalalloys sold to LSI for use in the joint venture.  There were no alloys sold to LSI during thethree and six months ended June 30, 2009.

 

Wehave outstanding liens and judgments on our assets by various creditors forpast-due trade payables totaling $1,218 which are held by creditors in SouthKorea, as of June 30, 2009.  We arecurrently working to resolve the matter with each creditor****by seeking forbearance until we are able to obtainfunding to repay the amounts due, although there is no assurance that we willbe able to obtain any such funding.   Ifwe cannot repay the amounts due or obtain forbearance, the creditors may seekto foreclose on the Company’s assets. Such a foreclosure would have material adverse effect on our operations,financial condition, and results of operations.

 

**12.    Related Party Transactions**

 

Soo Buchanan, the sister of John Kang, the Company’sChairman, provides services to the Company as a consultant.  During the three and six months ended June 30,2009, the Company incurred $0 for her services as a consultant.  During the three and six months ended June 30,2008, the Company incurred $30 and $60, respectively, for her services as aconsultant. Additionally, Otis Buchanan, the husband of Ms. Buchanan, wasemployed by the Company and was paid aggregate compensation of approximately$28 and $56 during each of the three and six months ended June 31, 2009and 2008, respectively.

 

On December 23, 2008, John Kang advanced the Company$200 to be used to repay the Company’s outstanding borrowings made under theFactoring, Loan and Security Agreement (the “Factoring Agreement”), dated April 21,2005, with a financing company.  Further,Mr. Kang entered into a Continuing Guarantee Agreement, dated January 5,2009, with the financing company to personally guarantee repayment of theoutstanding borrowings made under the Factoring Agreement (see Note 6).  In January 2009, the $200 advance wasoffset with $178 outstanding receivable from Mr. Kang arising fromliabilities incurred from certain stock transactions in August 2002 and$22 of the advance was paid to Mr. Kang.

 

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**LIQUIDMETAL TECHNOLOGIES ANDSUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**For the Six Months Ended June 30, 2009 and 2008**

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

**(unaudited)**

 

In May 2009, the Company completed a transactionin which (i) the holders of our 8% Convertible Subordinated Notesexchanged such notes for a combination of new 8% Senior Secured ConvertibleNotes and shares of a new series of convertible preferred stock designated “Series A-2Preferred Stock”, together with warrants thereon, and (ii) certaininvestors purchased, for an aggregate purchase price of $2,500, shares of a newseries of convertible preferred stock designated as “Series A-1 PreferredStock” (see Note 6).   The lead investors in this transactionwere Carlyle Liquid, LLC and Carlyle Liquid Holdings, LLC (the “CarlyleEntities”), which are two investor entities organized by Abdi Mahemedi andJack Chitayat.  Mr. Mahemedi became a director andgreater-than-5% beneficial owner of our company by reason of the May 2009transaction, and Jack Chitayat is a former director of our companywho became a greater-than-5% beneficial owner of our company by reason ofthe May 2009 transaction.  Mr. Mahemedi and Mr. Chitayathave shared voting and investment control over the shares held by theCarlyle Entities due to the fact that other entities owned by them are themanaging members of these two Carlyle entities.  Additionally, Mr. IrajAzarm, a director of our company, is a passive investor in the CarlyleEntities, and James Kang, a greater-than-5% beneficial owner of our company andthe brother of our Chairman John Kang, is also an indirect passiveinvestor in the Carlyle Entities.

 

The Company has an exclusive license agreement with LLPG, Inc.(“LLPG”), a corporation headed by Mr. Chitayat.  Under the terms of the agreement, LLPG hasthe right to commercialize Liquidmetal alloys, particularly precious-metalbased compositions, in jewelry and high-end luxury product markets.  TheCompany, in turn, will receive royalty payments over the life of the contracton all Liquidmetal products produced and sold by LLPG.    The Company recognized revenues from productsales and licensing fees of $8 and $203 from LLPG during the three and sixmonths ended June 30, 2009 and $137 and $172 of revenues during the threeand six months ended June 30, 2008, respectively.  Approximately, $72 and $30 is included inaccounts receivables as of June 30, 2009 and December 31, 2008,respectively, for outstanding trade receivables due from LLPG.

 

As of June 30, 2009 and December 31, 2008,Ricardo Salas, the Company’s Executive Vice President, held $0 and $381 of theconvertible unsecured subordinated notes, respectively, $259 of the unsecuredsubordinated notes for both periods.  Mr. Salasalso held a total of 1,307,884 and 377,691 of exercisable warrants as of June 30,2009 and December 31, 2008.

 

On June 1, 2007, the Company entered into atransaction with Grace Metal (currently Liquidmetal Korea Co., Ltd. “LMK”),under which (i) LMK agreed to purchase various equipments (including diecasting machines and vacuum induction melters) used in the Company’s bulkamorphous alloy business segment and (ii) the Company granted LMK a10-year exclusive license to manufacture products made from bulk Liquidmetalalloys for customers whose principal headquarters or whose major operations arelocated in South Korea.  LMK was formedby an investor group that includes the former director and officer of theCompany, James Kang, who is also the brother of John Kang, Chairman of ourcompany.  Under an equipment purchaseagreement between the Company and LMK, LMK agreed to buy the purchasedequipment for a total purchase price of $2,000, of which $759 were received asof June 30, 2009.  The equipmentpurchase agreement provides that delivery of the equipment can be delayed toaccommodate the Company’s continuing manufacturing needs, and it also providesthat the Company will retain a security interest in the purchased equipmentuntil full payment of the purchase price.

 

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

 

The Company purchased production supplies and outsourcedproduction of certain bulk alloy production with LMK. In June 2008, theCompany began sharing the use of its manufacturing facility and productionequipment in Pyongtaek, South Korea, with LMK as the Company began significantoutsourcing of its bulk alloy parts production. The Company incurred expensesfor purchase of production supplies and outsourcing fees of $256 and $436during the three and six months ended June 30, 2009, respectively, and$308 and $383 during the three and six months ended June 30, 2008,respectively.  Approximately, $510 and $0is included in accounts payable and accrued expenses as of June 31, 2009and December 31, 2008, respectively, for outstanding trade payables due toLMK.  The Company recognized revenue fromsales of raw materials and royalties for a total of $1,563 and $2,123 duringthe three and six months ended June 30, 2009, respectively, and $703 and$1,332 during the three and six months ended June 30, 2008,respectively.  Approximately, $1,584 and$212 is included in accounts receivables as of June 30, 2009 and December 31,2008, respectively, for outstanding trade receivables due from LMK.

 

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

** **

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

 

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

 

**Overview**

 

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

 

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

 

Our revenues are derived from three principaloperating segments: Liquidmetal alloy industrial coatings, Liquidmetal coatingsapplication, and bulk Liquidmetal alloy products.  Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used incoal-burning power plants. Liquidmetal coatings application is the serviceprovided for applying Liquidmetal products as a protective coating.  Bulk Liquidmetal alloy segment revenueincludes sales of parts or components of electronic devices, medical products,and sports and leisure goods, tooling and prototype parts (includingdemonstration parts and test samples) for customers with products indevelopment, product licensing and arrangements, and research and developmentrevenue relating primarily to defense and medical applications.  We expect that these sources of revenue willcontinue to significantly change the character of our revenue mix.

 

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

 

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Selling, general, and administrative expensescurrently consist primarily of salaries and related benefits, stock-based compensation,travel, consulting and professional fees, depreciation and amortization,insurance, office and administrative expenses, and other expenses related toour operations.

 

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

 

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

 

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

 

**Critical Accounting Policies and Estimates**

** **

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

 

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

 

·                 Exchange rate fluctuations

·                 Warranty accrual

·                 Allowance for doubtful accounts

·                 Inventories at lower of cost or net realizablevalue

·                 Deferred tax assets

·                 Valuation of derivatives of warrants andembedded conversion features

 

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

 

**Resultsof Operations**

 

Comparison of thethree months ended June 30, 2009 and 2008

 

*Revenue.* Revenue decreased $2.2 million to $3.5million for the three months ended June 30, 2009 from $5.7 millionfor the three months ended June 30, 2008.  The decrease consisted of$0.9 million decrease in sales and prototyping of parts manufactured from bulkLiquidmetal alloys to consumer electronics customers as a result of decrease indemand in electronic casings applications, a decrease of $1.0 million from thesales of our coating products as a result decrease in demand in oil drillingapplications, and a decrease of $0.3 million from our research and developmentcontracts.

 

*Cost ofSales.* Cost ofsales decreased to $1.9 million, or 54% of revenue, for the three months ended June 30,2009 from $4.6 million, or 82% of revenue, for the three months ended June 30,2008.  The decrease was a result of a continued change 

 

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in revenue mix during thethree months ended June 30, 2009. The cost to manufacture parts from ourbulk Liquidmetal alloys is variable and differs based on the unique design ofeach product.  However, the cost of sales for the products sold by thecoatings business segment is generally consistent because the Liquidmetalcoatings products are produced by third parties and sold wholesale to variousindustries.

 

*Selling,General, and Administrative Expenses*. Selling, general, and administrative expensesincreased to $1.4 million, or 39% of revenue, for the three months ended June 30,2009 from $1.3 million, or 23% of revenue, for the three months ended June 30,2008. The increase was primarily a result of an increase in bad debt expense of$0.2 million, offset by a decrease in salaries and related benefits expenses of$0.1 million.

 

*Researchand Development Expenses*. Research and development expenses were $0.3 million, or 9% ofrevenue, for the three months ended June 30, 2009 and $0.3 million, or 5%of revenue, for the three months ended June 30, 2008.  We continue to perform research anddevelopment of new Liquidmetal alloys and related processing capabilities,develop new manufacturing techniques, and contract with consultants to advancethe development of Liquidmetal alloys.

 

*Lossfrom Extinguishment of Debt. *Loss fromextinguishment of debt increased to $1.5 million, or 42% of revenue, for thethree months ended June 30, 2009 from $0 for the three months ended June 30,2008.  The $1.5 million loss wasrecognized from extinguishment of certain of our convertible and subordinatednotes.

 

*Changein Value of Warrants. *Change invalue of warrants increased to a gain of $6.2 million, or 178% of revenue, forthe three months ended June 30, 2009 from a gain of $1.3 million, or 23%of revenue, for the three months ended June 30, 2008.  The change in value of warrants consisted ofwarrants issued from convertible and subordinated notes and convertiblepreferred stocks issued between 2004 and 2009 primarily as a result offluctuations in our stock price.

 

*Changein Value of Conversion Feature.*Change in the value ofconversion feature liability from our convertible notes resulted in a gain of$0.9 million, or 26% of revenue, during the three months ended June 30,2009 from a gain of $1.2 million, or 22% of revenue, for the three months endedJune 30, 2008, primarily as a result of fluctuations in our stock price.

 

*OtherIncome.* Other income was $0.2 million, or 4% ofrevenue, for the three months ended June 30, 2008 from write off ofaccounts payables.   There was no otherincome for the three months ended June 30, 2009.

 

*InterestExpense*. Interestexpense was $1.4 million, or 40% of revenue, for the three months ended June 30,2009 and was $1.7 million, or 30% of revenue, for the three months ended June 30,2008. Interest expense consists primarily of debt discount amortization andinterest accrued on outstanding convertible and subordinated notes, borrowingsunder a factoring, loan, and security agreement, a revolving loan agreement,and the Kookmin loan.  The decrease wasdue to certain of our convertible and subordinated notes retired during thethree months ended June 30, 2009.

 

*InterestIncome.* Interest income was $1 thousand for the threemonths ended June 30, 2008 from interest earned on cash deposits.  There was no interest income for the threemonths ended June 30, 2009.

 

Comparison of thesix months ended June 30, 2009 and 2008

 

*Revenue.* Revenue decreased $5.3 million to $7.1million for the six months ended June 30, 2009 from $12.4 million forthe six months ended June 30, 2008.  The decrease consisted of $2.7million decrease in sales and prototyping of parts manufactured from bulkLiquidmetal alloys to consumer electronics customers as a result of decrease indemand in electronic casings applications, a decrease of $2.1 million from thesales of our coating products as a result decrease in demand in oil drillingapplications, and a decrease of $0.5 million from our research and developmentcontracts.

 

*Cost ofSales.* Cost ofsales decreased to $4.0 million, or 57% of revenue, for the six months ended June 30,2009 from $9.5 million, or 77% of revenue, for the six months ended June 30,2008.  The decrease was a result of a continued change in revenue mixduring the six months ended June 30, 2009. The cost to manufacture partsfrom our bulk Liquidmetal alloys is variable and differs based on the uniquedesign of each product.  However, the cost of sales for the products soldby the coatings business segment is generally consistent because theLiquidmetal coatings products are produced by third parties and sold wholesaleto various industries.

 

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*Selling,General, and Administrative Expenses*. Selling, general, and administrative expensesdecreased to $2.9 million, or 41% of revenue, for the six months ended June 30,2009 from $3.2 million, or 26% of revenue, for the six months ended June 30,2008. The decrease was primarily a result of decreases in salaries and relatedbenefits expenses of $0.2 million and travel expenses of $0.1 million.

 

*Researchand Development Expenses*. Research and development expenses were $0.5 million, or 8% ofrevenue, for the six months ended June, 2009 and $0.5 million, or 4% of revenuefor the six months ended June 30, 2008. We continue to perform research and development of new Liquidmetalalloys and related processing capabilities, develop new manufacturingtechniques, and contract with consultants to advance the development ofLiquidmetal alloys.

 

*Loss fromExtinguishment of Debt. *Loss fromextinguishment of debt increased to $1.5 million, or 21% of revenue, for thesix months ended June 30, 2009 from $0 for the six months ended June 30,2008.  The $1.5 million loss wasrecognized from extinguishment of certain of our convertible and subordinatednotes.

 

*Changein Value of Warrants. *Change invalue of warrants increased to a gain of $6.1 million, or 86% of revenue, forthe six months ended June 30, 2009 from a gain of $1.4 million, or 11% ofrevenue, for the six months ended June 30, 2008.  The change in value of warrants consisted ofwarrants issued from convertible and subordinated notes and convertiblepreferred stocks issued between 2004 and 2009 primarily as a result offluctuations in our stock price.

 

*Changein Value of Conversion Feature.*Change in the value ofconversion feature liability from our convertible notes resulted in a gain of$1.0 million, or 14% of revenue, during the six months ended June 30, 2009from a gain of $1.5 million, or 12% of revenue, for the six months ended June 30,2008, primarily as a result of fluctuations in our stock price.

 

*OtherExpense.* Other expense was $17 thousand for the sixmonths ended June 30, 2008 from costs of issuing shares of preferred unitsof our subsidiary.   There was no otherexpense for the six months ended June 30, 2009.

 

*OtherIncome.* Other income was $0.2 million, or 2% ofrevenue, for the six months ended June 30, 2008 from write off of accountspayables.   There was no other income forthe six months ended June 30, 2009.

 

*InterestExpense*. Interestexpense was $3.7 million, or 52% of revenue, for the six months ended June 30,2009 and was $3.4 million, or 27% of revenue, for the six months ended June 30,2008. Interest expense consists primarily of debt discount amortization andinterest accrued on outstanding convertible and subordinated notes, borrowingsunder a factoring, loan, and security agreement, a revolving loan agreement,and the Kookmin loan.  The increase wasdue to higher interest rates on convertible notes during the first quarter of2009.

 

*InterestIncome.* Interest income was $3 thousand for the sixmonths ended June 30, 2008 from interest earned on cash deposits.  There was no interest income for the sixmonths ended June 30, 2009.

 

**Liquidity and Capital Resources**

** **

Our cash used inoperating activities was $2.2 million for the six months ended June 30,2009 and our cash provided by operating activities was $0.4 million for the sixmonths ended June 30, 2008.  Our working capital deficit decreasedfrom $20.8 million at December 31, 2008 to $14.6 million at June 30,2009.  The working capital deficit decrease of $6.2 million was primarilyattributable to an increase of accounts receivables of $0.3 million, decreaseof accounts payable and accrued expenses of $0.5 million, decrease ofshort-term debt of $0.3 million, decrease of long-term debt, current portion,net of discounts of $12.7 million, offset by decrease of prepaid expenses andother current assts of $0.3 million, increase of warrant liabilities of $6.3million, and increase of conversion feature liabilities of $1.1 million.

 

Our cash used ininvesting activities was $0.5 million for the six months ended June 30,2009 for the acquisition of property and equipment and investments in patentsand trademarks.

 

Our cash provided by financing activities was $2.6 million for the sixmonths ended June 30, 2009.  We paidnet $12.7 million in borrowings from a factoring agreement executed in April 2005,a revolving loan agreement executed in July 2007, convertible andsubordinated notes, which were offset by $15.3 million proceeds from issuanceof convertible preferred stocks.

 

On May 1, 2009, the Company completed a financing transaction (the “Transaction”)whereby aggregate cash of $2.5 million and principal and accrued interest of$20.6 million due under the previously issued 8% Convertible Subordinated Notesdue 

 

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January 2010 (the “PriorNotes”) were exchanged for 500,000 shares of convertible Series A-1Preferred Stock with an original issue price of $5.00 per share, 2,625,002shares Series A-2 Preferred Stock with an original issue price of $5.00per share, and $7.5 million of new 8% Senior Secured Convertible SubordinatedNotes due January 2011 (the “Exchange Notes”).  Of the $2.5 million aggregate cash purchaseprice, approximately $0.1 million remains outstanding and is included prepaid expensesand other current assets in the condensed consolidated balance sheet as ofJune 30, 2009.  The Transaction wasconsummated pursuant to a Securities Purchase and Exchange Agreement, dated May 1,2009 (the “Securities Purchase Agreement”), among the exchanging note holdersand investors (collectively, the “Buyers”).  The Securities PurchaseAgreement gives the Buyers option to subscribe for an additional 1,000,000shares of Series A-1 Preferred Stock at $5.00 per share at any time priorto six months from the closing date (the “Series A-1 Option”).

 

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

 

The Series A-1Preferred Stock, Series A-2 Preferred Stock, and Exchange Notes areconvertible into the Company’s common stock at conversion price of $0.10, $0.22, and $0.60 per common share,respectively.  The Company issued warrants to purchase3,125,007 shares and 42,329,407 shares of the Company’s common stock at anexercise of $0.60 and $0.50 per share to the buyers of the Exchange Notes andpreferred stocks, respectively.  Thewarrants will expire in January 2012. The conversion prices and the number of common stock issuable under thepreferred stocks, Exchange Notes and warrants are subject to adjustments forant-dilution purposes.

 

We anticipate thatwe will not have sufficient funds to pursue our current operating plan beyondthe third quarter of 2009 and we will therefore require additionalfunding.  There is no assurance that the Series A-1 Option will beexercised to obtain any such funding. Because we cannot be certain that we will be able to obtain adequatefunding from debt, equity, or other traditional financing sources, we are alsoactively exploring several strategic financing options, including the possiblesale of our manufacturing plant in South Korea (which would then be replacedwith a smaller facility) and additional licensing and outsourcing of ourmanufacturing operations.

 

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

 

We have $0.4 million of outstanding loan as of June 30,2009 under a factoring, loan, and security agreement with a financingcompany.  In June 2009, we receiveda formal notice of default from the financing company for repayment of theoutstanding loan balance.  We intend to fully repay the amounts due under the loan.  However, asof the filing of this report, we did not repay the loan. We are currentlyworking to resolve the matter with the financing company by seeking a forbearance until we areable to restructure or obtain funding to repay this loan.

 

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

 

Wehave outstanding liens and judgments on our assets by various creditors forpast-due trade payables totaling $1.2 million, which are held by creditors inSouth Korea, as of June 30, 2009. We are currently working to resolve the matter with each creditor****by seeking forbearance until we are able to obtainfunding to repay the amounts due, although there is no assurance that we willbe able to obtain any such funding.   Ifwe cannot repay the amounts due or obtain forbearance, the creditors may seekto foreclose on the Company’s assets. Such a foreclosure would have material adverse effect on our operations,financial condition, and results of operations.

 

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**ContractualObligations**

** **

The following table summarizes the Company’sobligations and commitments as of June 30, 2009:

 
| ** **                                    | ** ** | ** ** | ** ** | **Payments Due by Period (in thousands)** | ** ** | ** **    | ** ** |
|-----------------------------------------------|------------|------------|------------|-------------------------------------------|------------|---------------|------------|
| **Contractual Cash Obligations**              | ** ** | **Total**  | ** ** | **Less Than  1 Year**                     | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Thereafter** | ** ** |
|                                          |       |       |       |                                      |       |          |       |   |   |   |   |
| Long-term debt (2)                            |       | $          | 7,907      |                                      | $          | 407           |       | $ | 7,500 |   | $ | — |   | $ | — |   |
| Long-term debt of consolidated subsidiary (2) |       | 9,102      |       | 1,029                                     |       | 1,291         |       | 6,782 |   | — |   |
| Short-term debt (3)                           |       | 361        |       | 361                                       |       | —        |       | — |   | — |   |
| Short-term debt of consolidated subsidiary    |       | 527        |       | 527                                       |       | —        |       | — |   | — |   |
| Interest payments (4)                         |       | 4,010      |       | 1,749                                     |       | 2,211         |       | 50 |   | — |   |
| Operating leases and rents                    |       | 906        |       | 292                                       |       | 605           |       | 9 |   | — |   |
| Consulting services payable                   |       | 48         |       | 48                                        |       | —        |       | — |   | — |   |
| Foster Wheeler                                |       | 126        |       | 126                                       |       | —        |       | — |   | — |   |
| Dongyang                                      |       | 9          |       | 9                                         |       | —        |       | — |   | — |   |
| Nichimen                                      |       | 315        |       | 315                                       |       | —        |       | — |   | — |   |
| Totals (1)                                    |       | $          | 23,311     |                                      | $          | 4,863         |       | $ | 11,607 |   | $ | 6,841 |   | $ | — |   |

 

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| (1) | Contractual cash  obligations include Long-term debt comprised of $258 of Unsecured  Subordinated Notes issued in 2006, $7,500 of Convertible Notes issued in  2009, and $149 of Kookmin Bank Loan; Long-term debt of consolidated  subsidiary comprised of $2,229 of Bank Midwest Term Loan, $6,757 of C3  Capital Partners Subordinated Notes, and $116 of Bank Midwest Promissory Notes;  Short-term debt comprised of $361 outstanding advances received under  factoring, loan, and security agreement; Short-term debt of consolidated  subsidiary comprised of $527 of Bank Midwest revolving loan; future minimum  lease payments under capital and operating leases; purchase commitments from  consultants; payments due from assets purchased from Foster Wheeler thermal  spray coatings business; payments due from our discontinued equipment  manufacturing business; and minimum payments due under a distribution  agreement. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Does not include  accrued and scheduled interest payments of $4,010; and un-amortized discounts  for conversion feature and warrants of $4,118 of our convertible notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (3) | Does not include  minimum interest and fee payments of $30.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4) | Interest payments  include accrued and scheduled payments due on long-term debt and long-term  debt of consolidated subsidiary with annual interest rates between 8% to 12%.  Interest payments also include estimated interest on short-term debt and  short-term debt of majority owned subsidiary with annual interest rates  between 8.48% to 11.5% with expected maturity of approximately 1 year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

**OffBalance Sheet Arrangements**

 

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

 

On June 26,2006, we entered into a joint venture agreement with SAGA, SpA in Padova,Italy, (‘SAGA”) a specialist precision parts manufacturer.  The jointventure is named Liquidmetal SAGA Italy, Srl (“LSI”).  We also enteredinto an exclusive manufacturing license agreement for the eyewear industry withLSI.  Under the joint venture agreement, we have the option to buy anownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006,we purchased 19.9% interest in the joint venture.  Under the licensingagreement, at any time following 18 months after the effective date of theagreement, LSI may exercise its option to sell us certain business assetsincluding manufacturing equipment acquired under the joint venture. During the year ended December 31, 2007, we recognized revenues of $0.7million of Liquidmetal alloys sold to SAGA for use in the joint venture.  During 2008, 2007 and 2006, the Company recognized revenues of $0, $0.1million and $0.7 million, respectively, of Liquidmetal alloys sold to LSI foruse in the joint venture.   There were noalloys sold to LSI during the six months ended June 30, 2009.

 

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

 

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

 

*InterestRates.*  We are exposed to market risks relating tochanges in interest rates as our borrowings are subject to the volatility ofinterest rate risk.  Although we do notcurrently have any borrowings with variable interest rates, fluctuations ininterest rates may have a negative impact to any future borrowings.

 

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

 

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

 

**Item4T – Controls and Procedures**

** **

Evaluation of DisclosureControls and Procedures.   Based on an evaluation of the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under theExchange Act) as of June 30, 2009, the end of the period covered by thisreport, our Chief Executive Officer and Chief Financial Officer have concludedthat the disclosure controls and procedures were effective.

 

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

 

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**PART II**

**OTHERINFORMATION**

 

**Item1 – Legal Proceedings**

 

None.

 

**Item 1A – Risk Factors**

 

None.

 

**Item 3 -Defaults Upon Senior Securities**

 

We have $0.4 million of outstanding loan as of June 30,2009 under a factoring, loan, and security agreement with a financingcompany.  In June 2009, we receiveda formal notice of default from the financing company for repayment of theoutstanding loan balance.  We intend to fully repay the amounts due under the loan.  However, asof the filing of this report, we did not repay the loan. We are currentlyworking to resolve the matter with the financing company by seeking a forbearance until we areable to restructure or obtain funding to repay this loan.

 

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

 

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

 

The Annual Meeting of our stockholders was heldJuly 31, 2009.  The following are the results of stockholdervoting on proposals that were presented and adopted:

 

1. The election of the following directors fora term of one (1) year expiring at the Annual Meeting of Stockholders tobe held in 2010.

 

| ** **                   | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------------------|------------|------------|------------|--------------|------------|
| Robert Biehl                 |       | 35,039,450 |       | 2,288,840    |       |
| John Kang                    |       | 33,347,778 |       | 3,980,512    |       |
| Abdi Mahamedi                |       | 35,048,286 |       | 2,280,004    |       |
| William Scott, Jr. Ph.D |       | 35,564,174 |       | 1,764,116    |       |
| Iraj Azarm                   |       | 35,049,182 |       | 2,279,108    |       |

 

2. Approve amending the Company’sCertificate of Incorporation to increase the number of authorized shares of theCompany’s common stock, par value $0.01 per share to 300,000,000.

 
| ** **                                                    | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Increase authorized shares of the Company’s common stock |       | 34,815,844 |       | 2,502,345   |       | 10,099      |       |

 

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3. Approve amending the Company’s Certificate of Incorporation (the “CharterAmendment”) to provide for the establishment of a five-member Board ofDirectors, the election of Directors by a Class Vote and the voting of theClass A Preferred on an as-converted basis together with the Company’scommon stock as a single class.

 
| ** **                                                                                                                                                                                     | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Establish five-member Board of Directors, the election by a class  vote, and voting of Class A Preferred Stock on an as-converted basis  together with the common stock as a single class |       | 34,842,466 |       | 2,444,092   |       | 41,730      |       |

 

**Item 5 – Other Information**

 

None.

 

**Item 6 – Exhibits**

 

The following documentsare filed as an exhibit to this Report:

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                       |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                        |
| 31.1                |       | Certification of the  President and Chief Executive Officer, Larry Buffington, as required by  Section 302 of Sarbanes-Oxley Act of 2002                                     |
|                |       |                                                                                                                                                                              |
| 31.2                |       | Certification of  Principal Financial Officer, Tony Chung, as required by Section 302 of  Sarbanes-Oxley Act of 2002                                                         |
|                |       |                                                                                                                                                                              |
| 32.1                |       | Certification of  Principal Executive Officer, Larry Buffington, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley  Act of 2002 |
|                |       |                                                                                                                                                                              |
| 32.2                |       | Certification of  Principal Financial Officer, Tony Chung, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley  Act of 2002       |

 

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**SIGNATURES**

 

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

 

 
|                        | LIQUIDMETAL  TECHNOLOGIES, INC.               |
|-----------------------------|-----------------------------------------------|
|                        | (Registrant)                                  |
|                        |                                          |
| Date: August 19,  2009 | /s/ Larry Buffington                          |
|                        | Larry Buffington                              |
|                        | President and Chief  Executive Officer        |
|                        | (Principal Executive  Officer)                |
|                        |                                          |
|                        |                                          |
| Date: August 19,  2009 | /s/ Tony Chung                                |
|                        | Tony Chung                                    |
|                        | Chief Financial Officer                       |
|                        | (Principal Financial  and Accounting Officer) |

 

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