Attached files

file filename
EX-32.1 - EX-32.1 - LIQUIDMETAL TECHNOLOGIES INCa10-16189_1ex32d1.htm
EX-23.1 - EX-23.1 - LIQUIDMETAL TECHNOLOGIES INCa10-16189_1ex23d1.htm
EX-31.1 - EX-31.1 - LIQUIDMETAL TECHNOLOGIES INCa10-16189_1ex31d1.htm
EX-31.2 - EX-31.2 - LIQUIDMETAL TECHNOLOGIES INCa10-16189_1ex31d2.htm
EX-10.52 - EX-10.52 - LIQUIDMETAL TECHNOLOGIES INCa10-16189_1ex10d52.htm

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2009

 

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

 

For the transition period from              to            

 

Commission File No. 000-31332

 


 

LIQUIDMETAL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

33-0264467

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer
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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of each Class
Common Stock, $0.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K   o

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

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

 

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of June 30, 2009 was approximately $6,500,357. For purposes of this calculation only, (i) shares of Common Stock are deemed to have a market value of $0.18 per share, the closing price of the Common Stock as reported on the OTC Bulletin Board on June 30, 2009 and (ii) each of the executive officers, directors and persons holding more than 10% of the outstanding Common Stock as of June 30, 2009 is deemed to be an affiliate.

 

The number of common shares outstanding as of August 20, 2010 was 84,763,339, respectively.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

PART I

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

13

Item 1B.

Unresolved Staff Comments

22

Item 2.

Properties

22

Item 3.

Legal Proceedings

23

Item 4.

Submission of Matters to a Vote of Security Holdings

23

PART II

 

 

 

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

24

Item 6.

Selected Financial Data

25

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 8.

Financial Statements and Supplementary Data

40

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

40

Item 9A(T).

Controls and Procedures

41

Item 9B.

Other Information

41

PART III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

42

Item 11.

Executive Compensation

44

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

48

Item 13.

Certain Relationships and Related Transactions. And Director Independence

53

Item 14.

Principal Accountant Fees and Services

54

PART IV

 

 

55

Item 15.

Exhibits and Financial Statement Schedules

 

 

2



Table of Contents

 

PART I

 

Forward-Looking Statements

 

This annual report on Form 10-K of Liquidmetal Technologies, Inc. contains “forward-looking statements” that may state our management’s current expectations, estimates, forecasts, and projections about the company and its business. Any statement in this report that is not a statement of historical fact is a forward-looking statement, and in some cases, words such as “believe,” “estimate,” “project,” “expect,” “intend,” “may,” “anticipate,” “plans,” “seeks,” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual outcomes and results to differ materially from the anticipated outcomes or result. These statements are not guarantees of future performance, and undue reliance should not be placed on these statements.  It is important to note that Liquidmetal Technologies, Inc.’s actual results could differ materially from what is expressed in our forward-looking statements due to the risk factors described in the section of this report entitled “Risk Factors” in Item 1A of this report as well as the following risks and uncertainties:

 

·                  Our history of operating losses and uncertainty surrounding our ability to achieve or sustain profitability;

·                  Our limited history of developing, manufacturing, and selling products made from our bulk amorphous alloys;

·                  Lengthy customer adoption cycles and unpredictable customer adoption practices;

·                  Our ability to identify, develop, and commercialize new product applications for our technology;

·                  Competition from current suppliers of incumbent materials or producers of competing products;

·                  Our ability to identify, consummate, and/or integrate strategic partnerships;

·                  The potential for manufacturing problems or delays; and

·                  Potential difficulties associated with protecting or expanding our intellectual property position.

 

Liquidmetal Technologies, Inc. undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Item 1. Business

 

In this annual report on Form 10-K, unless the context indicates otherwise, references to “the Company”, “Liquidmetal Technologies”, “our Company”, “we”, “us”, and similar references refer to Liquidmetal Technologies, Inc. and its subsidiaries.

 

Overview

 

We are a materials technology company that develops and commercializes products made from amorphous alloys.  Our Liquidmetal® family of alloys consists of a variety of proprietary coatings, powders, bulk alloys, and composites that utilize the advantages offered by amorphous alloy technology. We develop, manufacture, and sell products and components from bulk amorphous alloys to customers in various industries, and we also partner with third-party licensees and distributors to develop and commercialize bulk Liquidmetal alloy products. We believe that our proprietary bulk alloys are the only commercially viable bulk amorphous alloys currently available in the marketplace.  In addition to our bulk alloys, we market and sell a line of proprietary amorphous alloy-based industrial coatings under the Liquidmetal Armacor™ Coatings brand.

 

Amorphous alloys are unique materials that are distinguished by their ability to retain a random atomic structure when they solidify, in contrast to the crystalline atomic structure that forms in other metals and alloys when they solidify. Liquidmetal alloys possess a combination of performance, processing, and potential cost advantages that we believe will make them preferable to other materials in a variety of applications. The amorphous atomic structure of our alloys enables them to overcome certain performance limitations caused by inherent weaknesses in crystalline atomic structures, thus facilitating performance and processing characteristics superior in many ways to those of their crystalline counterparts. For example, our zirconium-titanium Liquidmetal alloys are approximately 250% stronger than commonly used titanium alloys such as Ti-6Al-4V, but they also have some of the beneficial processing characteristics more commonly associated with plastics. We believe these advantages could result in Liquidmetal alloys supplanting high-performance alloys, such as titanium and stainless steel, and other incumbent materials in a wide variety of applications. Moreover, we believe these advantages could enable the introduction of entirely new products and applications that are not possible or commercially viable with other materials.

 

3



Table of Contents

 

General Corporate Information

 

We were originally incorporated in California in 1987, and we reincorporated in Delaware in May 2003.  Our principal executive offices are located at 30452 Esperanza, Rancho Santa Margarita, California 92688. Our telephone number at that address is (949) 635-2100. Our Internet website address is www.liquidmetal.com and all of our filings with the Securities and Exchange Commission  (“SEC”) are available free of charge on our website.

 

Subsidiaries and Other Locations

 

We currently own and operate a manufacturing facility in Pyongtaek, South Korea, which became operational in the third quarter of 2002.  This Korean subsidiary handles our Bulk Liquidmetal alloy business which includes market opportunities to manufacture and sell components made out our bulk alloys.  We operate a distribution warehouse division in Huntsville, Texas to handle our Liquidmetal alloy industrial coatings which are used primarily as protective coatings for industrial machinery and equipment, such as drill pipe used by the oil drilling industry and boiler tubes used by coal burning power plants.  Lastly, we operate a coatings application business based in Dothan, Alabama used to support our industrial coatings business.

 

Segments

 

In April 2002, we began classifying operations into two reportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings are used primarily as a protective coating for industrial machinery and equipment, such as drill pipe used by the oil drilling industry and boiler tubes used by coal burning power plants.  Bulk Liquidmetal alloys include market opportunities to manufacture and sell components made out of our bulk alloys.  The expenses incurred by the bulk Liquidmetal alloy segment are manufacturing, research and development costs, and selling expenses associated with identifying and developing market opportunities.  Bulk Liquidmetal alloy products can be distinguished from Liquidmetal alloy coatings in that the bulk Liquidmetal alloy can have significant thickness, up to approximately one inch, which allows for their use in a wider variety of applications other than a thin protective coating applied to machinery and equipment.  Revenue and expenses associated with research and development services are included in the bulk Liquidmetal alloy segment.

 

Results of segment operations and assets are included in Note 15 to the Consolidated Financial Statements contained in this Form 10-K.

 

Our Technology

 

The performance, processing, and potential cost advantages of Liquidmetal alloys are a function of their unique atomic structure and their proprietary material composition.

 

Unique Atomic Structure

 

The atomic structure of Liquidmetal alloys is the fundamental feature that differentiates them from other alloys and metals. In the molten state, the atomic particles of all alloys and metals have an amorphous atomic structure, which means that the atomic particles appear in a completely random structure with no discernible patterns. However, when non-amorphous alloys and metals are cooled to a solid state, their atoms bond together in a repeating pattern of regular and predictable shapes, or crystalline grains. This process is analogous to the way ice forms when water freezes and crystallizes. In non-amorphous metals and alloys, the individual crystalline grains contain naturally occurring structural defects that limit the potential strength and performance characteristics of the material. These defects, known as dislocations, consist of discontinuities or inconsistencies in the patterned atomic structure of each grain. Unlike other alloys and metals, bulk Liquidmetal alloys can retain their amorphous atomic structure throughout the solidification process and therefore do not develop crystalline grains and the associated dislocations. Consequently, bulk Liquidmetal alloys exhibit superior strength and other superior performance characteristics compared to their crystalline counterparts. Our Liquidmetal alloy coatings, in contrast to our bulk alloys, have a crystalline atomic structure when initially applied, but their atomic structure becomes amorphous as the coatings rub against surfaces under force, thus improving their performance over time.

 

Prior to 1993, commercially viable amorphous alloys could be created only in thin forms, such as coatings, films, or ribbons. However, in 1993, researchers at the California Institute of Technology (Caltech) developed the first commercially viable amorphous alloy in a bulk form. Today, bulk Liquidmetal alloys can be formed into objects that are up to one inch thick, and we are not aware of any other commercially available amorphous alloys that can achieve this thickness. We obtained the exclusive right to commercialize the bulk amorphous alloy through a license agreement with Caltech and have developed the technology to enable the commercialization of the bulk amorphous alloys.

 

4



Table of Contents

 

Proprietary Material Composition

 

The constituent elements and percentage composition of Liquidmetal alloys are critical to their ability to solidify into an amorphous atomic structure. We have several different alloy compositions that have different constituent elements in varying percentages. These compositions are protected by various patents that we own or exclusively license from third parties, including Caltech. The raw materials that we use in Liquidmetal alloys are readily available and can be purchased from multiple suppliers.

 

Advantages of Liquidmetal Alloys

 

Liquidmetal alloys possess a unique combination of performance, processing and cost advantages that we believe makes them superior in many ways to other commercially available materials for a variety of existing and potential future product applications.

 

Performance Advantages

 

Our bulk Liquidmetal alloys provide several distinct performance advantages over other materials, and we believe that these advantages make the alloys desirable in applications that require high yield strength, strength-to-weight ratio, elasticity and hardness.

 

The high yield strength of bulk Liquidmetal alloys means that a high amount of stress must be exerted to create permanent deformation. However, because the yield strength is so high, the yield strength of many of our bulk Liquidmetal alloy compositions is very near their ultimate strength, which is the measure of stress at which total breakage occurs. Therefore, very little additional stress may be required to break an object made of bulk Liquidmetal alloys once the yield strength is exceeded. Although we believe that the yield strength of many of our bulk alloys exceeds the ultimate strength of most other commonly used alloys and metals, our bulk alloys may not be suitable for certain applications, such as pressurized tanks, in which the ability of the material to yield significantly before it breaks is more important than its strength advantage. Additionally, although our bulk alloys show a high resistance to crack initiation because of their very high strength and hardness, certain of our bulk alloys are sensitive to crack propagation under certain long-term, cyclical loading conditions. Crack propagation is the tendency of a crack to grow after it forms. We are currently developing new alloy compositions that have improved material properties to overcome these limitations.

 

Processing Advantages

 

The processing of a material generally refers to how a material is shaped, formed, or combined with other materials to create a finished product. Bulk Liquidmetal alloys possess processing characteristics that we believe make them preferable to other materials in a wide variety of applications. In particular, our alloys are amenable to processing options that are similar in many respects to those associated with plastics. For example, we believe that bulk Liquidmetal alloys have superior net-shape casting capabilities as compared to high-strength crystalline metals and alloys.  “Net-shape casting” is a type of casting that permits the creation of near-to-net shaped products that reduce costly post-cast processing or machining. Additionally, unlike most metals and alloys, our bulk Liquidmetal alloys are capable of being thermoplastically molded in bulk form. Thermoplastic molding consists of heating a solid piece of material until it is transformed into a moldable state, although at temperatures much lower than the melting temperature, and then introducing it into a mold to form near-to-net shaped products.  Accordingly, thermoplastic molding can be beneficial and economical for net shape fabrication of high-strength products.

 

Bulk Liquidmetal alloys also permit the creation of composite materials that cannot be created with most non-amorphous metals and alloys. A composite is a material that is made from two or more different types of materials. In general, the ability to create composites is beneficial because constituent materials can be combined with one another to optimize the composite’s performance characteristics for different applications. In other metals and alloys, the high temperatures required for processing could damage some of the composite’s constituent materials and therefore limit their utility. However, the relatively low melting temperatures of bulk Liquidmetal alloys allow mild processing conditions that eliminate or limit damage to the constituent materials when creating composites. In addition to composites, we believe that the processing advantages of Liquidmetal alloys will ultimately allow for a variety of other finished forms, including sheets and extrusions.

 

5



Table of Contents

 

Notwithstanding the foregoing advantages, our bulk Liquidmetal alloys possess certain limitations relative to processing. The beneficial processing features of our bulk alloys are made possible in part by the alloys’ relatively low melting temperatures. Although a lower melting temperature is a beneficial characteristic for processing purposes, it renders certain bulk alloy compositions unsuitable for certain high-temperature applications, such as jet engine exhaust components. Additionally, the current one-inch thickness limitation of our zirconium-titanium bulk alloy renders our alloys currently unsuitable for use as structural materials in large-scale applications, such as load-bearing beams in building construction. We are currently engaged in research and development with the goal of developing processing technology and new alloy compositions that will enable our bulk alloys to be formed into thicker objects.

 

Cost Advantages

 

Liquidmetal alloys have the potential to provide cost advantages over other high-strength metals and alloys in certain applications. Because bulk Liquidmetal alloy has processing characteristics similar in some respects to plastics, which lends itself to near-to-net shape casting and molding, Liquidmetal alloys can in many cases be shaped efficiently into intricate, engineered products. This capability can eliminate or reduce certain post-casting steps, such as machining and re-forming, and therefore has the potential to significantly reduce processing costs associated with making parts in high volume.

 

Additionally, because the near-to-net shape processing of Liquidmetal alloys reduces the need for capital-intensive heavy industrial equipment such as that found in foundry and forging operations, Liquidmetal alloys can be processed with a smaller machinery footprint, which allows for more efficient development of facilities and reduced permitting and regulatory costs. We believe that these advantages may allow our customers an opportunity to maintain or improve the performance of their products without a commensurate increase in cost.

 

Our Strategy

 

As a result of the experience and knowledge that we have gained through our activities to date, and recognizing that developing and commercializing a revolutionary new technology is an evolutionary process, we are continually modifying our business strategy to enable us to better capitalize on our evolving core strengths and more effectively pursue revenue growth and profitability.  The key elements of our strategy include:

 

·

 

Identifying and Developing New Applications for Our Liquidmetal Alloy Technology. We intend to continue to identify and develop new applications that will benefit from the performance, processing, and cost advantages of Liquidmetal alloys.

 

 

 

·

 

Focusing Our Marketing and Internal Manufacturing Activities on Select Products with Expected Higher Gross-Margins. We intend to focus our marketing and internal manufacturing activities on select products with anticipated higher gross margins.  This strategy is designed to align our product development initiatives with our manufacturing processes and manufacturing cost structure, and to reduce our exposure to more commodity-type product applications that are prone to unpredictable demand and fluctuating pricing.  Our focus is primarily on higher-margin products that possess design features that take optimal advantage of our existing and developing manufacturing technology and that command a price commensurate with the performance advantages of our alloys.  In addition to our focus on products with higher gross margins, we will continue to engage in prototype manufacturing, both for internally manufactured products and for products that will ultimately be licensed to or manufactured by third parties.

 

 

 

·

 

Further Developing Our Manufacturing Processes, Capabilities, and Efficiencies for Bulk Liquidmetal Alloys. We intend to improve and enhance our internal manufacturing processes, capabilities, and efficiencies in order to maintain quality control over products made from bulk Liquidmetal alloys, to focus on improvements to the processing of our alloys, and to protect our intellectual property. As our alloys become more pervasive, however, we expect to enter into additional strategic relationships that would involve the licensing of Liquidmetal technology to third parties for certain market segments.

 

 

 

·

 

Pursuing Strategic Partnerships In Order to More Rapidly Develop and Commercialize Products. We intend to actively pursue and support strategic partnerships that will enable us to leverage the resources, strength, and technologies of other companies in order to more rapidly develop and commercialize products.  These partnerships may include licensing transactions in which we license full commercial rights to our technology in a specific application area, or they may include transactions of a more limited scope in which, for example, we outsource manufacturing activities or grant distribution rights.  We believe that utilizing such a partnering strategy will enable us to reduce our working capital burden, better fund product development efforts, better understand customer adoption practices, leverage the technical and financial resources of our partners, and more effectively handle product design and process challenges.  As this partnering strategy evolves, a growing portion of our revenue mix may be comprised of revenue from the provision of product development services, technical support, and engineering services, as well as revenues from royalties on the sale of Liquidmetal alloy products by our partners.

 

6



Table of Contents

 

·

 

Advancing the Liquidmetal® Brand. We believe that building our corporate brand will foster continued adoption of our technology. Our goal is to position Liquidmetal alloys as a superior substitute for materials currently used in a variety of products across a range of industries. Furthermore, we seek to establish Liquidmetal alloys as an enabling technology that will facilitate the creation of a broad range of commercially viable new products. To enhance industry awareness of our company and increase demand for Liquidmetal alloys, we are reviewing various brand development strategies that could include collaborative advertising and promotional campaigns with select customers, industry conference and trade show appearances, public relations, and other means.

 

Applications for Liquidmetal Alloys

 

We have focused our commercialization efforts for Liquidmetal alloys on four identified product areas.  We believe that these areas are consistent with our strategy in terms of market size, building brand recognition, and providing an opportunity to develop and refine our processing capabilities. Although we believe that strategic partnering transactions could create valuable opportunities beyond the parameters of these target markets, we anticipate continuing to pursue these markets both internally and in conjunction with partners.

 

Components for Electronic Products

 

We produce components for electronic devices using our bulk Liquidmetal alloys and believe that our alloys offer enhanced performance and design benefits for these components in certain applications.  Bulk Liquidmetal alloys can be used for various structural components of a cellular phone, including the shield, faceplate, hinge, hinge housings, back plate, side plates, brackets, and the cover on the phones. We initially targeted the electronic casings market because of its potential for high product volumes and branding opportunities; however, unpredictable customer adoption practices, short product model lives, processing limitations, and intense pricing pressures make it very challenging to compete in this high-volume market.  Accordingly, we are currently limiting our focus in this market to higher-margin applications that have the potential to benefit from the unique performance characteristics of bulk Liquidmetal alloys.  We continue to believe that the high strength-to-weight ratio and elastic limit of bulk Liquidmetal alloys enable the production of stronger and thinner electronic devices as compared to plastic, zinc, and magnesium, and we intend to focus on products that require these design and performance benefits.

 

Sporting Goods and Leisure Products

 

We are developing a variety of applications for Liquidmetal alloys in the sporting goods and leisure products area.

 

In the sporting goods industry, we believe that the high strength, hardness, and elasticity of our bulk alloys have the potential to enhance performance in a variety of products, and we further believe that many sporting goods products are conducive to our internal manufacturing strategy of focusing on high-margin products that meet our design criteria.  Substantial opportunities also exist for our amorphous alloy coatings, powders and composites. In 2003, Rawlings Sporting Goods Company launched a new line of baseball and softball bats that utilize a Liquidmetal alloy coating, and HEAD NV Sport launched a new line of HEAD® Liquidmetal® tennis racquets that incorporates Liquidmetal alloy in composite form in their racquet design. In 2005, we have also launched goods that utilize Liquidmetal alloy including skis.  Other potential applications for our alloys in this industry include golf clubs, eyewear, fishing, hunting, and other sport products.

 

In the leisure products category, we believe that bulk Liquidmetal alloys can be used to efficiently produce intricately engineered designs with high-quality finishes, such as premium watchcases, and we further believe that Liquidmetal alloy technology can be used to make high-quality, high-strength jewelry from precious metals.  We have successfully produced prototype rings made from an amorphous Liquidmetal platinum alloy that is harder (and hence more scratch resistant) than conventional platinum jewelry.

 

In order to accelerate the commercialization of Liquidmetal alloys in the jewelry and high-end luxury products market, in June 2003, we entered into an exclusive, ten-year license agreement with LLPG, Inc. (“LLPG”).  Under the terms of the agreement, LLPG has the right to commercialize Liquidmetal alloys, particularly precious-metal based compositions, in jewelry and high-end luxury product markets.

 

7



Table of Contents

 

Medical Devices

 

We are engaged in product development efforts relating to various medical devices that could be made from Liquidmetal alloys. We believe that the unique properties of bulk Liquidmetal alloys provide a combination of performance and cost benefits that could make them a desirable replacement to incumbent materials, such as stainless steel and titanium, currently used in various medical device applications.  Our ongoing emphasis has been on surgical instrument applications for Liquidmetal alloys. These include, but are not limited to, specialized blades, orthopedic instruments utilized for implant surgery procedures, dental devices, and general surgery devices. The potential value offered by our alloys is high performance in some cases and cost reduction in others, the latter stemming from the ability of Liquidmetal alloys to be net shape cast into components, thus reducing costs of secondary processing. The status of most components in the prototyping phase is subject to non-disclosure agreements with our customers.

 

We believe that our future success in the medical device market will be driven largely by strategically aligning ourselves with well-established companies that are uniquely positioned to facilitate the introduction of Liquidmetal alloys into this market, especially as it relates to the unique processing challenges and stringent material qualification requirements that are prevalent in this industry.  We also believe that our prospects for success in this market will be enhanced through our focus on optimizing existing alloy compositions and developing new alloy compositions to satisfy the industry’s rigorous material qualification standards.

 

Industrial Coatings and Powders

 

We continue to market and sell amorphous alloy industrial coatings and powders under the Liquidmetal Armacor™ Coatings brand name. Liquidmetal alloy coatings are used primarily as a protective coating for industrial machinery and equipment. Since the inception of this business in the late 1980s, our proprietary coatings have demonstrated a high degree of hardness and low coefficient of friction which, when combined with their strong adhesion properties, reduce the wear and consequent failure of the machinery and equipment on which they are used. In contrast to our bulk alloys, we sell Liquidmetal coatings primarily in the form of a wire or powder feedstock that is melted and applied to machinery or equipment through welding or thermal spray processes.

 

Our Liquidmetal coatings are widely used in the oil drilling industry as a protective coating on drill pipe and casings, and we estimate that our coatings represent a dominant share of annual worldwide sales of hard band coatings for new oil drill pipe. Drilling often places tremendous stress on pipes and casings, especially whenever the drill changes direction. Both the drill pipe and casing experience excessive wear, which leads to higher replacement costs and greater failure rates. Liquidmetal coatings are used to provide a protective coating, or hard band, around the outside of the drill pipe and the inside of casings to reduce wear and failure rates and accordingly reduce operating costs.

 

Liquidmetal coatings have also been sold into the power generation industry specifically for the purpose of coating boiler tubes in coal-burning power plants in order to extend the lives of these boilers. Boiler tubes are subject to high heat, erosion, and corrosion and often require costly replacement, both in terms of replacement parts and length of downtime for installation. Additionally, residue build-up in boiler tubes of coal burning power plants creates operating inefficiencies. Historic performance and testing of Liquidmetal coatings have demonstrated that our coatings extend the life of these boiler tubes meaningfully beyond their current average life depending on the specific environment. In addition, our coatings have demonstrated the ability to reduce build-up of residue on boiler tubes, helping to improve the efficiencies of the boilers. Historically, we have not concentrated sales efforts on the boiler tube market in a substantial way. However, given the size of the market and potential opportunities for our coatings, we have recently dedicated greater effort to this area.

 

Going Concern /Liquidity

 

We have experienced significant cumulative operating losses since our inception. Our net income for the fiscal year ended December 31, 2009 was $0.3 million while our net loss for the fiscal years ended December 31, 2008 and 2007 was $6.6 million, and $5.6 million, respectively.  In the audit report on our financial statements for our fiscal years ended December 31, 2009 and 2008, our auditors included a going-concern qualification indicating that our significant operating losses and working capital deficit cause substantial doubt about our ability to continue as a going concern. By issuing an opinion stating that there is substantial doubt about our ability to continue as a going concern, our auditors have indicated that they are uncertain as to whether we have the capability to continue our operations without additional funding.

 

8



Table of Contents

 

On May 1, 2009, we completed a financing transaction (the “Transaction”) whereby aggregate cash of $2.5 million and principal and accrued interest of $20.6 million due under the previously issued 8% Convertible Subordinated Notes due January 2010 (the “Prior Notes”) were exchanged for 500,000 shares of convertible Series A-1 Preferred Stock with an original issue price of $5.00 per share, 2,625,002 shares Series A-2 Preferred Stock with an original issue price of $5.00 per share, and $7.5 million of new 8% Senior Secured Convertible Subordinated Notes due January 2011 (the “Exchange Notes”).  The Transaction was consummated pursuant to a Securities Purchase and Exchange 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 an additional 1,000,000 shares of Series A-1 Preferred Stock at $5.00 per share at any time prior to six months from the closing date (the “Series A-1 Option”).  On August 5, 2010, we repaid in full all principal and interest on the Exchange Notes in the amount of $8.2 million, and all security interests on our assets securing such obligations were released and terminated.

 

On October 30, 2009, we entered into an agreement with various investors to issue 180,000 shares of convertible Series A-1 Preferred Stock for $0.9 million of cash pursuant to the Series A-1 Option.

 

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

 

We have approximately $0.3 million of principal and accrued interest outstanding as of December 31, 2009, under the 8% unsecured subordinated notes (the “Bridge Notes”), which were due August 17, 2007.  On August 5, 2010, we repaid in full all principal and interest on the Bridge Notes in the amount of $0.3 million.

 

We have $0.3 million of outstanding loan as of December 31, 2009 under a factoring, loan, and security agreement with a financing company.  In June 2009, we received a formal notice of default from the financing company for repayment of the outstanding loan balance and entered into a settlement agreement with the financing company whereby we agreed to repay approximately $0.1 million each month until the outstanding loans and accrued fees have been repaid.   As of December 31, 2009, we were unable to pay the $0.1 million monthly payments and were in discussions with the financing company to either extend or enter into another settlement agreement.  On August 5, 2010, we repaid in full all principal, interest and fees on the factoring loan in the amount of $0.3 million and all security interests on our assets securing such obligation was released and terminated.

 

We have outstanding liens on assets by our South Korean subsidiary by various creditors for past-due trade payables totaling $1.3 million, of which $1.1 million is held by creditors in South Korea, as of December 31, 2009.  We are currently working to resolve the matter with each creditor by seeking a forbearance or compromise.  If we cannot repay the amounts due or obtain a forbearance or compromise, the creditors may seek to foreclose on the Company’s assets located in South Korea.  Such a foreclosure would have material adverse effect on our operations, financial condition, and results of operations.

 

Liquidmetal Golf

 

From 1997 until September 2001, we were engaged in the retail marketing and sale of golf clubs through a majority owned subsidiary, Liquidmetal Golf. The retail business of Liquidmetal Golf was discontinued in September 2001. Although the retail golf club business has been discontinued, Liquidmetal Golf is engaged in the development of golf club components for golf original equipment manufacturers that will integrate these components into their own clubs and then sell them under their respective brand names. Liquidmetal Technologies owns 79% of the outstanding common stock in Liquidmetal Golf.

 

9



Table of Contents

 

Our Liquidmetal Golf subsidiary has the exclusive right and license to utilize our Liquidmetal alloy technology for purposes of golf equipment applications. This right and license is set forth in an intercompany license agreement between Liquidmetal Technologies and Liquidmetal Golf. This license agreement provides that Liquidmetal Golf has a perpetual and exclusive license to use Liquidmetal alloy technology for the purpose of manufacturing, marketing, and selling golf club components and other products used in the sport of golf. In consideration of this license, Liquidmetal Golf has issued 4,500,000 shares of Liquidmetal Golf common stock to Liquidmetal Technologies.

 

Our Intellectual Property

 

Our intellectual property consists of patents, trade secrets, know-how, and trademarks. Protection of our intellectual property is a strategic priority for our business, and we intend to vigorously protect our patents and other intellectual property. Our intellectual property portfolio includes 50 owned or licensed U.S. patents and numerous patent applications relating to the composition, processing, and application of our alloys, as well as various foreign counterpart patents and patent applications.

 

Our initial bulk amorphous alloy technology was developed by researchers at the California Institute of Technology (“Caltech”). We have purchased patent rights that provide us with the exclusive right to commercialize the amorphous alloy and other amorphous alloy technology acquired from Caltech through a license agreement (“Caltech License Agreement”) with Caltech.  In addition to the patents and patent applications that we license from Caltech, we are building a portfolio of our own patents to expand and enhance our technology position. These patents and patent applications primarily relate to various applications of our bulk amorphous alloys, the composition of our coatings and powders, and the processing of our alloys. The patents relating to our coatings expire on various dates until 2020 and the patents relating to our bulk amorphous alloys expire on various dates between 2013 and 2028. Our policy is to seek patent protection for all technology, inventions, and improvements that are of commercial importance to the development of our business, except to the extent that we believe it is advisable to maintain such technology or invention as a trade secret.

 

In order to protect the confidentiality of our technology, including trade secrets, know-how, and other proprietary technical and business information, we require that all of our employees, consultants, advisors and collaborators enter into confidentiality agreements that prohibit the use or disclosure of information that is deemed confidential. The agreements also obligate our employees, consultants, advisors and collaborators to assign to us developments, discoveries and inventions made by such persons in connection with their work with us.

 

Research and Development

 

We are engaged in ongoing research and development programs that are driven by the following key objectives:

 

·

 

Enhance Material Processing and Manufacturing Efficiencies. We plan to continue research and development of processes and compositions that will decrease our cost of making products from Liquidmetal alloys.

 

 

 

·

 

Optimize Existing Alloys and Develop New Compositions. We believe that the primary technology driver of our business will continue to be our proprietary alloy compositions. We plan to continue research and development on new alloy compositions to generate a broader class of amorphous alloys with a wider range of specialized performance characteristics. Since 2003, we have successfully expanded our portfolio of bulk amorphous alloys to include additional zirconium-titanium alloys, as well as alloys based on other metals, such as gold and platinum.  Although these various compositions are at different stages of development and only a few are currently suitable for commercial use, we believe that a larger alloy portfolio will enable us to increase the attractiveness of our alloys as an alternative to incumbent materials and, in certain cases, drive down product costs.  We also believe that our ability to optimize our existing alloy compositions will enable us to better tailor our alloys to our customers’ specific application requirements.

 

 

 

·

 

Develop New Applications. We will continue the research and development of new applications for Liquidmetal alloys. We believe the range of potential applications will broaden by expanding the forms, compositions, and methods of processing of our alloys.

 

We conduct our research and development programs internally and also through strategic relationships that we enter into with third parties. Our internal research and development efforts are conducted by a team of 10 scientists and engineers whom we either employ directly or as a consultant.

 

In addition to our internal research and development efforts, we enter into cooperative research and development relationships with leading academic institutions.  We have entered into development relationships with other companies for the purpose of identifying new applications for our alloys and establishing customer relationships with such companies. Some of our product development programs are partially funded by our customers. We are also engaged in negotiations with other potential customers regarding possible product development relationships. Our research and development expenses for the years ended December 31, 2009, 2008 and 2007, were $1.2 million, $1.0 million, and $1.1 million, respectively.

 

10



Table of Contents

 

Manufacturing

 

We currently own and operate a 166,000 square foot manufacturing facility in Pyongtaek, South Korea, which became operational in the third quarter of 2002.  We believe that the facility will meet our anticipated manufacturing needs for the foreseeable future, although these needs may change depending upon the actual and forecasted orders we receive for our products. We currently intend to develop supplemental research and development, prototyping and manufacturing capabilities elsewhere, including the United States, for purposes of meeting our long-term manufacturing needs and our customers’ requirements.

 

In June 2006, we entered into a joint venture agreement with SAGA, SpA in Padova, Italy, (“SAGA”) a specialist precision parts manufacturer. The joint venture is named Liquidmetal SAGA Italy, Srl (“LSI”), under which LSI is currently acting as a contract manufacturer to our company for the purpose of producing prototypes and certain products in Europe.

 

In June 2007, we entered into a licensing agreement with Liquidmetal Korea Co. Ltd (“LMK”), a South Korean company,  for a 10-year exclusive license to manufacture Liquidmetal alloys for customers whose principal headquarters or major operations are based in South Korea.  Subsequent to December 31, 2009, the licensing agreement with LMK was terminated on June 15, 2010.

 

Raw Materials

 

Liquidmetal alloy compositions are comprised of many elements, all of which are available commodity products. We believe that each of these raw materials is readily available in sufficient quantities from multiple sources on commercially acceptable terms. However, any substantial increase in the price or interruption in the supply of these materials could have an adverse effect on our profitability.

 

Customers

 

During 2009, one customer, Liquidmetal Korea Co. Ltd. (“LMK”), accounted for more than 10% of our revenues from continuing operations.  During both of 2008 and 2007, two customers, Grant Prideco and Liquidmetal Korea, accounted for 10% or more of our revenues from continuing operations. We expect that a significant portion of our revenue may continue to be concentrated in a limited number of customers, even as our bulk Liquidmetal alloy business grows.

 

Competition

 

We are not aware of any other company or business that manufactures, markets, distributes, or sells bulk amorphous alloys or products made from bulk amorphous alloys. We believe it would be difficult to develop a competitive bulk amorphous alloy without infringing our patents. However, our bulk Liquidmetal alloys face competition from other materials, including metals, alloys, plastics and composites, which are currently used in the commercial applications that we pursue. For example, we face significant competition from plastics and zinc in our electronics components business, and titanium and composites will continue to be used widely in medical devices and sporting goods. Based on our experience with developing products for a variety of customers, we believe that the selection of materials by potential customers will continue to be product-specific in nature, with the decision for each product being driven primarily by the performance needs of the application and secondarily by cost considerations and design flexibility. Because of the relatively high strength of our alloys and the design flexibility of our process, we are most competitive when the customer is seeking a higher strength as well as greater design flexibility than currently available with other materials. However, if currently available materials, such as plastics, are strong enough for the application, our alloys are often not competitive those applications with respect to price. We also believe that our alloys are generally not competitive with the cost of some of the basic metals, such as steel, aluminum or copper, when such basic metals can be used in specific applications, but our alloys are generally more competitive with price on more exotic metals, such as titanium. Our alloys could also face competition from new materials that may be developed in the future, including new materials that could render our alloys obsolete.

 

Our Liquidmetal alloy coatings face competition from industrial coatings currently manufactured or sold by other companies. At present, the primary competitors of our coatings business are Varco International, Inc. and Arnco Technology Trust, Limited. Although we believe, based on market data gathered by us, that our coatings compete favorably with these companies’ products and that we continue to maintain the dominant market share with respect to protective coatings for oil and gas drill pipe and casings, these competitors are larger well-established businesses that have substantially greater financial, marketing, and other resources than we do.

 

11



Table of Contents

 

We will also experience indirect competition from the competitors of our customers. Because we will rely on our customers to market and sell finished goods that incorporate our components or products, our success will depend in part on the ability of our customers to effectively market and sell their own products and compete in their respective markets.

 

Backlog

 

In our bulk alloy segment, because of the minimal lead-time associated with orders of bulk alloy parts, we generally do not carry a significant backlog. In our coatings segment, we typically ship our coating products shortly after receipt of an order, and our coatings backlog is therefore also insignificant. In both our bulk alloy segment and coatings segment, the backlog as of any particular date gives no indication of actual sales for any succeeding period.

 

Sales and Marketing

 

We direct our marketing efforts towards customers that will incorporate our components and products into their finished goods. To that end, we will continue to hire business development personnel who, in conjunction with engineers and scientists, will actively identify potential customers that may be able to benefit from the introduction of Liquidmetal alloys to their products. In some cases, we will develop applications in conjunction with existing or potential customers. By adopting this strategy, we intend to take advantage of the sales and marketing forces and distribution channels of our customers to facilitate the commercialization of our alloys.  We also direct business development efforts toward companies who we believe could be viable candidates for potential partnering transactions, such as licensing relationships, distribution arrangements, joint ventures, and the like.

 

Employees

 

As of December 31, 2009, we had 52 full-time and 2 part-time employees for a total of 54 employees. As of that date, none of our employees were represented by a labor union.  We have not experienced any work stoppages and we consider our employee relations to be favorable.

 

Governmental Regulation

 

Medical instruments incorporating our Liquidmetal alloys will be subject to regulation in the United States by the FDA and corresponding state and foreign regulatory agencies. Any orthopedic devices that we develop will be regulated in a similar manner. Medical device manufacturers to whom we intend to sell our products may need to obtain FDA approval before marketing their medical devices that incorporate our products. Medical device manufacturers may need to obtain similar approvals before marketing these medical device products in foreign countries.

 

Because we intend to sell our medical device products to medical device manufacturers, we do not believe that we will need to obtain FDA approval or similar foreign approvals before selling products to medical device manufacturers.  Nonetheless, as a manufacturer of medical device components, we would be subject to quality control and record keeping requirements of FDA and other federal and state statutes and regulations, as well as similar regulations in foreign countries.

 

The process of obtaining and maintaining required FDA and foreign regulatory approvals for medical devices that incorporate our products could be lengthy, expensive, and uncertain for our customers. Additionally, regulatory agencies can delay or prevent product introductions. Generally, before a medical device manufacturer can market a product incorporating one of our products, our customer must obtain for their finished product marketing clearance through a 510(k) premarket notification or approval of a pre-market approval application, or PMA. The FDA will typically grant a 510(k) clearance if the applicant can establish that the device is substantially equivalent to a predicate device. It generally takes a number of months from the date of a 510(k) submission to obtain clearance, but it may take longer, particularly if a clinical trial is required.

 

The FDA may find that a 510(k) is not appropriate for a medical device that incorporates our product or that substantial equivalence has not been shown and as a result will require a PMA. A PMA application must be submitted if a proposed medical device does not qualify for a 510(k) pre-market clearance procedure. PMA applications must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical trials, bench tests, and laboratory and animal studies. The PMA process can be expensive, uncertain and lengthy, requires detailed and comprehensive data, and generally takes significantly longer than the 510(k) process. Additionally, the FDA may never approve the PMA.

 

12



Table of Contents

 

Similar regulations in foreign countries vary significantly from country to country and with respect to the nature of the particular medical device. The time required to obtain these foreign approvals to market our products may be longer or shorter than that required in the United States, and requirements for such approval may differ from FDA requirements.

 

Environmental Law Compliance

 

Our manufacturing operations are subject to national, state, and local environmental laws in each of South Korea and the United States. We believe that we are in material compliance with all applicable environmental regulations. While we continue to incur costs to comply with environmental regulations, we do not believe that such costs will have a material effect on our capital expenditures, earnings, or competitive position.

 

Item 1A. Risk Factors

 

This report contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on management’s current expectations, estimates, forecasts, and projections about the Company and its business. In addition, other written or oral statements which constitute forward-looking statements may be made from time to time by or on behalf of Liquidmetal Technologies, Inc. Any statement in this report that is not a statement of historical fact is a forward-looking statement, and in some cases, words such as “believe,” “estimate,” “project,” “expect,” “intend,” “may,” “anticipate,” “plans,” “seeks,” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual outcomes and results to differ materially from the anticipated outcomes or result. These statements are not guarantees of future performance, and undue reliance should not be placed on these statements. Liquidmetal Technologies, Inc. undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Factors that could cause actual results to differ materially from what is expressed or forecasted in our forward-looking statements include, but are not limited to, the following:

 

We have incurred significant operating losses in the past and may not be able to achieve or sustain profitability in the future.

 

We have experienced significant cumulative operating losses since our inception.  Our net income for the fiscal year ended December 31, 2009 was $0.3 million while our net loss for the fiscal years ended December 31, 2008 and 2007 was $6.6 million and $5.6 million, respectively.  We had an accumulated deficit of approximately $162.8 million at December 31, 2009. Of this accumulated deficit, $44.5 million was attributable to losses generated by our discontinued equipment manufacturing and retail golf operations.  We anticipate that we may continue to incur operating losses for the foreseeable future.  Consequently, it is possible that we may never achieve positive earnings and, if we do achieve positive earnings, we may not be able to achieve them on a sustainable basis.

 

We have a limited history of developing, manufacturing, and selling products made from our bulk amorphous alloys.

 

We have marketed and sold industrial coatings to distributors in the coatings industry since 1987. Prior to the third quarter of 2002, our experience selling products made from bulk amorphous alloys has been limited to our discontinued retail golf business, which had a different marketing strategy than the one we are currently employing.  Therefore, we have a relatively limited history of producing bulk amorphous alloy components and products on a mass-production basis.  Furthermore, our ability to produce our products in desired quantities and at commercially reasonable prices is uncertain and is dependent on a variety of factors that are outside of our control, including the nature and design of the component, the customer’s specifications, and required delivery timelines.

 

We rely on assumptions about the markets for our products and components that, if incorrect, may adversely affect our profitability.

 

We have a relatively short history producing bulk amorphous alloy components on a mass-production basis. We have made assumptions regarding the market size for, and the manufacturing requirements of, our products and components based in part on information we received from third parties and also from our limited history. If these assumptions prove to be incorrect, we may not achieve anticipated revenue targets or profitability.

 

13



Table of Contents

 

If we cannot establish and maintain relationships with customers that incorporate our components and products into their finished goods, we will not be able to increase our revenue and commercialize our products.

 

Our business is based upon the commercialization of a new and unique materials technology. Our ability to increase our revenues will depend on our ability to successfully maintain and establish relationships with customers who are willing to incorporate our proprietary alloys and technology into their finished products. However, we believe that the size of our company and the newness of our technology and manufacturing process may continue to make it challenging to maintain and establish such relationships. In addition, we rely and will continue to rely to a large extent on the manufacturing, research, and development capabilities, as well as the marketing and distribution capabilities, of our customers in order to commercialize our products. Our future growth and success will depend in large part on our ability to enter into these relationships and the subsequent success of these relationships. If our products are selected for use in a customer’s products, we still may not realize significant revenue from that customer if that customer’s products are not commercially successful.

 

It may take significant time and cost for us to develop new customer relationships, which may delay our ability to generate additional revenue or achieve profitability.

 

Our ability to generate revenue from new customers is generally affected by the amount of time it takes for us to, among other things:

 

·                  identify a potential customer and introduce the customer to Liquidmetal alloys;

 

·                  work with the customer to select and design the parts to be fabricated from Liquidmetal alloys;

 

·                  make the molds and tooling to be used to produce the selected part;

 

·                  make prototypes and samples for customer testing;

 

·                  work with our customers to test and analyze prototypes and samples; and

 

·                  with respect to some types of products, such as medical devices, to obtain regulatory approval.

 

We currently do not have a sufficient history of selling products made from our bulk amorphous alloys to predict accurately the length of our average sales cycle. We believe that our average sales cycle from the time we deliver an active proposal to a customer until the time our customer fully integrates our bulk amorphous alloys into its product could be a significant period of time. Our history to date has demonstrated that the sales cycle could extend significantly longer than we anticipate. The time it takes to transition a customer from limited production to full-scale production runs will depend upon the nature of the processes and products into which our alloys are integrated.  Moreover, we have found that customers often proceed very cautiously and slowly before incorporating a fundamentally new and unique type of material into their products.

 

After we develop a customer relationship, it may take a significant amount of time for that customer to develop, manufacture, and sell finished goods that incorporate our components and products.

 

Our experience has shown that our customers will perform numerous tests and extensively evaluate our components and products before incorporating them into their finished products. The time required for testing, evaluating, and designing our components and products into a customer’s products, and in some cases, obtaining regulatory approval, can take a significant amount of time, with an additional period of time before a customer commences volume production of products incorporating our components and products, if ever. Moreover, because of this lengthy development cycle, we may experience a delay between the time we accrue expenses for research and development and sales and marketing efforts and the time when we generate revenue, if any. We may incur substantial costs in an attempt to transition a customer from initial testing to prototype and from prototype to final product. If we are unable to minimize these transition costs, or to recover the costs of these transitions from our customers, our operating results will be adversely affected.

 

14



Table of Contents

 

A limited number of our customers generate a significant portion of our revenue.

 

For the near future, we expect that a significant portion of our revenue will be concentrated in a limited number of customers. For example, for the years ended December 31, 2009, 2008 and 2007, revenues from two customers, Grant Prideco and Liquidmetal Korea, represented approximately 39%, 19% and 22% respectively, of total revenues from continuing operations.  A reduction, delay, or cancellation of orders from one or more of these customers or the loss of one or more customer relationships could significantly reduce our revenue. Unless we establish long-term sales arrangements with these customers, they will have the ability to reduce or discontinue their purchases of our products on short notice.

 

We expect to rely on our customers to market and sell finished goods that incorporate our products and components, a process over which we will have little control.

 

Our future revenue growth and ultimate profitability will depend in part on the ability of our customers to successfully market and sell their finished goods that incorporate our products. We will have little control over our customers’ marketing and sales efforts. These marketing and sales efforts may be unsuccessful for various reasons, any of which could hinder our ability to increase revenue or achieve profitability. For example, our customers may not have or devote sufficient resources to develop, market, and sell their finished goods that incorporate our products. Because we typically will not have exclusive sales arrangements with our customers, they will not be precluded from exploring and adopting competing technologies. Also, products incorporating competing technologies may be more successful for reasons unrelated to the performance of our customers’ products or the marketing efforts of our customers.

 

Our growth depends on our ability to identify, develop, and commercialize new applications for our technology.

 

Our future growth and success will depend in part on our ability to identify, develop, and commercialize, either alone or in conjunction with our customers, new applications and uses for Liquidmetal alloys. If we are unable to identify and develop new applications, we may be unable to develop new products or generate additional revenue. Successful development of new applications for our products may require additional investment, including costs associated with research and development and the identification of new customers. In addition, difficulties in developing and achieving market acceptance of new products would harm our business.

 

We may not be able to effectively compete with current suppliers of incumbent materials or producers of competing products.

 

The future growth and success of our bulk amorphous alloy business will depend in part on our ability to establish and retain a technological advantage over other materials for our targeted applications. For many of our targeted applications, we will compete with manufacturers of similar products that use different materials. These different materials may include plastics, titanium alloys, or stainless steel, among others. For example, we have targeted the cellular phone component market as an application for bulk Liquidmetal alloys. In this market, we believe we will compete with other manufacturers of cellular phone components who use plastics or metal to construct their components. These other manufacturers may be able to manufacture their cellular phone components, particularly those made from plastics, at significantly less cost than our alloys. In other markets, we will compete directly with suppliers of the incumbent material. In addition, in each of our targeted markets, our success will depend in part on the ability of our customers to compete successfully in their respective markets. Thus, even if we are successful in replacing an incumbent material in a finished product, we will remain subject to the risk that our customer will not compete successfully in its own market.

 

Our bulk amorphous alloy technology is still at an early stage of commercialization relative to many other materials.

 

Our bulk amorphous alloy technology is a relatively new technology as compared to many other material technologies, such as plastics and widely-used high-performance crystalline alloys.  Historically, the successful commercialization of a new materials technology has required the persistent improvement and refining of the technology over a sometimes lengthy period of time.  Accordingly, we believe that our company’s future success will be dependent on our ability to continue expanding and improving our technology platform by, among other things, constantly refining and improving our manufacturing processes, optimizing our existing amorphous alloy compositions for various applications, and developing and improving new bulk amorphous alloy compositions.  Our failure to further expand our technology base could limit our growth opportunities and hamper our commercialization efforts.

 

15



Table of Contents

 

Future advances in materials science could render Liquidmetal alloys obsolete.

 

Academic institutions and business enterprises frequently engage in the research and testing of new materials, including alloys and plastics. Advances in materials science could lead to new materials that have a more favorable combination of performance, processing, and cost characteristics than our alloys. The future development of any such new materials could render our alloys obsolete and unmarketable or may impair our ability to compete effectively.

 

Our growth depends upon our ability to retain and attract a sufficient number of qualified employees.

 

Our business is based upon the commercialization of a new and unique materials technology. Our future growth and success will depend in part on our ability to retain key members of our management and scientific staff, who are familiar with this technology and the potential applications and markets for it. For example, as a result of their experience and knowledge of our alloy technology, we believe that our future growth and success will depend in large part on the efforts of Larry Buffington, our former President and Chief Executive Officer. We do not have “key man” or similar insurance on any of these individuals. If we lose their services or the services of other key personnel, our financial results or business prospects may be harmed. Additionally, our future growth and success will depend in part on our ability to attract, train, and retain scientific engineering, manufacturing, sales, marketing, and management personnel. We cannot be certain that we will be able to attract and retain the personnel necessary to manage our operations effectively. Competition for experienced executives and scientists from numerous companies and academic and other research institutions may limit our ability to hire or retain personnel on acceptable terms. In addition, many of the companies with which we compete for experienced personnel have greater financial and other resources than we do. Moreover, the employment of non-citizens may be restricted by applicable immigration laws.

 

We may not be able to successfully identify, consummate, or integrate strategic partnerships.

 

As a part of our business strategy, we intend to pursue strategic partnering transactions that provide access to new technologies, products, markets, and manufacturing capabilities. These transactions could include licensing agreements, joint ventures, or even business combinations. We believe that these transactions will be particularly important to our future growth and success due to the size and resources of our company and the newness of our technology. For example, we may determine that we may need to license our technology to a larger manufacturer in order to penetrate a particular market. In addition, we may pursue transactions that will give us access to new technologies that are useful in connection with the composition, processing, or application of Liquidmetal alloys. We may not be able to successfully identify any potential strategic partnerships. Even if we do identify one or more potentially beneficial strategic partnering, we may not be able to consummate these transactions on favorable terms or obtain the benefits we anticipate from such a transaction.

 

We may encounter manufacturing problems or delays or may be unable to produce high-quality products at acceptable costs.

 

We have relatively limited experience in manufacturing our products and may be required to manufacture a range of products in high volumes while ensuring high quality and consistency. Although we currently own and operate a 166,000 square feet manufacturing facility in South Korea, we cannot guarantee that the facility will be able to produce the intended products with production yields, quality controls, and production costs that provide us with acceptable margins or profitability or satisfy the requirements of our customers.

 

We expect to derive a substantial portion of our revenue from sales outside the United States, and problems associated with international business operations could affect our ability to manufacture and sell our products.

 

We expect that we will continue to manufacture a substantial portion of our initial bulk Liquidmetal alloy products in our South Korean facility and derive a material portion of our revenues from customers in South Korea and revenues from products manufactured by our licensing partner in China.  For our fiscal years ended December 31, 2009, 2008 and 2007, approximately 31%, 5% and 27%, of our revenues came from customers located in South Korea, respectively.  As a result, our manufacturing operations and financial results are subject to risks of political instability, including the risk of conflict between North Korea and South Korea and tensions between the United States and North Korea. In addition, we anticipate that the trend of foreign customers accounting for a significant portion of our total revenues may continue. Specifically, we expect to continue to derive a significant amount of revenue from sales to customers located in Asia. A downturn in the economies of Asian countries where our products will be sold, particularly South Korea’s economy, could materially harm our business.

 

16



Table of Contents

 

Consequently, our operations and revenue likely will be subject to a number of risks associated with foreign commerce, including:

 

·                  staffing and managing our manufacturing facility located in South Korea;

 

·                product or material transportation delays or disruption, including the availability and costs of air and other transportation between our South Korean facility and the United States;

 

·                  political and economic instability, including instability involving China and North Korea that may disrupt our operations in South Korea;

 

·                  potentially adverse tax consequences, which may reduce the profitability of products manufactured overseas or sold to overseas customers;

 

·                  burden of complying with complex foreign laws and treaties, which could limit our ability to conduct our business as contemplated in South Korea; and

 

·                  trade protection laws, policies, and measures and other regulatory requirements affecting trade and investment that could adversely affect the profitability of our South Korean Operations, including loss or modification of exemptions for taxes and tariffs.

 

Moreover, customers may sell finished goods that incorporate our components and products outside of the United States, which exposes us indirectly to additional foreign commerce risks.

 

A substantial increase in the price or interruption in the supply of raw materials for our alloys could have an adverse effect on our profitability.

 

Our proprietary alloy compositions are comprised of many elements, all of which are available commodity products. Although we believe that each of these raw materials is currently readily available in sufficient quantities from multiple sources on commercially acceptable terms, if the prices of these materials substantially increase or there is an interruption in the supply of these materials, such increase or interruption could adversely affect our profitability. For example, if the price of one of the elements included in our alloys substantially increases, we may not be able to pass the price increase on to our customers.

 

We rely on our suppliers for mold making and manufacture of our bulk amorphous alloy parts.

 

We have outsourced much of our mold making and manufacturing of our bulk amorphous alloy parts. Therefore, our revenue growth is dependent on our ability to obtain sufficient manufacturing capacity.  Our suppliers may allocate their limited capacity to fulfill the production requirements of other customers.  In the event of a disruption of the operations of our suppliers, we may not have a secondary manufacturing source immediately available. Such an event could cause significant delays in shipments and may adversely affect our cost of goods sold and our results of operations.

 

Our business is subject to the potential adverse consequences of exchange rate fluctuations.

 

We expect to conduct business in various foreign currencies and will be exposed to market risk from changes in foreign currency exchange rates and interest rates. Fluctuations in exchange rates between the U.S. dollar and such foreign currencies may have a material adverse effect on our business, results of operations, and financial condition and could specifically result in foreign exchange gains and losses. The impact of future exchange rate fluctuations on our operations cannot be accurately predicted. To the extent that the percentage of our non-U.S. dollar revenue derived from international sales increases in the future, our exposure to risks associated with fluctuations in foreign exchange rates will increase further. Moreover, as a result of operating a manufacturing facility in South Korea, a substantial portion of our costs are and will continue to be denominated in the South Korean won. Adverse changes in the exchange rates of the South Korean won to the U.S. dollar will affect our costs of goods sold and operating margins and could result in exchange losses. The average foreign exchange rates for the years ended December 31, 2009, 2008 and 2007 were 1,279, 1,103 and 935 South Korean Won to the U.S. dollar, respectively. The fluctuations in the exchange rates resulted in foreign currency translation gain (loss) of $0.4 million, ($1.8) million and $0.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.

 

17



Table of Contents

 

Our inability to protect our licenses, patents, and proprietary rights in the United States and foreign countries could harm our business because third parties may take advantage of our research and development efforts.

 

We have obtained several patents relating to amorphous alloy technology, and we have other rights to amorphous alloy patents through an exclusive license from the California Institute of Technology (“Caltech”).  Our success depends in part on our ability to obtain and maintain patent and other proprietary right protection for our technologies and products in the United States and other countries. If we are unable to obtain or maintain these protections, we may not be able to prevent third parties from using our proprietary rights. Specifically, we must:

 

·                  protect and enforce our owned and licensed patents and intellectual property;

 

·                  exploit our patented technology (owned and licensed); and

 

·                  operate our business without infringing on the intellectual property rights of third parties.

 

Our licensed technology comprises several issued United States patents covering the composition and method of manufacturing of the family of Liquidmetal alloys. We also hold several United States and corresponding foreign patents covering the manufacturing processes of Liquidmetal alloys and their use. The patents relating to our coatings have various expiration dates until 2020, and those relating to our bulk amorphous alloys have expiration dates between 2013 and 2028. We continue to hold other coatings related patents; however, if we are unable to protect our proprietary rights prior to the expiration of these patents, we may lose the advantage we have established as being the first to market bulk amorphous alloy products. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems and costs in protecting our proprietary rights in these foreign countries.

 

Patent law is still evolving relative to the scope and enforceability of claims in the fields in which we operate. Our patent protection involves complex legal and technical questions. Our patents and those patents for which we have license rights may be challenged, narrowed, invalidated, or circumvented. We may be able to protect our proprietary rights from infringement by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. Litigation or other proceedings to defend or enforce our intellectual property rights could require us to spend significant time and money and could otherwise adversely affect our business.

 

Other companies may claim that we infringe their intellectual property rights, which could cause us to incur significant expenses or prevent us from selling our products.

 

Our success depends, in part, on our ability to operate without infringing on valid, enforceable patents or proprietary rights of third parties and not breaching any licenses that may relate to our technology and products. Future patents issued to third parties may contain claims that conflict with our patents and that compete with our products and technologies, and third parties could assert infringement claims against us. Any litigation or interference proceedings, regardless of their outcome, may be costly and may require significant time and attention of our management and technical personnel. Litigation or interference proceedings could also force us to:

 

·                   stop or delay using our technology;

 

·                   stop or delay our customers from selling, manufacturing or using products that incorporate the challenged intellectual property;

 

·                   pay damages; or

 

·                   enter into licensing or royalty agreements that may be unavailable on acceptable terms.

 

Our level of indebtedness reduces our financial flexibility and could impede our ability to operate.

 

As of December 31, 2009, our long-term debt was $14.1 million, net of debt discount of $3.2 million, including the current portion of such debt.  Our long-term debt (including the current portion) includes the following:

 

·                  $4.7 million in principal outstanding under the 8% Senior Secured Convertible Notes due January 2011 (the “January 2011 Notes”) issued in May 1, 2009;

 

·                  $1.4 million in principal outstanding under the Bank Midwest term loan issued in July 2007;

 

18



Table of Contents

 

·                  $0.1 million in principal outstanding under the Bank Midwest capital loans issued in August 2007 and October 2008;

 

·                  $7.6 million in principal outstanding under the C3 Capital Partners Subordinated Promissory Notes due July 2012 issued in July 2007; and

 

·                  $0.3 million in principal outstanding under the 8% Unsecured Subordinated Notes issued in 2006 private placements.

 

As of December 31, 2009, our short-term debt was $0.9 million.  Our short-term debt included the following:

 

·                  $0.3 million in outstanding advances received under a factoring, loan, and security agreement executed in April 2005, as amended, with a financing company;

 

·                  $0.3 million in outstanding advances received under a revolving loan from Bank Midwest issued in July 2007;

 

·                  $0.1 in outstanding advances received from John Kang, our former Chairman; and

 

·                  $0.2 in outstanding advances received from Ricardo Salas, our Executive Vice President.

 

The $0.3 million in aggregate principal amount under the 8% Unsecured Subordinated Notes became due in August 2007, and $4.7 million in aggregate principal amount under our January 2011 Notes is due on January 3, 2011.

 

Our level of debt affects our operations in several important ways, including the following:

 

·                  a significant portion of our cash flow from operations is likely to be dedicated to the payment of the principal of and interest on our indebtedness;

 

·                  we may be unable to refinance our indebtedness on terms acceptable to us or at all;

 

·                  our cash flow may be insufficient to meet our required principal and interest payments; and

 

·                  we may be unable to obtain additional loans as a result of covenants and agreements with existing debt holders.

 

In addition, our convertible notes and related documents contain restrictive covenants pursuant to which we generally may not incur any indebtedness that would be senior to, or on the same rank as, the convertible notes with respect to payment or security.  These covenants may curtail our ability to raise capital in the future or otherwise restrict our ability to enter into a transaction that we believe would be in the best interest of our stockholders.

 

We are in default under various debt obligations.

 

We have approximately $0.3 million of principal and accrued interest outstanding as of December 31, 2009, under the 8% unsecured subordinated notes (“Bridge Notes”), which were due August 17, 2007.  As of the date of this report, we did not have sufficient funds to repay the Bridge Notes and were in default under the Bridge Notes.  On August 5, 2010, we repaid in full all principal and interest on the Bridge Notes in the amount of $0.3 million.

 

We have $0.3 million of outstanding loan as of December 31, 2009 under a factoring loan, and security agreement with a financing company.  As of the date of this report, we did not have sufficient funds to repay the loan and were in default under this loan.  On August 5, 2010, we repaid in full all principal and interest on the factoring loan in the amount of $0.3 million and all security interests on our assets securing such obligation was released and terminated.

 

19



Table of Contents

 

Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty.

 

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations, are creating uncertainty for public companies. As a result of these new rules and the size and limited resources of our company, we will incur additional costs associated with our public company reporting requirements, and we may not be able to comply with some of these new rules.  In addition, these new rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and this could make it difficult for us to attract and retain qualified persons to serve on our board of directors.

 

We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. These new or changed laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

 

We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed.

 

The time and cost associated with complying with government regulations to which we could become subject could have a material adverse effect on our business.

 

Some of the applications that we have identified or may identify in the future may be subject to government regulations. For example, any medical devices such as precision ophthalmic instruments and orthopedic devices made from our alloys likely will be subject to extensive government regulation in the United States by the Food and Drug Administration, or FDA. Any medical device manufacturers to whom we sell Liquidmetal alloy products may need to comply with FDA requirements, including premarket approval or clearance under Section 510(k) of the Food Drug and Cosmetic Act before marketing in the United States Liquidmetal alloy medical device products. These medical device manufacturers may be required to obtain similar approvals before marketing these medical devices in foreign countries. Any medical device manufacturers with which we jointly develop and sell medical device products may not provide significant assistance to us in obtaining required regulatory approvals. The process of obtaining and maintaining required FDA and foreign regulatory approvals could be lengthy, expensive, and uncertain. Additionally, regulatory agencies can delay or prevent product introductions. The failure to comply with applicable regulatory requirements can result in substantial fines, civil and criminal penalties, stop sale orders, loss or denial of approvals, recalls of products, and product seizures.

 

In addition, the processing of beryllium, a minor constituent element of some of our alloys, can result in the release of beryllium into the workplace and the environment and in the creation of beryllium oxide as a by-product. Beryllium is classified as a hazardous air pollutant, a toxic substance, a hazardous substance, and a probable human carcinogen under environmental, safety, and health laws, and various acute and chronic health effects may result from exposure to beryllium. We are required to comply with certain regulatory requirements and to obtain a permit from the U.S. Environmental Protection Agency or other government agencies to process beryllium. Our failure to comply with present or future governmental regulations related to the processing of beryllium could result in suspension of manufacturing operations and substantial fines or criminal penalties.

 

To the extent that our products have the potential for dual use, such as military and non-military applications, they may be subject to import and export restrictions of the U.S. government, as well as other countries. The process of obtaining any required U.S. or foreign licenses or approvals could be time-consuming, costly, and uncertain. Failure to comply with import and export regulatory requirements can lead to substantial fines, civil and criminal penalties, and the loss of government contracting and export privileges.

 

The existence of minority stockholders in our Liquidmetal Coatings and Liquidmetal Golf subsidiaries creates potential for conflicts of interest.

 

We directly own 69.25% of outstanding common membership units of Liquidmetal Coatings, LLC, our subsidiary that has exclusive right over industrial coatings market and 79% of the outstanding capital stock of Liquidmetal Golf, our subsidiary that has the exclusive right to commercialize our technology in the golf market.  The remaining 30.75% of Liquidmetal Coatings, LLC common membership units are owned by 4 members and the remaining 21% of

 

20



Table of Contents

 

Liquidmetal Golf stock is owned by approximately 95 stockholders of record. As a result, conflicts of interest may develop between us and the minority members of Liquidmetal Coatings and stockholders of Liquidmetal Golf. To the extent that our officers and directors are also officers or directors of Liquidmetal Coatings and Liquidmetal Golf, matters may arise that place the fiduciary duties of these individuals in conflicting positions.

 

Our stock price has experienced volatility and may continue to experience volatility.

 

During 2009, the highest bid price for our common stock was $0.44 per share, while the lowest bid price during that period was $0.08 per share.  The trading price of our common stock could continue to fluctuate widely due to:

 

·                  quarter-to-quarter variations in results of operations;

 

·                  loss of a major customer;

 

·                  announcements of technological innovations by us or our potential competitors;

 

·                  changes in, or our failure to meet, the expectations of securities analysts;

 

·                  new products offered by us or our competitors;

 

·                  announcements of strategic relationships or strategic partnerships; or

 

·                  other events or factors that may be beyond our control.

 

In addition, the securities markets in general have experienced extreme price and trading volume volatility in the past. The trading prices of securities of many companies at our stage of growth have fluctuated broadly, often for reasons unrelated to the operating performance of the specific companies. These general market and industry factors may adversely affect the trading price of our common stock, regardless of our actual operating performance.  If our stock price is volatile, we could face securities class action litigation, which could result in substantial costs and a diversion of management’s attention and resources and could cause our stock price to fall.

 

Our convertible notes and warrants contain anti-dilution provisions that, if triggered, could cause substantial dilution to our then-existing stockholders.

 

The convertible notes issued in our May 1, 2009 financing transaction (“January 2011 Notes”) contain “full-ratchet” anti-dilution rights.  As a result of these anti-dilution rights, if we issue or grant in the future any rights to purchase any of our common stock, or other security convertible into our common stock, for an effective per share price less than the conversion price then in effect, the conversion price of all unconverted January 2011 Notes will be decreased to equal such lower price.  The foregoing adjustments to the conversion price of the January 2011 Notes will not apply to certain exempt issuances, including issuances pursuant to employee stock option plans and strategic transactions.

 

In addition to the above-described full-ratchet anti-dilution rights, warrants issued under the January 2011 Notes and certain previously issued warrants contain “weighted-average” anti-dilution provisions.  As of December 31, 2009, we had warrants to purchase 59,928,242 shares at exercise prices ranging from $0.50 to $1.75 with weighted-average anti-dilution provisions.  Under these provisions, if we issue shares in the future for consideration below the conversion or exercise prices then in effect, then (with certain exceptions, including the issuance of stock options) the conversion price for our convertible notes would automatically be reduced (allowing the holders of the notes to receive additional shares of common stock upon conversion) and the exercise price of the warrants would automatically be reduced (with a corresponding increase in the number of shares issuable pursuant to such warrants).

 

To illustrate the impact of these weighted-average anti-dilution provisions, because of the issuance of the January 2011 Notes in May 2009 and the reduction of the conversion price of certain previously issued warrants, the above-described warrants outstanding as of December 31, 2009 includes an aggregate of 3,214,451 additional shares of our common stock that have become issuable as a result of the operation of these weighted-average anti-dilution provisions.  It is also possible that a future triggering of the full-ratchet anti-dilution rights in our January 2010 Notes could result in a corresponding triggering of the above-described weighted-average anti-dilution provisions in the other notes and warrants.

 

21



Table of Contents

 

If our available funds and cash generated from operations are insufficient to satisfy our liquidity requirements in the future, then we may need to raise substantial additional funds in the future to support our working capital requirements and for other purposes. If shares of our common stock or securities convertible into or exercisable for our common stock are issued in consideration of such funds at an effective per share price lower than the conversion and exercise prices of our convertible notes and warrants, then these anti-dilution provisions would be triggered, thus possibly causing substantial dilution to our then-existing stockholders if the notes are converted or the warrants are exercised. Further, subsequent sales of the shares in the public market could depress the market price of our stock by creating an excess in supply of shares for sale.

 

We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.

 

We have paid no cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our businesses, and upon the completion of this offering, we do not anticipate paying any cash dividends on our capital stock for the foreseeable future. In addition, the terms of existing or any future debts may preclude us from paying dividends on our stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

Antitakeover provisions of our certificate of incorporation and bylaws and provisions of applicable corporate law could delay or prevent a change of control that you may favor.

 

Provisions in our certificate of incorporation, our bylaws, and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our shares. Because of these provisions, you might not be able to receive a premium on your investment. These provisions:

 

·                  authorize our board of directors, without stockholder approval, to issue up to 10,000,000 shares of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and prevent a takeover attempt;

 

·                  limit stockholders’ ability to call a special meeting of our stockholders;

 

·                  provide for a classified board of directors; and

 

·                  establish advance notice requirements to nominate directors for election to our board of directors or to propose matters that can be acted on by stockholders at stockholder meetings.

 

The provisions described above could delay or make more difficult transactions involving a change in control of us or our management.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Our principal executive offices and principal research and development offices are located in Rancho Santa Margarita, California and consist of approximately 15,000 square feet. This facility is occupied pursuant to a lease agreement that expires on April 20, 2012.

 

In Kingwood, Texas, we lease an office for our coatings business segment.  This facility, which is approximately 2,715 square feet, is leased through December 31, 2012.

 

In Huntsville, Texas, we lease a warehouse for our coatings business segment.  This facility, which is approximately 4,500 square feet, is leased through August 1, 2012.

 

In Dothan, Alabama, we lease an application facility for our coatings business segment.  This facility, which is approximately 5,000 square feet, is leased through June 30, 2010.

 

22



Table of Contents

 

Our principal prototyping and manufacturing facility is in Pyongtaek, South Korea, and consists of approximately 166,000 square feet. We lease the land on which this facility is located, although we own the buildings, fixtures, and all personal property located on the land. The parcel of land consists of approximately four acres and is leased through 2022.

 

We currently expect that the foregoing facilities will meet our anticipated internal manufacturing, research, warehousing, and administrative needs for the foreseeable future.

 

Item 3. Legal Proceedings

 

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

 

Item 4.  Submission of Matters to a Vote of Security Holdings

 

None.

 

23



Table of Contents

 

PART II

 

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is currently quoted on the OTC Bulletin Board under the symbol “LQMT.”  On April 6, 2010, the last reported sales price of our common stock was $0.10 per share.  As of April 6, 2010, we had 267 record holders of our common stock.

 

The following table sets forth, on a per share basis, the range of high and low bid information for the shares of our common stock for each full quarterly period within the two most recent fiscal years and any subsequent interim period for which financial statements are included.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

2009

 

High

 

Low

 

Fourth Quarter

 

$

0.21

 

$

0.11

 

Third Quarter

 

$

0.22

 

$

0.14

 

Second Quarter

 

$

0.44

 

$

0.16

 

First Quarter

 

$

0.30

 

$

0.08

 

 

2008

 

High

 

Low

 

Fourth Quarter

 

$

0.33

 

$

0.06

 

Third Quarter

 

$

0.57

 

$

0.20

 

Second Quarter

 

$

0.75

 

$

0.50

 

First Quarter

 

$

0.75

 

$

0.53

 

 

We have never paid a cash dividend on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future, and we plan to retain our earnings to finance future growth.

 

24



Table of Contents

 

Item 6. Selected Consolidated Financial Data

 

The following table shows our selected consolidated financial data as of and for the years ended December 31, 2005 through 2009.

 

 

 

For the Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

(Restated)

 

(Restated)

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

14,720

 

$

22,083

 

$

29,022

 

$

27,669

 

$

16,365

 

Cost of sales

 

9,097

 

17,131

 

26,459

 

22,418

 

15,129

 

Gross profit

 

5,623

 

4,952

 

2,563

 

5,251

 

1,236

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

6,740

 

6,529

 

8,921

 

9,962

 

8,534

 

Research and development expenses

 

1,173

 

1,022

 

1,123

 

950

 

1,120

 

Impairment of long-lived assets

 

1,381

 

132

 

 

 

4,487

 

Total operating expenses

 

9,294

 

7,683

 

10,044

 

10,912

 

14,141

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before interest, other income, income taxes, non-controlling interest and discontinued operations

 

(3,671

)

(2,731

)

(7,481

)

(5,661

)

(12,905

)

Loss from extinguishments of debt

 

(1,471

)

 

(648

)

 

(1,247

)

Change in value of warrants, gain

 

9,835

 

1,890

 

4,923

 

279

 

3,985

 

Change in value of conversion feature, gain (loss)

 

1,827

 

1,987

 

6,965

 

(226

)

9,118

 

Other expense

 

(308

)

(17

)

 

 

 

Other income

 

 

429

 

226

 

572

 

 

Interest expense

 

(5,862

)

(7,712

)

(9,364

)

(9,509

)

(6,021

)

Interest income

 

 

3

 

123

 

23

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) before income taxes, minority interest and discontinued operations

 

350

 

(6,151

)

(5,256

)

(14,522

)

(7,053

)

Income taxes

 

(168

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before non-controlling interest

 

182

 

(6,151

)

(5,256

)

(14,522

)

(7,053

)

Non-controlling interest

 

69

 

(421

)

(384

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

251

 

(6,572

)

(5,640

)

(14,522

)

(7,053

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

251

 

$

(6,572

)

$

(5,640

)

$

(14,522

)

$

(7,053

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share from continuing operations - basic and diluted

 

$

0.01

 

$

(0.15

)

$

(0.13

)

$

(0.33

)

$

(0.17

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share from continuing operations - basic

 

$

0.01

 

$

(0.15

)

$

(0.13

)

$

(0.33

)

$

(0.17

)

Income (loss) per share from continuing operations - diluted

 

$

0.00

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - basic

 

46,084

 

44,735

 

44,730

 

43,809

 

41,833

 

Weighted average common shares - diluted

 

214,429

 

44,735

 

44,730

 

43,809

 

41,833

 

 

25



Table of Contents

 

 

 

As of December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

(Restated)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

151

 

$

157

 

$

1,180

 

$

144

 

$

1,392

 

Working capital (deficiency)

 

(13,084

)

(20,755

)

(12,324

)

(23,157

)

(10,993

)

Total assets

 

10,440

 

13,240

 

22,513

 

22,244

 

21,563

 

Long-term debt, including current portion, net of discount

 

14,054

 

22,693

 

20,724

 

14,705

 

6,776

 

Shareholders’ equity (deficiency)

 

(18,367

)

(20,380

)

(14,580

)

(10,363

)

(1,320

)

 

26



Table of Contents

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This management’s discussion and analysis should be read in the conjunction with the condensed consolidated financial statements and notes included elsewhere in this report on Form 10-K.

 

This management’s discussion and analysis, as well as other sections of this report on Form 10-K, may contain “forward-looking statements” that involve risks and uncertainties, including statements regarding our plans, future events, objectives, expectations, forecasts, or assumptions. Any statement that is not a statement of historical fact is a forward-looking statement, and in some cases, words such as “believe,” “estimate,” “ project,” “expect,” “intend,” “may,” “anticipate,” “plans,” “seeks,” and similar expressions identify forward-looking statements. These statements involve risks and uncertainties that could cause actual outcomes and results to differ materially from the anticipated outcomes or results, and undue reliance should not be placed on these statements. These risks and uncertainties include, but are not limited to, the matters discussed under the caption “Risk Factors” in Item 1A of this report and other risks and uncertainties discussed in filings made with the Securities and Exchange Commission (including risks described in subsequent reports on Form 10-Q, Form 10-K, Form 8-K, and other filings). Liquidmetal Technologies, Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

OVERVIEW

 

We are a materials technology company that develops and commercializes products made from amorphous alloys.  Our Liquidmetal® family of alloys consists of a variety of proprietary coatings, powders, bulk alloys, and composites that utilize the advantages offered by amorphous alloy technology. We develop, manufacture, and sell products and components from bulk amorphous alloys to customers in various industries, and we also partner with third-party licensees to develop and commercialize bulk Liquidmetal alloy products. We believe that our proprietary bulk alloys are the only commercially viable bulk amorphous alloys currently available in the marketplace.  In addition to our bulk alloys, we market and sell a line of proprietary amorphous alloy-based industrial coatings under the Liquidmetal ArmacorTM coatings brand.

 

Amorphous alloys are unique materials that are distinguished by their ability to retain a random atomic structure when they solidify, in contrast to the crystalline atomic structure that forms in other metals and alloys when they solidify. Liquidmetal alloys possess a combination of performance, processing, and potential cost advantages that we believe can make them preferable to other materials in a variety of applications. The amorphous atomic structure of our alloys enables them to overcome certain performance limitations caused by inherent weaknesses in crystalline atomic structures, thus facilitating performance and processing characteristics superior in many ways to those of their crystalline counterparts. For example, our zirconium-titanium Liquidmetal alloys are approximately 250% stronger than commonly used titanium alloys such as Ti-6Al-4V, but they also have some of the beneficial processing characteristics more commonly associated with plastics. We believe these advantages could result in Liquidmetal alloys supplanting high-performance alloys, such as titanium and stainless steel, and other incumbent materials in a wide variety of applications. Moreover, we believe these advantages could enable the introduction of entirely new products and applications that are not possible or commercially viable with other materials.

 

Our revenues are derived from two principal operating segments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloy products.  Liquidmetal alloy industrial coatings are used primarily as a protective coating for industrial machinery and equipment, such as drill pipe used by the oil drilling industry and boiler tubes used in coal-burning power plants. Bulk Liquidmetal alloy segment revenue includes sales of parts or components of electronic devices, medical products, and sports and leisure goods; tooling and prototype parts (including demonstration parts and test samples) for customers with products in development, product licensing and arrangements, and research and development revenue relating primarily to defense and medical applications.  We expect that these sources of revenue will continue to significantly change the character of our revenue mix.

 

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

 

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

 

27



Table of Contents

 

Research and development expenses represent salaries, related benefits expense, stock-based compensation, depreciation of research equipment, consulting and contract services, expenses incurred for the design and testing of new processing methods, expenses for the development of sample and prototype products, and other expenses related to the research and development of Liquidmetal alloys. Costs associated with research and development activities are expensed as incurred. We plan to enhance our competitive position by improving our existing technologies and developing advances in amorphous alloy technologies. We believe that our research and development efforts will focus on the discovery of new alloy compositions, the development of improved processing technology, and the identification of new applications for our alloys.

 

Impairment of Long-Lived Assets consists of a write-down of $1.4 million of our manufacturing facility in Pyongtaek, South Korea. While we have actively marketed the manufacturing facility for ultimate sale, we were unable to sell this facility and determined that the carrying value of the idle equipment exceeded its fair value in the amount of $1.4 million during the fourth quarter of fiscal year 2009.

 

Change in Value of Warrants consists of changes to the fair value of warrants outstanding at each period.  The warrants have been accounted for as a liability in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” with the change in fair values reported in earnings. The fair values are determined using a Black-Scholes pricing model and fluctuations in our stock price have had the greatest impact on the valuation of outstanding warrants.

 

Change in Value of Conversion Feature consists of changes to the fair value of the embedded conversion feature of our senior convertible notes.  The embedded conversion feature has been accounted for as a separate derivative instrument in accordance with ASC 815 with a change in fair values reported in earnings.  The change in fair values is determined using a Black-Scholes pricing model and fluctuations in our stock price have had the greatest impact on the valuation of outstanding conversion features.

 

On May 21, 2003, we completed a reincorporation by transitioning from a California corporation to a Delaware corporation. The reincorporation was effected through the merger of the former California entity into a newly created wholly owned Delaware subsidiary. The reincorporation changed the legal domicile of our company but did not result in any change to our business, management, employees, fiscal year, assets or liabilities, or location of facilities. As part of the reincorporation, each share of the California corporation was automatically converted into one share of the Delaware corporation.  In addition, total authorized shares decreased from 200,000,000 shares to 100,000,000 shares.

 

On June 26, 2006, we entered into a joint venture agreement with SAGA, SpA in Padova, Italy, (“SAGA”) a specialist precision parts manufacturer.  The joint venture is named Liquidmetal SAGA Italy, Srl (“LSI”).  We also entered into an exclusive manufacturing license agreement for the eyewear industry with LSI.  Under the joint venture agreement, we have the option to buy ownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006, we have purchased 19.9% interest in the joint venture.  In January 2007 and June 2007, we contributed additional $0.2 million and $0.1 million, respectively, into LSI as additional investment.  The contribution did not change our 19.9% interest in LSI.  Under the licensing agreement, at any time following 18 months after the effective date of the agreement, LSI may exercise its option to sell to us certain business assets including manufacturing equipment acquired under the joint venture.  During the fourth quarter of the year ended December 31, 2009, we wrote-off its investment of $0.3 million in the joint venture due to slower than anticipated growth in the eyewear industry.  During the years ended December 31, 2009, 2008 and 2007, we recognized revenues of $0, $0 and $0.1 million, respectively, of Liquidmetal alloys sold to SAGA for use in the joint venture.

 

On August 6, 2010, SAGA filed a litigation case against us claiming damages of $3.2 million for payment on a loan and for breach of contract in connection with the formation of LSI, a joint venture between us and SAGA.  We are in the process of responding to the claim and working with SAGA to resolve the matter.

 

In a connection to an equipment purchase agreement entered into with Grace Metal, currently Liquidmetal Korea Co., Ltd. (“LMK”), a South Korean corporation, effective June 1, 2007, we discontinued our post-processing operation in Weihai, China and transferred our manufacturing staff and equipment in Weihai to LMK under an amendment to the equipment purchase agreement with LMK. Further, we transferred certain of our manufacturing staff from our South Korean plant to LMK. LMK was formed by an investor group that includes the former director and officer of our company, James Kang, who is also the brother of John Kang, former Chairman of the Board of our company.

 

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

 

28



Table of Contents

 

Results of Operations

 

Comparison of the years ended December 31, 2009 and 2008

 

Revenue. Revenue decreased $7.4 million to $14.7 million for the twelve months ended December 31, 2009 from $22.1 million for the twelve months ended December 31, 2008.  The decrease consisted of $2.7 million decrease in sales and prototyping of parts manufactured from bulk Liquidmetal alloys to consumer electronics customers as a result of increased reliance on our licensee to market and sell bulk Liquidmetal alloys, a decrease of $3.9 million from sales of our coating products as a result of decrease in demand from oil drilling applications, and a decrease of $0.8 million from our research and development contracts.

 

Cost of Sales. Cost of sales decreased to $9.1 million, or 62% of revenue, for the twelve months ended December 31, 2009 from $17.1 million, or 78% of revenue, for the twelve months ended December 31, 2008.  The decreases were a result of a continued change in revenue mix during the twelve months ended December 31, 2009.  The cost to manufacture parts from our bulk Liquidmetal alloys is variable and differs based on the unique design of each product.  However, the cost of sales for the products sold by the coatings business segment is generally consistent because the Liquidmetal coatings products are produced by third parties and sold wholesale to various industries.

 

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased to $6.7 million, or 46% of revenue, for the twelve months ended December 31, 2009 from $6.5 million, or 30% of revenue, for the twelve months ended December 31, 2008. The increase was primarily a result of an increase in bad debt expense of $1.3 million offset by a decrease in salaries and related benefits expense of $0.4 million, decrease in product warranty expense of $0.2 million, decrease in professional services expense of $0.2 million, decrease in travel expenses of $0.2 million and decrease in depreciation expense of $0.1 million.

 

Research and Development Expenses. Research and development expenses increased to $1.2 million, or 8% of revenue, for the twelve months ended December 31, 2009 from $1.0 million, or 5% of revenue, for the twelve months ended December 31, 2008. The increase was primarily a result of an increase in salaries and related benefits expenses of $0.1 million and increase in amortization expense of $0.1 million.  We continue to perform research and development of new Liquidmetal alloys and related processing capabilities, develop new manufacturing techniques, and contract with consultants to advance the development of Liquidmetal alloys.

 

Impairment of Long-Lived Assets. Impairment of long-lived assets was $1.4 million or 9% of revenue for the twelve months ended December 31, 2009 from a write-down of our manufacturing facility in Pyongtaek, South Korea.  Impairment of long-lived assets was $0.1 million, or 1% of revenue, for the twelve months ended December 31, 2008 from of a write-down of idle equipment held by our South Korean subsidiary, Liquidmetal Technologies Co., Ltd. While we have actively marketed our manufacturing facility and the idle equipment for ultimate sale, we were unable to sell them and determined that their carrying value exceeded their fair value.

 

Loss from Extinguishments of Debts. Loss from extinguishments of debt increased to $1.5 million, or 10% of revenue, for the twelve months ended December 31, 2009 from $0 for the twelve months ended December 31, 2008.  The $1.5 million loss was recognized from the extinguishment of certain of our convertible and subordinated notes during the second quarter of 2009.

 

Change in Value of Warrants.  Change in value of warrants increased to a gain of $9.8 million, or 67% of revenue, during the twelve months ended December 31, 2009 from a gain of $1.9 million, or 9% of revenue, during the twelve months ended December 31, 2008.  The change in value of warrants consisted of warrants issued from convertible and subordinated notes funded between 2004 and 2009 primarily as a result of fluctuations in our stock price.

 

Change in Value of Conversion Feature.  Change in the value of our conversion feature liability resulted in gain of $1.8 million, or 12% of revenue, during the twelve months ended December 31, 2009 from a gain of $2.0 million, or 9% of revenue, during the twelve months ended December 31, 2008 primarily as a result of fluctuation in our stock prices.

 

Other Expense.  Other expense increased to $0.3 million for the twelve months ended December 31, 2009 from $17 thousand for the twelve months ended December 31, 2008, primarily from a write-down of our joint venture, Liquidmetal SAGA Italy, srl, with SAGA, SpA .

 

Other Income.  Other income was $0.4 million, or 2% of revenue, for the twelve months ended December 31, 2008, primarily from gain $0.2 million recognized from deferred gain on sale of equipment from 2007 and $0.2 million from write off accounts payablesThere was no other income for the twelve months ended December 31, 2009.

 

29



Table of Contents

 

Interest Expense. Interest expense was $5.9 million, or 40% of revenue, for the twelve months ended December 31, 2009 and was $7.7 million, or 35% of revenue, for the twelve months ended December 31, 2008.  Interest expense consists primarily of debt amortization and interest accrued on outstanding convertible and subordinated notes, borrowings under a factoring, loan, and security agreement, a revolving loan agreement, and the Kookmin loan.  The decrease was due to extinguishment of certain of our convertible and subordinated notes during the second quarter of 2009.

 

Interest Income.  Interest income was $3 thousand for the twelve months ended December 31, 2008 from interest earned on cash deposits.  There was no interest income for the twelve months ended December 31, 2009.

 

Comparison of the years ended December 31, 2008 and 2007

 

Revenue. Revenue decreased $6.9 million to $22.1 million for the twelve months ended December 31, 2008 from $29.0 million for the twelve months ended December 31, 2007.  The decrease included $5.0 million decrease in sales and prototyping of parts manufactured from bulk Liquidmetal alloys to consumer electronics customers as a result of increased reliance on licensees to manufacture and sell bulk Liquidmetal alloy parts and a decrease of $1.9 million from sales of our coating products as a result of decrease in demand from oil drilling applications.

 

Cost of Sales. Cost of sales decreased to $17.1 million, or 78% of revenue, for the twelve months ended December 31, 2008 from $26.5 million, or 91% of revenue, for the twelve months ended December 31, 2007.  The decreases were a result of a change in revenue mix during the twelve months ended December 31, 2008 primarily from increased royalty revenues.  We also believe that higher manufacturing volumes and greater mix of higher-margin products in the future will cause the gross profit to improve over time.  The cost to manufacture parts from our bulk Liquidmetal alloys is variable and differs based on the unique design of each product.  However, the cost of sales for the products sold by the coatings business segment is generally consistent because the Liquidmetal coatings products are produced by third parties and sold wholesale to various industries.

 

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased to $6.5 million, or 30% of revenue, for the twelve months ended December 31, 2008 from $8.9 million, or 31% of revenue, for the twelve months ended December 31, 2007. The decrease was primarily a result of decrease in wages and expenses of $0.4 million, decrease in professional and consulting fees of $1.3 million, decrease in bad debt expense of $0.3 million, decrease in depreciation and amortization expense of $0.1 million, and decrease in office and equipment rent expense of $0.1 million.

 

Research and Development Expenses. Research and development expenses decreased to $1.0 million, or 5% of revenue, for the twelve months ended December 31, 2008 from $1.1 million, or 4% of revenue, for the twelve months ended December 31, 2007. The decrease was primarily due to decrease in wages and related expenses.  We continue to perform research and development of new Liquidmetal alloys and related processing capabilities, develop new manufacturing techniques, and contract with consultants to advance the development of Liquidmetal alloys.

 

Impairment of Long-Lived Assets. Impairment of long-lived assets was $0.1 million, or 1% of revenue, for the twelve months ended December 31, 2008 from of a write-down of idle equipment held by our South Korean subsidiary, Liquidmetal Technologies Co., Ltd. While we have actively marketed the idle equipment for ultimate sale since early 2004, we were unable to sell this equipment and determined that the carrying value of the idle equipment exceeded its fair value in the amount of $0.1 million during the fourth quarter of fiscal year 2008.  There was no impairment of long-lived assets recognized during the twelve months ended December 31, 2007.

 

Loss from Extinguishments of Debts. Loss from extinguishments of debt decreased to $0 for the twelve months ended December 31, 2008 from $0.6 million, or 2% of revenue, for the twelve months ended December 31, 2007.  The $0.6 million loss was recognized from the extinguishment of certain of our convertible and subordinated notes in 2007.

 

Change in Value of Warrants.  Change in value of warrants decreased to a gain of $1.9 million, or 9% of revenue, during the twelve months ended December 31, 2008 from a gain of $4.9 million, or 17% of revenue, during the twelve months ended December 31, 2007.  The change in value of warrants consisted of warrants issued from convertible notes and subordinated notes funded between 2004 and 2007 primarily as a result of fluctuations in our stock price.

 

Change in Value of Conversion Feature.  Change in the value of our conversion feature liability from our convertible notes funded between 2004 and 2007 resulted in gain of $2.0 million, or 9% of revenue, during the twelve months ended December 31, 2008 from a gain of $7.0 million, or 24% of revenue, during the twelve months ended December 31, 2007 primarily as a result of fluctuation in our stock prices.

 

Other Expense.  Other expense was $17 thousand for the twelve months ended December 31, 2008, primarily from loss on disposal of assets.  There was no other expense recognized for the twelve months ended December 31, 2007.

 

30


 


Table of Contents

 

Other Income.  Other income was $0.4 million, or 2% of revenue, for the twelve months ended December 31, 2008, primarily from gain $0.2 million recognized from deferred gain on sale of equipment from 2007 and $0.2 million from write off accounts payablesOther income was $0.2 million, or 1% of revenue, for the twelve months ended December 31, 2007, primarily from gain recognized from sale of equipment.

 

Interest Expense. Interest expense was $7.7 million, or 35% of revenue, for the twelve months ended December 31, 2008 and was $9.4 million, or 32% of revenue, for the twelve months ended December 31, 2007.  Interest expense consists primarily of debt amortization and interest accrued on outstanding convertible and subordinated notes, borrowings under the April 2005 factoring, loan, and security agreement, the Kookmin loan, the Bank Midwest loans, and late registration and late filing fee penalties.

 

Interest Income.  Interest income was $3 thousand for the twelve months ended December 31, 2008 and $0.1 million for the twelve months ended December 31, 2007, from interest earned on cash deposits.

 

31



Table of Contents

 

QUARTERLY RESULTS

 

The following information presents our unaudited quarterly operating results for 2009 and 2008. The data has been prepared by Liquidmetal Technologies, Inc. on a basis consistent with the Consolidated Financial Statements included elsewhere in this Form 10-K, and includes all adjustments, consisting of normal recurring accruals, that we consider necessary for a fair presentation thereof. These operating results are not necessarily indicative of our future performance.

 

 

 

For the Three Months Ended

 

Consolidated Statements of Operations Data:

 

12/31/09

 

09/30/09

 

06/30/09

 

03/31/09

 

 

 

(In thousands, except per share data)

 

 

 

(Unaudited)

 

Revenue

 

$

3,400

 

$

4,209

 

$

3,519

 

$

3,592

 

Cost of sales

 

2,152

 

2,909

 

1,895

 

2,141

 

Gross profit

 

1,248

 

1,300

 

1,624

 

1,451

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

 

2,454

 

1,341

 

1,357

 

1,588

 

Research and development

 

276

 

349

 

301

 

247

 

Impairment of long-lived assets

 

1,381

 

 

 

 

Total operating expenses

 

4,111

 

1,690

 

1,658

 

1,835

 

Loss from operations

 

(2,863

)

(390

)

(34

)

(384

)

 

 

 

 

 

 

 

 

 

 

Loss from extingquishment of debt

 

 

 

(1,471

)

 

Change in value of warrants, gain (loss)

 

1,697

 

2,015

 

6,249

 

(126

)

Change in value of conversion feature, gain

 

393

 

474

 

930

 

30

 

Other expense

 

(308

)

 

 

 

Other income

 

 

 

 

 

Interest expense

 

(1,102

)

(1,055

)

(1,415

)

(2,290

)

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

(2,183

)

1,044

 

4,259

 

(2,770

)

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

(48

)

(75

)

(45

)

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(2,231

)

969

 

4,214

 

(2,770

)

 

 

 

 

 

 

 

 

 

 

Net loss (income) attributable to noncontrolling interest

 

10

 

39

 

51

 

(31

)

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to Liquidmetal Technologies, Inc.

 

(2,221

)

1,008

 

4,265

 

(2,801

)

 

 

 

 

 

 

 

 

 

 

Other comprhensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign exhange translation gain (loss)

 

98

 

393

 

336

 

(413

)

Comprehensive (loss) income

 

$

(2,123

)

$

1,401

 

$

4,601

 

$

(3,214

)

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share basic and diluted:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Liquidmetal Technologies, Inc.

 

$

(0.05

)

$

0.02

 

$

0.09

 

$

(0.06

)

 

 

 

 

 

 

 

 

 

 

Number of weighted average shares - basic and diluted

 

47,507

 

46,595

 

45,408

 

44,825

 

 

32



Table of Contents

 

 

 

For the Three Months Ended

 

Consolidated Statements of Operations Data:

 

12/31/08

 

09/30/08

 

06/30/08

 

03/31/08

 

 

 

(In thousands, except per share data)

 

 

 

(Unaudited)

 

Revenue

 

$

4,605

 

$

5,041

 

$

5,669

 

$

6,768

 

Cost of sales

 

3,806

 

3,791

 

4,633

 

4,901

 

Gross profit

 

799

 

1,250

 

1,036

 

1,867

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

 

1,912

 

1,417

 

1,326

 

1,874

 

Research and development

 

207

 

279

 

278

 

258

 

Impairment of long-lived assets

 

132

 

 

 

 

Total operating expenses

 

2,251

 

1,696

 

1,604

 

2,132

 

Loss from operations

 

(1,452

)

(446

)

(568

)

(265

)

 

 

 

 

 

 

 

 

 

 

Change in value of warrants, (loss) gain

 

(495

)

989

 

1,290

 

106

 

Change in value of conversion feature, (loss) gain

 

(117

)

642

 

1,240

 

222

 

Other expense

 

 

 

 

(17

)

Other income

 

182

 

 

247

 

 

Interest expense

 

(2,432

)

(1,860

)

(1,717

)

(1,703

)

Interest income

 

 

 

1

 

2

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before minority interests

 

(4,314

)

(675

)

493

 

(1,655

)

 

 

 

 

 

 

 

 

 

 

Minority interests

 

(80

)

(115

)

(65

)

(161

)

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations before income taxes

 

(4,394

)

(790

)

428

 

(1,816

)

Income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(4,394

)

(790

)

428

 

(1,816

)

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share from continuing operations - basic and diluted

 

$

(0.10

)

$

(0.02

)

$

0.01

 

$

(0.04

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares used to compute (loss) income per share from continuing operations - basic and diluted

 

44,759

 

44,726

 

44,726

 

44,726

 

 

33



Table of Contents

 

LIQUIDITY AND CAPITAL RESOURCES

 

Since our inception, we have funded our operations through the sale of equity securities in private placements and our initial public offering, the sale of convertible notes and warrants in private placements, debt financing, and cash generated from operations.

 

Our cash (used in) provided by operating activities was ($3.4) million and $0.4 million for the years ended December 31, 2009 and 2008, respectively.  Our working capital deficit decreased from $20.8 million at December 31, 2008 to $13.1 million at December 31, 2009.  Our working capital deficit decrease of $7.7 million was primarily attributable to a decrease in current portion of long-term debt of $12.8 million, offset by a decrease in trade account receivables, net, of $1.1 million, a decrease in prepaid expenses and other current assets of $0.4 million, an increase of accounts payable and accrued expenses of $0.5 million and an increase in warrant liabilities of $3.3 million.

 

Our cash used in investing activities was $0.5 million for the year ended December 31, 2009 primarily from purchase of property and equipment and investments in patents and trademarks.

 

Our cash provided by financing activities was $4.0 million for the year ended December 31, 2009.  We paid net $29.0 million in borrowings from a factoring agreement executed in April 2005, a revolving and term loan agreement executed in July 2007, and convertible and subordinated notes, which were offset by $16.6 million proceeds from issuance of convertible subordinated notes, $16.2 million proceeds from issuance of convertible preferred stocks and $0.2 million of contribution to noncontrolling interest.

 

On May 1, 2009, we completed a financing transaction (the “Transaction”) whereby aggregate cash of $2.5 million and principal and accrued interest of $20.6 million due under the previously issued 8% Convertible Subordinated Notes due January 2010 (the “Prior Notes”) were exchanged for 500,000 shares of convertible Series A-1 Preferred Stock with an original issue price of $5.00 per share, 2,625,002 shares of Series A-2 Preferred Stock with an original issue price of $5.00 per share, and $7.5 million of new 8% Senior Secured Convertible Subordinated Notes due January 2011 (the “Exchange Notes”). Of the $2.5 million aggregate cash purchase price, approximately $0.1 million remains outstanding and is included prepaid expenses and other current assets in the condensed consolidated balance sheet as of December 31, 2009.  The Transaction was consummated pursuant to a Securities Purchase and Exchange 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 an additional 1,000,000 shares of Series A-1 Preferred Stock at $5.00 per share at any time prior to six months from the closing date (the “Series A-1 Option”).  On November 1, 2009, the Company issued $0.4 million of additional Exchange Notes for accrued interest due under the notes in lieu of cash payment.

 

The Exchange Notes are due January 3, 2011 and bear annual interest rate of 8% with interest payable in October and April in cash or, at our company’s option, in the form of additional notes (in which case the interest rate will be 10%).  The preferred stocks accrue cumulative dividends at an annual rate of 8%, which is payable semi-annually. Beginning on the second anniversary of the initial issuance, the dividend will increase to 10%.  As of December 31, 2009, we have accrued dividends of $0.7 million included in accounts payable and other accrued expenses.  The dividends are payable in cash or in kind by the issuance of the company of additional preferred stock, only when and as declared by our Board of Directors.  On August 5, 2010, we repaid in full all principal and interest on the Exchange Notes in the amount of $8.2 million and all security interests on our assets securing such obligations were released and terminated.

 

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

 

On October 30, 2009, we entered into an agreement with various investors to issue 180,000 shares of convertible Series A-1 Preferred Stock for $0.9 million of cash pursuant to the Series A-1 Option.  Further, we issued warrants to purchase 2,500,000 shares of common stock at an exercise price of $0.50 per share with an expiration date of January 3, 2012.

 

On May 28, 2010, we issued $2.0 million of 13% Subordinated Promissory Note (“January 2011 Subordinated Note”) due on the earlier date of January 3, 2011 or the date on which all outstanding amounts are due under the Company’s 8% January 2011 Notes.  Following the due date, the interest on the January 2011 Subordinated Note shall be 15%.  The January 2011 Subordinated Note may be repaid in whole or in part at any time without penalty or premium, but is subordinate in right of payment to the January 2011 Notes and may not be paid until after the January 2011 Notes are paid in full.  We may, at our sole discretion, elect to pay all or any portion of the outstanding principal or accrued interest in cash or the Company’s common stock or any combination thereof, at a value equal to the lower of $0.26 per share or the average market price per share for the 10 previous trading days immediately prior to the date the payment is made. As a condition for the January 2011 Subordinated Note,

 

34



Table of Contents

 

Carlyle Liquid Holdings, LLC, a current stockholder of the Company granted the holder of the January 2011 Subordinated Note a warrant to purchase up to 7,700,000 shares of the Company’s common stock at a price equal to $0.26 per share, which warrant is exercisable for a period of 90-days beginning on the date in which we repay the January 2011 Subordinated Note in cash (if we repay in cash).  On August 5, 2010, we repaid in full all principal and interest on the January 2011 Subordinated Notes in the amount of $2.0 million.  In connection with the repayment, on August 10, 2010, we entered into a Subscription Agreement pursuant to which the Company issued 7,870,307 shares of the Company’s common stock for an aggregate price of $2.0 million.

 

Our capital requirements during the next twelve months will depend on numerous factors, including the success of existing products either in manufacturing or development, the development of new applications for Liquidmetal alloys, the resources we devote to develop and support our Liquidmetal alloy products, the success of pursuing strategic licensing and funded product development relationships with external partners.

 

We have experienced significant cumulative operating losses since our inception. Our net income for the fiscal year ended December 31, 2009 was $0.3 million, while our net loss for the fiscal years ended December 31, 2008 and 2007 was $6.6 million and $5.6 million, respectively.  In the audit report on our financial statements for our fiscal years ended December 31, 2008 our auditors included a going-concern qualification indicating that our significant operating losses and working capital deficit cause substantial doubt about our ability to continue as a going concern.

 

We have approximately $0.3 million of principal and accrued interest outstanding as of December 31, 2009, under the 8% unsecured subordinated notes (the “Bridge Notes”), which were due August 17, 2007.  On August 5, 2010, we repaid in full all principal and interest on the Bridge Notes in the amount of $0.3 million.

 

We have $0.3 million of outstanding loan as of December 31, 2009 under a factoring, loan, and security agreement with a financing company.  In June 2009, the Company received a formal notice of default from the financing company for repayment of the outstanding loan balance and has entered into a settlement agreement with the financing company whereby it agreed to repay approximately $0.1 million each month until the outstanding loans and accrued fees have been repaid.   As of December 31, 2009, we were unable to pay the $0.1 million monthly payments and were in discussions with the financing company to either extend or enter into another settlement agreement.  On August 5, 2010, we repaid in full all principal, interest and fees on the factoring loan in the amount of $0.3 million and all security interests on our assets securing such obligation was released and terminated.

 

We have outstanding liens on assets by our South Korean subsidiary by various creditors for past-due trade payables totaling $1.3 million, of which $1.1 million is held by creditors in South Korea, as of December 31, 2009.  We are currently working to resolve the matter with each creditor by seeking a forbearance or compromise.  If we cannot repay the amounts due or obtain a forbearance or compromise, the creditors may seek to foreclose on the Company’s assets located in South Korea.  Such a foreclosure would have material adverse effect on our operations, financial condition, and results of operations.

 

Initial Public Offering Proceeds

 

Pursuant to our Registration Statement on Form S-1 (Registration No. 333-73716), as amended, initially filed with the Securities and Exchange Commission on November 20, 2001 and declared effective May 21, 2002, we closed an initial public offering of 5,000,000 shares of common stock on May 28, 2002, plus an additional 229,000 shares on June 10, 2002 pursuant to an over allotment option, at a price of $15.00 per share (which sale is referred to herein as the “Offering”). The Offering generated aggregate cash proceeds during the second quarter 2002 of $78.4 million. The net proceeds were $70.7 million after deducting underwriting commissions of $5.5 million and other transaction fees of $2.2 million. As of December 31, 2003, we used $70.7 million of net proceeds from the Offering.

 

Private Placements of Convertible Notes and Bridge Notes

 

The following private placement of convertible notes and bridge notes are outstanding as of December 31, 2009.

 

On May 17, 2006, September 21, 2006, and December 1, 2006, we completed a private placement of 8% Unsecured Subordinated Notes in the aggregate principal amount of $4.6 million (the “Bridge Notes”), together with warrants to purchase up to an aggregate of 973,064 shares of our common stock.  The Bridge Notes were unsecured and were scheduled to become due on the earlier of August 17, 2007 or the consummation of a follow-on equity or debt offering pursuant to which we receive gross proceeds of at least $6.0 million, but in no event will the Bridge Notes become due any earlier than the payment in full of the previously issued promissory notes, including 7% Senior Secured Notes Due August 2007 (the “August 2007 Notes”) and 6% Senior Secured Notes Due July 2007 (the “July 2007 Notes”).  As a part of the private placement of the Bridge Notes, we issued warrants to the purchasers of the Bridge Notes giving them the right to purchase up to an aggregate of 890,990 shares of our common stock, and warrants to purchase 82,074 shares of our common stock were issued to the placement agent in the transaction. The warrants have an exercise price of $2.58 per share and will expire on May 17, 2011.

 

35



Table of Contents

 

On May 1, 2009, we completed a financing transaction (the “Transaction”) whereby aggregate cash of $2.5 million and principal and accrued interest of $20.6 million due under the previously issued 8% Convertible Subordinated Notes due January 2010 (the “Prior Notes”) were exchanged for 500,000 shares of convertible Series A-1 Preferred Stock with an original issue price of $5.00 per share, 2,625,002 shares Series A-2 Preferred Stock with an original issue price of $5.00 per share, and $7.5 million of new 8% Senior Secured Convertible Subordinated Notes due January 3, 2011 (the “January 2011 Notes”).  The Transaction was consummated pursuant to a Securities Purchase and Exchange 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 an additional 1,000,000 shares of Series A-1 Preferred Stock at $5.00 per share at any time prior to six months from the closing date (the “Series A-1 Option”).

 

The January 2011 Notes are convertible at any time at the option of the holder into shares of our common stock at a conversion price of $0.60 per share, subject to adjustment for stock splits, stock dividends, and the like.  The January 2011 Notes bear annual interest rate of 8% with interest payable in October and April in cash or, at our option, in the form of additional notes (in which case the interest rate will be 10%).  The preferred stocks accrue cumulative dividends at an annual rate of 8%, which is payable semi-annually. Beginning on the second anniversary of the initial issuance, the dividend will increase to 10%. As of December 31, 2009, we have accrued dividends of $0.7 million included in accounts payable and other accrued expenses.  The dividends are payable in cash or in kind by the issuance of the company of additional preferred stock, only when and as declared by our Board of Directors.  On August 5, 2010, we repaid in full all principal and interest on the Exchange Notes in the amount of $8.2 million and all security interests on our assets securing such obligations were released and terminated.

 

The Series A-1 Preferred Stock and Series A-2 Preferred Stock are convertible into the company’s common stock at conversion price of $0.10 and $0.22 per common share, respectively.  As part of the Transaction, we issued warrants to purchase 3,125,007 shares and 42,329,407 shares of our company’s common stock at an exercise of $0.60 and $0.50 per share to the buyers of the January 2011 Notes and preferred stocks, respectively.  The warrants will expire in January 2012.  The conversion prices and the number of common stock issuable under the preferred stocks, Exchange Notes and warrants are subject to adjustments for anti-dilution purposes.

 

In connection with the Transaction, the Company and the Buyers entered into a Registration Rights Agreement under which the Company is required, upon the written request of the holders of more than fifty percent (50%) of the securities underlying the January 2011 Notes, warrants, and preferred stocks,  after 180 days of the closing of the Transaction, to file a registration statement with the SEC covering the resale of the shares of Company’s common stock issuable pursuant to the January 2011 Notes, the warrants and the preferred stocks and to use its best efforts to have the registration declared effective at the earliest date (but in no event later than 60 days after filing if there is no SEC review of the registration statement, or 120 days if there is an SEC review).  The Company may be required to pay liquidated damages as set forth in the Registration Rights Agreement, if the registration statement is not filed or does not become effective on a timely basis.

 

On October 30, 2009, we entered into an agreement with various investors, to issue 180,000 shares of convertible Series A-1 Preferred Stock for $0.9 million of cash pursuant to the Series A-1 Option.  Further, we issued warrants to purchase 2,500,000 shares of common stock at an exercise price of $0.50 per share with an expiration date of January 3, 2012.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to our company, or that engages in leasing, hedging, or research and development arrangements with our 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 joint venture is named Liquidmetal SAGA Italy, Srl (“LSI”).  We also entered into an exclusive manufacturing license agreement for the eyewear industry with LSI.  Under the joint venture agreement, we have the option to buy ownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006, we purchased a 19.9% interest in the joint venture.  During the years ended December 31, 2009, 2008 and 2007, we recognized revenues of $0, $0 and $0.1 million, respectively, of Liquidmetal alloys sold to SAGA for use in the joint venture.  During the fourth quarter of the year ended December 31, 2009, the Company wrote-off its investment of $0.3 million in the joint venture due to slower than anticipated growth in the eyewear industry.

 

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

 

36


 


Table of Contents

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes our company’s obligations and commitments as of December 31, 2009:

 

 

 

Payments Due by Period (in thousands)

 

Contractual Cash Obligations

 

Total

 

Less Than
1 Year

 

1-3 Years

 

3-5 Years

 

After 5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (2)

 

$

8,137

 

$

259

 

$

7,878

 

$

 

$

 

Long-term debt of majority owned subsidiary (2)

 

16,353

 

1,134

 

7,997

 

13

 

 

Short-term debt (3)

 

589

 

589

 

 

 

 

Short-term debt of consolidated subsidiary

 

307

 

307

 

 

 

 

Interest payments (4)

 

4,455

 

1,785

 

1,723

 

947

 

 

Operating leases and rents

 

855

 

365

 

490

 

 

 

Foster Wheeler

 

53

 

53

 

 

 

 

Dongyang

 

9

 

9

 

 

 

 

Nichimen

 

315

 

315

 

 

 

 

Totals (1)

 

$

31,073

 

$

4,816

 

$

18,088

 

$

960

 

$

 

 


(1) Contractual cash obligations include Long-term debt comprised of $259 of Unsecured Subordinated Notes issued in 2006 and $7,878 of Convertible Unsecured Notes originally issued in 2009; Long-term debt of consolidated subsidiary comprised of $1,430 of Bank Midwest Term Loan, $7,613 of C3 Capital Partners Subordinated Notes, and $102 of Bank Midwest Promissory Notes; Short-term debt comprised of $284 outstanding advances received under factoring, loan, and security agreement, $130 of outstanding advances from John Kang, our former Chairman and $175 of outstanding advances from Ricardo Salas, our Executive Vice President; Short-term debt of consolidated subsidiary comprised of $307 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 $3,509; and un-amortized cash discount and discounts for conversion feature and warrants of $3,227 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 7.43% to 14.00%.  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 10.00% with expected maturity of approximately 1 year.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions.

 

We believe that the following accounting policies are the most critical to our consolidated financial statements since these policies require significant judgment or involve complex estimates that are important to the portrayal of our financial condition and operating results:

 

 

·

Our earnings and cash flows are subject to fluctuations due to changes in non-U.S. currency exchange rates. We are exposed to non-U.S. exchange rate fluctuations as the financial results of non-U.S. subsidiary in Korea are translated into U.S. dollars. As exchange rates vary, those results, when translated, may vary from expectations and adversely impact overall expected profitability. The cumulative translation effects for subsidiaries using functional currencies other than the U.S. dollar are included in accumulated foreign exchange translation in stockholders’ equity. Movements in non-U.S. currency exchange rates may affect our competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors.

 

37



Table of Contents

 

 

 

 

 

·

We record an accrual for potential product warranty costs. Due to the lack of historical information for warranty expense related to bulk alloy products, management estimates product warranties as a percentage of bulk alloy product sales earned during the period. In the event in future periods the actual product warranty costs consistently exceed the estimate for product warranty costs, an adjustment would be made and income would decrease in the period of such determination. Likewise, in the event we determine that actual product warranty costs are consistently lower than the estimate for product warranty costs, an adjustment would be made and income would increase in the period of such determination.

 

 

 

 

·

We record an allowance for doubtful accounts as a contra-asset to our trade receivables for estimated uncollectible accounts. Management estimates the amount of potentially uncollectible accounts by reviewing significantly past due customer balances relative to historical information available for those customers. In the event, in future periods, actual uncollectible accounts exceed the estimate for uncollectible accounts, an adjustment would be made and income would decrease in the period of such determination. Likewise, in the event, in future periods, actual uncollectible accounts are lower than the estimate for uncollectible accounts, an adjustment would be made and income would increase in the period of such determination.

 

 

 

 

·

We value inventories at lower of cost or net realizable value. Management has determined net realizable value to be equal to the selling price of the products to be produced and sold less the cost of disposal. In the event, in future periods, the actual selling prices exceed the estimate for selling prices less cost to sell, an adjustment would be made and income would increase in the period of such determination. Likewise, in the event, in future periods, actual selling prices are lower than the estimate for selling prices, an adjustment would be made and income would decrease in the period of such determination.

 

 

 

 

·

We value our assets at lower of cost or fair market value. Management has determined fair market to be equal to the selling price of the assets to be sold less the cost of disposal. In the event, in future periods, actual selling prices are lower than the estimate for selling prices, an adjustment would be made and income would decrease in the period of such determination.

 

 

 

 

·

We record valuation allowances to reduce the deferred tax assets to the amounts estimated to be realized. While we consider taxable income in assessing the need for a valuation allowance, in the event we determine we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment would be made and income increased in the period of such determination. Likewise, in the event we determine we would not be able to realize all or part of our deferred tax assets in the future, an adjustment would be made and charged to income in the period of such determination.

 

 

 

 

·

We account for the warrants and the embedded conversion feature of our senior convertible notes as derivatives in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Fair values of warrants and embedded conversion features are measured at each period end using Black-Scholes pricing models and changes in fair value during the period are reported in our earnings

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Minority interests will be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity separate from the parent’s equity. In addition, SFAS 160 establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective prospectively, except for certain retrospective disclosure requirements, for fiscal years beginning after December 15, 2008. Accordingly, we will adopt SFAS 160 in 2009. The presentation and disclosure requirements of this standard must be applied retrospectively for all periods presented and will impact how we present and disclose noncontrolling interests and income from noncontrolling interests in our company’s consolidated financial statements.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine 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 life of a recognized intangible asset under SFAS 142 and

 

38



Table of Contents

 

the period of expected cash flows used to measure the fair value of an asset under SFAS 141(R) and other U.S. generally accepted accounting principles FSP 142-3 applies to intangible assets that are acquired individually or with a group of other assets acquired in business combinations and asset acquisitions. FSP 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008.  We have adopted SFP 142-3 as of January 1, 2009

 

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) which clarifies that convertible debt instruments that may be settled in cash or other assets upon conversion are not addressed by APB No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, FSP APB 14-1 requires an entity to separately account for the liability and equity components of a convertible instrument to reflect an entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 also expands the disclosure requirements regarding convertible debt instrument terms and how the instrument is reflected in an entity’s financial statements. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We have adopted APB 14-1 as of January 1, 2009.

 

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

 

In June 2008, the FASB ratified the consensus reached on EITF Issue No. 07-5, “Determining Whether 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 would qualify as a scope exception under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption for an existing instrument is not permitted. We have adopted EITF 07-5 as of January 1, 2009.

 

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

 

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

 

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. This FSP amends the other-than-temporary guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 that amend SFAS 115 and SFAS 124 are effective for interim and annual reporting periods ending after June 15, 2009. The implementation of this FSP is not expected to affect our consolidated results of operations or financial condition.

 

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

 

39



Table of Contents

 

In June 2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46R,” which will be effective for us on January 1, 2010. SFAS 167 requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This statement requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. We do not expect a material effect from the adoption of this standard on our consolidated financial statements.

 

In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162,” which was effective for us on September 30, 2009.  SFAS 168’s objective is to establish the FASB Accounting Standards Codification as the source of authoritative non-governmental accounting principles to be applied in the preparation of financial statements in conformity with US GAAP. Although SFAS 168 does not change GAAP, the adoption of SFAS 168 will impact the Company’s consolidated financial statements since all future references to authoritative accounting literature will be in accordance with SFAS 168.

 

In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, Fair Value Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

Other recent accounting pronouncements 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 a material impact on our company’s present or future consolidated financial statements.

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

 

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

 

Interest Rates. We are exposed to market risks relating to changes in interest rates.  Although we do not currently have any borrowings with variable interest rates, fluctuations in interest rates may have a negative impact to any future borrowings.

 

Commodity Prices. We are exposed to price risk related to anticipated purchases of certain commodities used as raw materials by our businesses, including titanium and zirconium. Although we do not currently enter into commodity future, forward, and option 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 our purchases of these raw materials increases.

 

Foreign Exchange Rates. As a result of our manufacturing presence in South Korea, a substantial portion of our costs will be denominated in South Korean won. Consequently, fluctuations in the exchange rates of the South Korean won to the U.S. dollar will affect our costs of goods sold and operating margins and could result in exchange losses. Although we do not currently enter into foreign exchange hedge transactions, we may do so in the future as our business grows. Fluctuations in exchange rates resulted in foreign currency translation (loss) gains of $0.4 million, ($1.8) million and $0.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.

 

Item 8. Financial Statements and Supplementary Data

 

The financial statements required by this item are located in Consolidated Financial Statements in Item 15 of this report. The supplementary financial information required by this item is located under the caption “QUARTERLY RESULTS” in Item 7 of this report.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

 

None.

 

40



Table of Contents

 

Item 9A(T). Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.  Based on an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2009, the end of the period covered by this report, our Chief Executive Officer (Principal Executive officer) and Chief Financial Officer (Principal Financial Officer) have concluded that our disclosure controls and procedures were effective.

 

Changes in Internal Controls.  During the quarter ended December 31, 2009, there was no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Management’s Report on Internal Control over Financial Reporting.  The company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the company’s receipts and expenditures are being made only in accordance with authorizations of the company’s management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

As required by Section 404 of the Sarbanes-Oxley Act of 2002 and the related rule of the SEC, management assessed the effectiveness of the company’s internal control over financial reporting using the Internal Control-Integrated Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Based on this assessment, management concluded that the company’s internal control over financial reporting was effective as of December 31, 2009. Management has not identified any material weaknesses in the company’s internal control over financial reporting as of December 31, 2009.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

Item 9B. Other Information

 

None.

 

41



Table of Contents

 

PART III

 

Item 10. Directors and Executive Officers of the Registrant

 

Set forth below is a table identifying our directors and executive officers as of April 6, 2010:

 

Name

 

Age

 

Position

 

 

 

 

 

Larry Buffington

 

63

 

Former President and Chief Executive Officer

 

 

 

 

 

Tony Chung

 

40

 

Chief Financial Officer

 

 

 

 

 

Ricardo Salas

 

46

 

Executive Vice-President

 

 

 

 

 

Abdi Mahamedi

 

48

 

Chairman of the Board

 

 

 

 

 

Martin Weinstein

 

75

 

Vice Chairman of the Board

 

 

 

 

 

Robert Biehl

 

64

 

Director

 

 

 

 

 

Iraj Azarm

 

70

 

Director

 

Larry Buffington was elected by our Board of Directors to serve as the President and Chief Executive Officer in October 2006.  Mr. Buffington has been serving as full-time consultant to the Company since July 2006.  He is also the president of Buffington Consulting, a consulting firm that Mr. Buffington started in 1997 focusing on the assessment and turnaround of manufacturing operations.  Prior to starting Buffington Consulting, Mr. Buffington was the General Manager of the Communications Products Business Unit of Augat, Inc., a public company with worldwide manufacturing operations in communication, automotive and electronic products.  Mr. Buffington received a bachelor’s degree in Industrial Engineering from Pennsylvania State University in 1969.  On August 5, 2010, Mr. Buffington ceased to serve as the Company’s President and Chief Executive Officer, although Mr. Buffington will continue to serve as the Chief Executive Officer of the our majority-owned Liquidmetal Coatings subsidiary.

 

Tony Chung was elected by our Board of Directors to serve as the Chief Financial Officer in December 2008.  Mr. Chung most recently served as Chief Financial Officer at BETEK Corporation, a real estate and investment subsidiary of SK Engineering and Construction, and as Chief Financial Officer of Solarcity, a company providing advanced solar technology and installation services.  Mr. Chung is a Certified Public Accountant and served eight years at KPMG as an Audit and Consulting Manager for several large multinational companies.  He received his B.S. degree in Business Administration from University of California Berkeley’s Haas School of Business in 1992.  Mr. Chung is also an Attorney at Law and received his J. D. degree from Pacific Coast University School of Law in 2006.

 

Ricardo Salas began serving as our Executive Vice President on December 1, 2008.  He previously served as our Chief Executive Officer and President from December 30, 2005 through October 8, 2006.  Mr. Salas also served as a Board member of the Company from April 1995 to May 2003.  From January 2000 through June 2005, Mr. Salas served as Chief Executive Officer of iLIANT Corporation, an information technology and outsourcing service firm in the health care industry.  He currently serves as a director of VillageEDOCS, a technology company providing software-as-a-service to the financial services, healthcare and various industries.  Mr. Salas received a B.A. degree in Economics from Harvard College in 1986.

 

Abdi Mahamedi has served as a director since May 2009 and became Chairman of the Board in March 2010.  Since 1987, Mr. Mahamedi has served as the President and Chief Executive Officer of Carlyle Development Group of Companies (“CDG”), which develops and manages residential and commercial properties in the United States on behalf of investors worldwide.  At CDG, Mr. Mahamedi evaluates and supervises all of the investment activities and management personnel.  Prior to joining CDG, Mr. Mahamedi founded Emanuel Land Company, a subsidiary of Emanuel & Company, a Wall Street investment banking firm, and served as a managing director for Emanuel Land Company from 1986 to 1987.  In 1983, Mr. Mahamedi received his B.S.E. degree in Civil and Structural Engineering from the University of Pennsylvania, and in 1984 he received his M.S.E. degree in Civil and Structural Engineering from the University of Pennsylvania.

 

Martin Weinstein has served as Vice-Chairman since March 2010.  Dr. Weinstein served as the Chairman and Chief Executive Officer of Sequa Corporation, New York, and Chairman of Chromalloy Gas Turbine Corporation, San Antonio, Texas. Chromalloy Gas Turbine Corporation, with sales of approximately $1.3 billion and six thousand employees worldwide, is the world’s largest supplier of advanced metallurgical and manufacturing services to the global gas turbine and jet engine industry.  He was also a founding stockholder of Tyco Labs, which then became Tyco Corporation, where he served as head of Tyco’s

 

42



Table of Contents

 

Material Sciences Department.  In December of 2008, Martin Weinstein retired as Vice-Chairman and CEO of Sequa and Chairman of Chromalloy Gas Turbine Corporation where he remains a senior consultant to the company. He is currently the founder/owner of Sheffield Scientific, a company formed to pursue developments in advanced materials and energy.  Dr. Weinstein received his ScD in metallurgy from Massachusetts Institute of Technology.

 

Robert Biehl was re-elected as a director in November 2007. Mr. Biehl has served as a director since 2005.  Mr. Biehl founded the Masterplanning Group International and as President, personally consulted over 400 clients and mentored over 2,500 executives and world leaders.  Prior to starting Masterplanning Group, Mr. Biehl was an executive staff of World Vision International where he designed and developed the Love Loaf Program, which has raised millions of dollars worldwide.  He has also published many books in the area of personal and organizational development.  Mr. Biehl received his B.A. degree in Psychology and a Masters Degree in Counseling from Michigan State University.

 

Iraj Azarm has served as director since April 2009. Since 1987, Mr. Azarm has served as the Comptroller of CDG, where he directs the day to day activities of the company and acts as the liaison for investors and the firm’s institutional lenders. In 1963, Mr. Azarm received degrees in Mechanical Engineering and Economics from the University of California at Berkeley.

 

Change in Directors

 

In March 2010, Mr. John Kang voluntarily resigned as our company’s Chairman of the Board and Director.  Mr. Kang served as our Chairman and Director since August 2003.

 

In March, 2010, Mr. William Scott voluntarily resigned as our company’s Director.  Mr. Scott served as a Director of our company since May 2009

 

In March 2010, Mr. Martin Weinstein joined our company’s Board as Vice-Chairman.

 

Change in Principal Financial Officer

 

On December 1, 2008 Gerald Morrow ceased to be our company’s Chief Financial Officer upon appointment of Tony Chung as our Chief Financial Officer by our Board of Directors.  Mr. Morrow was previously elected to serve as our Chief Financial Officer on January 13, 2008 by our Board of Directors.  Additional information regarding Mr. Chung is set forth above in this Item 10.

 

On August 5, 2010, the Company appointed Thomas Steipp to serve as the Company’s President and Chief Executive Officer.  Mr. Steipp was also appointed as a member of the Company’s Board of Directors.  Upon Mr. Steipp’s appointment as the Company’s President and Chief Executive Officer, Larry Buffington ceased to serve as the Company’s President and Chief Executive Officer, although Mr. Buffington will continue to serve as the Chief Executive Officer of the Company’s majority-owned Liquidmetal Coatings subsidiary.

 

BOARD OF DIRECTORS

 

Terms of Directors

 

Each director serves a term of one-year until the next ensuing annual stockholder meeting or until his successor is duly elected or his earlier resignation or removal.

 

Audit Committee

 

Our board of directors has an Audit Committee that is currently comprised of Mr. Biehl.  The Audit Committee is responsible for reviewing the independence, qualifications, and activities of our independent certified accountants and our financial policies, control procedures, and accounting staff.  The Audit Committee is also responsible for the review of transactions between us and any officer, director, or entity in which an officer or director of our company has a material interest.  We do not have an “audit committee financial expert” as defined by the regulations of the Securities and Exchange Commission.   The Board of Directors will consider and appoint a financial expert to the Audit Committee in the near future.  However, our board of directors has determined that Mr. Biehl is an “independent” director within the meaning of Rule 10A-3(b)(i) under the Securities Exchange Act of 1934.  The Audit Committee is governed by a written charter approved by the board of directors.

 

43



Table of Contents

 

Code of Ethics

 

Our board of directors has adopted a Code of Ethics that is applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions.  The Code of Ethics is attached as Exhibit 14 to our Annual Report on Form 10-K filed on November 10, 2004.  In addition, we intend to promptly disclose (1) the nature of any amendment to our Code that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our Code that is granted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website at www.liquidmetal.com in the future. You may also request a copy of the Code by sending the request to information@liquidmetal.com.

 

Item 11.  Executive Compensation

 

Executive Benefits and Perquisites

 

Set forth below is information regarding compensation earned by or paid or awarded to the following executive officers of the company during the year ended December 31, 2009: (i) Larry Buffington, our former President and Chief Executive Officer; (ii) Tony Chung, our Chief Financial Officer; (iii) Rick Salas, our Executive Vice-President and (iv) John Kang, our former Chairman of the Board.  These persons are hereafter referred to as our “named executive officers.”  The identification of such named executive officers is determined based on the individual’s total compensation for the year ended December 31, 2009, as reported below in the Summary Compensation Table.

 

Summary Compensation Table

 

The following table sets forth for each of the named executive officers: (i) the dollar value of base salary and bonus earned during the years ended December 31, 2009 and 2008; (ii) the aggregate grant date fair value of stock and option awards granted during 2009 and 2008, computed in accordance with FASB Accounting Standards Codification (“ASC”) Topic 718 (R); (iii) the dollar value of earnings for services pursuant to awards granted during 2009 and 2008 under non-equity incentive plans; (iv) non-qualified deferred compensation earnings during 2009 and 2008; (v) all other compensation for 2009 and 2008; and, finally, (vi) the dollar value of total compensation for 2009 and 2008.

 

Name and
Principal
Position

 

Year

 

Salary

 

Bonus

 

Stock
Awards

 

Option
Awards
(1)

 

Non-Equity
Incentive Plan
Compensation

 

Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings

 

All Other
Compensation

 

Total

 

Larry Buffington

 

2009

 

$

250,000

 

 

 

 

 

 

$

11,436

(1)

$

264,436

 

 

 

2008

 

$

250,000

 

 

 

 

 

 

$

9,600

(2)

$

259,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tony Chung

 

2009

 

$

160,000

 

 

 

 

 

 

 

$

160,000

 

 

 

2008

 

$

12,500

 

 

 

$

9,027

 

 

 

 

$

21,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ricardo Salas

 

2009

 

240,000

 

 

 

 

 

 

 

$

240,000

 

 

 

2008

 

$

20,000

 

 

 

 

 

 

$

220,000

(3)

$

240,000

 

 


(1) Amount represents the fair value of stock options granted in 2008 under FASB ASC Topic 718 as discussed in Note 13, “Stock Compensation Plan” to our financial statement included elsewhere in this annual report on Form 10-K.

 

(2) Amount represents automobile lease payments on use of a company car as well as reimbursements for insurance premiums.

 

(3) Amount represents compensation earned for consulting services provided to the company from January 2008 through November 2008.

 

44



Table of Contents

 

For a description of the material terms of employment agreements with our named executive officers, see “—Employment Agreements.”

 

Outstanding Equity Awards at 2009 Fiscal Year-End

 

The following table sets forth information on outstanding option and stock awards held by the named executive officers at December 31, 2009, including the number of shares underlying both exercisable and unexercisable portions of each stock option as well as the exercise price and expiration date of each outstanding option.

 

 

 

Option Awards

 

Stock Awards

 

Name

 

Number of
Securities
Underlying
Unexercised
Options
Exercisable

 

Number of
Securities
Underlying
Unexercised
Options
Unexercisable

 

Equity
Incentive
Plan
Awards
Number of
Securities
Underlying
Unexercised
Unearned
Options

 

Option
Exercise
Price

 

Option
Expiration
Date

 

Vesting
Commencement
Date

 

Number
of Shares
or Units
of Stock
That
Have Not
Vested

 

Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested

 

Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested

 

Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Larry Buffington

 

200,000

 

300,000

 

 

$

0.772

 

09/19/2017

 

09/20/2008(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tony Chung

 

40,000

 

160,000

 

 

$

0.086

 

11/30/2018

 

12/01/2009(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ricardo Salas

 

 

 

 

 

 

 

 

 

 

 

 


(1)                                  The shares underlying this option vest 20% per year starting with the vesting commencement date and thereafter.

 

Employment Agreements

 

We have entered into the following employment agreements with the named executive officers identified above.

 

Larry Buffington. On October 8, 2006 we elected Larry Buffington as our President and Chief Executive Officer who received an initial base salary of $200,000 for serving as President and Chief Executive Officer of our company.  Effective January 1, 2007, the Compensation Committee approved an increase in the base salary to $250,000.  On July 24, 2007, we transferred substantially all of the assets of its Liquidmetal alloy industrial coatings business to a newly formed, newly capitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limited liability company (“LMC”), and LMC assumed substantially all of the liabilities of the coatings business, in which we hold a 69.25% ownership interest.  In conjunction to the transfer, LMC entered into an employment agreement with Mr. Buffington as its President and Chief Executive Officer.  The employment agreement has an initial 5-year term (“Initial Term”), provides for an annual base salary of $250,000 per year with an opportunity for an annual performance bonus of up to 50% of his salary based on meeting certain target goals.  In addition, Mr. Buffington has a 10% ownership in LMC which vests evenly over five years.  Mr. Buffington’s employment will terminate upon the earlier of his death, resignation, disability, or termination by the board of directors for any reason, provided that if his employment is terminated without cause, he will continue to receive the Employee’s base salary (as then in effect) through the later of one year after the date of the termination or the end of the Initial Term.

 

45



Table of Contents

 

He will also forfeit the unvested portion of his interest in LMC if he terminates prior to the completion of his five years of employment with LMC.  On August 5, 2010, Mr. Buffington ceased to serve as the Company’s President and Chief Executive Officer, although Mr. Buffington will continue to serve as the Chief Executive Officer of LMC.

 

Tony Chung, who was elected as our Chief Financial Officer on December 1, 2008, receives a base salary of $160,000.  In connection with the commencement of his employment, Mr. Chung was granted an option to purchase up to 200,000 shares of Company common stock under the Company’s 2002 Equity Incentive plan. The option was granted at an exercise price equal to $0.09 per share, which was the fair market value of the Company’s common stock on the option grant date, and the option vests to the extent of 40,000 shares on each anniversary of the option grant date beginning in 2009.  We and Mr. Chung have not entered into an employment agreement relating to Mr. Chung’s employment with us, but we may determine to do so in the future.

 

Ricardo Salas, who previously served as our Chief Executive Officer and President from December 30, 2005 through October 8, 2006, began serving as our Executive Vice President on December 1, 2008.  Mr. Salas will receive an initial base salary of $240,000.  We and Mr. Salas have not entered into an employment agreement relating to Mr. Salas’ employment with us, but we may determine to do so in the future.

 

401(k) Savings Plan

 

We have adopted a tax-qualified employee savings and retirement plan, or 401(k) plan that covers all of our employees. Pursuant to our 401(k) plan, participants may elect to reduce their current compensation, on a pre-tax basis, by up to 15% of their taxable compensation or of the statutorily prescribed annual limit, whichever is lower, and have the amount of the reduction contributed to the 401(k) plan. The 401(k) plan permits us, in our sole discretion, to make additional employer contributions to the 401(k) plan. However, we do not currently make employer contributions to the 401(k) plan and may not do so in the future. As such, contributions by employees or by us to the 401(k) plan, and the income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) plan, and we can deduct our contributions, if any, at the time they are made.

 

Pension Benefits

 

We do not sponsor any qualified or non-qualified defined benefit plans.

 

Nonqualified Deferred Compensation

 

We do not maintain any non-qualified defined contribution or deferred compensation plans. The compensation committee, which is comprised solely of “outside directors” as defined for purposes of Section 162(m) of the Code, may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the compensation committee determines that doing so is in our best interests. We sponsor a tax qualified defined contribution 401(k) savings plan.

 

46



Table of Contents

 

Potential Payments upon Termination or Change in Control

 

Potential payments payable to our executive officers upon termination of employment following a change in control of us is discussed under “—Employment Agreements”. The compensation committee of our board of directors may, at their discretion, amend or add benefits to these arrangements as they deem advisable.

 

The table below presents estimate presents estimates of the amounts of compensation payable to each named executive officer upon a change in control and termination of the executive.  The amounts shown assume that such a change in control and termination were both effective as of December 31, 2009.  The actual amounts to be paid can only be determined at the time of a change in control or executive’s termination.

 

 

 

Larry Buffington

 

Tony Chung

 

Ricardo Salas

 

Benefit

 

Change
in
Control

 

Termination

 

Change in
Control

 

Termination

 

Change in
Control

 

Termination

 

UNEARNED COMPENSATION (payment contingent on termination)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Severance (a)

 

 

$

896,000

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Unexercisable Options

 

 

 

 

 

 

 

Benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

Health

 

 

$

11,593

 

 

 

 

 

Total

 

 

$

907,593

 

 

 

 

 

 


(a)          For Mr. Buffington, reflects approximately 3.6 times his annual base pay for a termination.  Mr. Buffington will receive annual base salary through the later of one year or his initial 5 year term.  For Mr. Kang, reflects two times his annual base pay for a change of control or termination.

 

Director Compensation

 

The following table sets forth information regarding the compensation received by each of our directors during the year ended December 31, 2009;

 

Name

 

Fees
Earned or
Paid in
Cash

 

Stock
Awards

 

Option
Awards
(1)

 

Non-Equity
Incentive Plan
Compensation

 

Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings

 

All Other
Compensation

 

Total

 

Abdi Mahamedi

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Martin Weinstein

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert Biehl

 

$

48,000

(2)

 

$

28,676

(3)

 

 

 

$

76,676

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Iraj Azarm

 

 

 

 

 

 

 

 

 


(1)                                  Amount represent the fair value of stock options granted in 2009 under FASB ASC Topic 718 as discussed in Note 12, “Stock Compensation Plan”, to our consolidated financial statements included in this report on Form 10K.

 

(2)                                  Amount of fees earned were reinvested into the Company as preferred stocks under a private placement of convertible notes in May, 2009 as discussed in Note 10, “Notes Payable” and Note 19, “Related Party Transactions”, to our consolidated financial statements included in this report on Form 10K.

 

(3)                                  551,041 shares of options were outstanding as of December 31, 2009.  Amount includes fair value of stock options issued for consulting services provided during 2009 totaling $27,509.

 

47



Table of Contents

 

Our non-employee directors are entitled to receive certain compensation for their services and are reimbursed for expenses incurred in attending board and committee meetings, as determined by the board of directors.

 

We also have a 2002 Non-Employee Director Stock Option Plan pursuant to which our non-employee directors are entitled to receive stock options.  All options granted under the plan have an exercise price equal to the fair market value of our common stock on the date of the grant.  These stock options have a 10-year term, vest, and are exercisable pursuant to an equal 5-year vesting schedule, and remain exercisable for certain periods of time after a person is no longer a director.

 

No director who is an employee will receive separate compensation for services rendered as a director.  However, our employee directors are eligible to participate in our 2002 Equity Incentive Plan.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth certain information regarding the beneficial ownership of our common stock as of April 9, 2010 by:

 

·                  each person known by us to be a beneficial owner of more than 5.0% of our outstanding common stock;

·                  each of our directors;

·                  each of our named executive officers; and

·                  all directors and executive officers as a group.

 

The number and percentage of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire beneficial ownership of within 60 days of April 9, 2010 through the exercise of any stock option or other right. Unless otherwise indicated in the footnotes, each person has sole voting and investment power with respect to the shares shown as beneficially owned. A total of 47,583,102 shares of our common stock were issued and outstanding as of April 9, 2010.  Unless otherwise indicated, the address of all directors and named executive officers is 30452 Esperanza, Rancho Santa Margarita, CA 92688.

 

Name of Beneficial Owner

 

Amount and
Nature of
Beneficial
Ownership

 

Percent of Class

 

5% Stockholders

 

 

 

 

 

Carlyle Liquid Holdings, LLC
2 Gannett Drive, Suite 201
White Plains, NY 10604

 

67,798,048

 

58.8

%

Carlyle Liquid, LLC
2 Gannett Drive, Suite 201
White Plains, NY 10604

 

15,941,309

 

25.1