LIQUIDMETAL TECHNOLOGIES INC - Quarter Report: 2019 September (Form 10-Q)

 

Table of Contents

 

UNITED STATES

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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

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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.)

 

20321 Valencia Circle

Lake Forest, CA 92630

(Address of principal executive offices, zip code)

 

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

 

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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  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted 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 such files). 

Yes   ☒   No  ☐

 

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

 

Large accelerated filer ☐	Accelerated filer ☒	Non-accelerated filer ☐
Smaller reporting company ☐	Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes   ☐    No  ☒

 

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

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value per share	LQMT	OTCQB

 

The number of common shares outstanding as of November 8, 2019 was 914,359,124.

 

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TABLE OF CONTENTS

 

PART I - Financial Information
Item 1 – Financial Statements	4
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	21
Item 4 – Controls and Procedures	21
PART II – Other Information
Item 1 – Legal Proceedings	22
Item 1A – Risk Factors	22
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3 – Defaults Upon Senior Securities	22
Item 4 – Mine Safety Disclosures	22
Item 5 – Other Information	22
Item 6 – Exhibits	23
Signatures	24

 

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		September 30,				December 31,
		2019				2018
		(Unaudited)
ASSETS
Current assets:
Cash		$	31,219			$	35,229
Restricted cash			5				5
Trade accounts receivable			312				120
Inventory			86				31
Prepaid expenses and other current assets			411				363
Total current assets		$	32,033			$	35,748
Property and equipment, net			9,081				11,767
Patents and trademarks, net			259				322
Equipment held for sale			585				-
Other assets			14				14
Total assets		$	41,972			$	47,851
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	124			$	253
Accrued liabilities			508				270
Deferred revenue			1				31
Total current liabilities		$	633			$	554
Long-term liabilities:
Other long-term liabilities			856				856
Total liabilities		$	1,489			$	1,410
Shareholders' equity:
Preferred Stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively			-				-
Common stock, $0.001 par value; 1,100,000,000 shares authorized; 914,359,124 and 914,206,832 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively			914				914
Warrants			18,179				18,179
Additional paid-in capital			286,705				286,276
Accumulated deficit			(265,240	)			(258,854	)
Non-controlling interest in subsidiary			(75	)			(74	)
Total shareholders' equity		$	40,483			$	46,441
Total liabilities and shareholders' equity		$	41,972			$	47,851

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		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2019				2018				2019				2018
Revenue
Products		$	373			$	205			$	728			$	340
Licensing and royalties			48				48				48				48
Total revenue			421				253				776				388
Cost of sales			284				884				566				1,026
Gross profit (loss)			137				(631	)			210				(638	)
Operating expenses
Selling, marketing, general and administrative			1,380				1,381				4,088				4,493
Research and development			284				601				1,179				1,855
Impairment of long-lived assets			-				-				1,676				-
Gain on disposal of fixed assets			(7	)			-				(2	)			-
Total operating expenses			1,657				1,982				6,941				6,348
Operating loss			(1,520	)			(2,613	)			(6,731	)			(6,986	)
Interest income			125				89				344				157
Net loss and comprehensive loss			(1,395	)			(2,524	)			(6,387	)			(6,829	)
Net loss attributable to non-controlling interest			-				1				1				1
Net loss and comprehensive loss attributable to
Liquidmetal Technologies shareholders		$	(1,395	)		$	(2,523	)		$	(6,386	)		$	(6,828	)
Net loss per common share attributable to Liquidmetal Technologies shareholders, basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Number of weighted average shares - basic and diluted			914,359,124				909,972,342				914,332,758				909,366,218

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		For the Nine Months Ended September 30,
		2019				2018
Operating activities:
Net loss		$	(6,387	)		$	(6,829	)
Adjustments to reconcile net loss to net cash used in operating activities:
Mark-down of inventory			-				641
Depreciation and amortization			848				802
Stock-based compensation			415				725
Impairment of long-lived assets			1,676				-
Loss on disposal of fixed assets			(2	)			-
Changes in operating assets and liabilities:
Trade accounts receivable			(192	)			(15	)
Inventory			(55	)			(269	)
Prepaid expenses and other current assets			(48	)			(22	)
Accounts payable and accrued liabilities			109				31
Deferred revenue			(30	)			6
Net cash used in operating activities			(3,666	)			(4,930	)
Investing Activities:
Purchases of property and equipment			(630	)			(156	)
Proceeds from disposal of fixed assets			272				-
Net cash used in investing activities			(358	)			(156	)
Financing Activities:
Proceeds from exercise of stock options			14				125
Net cash provided by financing activities			14				125
Net decrease in cash and restricted cash			(4,010	)			(4,961	)
Cash and restricted cash at beginning of period			35,234				41,314
Cash and restricted cash at end of period		$	31,224			$	36,353

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1. Description of Business

 

Liquidmetal Technologies, Inc. (the “Company”) is a materials technology 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 utilize the advantages offered by amorphous alloys technology. The Company designs, develops and sells products and custom parts 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 believes that the alloys and the molding technologies it employs may result in components, for many applications, 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 often 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 to customers who produce medical devices, automotive assemblies, sports and leisure goods, and non-consumer electronic devices, 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.

 

In July 2019, the Company adopted a restructuring plan pursuant to which the Company elected to wind down its prior manufacturing operations at the Company’s Lake Forest, CA facility and seek to outsource the manufacture of parts utilizing the Company’s technology through its domestic and international manufacturing partners (the “2019 Restructuring Plan”). In connection with the 2019 Restructuring Plan, the Company shifted its business strategy from internal manufacture of parts and products for customers toward the use and reliance of outsourced manufacturers, which will initially be Dongguan Yihao Metals Materials Technology Co., Ltd. (“Yihao”), a China-based company that is an affiliate of our largest beneficial stockholder, CEO and Chairman, Professor Lugee Li.

 

 

2. Basis of Presentation and Recent Accounting Pronouncements

 

The accompanying unaudited interim consolidated financial statements as of and for the nine months ended September 30, 2019 and September 30, 2018 have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) 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 US GAAP 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 and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any future periods or the year ending December 31, 2019. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 5, 2019.

 

Impairment of long-lived assets

 

The Company reviews long-lived assets to be held and used in operations for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. These evaluations may result from significant decreases in the overall market outlook for the Company’s technology or the market price of an asset, a significant adverse change in the extent or manner in which an asset is being used in its physical condition, a significant adverse change in legal factors or in the business climate that could affect the value of an asset, as well as economic or operational analyses. If the Company concludes that the carrying value of certain assets will not be recovered based on expected undiscounted future cash flows, an impairment write-down is recorded to reduce the assets to their estimated fair value. Fair value is determined via market, cost and income based valuation techniques, as appropriate. The fair value is measured on a nonrecurring basis using a combination of quoted prices for similar assets in active markets and other unobservable adjustments to historical cost (Level 3) inputs. Based on the results of this analysis, the Company recorded non-cash impairment charges of $0 and $1,676 for the three and nine month periods ended September 30, 2019, respectively, primarily related to the carrying value of the Company’s manufacturing assets that it does not plan to utilize as a result of the 2019 Restructuring Plan.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2019 and 2018

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

(unaudited)

 

Leases

 

In February 2016, the Financial Accounting Standards Board (“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. The Company adopted the requirements of this guidance as of January 1, 2019, utilizing the modified retrospective approach. Due to the Company not having any qualifying lease obligations, the adoption of this guidance did not have any impact on the Company’s consolidated financial statements.

 

Liability Classified Warrants

 

In July 2017, the FASB issued an accounting standards update which modifies the requirements for the classification of certain financial instruments with down round features as equity versus liabilities. The guidance will allow for financial instruments previously required to be presented as liabilities due to the presence of down round features to be presented as equity upon meeting other criteria. The Company adopted the requirements of this update effective as of January 1, 2019, utilizing the full retrospective transition option. Accordingly, the Company reclassified the warrant liability to additional paid in capital on its December 31, 2018 consolidated balance sheets, which increased additional paid-in capital by $6,970, increased accumulated deficit by $4,778, and decreased warrant liability by $2,192. In addition, because of the retrospective adoption, the Company credited change in fair value of warrant liability on its consolidated statements of operations by $1,267 for year ended December 31, 2018. The change in fair value of the warrant liability was offset by a $1,267 credit to accumulated deficit on the consolidated balance sheets. Similarly, the Company debited change in fair value of warrant liability on its consolidated statements of operations by $585 and $593 for three and nine month periods ended September 30, 2018, respectively. The adoption of this guidance had no impact on the Company’s consolidated statement of cash flows in the current or previous interim and annual reporting periods. The following table provides a reconciliation of warrant liability, additional paid-in capital, accumulated deficit, and change in fair value of warrant liability on the consolidated balance sheets for the year ended December 31, 2018 and the three and nine month periods ended September 30, 2018:

 

 

 

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 and restricted cash approximate their carrying value due to their short maturities and are classified as Level 1 instruments within the fair value hierarchy.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2019 and 2018

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

(unaudited)

 

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.

 

 

Other recent pronouncements

 

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants 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

 

Manufacturing Facility Purchase

 

On February 16, 2017, the Company purchased a 41,000 square foot manufacturing facility located in Lake Forest, CA, where operations commenced during July 2017. The purchase price for the property was $7,818. As a result of the 2019 Restructuring Plan, the Company will discontinue manufacturing operations in this facility and seek to lease it to a third-party commercial tenant.

 

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”), which is controlled by the Company’s Chairman and CEO, Professor Lugee Li (“Professor Li”). The 2016 Purchase Agreement provided for the purchase by the Investor of a total of 405,000,000 shares of the Company’s common stock for an aggregate purchase price of $63,400. The transaction occurred in multiple closings, with the Investor having purchased 105,000,000 shares at a purchase price of $8,400 (or $0.08 per share) at the initial closing on March 10, 2016 and 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 $55,000 on October 26, 2016.

 

In addition to the shares issuable under the 2016 Purchase Agreement, the Company issued to the Investor a warrant to acquire 10,066,809 shares of common stock (of which the right to exercise 2,609,913 of the warrant shares vested on March 10, 2016 and the right to exercise the remaining 7,456,896 warrant shares vested on October 26, 2016 at an exercise price of $0.07 per share). The warrant will expire on the tenth anniversary of its issuance date.

 

Further, the 2016 Purchase Agreement provided that the Investor would have the right to designate three members of the Company’s board of directors, with one such member serving as Chairman. The 2016 Purchase Agreement also provided that, with certain limited exceptions, if the Company issues any shares of common stock at any time through the fifth anniversary of the 2016 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.

 

Eontec License Agreement

 

On March 10, 2016, in connection with the 2016 Purchase Agreement, 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 agreed to cross-license their respective technologies. The Company’s Chairman and CEO, Professor Li, is also a major shareholder and Chairman of Eontec.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2019 and 2018

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

(unaudited)

 

The License Agreement provides for the cross-license of certain patents, technical information, and trademarks between the Company and Eontec. In particular, the Company granted to Eontec a paid-up, royalty-free, perpetual license 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. In turn, Eontec granted to the Company a paid-up, royalty-free, perpetual license 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 of the Company) in the countries of Brunei, Cambodia, China (P.R.C and R.O.C.), East Timor, Indonesia, Japan, Laos, Malaysia, Myanmar, 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.

 

Beyond the License Agreement, the Company collaborates with Eontec to accelerate the commercialization of amorphous alloy technology. This includes but is not limited to developing technologies to reduce the cost of amorphous alloys, working on die cast machine technology platforms to pursue broader markets, sharing knowledge to broaden our intellectual property portfolio, and utilizing Eontec’s volume production capabilities as a third party contract manufacturer.

 

In March 2017, the Company signed contracts with Eontec to purchase two hot-crucible amorphous metal molding machines (“Machines”) at a total purchase price of $780. The Machines were delivered to the Company’s new manufacturing facility located in Lake Forest, CA in April 2017 and were operational during the fourth quarter of 2017. As a result of the 2019 Restructuring Plan, the Company will seek to develop domestic manufacturing partners and will transfer the Machines, and associated equipment, to support the continued commercialization of amorphous metal applications.

 

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.

 

Under the agreements relating to the license transaction with Apple, the Company was obligated to contribute, to CIP, 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.

 

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 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 majority-owned 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 parts 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.

 

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, 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.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2019 and 2018

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

(unaudited)

 

 

4. Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets totaled $411 and $363 as of September 30, 2019 and December 31, 2018, respectively. Included within these totals are the following:

 

 

 

5. Inventory

 

Inventory totaled $86 and $31 as of September 30, 2019 and December 31, 2018, respectively. Included within these totals are the following:

 

 

 

6. Property and Equipment, net

 

Property and equipment consist of the following:

 

 

Depreciation expense for three and nine months ended September 30, 2019 was $265 and $785, respectively. Depreciation expense for the three and nine months ended September 30, 2018 was $253 and $736, respectively. For the three and nine months ended September 30, 2019, $24 and $75 of depreciation expense, respectively, was included in cost of sales and $241 and $710 was included in selling, marketing, general and administrative expenses, respectively. For the three and nine months ended September 30, 2018, $18 and $45 of depreciation expense, respectively, was included in cost of sales and $235 and $691 was included in selling, marketing, general and administrative expenses, respectively.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2019 and 2018

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

(unaudited)

 

The 2019 Restructuring Plan involves, among other actions, the disposal and/ or cease of use of the Company’s manufacturing equipment. The implications of the 2019 Restructuring Plan, including asset groupings and future use, were incorporated into the Company’s periodic review of its long-lived assets for impairment and the Company recorded non-cash impairment charges of $1,676, during the three months ended June 30, 2019. Additionally, the remaining useful life, for depreciation purposes, of the Company’s machinery and equipment was adjusted to align with the cease of use contemplated under the 2019 Restructuring Plan.

 

During the three-month period ended September 30, 2019, the Company disposed of certain equipment that it was not expecting to utilize prospectively, as part of the 2019 Restructuring Plan, for gross proceeds of $267. This resulted in a gain on disposal of $7 during the three-month period ended September 30, 2019.

 

 

7. Equipment Held for Sale

 

During the three-month period ended September 30, 2019, the Company reclassified $585 in equipment, planned to be disposed of under the 2019 Restructuring Plan, from property and equipment to equipment held for sale on its consolidated balance sheet. As of September 30, 2019, the Company had identified a buyer for this equipment, with a negotiated sales price of $600. The sale will be finalized during the fourth quarter following delivery and other title transfer of equipment to the buyer. No additional adjustments to asset carrying value were recorded as a result of this reclassification.

 

 

8. Patents and Trademarks, net

 

Net patents and trademarks totaled $259 and $322 as of September 30, 2019 and December 31, 2018, 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.

     

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 $21 and $63 for the three and nine months ended September 30, 2019, respectively. This compares to $22 and $66 for the three and nine months ended September 30, 2018, respectively.

 

 

9. Other Assets

 

Other assets totaled $14 and $14 as of September 30, 2019 and December 31, 2018, respectively, and consisted of long-term deposits.

 

 

10. Accrued Liabilities

 

Accrued liabilities totaled $508 and $270 as of September 30, 2019 and December 31, 2018, respectively. Included within these totals are the following:

 

 

In connection with the 2019 Restructuring Plan, the Company has recorded severance expenses related to employees who will be terminated. The elements and impact of the 2019 Restructuring Plan were communicated to all impacted employees during July 2019, inclusive of outlining the severance elements that Company has adopted. Total expense of $273 has been recorded as a component of sales, general, and administrative expenses within the consolidated statement of operations for the three-month period ended September 30, 2019. As of September 30, 2019, $256 remains as an accrued liability.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2019 and 2018

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

(unaudited)

 

 

11. Other Long-Term Liabilities  

 

Other long-term liabilities were $856 as of September 30, 2019 and December 31, 2018, 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.

 

 

12. Stock Compensation Plans

 

On April 4, 2002, our shareholders and Board of Directors adopted the 2002 Equity Incentive Plan (“2002 Plan”). The 2002 Plan provided for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries. A total of 10,000,000 shares of our common stock were available to be granted under the 2002 Plan. The 2002 Plan expired by its terms in April 2012, and remains in effect only with respect to the equity awards that have been granted prior to its expiration. As of September 30, 2019 and December 31, 2018, there were 69,000 and 169,000 options, respectively, outstanding under the 2002 Plan.

 

On June 28, 2012, the Company adopted the 2012 Equity Incentive Plan (“2012 Plan”), with the approval of the shareholders, which provides for the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries. The 2012 Plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for the granting to employees and consultants of non-statutory stock options. In addition, the Plan permits the granting of stock appreciation rights, or SARs, with or independently of options, as well as stock bonuses and rights to purchase restricted stock. A total of 30,000,000 shares of the Company’s common stock may be granted under the 2012 Plan, and all options granted under the 2012 Plan had exercise prices that were equal to the fair market value on the date of grant. During the nine months ended September 30, 2019, the Company granted no options to purchase shares of common stock. Under this plan, the Company had outstanding grants of options to purchase 7,892,666 and 11,755,503 shares of the Company’s common stock as of September 30, 2019 and December 31, 2018, respectively.

 

On January 27, 2015, the Company adopted its 2015 Equity Incentive Plan (“2015 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 the 2015 Plan. All options granted under the 2015 Plan had exercise prices that were equal to the fair market value on the dates of grant. During the nine months ended September 30, 2019, the Company granted no options to purchase shares of common stock. Under this plan, the Company had outstanding grants of options to purchase 12,341,667 and 16,906,667 shares of the Company’s common stock as of September 30, 2019 and December 31, 2018, respectively.

 

Stock based compensation expense attributable to these plans was $73 and $415 for the three and nine months ended September 30, 2019, respectively. This compares to $179 and $725 for the three and nine months ended September 30, 2018, respectively.

 

In connection with the separation of former executives and directors, the Company has modified previously granted equity awards to allow for the acceleration of vesting of equity awards, and the extension of the timing to exercise vested awards, following the respective separation dates. The Company incurred incremental stock-based compensation expense of $0 and $0 during the three and nine months ended September 30, 2019, respectively. This compares to $0 and $104 for the three and nine months ended September 30, 2018, respectively.

 

 

13. Consolidated Statements of Changes in Equity

 

The following table provides the Company’s changes in equity for the three months ended September 30, 2019:

 

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2019 and 2018

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

(unaudited)

 

The following table provides the Company’s changes in equity for the nine months ended September 30, 2019:

 

 

 

The following table provides the Company’s changes in equity for the three months ended September 30, 2018:

 

 

 

The following table provides the Company’s changes in equity for the nine months ended September 30, 2018:

 

 

 

14. 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 applicable period. Diluted EPS reflects the potential dilution of securities that could share in the earnings.

 

Options to purchase 20,303,333 shares of common stock, at prices ranging from $0.07 to $0.38 per share, were outstanding at September 30, 2019, 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 10,066,809 shares of common stock, with a price of $0.07 per share, outstanding at September 30, 2019, 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 33,359,068 shares of common stock, at prices ranging from $0.07 to $0.47 per share, were outstanding at September 30, 2018, 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 10,066,809 shares of common stock, with a price of $0.07 per share, outstanding at September 30, 2018, 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.

 

 

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2019 and 2018

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

(unaudited)

 

 

15. Commitments and Contingencies

 

Legal Contingencies

 

During October 2018, the Company received a notice of intent to sue from a former employee. The Claims raised in the notice included accusations of pay discrimination, employment misclassification, and unfair labor practices. On April 30, 2019, the Company reached a confidential settlement of the matter in the amount of $250. This amount was included as a portion of sales, general, and administrative expense and was fully paid as of June 30, 2019.

 

 

16. Related Party Transactions

 

On March 10, 2016, the Company entered into the 2016 Purchase Agreement with Liquidmetal Technology Limited, providing for the purchase of 405,000,000 shares of the Company’s common stock for an aggregate purchase price of $63,400. Liquidmetal Technology Limited was a newly formed company owned by Professor Li. In connection with the 2016 Purchase Agreement and also on March 10, 2016, the Company and Eontec, entered into 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 of which Professor Li is the Chairman and major shareholder. As of September 30, 2019, Professor Li is a greater-than 5% beneficial owner of the Company and serves as the Company’s Chairman, President, and Chief Executive Officer. Equipment and services procured from Eontec were $0 and $0 during the three and nine months ended September 30, 2019, respectively. Equipment and services procured from Eontec were $85 and $133 during the three and nine months ended September 30, 2018, respectively.

 

 

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