UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to

Commission File No 001-31332
 

 
LIQUIDMETAL TECHNOLOGIES, INC.
 ( Exact name of Registrant as specified in its charter )
 
Delaware
 
33-0264467
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
30452 Esperanza
Rancho Santa Margarita, CA 92688
(Address of principal executive office, zip code)
 
Registrant’s telephone number, including area code: (949) 635-2100  

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   ¨

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    ¨    No  ¨

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.
 
Large accelerated filer  ¨
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes    ¨     No   x
 
The number of common shares outstanding as of November 4, 2010 was 84,849,172.

 
 

 

LIQUIDMETAL TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2010

FORWARD-LOOKING INFORMATION
 
Statements in this report concerning the future sales, expenses, profitability, financial resources, product mix, market demand, product development and other statements in this report concerning the future results of operations, financial condition and business of Liquidmetal Technologies, Inc. are "forward-looking" statements as defined in the Securities Act of 1933 and the  Securities Exchange Act of 1934. Investors are cautioned that the Company's actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company's operations and business environment, including competition, the need for increased acceptance of products, our ability to continue to develop and extend our brand identity, our ability to anticipate and adapt to a competitive market, ability to effectively manage rapidly expanding operations, the amount and timing of operating costs and capital expenditures relating to expansion of our business, our operations and infrastructure, our ability to provide superior customer service, our dependence upon key personnel and the like. The Company's most recent filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2009, contain additional information concerning many of these risk factors, and copies of these filings are available from the Company upon request and without charge.

 
2

 

TABLE OF CONTENTS

PART I - Financial Information
 
   
Item 1 – Financial Statements
4
Condensed Consolidated Balance Sheets (unaudited)
4
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)
5
Condensed Consolidated Statements of Shareholders’ Deficiency (unaudited)
  6
Condensed Consolidated Statements of Cash Flows (unaudited)
7
Notes to Condensed Consolidated Financial Statements (unaudited)
9
   
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
   
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
28
   
Item 4 – Controls and Procedures
28
   
PART II – Other Information
 
   
Item 1 – Legal Proceedings
29
   
Item 1A – Risk Factors
29
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
29
   
Item 3 – Defaults Upon Senior Securities
29
   
Item 4 – Removed and Reserved
29
   
Item 5 – Other Information
29
   
Item 6 – Exhibits
29
   
Signatures
31
 
 
3

 

PART I
FINANCIAL INFORMATION
Item 1 – Financial Statements

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(unaudited)
       
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 3,157     $ 151  
Trade accounts receivables, net of allowance for doubtful accounts of $0 and $1,314
    1,142       1,180  
Inventories
    948       982  
Prepaid expenses and other current assets
    731       594  
Total current assets
    5,978       2,907  
                 
Property, plant and equipment, net
    5,168       5,668  
Other intangibles, net
    1,156       1,232  
Other assets
    390       633  
Total assets
    12,692       10,440  
                 
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
    6,452       9,111  
Deferred revenue
    39       31  
Short-term debt
    415       896  
Long-term debt, current portion
    -       1,393  
Warrant liabilities
    26,786       3,975  
Conversion feature liabilities
    -       444  
Other liabilities, current portion
    133       141  
Total current liabilities
    33,825       15,991  
                 
Long-term debt, net of current portion
    9,850       12,661  
Other long-term liabilities, net of current portion
    647       155  
Total liabilities
    44,322       28,807  
                 
Shareholders' deficiency:
               
Liquidmetal Technologies, Inc. shareholders' deficiency
               
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 2,486,095 and 3,183,663 shares issued and outstanding as of both September 30, 2010 and December 31, 2009
    3       4  
Common stock, $0.001 par value; 300,000,000 shares authorized; 84,763,338 and 47,583,102 shares issued and outstanding as of both September 30, 2010 and December 31, 2009
    79       48  
Additional paid-in capital
    147,120       142,135  
Accumulated deficit
    (180,827 )     (162,777 )
Accumulated other comprehensive income
    1,442       1,441  
Total Liquidmetal Technologies, Inc. shareholders' deficiency
    (32,183 )     (19,149 )
Noncontrolling interest
    553       782  
Total shareholders' deficiency
    (31,630 )     (18,367 )
                 
Total liabilities and shareholders' deficiency
  $ 12,692     $ 10,440  

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

 
4

 


LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenue
  $ 17,309     $ 4,209     $ 22,213     $ 11,320  
Cost of sales
    1,604       2,909       5,376       6,945  
                                 
Gross profit
    15,705       1,300       16,837       4,375  
                                 
Operating expenses
                               
Selling, general, and administrative
    2,444       1,341       5,088       4,286  
Research and development
    331       349       804       897  
Total operating expenses
    2,775       1,690       5,892       5,183  
                                 
Income (loss) from operations
    12,930       (390 )     10,945       (808 )
                                 
Loss from extinguishment of debt
    -       -       -       (1,471 )
Change in value of warrants, (loss) gain
    (27,199 )     2,015       (24,361 )     8,138  
Change in value of conversion feature, gain
    15       474       444       1,434  
Other income
    18       -       81       -  
Interest expense
    (2,504 )     (1,055 )     (5,053 )     (4,760 )
                                 
Net (loss) income before income taxes
    (16,740 )     1,044       (17,944 )     2,533  
                                 
Income taxes
    -       (75 )     -       (120 )
                                 
Net (loss) income
    (16,740 )     969       (17,944 )     2,413  
                                 
Net loss attributable to noncontrolling interest
    114       39       250       59  
                                 
Net (loss) income attributable to Liquidmetal Technologies, Inc.
    (16,626 )     1,008       (17,694 )     2,472  
                                 
Other comprehensive (loss) income:
                               
Foreign exchange translation gain
    108       393       1       316  
Comprehensive (loss) income
  $ (16,518 )   $ 1,401     $ (17,693 )   $ 2,788  
                                 
Per common share basic and diluted:
                               
Net (loss) income attributable to
Liquidmetal Technologies, Inc. - basic
  $ (0.23 )   $ 0.02     $ (0.31 )   $ 0.05  
Net (loss) income attributable to
Liquidmetal Technologies, Inc. - diluted
  $ (0.23 )   $ 0.01     $ (0.31 )   $ 0.01  
                                 
Number of weighted average shares - basic
    72,928       46,595       56,329       45,610  
Number of weighted average shares - diluted
    72,928       192,404       56,329       191,418  

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

5

 
LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
For the Nine Months Ended September 30, 2010
(in thousands, except per share data)
(unaudited)

   
Liquidmetal Technologies, Inc.
             
   
Preferred
Shares
   
Common
Shares
   
Preferred
Stock
   
Common
Stock
   
Additional
Paid-in
Capital
   
Accumulated
Deficit
   
Accumulated
Other
Compre-
hensive
Income (Loss)
   
Non-
controlling
Interest
   
Total
 
                                                       
Balance, December 31, 2009
    3,183,663       47,583,102       4       48       142,135       (162,777 )     1,441       782       (18,367 )
Conversion of preferred stocks
    (697,568 )     17,219,681       (1 )     17       (16 )     -       -       -       -  
Conversion of warrants
    -       4,849,775       -       5       2,547       -       -       -       2,552  
Restricted shares issued
    -       13,870,307       -       8       2,038       -       -       -       2,046  
Common stock issued in lieu of cash
    -       907,141       -       1       116       -       -       -       117  
Conversion of notes payable
    -       333,332       -       -       200       -       -       -       200  
Dividends
    -       -       -       -       -       (356 )     -       -       (356 )
Minority interest contribution in a subsidiary
    -       -       -       -       -       -       -       21       21  
Stock-based compensation
    -       -       -       -       100       -       -       -       100  
Foreign exchange translation gain (loss)
    -       -       -       -       -       -       1       -       1  
Net ( loss)
    -       -       -       -       -       (17,694 )     -       (250 )     (17,944 )
Balance, September 30, 2010
    2,486,095       84,763,338       3       79       147,120       (180,827 )     1,442       553       (31,630 )
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
6

 

LIQUIDMETAL TECHNOLOGIES, INC.  AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
 (unaudited)

   
For the Nine Months Ended
September 30,
 
   
2010
   
2009
 
             
Operating activities:
           
Net (loss) income attributable to Liquidmetal Technologies, Inc.
  $ (17,694 )   $ 2,472  
                 
Adjustments to reconcile loss (income) from operations to net cash provided for (used in) operating activities:
               
Gain on disposal of asset
    51       -  
Loss attributable to noncontrolling interest of consolidated subsidiary
    (250 )     (59 )
Depreciation and amortization
    868       772  
Loss on extinguishment of debt
    -       1,471  
Amortization of debt discount
    3,522       2,633  
Stock-based compensation
    101       262  
Bad debt expense
    61       29  
Warranty recovery
    (176 )     (92 )
Loss (gain) from change in value of warrants
    24,361       (8,138 )
Gain from change in value of conversion feature
    (444 )     (1,434 )
                 
Changes in operating assets and liabilities:
               
Trade accounts receivable
    (22 )     (142 )
Inventories
    35       (292 )
Prepaid expenses and other current assets
    (137 )     (240 )
Other assets
    (52 )     (306 )
Accounts payable and accrued expenses
    (2,018 )     1,213  
Deferred revenue
    8       11  
Other liabilities
    485       (14 )
Net cash provided by (used in) operating activities
    8,699       (1,854 )
                 
Investing Activities:
               
Purchases of property and equipment
    (190 )     (412 )
Investment in patents and trademarks
    (29 )     (277 )
Net cash used in investing activities
    (219 )     (689 )
                 
Financing Activities:
               
Proceeds from borrowings
    9,563       13,747  
Repayment of borrowings
    (17,274 )     (26,520 )
Proceeds from issuance of convertible preferred stocks
    -       15,328  
Proceeds from issuance of comon stocks
    2,046       -  
Warrants exercised
    1,002       -  
Cash distributions
    -       (9 )
Minority interest in subsidiary's joint venture
    21       -  
Net cash (used in) provided by financing activities
    (4,642 )     2,546  
Effect of foreign exchange translation
    (832 )     (39 )
Net increase (decrease) in cash and cash equivalents
    3,006       (36 )
                 
Cash and cash equivalents at beginning of period
    151       157  
Cash and cash equivalents at end of period
  $ 3,157     $ 121  

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

7

 
LIQUIDMETAL TECHNOLOGIES, INC.  AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(in thousands, except per share data)
 (unaudited)

During the nine months ended September 30, 2010, $200 of the Company’s 8% Senior Convertible Notes due January 2011 was converted into 333,332 shares of the Company’s common stock at a conversion price of $0.60 per share.
 
8

 
LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

1.  Basis of Presentation / Description of Business

The accompanying condensed balance sheet as of December 31, 2009, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.  All intercompany balances and transactions have been eliminated.  Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for any future periods or the year ending December 31, 2010.  The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's Form 10-K filed with the Securities and Exchange Commission on August 20, 2010.

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

The Company classifies operations into two reportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys (see Note 10). Liquidmetal alloy industrial coatings are used primarily as a protective coating for industrial machinery and equipment, such as drill pipes used by the oil drilling industry and boiler tubes used by coal-burning power plants. Bulk Liquidmetal alloys include potential market opportunities to manufacture and sell products and components for electronic devices, medical devices, defense applications, and sporting goods.  In addition, the bulk Liquidmetal alloys segment includes tooling and prototype sampling.  Furthermore, such alloys are used to generate research and development services revenue for developing uses related primarily to defense and medical applications as well as potential license fees, royalties, and other compensation from strategic partnering transactions.

In July 2007, the Company 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 assets and 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.  The Company initially held a 69.25% ownership interest in LMC, however, during 2010, LMC failed to redeem its preferred units by the specified time and was required to issue additional shares to its noteholders. (See Note 9)  As a result, the Company’s ownership interest in LMC decreased to 66.56%.  The results of operation of LMC are consolidated and comprise our Liquidmetal alloy industrial coatings segment for financial reporting purposes.

In May 2010, LMC entered into a joint venture agreement with IMCO Alloys Private Limited (“IMCO”) to create a subsidiary named Liquidmetal Coatings Solutions India Private Limited (“LMCSI”) and engage in application services of Liquidmetal products as a protective coating.  Initially, under the joint venture agreement, LMC held 80% and IMCO held 20% of the outstanding Class A Shares of LMCSI.  LMC may, at its option, subscribe to Class B Shares of the Company.  In September 2010, LMC provided approximately $80 in capital equipment and was issued 358,204 Class B Shares of LMCSI.  As a result, LMC holds 88.6% and IMCO holds 11.4% ownership interest in LMCSI as of September 30, 2010.

 
9

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

2.  Basis of Presentation and Recent Accounting Pronouncements
 
Translation of Foreign Currency
 
The Company applies Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 830 , Foreign Currency, for translating foreign currency into US dollars in our consolidation of the financial statements.  Upon consolidation of the Company’s foreign subsidiaries into the Company’s consolidated financial statements, any balances with the subsidiaries denominated in the foreign currency are translated at the exchange rate at period-end. The financial statements of Liquidmetal Technologies Korea have been translated based upon Korean Won as the functional currency. Liquidmetal Technologies Korea’s assets and liabilities were translated using the exchange rate at period end and income and expense items were translated at the average exchange rate for the reporting period. The resulting translation adjustment was included in other comprehensive (loss) income.
 
Recent Accounting Pronouncements
 
In January 2010, the FASB issued new authoritative guidance to require additional disclosures for fair value measurements including the following: (1) amounts transferred in and out of Level 1 and 2 fair value measurements, which is effective for interim and annual reporting periods beginning after December 15, 2009 (“Part I”), and (2) activities in Level 3 fair value measurements including purchases, sales, issuances and settlements, which is effective for interim and annual reporting periods beginning after December 15, 2010 (“Part II”). The Company adopted Part I of the revised guidance for fair value measurements disclosures, which did not have a significant effect on our unaudited Condensed Consolidated Financial Statements as of the beginning of fiscal 2010 .

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.

3.  Liquidity

The Company has experienced losses from continuing operations during the last three fiscal years and has an accumulated deficit of $180,827 as of September 30, 2010.  Cash provided by operations for the nine months ended September 30, 2010 was $8,699.  As of September 30, 2010, the Company’s principal source of liquidity is $3,157 of cash and $1,142 of trade accounts receivable. 
 
On May 1, 2009, the Company completed a financing transaction (the “Transaction”) whereby aggregate cash of $2,500 and principal and accrued interest of $20,625 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 $7,500 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, among the exchanging note holders and investors.  On August 5, 2010, the Company repaid in full all principal and interest on the January 2011 Notes.  All security interests in Company assets securing such obligations under the January 2011 Notes were released and terminated.  (See Note 7)

On May 28, 2010, the Company issued $2,000 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.  On August 5, 2010, the Company repaid in full all principal and accrued interest of $2,046 on the January 2011 Subordinated Note.  In connection with the repayment, on August 10, 2010, the Company entered into a Subscription Agreement pursuant to which the Company issued 7,870,307 shares of the Company’s common stock to the noteholder for an aggregate price of $2,046. (See Note 7)

On August 5, 2010, the Company entered into a licensing agreement with Apple Inc. (“Apple”) pursuant to which (i) the Company contributed substantially all of its intellectual property assets to a newly organized special-purpose, wholly-owned subsidiary, called Crucible Intellectual Property (“CIP”), (ii) CIP granted to Apple a perpetual, worldwide, fully-paid, exclusive license to commercialize such intellectual property in the field of consumer electronic products in exchange for a license fee, and (iii) CIP granted back to the Company a perpetual, worldwide, fully-paid, exclusive license to commercialize such intellectual property in all other fields of use.  Upon closing of the foregoing transaction, the Company was paid a portion of the license fee which was used to pay off noteholders and fund operations.   90 days after the closing date and upon completion of certain support milestones, the Company shall be paid the remaining portion of the license fee.

 
10

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

As of September 30, 2010, the Company has outstanding liens on assets of its South Korean subsidiary by various creditors in South Korea for past-due trade payables totaling $2,175, which are held by creditors in South Korea, as of September 30, 2010.  The Company is currently working to resolve the matter with each creditor   by seeking a forbearance or compromise.  If it cannot repay the amounts due or obtain forbearance or compromise, the creditors may seek to foreclose on the Company’s assets located in Korea.

4.  Fair Value of Financial Instruments

The fair value of cash and cash equivalents and trade receivables approximates its carrying value due to its short maturity.  The estimated fair value of long-term debt was determined by discounting future cash flows using rates currently available to us for debt with similar terms and remaining maturities.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value based upon the following fair value hierarchy:

Level 1 —
Quoted prices in active markets for identical assets or liabilities;
   
Level 2 —
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
   
Level 3 —
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009:

   
Level
   
September, 2010
   
December 31, 2009
 
Warrant Liabilities
 
2
    $ 26,786     $ 3,975  
Conversion Feature Liabilities
 
2
    $ -     $ 444  

The warrant liabilities and conversion feature liabilities are recorded at fair value based on upon valuation models with utilize relevant factors such as expected life, volatility of the Company’s stock prices, risk free interest and dividend rate.

The Company calculated that the estimated fair value of the long term debt is not significantly different than the carrying value of the debt.

5.  Inventories

Inventories are accounted for using the moving average basis and at standard cost, which approximate cost on a first-in, first-out basis and are valued at the lower of cost or market.  Inventories were comprised of the following:

 
11

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
             
Raw materials
  $ 632     $ 675  
Work in process
    88       94  
Finished goods
    228       213  
Total inventories
  $ 948     $ 982  

6.  Product Warranty

Management estimates product warranties as a percentage of certain bulk alloy product sales earned during the period.  As of September 30, 2010, the Company used 5% of bulk alloy product sales as an estimate of warranties to be claimed.  The percentage is based on industry averages and historical information.  Additionally, as of September 30, 2010 the Company used 1% of coatings applications sales as estimates of warranties to be claimed.

During the three and nine months ended September 30, 2010, the Company recorded $28 and $176 of net gain on warranty, respectively. During the three and nine months ended September 30, 2009, the Company recorded $0 and $92 of net gain on warranty, respectively.  The warranty accrual balance is included in accounts payable and accrued expenses.

7.  Notes Payable

Unsecured Subordinated Notes

On May 17, 2006, September 21, 2006, and December 1, 2006, the Company issued 8% Unsecured Subordinated Notes due August 2007 in the aggregate principal amount of $4,584 (the “August 2007 Subordinated Notes”).  The August 2007 Subordinated Notes are unsecured and became due August 2007, of which $3,575 were retired during 2007 and 2008.  During 2009, the Company retired $750 of the August 2007 Subordinated Notes, and on August 5, 2010, the Company retired the remaining $259 of the August 2007 Subordinated Notes.

Interest expense for the August 2007 Subordinated Notes were $2 and $55 for the three and nine months ended September 30, 2010, respectively.  Interest expense for the August 2007 Subordinated notes were $5 and $41 for the three and nine months ended September 30, 2009, respectively.  As of September 30, 2010 and December 31, 2009, the Company’s gross outstanding loan balance of the August 2007 Subordinated Notes totaled $0 and $259, respectively, and was included in current portion of long-term debt.

On May 28, 2010, the Company issued $2,000 of 13% Subordinated Promissory Note (“the 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.  On August 5, 2010, the Company repaid in full all principal and accrued interest of $2,046 on the January 2011 Subordinated Note.  In connection with the repayment, on August 10, 2010, the Company 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 $2,046.
 
Secured Convertible Subordinated Notes

During 2007, 2008, and 2009, the Company issued 8% Convertible Subordinated Notes due January 2010 in the aggregate principal amount of $17, 300 (The “January 2010 Notes”) and an additional aggregate amount of $3,009 for accrued interest. On May 1, 2009, the January 2010 Notes were retired as part of a financing transaction (see “Senior Secured Convertible Notes” below).

 
12

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

The Company’s gross outstanding loan balance of the January 2010 Notes totaled $0 as of both September 30, 2010 and December 31, 2009.  As of both September 30, 2010 and December 31, 2009, un-amortized discounts for conversion feature, warrants, and cash discount totaled $0, and other asset debt issuance costs totaled $0.  Interest expense for the amortization of debt issuance cost and discount on note was $0 for both the three and nine months ended September 30, 2010.  Interest expense for the amortization of debt issuance cost and discount on note was $0 and $1,816 for the three and nine months ended September 30, 2009, respectively.

Pursuant to FASB ASC 815 , Derivatives and Hedging, the Company is required to report a value of the conversion liability as a fair value and record the fluctuation to the fair value of the conversion feature liability to current operations.  The change in the fair value of the conversion feature liability resulted in gains of $0 for both the three and nine months ended September 30, 2010, respectively.  The change in the fair value of the conversion feature liability resulted in losses of $0 and $1,137 for three and nine months ended September 30, 2009, respectively.
 
Senior Secured Convertible Notes
 
On May 1, 2009, the Company completed a financing transaction (the “Transaction”) whereby aggregate cash of $2,500 and principal and accrued interest of $20,625 due under the previously issued 8% Convertible Subordinated Notes due January 2010 (the “January 2010 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 $7,500 of new 8% Senior Secured Convertible Notes due January 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 redemption of the previously issued January 2010 Notes was treated as an extinguishment of debt in accordance with Emerging Issues Task Force No. 96-19, “Debtors Accounting for a Modification or Exchange of Debt Instruments.”  The Transaction resulted in a $2,029 loss from extinguishment of debt, which consisted of write down of $503 other asset deferred issue costs, $5,487 debt discount, $1,306 decrease in conversion feature liability of the extinguished notes, $2,347 decrease in warrant liability from the warrants redeemed from holders of the January 2011 Notes, and $308 write off of accrued fees.

The January 2011 Notes were due January 3, 2011 and bear annual interest rate of 8% with interest payable in October and April in cash or, at the Company’s option, in the form of additional notes (in which case the interest rate will be 10%).   In November 1, 2009 and May 1, 2010, the Company issued $378 and $391, respectively, of additional January 2011 Notes for accrued interest due under the notes in lieu of cash payments.  On August 5, 2010, the Company repaid in full all principal and interest on the January 2011 Notes in the amount of $8,242, and all security interest in the company assets securing such obligations under the January 2011 Notes were released and terminated.

The Series A-1 Preferred Stock, Series A-2 Preferred Stock, and January 2011 Notes are convertible into the Company’s common stock at   conversion price of $0.10, $0.22, and $0.60 per common share, respectively.  During the three and nine months ended September 30, 2010 59,000 and 638,568 of the Company’s Series A-2 Preferred Stocks, respectively, were converted into 333,333 and 14,512,909 of the Company’s common stocks, respectively.  The Company issued warrants to purchase 3,125,007 shares and 42,329,407 shares of the 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.  During both the three and nine months ended September 30, 2010, 4,849,775 of warrants were exercised into the Company’s common stocks.  Unexercised warrants will expire on January 3, 2012.  The conversion prices and the number of common stock issuable under the preferred stocks, January 2011 Notes and warrants are subject to adjustments for anti-dilution purposes.   (See Note 14)

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%.  In conjunction with the Series A-1 Preferred Stock conversion during the three months ended September 30, 2010, the Company granted in-kind dividends to the preferred stocks holders, which were simultaneously converted into 1,365,863 of common stocks. As of September 30, 2010, the Company has accrued dividends of $1,063 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 the Company’s Board of Directors.

 
13

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

Pursuant to Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” and EITF 05-2 “The Meaning of ‘Conventional Convertible Debt Instrument’ in EITF Issue No. 00-19,” the original fair value of the embedded conversion feature of $3,367 have been recorded as conversion feature liability as the debt is considered nonconventional convertible debt. The original fair value was computed using the Black-Scholes model under the following assumptions: (1) expected life of 1.68 years; (2) volatility of 176%; (3) risk free interest of 0.92% and dividend rate of 0%. In addition, the Company is required to report a value of the conversion liability as a fair value and record the fluctuation to the fair value of the conversion feature liability to current operations.
 
The change in the fair value of the conversion feature liability resulted in gains of $15 and $444 for the three and nine months ended September 30, 2010, respectively.  The change in the fair value of the conversion feature liability resulted in gains of $474 and $2,572 for the three and nine months ended September 30, 2009, respectively.  The fair value of conversion feature outstanding at September 30, 2010 and December 31, 2009 was $0 and $444, respectively.  The fair value of conversion feature outstanding at December 31, 2009 was computed using the Black-Scholes model under the following assumptions: (1) expected life of 1.01 years; (2) volatility of 152%, (3) risk free interest of 0.5% and dividend rate of 0%.
 
Pursuant to EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the original fair values of the warrants of $14,773 have been recorded as warrant liability, which was computed using the Black-Scholes pricing model under the following assumptions: (1) expected life of 2.67 years; (2) volatility of 176%; (3) risk free interest of 1.39% and (4) dividend rate of 0%. 
 
The original fair value of the embedded conversion feature of $3,367 was recorded as discounts on the convertible notes and the original fair value of the warrants issued to buyers of the January 2011 Notes of $999 was recorded as discounts of the convertible notes. The original fair value of warrants issued to buyers of preferred stocks of $13,774 was recorded as reduction of additional paid-in capital. In addition, the Company incurred $440 of direct costs relating to the Transaction, of which $143 of was recorded as debt issuance cost in other assets relating to issuance of the convertible notes and $297 was recorded as reduction of additional paid-in capital relating to the issuance of the preferred stocks.
 
The Company’s gross outstanding loan balance of the January 2011 Notes totaled $0 and $7,878 as of September 30, 2010 and December 31, 2009, respectively.  As of September 30, 2010 and December 31, 2009, un-amortized discounts for conversion feature and warrants totaled $0 and $3,227, respectively, and other asset debt issuance costs totaled $0 and $104, respectively.   Interest expense for the amortization of debt issuance cost and discount on note was $1,960 and $2,994 for the three and nine months ended September 30, 2010, respectively.  Interest expense for the amortization of debt issuance cost and discount on note was $441 and $696 for the three and nine months ended September 30, 2009, respectively.

Factoring Agreement

The Company entered into a Factoring, Loan, and Security Agreement (the “Agreement”) with a financing company on April 21, 2005.  All borrowings were secured by outstanding receivables specifically assigned to the financing company.  In June 2009, the Company received a formal notice of default from the financing company for repayment of the outstanding loan. On August 5, 2010, the Company terminated the Agreement and repaid in full all principal and interest on the Agreement in the amount of $309.  All security interest in Company assets securing such obligations under the factoring loan were released and terminated.

For the nine months ended September 30, 2010, the Company borrowed $3 and repaid $287 under the Agreement.  The total outstanding advance made under the agreement is $0 and $284 as of September 30, 2010 and December 31, 2009, respectively, which is presented as short-term debt.

 
14

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

Debt of Majority Owned Subsidiary

On July 24, 2007, the Company completed an $11,500 financing transaction (the “Transaction”) that provided funding to repay convertible notes previously issued by the Company that were scheduled to become due in July and August 2007.  In the Transaction, the Company transferred substantially all of the assets of the Company’s Liquidmetal Coatings division 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 division. 

LMC was capitalized through a $6,500 subordinated debt and equity investment by C3 Capital Partners (“C3”) and a $5,000 senior credit facility with Bank Midwest, N.A.  This debt and equity resulted in cash proceeds of $11,102 after related debt issuance costs of $398, which proceeds LMC used to purchase all of the assets and liabilities from the Company.  The Company incurred an additional $459 in issuance costs directly related to the debt issuance.  As a result, $857 was recorded as deferred debt issuance costs to be amortized over the life of the debt.  Interest expense for the amortization of debt issuance cost was $100 and $190 for the three and nine months ended September 30, 2010, respectively.  Interest expense for the amortization of debt issuance cost was $42 and $121 for the three and nine months ended September 30, 2009, respectively.

The Company retains a 66.56% ownership interest in LMC, C3 holds a 22.15% ownership interest, Larry Buffington, the Company’s former President and CEO, (who also serves as the President and CEO of LMC) holds a 9.61% ownership interest, and CRESO Capital Partners (“CRESO”), the Company’s financial advisor in the Transaction, holds a 1.68% ownership interest. The equity interests acquired by C3 and issued to CRESO were not considered a discount to debt, as the unconsolidated net assets of LMC were deemed to have an initial value of $0 upon closing of the Transaction for financial accounting purposes.  Further, LMC is fully responsible for the repayment of debt obligations.

Midwest Debt

In connection with the Transaction, LMC entered into a Loan Agreement (the “Loan Agreement”), dated July 24, 2007, with Bank Midwest, N.A. (“Midwest”).  Following the Transaction, the Loan Agreement has been amended to renew and modify certain terms. The Loan Agreement, as amended on October 6, 2009 (the “Loan Amendment”), provided for total loan availability of $5,025, consisting of a $4,000 term loan and a revolving loan of up to $1,025 based on a percentage of LMC’s eligible receivable and inventory.  The Loan Amendment adjusted, among other terms, the interest rate of all outstanding loans to a fixed rate of 9%, certain financial covenants under the Loan Agreement, maturity date of the revolving loan through June 30, 2010 with monthly interest payments, and required an immediate repayment of $325 of the term loan and $325 of the revolving loan.  The members of the Liquidmetal Coatings, LLC (the “Members”) were required to contribute $650 in equity to repay the amounts due under the Loan Agreement (the “Capital Call”).  On October 6, 2009, the Company paid $450 which represented its portion of the Capital Call and the remaining Members paid $200.  As a result of the payment, the monthly amortization payments due under the term loan were reduced to $47 and the maturity date was extended to September 30, 2012.  In connection with the Loan Amendment, the Company borrowed $450 from C3 Capital Partners (“C3”) to contribute its share of the Capital Call pursuant to a bridge loan agreement with C3 and subsequently paid down the bridge loan in November 2009.

Additionally, LMC entered into Promissory Notes, dated August 29, 2007 and October 21, 2008 (the “Capital Loan”), with Midwest to provide for $45 and $105 to be used towards the purchase of a company truck and HVOF spray equipment with annual interest rates of 7.43% and 8.25%, respectively.  The Capital Loan had maturity dates of September 1, 2012 and November 1, 2013.

On June 25, 2010 LMC entered into a Credit Agreement with Enterprise Bank & Trust and retired all of its loan agreements with Midwest (see “ Enterprise Debt” below).

 
15

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

As of September 30, 2010 and December 31, 2009, the gross outstanding loan balance under the Midwest term loan totaled $0 and $1,430, respectively, and the gross outstanding loan balance under the Midwest revolving loan totaled $0 and $307, respectively. The loans are presented as long-term debt and short-term debt on the Company’s consolidated balance sheet, respectively.  Interest expense incurred under the term loan and revolving loan totaled $0 and $66 for the three and nine months ended September 30, 2010, respectively.   Interest expense incurred under the term loan and revolving loan totaled $54 and $177 for the three and nine months ended September 30, 2009, respectively.   As of September 30, 2010 and December 31, 2009, the gross outstanding loan balance under the Capital Loan totaled $0 and $102, respectively, which is presented as long-term debt on the Company’s consolidated balance sheet.  Interest expense incurred under the Capital Loan totaled $0 and $4 for the three and nine months ended September 30, 2010, respectively.  Interest expense incurred under the Capital Loan totaled $2 and $7 for the three and nine months ended September 30, 2009, respectively.
 
Enterprise Debt
 
On June 25, 2010, LMC entered into a Credit Agreement (“Credit Agreement”) with Enterprise Bank & Trust (“Enterprise”).  The Credit Agreement provides for a total loan availability of $3,700, consisting of $1,500 term loan (“Term Note”), a revolving loan of up to $2,000 (“Revolving Note”), and equipment loans (“Equipment Note”) of up to $200.  The Term Note of $1,500 has a maturity date of June 25, 2013 and bears an interest rate of 7% per annum.  LMC is required to make monthly payments of principal and interest under the Term Note, with monthly payments of (i) $50 during months 1 through 12, (ii) $42 during months 13 through 24 and (iii) $33 during months 25 through 36.  All remaining principal and interest shall be due and payable upon the maturity date
 
Borrowing availability under the Revolving Note is based on a percentage of LMC’s eligible receivables and inventory and accrues interest at the rate of the greater of libor plus 3.75% or 6%.  LMC will make monthly interest payments on the Revolving Note until June 24, 2011, at which point all remaining principal and interests are due.  LMC has the right to prepay the Term Note and the Revolving Note and the Equipment Note, in whole or in part, at any time without penalty or premium.
 
The Credit Agreement is secured by a blanket security interest in all of the LMC’s assets.  Pursuant to a subordination agreement between C3 Capital Partners, L.P., C3 Capital Partners II, L.P. (collectively the “C3 Entities”) and Enterprise, Enterprise’s security interest in the assets is senior to the C3 Entities’ security interest in the same assets.
 
As of September 30, 2010 and December 31, 2009, the gross outstanding loan balance under the Enterprise Term Note totaled $1,400 and $0, respectively, and the gross outstanding loan balance under the Enterprise Revolving Note totaled $415 and $0, respectively. The Term Note and the Revolving Note are presented as long-term debt and short-term debt on the Company’s consolidated balance sheet, respectively.
 
C3 Debt
 
In the Transaction, LMC also entered into a Securities Purchase Agreement, dated July 24, 2007 (the “Securities Purchase Agreement”), with C3 Capital Partners, L.P. (“C3”), C3 Capital Partners II, L.P. (“C3 II”, and with C3, the “C3 entities”), and Liquidmetal Coatings Solutions, LLC, a wholly owned subsidiary of LMC that will operate the thermal spray coatings business (“LMCS”).  Pursuant to the Securities Purchase Agreement, LMC issued to the C3 entities subordinated promissory notes in the aggregate principal amount of $6,500 (the “Subordinated Notes”). Under the Securities Purchase Agreement, the C3 entities have the right, beginning on the July 24, 2012 (or, if earlier, upon a default by LMC under the Subordinated Notes or Securities Purchase Agreement) to require LMC to purchase the C3 entities’ membership interests in LMC for a purchase price equal to their pro rata portion of the greater of (i) the appraised fair market value of LMC or (ii) six times LMC’s trailing 12-month earnings before interest, taxes, depreciation, and amortization, less funded debt.

The Subordinated Notes have a maturity date of July 20, 2012 with no required principal payments before maturity other than upon specified triggering events, such as a change in control of LMC.  Interest accrues at an annual rate of 14%, with 12% interest being payable monthly beginning September 2007 and the remaining 2% interest being payable at maturity.  In connection with the Securities Purchase Agreement and the Subordinated Notes, the Company and LMC entered into pledge agreements with the C3 entities in which the Company pledged its membership interest in LMC to secure the obligations under the notes and LMC pledged its membership interests in LMCS to secure its obligations under the notes.  LMC and LMCS also granted to C3 a blanket security interest in all of their assets to secure their obligations under the Subordinated Notes.

 
16

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)
 
The gross outstanding loan balance including accrued interest payable upon maturity of the Subordinated Note totaled $8,450 and $7,613 as of September 30, 2010 and December 31, 2009, respectively.  Interest expense incurred under the Subordinated Notes totaled $248 and $718 for the three and nine months ended September 30, 2010, respectively.  Interest expense incurred under the Subordinated Notes totaled $203 and $606 for the three and nine months ended September 30, 2009, respectively.
 
8.  Stock Compensation Plan

During the nine months ended September 30, 2010, there were no options granted under the Company’s 2002 Non-employee Director Stock Option Plan which provides for the grant of stock options to non-employee directors.  Further, all options granted under this plan had exercise prices that were equal to the fair market value on the date of grant.

During the nine months ended September 30, 2010, under the Company’s 2002 Equity Incentive Plan which provides for the grant of stock options to officers, employees, consultants and directors of the Company its subsidiaries, the Company granted options to purchase 3,080,000 of the Company’s common stock for an average price of $0.12.  Further, all options granted under this plan had exercise prices that were equal to the fair market value on the date of grant.

The Company cancelled 81,130 options during the nine months ended September 30, 2010, for terminated employees and options expired.

On August 3, 2010 (the “Grant Date”), the Company granted 6,000,000 shares of restricted Common Stock to Thomas Steipp, the Company’s President and Chief Executive Officer in conjunction with his employment agreement.  The restricted shares will vest ratably over a period of five years starting with the first anniversary of the Grant Date, provided that Mr. Steipp is continuously employed by the Company from the Grant Date through the applicable vesting date.

9.  Preferred Units of Subsidiary

On February 22, 2008, LMC completed a transaction under which it issued and sold $2,500 in preferred membership units to two minority members of LMC (the “Preferred Units Transaction”).  Immediately following the sale of the preferred membership units, the subscription proceeds (after a 1% transaction fee) were distributed to LMC’s common unit members, and as a result of such distribution, the Company received approximately $1,714 in the distribution.  The preferred units issued by LMC have an accruing priority return of 14% per year that are priority over any distribution made by LMC and may be redeemed at any time within four years of issuance through cash payment or distribution in excess of the 14% priority return.  LMC is required to redeem the preferred units on or before the second anniversary of the issue date and failure to redeem the preferred units at the specified time will result in the preferred unit holders receiving an additional 2% of common membership units (equal to 1,425 of the currently outstanding common units) per quarter until the preferred units are redeemed in full.  As of September 30, 2010, an additional 2,767 membership units have been issued to the preferred unit holders.

As of September 30, 2010, LMC has redeemed $236 of its preferred units and distributed $294 in priority return to the preferred unit holders.  The total preferred units outstanding are $2,264 as of September 30, 2010.

10.  Segment Reporting   and Geographic Information

ASC 280, Segment Reporting, requires companies to provide certain information about their operating segments.  In April 2002, the Company began classifying operations into two reportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings 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 casing components for electronic devices, medical devices, sporting goods, tooling, prototype sampling, defense applications and metal processing equipment.  Primarily, the expenses incurred by the bulk Liquidmetal alloy segment are research and development costs and selling expenses associated with identifying and developing market opportunities.  Bulk Liquidmetal alloys 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 and product licensing arrangements are included in the bulk Liquidmetal alloy segment.  The accounting policies of the reportable segments are the same as those described in Note 3 to the consolidated financial statements included in the Company's Form 10-K filed with the Securities and Exchange Commission on August 20, 2010.

 
17

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

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

   
Coatings
   
Bulk Alloy
   
Segment Totals
 
Three months ended September 30, 2010
                 
Revenue to external customers
  $ 1,839     $ 15,470     $ 17,309  
Gross profit
    671       15,034       15,705  
Total segment (loss) income
    (311 )     14,652       14,341  
Total identifiable assets at end of period
    2,406       6,718       9,124  
                         
Three months ended September 30, 2009
                       
Revenue to external customers
  $ 2,041     $ 2,168     $ 4,209  
Gross profit
    693       607       1,300  
Total segment (loss) income
    (124 )     156       32  
Total identifiable assets at end of period
    2,534       9,137       11,671  
                         
Nine months ended September 30, 2010
                       
Revenue to external customers
  $ 6,383     $ 15,830     $ 22,213  
Gross profit
    2,224       14,613       16,837  
Total segment (loss) income
    (754 )     13,881       13,127  
Total identifiable assets at end of period
    2,406       6,718       9,124  
                         
Nine months ended September 30, 2009
                       
Revenue to external customers
  $ 6,234     $ 5,086     $ 11,320  
Gross profit
    2,198       2,177       4,375  
Total segment (loss) income
    (271 )     1,013       742  
Total identifiable assets at end of period
    2,534       9,137       11,671  

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

 
18

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Total segment income
  $ 14,341     $ 32     $ 13,127     $ 742  
General and administrative expenses, excluded
    (1,755 )     (738 )     (3,132 )     (2,503 )
                                 
Consolidated income (loss) before interest, income taxes, and noncontrolling interests
  $ 12,586     $ (706 )   $ 9,995     $ (1,761 )
                                 
Loss from extinguishment of debt
    -       -       -       (1,471 )
Change in value of warrants, (loss) gain
    (27,199 )     2,015       (24,361 )     8,138  
Change in value of conversion feature, gain
    15       474       444       1,434  
Interest expense
    (2,142 )     (739 )     (4,022 )     (3,807 )
Income taxes
    -       (75 )     -       (120 )
Income attributable to noncontrolling interest
    114       39       250       59  
Consolidated net loss attributable to Liquidmetal Technologies, Inc.
  $ (16,626 )   $ 1,008     $ (17,694 )   $ 2,472  

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

Revenues from sales to companies in the United States were $16,987 and $1,983 during the three months ended September 30, 2010 and 2009, respectively.  The revenue related to the United States of America was earned under defense-related research and development contracts, sales of coatings products, sales of Liquidmetal bulk alloy products and royalties.

During the three months ended September 30, 2010, the Company had revenue from sales to companies outside of the United States of $322.  The revenue related to sales to companies outside of the United States was mostly from coating materials.  During the three months ended September 30, 2009, the Company had revenues from companies outside of the United States of $2,226 of which $1,404 represented sales to companies located in South Korea.  The revenue related to sales to companies outside of the United States was mostly from bulk alloy products.

Long-lived assets include net property, plant, and equipment, and net intangible assets. The Company had long-lived assets of $1,892 and $1,968 located in the United States at September 30, 2010 and December 31, 2009, respectively. The Company had long-lived assets of $4,432 and $4,932 located in South Korea at September 30, 2010 and December 31, 2009, respectively.

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

   
September 30,
 
   
2010
 
       
Total segment assets
  $ 9,124  
Cash and cash equivalents
    3,028  
Prepaid expenses and other current assets
    292  
Other property, plant and equipment
    44  
Intangibles, net
    -  
Other assets
    204  
Total consolidated assets
  $ 12,692  
 
 
19

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)
 
Assets excluded from segment assets include assets attributable to the Company’s corporate headquarters.  The Company’s largest corporate assets consist of intangible assets, which consist primarily of the Company’s patents and trademarks.

11.  Income (Loss) Per Common Share

Basic earnings per share (“EPS”) is computed by dividing earnings (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the periods. Diluted EPS reflects the potential dilution of securities that could share in the earnings.
 
Options to purchase 8,134,126 shares of common stock at prices ranging from $0.09 to $15.00 per share were outstanding at September 30, 2010, but were not included in the computation of diluted EPS for the same period as the inclusion would have been antidilutive.  Warrants to purchase 47,232,459 shares of common stock with prices ranging from $0.48 to $1.75 per share outstanding at September 30, 2010, were not included in the computation of diluted EPS for the same period as the inclusion would have been antidilutive.  75,047,614 shares of common stock issuable upon conversion of the Company’s convertible preferred stocks with conversion prices ranging from $0.10 and $0.22 per share outstanding at September 30, 2010 were not included in the computation of diluted EPS for the same period because the inclusion would have been antidilutive.  Additionally, 12,905,318 shares of common stocks issuable upon conversion of the Company’s convertible preferred stock dividends with conversion prices ranging from $0.10 and $0.22 per share outstanding at September 30, 2010 were not included in the computation of diluted EPS for the same period because the inclusion would have been antidilutive.
 
Pursuant to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the Company is required to report a value of the warrant as a fair value and record the fluctuation to the fair value of the warrant liability to current operations.  The change in the fair value of the warrants resulted in losses of $27,199 and $24,361 for the three and nine months ended September 30, 2010, respectively, and gains of $2,015 and $8,138 for the three and nine months ended September 30, 2009, respectively. The fair value of warrants outstanding at September 30, 2010 of $26,786 was computed using the Black-Scholes model under the following assumptions: (1) expected life of 0.63 to 4.08 years; (2) volatility of 149%, (3) risk free interest of 0.27% to 1.27%, and dividend rate of 0%.  The fair value of warrants outstanding at December 31, 2009 of $3,975 was computed using the Black-Scholes model under the following assumptions: (1) expected life of 0.45 to 4.83 years; (2) volatility of 152%, (3) risk free interest of 0.20% to 2.69%, and dividend rate of 0%.

12.  Commitments and Contingencies

The Company is from time to time a party to certain legal proceedings arising in the ordinary course of business. Although outcomes cannot be predicted with certainty, the Company does not believe that any legal proceeding to which it is a party will have a material adverse effect on the Company’s financial position, results of operations, and cash flows.
 
On June 26, 2006, the Company 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”).  The Company also entered into an exclusive manufacturing license agreement for the eyewear industry with LSI.  Under the joint venture agreement, the Company has the option to buy ownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006, the Company exercised the 19.9% interest in LSI and in January 2007 and June 2007, the Company contributed additional $217 and $86, respectively, into LSI as additional investment.  The contribution did not change the Company’s 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 the Company certain business assets including manufacturing equipment acquired under the joint venture.  During the fourth quarter of the year ended December 31, 2009, the Company wrote-off its investment of $306 in the joint venture due to lower than anticipated growth in the eye wear industry.  On August 6, 2010, SAGA filed a complaint  against the Company claiming damages of $3,200 for payment on an alleged loan and for alleged breach of contract in connection with the formation of LSI.  The Company is in the process of responding to the claim and working with SAGA to resolve the matter.

 
20

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

The Company has outstanding liens on assets by our South Korean subsidiary by various creditors for past-due trade payables totaling $2,175, which are held by creditors in South Korea, as of September 30, 2010.  The Company is currently working to resolve the matter with each creditor   by seeking a forbearance or compromise.  If the Company cannot repay the amounts due or obtain forbearance or compromise, the creditors may seek to foreclose on the Company’s assets located in Korea.

13.  Related Party Transactions

During 2009, John Kang, former Chairman of the Company, advanced the Company $250 to fund working capital needs.  On August 5, 2010, the Company paid off Mr. Kang $63 which represented the amount outstanding as well as 10% accrued interest as of that date.

On August 1, 2010, the Company entered into an agreement with John Kang, former Chairman of the Company, to provide consulting services to the Company through December 31, 2011 and on a month-to-month basis thereafter.  During both the three and nine months ended September 30, 2010, the Company paid $42 for his services.

As of September 30, 2010 and December 31, 2009, Ricardo Salas, the Company’s Director and Executive Vice President, held $0 and $259 of the unsecured subordinated notes, respectively.  Mr. Salas advanced the Company $210 and $175 during 2010 and 2009, respectively, to fund the Company’s working capital needs.  On August 5, 2010, the Company paid off Mr. Salas $408 which represented the amount outstanding as well as 10% accrued interest as of that date.

In October 2009, Mr. Kang, Mr. Salas and Tony Chung, the Company’s Chief Financial Officer, acquired 80,000 shares of the Company’s Series A-1 Preferred Stock and 2,000,000 warrants for an aggregate cash price of $400.  The Series A-1 Preferred Stock are convertible into the Company’s common stock at a conversion price of $0.10 per common share.  Further, the warrants are issuable into the Company’s common stock at an exercise price of $0.50 per share and expire on January 3, 2012.

In May 2009, the Company completed a transaction in which (i) the holders of our 8% Convertible Subordinated Notes exchanged such notes for a combination of new January 2011 Notes and shares of a new series of convertible preferred stock designated “Series A-2 Preferred Stock”, together with warrants thereon, and (ii) certain investors purchased, for an aggregate purchase price of $2,500, shares of a new series of convertible preferred stock designated as “Series A-1 Preferred Stock” (see Note 7).   The lead investors in this transaction were Carlyle Liquid, LLC and Carlyle Liquid Holdings, LLC (the "Carlyle Entities"), which are two investor entities organized by Abdi Mahamedi and Jack Chitayat, former director of the Company.  Mr. Mahamedi became a director and greater-than-5% beneficial owner of the company by reason of the May 2009 transaction, and Mr. Chitayat also became a greater-than-5% beneficial owner of our company by reason of the May 2009 transaction.  Mr. Mahamedi and Mr. Chitayat have shared voting and investment control over the shares held by the Carlyle Entities due to the fact that other entities owned by them are the managing members of these two Carlyle entities.  Additionally, Mr. Iraj Azarm and Mr. Robert Biehl, directors of the Company, are passive investors in the Carlyle Entities.

During the nine months ended September 30, 2010, Mr. Mahamedi and Carlyle Liquid Holdings, LLC advanced the Company $30 and $75, respectively, to fund the Company’s working capital needs.  On August 5, 2010, the Company paid off $31 and $78 to Mr. Mahamedi and Carlyle Liquid Holdings, LLC, respectively, representing the amounts outstanding and 10% accrued interest as of that date.

The Company has an exclusive license agreement with LLPG, Inc. (“LLPG”), a corporation headed by Mr. Chitayat.  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.  The Company, in turn, will receive royalty payments over the life of the contract on all Liquidmetal products produced and sold by LLPG.  The Company recognized revenues from product sales and licensing fees of $0 from LLPG during both the three and nine months ended September 30, 2010.  The Company recognized revenues from product sales and licensing fees of $0 and $203 from LLPG during the three and nine months ended September 30, 2009, respectively.  There are no accounts receivable from LLPG outstanding as of September 30, 2010 and December 31, 2009.  On August 6, 2010, the Company paid $360 to LLPG as a fee related to a modification of its existing exclusive license agreement in connection with the Apple licensing agreement.

 
21

 

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(unaudited)

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

In consideration of the license agreement with LMK, the Company was entitled to royalty of 10% of LMK’s net sales of licensed products (unless LMK’s margin on the products falls below specified levels, in which case a new royalty will be negotiated in good faith).  Effective June 1, 2008, the royalty rate was adjusted to 5%.  On June 15, 2010, the licensing agreement with LMK was terminated.

The Company purchased production supplies and outsourced production of certain bulk alloy production with LMK. In June 2008, the Company began sharing the use of its manufacturing facility and production equipment in Pyongtaek, South Korea, with LMK as the Company began significant outsourcing of its bulk alloy parts production. The Company incurred $0 in expenses for purchase of production supplies and outsourcing fees during both the three and nine months ended September 30, 2010.  The Company incurred expenses for purchase of production supplies and outsourcing fees of $698 and $1,135 during both the three and nine months ended September 30, 2009, respectively.  There are $0 included in accounts payable and accrued expenses for both September 30, 2010 and December 31, 2009 for outstanding trade payables due to LMK.  The Company recognized $0 revenue from sales of raw materials and royalties during both the three and nine months ended September 30, 2010.  The Company recognized $1,652 and $3,775 revenue from sales of raw materials and royalties during the three and nine months ended September 30, 2009, respectively.  There are $0 included in net accounts receivables as of both September 30, 2010 and December 31, 2009, for outstanding trade receivables due from LMK.

14.  Subsequent Event

On November 3, 2010, the Company filed an Amended and Restated Certificate of Designations, Preferences, and Rights (the "Amended Designation") for the Company's Series A Preferred Stock (the "Series A Preferred Stock").  The Amended Designation was approved by the requisite vote of the holders of the Company's Series A Preferred Stock and was filed with the Delaware Secretary of State in accordance with a Consent Agreement entered into between the Company and the holders of 2/3 of the Series A Preferred Stock (the "Consent Agreement").  The Amended Designation amends the terms of the Series A Preferred Stock by (i) providing that dividends ceased accruing thereon as of June 1, 2010, (ii) the liquidation preference and corresponding conversion value on the Series A Preferred Stock was increased from 1.0 to 1.08 of the sum of the issue price and accrued but unpaid dividends, (iii) the Series A Preferred Stock is now mandatorily convertible at any time at the option of the Company without condition, and (iv) the Series A Preferred Stock will no longer have any price-based anti-dilution rights.  The Consent Agreement provided that, in exchange for voting in favor of the Amended Designation, the warrants held by the holders signing the Consent Agreement (to the extent such warrants were issued in connection with the original issuance of the Series A Preferred Stock) will be extended to an expiration date of July 2015 and the price-based anti-dilution rights on such warrants are removed.
 
 
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Item 2 –  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

This management’s discussion and analysis, as well as other sections of this report on Form 10-Q, 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,” “plan,” “seek,” 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 heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and other risks and uncertainties discussed in other 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 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 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 that are incorporated into the finished goods of our customers, and we also market and sell amorphous alloy industrial coatings.  We also partner with third-party licensees and distributors to develop and commercialize Liquidmetal alloy products.  We have the exclusive right to develop, manufacture, and sell what we believe are the only commercially viable bulk amorphous alloys.

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 ordinary metals and alloys when they solidify. Liquidmetal alloys possess a combination of performance, processing, and cost advantages that we believe makes 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 have processing characteristics similar in many respects to plastics. We believe these advantages could result in Liquidmetal alloys supplanting other incumbent materials in a wide variety of applications. Moreover, we believe these advantages will 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, stock-based compensation, travel, consulting and professional fees, depreciation and amortization, insurance, office and administrative expenses, and other expenses related to our operations.
 
 
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Research and development expenses represent salaries, related benefits expense, 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.

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 initially held a 69.25% ownership interest in LMC, however, during 2010, LMC failed to redeem its preferred units by the specified time and was required to issue additional shares to its noteholders.  As a result, our ownership interest in LMC decreased to 66.56%.  The results of operation of LMC are consolidated and comprise our Liquidmetal alloy industrial coatings segment for financial reporting purposes.

In May 2010, LMC entered into a joint venture agreement with IMCO Alloys Private Limited (“IMCO”) to create a subsidiary named Liquidmetal Coatings Solutions India Private Limited (“LMCSI”) and engage in application services of Liquidmetal products as a protective coating.  Initially, under the joint venture agreement, LMC held 80% and IMCO held 20% of the outstanding Class A Shares of LMCSI.  LMC may, at its option, subscribe to Class B Shares of LMCSI.  In September 2010, LMC provided to LMCSI approximately $0.1 million in capital equipment and was issued 358,204 shares of Class B Shares of LMCSI.  As of September 30, 2010, LMC holds an 88.60% ownership interest in LMCSI.

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

Critical Accounting Policies and Estimates

The preparation of condensed 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 condensed 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:

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

Our Annual Report on Form 10-K for the year ended December 31, 2009, contains further discussions on our critical accounting policies and estimates.
 
 
24

 

Results of Operations

Comparison of the three months ended September 30, 2010 and 2009

Revenue. Revenue increased by $13.1 million to $17.3 million for the three months ended September 30, 2010 from $4.2 million for the three months ended September 30, 2009.  The increase consisted of a $13.3 million increase in revenue from the licensing and manufacturing of bulk Liquidmetal alloys, which was offset by a decrease of $0.2 million from sales of our coating products.

Cost of Sales. Cost of sales decreased to $1.6 million, or 9% of revenue, for the three months ended September 30, 2010 from $2.9 million, or 69% of revenue, for the three months ended September 30, 2009.  The decrease was a result of a continued change in revenue mix, primarily from licensing revenue, during the three months ended September 30, 2010. 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 $2.4 million, or 14% of revenue, for the three months ended September 30, 2010 from $1.3 million, or 32% of revenue, for the three months ended September 30, 2009. The increase was primarily a result of increases in legal and director fees of $0.7 million and an increase in other expense due to the LLPG license agreement modification fee of $0.4 million.

Research and Development Expenses . Research and development expenses were $0.3 million, or 2% of revenue, for the three months ended September 30, 2010 and $0.3 million, or 8% of revenue, for the three months ended September 30, 2009.  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.

Change in Value of Warrants.   Change in value of warrants decreased to a loss of $27.2 million, or 157% of revenue, for the three months ended September 30, 2010 from a gain of $2.1 million, or 48% of revenue, for the three months ended September 30, 2009.  The change in value of warrants, consisting of warrants issued from convertible and subordinated notes and convertible preferred stock issued between 2004 and 2009, was a significant loss for the three months ended September 30, 2010 primarily due to significant increases in our stock price since June 30, 2010.

Change in Value of Conversion Feature. Change in the value of conversion feature liability from our convertible notes resulted in a gain of $15 thousand, or 0.09% of revenue, during the three months ended September 30, 2010 from a gain of $0.5 million, or 11% of revenue, for the three months ended September 30, 2009, due to the retirement of our convertible notes.

Other Income.   Other income was $18 thousand for the three months ended September 30, 2010 which consisted of a write-off of accounts payable.  There was no other income for the three months ended September 30, 2009.

Interest Expense . Interest expense was $2.5 million, or 14% of revenue, for the three months ended September 30, 2010 and was $1.1 million, or 25% of revenue, for the three months ended September 30, 2009. Interest expense consists primarily of debt discount 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 increase was primarily due to increase in debt discount amortization expense in conjunction with the retirement of our senior convertible notes.

Comparison of the nine months ended September 30, 2010 and 2009

Revenue. Revenue increased by $10.9 million to $22.2 million for the nine months ended September 30, 2010 from $11.3 million for the nine months ended September 30, 2009.  The increase was primarily due to an increase in revenue from the licensing and manufacturing of bulk Liquidmetal alloys.

Cost of Sales. Cost of sales decreased to $5.4 million, or 24% of revenue, for the nine months ended September 30, 2010 from $6.9 million, or 61% of revenue, for the nine months ended September 30, 2009.  The decrease was a result of a continued change in revenue mix, primarily from licensing revenue, during the nine months ended September 30, 2010. 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.
 
 
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Selling, General, and Administrative Expenses . Selling, general, and administrative expenses increased to $5.1 million, or 23% of revenue, for the nine months ended September 30, 2010 from $4.3 million, or 38% of revenue, for the nine months ended September 30, 2009.  The increase was primarily a result of increases in director’s fees of $0.4 million and increases in other expense due to the LLPG license agreement modification fee of $0.4 million.

Research and Development Expenses . Research and development expenses were $0.8 million, or 4% of revenue, for the nine months ended September 30, 2010 and $0.9 million, or 8% of revenue for the nine months ended September 30, 2009.  The decrease was primarily a result of a decrease in patent and trademark expenses although 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.

Loss from Extinguishment of Debt.  Loss from extinguishment of debt decreased to $0 for the nine months ended September 30, 2010 from $1.5 million, or 13% of revenue, for the nine months ended September 30, 2009.  The $1.5 million loss was recognized from extinguishment of certain of our convertible and subordinated notes during 2009.

Change in Value of Warrants.  Change in value of warrants decreased to a loss of $24.4 million, or 110% of revenue, for the nine months ended September 30, 2010 from a gain of $8.1 million, or 72% of revenue, for the nine months ended September 30, 2009.  The change in value of warrants, consisting of warrants issued from convertible and subordinated notes and convertible preferred stock issued between 2004 and 2009, was a significant loss for the nine months ended September 30, 2010 primarily due to significant increases in our stock price since June 30, 2010.

Change in Value of Conversion Feature. Change in the value of conversion feature liability from our convertible notes resulted in a gain of $0.4 million, or 2% of revenue, during the nine months ended September 30, 2010 from a gain of $1.4 million, or 12% of revenue, for the nine months ended September 30, 2009, primarily as a result of fluctuations in our stock price and the retirement of our convertible notes.

Other Income.   Other income was $0.1 million, for the nine months ended September 30, 2010, which consisted of a write-off of accounts payable.  There was no other income for the nine months ended September 30, 2009.

Interest Expense . Interest expense was $5.1 million, or 23% of revenue, for the nine months ended September 30, 2010 and was $4.8 million, or 42% of revenue, for the nine months ended September 30, 2009. Interest expense consists primarily of debt discount amortization and interest accrued on outstanding convertible and subordinated notes, borrowings under a factoring, loan, and security agreement, and a revolving loan agreement.  The increase was primarily due to increase in debt discount amortization expense in conjunction with the retirement of our senior convertible notes.

Liquidity and Capital Resources

Our cash provided by operating activities was $8.7 million for the nine months ended September 30, 2010.  Our working capital deficit increased from $13.1 million at December 31, 2009 to $27.8 million at September 30, 2010.  The working capital deficit increase of $14.7 million was attributable to an increase in warrant liabilities of $22.8 million offset by an increase in cash and cash equivalents of $3.0 million, an increase of prepaid expenses and other current assets of $0.1 million, a decrease in accounts payable and accrued expenses of $2.7 million, a decrease in short-term debt of $0.5 million, a decrease in long-term debt, current portion of $1.4 million and a decrease in conversion feature liabilities of $0.4 million.

Our cash used in investing activities was $0.2 million for the nine months ended September 30, 2010 for the acquisition of property and equipment and investments in patents and trademarks.   
 
 
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Our cash used by financing activities was $4.6 million for the nine months ended September 30, 2010.  We paid net $17.3 million in borrowings mainly for our convertible subordinated notes, our subordinated promissory note, our bridge note, a factoring, load and security agreement, and related party advances, which were offset by $9.6 million in borrowings mainly from an additional term loan as payment for monthly accrued interest due, short term borrowings, and a promissory note, $2.0 million in subscriptions for our common stock and $1.0 million of warrants exercised.

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 3, 2011 (the “January 2011 Notes”).  The Transaction was consummated pursuant to a Securities Purchase and Exchange Agreement, dated May 1, 2009 among the exchanging note holders and investors. 

Our Series A-1 and Series A-2 Preferred Stock accrue cumulative dividends at an annual rate of 8%, which is payable semi-annually. Beginning on the second anniversary of the initial issuance of shares of our Series A-1 and Series A-2 Preferred Stock, the dividend will increase to 10%.  As of September 30, 2010, we have accrued dividends of $1.1 million included in accounts payable and other accrued expenses.  The dividends are payable in cash or in kind by the issuance by 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 January 2011 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 January 2011 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 January 2011 Notes and the buyers of shares of our Series A-1 and Series A-2 Preferred Stock, respectively.  The warrants will expire in January 2012.  The conversion prices and the number of shares of common stock issuable under the Series A-1 and Series A-2 Preferred Stock, the January 2011 Notes and the warrants are subject to adjustments for anti-dilution purposes.

On November 3, 2010, we filed an Amended and Restated Certificate of Designations, Preferences, and Rights (the "Amended Designation") for our Series A Preferred Stock (the "Series A Preferred Stock").  The Amended Designation was approved by the requisite vote of the holders of our Series A Preferred Stock and was filed with the Delaware Secretary of State in accordance with a Consent Agreement entered into between us and the holders of 2/3 of the Series A Preferred Stock (the "Consent Agreement").  The Amended Designation amends the terms of the Series A Preferred Stock by (i) providing that dividends ceased accruing thereon as of June 1, 2010, (ii) the liquidation preference and corresponding conversion value on the Series A Preferred Stock was increased from 1.0 to 1.08 of the sum of the issue price and accrued but unpaid dividends, (iii) the Series A Preferred Stock is now mandatorily convertible at any time at our option without condition, and (iv) the Series A Preferred Stock will no longer have any price-based anti-dilution rights.  The Consent Agreement provided that, in exchange for voting in favor of the Amended Designation, the warrants held by the holders signing the Consent Agreement (to the extent such warrants were issued in connection with the original issuance of the Series A Preferred Stock) will be extended to an expiration date of July 2015 and the price-based anti-dilution rights on such warrants are removed.

On May 28, 2010, we issued $2.0 million of 13% Subordinated Promissory Note (“the 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.  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 to the noteholder for an aggregate price of $2.0 million.

On August 5, 2010, we entered into a licensing agreement with Apple Inc. (“Apple”) pursuant to which (i) we contributed substantially all of our intellectual property assets to a newly organized special-purpose, wholly-owned subsidiary, called Crucible Intellectual Property (“CIP”), (ii) CIP granted to Apple a perpetual, worldwide, fully-paid, exclusive license to commercialize such intellectual property in the field of consumer electronic products in exchange for a license fee, and (iii) CIP granted back to us a perpetual, worldwide, fully-paid, exclusive license to commercialize such intellectual property in all other fields of use.  Upon closing of the foregoing transaction, we were paid a portion of the license fee which was used to pay off noteholders and fund operations.   90 days after the closing date and upon completion of certain support milestones, we shall be paid the remaining portion of the license fee.
 
 
27

 

As of September 30, 2010, we have outstanding liens on assets of our South Korean subsidiary by various creditors in South Korea for past-due trade payables totaling $2.2 million.  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 our assets located in Korea.

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) retained 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 the company, or that engages in leasing, hedging, or research and development arrangements with the 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 an ownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006, we exercised our right to acquire a 19.9% ownership interest in LSI and in January 2007 and June 2007 and contributed an 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 lower than anticipated growth in the eye wear industry.  On August 6, 2010, SAGA filed a complaint against us claiming damages of $3.2 million for payment on an alleged loan and for alleged 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.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures.    Based on an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2010, 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 Control.   During the quarter ended September 30, 2010, there was no change in our internal control 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.

 
28

 

PART II
OTHER INFORMATION
Item 1 – Legal Proceedings

On August 6, 2010, SAGA, SpA in Padova, Italy (“SAGA”) filed a complaint against us in the County of Orange in California claiming damages of $3.2 million for payment on an alleged loan and for alleged 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.

There are no other material legal proceedings that are pending.

Item 1A – Risk Factors

None.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Removed and Reserved
 
Item 5 – Other Information
 
None.

Item 6 – Exhibits

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

Exhibit
   
Number
 
Description of Document
     
  3.1
 
Amended and Restated Certificate of Designations, Preferences and Right, dated November 2, 2010, between Liquidmetal Technologies, Inc. and holders of the Series A-1 Preferred Stock and holders of the Series A-2 Preferred Stock.
     
10.1
 
Employment Agreement, dated August 3, 2010, between Thomas Steipp and Liquidmetal Technologies, Inc.
     
10.2
 
Restricted Stock Agreement, dated August 3, 2010, between Thomas Steipp and Liquidmetal Technologies, Inc.
     
10.3*
 
Master Transaction Agreement, dated August 5, 2010, between Apple Inc., Liquidmetal Technologies, Inc., Liquidmetal Coatings, LLC and Crucible Intellectual Property, LLC.
     
10.4
 
Subscription Agreement, dated August 10, 210, between Liquidmetal Technologies, Inc. and Norden LLC.
     
10.5
 
Consent Agreement between Liquidmetal Technologies, Inc. and holders of the Series A-1 Preferred Stock and holders of the Series A-2 Preferred Stock.
     
31.1
 
Certification of Principal Executive Officer, Thomas Steipp, as required by Section 302 of the Sarbanes-Oxley Act of 2002
 
 
29

 

31.2
 
Certification of Principal Financial Officer, Tony Chung, as required by Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1
 
Certification of Principal Executive Officer, Thomas Steipp, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2
 
Certification of Principal Financial Officer, Tony Chung, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
*
 
Portions of this exhibit have been omitted pursuant to a confidential treatment request.  Omitted information has been filed separately with the Securities and Exchange Commission
 
 
30

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
LIQUIDMETAL TECHNOLOGIES, INC.
 
 
(Registrant)
 
     
Date: November 4, 2010
/s/ Thomas Steipp
 
 
Thomas Steipp
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
     
     
Date: November 4, 2010
/s/ Tony Chung
 
 
Tony Chung
 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)
 

 
31

 

Exhibit 3.1

AMENDED AND RESTATED
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS

OF

SERIES A PREFERRED STOCK

OF

LIQUIDMETAL TECHNOLOGIES, INC.

(Pursuant to Section 151 of the
Delaware General Corporation Law)

Pursuant to Section 242 of the Delaware General Corporation Law, the undersigned officer hereby certifies that:
 
A.   He is the duly elected and acting Chief Executive Officer of Liquidmetal Technologies, Inc.., a Delaware corporation (the “ Company ”).
 
B.    On May 1, 2009, the Company filed with the Delaware Secretary of State a Certificate of Designations, Preferences, and Rights of Series A Preferred Stock (the “Designation”) creating a series of 1,875,000 shares of  “Series A-1 Preferred Stock” (hereinafter called the “ Series A-1 Preferred Stock ”) and a series of 3,281,253 shares of “Series A-2 Preferred Stock” (hereinafter called the “ Series A-2 Preferred Stock” ).
 
C.    Pursuant to resolutions duly adopted by the board of directors of the Company as of October 29, 2010, the Chief Executive Officer of the Company was authorized and directed to file an amended and restated Designation setting forth the changes to the rights and preferences of the Series A-1 Preferred Stock and Series A-2 Preferred Stock as are set forth below (the “ Amended Designation ”).
 
D.    The Amended Designation was duly approved and consented to by the holders of the Series A-1 Preferred Stock and Series A-2 Preferred Stock (both as separate classes and as a single class) pursuant to and in accordance with Sections 6 and 7 of the Designation, Article VIII of the Company’s Certificate of Incorporation, as amended, and Section 242 of the Delaware General Corporation Law.
 
NOW, THEREFORE, the Designation is hereby amended and restated as follows:
 
“Pursuant to authority vested in the Board or Directors of the Company by Article IV of the Company’s Certificate of Incorporation, out of the total authorized number of ten million (10,000,000) shares of Company preferred stock (the “ Preferred Stock ”), par value $0.001 per share, there shall be designated (i) a series of one million eight hundred seventy-five thousand (1,875,000) shares which shall be issued hereunder and constitute a single series to be known as “Series A-1 Preferred Stock” (hereinafter called the “ Series A-1 Preferred Stock ”) and (ii) a series of three million two hundred eighty-one thousand two hundred fifty-three (3,281,253)  shares which shall be issued hereunder and constitute a single series to be known as “Series A-2 Preferred Stock” (hereinafter called the “ Series A-2 Preferred Stock ”, and together with the Series A-1 Preferred Stock, the “ Series A Preferred Stock ”).  The shares of Series A Preferred Stock have the voting powers, designations, preferences and other special rights, and qualifications, limitations and restrictions thereof set forth below:
 
 
 

 

1.            Certain Definitions .

Approved Stock Plan ” means any employee benefit, option or incentive plan which has been approved by the Board of Directors and shareholders of the Company, pursuant to which the Company’s securities may be issued to any employee, consultant, officer or director for services provided to the Company; provided that the number of shares of the Company’s Common Stock issuable pursuant to such plans, in the aggregate, shall not exceed 10% of the shares of the Company’s Common Stock outstanding on a fully-diluted basis on the date of the First Closing (as defined in the Securities Purchase and Exchange Agreement) after giving effect to the First Closing and the full exercise of the Series A-1 Option (as defined in the Securities Purchase and Exchange Agreement), as adjusted for stock splits, reverse stock splits, and the like, unless such increased amount of shares is approved by the holders of the Company’s Common Stock and the holders of the Company’s Series A Preferred Stock voting together as a single class.  For purposes of this definition, “fully-diluted basis” shall take into account all outstanding shares of Common Stock as well as all shares of Common Stock issuable upon the conversion of all outstanding convertible securities of the Company, including all options and warrants granted.

 “ Buyer ” means a buyer under the Securities Purchase and Exchange Agreement.

Charter Amendment ” shall have the meaning set forth in the Securities Purchase and Exchange Agreement.

Closing Bid Price ” and “ Closing Sale Price means, for any security as of any date, the last closing bid price and last closing trade price, respectively, for such security on the OTC Bulletin Board, as reported by Bloomberg Financial Markets, or, if the OTC Bulletin Board begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price, as the case may be, then the last bid price or last trade price, respectively, of such security prior to 4:00 p.m., New York Time, as reported by Bloomberg Financial Markets, or, if the OTC Bulletin Board is not the principal securities exchange or trading market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg Financial Markets, or if the foregoing do not apply, the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg Financial Markets, or, if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg Financial Markets, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported by Pink OTC Markets (formerly known as Pink Sheets).  If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as mutually determined by the Company and the holders of Series A Preferred Stock. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.

 
2

 

Common Stock ” means the common stock, $0.001 par value, of the Company, including the stock into which the Series A Preferred Stock is convertible, and any capital stock of any class of the Company thereafter authorized that shall not be limited to a fixed sum in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company.

Convertible Securities ” means any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options.

Current Market Price ” shall mean, with respect to any shares of capital stock or other securities, (i) if such stock or securities are listed or admitted to trading on a national securities exchange or an inter-dealer quotation system or traded in the over-the-counter market, the price per share or security, as the case may be, at the close of trading on the Trading Day on which the relevant determination is to be made or, if such day is not a Trading Day, the Trading Day immediately preceding such day and (ii) if such stock or security is not so listed, admitted or traded, the fair market value of such stock or security as determined by the Board of Directors of the Company or, if the Board of Directors of the Company cannot agree, as determined by an Independent Appraiser (as defined below).

Excluded Securities ” means any share of Common Stock issued or issuable: (i) in connection with any Approved Stock Plan; (ii) upon exercise of any warrants of the Company issued pursuant to the Securities Purchase and Exchange Agreement or as dividends on the Series A Preferred Stock, or (C) in connection with any public offering by the Company; (iii) upon conversion or exercise of any Options or Convertible Securities which are outstanding on the Original Issuance Date, (iv) pursuant to or in connection with commercial credit arrangements, equipment lease financings, acquisitions of other assets or businesses, and strategic transactions not primarily for financing purposes (including licensing or development agreements), but only to the extent the transactions described in this clause (iv) are entered into with non-affiliates of the Company.

Independent Appraiser   means an investment banking firm, appraisal firm or any other financial expert of recognized national standing in the United States, selected by the holders of a majority of the Series A Preferred Stock and reasonably acceptable to the Company, that does not (or whose directors, officers, employees, affiliates or stockholders do not) have a direct or indirect material financial interest in the Company or a 5% or greater holder of Series A Preferred Stock, who has not been, and, at the time called upon to give independent financial advice to the Company or a holder of Series A Preferred Stock, is not (and none of its directors, officers, affiliates or stockholders are) a promoter, director or officer of the Company.
 
 
3

 

Options ” means rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

Original Issuance Date ” means May 1, 2009.

Securities Purchase and Exchange Agreement ” means the Securities Purchase and Exchange Agreement, dated May 1, 2009, among the Company and the persons identified as “Buyers” therein.

Senior Indebtedness ” means the principal of (and premium, if any), interest on, and all fees and other amounts (including, without limitation, any reasonable costs, enforcement expenses (including reasonable legal fees and disbursements, collateral protection expenses and other reimbursement or indemnity obligations relating thereto)), and all other obligations of the Company under (i) any of the agreements or instruments evidencing any indebtedness of the Company and its subsidiaries arising after the Original Issuance Date to an unaffiliated, third-party commercial lender (together with any renewals, refundings, refinancings or other extensions thereof) for purposes of purchasing equipment (which debt shall be secured only by the assets purchased with such financing), and (ii) indebtedness not to exceed $4,000,000 in the aggregate that is secured solely by the Company’s and/or its subsidiaries’ accounts receivable and/or inventory.

Series A Issuance Price ” means $5.00 per share.

Trading Day ” means (i) if the relevant stock or security is listed or admitted for trading on the New York Stock Exchange or any other national securities exchange, a day on which such exchange is open for business; (ii) if the relevant stock or security is not listed or admitted for trading on any national securities exchange but is quoted on any system for the automated dissemination of quotations of securities prices, a day on which trades may be effected through such system; or (iii) if the relevant stock or security is not listed or admitted for trading on any national securities exchange or quoted on any system for the automated dissemination of quotation of securities prices, a day on which the relevant stock or security is traded in a regular way in the over-the-counter market and for which a closing bid and a closing asked price for such stock or security are available.
 
 
4

 

 
2.
Dividends .

2A.         The holders of the Series A Preferred Stock shall be entitled to receive dividends, which shall begin to accrue on and be cumulative from the date of issuance of the Series A Preferred Stock (whether or not such dividends have been declared and whether or not there shall be net profits or net assets of the Company legally available for the payment of such dividends) through and until June 1, 2010, at an annual rate equal to eight percent (8%) of the sum of (A) the Series A Issuance Price plus (B) any accrued dividends through the immediately preceding Dividend Accrual Date that remain unpaid (the amount of such dividends being referred to as the “ Dividend Amount ”).  The dividends shall accrue semi-annually on June 1 and December 1 of each year (the “ Dividend Accrual Dates ”) and shall be payable   either in cash or in kind by issuance by the Company of additional shares of Series A Preferred Stock (the “ PIK Shares ”) at the option of the Company of the same securities. For purposes of clarification, if the Company pays any Dividend Amount on shares of Series A-1 Preferred Stock in PIK Shares, then such PIK Shares shall be shares of Series A-1 Preferred Stock.   If the Company pays any Dividend Amount on shares of Series A-2 Preferred Stock in PIK Shares, then such PIK Shares shall be shares of Series A-2 Preferred Stock.   Dividends shall be payable only when and as declared by the Board of Directors of the Company.  If the Company elects to pay any Dividend Amount in PIK Shares, each holder of Series A Preferred Stock shall be deemed to be the holder of record of such holder's pro rata share of the PIK Shares issuable with respect to the relevant Dividend Amount notwithstanding that the stock transfer books of the Company shall then be closed or that certificates evidencing such PIK Shares shall not have been actually delivered to such holder of Series A Preferred Stock.  In the event that dividends on the Series A Preferred Stock are paid with PIK Shares, each such PIK Share (i) shall be valued at the then applicable Liquidation Preference per share and (ii) shall have the same Liquidation Preference as each share of Series A Preferred Stock with respect to which the PIK Share constituted a dividend.  No dividends shall be paid on any Common Stock of the Company or any capital stock of the Company that ranks junior to the Series A Preferred Stock during any fiscal year of the Company until dividends in the aggregate Dividend Amount per share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series A Preferred Stock for the current and each prior Dividend Accrual Date shall have been paid or declared and set apart for payment to the holders of the Series A Preferred Stock.  For purposes hereof, the “ Liquidation Preference ” of a share of Series A Preferred Stock means, as of any specified date, the sum of (A) the Series A Issuance Price of such share plus (B) any accrued but unpaid dividends on such share through the Dividend Accrual Date that immediately precedes the specified date.

2B.         The amount of dividends payable for any period shorter than a full year shall be determined on the basis of twelve 30-day months and a 360-day year.  Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding.
 
 
5

 

 
3. 
  Liquidation; Redemption .

3A.          Liquidation .  Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the shares of Series A Preferred Stock shall be entitled, before any distributions shall be made to the holders of the Common Stock, or any other class of capital stock of the Company ranking junior to the Series A Preferred Stock, to be paid an amount (the “ Series A Liquidation Amount ”) equal to 1.08 multiplied by the Liquidation Preference per share (appropriately adjusted to reflect the occurrence of any stock split, stock dividend, stock combination, stock subdivision or like occurrences);  provided that if the amount per share that would be received by the holders of the shares of Series A Preferred Stock of any series if the assets of the Company were distributed ratably to the holders of the Common Stock and the Series A Preferred Stock on an as converted to Common Stock basis would be greater than the Liquidation Preference, then the holders of the Series A Preferred Stock of such series shall be entitled to receive such greater amount.  If upon such liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the assets to be distributed among the holders of Series A Preferred Stock of the Company shall be insufficient to permit payment to the holders of Series A Preferred Stock of the full Series A Liquidation Amount, then the entire assets of the Company to be distributed shall be distributed to the holders of Series A Preferred Stock.  Written notice of such liquidation, dissolution or winding up, stating a payment date, the Series A Liquidation Amount and the place where said sums shall be payable shall be given by mail, postage prepaid, not less than 30 or more than 60 days prior to the payment date stated therein, to the holders of record of each series of Series A Preferred Stock, such notice to be addressed to each shareholder at his post office address as shown by the records of the Company.  Unless waived in writing by the holders of a majority of the Series A Preferred Stock then outstanding, voting together as one class, a consolidation or merger of the Company into or with any other entity or entities, or the sale or transfer by the Company of all or substantially all of its assets, in each case under circumstances in which the holders of a majority in voting power of the outstanding capital stock of the Company, immediately prior to such a merger, consolidation or sale, own less than a majority in voting power of the outstanding capital stock of the company or the surviving or resulting company or acquirer, as the case may be, immediately following such a merger, consolidation or sale (each such transaction being hereinafter referred to as a “ Corporate Transaction ”) shall be treated as a liquidation within the meaning of this paragraph 3 for the purpose of determining the consideration to be received by holders of the Series A Preferred Stock upon redemption of such shares as well as the timing of such deemed redemption.

3B.          Optional Redemption .  The Company shall have the right at any time when no Notes remain outstanding to redeem the Series A Preferred Stock in whole or in part upon not less than 30 days’ notice at a redemption price equal to the Liquidation Preference plus any accrued and unpaid dividends through the redemption date.  Such redemption notice will include a certification by the Company’s Chief Executive Officer that the Company has sufficient funds available for such redemption. In the event of a redemption of the Series A Preferred Stock in part, the Company shall redeem the shares of each holder of Series A Preferred Stock pro rata (subject to rounding for fractional shares of Series A Preferred Stock).  The holders of Series A Preferred Stock shall have the right to convert the Series A Preferred Stock into Common Stock as set forth in Section 4A below at any time prior to the redemption date.
 
 
6

 

 
4.
  Conversion .

4A.          Right to Convert .  Subject to the terms and conditions of this subparagraph 4A, the holder of any share or shares of Series A Preferred Stock shall have the right, at its option at any time, to convert any such shares of Series A Preferred Stock into such number of fully paid and nonassessable whole shares of Common Stock as is obtained by multiplying (A) the number of shares of Series A Preferred Stock so to be converted by (B) the Liquidation Preference per share multiplied by 1.08, and dividing the result (together with any accrued but unpaid dividends on the shares being converted as of the conversion date) by (i) in the case of Series A-1 Preferred Stock, the conversion price of $0.10 per share of Common Stock, (ii) in the case of Series A-2 Preferred Stock, the conversion price of $0.22 per share of Common Stock, or (iii) if there has been an adjustment of such conversion prices, by the conversion prices as last adjusted and in effect at the date any share or shares of Series A Preferred Stock are surrendered for conversion (such prices, or such prices as last adjusted, being referred to herein as the “ Series A-1 Conversion Price ” for the Series A-1 Preferred Stock and the “ Series A-2 Conversion Price ” for the Series A-2 Preferred Stock, and the Series A-1 Conversion Price and Series A-2 Conversion Price are herein together referred to as the “ Conversion Price ”).  Such right of conversion shall be exercised by the holder thereof by surrender of a certificate or certificates for the shares to be converted to the Company at its principal office (or such other office or agency of the Company as the Company may designate by notice in writing to the holder or holders of the Series A Preferred Stock) at any time during its usual business hours on the date set forth in such notice, together with a properly completed notice of conversion in the form attached to the Series A Preferred Stock certificate with a statement of the name or names (with address), subject to compliance with applicable laws to the extent such designation shall involve a transfer, in which the certificate or certificates for shares of Common Stock, shall be issued.  No dividends will be paid on the Series A Preferred Stock at the time of conversion.

4B.          Issuance of Certificates; Time Conversion Effected .  On or before the second business day following the date of receipt by the Company of the written notice referred to in subparagraph 4A and surrender of the certificate or certificates for the share or shares of the Series A Preferred Stock to be converted (the “ Share Delivery Date ”), the Company shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, subject to compliance with applicable laws to the extent such designation shall involve a transfer, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Series A Preferred Stock. To the extent permitted by law, such conversion shall be deemed to have been effected and the Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been received by the Company and the certificate or certificates for such shares shall have been surrendered as aforesaid, and at such time the Series A Preferred Stock rights of the holder of such share or shares shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby.

4C.          Fractional Shares; Dividends; Partial Conversion .  No fractional shares shall be issued upon conversion of the Series A Preferred Stock into Common Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share, and no payment or adjustment shall be made upon any conversion on account of any cash dividends paid on the Series A Preferred Stock so converted or the Common Stock issued upon such conversion.  In case the number of shares of Series A Preferred Stock represented by the certificate or certificates surrendered pursuant to subparagraph 4A exceeds the number of shares converted, the Company shall upon such conversion, execute and deliver to the holder thereof at the expense of the Company, a new certificate for the number of shares of Series A Preferred Stock represented by the certificate or certificates surrendered which are not to be converted.
 
 
7

 

 
4D. 
Adjustments to Conversion Price .

(1)  [Reserved]

(2).          Subdivision or Combination of Stock . In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares or shall declare or pay a dividend on its outstanding shares of Common Stock payable in shares of Common Stock, the Series A-1 Conversion Price and Series A-2 Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, such Conversion Prices in effect immediately prior to such combination shall be proportionately increased.

(3).          Record Date .  In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities, or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

(4).          Certain Distributions .  If, at any time or from time to time after the Original Issuance Date, the Company shall issue or distribute to the holders of shares other than Series A Preferred Stock (the “ Dividend Stock ”) evidences of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding any issuance or distribution described in paragraph  4D(2) or 4(E), and also excluding cash dividends or cash distributions paid out of net profits legally available therefor in the full amount thereof) (any such non-excluded event being herein called a " Special Dividend "), then and in each such event the holders of each series of Series A Preferred Stock shall receive, simultaneously with the distribution to the holders of Common Stock, a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Series A Preferred Stock of such series had been converted into Common Stock on the date of such event.
 
 
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4E.           Reorganization or Reclassification .  If any capital reorganization or reclassification of the capital stock of the Company shall be effected in such a way (including, without limitation, by way of consolidation or merger, but excluding a consolidation, merger or sale which is treated as a Liquidation with respect to holders of Series A Preferred Stock for purposes of paragraph 3) that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock then, as a condition of such reorganization or reclassification, lawful and adequate provision (in form satisfactory to the holders of at least a majority of the outstanding shares of Series A Preferred Stock, voting together as one class) shall be made whereby each holder of a share or shares of Series A Preferred Stock shall thereafter have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock of the Company immediately theretofore receivable upon the conversion of such share or shares of the Series A Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of such stock immediately theretofore so receivable had such reorganization or reclassification not taken place and in any such case appropriate provision shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights (including an immediate adjustment, by reason of such reorganization or reclassification, of the Conversion Price to the value for the Common Stock reflected by the terms of such reorganization or reclassification if the value so reflected is less than the Conversion Price in effect immediately prior to such reorganization or reclassification).  In the event of a merger or consolidation of the Company as a result of which a greater or lesser number of shares of common stock of the surviving company are issuable to holders of the Common Stock of the Company outstanding immediately prior to such merger or consolidation, the Conversion Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock of the Company.  The Company will not effect any such consolidation or merger, or any sale of all or substantially all its assets and properties, unless prior to the consummation thereof the successor company (if other than the Company) resulting from such consolidation or merger or the company purchasing such assets shall assume by written instrument (in form satisfactory to the holders of at least a majority of the outstanding shares of Series A Preferred Stock voting together as one class) executed and mailed or delivered to each holder of shares of Series A Preferred Stock at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to receive.

4F.           Notice of Adjustment .  Upon any adjustment of the Series A-1 Conversion Price or Series A-2 Conversion Price, then, and in each such case, the Company shall give written notice thereof by first class mail, postage prepaid, addressed to each holder of shares of Series A-1 Preferred Stock or Series A-2 Preferred Stock, as applicable, at the address of such holder as shown on the books of the Company, which notice shall state the Conversion Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

4G.          Other Notices .  In case at any time:

(1)          the Company shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock;

(2)          the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of such stock of any class or other rights;

(3)          there shall be any capital reorganization or reclassification of the capital stock of the Company, or a consolidation or merger of the Company with, or a sale of all or substantially all its assets to, another company; or

 
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(4)          there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

then, in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to each holder of any shares of Series A Preferred Stock at the address of such holder as shown on the books of the Company, (a) at least 15 days’ prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 15 days’ prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be.

4H.          Mandatory Conversion .  The Board of Directors of the Company shall have the right at any time to convert each share of Series A Preferred Stock into Common Stock upon no less than 30 days prior written notice to holders of Series A Preferred Stock.  In addition, (A) the Board of Directors of the Company shall convert each share of Series A-1 Preferred Stock into Common Stock upon receipt of the written notice of holders of a majority of the then-outstanding shares of Series A-1 Preferred Stock of their election to cause an automatic conversion pursuant to this subparagraph 4H, and (B) the Board of Directors of the Company shall convert each share of Series A-2 Preferred Stock into Common Stock upon receipt of the written notice of holders of a majority of the then-outstanding shares of Series A-2 Preferred Stock of their election to cause an automatic conversion pursuant to this subparagraph 4H.  Any such conversion shall be effected in accordance with the provisions of subparagraphs 4B and 4C hereof, and any Series A Preferred Stock converted pursuant to this paragraph shall be converted into a number of shares of Common Stock equal to the quotient obtained by dividing (i) the Liquidation Preference per share of Series A Preferred Stock multiplied by 1.08, by (ii) the applicable Conversion Price.
 
 
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4I.           Stock to be Reserved .

(1)  The Company will at all times reserve and keep available out of its authorized but unissued Common Stock, solely for the purpose of issuance upon the conversion of the Series A Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series A Preferred Stock.  All shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all liens, duties and charges arising out of or by reason of the issue thereof (including, without limitation, in respect of taxes) and, without limiting the generality of the foregoing, the Company covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the effective Conversion Price.  The Company will take all such action within its control as may be necessary on its part to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Company may be listed.  The Company will not take any action which results in any adjustment of the Conversion Price if after such action the total number of shares of Common Stock issued and outstanding and thereafter issuable upon exercise of all options and conversion of Convertible Securities, including upon conversion of the Series A Preferred Stock, would exceed the total number of shares of such class of Common Stock then authorized by the Company's Certificate of Incorporation.

(2)          The Company will at all times reserve and keep available out of its authorized but unissued Series A Preferred Stock, a sufficient number of shares solely for the purpose of satisfying the Company’s obligations to issue PIK Shares as herein provided.  All shares of Series A Preferred Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all liens, duties and charges arising out of or by reason of the issue thereof (including, without limitation, in respect of taxes).

4J.           No Reissuance of Series A Preferred Stock .  Shares of Series A Preferred Stock that are converted into shares of Common Stock as provided herein shall not be reissued.

4K.          Issue Tax .  The issuance of certificates for shares of Common Stock upon conversion of the Series A Preferred Stock shall be made without charge to the holders thereof for any issuance tax, stamp tax, transfer tax, duty or charge in respect thereof, provided that the Company shall not be required to pay any tax, duty or charge which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series A Preferred Stock which is being converted.

4L.           Closing of Books .  The Company will at no time close its transfer books against the transfer of any Series A Preferred Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Series A Preferred Stock in any manner which interferes with the timely conversion of such Series A Preferred Stock; provided , however , nothing herein shall be construed to prevent the Company from setting record dates for the holders of its securities.

 
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4M.         Limitations on Conversions .

(1)           Beneficial Ownership .  Unless waived by a holder of Series A Preferred Stock upon no less than sixty one (61) days prior written notice to the Company, the Company shall not effect any conversion of the Series A Preferred Stock pursuant to this Section 4 to the extent that after giving effect to such conversion such holder (together with such holder’s affiliates) would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion.  Even if such holder waives the limitation set forth in the preceding sentence, the Company shall in no event effect any conversion under this Section 4, and such holder shall not have the right to convert Series A Preferred Stock pursuant to this Section 4, to the extent that after giving effect to such conversion, such holder (together with such holder’s affiliates) would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion.  For purposes of the foregoing sentences, the number of shares of Common Stock beneficially owned by a holder of Series A Preferred Stock and its affiliates shall include the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining Series A Preferred Stock owned by such holder or any of its affiliates and (B) conversion of the unexercised or nonconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by such holder or any of its affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 4(M)(1), beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended.  For purposes of this Section 4(M)(1), in determining the number of outstanding shares of Common Stock, the holders of Series A Preferred Stock may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding.  For any reason at any time, upon the written or oral request of a holder of Series A Preferred Stock, the Company shall within two (2) business days confirm orally and in writing to such holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including the Series A Preferred Stock, by such holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported.  Notwithstanding the foregoing, the limitations of this paragraph shall not apply to Carlyle Liquid, LLC, Carlyle Holdings, LLC, Abdi Mahamedi, Atlantic Realty, and Ricardo Salas.

(2)          [Reserved]

4N.          Company’s Failure to Timely Convert .  If the Company shall fail to issue a certificate to a holder of Series A Preferred Stock or credit such holder’s balance account with the Depository Trust Company (“ DTC ”) through its Deposit/Withdrawal At Custodian system for the number of shares of Common Stock to which such holder is entitled upon conversion of any Series A Preferred Stock on or prior to the date which is five (5) business days after the date that such holder exercises its conversion rights pursuant to this Section 4 (a “ Conversion Failure ”), then (A) the Company shall pay liquidated damages to such holder for each day of such Conversion Failure in an amount equal to 1.0% of the product of (I) the sum of the number of shares of Common Stock not issued to such holder on or prior to the Share Delivery Date and to which the such holder is entitled, and (II) the Closing Sale Price of the Common Stock on the Share Delivery Date and (B) such holder, upon written notice to the Company, may void its notice of conversion (in the form attached to the Series A Preferred Stock) with respect to, and have returned any Series A Preferred Stock that has not been converted pursuant to such notice of conversion; provided that the voiding of such notice of conversion shall not affect the Company’s obligations to make any payments of dividends pursuant to Section 2 hereof which have accrued prior to the date of such notice pursuant to this Section 4(N) or otherwise.  In addition to the foregoing, if within three (3) Trading Days after the Company's receipt of such notice of conversion, the Company shall fail to issue and deliver a certificate to such holder or credit such holder’s balance account with DTC for the number of shares of Common Stock to which such holder is entitled upon such holder's conversion of any Series A Preferred Stock, and if on or after such Trading Day such holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such holder of Common Stock issuable upon such conversion that such holder anticipated receiving from the Company (a " Buy-In "), then the Company shall, within five (5) business days after such holder’s  request and in such holder’s discretion, either (i) pay cash to such holder in an amount equal to such holder’s total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the " Buy-In Price "), at which point the Company's obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to such holder a certificate or certificates representing such Common Stock and pay cash to such holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Bid Price on the date that such holder exercises its conversion rights pursuant to this Section 4.

 
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5.             Right to Participate in Future Issuances .

In case the Company proposes at any time to issue or sell any Common Stock or any Options or Convertible Securities other than Excluded Securities and other than securities issued in a public offering (the “ Offered Securities ”), the Company shall, no later than ten (10) days prior to the consummation of such transaction (a “ Preemptive Rights Transaction ”), give notice in writing (the “ Preemptive Rights Offer Notice ”) of such Preemptive Rights Transaction to each Series A Preferred Stock holder (each, a “ Preemptive Rights Holder ”).  The Preemptive Rights Offer Notice shall describe the proposed Preemptive Rights Transaction, identify the proposed purchaser, and contain an offer (the “ Preemptive Rights Offer ”) to sell to each Preemptive Rights Holder, at the same consideration to be paid by the proposed purchasers, that number of Offered Securities required to maintain such Preemptive Rights Holder’s ownership percentage of the fully-diluted Common Stock in effect as of the date of the Preemptive Rights Offer Notice (the “ Maximum Offer Amount ”); provided, however, that in calculating such ownership percentage, only the Preemptive Rights Holder’s Series A Preferred Stock (and not any outstanding shares of Common Stock or Options or other Convertible Securities then held by the Preemptive Rights Holder) will be included when the percentage interest is calculated.  A Preemptive Rights Holder may subscribe for all or a portion of its Maximum Offer Amount on or prior to the 30 th day following the date of sale of the Offered Securities to the initial purchasers.  Any of the Offered Securities not subscribed for by a Preemptive Rights Holder shall be offered to the other Preemptive Rights Holders pursuant to a written notice from the Company on a pro rata basis for a period of 30 days.  When the Offered Securities are accepted in the manner set forth in this paragraph 5, the Company shall, as promptly as practicable but no later than twenty (20) days after acceptance by a Preemptive Rights Holder of its subscription portion of the Maximum Offer Amount, issue certificates representing the applicable number of Offered Securities (free of all liens and encumbrances) to such holder against delivery by such holder of the consideration payable therefor.  Any notice required to be given by Company pursuant to this paragraph 5 shall (i) specify the name of the proposed purchaser, the number of shares to be issued, the amount and type of consideration to be received therefor, and the other material terms on which the Company proposes to issue the shares, and (ii) contain an offer to sell to those holders permitted to participate in such offer all of such shares at the same price per share and for consideration consisting of (x) cash equal to the amount of cash proposed to be paid by the proposed purchaser and (y) if any of the consideration to be paid by the proposed purchaser is non-cash consideration, either the same non-cash consideration or, at the election of the particular holder, cash having an equivalent value to the non-cash consideration proposed to be paid by the proposed purchaser.  The determination of equivalent value required by the preceding sentence shall be made by an Independent Appraiser, it being understood that the fees and expenses of such Independent Appraiser shall be paid by the Company.  Notwithstanding anything to contrary herein, before the Company sends a Preemptive Rights Offer Notice to a Preemptive Rights Holder, the Company shall send written notification to such Preemptive Rights Holder that the Company intends to send a Preemptive Rights Offer Notice to such Preemptive Rights Holder (such notice, the “ Pre-Notice ”).  If the Company does not receive, within three (3) business days from the date of the Pre-Notice, a written notice from such Preemptive Rights Holder stating that he, she or it does not wish to receive material non-public information relating to the Company, then the Company shall send a Preemptive Rights Offer Notice to such Preemptive Rights Holder and such Preemptive Rights Holder shall not have the rights set forth in this paragraph.
 
 
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6.            Voting - Series A Preferred Stock .  In addition to any class voting rights provided by law and the Certificate of Incorporation, the holders of Series A Preferred Stock shall have the right to vote together with the holders of Common Stock as a single class on any matter on which the holders of Common Stock are entitled to vote , at any annual or special meeting of the stockholders and not as a separate class, and may act by written consent in the same manner as the holders of Common Stock ; provided , however , the voting rights of the holders of Series A Preferred Stock shall be subject to any limitations or additional rights that are set forth in the Company’s Certificate of Incorporation, as amended through the date of this Amended Certificate of Designation.  With respect to the voting rights of the holders of the Series A Preferred Stock pursuant to the preceding sentence, each holder of Series A Preferred Stock shall be entitled to one vote for each share of Common Stock that would be issuable to such holder upon the conversion of all the shares of Series A Preferred Stock held by such holder on the record date for the determination of shareholders entitled to vote at such meeting or the effective date of such written consent (after taking into account the conversion limitation set forth in Section 4M(1) above) , and shall have voting rights and powers equal to the voting rights and powers of the Common Stock, and shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Company.
 
 
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7.            Further Restrictions .  As long as at least 25% of the number of shares of Series A Preferred Stock issued on the Original Issuance Date are outstanding, and in addition to any other vote of the holders of Series A Preferred Stock required by law or by the Certificate of Incorporation, the prior consent of the holders of at least two-thirds of the outstanding Series A Preferred Stock shall be required for the Company to take any action that: (i) alters or changes the rights, preferences or privileges of the Series A Preferred Stock, (ii) creates (by reclassification or otherwise) any new class or series of shares or securities having rights, preferences or privileges senior to, or on a parity with, the Series A Preferred Stock, (iii) results in the redemption of any shares of Common Stock or any other shares or securities on a parity with or junior to the Series A Preferred Stock (other than pursuant to equity incentive agreements with service providers giving the Company the right to repurchase shares upon the termination of services), (iv) results in any merger, other corporate reorganization, sale of control, or any transaction in which all or substantially all of the assets of the Company are sold, (v) amends or waives any provision of the Company’s Certificate of Incorporation or Bylaws relative to the Series A Preferred Stock, (vi) increases the authorized size of the Company’s Board of Directors, (vii) results in the payment or declaration of any dividend on any shares of Common Stock or any other shares or securities junior to the Series A Preferred Stock, (viii) results in a confession of judgment against the Company, or settle or compromise by or against the Company (provided that no such consent shall be required for matters involving less than $50,000.00), ( i x) results in any filing by the Company for bankruptcy or receivership, (x ) results in any guaranty of any debt of a third party other than a direct or indirect wholly owned subsidiary of the Company; ( xi ) results in the making of any material cash investments in the securities of another entity other than in the ordinary course of business or other than investments in wholly owned subsidiaries of the Company, or (xii) results in the Company entering into a materially new line of businesses not related to the Company’s current line of business.

8.            No Waiver .  Except as otherwise modified or provided for herein, the holders of Series A Preferred Stock shall also be entitled to, and shall not be deemed to have waived, any other applicable rights granted to such holders under the applicable provisions of the Delaware General Corporation Law.

9.            No Impairment .  The Company will not, through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities on any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of Article Four and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights and liquidation preferences granted hereunder of the holders of the Series A Preferred Stock against impairment.”

 
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IN WITNESS WHEREOF, this Amended and Restated Certificate of Designation has been executed by the Company by a duly authorized executive officer as of this 2nd day of November, 2010.

 
LIQUIDMETAL TECHNOLOGIES, INC.
 
       
 
By:
/s/ Tony Chung
 
 
Name:
  Tony Chung
 
 
Title:
  Chief Financial Officer
 
 
 
 

 
 
Exhibit 10.1
 
EMPLOYMENT AGREEMENT
 
THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into effective as of August 3, 2010 (the “Effective Date”), by and between LIQUIDMETAL TECHNOLOGIES, INC., a Delaware corporation (the "Company"), THOMAS STEIPP , an individual residing in the State of California (the "Employee").
 
RECITALS
 
 
WHEREAS, the Employee desires to be employed by the Company upon the terms and conditions set forth in this Agreement; and
 
WHEREAS, the Company desires to assure itself of the Employee's continued employment in the capacities set forth herein.
 
NOW, THEREFORE , in consideration of the foregoing recitals and for other good and valuable consideration, the parties hereto covenant and agree as follows:
 
1.             Employment.   The Company hereby employs Employee, and the Employee hereby accepts such employment, upon the terms and conditions set forth in this Agreement.
 
2.             Term . Subject to the terms and conditions of this Agreement, including, but not limited to, the provisions for termination set forth in Section 5 hereof, the employment of the Employee under this Agreement shall commence on the Effective Date and shall continue through the close of business on August 3, 2015 (the " Initial Term ").  Upon the expiration of the Initial Term, the Employee’s employment with the Company will continue on an “at-will” basis and may be terminated by Employee or the Company for any reason and at any time, provided that the terminating party shall provide at least ninety (90) days prior written notice of the termination to the other party (unless the termination is With Cause as defined in this Agreement, in which case the Employee’s employment may be terminated immediately).
 
3.             Duties .  Employee will serve as PRESIDENT and CHIEF EXECUTIVE OFFICER of the Company. The Employee will devote his full business time, attention, skill, and energy to the business of the Company and will be a full-time employee  of the Company.  Employee will use the Employee’s best efforts to promote the success of the Company's business and will cooperate fully with the Board of Directors in the advancement of the best interests of the Company.  Furthermore, the Employee shall assume and competently perform such reasonable responsibilities and duties as may be assigned to the Employee from time to time by the Board of Directors and Chairman of the Board of the Company or their designee.  To the extent that the Company shall have any parent company, subsidiaries, affiliated corporations, partnerships, or joint ventures (collectively "Related Entities"), the Employee shall perform such duties to promote these entities and to promote and protect their respective interests to the same extent as the interests of the Company without additional compensation. At all times, the Employee agrees that the Employee has read and will abide by, and prospectively will read and abide by, any employee handbook, policy, or practice that the Company or Related Entities has or hereafter adopts with respect to its employees generally..
 

4.             Compensation .
 
(a)            Annual Base Salary .  As compensation for Employee’s services and in consideration for the Employee's covenants contained in this Agreement, the Company shall pay the Employee an annual base salary of $300,000.00, which salary shall be paid in accordance with the Company’s regular payroll schedule and will be subject to applicable tax and other legally required withholdings.  The annual compensation may be adjusted upward (but not downward) in the sole discretion of the Board of Directors.  For purposes of this Agreement, the term “ Salary Year ” means the one year, 365-day period (or 366 day period for a leap year) that begins on the Effective Date and each successive one year period thereafter.  The base salary established by this paragraph will be effective as of August 3, 2010, with any retroactive salary amount being payable by the Company within a reasonable period of time following the execution of this Agreement.
 
(b)            Bonuses .  In addition to the Employee’s annual base compensation, during the term of the Employee’s employment hereunder, the Employee shall be entitled to only such bonuses or additional compensation as may be granted to the Employee by the Board of Directors or Chairman of the Board of the Company, in their sole discretion.
 
(c)            Reimbursement of Expenses .  The Employee shall be reimbursed for all reasonable and customary travel and other business expenses incurred by Employee in the performance of Employee’s duties hereunder, provided that such reimbursement shall be subject to, and in accordance with, any expense reimbursement policies and/or expense documentation requirements of the Company that may be in effect from time to time
 
(d)            Stock Grant .  In addition to the foregoing, in consideration of the execution of this Agreement by the Employee, the Company shall, on the date hereof, grant to the employee 6,000,000   shares of the common stock of the Company in accordance with a restricted stock agreement in the form set forth as Exhibit A hereto.
 
(e)            Other   Benefits .  During the term of the Employee’s employment hereunder, the Employee shall be eligible to participate in such pension, life insurance, health insurance, disability insurance and other benefits plans, if any, which the Company may from time to time make available to similar-level employees.
 
(f)            Vacation .  The Employee shall be entitled to 4 Weeks paid vacation during each Salary Year during the term of the Employee’s employment hereunder.  Vacation shall be taken at such times and with such notice so as to not disrupt or interfere with the business of the Company.  Unused vacation from a particular Salary Year will not be paid in cash but will carry over to succeeding Salary Years up to a maximum of 3 Weeks , and no more than 3 weeks of carried-over vacation may be taken during any Salary Year.
 
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5.             Termination .
 
(a)            Death .  The Employee's employment under this Agreement shall terminate immediately upon Employee’s death.  In the event of a termination pursuant to this Section 5(a), the Employee’s estate shall be entitled to receive any unpaid base salary owing to Employee up through and including the date of the Employee’s death.
 
(b)            Disability .  If, during the term of the Employee’s employment hereunder, the Employee becomes physically or mentally disabled in the determination of a physician appointed or selected by the Company, or, if due to any physical or mental condition, the Employee becomes unable for a period of more than sixty (60) days during any six-month period to perform Employee’s duties hereunder on substantially a full-time basis as determined by a physician selected by the Company, the Company may, at its option, terminate the Employee's employment upon not less than thirty (30) days written notice. In the event of a termination pursuant to this Section 5(b), the Employee shall be entitled to receive any unpaid base salary owing to Employee up through and including the effective date of termination.
 
(c)            Termination By Company Without Cause .  In addition to the other termination provisions of this Agreement, the Company may terminate the Employee’s employment at any time without cause (a “Termination Without Cause”).  In the event of a Termination Without Cause, the Employee shall continue to receive the Employee’s base salary (as then in effect) during the twelve (12) month period immediately following the effective date of the Termination Without Cause or, if shorter, through the last day of the Initial Term (the “Severance Period”).  In addition to the severance pay described in the preceding sentence, the Employee shall continue, during the Severance Period, to receive all employee health and welfare benefits to which Employee was entitled immediately prior to the Termination of Cause, but only to the extent that the applicable benefit plan permits such continuation of benefits.  Employee agrees and acknowledges, however, that Employee will forfeit the right to receive base salary and benefits during the Severance Period immediately upon the Employee’s breach of any covenant set forth in Section 6 of this Agreement.  The Employee will also forfeit the right to salary and benefits during the Severance Period upon accepting employment with another employer with comparable salary, and benefits hereunder shall be forfeited and shall cease upon the Employee becoming eligible for benefits from the Employee’s new employer.  Notwithstanding the foregoing, the termination of the Employee’s employment pursuant to the second sentence of Section 2 of this Agreement shall not constitute a Termination Without Cause and shall not give rise to any severance payment or other benefits pursuant to this Section 5(c).  The Employee’s right to receive any severance payments pursuant to this Section 5(c) is conditioned upon the Employee signing a general release in form and substance satisfactory to the Company under which the Employee releases the Company and its affiliates, together with their respective officers, directors, shareholders, employees, agents and successors and assigns, from any and all claims Employee may have against them as of the date of such release (whether known or unknown), other than claims arising out of this Agreement.
 
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(d)            Termination By Company With Cause .  The Company may terminate the Employee’s employment at any time with Cause.  As used in this Agreement, "Cause" shall mean the following: (1) the Employee's failure or inability to perform Employee’s duties under this Agreement to the reasonable satisfaction of the Board of Directors of the Company after being given written notice of the Employee’s deficiencies and having a period of at least ten (10) days to cure such deficiencies to the reasonable satisfaction of the Board of Directors; (2) dishonesty or other serious misconduct, (3) the commission of an unlawful act material to Employee’s employment, (4) a material violation of the Company's policies or practices which reasonably justifies immediate termination; (5) committing, pleading guilty, nolo contendre or no contest (or their equivalent) to, entering into a pretrial intervention or diversion program regarding, or conviction of, a felony or any crime or act involving moral turpitude, fraud, dishonesty, or misrepresentation; (6) the commission by the Employee of any act which could reasonably affect or impact to a material degree the interests of the Company or Related Entities or in some manner injure the reputation, business, or business relationships of the Company or Related Entities; (7) the Employee's inability to perform an essential function of Employee’s position; (8) any material breach by Employee of this Agreement which, if unintentional and capable of being cured, is not cured within ten (10) of written notice of such breach by the Company to Employee.  The Company may terminate this Agreement for Cause at any time without notice.  In the event of a termination for Cause, the Company shall be relieved of all its obligations to the Employee provided for by this Agreement as of the effective date of termination, and all payments to the Employee hereunder shall immediately cease and terminate as of such date, except that Employee shall be entitled to the annual base salary hereunder up to and including the effective date of termination, provided, however, that the Employee’s obligations under Sections 6 and 7 of this Agreement shall survive such a Termination for Cause, and any other liabilities or obligations which have accrued and are owed by the Employee to the Company shall not be extinguished or released by such termination.
 
(e)            Termination by Employee Upon Change in Control .  In the event that a Change in Control (as defined below) occurs and Employee terminates his own employment with the Company by delivering written notice of termination to the Company within thirty (30) days after such Change in Control (an “Employee Termination Notice”), then Employee shall be entitled to lump-sum severance compensation in an amount equal to the amount of base salary to which Employee would have been entitled for the remainder of the Initial Term at the base salary rate being paid to Employee as of the date of the Change in Control (the “Change in Control Compensation”).  The Change in Control Compensation shall be payable on the last pay day of the Company of the month in which the Change in Control occurs, but no earlier than fifteen (15) days after which Employee delivers the Employee Termination Notice to the Company.  In addition to the Change in Control Compensation, the Employee shall, to the extent permitted by any applicable benefit plan, continue to receive, from the date of termination through the end of the Initial Term, all employee health and welfare benefits that Employee would have received during such period in the absence of such termination.  Employee agrees and acknowledges, however, that Employee will forfeit the right to receive Change in Control Compensation and benefits during such period immediately upon the Employee’s breach of any covenant set forth in Section 6 of this Agreement.  For purposes hereof, the term “Change in Control” means any of the following events: (i) any person, entity, or “group” (as described in Rule 13d-5(b)(1) promulgated under the Securities Exchange Act of 1934, as amended), other than an affiliate or subsidiary of the Company or an employee benefit plan established or maintained by the Company, a subsidiary of the Company, or any of their respective affiliates, acquires more than 50.0% of the combined voting power of the Company’s then outstanding securities; (ii) the consummation of (A) a merger or consolidation of the Company with or into another corporation unless, after giving effect to such transaction, the stockholders of the Company immediately prior to such transaction own more than 50% of the aggregate voting power of the Company or the successor entity of such transaction, or (B) a sale or disposition of all or substantially all of the Company’s assets; (iv) if during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the board of directors of the Company (the “Continuing Directors”) cease for any reason to constitute at least a majority thereof; provided that any individual whose election or nomination for election as a member of the board of directors of the Company was approved by a vote of at least a majority of the Continuing Directors then in office shall be considered a Continuing Director.  In the case of any ambiguity regarding the interpretation of the foregoing definition of “Change in Control”, such question shall be resolved in good faith by the board of directors of the Company.  The Employee’s right to receive any compensation pursuant to this Section 5(e) is conditioned upon the Employee signing (on or before such compensation is due) a general release in form and substance satisfactory to the Company under which the Employee releases the Company and its affiliates, together with their respective officers, directors, shareholders, employees, agents and successors and assigns, from any and all claims Employee may have against them as of the date of such release (whether known or unknown), other than claims arising out of this Agreement.
 
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(f)            Special Termination .  In addition to the foregoing, in the event that the Company does not within ninety (90) days after the date of this Agreement receive from Crucible Intellectual Property, LLC, a Delaware limited liability company and special-purpose wholly owned subsidiary of the Company (“Crucible”), the entire maximum amount of the second payment due to Crucible by Apple Inc. (“Apple”) pursuant to the Exclusive License Agreement of even date herewith between Crucible and Apple, the Company may at any time thereafter terminate this Agreement upon written notice to Employee.  In the event of such a termination, the Company shall be relieved of all its obligations to the Employee provided for by this Agreement as of the effective date of termination, and all payments to the Employee hereunder shall immediately cease and terminate as of such date, except that Employee shall be entitled to the annual base salary hereunder up to and including the effective date of termination, provided, however, that the Employee’s obligations under Sections 6 and 7 of this Agreement shall survive such a termination.
 
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6.             Nonsolicitation and Nondisclosure Covenants.
 
(a)            Rationale for Restrictions .  Employee acknowledges that Employee’s services hereunder are of a special, unique, and extraordinary character, and Employee’s position with the Company places Employee in a position of confidence and trust with customers, suppliers, and other persons and entities with whom the Company and its Related Entities have a business relationship.   The Employee further acknowledges that the rendering of services under this Agreement will likely require the disclosure to Employee of Confidential Information (as defined below) including Trade Secrets of the Company relating to the Company and/or Related Entities.  As a consequence, the Employee agrees that it is reasonable and necessary for the protection of the goodwill and legitimate business interests of the Company and Related Entities that the Employee make the covenants contained in this Section 6, that such covenants are a material inducement for the Company to employ the Employee and to enter into this Agreement, and that the covenants are given as an integral part of and incident to this Agreement.
 
(b)            Nonsolicitation Covenants .  As used herein, the term " Restrictive Period " means the time period commencing on the Effective Date of this Agreement and ending on the second (2 nd ) anniversary of the date on which the Employee’s employment by the Company (or any Related Entity) expires or is terminated for any reason, including both a termination by the Company for Cause and Not for Cause.  In addition, the term “ Covered Business ” means any business which is the same as, or similar to, any business conducted by the Company or any of the Related Entities at any time during the Restrictive Period.  The Employee agrees that the Employee will not engage in any of the following acts anywhere in the world during the Restrictive Period:
 
 
(i)
directly or indirectly assist, promote or encourage any existing or potential employees, customers, clients, or vendors of the Company or any Related Entity, as well as any other parties which have a business relationship with the Company or a Related Entity, to terminate, discontinue, or reduce the extent of their relationship with the Company or a Related Entity;
 
 
(ii)
directly or indirectly solicit business of the same or similar type as a Covered Business, from any person or entity known by the Employee to be a customer or client of the Company, whether or not the Employee had contact with such person or entity during the Employee’s employment with the Company;
 
 
(iii)
disparage the Company, any Related Entities, and/or any shareholder, director, officer, employee, or agent of the Company or any Related Entity; and/or
 
 
(iv)
engage in any practice the purpose of which is to evade the provisions of this Section 6.
 
Employee acknowledges that Employee’s services hereunder are of a special, unique, and extraordinary character, and Employee’s position with the Company places Employee in a position of confidence and trust with customers, suppliers, and other persons and entities with whom the Company and its Related Entities have a business relationship.   The Employee further acknowledges that the rendering of services under this Agreement will likely require the disclosure to Employee of Confidential Information (as defined below) and Trade Secrets (as defined below) of the Company relating to the Company and/or Related Entities.  As a consequence, the Employee agrees that it is reasonable and necessary for the protection of the goodwill and legitimate business interests of the Company and Related Entities that the Employee make the covenants contained in this Section 6, that such covenants are a material inducement for the Company to employ the Employee and to enter into this Agreement, and that the covenants are given as an integral part of and incident to this Agreement.

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(c)            Disclosure of Confidential Information .  The Employee acknowledges that the inventions, innovations, software, Trade Secrets, business plans, financial strategies, finances, and all other confidential or proprietary information with respect to the business and operations of the Company and Related Entities are valuable, special, and unique assets of the Company.  Accordingly, the Employee agrees not to, at any time whatsoever either during or after the Employee’s term of employment with the Company, disclose, directly or indirectly, to any person or entity, or use or authorize any person or entity to use, any confidential or proprietary information with respect to the Company or Related Entities without the prior written consent of the Company, including, without limitation, information as to the financial condition, results of operations, identities of clients or prospective clients, products under development, acquisition strategies or acquisitions under consideration, pricing or cost information, marketing strategies, passwords or codes or any other information relating to the Company or any of the Related Entities which could be reasonably regarded as confidential (collectively referred to as “Confidential Information”).  However, the term “Confidential Information” does not include any information which is or shall become generally available to the public other than as a result of disclosure by the Employee or by any person or entity which the Employee knows (or which the Employee reasonably should know) has a duty of confidentiality to the Company or a Related Entity with respect to such information.  In addition to the foregoing, Company will be fully entitled to all of the protections and benefits afforded by the California Uniform Trade Secrets Acts and any other applicable law.  The term “Trade Secret” shall mean any information, including a formula, pattern, compilation, program, device, method technique, or process that derives independent economic value, actual or potential, from being not generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use, including but not limited to the patented information and processes as well as the unpatented information and processes comprising, underlying, arising from, and associated with Liquidmetal alloys.
 
(d)            Prevention of Premature Disclosure of Confidential Information and Trade Secrets .  The Employee agrees and acknowledges that, because the success of the Company is heavily dependent upon maintaining the secrecy of the Company’s Confidential Information and Trade Secrets and preventing the premature public disclosure of the Company’s proprietary information and technology including its Confidential Information and Trade Secrets, the Employee agrees to use the Employee’s best efforts and his or her highest degree of care, diligence, and prudence to ensure that no Confidential Information or Trade Secret prematurely leaks or otherwise prematurely makes its way into the public domain or any public forum, including, without limitation, into any trade publications, internet chat rooms, or other similar forums.  In the event that the Employee becomes aware of any premature leak of Confidential Information or Trade Secret or becomes aware of any circumstances creating a risk of such a leak, the Employee shall immediately inform the Board of Directors, the Chief Executive Officer, or the Employee’s supervisor of such leak or of such circumstances.
 
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(e)            Removal and Return of Proprietary Items .  The Employee will not remove from the Company's premises (except to the extent such removal is for purposes of the performance of the Employee’s duties at home or while traveling, and under such conditions and restrictions as are specifically authorized and/or required by the Company) or transmit by any means, electronic or otherwise, any document, record, notebook, plan, model, component, device, computer software or code, or Confidential Information or Trade Secret whether embodied in a disk or in any other form, including electronic form (collectively, the " Proprietary Items ").  The Employee recognizes that, as between the Company and the Employee, all of the Proprietary Items, whether or not developed by the Employee, are the exclusive property of the Company.  Upon termination of Employee’s employment with the Company by either party (regardless of the reason for termination), or upon the request of the Company during the term of employment, the Employee will return to the Company all of the Proprietary Items in the Employee’s possession or subject to the Employee’s control, and the Employee shall not retain any copies, abstracts, sketches, or other physical embodiment of any of the Proprietary Items, Confidential Information, Trade Secret or any part thereof.
 
(f)            Enforcement and Remedies .  In the event of any breach of any of the covenants set forth in this Section 6, the Employee recognizes that the remedies at law will be inadequate and that in addition to any relief at law which may be available to the Company for such violation or breach and regardless of any other provision contained in this Agreement, the Company shall be entitled to equitable remedies (including an injunction) and such other relief as a court may grant after considering the intent of this Section 6.  Additionally, the period of time applicable to any covenant set forth in this Section 6 will be extended by the duration of any violation by Employee of such covenant.  In the event a court of competent jurisdiction determines that any of the covenants set forth in this Section 6 are excessively broad as to duration, geographic scope, prohibited activities or otherwise, the parties agree that this covenant shall be reduced or curtailed to the extent, but only to the extent, necessary to render it enforceable.
 
7.             Employee Inventions .
 
(a)           Employee agrees that any inventions, ideas, original works of authorship or other work product in whole or in part conceived or made by Employee which are made through the use of any of the Confidential Information or any of the Company's equipment, facilities, supplies, trade secrets or time, or which relate to the Company's business or the Company's actual or demonstrably anticipated research and development, or which result from any work performed by Employee for the Company, along with any rights in or to any of the foregoing under copyright, patent, trade secret, trademark, or other law, shall belong exclusively to the Company and shall be deemed part of the Confidential Information for purposes of this Agreement whether or not fixed in a tangible medium of expression. Without limiting the foregoing, Employee agrees that any such original works of authorship shall be deemed to be "works made for hire" and that the Company shall be deemed the author thereof under the U. S. Copyright Act (Title 17 of the U. S. Code), provided that in the event and to the extent such works are determined not to constitute "works made for hire" as a matter of law or that there are any rights that do not accrue to the Company as a work made for hire, Employee hereby irrevocably assigns and transfers to the Company all right, title and interest in and to such works, including but not limited to copyrights and other intellectual property rights. This Agreement shall be construed in accordance with the provisions of Section 2870 of the California Labor Code (a copy of which is attached as Exhibit A hereto) relating to inventions made by Employee, and accordingly this Agreement is not intended and shall not be interpreted to assign to or vest in the Company any of Employee's rights in any inventions other than those described in the first sentence of this Section 7(a).
 
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(b)           At all times during Employee's employment by the Company, Employee will maintain a complete and detailed current written record of all ideas, concepts, improvements, discoveries or inventions, of any nature ("Inventions"), whether patentable or not, created or made in whole or part by Employee, either solely or jointly with others, and Employee will promptly disclose any such Inventions to the Company, in writing.  Employee further agrees that all such written records shall be and remain the sole and exclusive property of the Company, and Employee shall make such written records available to the Company at any time upon request, for review, inspection or copying by the Company, and shall deliver all copies of such records to the Company upon termination of Employee's employment, for any reason.
 
(c)           With respect to Inventions made or conceived of in whole or part by Employee, either solely or jointly with others, whether during Employee's employment by the Company or after termination of such employment if developed using, applying or adapting, in any way, the Company's equipment, supplies, facilities, Confidential Information or trade secret information, or during Employee's working hours, or such Invention relates to the Company's business, or actual or demonstrably anticipated research or development, or results from any work done in whole or part by Employee, either solely or jointly with others, for the Company, or is based on or related to programs, processes, Inventions or information learned by Employee during such employment:
 
 
(i)
Employee shall inform the Company promptly and fully of such Inventions by a written report, setting forth in detail the procedures employed and the results achieved.
 
 
(ii)
Employee hereby expressly transfers and assigns to the Company all of Employee's right, title and interest in and to such Inventions; and to Applications for U.S. and/or foreign letters patent and/or copyrights as well as any and all continuations, continuations-in-part, and divisions thereof, and to U.S. and/or foreign letters patent and/or copyrights issued thereon, as well as any and all reissues, extensions, improvements, or further developments thereof.
 
 
(iii)
Employee shall apply, or assist the Company in applying, at the Company's request and expense, for U.S. and/or foreign letters patent and/or copyrights in the Company's name, or otherwise as the Company shall desire.  The decision to obtain letters patent and/or copyrights shall reside solely with the Company; however, the decision not to obtain or apply for letters patent and/or copyrights at the time of disclosure or at any time thereafter, shall not be construed as a waiver of any rights hereunder.
 
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(iv)
the Company shall also have the perpetual, royalty-free right to use in its business, to license others to use, and to make, use and sell products, processes and/or services derived from any Inventions, discoveries, designs, improvements, concepts, ideas, whether patentable or not, including but not limited to process, methods, formulas, techniques or know-how related thereto, which are not within the scope of Inventions as defined herein, but which are conceived or made in whole or part by Employee, either solely or jointly with others, during regular working hours or with the use of the Company's equipment, supplies, facilities, Confidential Information, trade secret information materials or personnel.
 
8.             Essential and Independent Covenants .  The Employee’s covenants in Sections 6 and 7 of this Agreement are independent covenants, and the existence of any claim by the Employee against the Company under this Agreement or otherwise will not excuse the Employee’s breach of any covenant in Section 6 or 7.  The covenants of Sections 6 and 7 shall survive the expiration, termination, extinguishment, or lapse of this Agreement under any circumstances, even if this Agreement is terminated by either party, whether for Cause or Not for Cause.
 
9.             Representations and Warranties by The Employee . The Employee represents and warrants to the Company that the execution and delivery by the Employee of this Agreement do not, and the performance by the Employee of the Employee’s obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (a) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to the Employee, or (b) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which the Employee is a party or by which the Employee is or may be bound, including, without limitation, any noncompetition agreement or similar agreement.  Employee further represents and warrants that he fully and completely understands this Agreement and that he has engaged in negotiations with the Company and has either consulted with an attorney of his choice or has had ample opportunity to do so and is fully satisfied with the opportunity he has had.
 
10.             Notices .  For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when hand-delivered, sent by facsimile transmission (as long as receipt is acknowledged), or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the address or facsimile number for each party set forth on the signature page hereto, or to such other address or facsimile number as either party may have furnished to the other in writing in accordance herewith, except that a notice of change of address shall be effective only upon receipt.
 
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11.             Miscellaneous .  No provision of this Agreement may be modified or waived unless such waiver or modification is agreed to in writing signed by both of the parties hereto.  No waiver by any party hereto of any breach by any other party hereto shall be deemed a waiver of any similar or dissimilar term or condition at the same or at any prior or subsequent time.  This Agreement is the entire agreement between the parties hereto with respect to the Employee's employment by the Company, and there are no agreements or representations, oral or otherwise, expressed or implied, with respect to or related to the employment of the Employee which are not set forth in this Agreement.  This Agreement shall be binding upon, and inure to the benefit of, the Company, its respective successors and assigns, and the Employee and Employee’s heirs, executors, administrators and legal representatives.  The duties and covenants of the Employee under this Agreement, being personal, may not be delegated or assigned by the Employee without the prior written consent of the Company, and any attempted delegation or assignment without such prior written consent shall be null and void and without legal effect.  The parties agree that if any provision of this Agreement shall under any circumstances be deemed invalid or inoperative, the Agreement shall be construed with the invalid or inoperative provision deleted and the rights and obligations of the parties shall be construed and enforced accordingly.  This Agreement may be assigned by the Company without the consent of the Employee, provided, however, that the Employee is given notice of the assignment.
 
12.             Governing Law; Resolution of Disputes .  The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of California without regard to principles of choice of law or conflicts of law thereunder.  Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of California, County of Orange, or, if it has or can acquire jurisdiction, in the federal courts located in, Orange County, California, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on either party anywhere in the world.  The parties hereto agree that having venue and jurisdiction solely in California is reasonable in that the headquarters for the Company is in Orange County, California and that site for litigation is the most central for such matters.  THE PARTIES HEREBY WAIVE A JURY TRIAL IN ANY LITIGATION ARISING UNDER OR RELATING TO THIS AGREEMENT OR THE EMPLOYMENT OF THE EMPLOYEE WITH THE COMPANY.  This Agreement shall not be construed against either party but shall be construed without regard to the participation of either party in the drafting of this Agreement or any part thereof.
 
13.             Counterparts; Facsimile Signatures .  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.  This Agreement may be effective upon the execution and delivery by any party hereto of facsimile copies of signature pages hereto duly executed by such party; provided , however , that any party delivering a facsimile signature page covenants and agrees to deliver promptly after the date hereof two (2) original copies to the other party hereto.
 
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14.             Modification By The Court .   In the event that any provision or Section of this Agreement violates any law of the state of California or is for some other reason unenforceable as written in the state of California, the Employee and the Company agree that the unenforceable provision or Section should not cause the entire Agreement to become unenforceable unless it is caused to fail in its essential purpose.  In the event that any provision or Section of this Agreement violates any law of the state of California or is for some other reason unenforceable as written in the state of California, the Employee agrees that the provision should be reduced in scope or length or otherwise modified by the Court, if possible under the law, to cause the provision or Section of the Agreement to be legal and enforceable but to still provide to the Company the maximum protection available to it under the law.
 
[signature(s) on following page]
 
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IN WITNESS WHEREOF , the parties have executed this Agreement as of the day and year first above written.
 
  LIQUIDMETAL TECHNOLOGIES, INC.  
     
       
 
By:
/s/ Abdi Mahamedi  
    Abdi Mahamedi, Chairman  
       
  Liquidmetal Technologies  
  30452 Esperanza  
  Rancho Santa Margarita, CA  
  92688  
  Facsimile Number:  949.635.2108  
 
 
  EMPLOYEE  
     
       
 
By:
/s/ Thomas Steipp  
       
 
Printed Name:
Thomas Steipp  
       
 
Address and Facsimile Number:
 
       
     
       
     
       
     
       
     
 
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EXHIBIT A
 
Section 2870 of the California Labor Code provides:
 
(a)           Any provision in an employment agreement which provides that an employee shall assign or offer to assign any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either:  (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; (2) Result from any work performed by the employee for the employer.
 
(b)           To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.
 

 
Exhibit 10.2

RESTRICTED STOCK AWARD AGREEMENT

THIS RESTRICTED STOCK AWARD AGREEMENT (this “ Agreement ”) is entered into this 3rd day of August, 2010 (the “ Grant Date ”), by and between LIQUIDMETAL TECHNOLOGIES, INC. , a Delaware corporation (the “ Company ”) and THOMAS STEIPP , an individual residing in the State of California (the “ Participant ”).

RECITALS
 
WHEREAS , the Company is a Delaware corporation with authorized capital stock as follows:
 
 
300,000,000 shares of common stock with par value $0.001 (the “ Common Stock ”); and
 
 10,000,000 shares of preferred stock with par value $0.001
 
WHEREAS , the Company and the Participant entered into that certain Employment Agreement dated as of August 3, 2010 (the “ Employment Agreement ”), whereby the Participant shall serve as President and Chief Executive Officer of the Company; and
 
WHEREAS , in connection with the Employment Agreement, the Company desires to grant 6,000,000 shares of restricted Common Stock (the “ Restricted Shares ”) to the Participant.
 
NOW, THEREFORE , in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
 
1.            Grant of Restricted Shares .  The Company hereby grants to the Participant the Restricted Shares, subject to the terms and conditions of this Agreement.
 
2.            Vesting .
 
a.           Subject to Section 2(c) hereinbelow, the Restricted Shares will vest in twenty percent (20%) increments on each of the first five (5) anniversaries of the Grant Date, provided that the Participant is continuously employed by the Company from the Grant Date through the applicable vesting date.
 
b.           If the Participant’s employment with the Company terminates for any reason, other than those reasons provided in Section 2(c) hereinbelow, before the date that the Restricted Shares are vested, the shares that have not yet vested as of the date of such termination will immediately be forfeited as of the date of such termination.
 
c.           Notwithstanding Section 2(b) hereinabove, in the event that the Participant’s employment with the Company terminates due to either (i) the death of the Participant, (ii) the Participant’s Termination By Company Without Cause (as defined in Section 5(c) of the Employment Agreement), or (iii) the Termination by Employee Upon Change in Control (as defined in Section 5(e) of the Employment Agreement; provided, however, that the Participant provides the Employee Termination Notice, as defined in the Employment Agreement, within the required time period), the Restricted Shares shall immediately vest as of the date of the Participant’s death or the termination of the Participant’s employment with the Company as a result of either subsection (ii) or (iii) of this Section 2(c).
 
 
 

 
 
3.            Issuance of Certificates/Escrow .
 
a.           The Company will issue in the Participant’s name certificate(s) evidencing the Restricted Shares as soon as practicable following the Participant’s execution of this Agreement.  In addition to any other legends placed on the certificate(s), such certificate(s) will bear the following legend:
 
“The sale or other transfer of the shares of common stock represented by this certificate, whether voluntary or by operation of law, is subject to restrictions set forth in the Restricted Stock Award Agreement, dated as of August 3, 2010, by and between Liquidmetal Technologies, Inc. and the registered owner hereof.  A copy of such agreement may be obtained from the Secretary of Liquidmetal Technologies, , Inc.”
 
b.           Upon the vesting of the Restricted Shares, the Participant will be entitled to a new certificate for the shares that have vested, without the foregoing legend, upon making a request for such certificate to the Secretary of the Company.
 
c.           The certificates representing the Restricted Shares will be held in escrow by the Company, as escrow agent.  The Company will give the Participant a receipt for the Restricted Shares held in escrow that will state that the Company holds such shares in escrow for the Participant’s account, subject to the terms of this Agreement, and the Participant will give the Company a stock power for such Restricted Shares duly endorsed in blank which will be used in the event such any of shares are forfeited in whole or in part.  As soon as practicable after the vesting date, the Restricted Shares will cease to be held in escrow, and certificate(s) for such number of shares of Restricted Shares will be delivered to the Participant or, in the case of the Participant’s death, to the Participant’s estate.
 
4.            Status of Participant .  This Agreement shall confer upon the Participant any right to continue in the employ of the Company, nor to interfere in any way with the right of the Company to terminate the employment of the Participant at any time.
 
5.            Nontransferability .  The Participant may not sell, transfer, assign, pledge, alienate, or hypothecate any of the Participant’s Restricted Shares until they are vested, other than as set forth herein and any such attempted sale, transfer, assignment, pledge, alienation, or hypothecation will be null and void.
 
6.            Voting and Dividends .  The Participant may exercise full voting rights and will receive all dividends and other distributions paid with respect to the Restricted Shares, whether or not vested, in each case so long as the applicable record date occurs before any forfeiture of such shares.  If, however, any such dividends or distributions are paid in shares of Company capital stock, such shares will be subject to the same risk of forfeiture, restrictions on transferability and other terms of this Agreement as is the Restricted Shares with respect to which they were paid.
 
 
2

 
 
7.            Market Stand-Off .  In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, including the Company’s initial public offering, the Participant shall not directly or indirectly sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer or agree to engage in any of the foregoing transactions with respect to, any Restricted Shares acquired under this Agreement without the prior written consent of the Company and the Company’s underwriters.  Such restriction shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters.  In no event, however, shall such period exceed one hundred eighty (180) days.
 
8.            Tax Matters .
 
a.           The Participant (and not the Company) shall be responsible for the Participant’s federal, state, local or foreign tax liability and any of the Participant’s other tax consequences that may arise as a result of the transactions contemplated by this Agreement.  The Participant shall rely solely on the determinations of the Participant’s tax advisors or the Participant’s own determinations, and not on any statements or representations by the Company or any of its agents, with regard to all such tax matters.  The acquisition of the Restricted Shares may result in adverse tax consequences that may be avoided or mitigated by filing an election under Section 83(b) of the Internal Revenue Code of 1986, as amended (the “ Code ”).  Such election may be filed only within thirty (30) days after the date of this Agreement.   The Participant should consult with a tax advisor to determine the tax consequences of acquiring the Restricted Shares and the advantages and disadvantages of filing the Code Section 83(b) election.  The Participant acknowledges that it is the Participant’s sole responsibility, and not the Company’s, to file a timely election under Section 83(b) of the Code, even if the Participant requests the Company or its representatives make this filing on the Participant’s behalf.  Attached a form 83(b) election as Exhibit A for convenience.
 
b.           To the extent that the receipt of the Restricted Shares or the vesting of the Restricted Shares results in income to the Participant for federal, state or local income tax purposes, the Participant shall deliver to the Company at the time the Company is obligated to withhold taxes in connection with such receipt or vesting, as the case may be, such amount as the Company requires to meet its withholding obligation under applicable tax laws or regulations, and if the Participant fails to do so, the Company has the right and authority to deduct or withhold from other compensation payable to the Participant an amount sufficient to satisfy its withholding obligations.  If the Participant does not make an election under Code Section 83(b) in connection with this Award, the Participant may satisfy the withholding requirement, in whole or in part, by electing to have the Company withhold for its own account that number of Restricted Shares otherwise deliverable to the Participant from escrow hereunder on the date the tax is to be determined having an aggregate Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax that the Company must withhold in connection with the vesting of such Restricted Shares.  The Participant’s election must be irrevocable, in writing, and submitted to the Secretary of the Company before the applicable vesting date.  The Fair Market Value of any fractional Restricted Shares not used to satisfy the withholding obligation (as determined on the date the tax is determined) will be paid to the Participant in cash.
 
 
3

 
 
9.            Miscellaneous .
 
a.           Each party to this Agreement (a) consents to the personal jurisdiction of the state and federal courts having jurisdiction in Orange County, California, (b) stipulates that the proper, exclusive, and convenient venue for any legal proceeding arising out of this Agreement is in the state or federal courts located in Orange County, California,  and (c) waives any defense, whether asserted by a motion or pleading, that any such court is an improper or inconvenient venue.
 
b.           No legal action or proceeding may be brought with respect to this Agreement more than one year after the later of (i) the last date on which the act or omission giving rise to the legal action or proceeding occurred, or (ii) the date on which the individual bringing such legal action or proceeding had knowledge or should have had knowledge of such act or omission.  At the Company’s election, such action or other legal proceeding shall be heard pursuant to a bench trial and, if so elected, the parties to such proceeding shall waive their rights to a trial by jury.
 
c.           This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company’s assets and business, and upon the Participant’s estate or any individual who obtains a right hereunder by will or the laws of descent and distribution.
 
10.            Investment Representation Statement .  The Participant must complete the Investment Representation Statement attached hereto as Exhibit B hereto to receive the Award.
 
 
COMPANY :
 
PARTICIPANT :
 
       
LIQUIDMETAL TECHNOLOGIES, INC., a Delaware corporation
     
         
By:
/s/ Ricardo Salas   /s/ Thomas Steipp  
Print Name:
Ricardo Salas  
THOMAS STEIPP
Print Title: Executive Vice President    
       
 
 
4

 

EXHIBIT A

 
ELECTION TO INCLUDE VALUE OF RESTRICTED PROPERTY IN GROSS INCOME IN YEAR OF TRANSFER UNDER CODE §83(b)
 
The undersigned hereby elects pursuant to Section 83 (b) of the Internal Revenue Code with respect to the property described below and supplies the following information in accordance with the regulations promulgated thereunder.
 
1.
The name, address, and taxpayer identification number of the undersigned are:
 
Name:  
Spouse’s Name:  
Address:  
City, State, Zip:  
Soc. Sec. Number:  
Spouse’s Soc. Sec. Num:  
 
2.
The property with respect to which this election is being made consists of ________________________ (__________) shares of Common Stock (the “ Shares ”) of LIQUIDMETAL TECHNOLOGIES, INC., a Delaware corporation (the “ Company ”).
 
3.
The date on which the property was transferred was _________ ___, _____.
 
4.
The Shares are subject to forfeiture, subject to the undersigned’s continuing performance of service on behalf of the Company, as set forth in a Restricted Stock Award Agreement entered into by the undersigned in connection with the undersigned’s acquisition of such Shares.
 
5.
The fair market value at the time of the transfer (determined without regard to any restrictions, other than those which by their term will never lapse) of the Shares is $______ per Share.
 
6.
The Shares were acquired by the undersigned in consideration for services.
 
7.
A copy of this statement has been furnished to the Company.
 
Dated:  __________ ___, _____
 
       
Taxpayer:
   
  Print Name:    
       
Spouse:    
  Print Name:    
 
 
A-1

 

EXHIBIT B
 
LIQUIDMETAL TECHNOLOGIES, INC.
INVESTMENT REPRESENTATION STATEMENT

TRANSFEREE:
Thomas Steipp, a resident of California  (“Transferee”)
   
ISSUER:
Liquidmetal Technologies, Inc., a Delaware corporation
   
SECURITY:
6,000,000 shares of Common Stock (the “Shares”)
   
DATE:
August ____, 2010
 
 
Transferee represents and warrants to the Issuer the following in connection with the Restricted Stock Award Agreement dated August __, 2010, between Transferee and Issuer, Issuer issued the Shares to Transferee, and, in connection therewith:
 
1.           Transferee understands that an investment in the Shares is speculative.  Transferee is aware of the Issuer’s business affairs and financial condition and has acquired sufficient information about the Issuer to reach an informed and knowledgeable decision to acquire the Shares.  Transferee is acquiring the Shares not with a view to, or for resale in connection with, any “distribution,” within the meaning of the Securities Act of 1933, as amended (“Securities Act”).
 
2.           Transferee understands that the Shares have not been registered under the Securities Act and are being transferred to the Transferee by reason of a specific exemption therefrom, which exemption depends upon, among other things, the accuracy of Transferee’s representations and warranties as set forth herein.
 
3.           Transferee understands that the Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available.  Transferee further acknowledges and understands that the Issuer is under no obligation to register the Shares.  Transferee understands that the instrument evidencing the Shares will be imprinted with a legend which prohibits the transfer of the Shares unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Issuer.
 
4.           Transferee is aware of the adoption of Rule 144 by the Securities and Exchange Commission, promulgated under the Securities Act, which permits limited public resale of shares acquired in a non-public offering subject to the satisfaction of certain conditions.  Transferee understands that if the Issuer is not satisfying the current public information requirement of Rule 144 at the time Transferee wishes to sell the Shares, Transferee would be precluded from selling the Shares under Rule 144 even if the minimum holding period has been satisfied.
 
 
B-1

 
 
5.            Transferee is capable of bearing the economic risk and burden of the investment and the possibility of complete loss of all of the investment, and the lack of a public market such that it may not be possible to readily liquidate the investment whenever desired.
 
 
Very truly yours,
 
     
       
 
By:
   
   
Transferee
 
       
 
 
B-2

 
Exhibit 10.3

 
MASTER TRANSACTION AGREEMENT
 
between
 
Apple Inc.,
 
Liquidmetal Technologies, Inc.
 
Liquidmetal Coatings, LLC
 
and
 
Crucible Intellectual Property, LLC
 

 
Effective as of
  August 5, 2010
 

 
 
 
 
 
 
[*] =
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS AND AN ASTERISK, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

 
 

 
 
CONTENTS
 
1.
LMT Technology
1
     
2.
Transaction Approvals
5
     
3.
LMT-SPE Formation
6
     
4.
LMT Technology Transfers to LMT-SPE
7
     
5.
LMT Patent Prosecution
9
     
6.
LMT-SPE Existence and Separateness
13
     
7.
Due Diligence
16
     
8.
LMT Indebtedness and Liens
17
     
9.
LMT-SPE Licenses
18
     
10.
Covenant Not to Compete
21
     
11.
Confidentiality
23
     
12.
Independent Contractor
24
     
13.
Indemnification
24
     
14.
Term, Termination and Suspension of Performance
25
     
15.
Guaranty
27
     
16.
Miscellaneous
29
 
 
Annex 1:
Permitted Liens
 
Annex 2:
Approvals
 
Annex 3:
LMC Assignment Agreement
 
Annex 4:
LMT Contribution Agreement
 
Annex 5:
Form of Payoff Letter
 
Annex 6:
Apple License
 
Annex 7:
LMT License
 
Annex 8:
LMC License
 
Annex 9:
Technology Development Agreement
 
Annex 10:
LMT Security Agreement
 
Annex 11:
LMT-SPE Security Agreement
 
Annex 12:
Form of Release
 
Annex 13:
Patent Counsel Engagement Letter
 
Annex 14:
Due Diligence Checklist
 
Annex 15:
List of Excluded LMC Patents and Trademarks
 
 
i

 

CERTAIN DEFINITIONS

Agreement
Introduction
Apple
Introduction
Apple License Agreement
9(a)
Apple-Related Entities
9 (f)
Approval
2(b)(iii)
business enterprise
6(j)
Caltech
1(e)
Caltech License
1(e)
Capture Period
1(a)(iv)
Closing Date
1(a)(i)
Consumer Electronic Products
10(a)
Due Diligence Checklist
7(a)
Guaranty
15(b)
indemnified party
13(a)
Intellectual Property
1(a)(ii)
Intellectual Property Rights
1(a)(iii)
Lien
1(b)(i)
LMC
Introduction
LMC