LIQUIDMETAL TECHNOLOGIES INC - Quarter Report: 2003 March (Form 10-Q)

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2003

OR

For the transition period from ____________ to ___________

Commission File No. 000-31332

LIQUIDMETAL TECHNOLOGIES

(Exact name of Registrant as specified in its charter)

100 North Tampa St., Suite 3150
Tampa, Florida 33602
(address of principal executive office, zip code)

Registrant’s telephone number, including area code: (813) 314-0280

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 at least the past 90 days.

Yes x  No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of May 14, 2003, there were 41,588,652 shares of the registrant’s common stock, no par value, outstanding.

1

Table of Contents

TABLE OF CONTENTS

2

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1 – Financial Statements and Independent Accountants’ Report

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

See notes to condensed consolidated financial statements.

3

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

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

     See notes to condensed consolidated financial statements.

4

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2003
(in thousands, except per share data)
(unaudited)

See notes to condensed consolidated financial statements.

5

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

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

6

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

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

     During the three months ended March 31, 2003, the Company reclassified $933 of machines from property, plant and equipment to inventory because the machines were sold in 2003.

     During the three months ended March 31, 2003, the change in the foreign exchange between the U.S. Dollar and the South Korean Won resulted in a $313 gain related to the note payable and $912 loss related to property, plant and equipment, including $39 related to accumulated depreciation.

     During the three months ended March 31, 2003, an option holder surrendered 93,758 share of the Company’s common stock in-lieu of cash payment for the option exercise price of $250 and income taxes payable by the option holder of $403. The common shares received in lieu of cash payment were immediately canceled upon receipt of the shares by the Company.

     During the three months ended March 31, 2002, the Company incurred $207 of costs related to its initial public offering that had not been paid as of March 31, 2002.

     During the three months ended March 31, 2002, the Company recorded a net addition to shareholders’ equity of $1,156 comprised of stock-based compensation in the discontinued retail golf operations. Additionally, there was a $98 foreign exchange loss effect in the discontinued retail golf operations.

See notes to condensed consolidated financial statements.

7

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(in thousands, except per share data)
(unaudited)

1.     Description of Business

     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 classifies operations into two reportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys. Liquidmetal alloy industrial coatings are used primarily as a protective coating for industrial machinery and equipment, such as drill pipe used by the oil drilling industry and boiler tubes used by coal-burning power plants. Bulk Liquidmetal alloys include market opportunities to manufacture and sell components for electronic devices, medical devices, sporting goods, tooling and prototype sampling, and metals processing equipment. In addition, such alloys are used to generate research and development services revenue for developing uses related primarily to defense and medical applications.

2.      Basis of Presentation and Recent Accounting Pronouncements

     The accompanying unaudited 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. In addition, certain reclassifications have been made for consistent presentation. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for any future periods or the year ending December 31, 2003. 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 March 31, 2003.

     Stock-based compensation. The Company applies Accounting Principles Board (“APB”) Opinion No. 25 for options when the exercise price of options granted to employees is less then the fair value of the underlying stock on the date of grant. The Company applies Statement of Financial Accounting Standards (“SFAS”) No. 123 for options granted to nonemployees who perform services for the Company.

8

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2003 and 2002
(in thousands, except per share data)
(unaudited)

     Had the Company determined compensation cost based on the fair value at the grant date for stock options consistent with the method of SFAS No. 123, the Company’s loss from continuing operations and basic and diluted loss per share from continuing operations would have been as follows:

     New Accounting Pronouncements. In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which such liabilities are incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs should be capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Adoption of SFAS No. 143 did not have a material impact on the Company’s financial statements.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated With Exit or Disposal Activities. Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires costs associated with exit or disposal activities to be recognized when the costs are incurred, rather than at a date of commitment to an exit or disposal plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company’s financial statements.

     In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation -Transition and Disclosure was issued by the FASB. This standard amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this standard amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for financial statements for fiscal years ending after December 15, 2002. The Company implemented SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for condensed financial statements for interim periods. The Company has not yet determined whether it will voluntarily change to the fair value based method of accounting for stock-based employee compensation.

9

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(in thousands, except per share data)
(unaudited)

     In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“Interpretation 45”). Interpretation 45 changes the accounting for and the disclosure of guarantees. Interpretation 45 requires that guarantees meeting the characteristics described in the Interpretation be initially recorded as fair value in contrast to FASB No. 5, which requires recording a liability when a loss is probable and reasonably estimable. The disclosure requirements of Interpretation 45 are effective for financial statements and annual periods ending after December 31, 2002. The initial recognition and initial measurement provisions of Interpretation 45 are effective on a prospective basis to guarantees issued or modified after December 30, 2002. The adoption of Interpretation 45 did not have a material impact on the Company’s financial statements.

3.     Trade receivables

4.     Inventories

     Inventories from continuing operations were comprised of the following:

     5.     Property, Plant and Equipment

     Property, plant and equipment consisted of the following:

10

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(in thousands, except per share data)
(unaudited)

     Depreciation expense was approximately $970 and $304 for the three months ended March 31, 2003 and 2002.

6.     Intangible Assets

     Intangible assets consisted of the following:

     Amortization expense was approximately $20 and $19 for the three months ended March 31, 2003 and 2002. The estimated aggregate amortization expense for each of the five succeeding years is as follows:

7.     Product Warranty

     Due to the lack of historical information for warranty expense related to bulk alloy products, management estimates product warranties as a percentage of bulk alloy product sales earned during the period. During the three months ended March 31, 2003, the Company recorded $367 of warranty expense. The product warranty accrual balance was included in accounts payable and accrued expenses at December 31, 2002.

8.     Note Payable

     On February 4, 2003, Liquidmetal Korea received 6,500,000 in South Korean Won, or approximately $5,488, under a loan from Kookmin Bank of South Korea, as evidenced by a note payable to Kookmin Bank. The principal and interest under this note is payable in equal monthly installments beginning eighteen months from the origination date until the maturity date on December 20, 2007. During the first eighteen months from the origination date, interest is payable on a monthly basis. The note payable bears interest at an annual rate of 7.1%. In the event of delayed repayment, the interest increases to a maximum of 21%, depending on the length of time the repayment is delayed. Since this note payable is denominated in South Korea Won, the balance will fluctuate with the exchange rate between the U.S. Dollar and the South Korean Won, resulting in the recognition of foreign exchange gains or losses which are included in other comprehensive loss. At March 31, 2003, the balance was $5,175 resulting in the recognition of a foreign exchange gain of $313 which is included in the net foreign exchange loss of $940 in other comprehensive loss during the three months ended March 31, 2003.

11

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(in thousands, except per share data)
(unaudited)

9.     Discontinued Operations

     On April 30, 2002, management terminated the operations of the retail golf segment by means of completing the liquidation of substantially all of the retail golf assets and liabilities. The disposition of the retail golf operations represented the disposal of a business segment. Accordingly, the accompanying condensed consolidated financial statements reflect the retail golf segment as a discontinued operation for all periods presented.

     During the three months ended March 31, 2003, there was no change in the estimate of expenses associated with the disposal of the discontinued retail golf operations. During the three months ended March 31, 2002, the Company recorded a net increase in the loss on disposal of $530, which was comprised of $628 due to changes in the estimated operating losses offset by $98 from the reversal of the accumulated foreign exchange gains after the liquidation of Liquidmetal Golf (Europe) Limited. The $628 of operating losses was comprised of $40 net reduction to accrued expenses, $368 related to inventory adjustments and $300 due to a change in accrued warranty expenses.

     At March 31, 2003, the net liabilities of the discontinued operations consisted entirely of current liabilities. There were no assets associated with discontinued retail golf operations at March 31, 2003.

10.     Stock Compensation Plan

     On April 4, 2002, the Company’s shareholders and board of directors adopted the 2002 Incentive Equity Plan (“2002 Equity Plan”). The 2002 Equity Plan authorizes for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries. In addition, the plan permits the granting of stock appreciation rights, with, or independently of, options, as well as stock bonuses and rights to purchase restricted stock. A total of 10,000,000 shares of our common stock may be granted under the 2002 Equity Plan. As of March 31, 2003, there are 357,420 options outstanding under the 2002 Equity Plan. The stock options are exercisable over a period determined by the Board of Directors or the Compensation Committee, but no longer than 10 years.

     Prior to the approval of the 2002 Equity Plan, options were primarily granted under the Company’s 1996 Stock Option Plan (“1996 Company Plan”). On April 4, 2002, the Company’s board of directors terminated the 1996 Company Plan. The termination will not affect any outstanding options under the 1996 Company Plan and all such options will continue to remain outstanding and be governed by the plan. No additional options may be granted under the 1996 Company Plan. As of March 31, 2003, there were 4,075,894 options outstanding under the 1996 Company Plan.

     On April 4, 2002, the Company’s shareholders and board of directors adopted the 2002 Non-employee Director Stock Option Plan (“2002 Director Plan”). Only non-employee directors are eligible for grants under the 2002 Director Plan. A total of 1,000,000 shares of the Company’s Common Stock may be granted under the 2002 Director Plan. There are 270,000 options outstanding under the 2002 Equity Plan as of March 31, 2003.

     Additionally, the Company has 2,221,508 options outstanding at March 31, 2003 which were granted outside the 1996 Company Plan, 2002 Equity Plan and 2002 Director Plan.

     The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants for the three months ended March 31, 2003 and 2002, respectively: expected volatility of 100% for all periods; dividend yield of 0.0% for all periods; expected option life of approximately 5 years; and a risk-free interest rate ranging from 2.9% to 3.8%.

12

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(in thousands, except per share data)
(unaudited)

     The following table summarizes the Company’s stock option transactions for the three months ended March 31, 2003:

     The following table summarizes the Company’s stock option transactions for the three months ended March 31, 2002:

     The weighted average fair value of options granted during the three months ended March 31, 2003 and 2002, was $7.63 and $12.25, respectively. There were 3,908,940 options with a weighted average exercise price of $4.69 exercisable at March 31, 2003 and 3,792,078 options with a weighted average exercise price of $3.79 exercisable at March 31, 2002.

     Included in the above tables are certain options granted where their exercise prices were below the fair market value of the common stock at the measurement date (“in-the-money”). In-the-money options of 569,249 with a weighted average fair value of $4.67 were outstanding at March 31, 2003 and 1,246,670 options with a weighted average fair value of $4.56 were outstanding at March 31, 2002.

     The following table summarizes the Company’s stock options outstanding and exercisable by ranges of option prices as of March 31, 2003:

13

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(in thousands, except per share data)
(unaudited)

11.     Segment Reporting and Major Customers

     SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, 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 are included in the bulk Liquidmetal alloy segment. The accounting policies of the reportable segments are the same as those described in Note 2 to the consolidated financial statements included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 31, 2003.

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

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

14

Table of Contents

LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(in thousands, except per share data)
(unaudited)

     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.

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

     Assets excluded from segment assets include assets attributable to the Company’s corporate headquarters. The largest asset represents the Company’s cash balances, primarily generated from the Company’s stock offering and proceeds from the Kookmin loan (See note 8).

12.     Income Taxes

     The provision for income tax benefit (expense) for the three months ended March 31, 2002 and 2002, respectively, is calculated, when applicable, through the use of an estimated annual income tax rate based on projected annualized income (loss). The Company estimated an effective tax rate of 0% during the three months ended March 31, 2003 and 2002, respectively, based on the Company’s reported losses.

13.     Income (Loss) Per Common Share

     Basic 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.