LIQUIDMETAL TECHNOLOGIES INC - Quarter Report: 2016 March (Form 10-Q)

---

---

---

		March 31,				December 31,
		2016				2015
		(Unaudited)				(Audited)
ASSETS
Current assets:
Cash		$	10,287			$	2,773
Restricted cash			1,005				2,008
Trade accounts receivable, net of allowance for doubtful accounts			102				30
Inventory			152				83
Prepaid expenses and other current assets			224				408
Total current assets		$	11,770			$	5,302
Property and equipment, net			1,263				1,370
Patents and trademarks, net			568				570
Other assets			36				31
Total assets		$	13,637			$	7,273
LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Short-term debt			700				700
Accounts payable			209				250
Accrued liabilities			1,246				947
Deferred revenue			-				77
Option liabilities			5,550				-
Total current liabilities		$	7,705			$	1,974
Long-term liabilities:
Warrant liabilities			2,388				59
Other long-term liabilities			856				856
Total liabilities		$	10,949			$	2,889
Redeemable Common Stock:
Common Stock, $0.001 par value; 105,000,000 and 0 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively (Note 14).			7,129				-
Shareholders' (deficit) equity:
Preferred Stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively			-				-
Common stock, $0.001 par value; 700,000,000 shares authorized; 477,149,485 and 477,149,485 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively.			477				477
Warrants			18,179				18,179
Additional paid-in capital			204,088				203,735
Accumulated deficit			(227,121	)			(217,945	)
Non-controlling interest in subsidiary			(64	)			(62	)
Total shareholders' (deficit) equity			(4,441	)			4,384
Total liabilities, redeemable common stock, and shareholders' (deficit) equity		$	13,637			$	7,273

---

		For the Three Months Ended March 31,
		2016				2015
Revenue
Products		$	165			$	23
Licensing and royalties			3				3
Total revenue			168				26
Cost of sales			158				19
Gross profit			10				7
Operating expenses
Selling, marketing, general and administrative			2,017				1,852
Research and development			559				482
Total operating expenses			2,576				2,334
Operating loss			(2,566	)			(2,327	)
Change in value of warrant liabilities, loss			(1,569	)			(161	)
Change in value of option liabilities, loss			(5,039	)			-
Interest expense			(4	)			-
Interest income			-				8
Net loss and comprehensive loss			(9,178	)			(2,480	)
Net loss attributable to non-controlling interest			2				2
Net loss and comprehensive loss attributable to Liquidmetal Technologies shareholders		$	(9,176	)		$	(2,478	)
Net loss per common share attributable to Liquidmetal Technologies shareholders, basic and diluted		$	(0.02	)		$	(0.01	)
Number of weighted average shares - basic and diluted			512,149,485				464,482,819

---

		Preferred Shares				Common Shares				Common Stock				Warrants part of Additional Paid-in Capital				Additional Paid-in Capital				Accumulated Deficit				Non- Controlling Interest				Total
Balance, December 31, 2015			-				477,149,485			$	477			$	18,179			$	203,735			$	(217,945	)		$	(62	)		$	4,384
Stock-based compensation																			353												353
Net loss																							(9,176	)			(2	)			(9,178	)
Balance, March 31, 2016			-				477,149,485			$	477			$	18,179			$	204,088			$	(227,121	)		$	(64	)		$	(4,441	)

---

		Three Months Ended March 31,
		2016				2015
Operating activities:
Net loss		$	(9,178	)		$	(2,480	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			149				115
Stock-based compensation			353				337
Restricted stock compensation issued to officer			-				78
Loss from change in value of warrant liabilities			1,569				161
Loss from change in value of option liabilities			5,039				-
Changes in operating assets and liabilities:
Trade accounts receivable			(72	)			62
Inventory			(69	)			-
Prepaid expenses and other current assets			184				(7	)
Other assets			(5	)			-
Accounts payable and accrued liabilities			245				46
Deferred revenue			(77	)			-
Net cash used in operating activities			(1,862	)			(1,688	)
Investing Activities:
Purchases of property and equipment			(9	)			(116	)
Decrease (increase) in restricted cash			1,003				(2,005	)
Investment in patents and trademarks			(18	)			-
Net cash provided by (used in) investing activities			976				(2,121	)
Financing Activities:
Proceeds from stock issuance			8,400				-
Net cash provided by financing activities			8,400				-
Net increase (decrease) in cash			7,514				(3,809	)
Cash at beginning of period			2,773				10,009
Cash at end of period		$	10,287			$	6,200
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Accrued capital expenditures			13				-

---

1. Description of Business

 

Liquidmetal Technologies, Inc. (the “Company”) is a materials technology and manufacturing company that develops and commercializes products made from amorphous alloys. The Company’s family of alloys consists of a variety of bulk alloys and composites that utilizes the advantages offered by amorphous alloys technology. The Company designs, develops, manufactures and sells products and custom components from bulk amorphous alloys to customers in a wide range of industries. The Company also partners with third-party manufacturers and licensees to develop and commercialize Liquidmetal alloy products.

 

Amorphous alloys are, in general, unique materials that are distinguished by their ability to retain a random atomic structure when they solidify, in contrast to the crystalline atomic structure that forms in other metals and alloys when they solidify. Liquidmetal alloys are proprietary amorphous alloys that possess a combination of performance, processing, and potential cost advantages that the Company believes will make them preferable to other materials in a variety of applications. The amorphous atomic structure of bulk 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. The Company’s alloys and the injection molding technology it employs results in components that exhibit: exceptional dimensional control and repeatability that rivals precision machining, excellent corrosion resistance, brilliant surface finish, high strength, high hardness, high elastic limit, alloys that are non-magnetic, and the ability to form complex shapes common to the injection molding of plastics. Interestingly, all of these characteristics are achievable from the molding process, so design engineers do not have to select specific alloys to achieve one or more of the characteristics as is the case with crystalline materials. The Company believes these advantages could result in Liquidmetal alloys supplanting high-performance alloys, such as titanium and stainless steel, and other incumbent materials in a wide variety of applications. Moreover, the Company believes these advantages could enable the introduction of entirely new products and applications that are not possible or commercially viable with other materials.

 

The Company’s revenues are derived from i) selling bulk Liquidmetal alloy products, which include non-consumer electronic devices, medical products, automotive components, and sports and leisure goods, ii) selling tooling and prototype parts such as demonstration parts and test samples for customers with products in development, iii) product licensing and royalty revenue, and iv) research and development revenue. The Company expects that these sources of revenue will continue to significantly change the character of the Company’s revenue mix.

2. Basis of Presentation and Recent Accounting Pronouncements

 

The accompanying unaudited interim consolidated financial statements as of and for the three months ended March 31, 2016 and March 31, 2015 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 in accordance 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 in consolidation. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for any future periods or the year ending December 31, 2016. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2016.

 

Revenue Recognition

 

The Company’s revenue recognition policy complies with the requirements of ASC 605. Revenue is recognized when i) persuasive evidence of an arrangement exists, ii) delivery has occurred, iii) the sales price is fixed or determinable, iv) collection is probable and v) all obligations have been substantially performed pursuant to the terms of the arrangement. Revenues primarily consist of the sales and prototyping of Liquidmetal molds and bulk alloys, licensing and royalties for the use of the Liquidmetal brand and bulk Liquidmetal alloys. Revenue is deferred and included in liabilities when the Company receives cash in advance for goods not yet delivered or if the licensing term has not begun.

 

License revenue arrangements in general provide for the grant of certain intellectual property rights for patented technologies owned or controlled by the Company. These rights typically include the grant of an exclusive or non-exclusive right to manufacture and/or sell products covered by patented technologies owned or controlled by the Company. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined period of time.

 

Licensing revenues that are one time fees upon the granting of the license are recognized when i) the license term begins in a manner consistent with the nature of the transaction and the earnings process is complete, ii) when collectability is reasonably assured or upon receipt of an upfront fee, and iii) when all other revenue recognition criteria have been met. Pursuant to the terms of these agreements, the Company has no further obligation with respect to the grant of the license. Licensing revenues that are related to royalties are recognized as the royalties are earned over the related period.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2016 and 2015

(numbers in thousands, except share and per share data)

(unaudited)

 

Fair Value Measurements

 

The estimated fair values of financial instruments reported in the consolidated financial statements have been determined using available market information and valuation methodologies, as applicable. The fair value of cash, restricted cash, and short-term debt approximate their carrying value due to their short 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 Company has several financial instruments, namely warrant liabilities and written call option liabilities that are recorded at fair value on a periodic basis using Level 2 measurement inputs. These instruments are evaluated under the hierarchy of FASB ASC Subtopic 480-10, FASB ASC Paragraph 815-25-1 and FASB ASC Subparagraph 815-10-15-74 addressing embedded derivatives. The fair value of such instruments is estimated using the Black-Scholes option pricing model. Due to the presence of certain anti-dilution and exercise price reset provisions, as well as other criteria under applicable accounting standards precluding equity treatment, such instruments are required to be classified as liabilities (see Notes 11 and 12).

 

As of March 31, 2016, the following table represents the Company’s fair value hierarchy for items that are required to be measured at fair value on a recurring basis:

  

 

As of December 31, 2015, the following table represents the Company’s fair value hierarchy for items that are required to be measured at fair value on a recurring basis:

  

 

Recent Accounting Pronouncements

 

Leases

 

In February 2016, the FASB issued an accounting standards update which modifies the accounting for leasing arrangements, particularly those arrangements classified as operating leases. This update will require entities to recognize the assets and liabilities arising from operating leases on the balance sheet. This guidance is effective for fiscal and interim periods beginning after December 15, 2018 and is required to be applied retrospectively to all leasing arrangements. The Company is currently assessing the effects this guidance may have on its consolidated financial statements.

 

Stock-Based Compensation

 

In March 2016, the FASB issued an accounting standards update which simplifies the accounting for share-based payment transactions, inclusive of income tax accounting and disclosure considerations. This guidance is effective for fiscal and interim periods beginning after December 15, 2016 and is required to be applied retrospectively to all impacted share-based payment arrangements. The Company is currently assessing the effects this guidance may have on its consolidated financial statements.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2016 and 2015

(numbers in thousands, except share and per share data)

(unaudited)

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued an accounting standards update which modifies the requirements for identifying, allocating, and recognizing revenue related to the achievement of performance conditions under contracts with customers. This update also requires additional disclosure related to the nature, amount, timing, and uncertainty of revenue that is recognized under contracts with customers. This guidance is effective for fiscal and interim periods beginning after December 15, 2017 and is required to be applied retrospectively to all revenue arrangements. The Company is currently assessing the effects this guidance may have on its consolidated financial statements.

 

Ability to Continue as a Going Concern

 

In August 2014, the FASB issued an accounting standards update which requires an assessment of an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently addressed by U.S. auditing standards. This standard is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

Inventory

 

In July 2015, the FASB issued an accounting standards update which modifies the requirements for measuring the value of inventory on a periodic basis. The new requirement will be to measure inventory at the lower of cost or net realizable value. This standard is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

3. Significant Transactions

 

2016 Purchase Agreement

 

On March 10, 2016, the Company entered into a Securities Purchase Agreement (the “2016 Purchase Agreement”) with Liquidmetal Technology Limited, a Hong Kong company (the “Investor”), providing for the purchase by Investor of up to 405,000,000 shares of the Company’s common stock for an aggregate purchase price of $63.4 million.

 

The 2016 Purchase Agreement provides that the Investor is obligated to purchase up to 405,000,000 shares of the Company’s common stock in multiple closings, with the Investor having purchased 105,000,000 shares at an aggregate purchase price of $8.4 million (or $0.08 per share) at the initial closing on March 10, 2016. The Purchase Agreement provides that the Investor will purchase the remaining 200,000,000 shares at $0.15 per share and 100,000,000 shares at $0.25 per share for an aggregate purchase price of $55.0 million no later than ninety (90) days after the satisfaction of certain conditions, including Company shareholder approval of an amendment to the Company’s Amended and Restated Certificate of Incorporation increasing the Company’s authorized number of shares of common stock from 700,000,000 to 1,100,000,000 (the “Charter Amendment”).

 

In addition to the shares issuable under the 2016 Purchase Agreement, the Company also issued to the Investor a warrant to acquire 10,066,809 shares of common stock of the Company at an exercise price of $0.07 per share. The warrant vests in increments on each closing date under the 2016 Purchase Agreement for a number of warrant shares that is proportionate to the amount of shares purchased under the 2016 Purchase Agreement on such closing date (with 2,609,913 warrant shares having initially vested on March 10, 2016). The warrant will expire on the tenth anniversary of its issuance date; provided, however, that should the subsequent closings under the 2016 Purchase Agreement not occur prior to the ninetieth (90th) day after the filing of the Charter Amendment, the warrant will automatically terminate and the Investor shall have no further right to exercise the remaining unvested 7,456,896 warrant shares under the warrant.

 

The 2016 Purchase Agreement provides that the Investor will have the right to designate one (1) individual to serve on the Company’s Board of Directors. Once the Investor purchases the remaining 300,000,000 shares of common stock under the 2016 Purchase Agreement, the Investor will thereafter have the right to designate an additional two (2) individuals to serve on the Company’s Board of Directors (such that the Investor would have designation rights with respect to three (3) of the seven (7) members of the Company’s Board of Directors, with one such member serving as Chairman). The 2016 Purchase Agreement also provides that, with certain limited exceptions, if the Company issues any shares of common stock at any time through the fifth (5th) anniversary of the Purchase Agreement, the Investor will have a preemptive right to subscribe for and to purchase at the same price per share (or at market price, in the case of issuance of shares pursuant to stock options) the number of shares necessary to maintain its ownership percentage of Company-issued shares of Common Stock.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2016 and 2015

(numbers in thousands, except share and per share data)

(unaudited)

 

The 2016 Purchase Agreement requires the Company to use commercially reasonable efforts to obtain, on or before May 31, 2016, shareholder approval of the Charter Amendment, to file the Charter Amendment with the State of Delaware, and to reserve sufficient shares of its common stock for issuance to the Investor under the 2016 Purchase Agreement. If the Company does not obtain shareholder approval of the Charter Amendment in order to file it by May 31, 2016, the Investor will have the right to sell the 105,000,000 shares purchased at the first closing back to the Company for $0.08 per share, with such purchase price to be paid by means of a secured convertible promissory note issued by the Company in the principal amount of $8.4 million (the “Put Note”). Such note, if issued, would accrue interest at the rate of 3% per annum, would be convertible at $0.08 and be due and payable on the eighteen (18) month anniversary of its issuance. If the Put Note is issued, the Company and the Investor would enter into a security agreement which would grant a security interest to the Investor in all of the Company’s assets other than its intellectual property and its equity interests in its subsidiary, Crucible Intellectual Property, LLC.

 

If the Investor fails to purchase the remaining 300,000,000 shares of common stock within 90 days after the filing of the Charter Amendment (assuming all other conditions to such closing have been satisfied), the Investor will forfeit certain rights, including the right to designate additional directors to the Company’s Board of Directors following such failure and the right to exercise the above-described preemptive right. In such event, the Company will also have the right to repurchase all of the shares held by the Investor at a per-share price of $0.08 within 15 months following the approval and filing of the Charter Amendment.

 

Eontec License Agreement

 

In connection with the 2016 Purchase Agreement and also on March 10, 2016, the Company and DongGuan Eontec Co., Ltd., a Hong Kong corporation (“Eontec”), entered into a Parallel License Agreement (the “License Agreement”) pursuant to which the Company and Eontec entered into a cross-license of their respective technologies.

 

The License Agreement provides for the cross-license of certain patents, technical information, and trademarks between the Company and Eontec. In particular, under the License Agreement, the Company granted to Eontec a paid-up, royalty-free, perpetual license (or sublicense, as the case may be) to the Company’s patents and related technical information to make, have made, use, offer to sell, sell, export and import products in certain geographic areas outside of North America and Europe, and Eontec granted to the Company a paid-up, royalty-free, perpetual license (or sublicense, as the case may be) to Eontec’s patents and related technical information to make, have made, use, offer to sell, sell, export and import products in certain geographic areas outside of specified countries in Asia. The license granted by the Company to Eontec is exclusive (including to the exclusion to the Company) in the countries of Brunei, Cambodia, China (P.R.C and R.O.C.), East Timor, Indonesia, Japan, Laos, Malaysia, Myanmar, North Korea, Philippines, Singapore, South Korea, Thailand. and Vietnam. The license granted by Eontec to the Company is exclusive (including to the exclusion of Eontec) in North America and Europe. The cross-licenses are non-exclusive in geographic areas outside of the foregoing exclusive territories.

 

2014 Purchase Agreement

 

On August 20, 2014, the Company entered into a common stock purchase agreement (“2014 Purchase Agreement”) with Aspire Capital Fund LLC (“Aspire Capital”), which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital would be committed to purchase up to an aggregate of $30,000 worth of the Company’s common stock, $0.001 par value, over the 36-month term of the 2014 Purchase Agreement.

 

As of March 31, 2016, the Company had received an aggregate of $1,568 under the 2014 Purchase Agreement through the issuance of 12,500,000 shares of its common stock at a weighted average price of $0.13 per share. On March 9, 2016, the Company terminated the 2014 Purchase Agreement.

 

Line of Credit Facility

 

In February 2015, the Company entered into a $2,000 line of credit facility, with a fixed interest rate of 2.1%, which originally matured on February 13, 2016. The facility has been extended through August 25, 2016, with reductions in available borrowings and associated collateral requirements to $1,000. Amounts available under this facility are secured by cash collateral. Such collateral is included as restricted cash on the Company’s consolidated balance sheet. As of March 31, 2016, there was $700 in outstanding borrowings under this facility. Interest expense applicable to these borrowings was $4 for the three months ended March 31, 2016 and $0 for the three months ended March 31, 2015.

 

Apple License Transaction

 

On August 5, 2010, the Company entered into a license transaction 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, LLC (“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, as defined in the license agreement, 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. Additionally, in connection with the license transaction, Apple required the Company to complete a statement of work related to the exchange of Liquidmetal intellectual property information. The Company recognized a portion of the one-time license fee upon receipt of the initial payment and completion of the foregoing requirements under the license transaction. The remaining portion of the one-time license fee was recognized at the completion of the required statement of work.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2016 and 2015

(numbers in thousands, except share and per share data)

(unaudited)

 

Under the agreements relating to the license transaction with Apple, the Company was obligated to contribute, to CIP, all intellectual property that it developed through February 2012. Subsequently, this obligation has been extended to apply to all intellectual property developed through February 2016. The Company is also obligated to maintain certain limited liability company formalities with respect to CIP at all times after the closing of the license transaction.

 

Visser Precision Cast, LLC License Agreement 

 

On June 1, 2012, the Company entered into a Master Transaction Agreement (the “Visser MTA”) with Visser Precision Cast, LLC (“Visser”) relating to a strategic transaction for manufacturing services and financing. Under the manufacturing and service component of the Visser MTA, the Company had agreed to engage Visser as a perpetual, exclusive manufacturer of non-consumer electronic products. Under the financing component of the Visser MTA, the Company issued and sold to Visser in a private placement transaction (i) 30,000,000 shares of common stock at a purchase price of $0.10 per share resulting in proceeds of $3,000 and (ii) two warrants to purchase 15,000,000 shares of common stock at an original exercise price of $0.22 per share which expire on June 1, 2017.

 

On May 20, 2014, the Company and Visser entered into a settlement agreement whereby the parties have amended and restated the sublicense and financing components of the Visser MTA. Additionally, the manufacturing services component and remaining considerations of the Visser MTA were terminated. Under the amended and restated sublicense agreement, the Company has granted to Visser a fully paid-up, royalty-free, irrevocable, perpetual, worldwide, non-transferable, nonexclusive sublicense to all of the Company’s intellectual property developed on or prior to May 20, 2014 (the “Effective Date”), for all fields of use other than certain excluded fields as set forth therein. Visser does not have any rights, now or in the future, to intellectual property of the Company developed after the Effective Date. The license to the Company’s intellectual property developed on or prior to the Effective Date does not include the right to use the “Liquidmetal” trademark or any of the Company’s other trademarks, except in certain defined situations, as set forth in the amended and restated agreement.

 

With the foregoing revised arrangements, the Company is no longer required to use Visser as its exclusive manufacturer and is free to license other manufacturers on a non-exclusive basis in any industry or geographic market as to which the Company has not previously granted an exclusive license to a third party. Any such manufacturers licensed by the Company in the future will be able both to manufacture parts for the Company and the Company’s customers, and to manufacture and sell products for their own account for such industries or markets as the Company may agree, subject to whatever royalty arrangements the Company may negotiate. The Company has not yet licensed any manufacturers other than Visser. Visser will also have the right to manufacture and sell products under the amended and restated sublicense agreement.

 

The settlement amended and restated the two warrants the Company issued to Visser in June 2012 to purchase 15,000,000 shares of the Company’s common stock at an exercise price of $0.22 per share. Those warrants contained anti-dilution mechanisms under which the number of shares issuable upon exercise of those warrants would be increased, and the exercise price for such shares would be reduced if the Company issued shares of its common stock at prices less than the warrants’ exercise price. The amended and restated warrant agreement includes the effect of such anti-dilution adjustments and is exercisable for 18,611,079 shares of common stock (increased further to 21,122,920 shares under the anti-dilution provisions of the warrants, see note 11) at an exercise price of $0.17 per share (further reduced to $0.16 per share under the anti-dilution provisions of the warrants, see note 11). The amended and restated warrant agreement continues to contain comparable anti-dilution adjustment mechanisms. The amended and restated warrant agreement also removes certain lock-up provisions that were included in the original warrants.

 

Other License Transactions

 

On January 31, 2012, the Company entered into a Supply and License Agreement for a five year term with Engel Austria Gmbh (“Engel”) whereby Engel was granted a non-exclusive license to manufacture and sell injection molding machines to the Company’s licensees. Since that time, the Company and Engel have agreed on an injection molding machine configuration that can be commercially supplied and supported by Engel.  On December 6, 2013, the companies entered into an Exclusivity Agreement for a 10 year term whereby the Company agreed, with certain exceptions and limitations, that the Company and its licensees would purchase amorphous alloy injection molding machines exclusively from Engel, and this exclusivity right was granted in exchange for certain royalties to be paid by Engel to the Company based on a percentage of the net sales price of such injection molding machines.

 

The Company’s Liquidmetal Golf subsidiary has the exclusive right and license to utilize the Company’s Liquidmetal alloy technology for purposes of golf equipment applications. This right and license is set forth in an intercompany license agreement between Liquidmetal Technologies and Liquidmetal Golf. This license agreement provides that Liquidmetal Golf has a perpetual and exclusive license to use Liquidmetal alloy technology for the purpose of manufacturing, marketing, and selling golf club components and other products used in the sport of golf. The Company owns 79% of the outstanding common stock of Liquidmetal Golf.

 

In June 2003, the Company entered into an exclusive license agreement with LLPG, Inc. (“LLPG”).  Under the terms of the agreement, LLPG has the exclusive 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 exclusive license agreement with LLPG expires on December 31, 2021.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2016 and 2015

(numbers in thousands, except share and per share data)

(unaudited)

 

In March 2009, the Company entered into a license agreement with Swatch Group, Ltd. (“Swatch”) under which Swatch was granted a non-exclusive license to the Company’s technology to produce and market watches and certain other luxury products. In March 2011, this license agreement was amended to grant Swatch exclusive rights as to watches and all third parties (including the Company), but non-exclusive as to Apple, and the Company’s license agreement with LLPG was simultaneously amended to exclude watches from LLPG’s rights. The Company will receive royalty payments over the life of the contract on all Liquidmetal products produced and sold by Swatch. The license agreement with Swatch will expire on the expiration date of the last licensed patent.

 

4. Liquidity and Capital Resources

 

For the three months ended March 31, 2016, the Company’s cash used in operations was $1,862, cash flows from investing activities were $976, primarily due to reductions in restricted cash as a result of collateral requirement reductions, and cash provided by financing activities was $8,400 due to cash received from equity sales under the 2016 Purchase Agreement. As of March 31, 2016, the Company’s cash and restricted cash balance was $11,292, which consisted of $10,287 of cash and $1,005 of short-term restricted cash.

 

On March 10, 2016, the Company entered into the 2016 Purchase Agreement with Liquidmetal Technology Limited providing for the purchase by the Investor of up to 405,000,000 shares of the Company’s common stock for an aggregate purchase price of $63.4 million.

 

The 2016 Purchase Agreement provides that the Investor is obligated to purchase up to 405,000,000 shares of the Company’s common stock in multiple closings, with the Investor having purchased 105,000,000 shares at an aggregate purchase price of $8.4 million (or $0.08 per share) at the initial closing on March 10, 2016. The 2016 Purchase Agreement provides that the Investor will purchase the remaining 200,000,000 shares at $0.15 per share and 100,000,000 shares at $0.25 per share for an aggregate purchase price of $55.0 million no later than ninety days after the satisfaction of certain conditions, including Company shareholder approval of an amendment to the Company’s Amended and Restated Certificate of Incorporation increasing the Company’s authorized number of shares of common stock from 700,000,000 to 1,100,000,000 (see note 3).

 

The Company anticipates that its current capital resources, when considering expected losses from operations, will be sufficient to fund the Company’s operations through the middle of 2017. The Company has a relatively limited history of producing bulk amorphous alloy components and products on a mass-production scale. Furthermore, the ability of future contract manufacturers to produce the Company’s products in desired quantities and at commercially reasonable prices is uncertain and is dependent on a variety of factors that are outside of the Company’s control, including the nature and design of the component, the customer’s specifications, and required delivery timelines. These factors will likely require that the Company make further equity sales under the 2016 Purchase Agreement, raise additional funds by other means, or pursue other strategic initiatives to support its operations beyond the middle of 2017. There is no assurance that the Company will be able to make equity sales under the 2016 Purchase Agreement or raise additional funds by other means on acceptable terms, if at all. If the Company were to make equity sales under the 2016 Purchase Agreement or to raise additional funds through other means by issuing securities, existing shareholders will be diluted. If funding is insufficient at any time in the future, the Company may be required to alter or reduce the scope of its operations or to cease operations entirely. Uncertainty as to the outcome of these factors raises substantial doubt about the Company’s ability to continue as a going concern.

 

5. Inventory

 

Inventory totaled $152 and $83 as of March 31, 2016 and December 31, 2015, respectively, and primarily consisted of raw alloy and finished goods inventory to satisfy future customer orders. Inventory is stated at the lower of weighted-average cost or market.

6. Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets totaled $224 and $408 as of March 31, 2016 and December 31, 2015, respectively, and primarily consisted of prepaid invoices and insurance premiums that will be recognized as expenses as shipments are made to customers or services are provided.

7. Patents and Trademarks, net

 

Net patents and trademarks totaled $568 and $570 as of March 31, 2016 and December 31, 2015, respectively, and primarily consisted of purchased patent rights and internally developed patents.

 

Purchased patent rights represent the exclusive right to commercialize the bulk amorphous alloy and other amorphous alloy technology acquired from California Institute of Technology (“Caltech”), through a license agreement with Caltech and other institutions. All fees and other amounts payable by the Company for these rights and licenses have been paid or accrued in full, and no further royalties, license fees or other amounts will be payable in the future under the license agreement.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2016 and 2015

(numbers in thousands, except share and per share data)

(unaudited)

 

In addition to the purchased and licensed patents, the Company has internally developed patents. Internally developed patents include legal and registration costs incurred to obtain the respective patents. The Company currently holds various patents and numerous pending patent applications in the United States, as well as numerous foreign counterparts to these patents outside of the United States.

 

The Company amortizes capitalized patents and trademarks over an average of 10 to 17 year periods. Amortization expense for patents and trademarks was $25 and $25 for the three month periods ended March 31, 2016 and 2015, respectively.

8. Other Assets

 

Other assets totaled $36 and $31 as of March 31, 2016 and December 31, 2015, respectively, and consisted of deposits under long-term lease agreements.

 

9. Accrued Liabilities

 

Accrued liabilities totaled $1,246 and $947 as of March 31, 2016 and December 31, 2015, respectively. Included within these totals are employee related accruals for normal wages, bonuses, and vacation liabilities of $1,139 and $766, as well as accrued audit fees of $34 and $109 as of March 31, 2016 and December 31, 2015, respectively. In addition, as of March 31, 2016 and December 31, 2015, respectively, $73 and $72 of deferred straight-line rent liabilities existed related to the Company’s warehouse and office facility lease.

10. Short-Term Debt

 

Short-term debt totaled $700 and $700 as of March 31, 2016 and December 31, 2015, respectively, and consisted of borrowings under a line of credit facility, with a fixed interest rate of 2.1%. Interest expense related to outstanding borrowings was $4 and $0 for the three months ended March 31, 2016 and 2015, respectively.

 

This credit facility requires the Company to maintain collateral for the full amount of the facility. A failure to meet this requirement could trigger a prepayment of all outstanding borrowings.

 

Given the proximity to maturity, the carrying amount of short-term debt approximates fair value.

11. Warrant Liabilities

 

Pursuant to FASB ASC 815, the Company is required to report the value of certain warrants as a liability at fair value and record the changes in the fair value of the warrant liabilities as a gain or loss in its consolidated statement of operations and comprehensive loss due to the price-based anti-dilution rights of the warrants.

 

During June 2012, the Company issued warrants to purchase a total of 15,000,000 shares of common stock to Visser under the Visser MTA Agreement (see Note 3). These warrants had an original exercise price of $0.22 per share, expire on June 1, 2017 and were originally valued at $4,260. These warrants have certain anti-dilution and exercise price reset provisions which qualify the warrants to be classified as a liability under FASB ASC 815. As a result of subsequent issuances of the Company’s common stock, which resulted in anti-dilutive price resets, the exercise price of these warrants was reduced to $0.16 and $0.17 as of March 31, 2016 and December 31, 2015, respectively. In addition, the number of shares to be issued under the warrants as a result of the anti-dilution provision increased to 21,122,920 and 18,937,931 as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, these warrants were valued at $636 under the Black-Scholes valuation model utilizing the following assumptions: (i) expected life of 1.17 years, (ii) volatility of 69%, (iii) risk-free interest rate of 0.7%, and (iv) dividend rate of 0. The change in fair value for these warrants was a loss of $602 for the three months ended March 31, 2016.

 

On July 2, 2012, the Company issued warrants to purchase a total of 18,750,000 shares of common stock in a private placement (the “July 2012 Private Placement”). These warrants have an exercise price of $0.384 per share, expire on July 2, 2017, and were originally valued at $5,053. These warrants have certain anti-dilution and exercise price reset provisions which qualify the warrants to be classified as a liability under FASB ASC 815. As a result of executed draw-downs under the 2013 and 2014 Purchase Agreements, contractually defined price resets, and issuances under the 2016 Purchase Agreement, which resulted in an anti-dilution impact, the exercise price of these warrants was reduced to $0.17 and $0.19 as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016 there were warrants to purchase a total of 17,572,000 shares of common stock outstanding, which were valued at $499 under the Black-Scholes valuation model utilizing the following assumptions: (i) expected life of 1.25 years, (ii) volatility of 70%, (iii) risk-free interest rate of 0.7%, and (iv) dividend rate of 0. The change in fair value for these warrants was a loss of $474 for the three months ended March 31, 2016.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2016 and 2015

(numbers in thousands, except share and per share data)

(unaudited)

 

On March 10, 2016, the Company issued warrants to purchase a total of 10,066,809 shares of common stock as part of the 2016 Purchase Agreement. These warrants have an exercise price of $0.07 per share, expire on March 10, 2026, and were originally valued at $760. These warrants have certain anti-dilution and exercise price reset provisions which qualify the warrants to be classified as a liability under FASB ASC 815. As of March 31, 2016, these warrants were valued at $1,253 under the Black-Scholes valuation model utilizing the following assumptions: (i) expected life of 9.94 years, (ii) volatility of 117%, (iii) risk-free interest rate of 1.78%, and (iv) dividend rate of 0. The change in fair value for these warrants was a loss of $493 for the three months ended March 31, 2016.

 

The following table summarizes the change in the Company’s warrant liabilities as of March 31, 2016:

 

 

The Company had warrants to purchase 48,761,729 and 36,509,931 shares of common stock outstanding as of March 31, 2016 and December 31, 2015, respectively, which were valued and classified as a liability under FASB ASC 815.

 

12. Option Liabilities

 

As part of the 2016 Purchase Agreement, executed on March 10, 2016, the Company granted to the Investor the rights for future purchases of shares of Company’s common stock at predetermined prices. These options allow the investor to purchase 200,000,000 shares of the Company’s common stock at a price of $0.15 per share and 100,000,000 shares of the Company’s common stock at a price of $0.25 per share. Given that the volume of shares to be issued upon exercise of these instruments is in excess of that currently authorized for issuance, these options are required to be classified as liabilities under FASB ASC 815. The 200 million share option and the 100 million share option were initially valued at $489 and $22, respectively. As of March 31, 2016, these written call options were valued at $4,808 and $742, respectively, under the Black-Scholes valuation model utilizing the following assumptions: (i) expected life of 0.38 years, (ii) volatility of 97%, (iii) risk-free interest rate of 0.39%, and (iv) dividend rate of 0. The change in fair value for these options was a loss of $4,319 and $720, respectively, for the three months ended March 31, 2016.

 

The following table summarizes the change in the Company’s option liabilities as of March 31, 2016:

 

 

13. Other Long-term Liabilities  

 

Other long-term liabilities were $856 as of March 31, 2016 and December 31, 2015, and consisted of long-term, aged payables to vendors, individuals, and other third parties that have been outstanding for more than 5 years. The Company is in the process of researching and resolving the balances for settlement and/or escheatment in accordance with applicable state law.

 

---

15. Stock Compensation Plans

 

Under the Company’s 2002 Equity Incentive Plan (the “2002 Plan”), which provided for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries, the Company granted options to purchase the Company’s common stock. A total of 10,000,000 shares of the Company’s common stock were available for issuance under the 2002 Plan. The 2002 Plan expired by its terms in April 2012, but remains in effect only with respect to the equity awards that had been granted prior to its expiration. The Company had outstanding grants of options to purchase 822,000 and 822,000 shares of the Company’s common stock as of March 31, 2016 and December 31, 2015, respectively.

 

On June 28, 2012, the Company adopted its 2012 Equity Incentive Plan, with the approval of the Company’s shareholders, which provided for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries. All options granted under this plan had exercise prices that were equal to the fair market value on the dates of grant. During the three months ended March 31, 2016, the Company granted options to purchase 2,000,000 shares of common stock. Under this plan, the Company had outstanding grants of options to purchase 27,724,242 and 25,988,734 shares of the Company’s common stock as of March 31, 2016 and December 31, 2015, respectively.

 

On January 27, 2015, the Company adopted its 2015 Equity Incentive Plan, which provided for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries. A total of 40,000,000 shares of the Company’s common stock are available for issuance under this plan. All options granted under this plan had exercise prices that were equal to the fair market value on the dates of grant. During the three months ended March 31, 2016, the Company granted options to purchase 13,700,000 shares of common stock. Under this plan, the Company had outstanding grants of options to purchase 28,086,667 and 15,100,000 shares of the Company’s common stock as of March 31, 2016 and December 31, 2015, respectively.

 

Stock based compensation expense attributable to these plans was $353 for the three months ended March 31, 2016. This compares to $337 for the three months ended March 31, 2015. The increase was due to additional options issued under 2016 stock option grants.

 

16. Shareholders’ (Deficit) Equity

 

Common stock

 

In June 2012, the Company issued 30,000,000 shares of common stock to Visser in connection with the Visser MTA Agreement (see Note 3).

 

Pursuant to the terms of the Company’s Senior Convertible Notes due September 1, 2013, which were also issued in the July 2012 Private Placement, the Company opted to pay the twelve monthly installment payments prior to the September 1, 2013 maturity date with shares of the Company’s common stock. Upon final settlement, the Company had issued 163,641,547 shares of common stock at a weighted average conversion price of $0.0774, for the twelve installment payments due under the notes, consisting of $12,000 principal and $680 of interest.

 

During the year ended December 31, 2013, the holders of the Company’s Series A Preferred Stock converted all of the outstanding 506,936 shares of Series A Preferred Stock into 16,896,070 shares of the Company’s common stock. After giving effect to such conversion, the Company has no shares of preferred stock outstanding.

 

On February 28, 2013, the Company’s shareholders approved an amendment to the Certificate of Incorporation of the Company increasing the number of authorized shares of common stock from 400 million shares to 500 million shares.

 

On October 24, 2013, the Company’s shareholders approved an amendment to the Company’s Certificate of Incorporation increasing the number of authorized shares of common stock from 500 million shares to 700 million shares.

 

In connection with the execution of the 2013 Purchase Agreement, the Company issued to each of the 2013 Investors a pro rata portion of 2,666,667 shares of the Company’s common stock. As of December 31, 2014, the Company had received an aggregate of $16,000 under the 2013 Purchase Agreement through the issuance of 85,355,615 shares of its common stock at a weighted average price of $0.19 per share. On August 22, 2014, the Company voluntarily terminated the 2013 Purchase Agreement, effective August 25, 2014 (see Note 3).

 

On September 9, 2014, an initial registration statement covering 75,000,000 shares issued and issuable pursuant to the 2014 Purchase Agreement was declared effective by the SEC. As of September 30, 2015, the Company had received an aggregate of $1,568 under the 2014 Purchase Agreement through the issuance of 12,500,000 shares of its common stock at a weighted average price of $0.13 per share. On March 8, 2016, the Company voluntarily terminated the 2014 Purchase Agreement, effective March 9, 2016 (see Note 3).

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2016 and 2015

(numbers in thousands, except share and per share data)

(unaudited)

 

Warrants

 

In connection with the Series A Preferred Stock issuances in 2009, warrants to purchase 29,779,557 shares of the Company’s common stock, valued at $18,179, were outstanding through July 15, 2015. Due to extension of the expiration date of these warrants during 2010, they no longer contained anti-dilution provisions and were reflected as equity as they did not meet the criteria under FASB ASC 815 for liability treatment. Such warrants had exercise prices ranging between $0.48 and $0.49 and expired on July 15, 2015.

 

Non-Controlling Interest

 

The Company’s Liquidmetal Golf subsidiary has the exclusive right and license to utilize the Company’s Liquidmetal alloy technology for purposes of golf equipment applications. Liquidmetal Technologies owns 79% of the outstanding common stock of Liquidmetal Golf. As of March 31, 2016, non-controlling interest was a deficit of $64. The December 31, 2015 non-controlling interest was a deficit of $62.

17. 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 56,632,909 shares of common stock, at prices ranging from $0.07 to $1.44 per share, were outstanding at March 31, 2016, but were not included in the computation of diluted EPS for the same period as the inclusion would have been antidilutive, given the Company’s net loss. Warrants to purchase 48,761,729 shares of common stock, with prices ranging from $0.07 to $0.17 per share, outstanding at March 31, 2016 were not included in the computation of diluted EPS for the same period as the inclusion would have been antidilutive, given the Company’s net loss.

 

Options to purchase 44,445,400 shares of common stock, at prices ranging from $0.08 to $1.44 per share, were outstanding at March 31, 2015, but were not included in the computation of diluted EPS for the same period as the inclusion would have been antidilutive, given the Company’s net loss. Warrants to purchase 66,057,792 shares of common stock, with prices ranging from $0.18 to $0.49 per share, outstanding at March 31, 2015 were not included in the computation of diluted EPS for the same period as the inclusion would have been antidilutive, given the Company’s net loss.

18. Commitments and Contingencies

 

Operating Lease Commitments

 

The Company leases its offices and warehouse facilities under various lease agreements, certain of which are subject to escalations based upon increases in specified operating expenses or increases in the Consumer Price Index. As of March 31, 2016 and December 31, 2015, the Company had recorded $73 and $72, respectively, of deferred rent expenses.

 

Rent expense was $56 and $56 for the three months ended March 31, 2016 and 2015, respectively.

19. Related Party Transactions

 

The Company entered into a license agreement (the “IMG License Agreement”) with Innovative Materials Group, LLC (“IMG”), a California limited liability company which is majority owned by Mr. Kang, a former Chief Executive Officer and former Chairman of the Company, to license certain patents and technical information for the limited purpose of manufacturing certain licensed products with the Company’s first generation die cast machines. The IMG License Agreement granted a non-exclusive license to certain product categories, as well as an exclusive license to specific types of consumer eyewear products and obligated IMG to pay the Company a running royalty based on its sales of licensed products through August 5, 2021. The Company recognized $0 in royalty revenues from IMG during the three months ended March 31, 2016 and 2015. The IMG License Agreement was terminated on March 8, 2016.

 

In March 2016, the Company executed an Amended and Restated Employment Agreement with Mr. Steipp. The Restated Employment Agreement provides for an employment term from its effective date through August 3, 2017, after which the employment term is renewed annually for successive one year terms, unless terminated by the Company or Mr. Steipp. Under the Restated Employment Agreement, Mr. Steipp is entitled to certain benefits if his employment is terminated involuntarily. These benefits include payment of a lump sum amount equal to one year of his annual base salary, continued insurance benefits at the Company’s expense for one year and accelerated vesting of equity awards. If the Company undergoes a “change of control”, and Mr. Steipp (i) is subsequently terminated without “cause”, or (ii) the Company subsequently takes certain actions that constitute “good reason”, and thereafter Mr. Steipp resigns, he will be entitled to a payment equal to one year of base salary, plus continued insurance benefits for two years, plus acceleration of vesting on equity awards and an extended time during which to exercise any equity awards that are stock options.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2016 and 2015

(numbers in thousands, except share and per share data)

(unaudited)

 

In March 2016, the Company entered into amended Change of Control Agreements with certain of its executive officers. The Change of Control Agreements provide that if the executive officer’s employment with the Company is terminated without cause during the one-year period after a change of control of the Company, then the terminated officer will receive lump sum severance compensation in an amount equal to twelve months of his then-current base salary. Under the agreements, each of the executive officers will also be entitled to the above-described severance compensation in the event he terminates his own employment within one year after a change of control because of a salary decrease, assignment to a lower-level position, or a required move of more than twenty-five miles. In addition, upon termination, all unvested stock options related to these officers will automatically and immediately vest and shall thereafter be exercisable in accordance with the terms and provisions of the applicable award agreements.

 

On March 10, 2016, the Company entered into the 2016 Purchase Agreement with Liquidmetal Technology Limited, providing for the purchase of up to 405,000,000 shares of the Company’s common stock for an aggregate purchase price of $63.4 million. Liquidmetal Technology Limited is a newly formed company owned by Mr. Yeung Tak Lugee Li (“Mr. Li”). In connection with the 2016 Purchase Agreement and also on March 10, 2016, the Company and DongGuan Eontec Co., Ltd., entered into a a license agreement pursuant to which the Company and Eontec entered into a cross-license of their respective technologies. Eontec is a publicly held Hong Kong corporation in which Mr. Li is the Chairman and majority shareholder. As of March 31, 2016, Mr Li is a greater-than-5% beneficial owner of the Company.

 

---

---

---

---

---

---

---

---

---