**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K/A**

**Amendment No. 3**

** **
| **x** | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|-------------------------------------------------------------------------------------------|

 

**For the fiscal year endedDecember 31, 2004**

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------|

 

**For the transition periodfrom                        to                        **

 

**Commission File No.000-31332**

 

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**LIQUIDMETAL TECHNOLOGIES, INC.**

**(**Exact name ofRegistrant as specified in its charter**)**

 

| **Delaware**                                       |   | **33-0264467**                        |
|----------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or |   | (I.R.S. Employer  Identification No.) |
| organization)                                      |   |                                  |

 

**25800 Commercentre Drive,Suite 100Lake Forest, California 92630**

(address of principal executive office, zip code)

 

Registrant’s telephone number, including area code: **(949) 206-8000**

 

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

 

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

 

|                                | **Title  of each Class** | ** ** |
|--------------------------------|--------------------------|------------|
| Common Stock,  $.001 par value |

 

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 (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for at least the past90 days.    Yes   **x**   No   o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to thisForm 10-K   o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange ActRule 12b-2).    Yes   **x**   No   o

Theaggregate market value of the registrant’s Common Stock held by non-affiliatesof the registrant as of June 30, 2004 was approximately $34,793,699. Forpurposes of this calculation only, (i) shares of Common Stock are deemed tohave a market value of $1.42 per share, the closing price of the Common Stock asreported on the Nasdaq National Market on June 30, 2004, and (ii) each of theexecutive officers, directors and persons holding more than 10% of theoutstanding Common Stock as of June 30, 2004 is deemed to be an affiliate.

 

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** **

**LIQUIDMETAL TECHNOLOGIES, INC.**

**Amendment No. 3 to the Annual Reporton Form 10-K**

## **For the Fiscal Year ended December 31, 2004**

## **EXPLANATORY NOTE**

We are filing this AmendmentNo. 3 to our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2004, as filed with the U.S. Securities and Exchange Commission(SEC) on March 30, 2005, as amended on May 10, 2005 and on March 16, 2006, torestate our financial statements to properly account for the conversion featureof the senior convertible notes.  Additionally,reclassifications to our financial statements have been made for consistentpresentation of our warrant liabilities, settlement payable, and change invalue of warrant liabilities.

Other than the changesreferred to above, all other information included in the above described Form10-K, as amended, remains unchanged. This amendment does not reflect events occurring after the filing ofsuch Form 10-K, as amended, and does not modify or update the disclosurestherein in any way other than as required to reflect the amendment as describedabove and set forth below.

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**TABLEOF CONTENTS**
| PART I   |                                                                                                                                 |
|----------|--------------------------------------------------------------------------------------------------------------------------------------|
|     | Item 1.  Business                                                                                                               |   |
|     | Item 2.  Properties                                                                                                             |   |
|     | Item 3. Legal  Proceedings                                                                                                      |   |
|     | Item 4.  Submission of Matters to a Vote of Security Holders                                                                    |   |
| PART II  |                                                                                                                                 |
|     | Item 5.  Market For Registrant’s Common Equity and Related Stockholder Matters                                             |   |
|     | Item 6.  Selected Consolidated Financial Data                                                                                   |   |
|     | Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                            |   |
|     | Item 7A. Quantitative  and Qualitative Disclosures About Market Risks                                                           |   |
|     | Item 8.  Financial Statements and Supplementary Data                                                                            |   |
|     | Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial  Disclosure Item 9A. Controls and Procedures |   |
| PART III |                                                                                                                                 |
|     | Item 10.  Directors and Executive Officers of the Registrant                                                                    |   |
|     | Item 11.  Executive Compensation                                                                                                |   |
|     | Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters                       |   |
|     | Item 13.  Certain Relationships and Related Transactions Item 14. Principal Accounting  Fees and Services                       |   |
| PART IV  |                                                                                                                                 |
|     | Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K                                                  |   |

 

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**PART I**

**Forward-Looking Statements**

Thisannual report on Form 10-K of Liquidmetal Technologies, Inc. contains “forward-lookingstatements” that may state our management’s current expectations, estimates,forecasts, and projections about the company and its business. Any statement inthis report that is not a statement of historical fact is a forward-lookingstatement, and in some cases, words such as “believe,” “estimate,” “project,” “expect,”“intend,” “may,” “anticipate,” “plans,” “seeks,” and similar expressionsidentify forward-looking statements. Forward-looking statements involve risksand uncertainties that could cause actual outcomes and results to differmaterially from the anticipated outcomes or result. These statements are notguarantees of future performance, and undue reliance should not be placed onthese statements.  It is important tonote that Liquidmetal Technologies, Inc.’s actual results could differmaterially from what is expressed in our forward-looking statements due to therisk factors described in the section of this report entitled “FactorsAffecting Future Results,” as well as the following risks and uncertainties:

·                  Our history of losses and uncertaintysurrounding our ability to achieve profitability;

·                  Our limited history of manufacturing productsfrom bulk amorphous alloys;

·                  Lengthy customer adoption cycles andunpredictable customer adoption practices;

·                  Our ability to identify, develop, andcommercialize new product applications;

·                  Competition from other materials;

·                  Our ability to consummate strategicpartnerships in the future;

·                  The potential for manufacturing problems ordelays;

·                  Potential difficulties associated withprotecting or expanding our intellectual property position; and

·                  Pending shareholder litigation against ourcompany

 

LiquidmetalTechnologies, Inc. undertakes no obligation to update publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

**Item 1.Business**

**Overview**

We are a materialstechnology company that develops and commercializes products made fromamorphous alloys.  Our Liquidmetal® family of alloysconsists of a variety of proprietary coatings, powders, bulk alloys, andcomposites that utilize the advantages offered by amorphous alloy technology.We develop, manufacture, and sell products and components from bulk amorphousalloys to customers in various industries, and we also partner with third-partylicensees and distributors to develop and commercialize bulk Liquidmetal alloyproducts. We believe that our proprietary bulk alloys are the only commerciallyviable bulk amorphous alloys currently available in the marketplace.  In addition to our bulk alloys, we market andsell a line of proprietary amorphous alloy-based industrial coatings under theLiquidmetal® ArmacorTM Coatings brand.

Amorphous alloys areunique materials that are distinguished by their ability to retain a randomatomic structure when they solidify, in contrast to the crystalline atomicstructure that forms in other metals and alloys when they solidify. Liquidmetalalloys possess a combination of performance, processing, and potential cost advantagesthat we believe will make them preferable to other materials in a variety ofapplications. The amorphous atomic structure of our alloys enables them toovercome certain performance limitations caused by inherent weaknesses incrystalline atomic structures, thus facilitating performance and processingcharacteristics superior in many ways to those of their crystallinecounterparts. For example, our zirconium-titanium Liquidmetal alloys areapproximately 250% stronger than commonly used titanium alloys such asTi-6Al-4V, but they also have some of the beneficial processing characteristicsmore commonly associated with plastics. We believe these advantages couldresult in Liquidmetal alloys supplanting high-performance alloys, such astitanium and stainless steel, and other incumbent materials in a wide varietyof applications. Moreover, we believe these advantages could enable theintroduction of entirely new products and applications that are not possible orcommercially viable with other materials.

**General Corporate Information**

We were originallyincorporated in California in 1987, and we reincorporated in Delaware in May2003.  Our principal executive officesare located at 25800 Commercentre Dr., Suite 100, Lake Forest, California92630. Our telephone number at that address is (949) 206-8000. Previously,our principal executive offices were located in Tampa, Florida. In December2003, we consolidated all corporate functions into our Lake Forest facility,which had previously served as our principal research and development office.Our Internet website address is www.liquidmetal.com and all of our filings withthe Securities and Exchange Commission are available free of charge on ourwebsite.

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**Our Technology**

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

***Unique AtomicStructure***

The atomic structure ofLiquidmetal alloys is the fundamental feature that differentiates them fromother alloys and metals. In the molten state, the atomic particles of allalloys and metals have an amorphous atomic structure, which means that theatomic particles appear in a completely random structure with no discerniblepatterns. However, when non-amorphous alloys and metals are cooled to a solidstate, their atoms bond together in a repeating pattern of regular andpredictable shapes, or crystalline grains. This process is analogous to the wayice forms when water freezes and crystallizes. In non-amorphous metals andalloys, the individual crystalline grains contain naturally occurringstructural defects that limit the potential strength and performancecharacteristics of the material. These defects, known as dislocations, consistof discontinuities or inconsistencies in the patterned atomic structure of eachgrain. Unlike other alloys and metals, bulk Liquidmetal alloys can retain theiramorphous atomic structure throughout the solidification process and thereforedo not develop crystalline grains and the associated dislocations.Consequently, bulk Liquidmetal alloys exhibit superior strength and othersuperior performance characteristics compared to their crystallinecounterparts. Our Liquidmetal alloy coatings, in contrast to our bulk alloys,have a crystalline atomic structure when initially applied, but their atomicstructure becomes amorphous as the coatings rub against surfaces under force,thus improving their performance over time.

Prior to 1993,commercially viable amorphous alloys could be created only in thin forms, suchas coatings, films, or ribbons. However, in 1993, researchers at the CaliforniaInstitute of Technology (Caltech) developed the first commercially viableamorphous alloy in a bulk form. Today, bulk Liquidmetal alloys can be formedinto objects that are up to one inch thick, and we are not aware of any othercommercially available amorphous alloys that can achieve this thickness. Wehave the exclusive right to commercialize bulk amorphous alloy technologythrough a license agreement with Caltech and other patents that we own.

***ProprietaryMaterial Composition***

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

**Advantages of LiquidmetalAlloys**

Liquidmetal alloyspossess a unique combination of performance, processing and cost advantagesthat we believe makes them superior in many ways to other commerciallyavailable materials for a variety of existing and potential future productapplications.

***PerformanceAdvantages***

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

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

***ProcessingAdvantages***

The processing of amaterial generally refers to how a material is shaped, formed, or combined withother materials to create a finished product. Bulk Liquidmetal alloys possessprocessing characteristics that we believe make them preferable to othermaterials in a wide variety of applications. In particular, our alloys areamenable to processing options that are similar in many respects to thoseassociated with plastics. For example, we believe that bulk Liquidmetal alloyshave superior net-shape casting capabilities as compared to high-strengthcrystalline metals and alloys.  “Net-shapecasting” is a type of casting that permits the creation of near-to-net shapedproducts that do not require much costly post-cast processing or machining.Additionally, unlike most metals and alloys, our bulk Liquidmetal alloys arecapable of being thermoplastically molded in bulk form. Thermoplastic moldingconsists of heating a solid piece of material until it is transformed into amoldable state, although at temperatures much lower than the meltingtemperature, and then introducing it into a mold to form near-to-net shapedproducts.  Accordingly, thermoplasticmolding can be beneficial and economical for net shape fabrication ofhigh-strength products.

Bulk Liquidmetal alloysalso permit the creation of composite materials that cannot be created withmost non-amorphous metals and alloys. A composite is a material that is madefrom two or more different types of materials. In general, the ability tocreate composites is beneficial because constituent materials can be combinedwith one another to optimize the composite’s performance characteristics fordifferent applications. In other metals and alloys, the high temperaturesrequired for processing could damage some of the composite’s constituentmaterials and therefore limit their utility. However, the relatively lowmelting temperatures of bulk Liquidmetal alloys allow mild processingconditions that eliminate or limit damage to the constituent materials whencreating composites. In addition to composites, we believe that the processingadvantages of Liquidmetal alloys will ultimately allow for a variety of otherfinished forms, including a coating or a spray. Most high-strength metals andalloys cannot be processed into these forms.

Notwithstanding theforegoing advantages, our bulk Liquidmetal alloys possess certain limitationsrelative to processing. The beneficial processing features of our bulk alloysare made possible in part by the alloys’ relatively low melting temperatures.Although a lower melting temperature is a beneficial characteristic for processingpurposes, it renders certain bulk alloy compositions unsuitable for certainhigh-temperature applications, such as jet engine exhaust components.Additionally, the current one-inch thickness limitation of ourzirconium-titanium bulk alloy renders our alloys currently unsuitable for useas structural materials in large-scale applications, such as load-bearing beamsin building construction. We are currently engaged in research and developmentwith the goal of developing processing technology and new alloy compositionsthat will enable our bulk alloys to be formed into thicker objects.

***CostAdvantages***

Liquidmetal alloys havethe potential to provide cost advantages over other high-strength metals andalloys in certain applications. Because bulk Liquidmetal alloy has processingcharacteristics similar in some respects to plastics, which lends itself tonear-to-net shape casting and molding, Liquidmetal alloys can in many cases beshaped efficiently into intricate, engineered products. This capability caneliminate or reduce certain post-casting steps, such as machining andre-forming, and therefore has the potential to significantly reduce processingcosts associated with making parts in high volume.

Additionally, becausethe near-to-net shape processing of Liquidmetal alloys reduces the need forcapital-intensive heavy industrial equipment such as that found in foundry andforging operations, Liquidmetal alloys can be processed with a smallermachinery footprint, which allows for more efficient development of facilitiesand reduced permitting and regulatory costs. We believe that these advantagesmay allow our customers an opportunity to maintain or improve the performanceof their products without a commensurate increase in cost.

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** **

**Our Strategy**

Asa result of the experience and knowledge that we have gained through ouractivities to date, and recognizing that developing and commercializing arevolutionary new technology is an evolutionary process, we are continuallymodifying our business strategy to enable us to better capitalize on ourevolving core strengths and more effectively pursue revenue growth andprofitability.  The key elements of ourstrategy include:

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

·                    *Focusing Our Marketing and Internal ManufacturingActivities on Select Products with Expected Higher Gross-Margins*.   Weintend to focus our marketing and internal manufacturing activities on selectproducts with anticipated higher gross margins. This strategy is designed to align our product development initiativeswith our manufacturing processes and manufacturing cost structure, and toreduce our exposure to more commodity-type product applications that are proneto unpredictable demand and fluctuating pricing.  Our focus is primarily on higher-marginproducts that possess design features that take optimal advantage of ourexisting and developing manufacturing technology and that command a pricecommensurate with the performance advantages of our alloys.  In addition to our focus on products withhigher gross margins, we will continue to engage in prototype manufacturing,both for internally manufactured products and for products that will ultimatelybe licensed to or manufactured by third parties.

·                    *Further Developing Our Manufacturing Processes,Capabilities, and Efficiencies for Bulk Liquidmetal Alloys.  *Weintend to improve and enhance our internal manufacturing processes,capabilities, and efficiencies in order to maintain quality control overproducts made from bulk Liquidmetal alloys, to focus on improvements to theprocessing of our alloys, and to protect our intellectual property. As ouralloys become more pervasive, however, we expect to enter into additionalstrategic relationships that would involve the licensing of Liquidmetaltechnology to third parties for certain market segments.

·                    *Pursuing Strategic Partnerships In Order to MoreRapidly Develop and Commercialize Products.  *We intend toactively pursue and support strategic partnerships that will enable us toleverage the resources, strength, and technologies of other companies in orderto more rapidly develop and commercialize products.  These partnerships may include licensingtransactions in which we license full commercial rights to our technology in aspecific application area, or they may include transactions of a more limitedscope in which, for example, we outsource manufacturing activities or grantdistribution rights.  We believe thatutilizing such a partnering strategy will enable us to reduce our workingcapital burden, better fund product development efforts, better understandcustomer adoption practices, leverage the technical and financial resources ofour partners, and more effectively handle product design and processchallenges.  As this partnering strategyevolves, a growing portion of our revenue mix may be comprised of revenue fromthe provision of product development services, technical support, andengineering services, as well as revenues from royalties on the sale ofLiquidmetal alloy products by our partners.

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

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**Initial Applications**

We have focused ourcommercialization efforts for Liquidmetal alloys on five identified productareas.  We believe that these areas areconsistent with our strategy in terms of market size, building brandrecognition, and providing an opportunity to develop and refine our processingcapabilities. Although we believe that strategic partnering transactions couldcreate valuable opportunities beyond the parameters of these target markets, weanticipate continuing to pursue these markets both internally and in conjunctionwith partners.

***Casings for Electronic Products***

We produce casingcomponents for electronic devices using our bulk Liquidmetal alloys and believethat our alloys offer enhanced performance and design benefits for thesecasings in certain applications.  BulkLiquidmetal alloys can be used for various structural components of a cellularphone, including the shield, faceplate, hinge, hinge housings, back plate, sideplates, brackets, and the cover on the phones. We initially targeted theelectronic casings market because of its potential for high product volumes andbranding opportunities; however, unpredictable customer adoption practices,short product model lives, processing limitations, and intense pricingpressures make it very challenging to compete in this high-volume market.  Accordingly, we are currently limiting ourfocus in this market to higher-margin applications that have the potential tobenefit from the unique performance characteristics of bulk Liquidmetalalloys.  We continue to believe that thehigh strength-to-weight ratio and elastic limit of bulk Liquidmetal alloysenable the production of stronger and thinner electronic devices as compared toplastic, zinc, and magnesium, and we intend to focus on products that requirethese design and performance benefits.

Through our shipments todate, we have demonstrated that bulk Liquidmetal alloys can be used forstructural components of cellular phones and other electronic devices.  During 2003 and 2004, we shipped productionquantities of cell phone components to Samsung Electronics Company and VertuLimited, the luxury communication products subsidiary of Nokia, for inclusionin various cellular phone models.

***Sporting Goods and Leisure Products***

We are developing avariety of applications for Liquidmetal alloys in the sporting goods andleisure products area.

In the sporting goodsindustry, we believe that the high strength, hardness, and elasticity of ourbulk alloys have the potential to enhance performance in a variety of products,and we further believe that many sporting goods products are conducive to ourinternal manufacturing strategy of focusing on high-margin products that meetour design criteria.  Substantialopportunities also exist for our amorphous alloy coatings, powders andcomposites. In 2003, Rawlings Sporting Goods Company launched a new line ofbaseball and softball bats that utilize a Liquidmetal alloy coating, and HEADNV Sport launched a new line of HEAD® Liquidmetal® tennis racquets that incorporates Liquidmetalalloy in composite form in their racquet design. In 2005, we will also belaunching goods that utilize Liquidmetal alloy including skis, lacrosse sticksand other sporting goods.  We arecontinuing to work with golf companies for the development of golf clubcomponents made from bulk Liquidmetal alloys. Other potential applications forour alloys in this industry include eyewear, fishing, hunting, diving, bicycle,skate and winter sport products.

In the leisure productscategory, we believe that bulk Liquidmetal alloys can be used to efficientlyproduce intricately engineered designs with high-quality finishes, such aspremium watchcases, and we further believe that Liquidmetal alloy technologycan be used to make high-quality, high-strength jewelry from precious metals.  We have successfully produced prototype ringsmade from an amorphous Liquidmetal platinum alloy that is harder (and hencemore scratch resistant) than conventional platinum jewelry.  In 2003, aspecial-edition concept chronograph timepiece featuring our titanium-zirconiumLiquidmetal alloy was showcased by luxury watchmaker TAG Heuer at the renownedBasel Watch and Jewelry Show in Basel, Switzerland.  In 2004, we have begun prototyping variouswatch pieces with TAG Heuer and we expect to be ready to move into productionin 2005.

Inorder to accelerate the commercialization of Liquidmetal alloys in the jewelryand high-end luxury products market, in June 2003 we entered into a strategiclicensing transaction with LLPG, Inc., a corporation headed by a former directorof our company with ties to the Swiss jewelry and luxury goods market.  Under this agreement, LLPG was granted a10-year exclusive worldwide license to manufacture and sell a variety of luxurygoods, including watchcases and precious-metal jewelry, utilizing Liquidmetalalloys.  Under the agreement, we areentitled to royalties over the life of the contract on all products producedand sold by LLPG.

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***MedicalDevices***

We are engaged inproduct development efforts relating to various medical devices that could bemade from Liquidmetal alloys. We believe that the unique properties of bulkLiquidmetal alloys provide a combination of performance and cost benefits thatcould make them a desirable replacement to incumbent materials, such asstainless steel and titanium, currently used in various medical deviceapplications.  Our greatest emphasis in2003 and ongoing in 2004 has been on surgical instrument applications forLiquidmetal alloys. These include, but are not limited to, specialized blades,orthopedic instruments utilized for implant surgery procedures, ultrasonicdevices, dental devices, external fixation devices and general surgery devices.The potential value offered by our alloys is high performance in some cases andcost reduction in others, the latter stemming from the ability of Liquidmetalalloys to be net shape cast into components, thus reducing costs of secondaryprocessing. The status of most components in the prototyping phase is subjectto non-disclosure agreements with our customers.

We believe that ourfuture success in the medical device market will be driven largely bystrategically aligning ourselves with well-established companies that areuniquely positioned to facilitate the introduction of Liquidmetal alloys intothis market, especially as it relates to the unique processing challenges andstringent material qualification requirements that are prevalent in thisindustry.  We also believe that ourprospects for success in this market will be enhanced through our focus onoptimizing existing alloy compositions and developing new alloy compositions tosatisfy the industry’s rigorous material qualification standards. For example,we have been working with DePuy Orthopaedics, Inc., a Johnson & Johnsoncompany, to develop an alloy for orthopedic implants and instruments in theknee replacement device market.  Ouragreement with DePuy gives them the exclusive worldwide right and license tomarket and sell knee replacement devices that incorporate Liquidmetalalloys.  We are also in the early stagesof working with other orthopedic companies to identify surgical instrument ordevice applications that would benefit from utilizing Liquidmetal alloys.

***IndustrialCoatings and Powders***

We continue to marketand sell amorphous alloy industrial coatings and powders under the Liquidmetal® ArmacorTM Coatings brand name.Liquidmetal alloy coatings are used primarily as a protective coating forindustrial machinery and equipment. Since the inception of this business in thelate 1980s, our proprietary coatings have demonstrated a high degree ofhardness and low coefficient of friction which, when combined with their strongadhesion properties, reduce the wear and consequent failure of the machineryand equipment on which they are used. In contrast to our bulk alloys, we sellLiquidmetal coatings primarily in the form of a wire or powder feedstock thatis melted and applied to machinery or equipment through welding or thermalspray processes.

Our Liquidmetal coatingsare widely used in the oil drilling industry as a protective coating on drillpipe and casings, and we estimate that our coatings represent a dominant shareof annual worldwide sales of hard band coatings for new oil drill pipe.Drilling often places tremendous stress on pipes and casings, especiallywhenever the drill changes direction. Both the drill pipe and casing experienceexcessive wear, which leads to higher replacement costs and greater failurerates. Liquidmetal coatings are used to provide a protective coating, or hardband, around the outside of the drill pipe and the inside of casings to reducewear and failure rates and accordingly reduce operating costs. Our principalcoatings customers currently include Grant Prideco, Inc., and TAFA, Inc. amongother distributors and applicators.

Liquidmetal coatingshave also been sold into the power generation industry specifically for thepurpose of coating boiler tubes in coal-burning power plants in order to extendthe lives of these boilers. Boiler tubes are subject to high heat, erosion, andcorrosion and often require costly replacement, both in terms of replacementparts and length of downtime for installation. Additionally, residue build-upin boiler tubes of coal burning power plants creates operating inefficiencies.Historic performance and testing of Liquidmetal coatings have demonstrated thatour coatings extend the life of these boiler tubes meaningfully beyond theircurrent average life depending on the specific environment. In addition, ourcoatings have demonstrated the ability to reduce build-up of residue on boilertubes, helping to improve the efficiencies of the boilers. Historically, wehave not concentrated sales efforts on the boiler tube market in a substantialway. However, given the size of the market and potential opportunities for ourcoatings, we have recently dedicated greater effort to this area by, amongother initial steps, establishing a team of independent industrial salesrepresentatives who are now including our coatings in their product portfolios.  In addition to boiler tubes, these salesrepresentatives are soliciting other OEM product applications for Liquidmetalcoatings.

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**DefenseApplications**

We are working with the U.S. Department of Defense, aswell as a variety of defense-related research and development agencies andlarge defense contractors, to develop various defense-related applications forLiquidmetal alloys. For example, we are currently developing prototype kineticenergy penetrator rods for use in armor-piercing ammunition systems. Kineticenergy penetrators, or KEPs, are armor piercing munitions that are currentlymade primarily from depleted uranium or tungsten. Initial live-fire ballistictests under the Liquidmetal KEP program have demonstrated that tungsten KEPsperform better whenever Liquidmetal alloy is combined with the tungsten tocreate a composite material.  In August2003, we signed a new $3.0 million research and development contract with the U.S. Army for the developmentof KEPs. Our strategy is to orient the KEP program toward future systems suchas the Joint Strike Fighter program and the Army’s Future Combat System.

Inaddition to funding the Army KEP program in 2005, the Department of DefenseSpending Bill for 2005 contains money to support the development of an advancedLiquidmetal alloy for use in aerospace applications.  Lockheed Martin has joined LiquidmetalTechnologies for this new program that will be managed by the U.S. Navy.

Liquidmetal is alsoworking with NASA to conduct an experiment to use Liquidmetal alloys as theoptical surface for spaced-based telescopes.

We also continue to workwith a number of defense-related research and development agencies and largedefense companies to identify additional military applications that may benefitfrom using Liquidmetal alloys. We believe that our alloys are well-positionedto capitalize on the trend toward lighter but stronger weapon systems in theU.S. military, and our strategy is to align ourselves with the largest and mostsignificant players in this industry.  Productdevelopment programs for defense applications are currently underway withseveral leading defense contractors, including Alliant Techsystems and LockheedMartin.

**Liquidmetal Golf**

From 1997 untilSeptember 2001, we engaged in the retail marketing and sale of golf clubsthrough a majority owned subsidiary, Liquidmetal Golf. The retail business ofLiquidmetal Golf was discontinued in September 2001 and is now treated as adiscontinued operation in our consolidated financial statements. Although theretail golf club business has been discontinued, Liquidmetal Golf will beengaged in the business of manufacturing and selling golf club components togolf original equipment manufacturers that will integrate these components intotheir own clubs and then sell them under their respective brand names.Liquidmetal Technologies owns 79% of the outstanding common stock inLiquidmetal Golf.

Our Liquidmetal Golfsubsidiary has the exclusive right and license to utilize our Liquidmetal alloytechnology for purposes of golf equipment applications. This right and licenseis set forth in an intercompany license agreement between LiquidmetalTechnologies and Liquidmetal Golf. This license agreement provides thatLiquidmetal Golf has a perpetual and exclusive license to use Liquidmetal alloytechnology for the purpose of manufacturing, marketing, and selling golf clubcomponents and other products used in the sport of golf. In consideration ofthis license, Liquidmetal Golf has issued 4,500,000 shares of Liquidmetal Golfcommon stock to Liquidmetal Technologies.

**Our Intellectual Property**

Our intellectualproperty consists of patents, trade secrets, know-how, and trademarks.Protection of our intellectual property is a strategic priority for ourbusiness, and we intend to vigorously protect our patents and otherintellectual property. Our intellectual property portfolio includes 24 owned orlicensed U.S. patents and numerous patent applications relating to thecomposition, processing, and application of our alloys, as well as variousforeign counterpart patents and patent applications.

Our initial bulkamorphous alloy technology was developed by researchers at the CaliforniaInstitute of Technology (“Caltech”). We have purchased patent rights thatprovide us with the exclusive right to commercialize the amorphous alloy andother amorphous alloy technology acquired from Caltech through a licenseagreement (“Caltech License Agreement”) with Caltech. Under the Caltech licenseagreement, we have the exclusive worldwide right to make, use, and sell productsfrom all of Caltech’s inventions, proprietary information, know-how, and othertechnology relating to amorphous alloys existing as of September 1, 2001.We also have an exclusive worldwide license to nine issued patents and fourpatent applications held by Caltech relating to amorphous alloy technology, aswell as all related foreign counterpart patents and patent applications. Of thepatents currently issued to Caltech and licensed by us, the earliest expirationdate is 2013 and the latest expiration date is 2021.  Furthermore, the license agreement gives usthe exclusive right to make, use, and sell products from substantially allamorphous alloy technology that is developed in Professor William Johnson’sCaltech laboratory during the period September 1, 2001 throughAugust 31, 2005. All fees and other amounts payable by us for these rightsand licenses have been paid in full, and no further royalties, license fees, orother amounts will be payable in the future under this license agreement.

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Our rights under thelicense agreement are perpetual in duration. However, Caltech has the right toconvert the license to a non-exclusive license if we fail to utilize thelicensed technology for a period of 18 or more consecutive months, providedthat Caltech must give us 180-days advance written notice of the conversion andwe may cure the failure at any time during the 180-day notice period. If wecure the failure, then the license will not be converted into a non-exclusivelicense.

Under the licenseagreement, we have the right to sublicense any of the licensed technology orpatents. The license agreement also provides that Caltech reserves the right touse the licensed technology and patents for noncommercial educational andresearch purposes. The patents and patent applications that we license fromCaltech relate primarily to the composition and processing of our alloys. Thecurrently issued U.S. patents covered by the license agreement will expirebetween 2013 and 2021.

Under the Caltechlicense agreement, the parties are obligated to provide reasonable cooperationto each other in connection with any threatened or actual infringement of thelicensed technology by third parties. We have the right to commence an actionfor infringement of any of the licensed technology, and although Caltech is notobligated to bring suit or take action against infringers, Caltech is obligatedto join in any such lawsuit upon our request.

In addition to thepatents and patent applications that we license from Caltech, we are building aportfolio of our own patents to expand and enhance our technology position.These patents and patent applications primarily relate to various applicationsof our bulk amorphous alloys, the composition of our coatings and powders, andthe processing of our alloys. The patents relating to our coatings expire onvarious dates between 2005 and 2017, and the patents relating to our bulkamorphous alloys expire on various dates between 2013 and 2021. Our policy isto seek patent protection for all technology, inventions, and improvements thatare of commercial importance to the development of our business, except to theextent that we believe it is advisable to maintain such technology or inventionas a trade secret.

In order to protect theconfidentiality of our technology, including trade secrets, know-how, and otherproprietary technical and business information, we require that all of ouremployees, consultants, advisors and collaborators enter into confidentialityagreements that prohibit the use or disclosure of information that is deemedconfidential. The agreements also obligate our employees, consultants, advisorsand collaborators to assign to us developments, discoveries and inventions madeby such persons in connection with their work with us.

**Research and Development**

We are engaged inongoing research and development programs that are driven by the following keyobjectives:

·                    *Enhance Material Processing and ManufacturingEfficiencies.*We plan to continue research and development ofprocesses and compositions that will decrease our cost of making products fromLiquidmetal alloys.

·                    *Optimize Existing Alloys and Develop New Compositions*.  We believe that the primary technology driverof our business will continue to be our proprietary alloy compositions.**We plan to continue research anddevelopment on new alloy compositions to generate a broader class of amorphousalloys with a wider range of specialized performance characteristics. During2003 and continuing into 2004, we have successfully expanded our portfolio ofbulk amorphous alloys to include additional zirconium-titanium alloys, as wellas alloys based on other metals, such as iron and platinum.  Although these various compositions are atdifferent stages of development and only a few are currently suitable forcommercial use, we believe that a larger alloy portfolio will enable us toincrease the attractiveness of our alloys as an alternative to incumbentmaterials and, in certain cases, drive down product costs.  We also believe that our ability to optimizeour existing alloy compositions will enable us to better tailor our alloys toour customers’ specific application requirements.

·                    *Develop New Applications.*We will continueresearch and development of new applications for Liquidmetal alloys. We believethe range of potential applications will broaden by expanding the forms,compositions, and methods of processing of our alloys.

We conduct our research and development programsinternally and also through strategic relationships that we enter into withthird parties. Our internal research and development efforts are currentlyfocused on product and process development. Our internal research anddevelopment efforts are conducted by a team of 21 scientists, engineers andresearchers whom we either employ directly or engage as consultants. Includedamong this team are Professor William Johnson, who discovered our initial bulkamorphous alloy at Caltech in 1993, and his graduate student at the time,Atakan Peker, who is employed as our Vice President of Technology.  Professor Johnson was an employee of ourcompany from October 2001 through December 2003 and then became a consultant tothe Company.  Professor Johnson continuesto be a member of our board of directors.

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In addition to ourinternal research and development efforts, we enter into cooperative researchand development relationships with leading academic institutions. ProfessorJohnson continues to supervise a laboratory at Caltech, and through our licenseagreement with Caltech, we have a continuing relationship with the otherresearchers in Professor Johnson’s Caltech laboratory. We have also enteredinto research relationships with several other academic institutions for theconduct of research relating to the properties and characteristics of ouralloys.

We have entered into development relationshipswith other companies for the purpose of identifying new applications for ouralloys and establishing customer relationships with such companies. Some of ourproduct development programs are partially funded by our customers. We are alsoengaged in negotiations with other potential customers regarding possibleproduct development relationships. Our research and development expenses forthe years ended December 31, 2004, 2003, and 2002 were $1.5 million,$8.8 million, and $11.8 million, respectively.

**Manufacturing**

We currently own andoperate a 166,000 square feet manufacturing facility in Pyongtaek, South Korea,which became operational in the third quarter of 2002.  We opened a 14,400 square feet facility inWeihai, China in August 2004 to facilitate our bulk alloy manufacturingbusiness.  We believe that thesefacilities will meet our anticipated manufacturing needs for the foreseeablefuture, although these needs may change depending upon the actual andforecasted orders we receive for our products. We currently intend to developsupplemental research and development, prototyping and manufacturingcapabilities elsewhere, including the United States, for purposes of meetingour long-term manufacturing needs and our customers’ requirements.  In December 2003, we entered into a licenseagreement with Florida Custom Mold, Inc., a Clearwater, Florida-based companythat specializes in high-quality mold design and injection molding services, underwhich Florida Custom Mold is currently acting as a contract manufacturer to ourcompany for purposes of producing prototypes of certain defense and medicalproducts in the US.

**Raw Materials**

Liquidmetal alloycompositions are comprised of many elements, all of which are availablecommodity products. We believe that each of these raw materials is readilyavailable in sufficient quantities from multiple sources on commerciallyacceptable terms. However, any substantial increase in the price orinterruption in the supply of these materials could have an adverse effect onour profitability.

**Customers**

During 2004, fourcustomers accounted for 10% or more of our revenue from continuingoperations.  Revenues from Charm Tech andPntel, both of which are direct suppliers to Samsung, represented 62% ofrevenue from continuing operations for the year ended 2004.  Also, revenues from defense related contractswith the Unites States of America represented 10% and Growell Metal represented12% of revenue from continuing operations for the year ended 2004.  During 2003, three customers accounted for10% or more of our revenue from continuing operations. Revenue from Samsungrepresented 10% of revenue, revenue from LLPG, Inc. represented 12% anddefense-related contracts with three departments of the United States ofAmerica represented 16% of revenue from continuing operations for the yearended December 31, 2003. During the year ended December 31, 2002, revenuefrom Samsung represented 15% of revenue while revenue earned on contracts withthe government represented 16% of revenue from continuing operations.  We expect that a significant portion of ourrevenue may continue to be concentrated in a limited number of customers, evenas our bulk Liquidmetal alloy business grows.

**Competition**

We are not aware of anyother company or business that manufactures, markets, distributes, or sellsbulk amorphous alloys or products made from bulk amorphous alloys. We believeit would be difficult to develop a competitive bulk amorphous alloy withoutinfringing our patents. However, we expect that our bulk Liquidmetal alloyswill face competition from other materials, including metals, alloys, plasticsand composites, which are currently used in the commercial applications that wepursue. Our alloys could also face competition from new materials that may bedeveloped in the future, including new materials that could render our alloysobsolete.

Our Liquidmetal alloycoatings face competition from industrial coatings currently manufactured orsold by other companies. At present, the primary competitors of our coatingsbusiness are Varco International, Inc. and Arnco Technology Trust, Limited.Although we believe, based on market data gathered by us, that our coatingscompete favorably with these companies’ products and that we continue tomaintain the dominant market share with respect to protective coatings for oildrill pipe and casings, these competitors are larger well-establishedbusinesses that have substantially greater financial, marketing, and otherresources than we do.

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

**Backlog**

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

**Sales and Marketing**

We direct our marketingefforts towards customers that will incorporate our components and productsinto their finished goods. To that end, we will continue to hire businessdevelopment personnel who, in conjunction with engineers and scientists, willactively identify potential customers that may be able to benefit from theintroduction of Liquidmetal alloys to their products. In some cases, we will developapplications in conjunction with existing or potential customers. By adoptingthis strategy, we intend to take advantage of the sales and marketing forcesand distribution channels of our customers to facilitate the commercializationof our alloys.  We also direct businessdevelopment efforts toward companies who we believe could be viable candidatesfor potential partnering transactions, such as licensing relationships,distribution arrangements, joint ventures, and the like.

**Employees**

As of December 31, 2004,we had 158 full-time employees. As of December 31, 2004, 55 of our Koreanoperation employees were represented by a labor union.  We have not experienced any work stoppagesand we consider our employee relations to be favorable.

**Governmental Regulation**

Medical instrumentsincorporating our Liquidmetal alloys will be subject to regulation in theUnited States by the FDA and corresponding state and foreign regulatoryagencies. Any orthopedic devices that we develop will be regulated in a similarmanner. Medical device manufacturers to whom we intend to sell our products mayneed to obtain FDA approval before marketing their medical devices thatincorporate our products. Medical device manufacturers may need to obtainsimilar approvals before marketing these medical device products in foreigncountries.

Because we intend tosell our medical device products to medical device manufacturers, we do notbelieve that we will need to obtain FDA approval or similar foreign approvalsbefore selling products to medical device manufacturers.  Nonetheless, as a manufacturer of medicaldevice components, we would be subject to quality control and record keepingrequirements of FDA and other federal and state statutes and regulations, aswell as similar regulations in foreign countries.

The process of obtainingand maintaining required FDA and foreign regulatory approvals for medicaldevices that incorporate our products could be lengthy, expensive, anduncertain for our customers. Additionally, regulatory agencies can delay orprevent product introductions. Generally, before a medical device manufacturercan market a product incorporating one of our products, our customer mustobtain for their finished product marketing clearance through a 510(k)premarket notification or approval of a pre-market approval application, orPMA. The FDA will typically grant a 510(k) clearance if the applicant canestablish that the device is substantially equivalent to a predicate device. Itgenerally takes a number of months from the date of a 510(k) submission toobtain clearance, but it may take longer, particularly if a clinical trial isrequired.

The FDA may find that a510(k) is not appropriate for a medical device that incorporates our product orthat substantial equivalence has not been shown and as a result willrequire a PMA. A PMA application must be submitted if a proposed medical devicedoes not qualify for a 510(k) pre-market clearance procedure. PMAapplications must be supported by valid scientific evidence to demonstrate thesafety and effectiveness of the device, typically including the results ofclinical trials, bench tests, and laboratory and animal studies. The PMAprocess can be expensive, uncertain and lengthy, requires detailed andcomprehensive data, and generally takes significantly longer than the 510(k)process. Additionally, the FDA may never approve the PMA.

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Similar regulations inforeign countries vary significantly from country to country and with respectto the nature of the particular medical device. The time required to obtainthese foreign approvals to market our products may be longer or shorter thanthat required in the United States, and requirements for such approval maydiffer from FDA requirements.

**Factors Affecting FutureResults**

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

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

**We have not sustainedprofitability and may incur losses in the future.**

We had an accumulateddeficit of approximately $127.5 million at December 31, 2004. Of thisaccumulated deficit, $44.5 million was attributable to losses generated byour discontinued equipment manufacturing and retail golf businesses throughDecember 31, 2004.  We may incuradditional operating losses in the future. Consequently, it is possible that wemay not achieve positive earnings and, if we do achieve positive earnings, wemay not be able to achieve them on a sustainable basis.

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

We have marketed andsold industrial coatings to distributors in the coatings industry since 1987.Prior to the third quarter of 2002, our experience selling products made frombulk amorphous alloys has been limited to our discontinued retail golfbusiness, which had a different marketing strategy than the one we arecurrently employing. Therefore, we have a relatively limited history ofproducing bulk amorphous alloy components and products on a mass-productionbasis. Many of our relationships with potential customers for bulk alloy productsare at an early stage, and there can be no assurance that these customers willenter into purchase commitments with us.

**We relyon assumptions about the markets for our products and components that, ifincorrect, may adversely affect our profitability.**

We have a relativelyshort history producing bulk amorphous alloy components on a mass-productionbasis. We have made assumptions regarding the market size for, and themanufacturing requirements of, our products and components based in part oninformation we received from third parties and also from our limited history.If these assumptions prove to be incorrect, we may not achieve anticipatedrevenue targets or profitability.

**If wecannot establish and maintain relationships with customers that incorporate ourcomponents and products into their finished goods, we will not be able toincrease our revenue and commercialize our products.**

To increase our revenue,we must establish and maintain relationships with customers that willincorporate our components and products into their finished goods. We expect torely on the marketing, distribution, and, in some cases, the manufacturing,research, and development abilities of our customers to assist us indeveloping, commercializing, and marketing our products in different markets.Our future growth and success will depend in large part on our ability to enterinto these relationships and the subsequent success of these relationships. Ifour products are selected for use in a customer’s products, we still may not realizesignificant revenue from that customer if that customer’s products are notcommercially successful.

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**It may take significant timeand cost for us to develop new customer relationships, which may delay ourability to generate additional revenue or achieve profitability.**

Our ability to generate revenue from newcustomers will be affected by the amount of time it takes for us to, amongother things:

·     identify a potential customer and introducethe customer to Liquidmetal alloys;

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

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

·     make prototypes and samples for customertesting;

·     work with our customers to test and analyzeprototypes and samples; and

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

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

**After we develop a customerrelationship, it may take a significant amount of time for that customer todevelop, manufacture, and sell finished goods that incorporate our componentsand products.**

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

**A limited number of ourcustomers generate a significant portion of our revenue.**

For the near future, we expect that asignificant portion of our revenue will be concentrated in a limited number ofcustomers. For example, for the year ended December 31, 2004, revenue from twocustomers represented approximately 62% of total revenue from continuingoperations and for the year ended December 31, 2003, revenue from twocustomers represented approximately 26% of total revenue from continuingoperations. A reduction, delay, or cancellation of orders from one or more ofthese customers or the loss of one or more customer relationships couldsignificantly reduce our revenue. Unless we establish long-term salesarrangements with these customers, they will have the ability to reduce ordiscontinue their purchases of our products on short notice.

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

Our future revenuegrowth and ultimate profitability will depend in part on the ability of ourcustomers to successfully market and sell their finished goods that incorporateour products. We will have little control over our customers’ marketing andsales efforts. These marketing and sales efforts may be unsuccessful forvarious reasons, any of which could hinder our ability to increase revenue orachieve profitability. For example, our customers may not have or devotesufficient resources to develop, market, and sell their finished goods thatincorporate our products. Because we typically will not have exclusive salesarrangements with our customers, they will not be precluded from exploring andadopting competing technologies. Also, products incorporating competingtechnologies may be more successful for reasons unrelated to the performance ofour customers’ products or the marketing efforts of our customers.

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**Our growth depends on our abilityto identify, develop, and commercialize new applications for our technology.**

Our future growth and success will depend inpart on our ability to identify, develop, and commercialize, either alone or inconjunction with our customers, new applications and uses for Liquidmetalalloys. If we are unable to identify and develop new applications, we may beunable to develop new products or generate additional revenue. Successfuldevelopment of new applications for our products may require additional investment,including costs associated with research and development and the identificationof new customers. In addition, difficulties in developing and achieving marketacceptance of new products would harm our business.

**We may not be able toeffectively compete with current suppliers of incumbent materials or producersof competing products.**

The future growth and success of our bulkamorphous alloy business will depend in part on our ability to establish andretain a technological advantage over other materials for our targetedapplications. For many of our targeted applications, we will compete withmanufacturers of similar products that use different materials. For example, wehave targeted the cellular phone casing market as an application for bulkLiquidmetal alloys. In this market, we believe we will compete with othermanufacturers of cellular phone casings who use plastics or metal to constructtheir casings. In other markets, we will compete directly with suppliers of theincumbent material.  In addition, in each of our targeted markets,our success will depend in part on the ability of our customers to competesuccessfully in their respective markets. Thus, even if we are successful inreplacing an incumbent material in a finished product, we will remain subjectto the risk that our customer will not compete successfully in its own market.

**Future advances in materialsscience could render Liquidmetal alloys obsolete.**

Academic institutions and business enterprisesfrequently engage in the research and testing of new materials, includingalloys and plastics. Advances in materials science could lead to new materialsthat have a more favorable combination of performance, processing, and costcharacteristics than our alloys. The future development of any such newmaterials could render our alloys obsolete and unmarketable or may impair ourability to compete effectively.

**Our growth depends upon ourability to retain and attract a sufficient number of qualified employees.**

Our future growth and success will depend inpart on our ability to retain key members of our management and scientificstaff, particularly John Kang, our Chairman of the board of directors,Professor William Johnson, a member of our board of directors and a professorat Caltech, and Dr. Atakan Peker, our Vice President of Technology. We do nothave “key man” or similar insurance on any of these individuals. If we losetheir services or the services of other key personnel, our financial results orbusiness prospects may be harmed. Additionally, our future growth and successwill depend in part on our ability to attract, train, and retain scientificengineering, manufacturing, sales, marketing, and management personnel. Wecannot be certain that we will be able to attract and retain the personnel necessaryto manage our operations effectively. Competition for experienced executivesand scientists from numerous companies and academic and other researchinstitutions may limit our ability to hire or retain personnel on acceptableterms. In addition, many of the companies with which we compete for experiencedpersonnel have greater financial and other resources than we do. Moreover, theemployment of non-citizens may be restricted by applicable immigration laws.

**We may not be able tosuccessfully identify, consummate, or integrate strategic partnerships.**

As a part of ourbusiness strategy, we intend to pursue strategic partnering transactions thatprovide access to new technologies, products, markets, and manufacturingcapabilities. These transactions could include licensing agreements, jointventures, or even business combinations. For example, we may pursuetransactions that will give us access to new technologies that are useful inconnection with the composition, processing, or application of Liquidmetal alloys.We may not be able to successfully identify any potential strategicpartnerships. Even if we do identify one or more potentially beneficialstrategic partnering, we may not be able to consummate these transactions onfavorable terms or obtain the benefits we anticipate from such a transaction.

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**We may encounter manufacturingproblems or delays or may be unable to produce high-quality products atacceptable costs.**

We have relatively limited experience inmanufacturing our products and may be required to manufacture a range ofproducts in high volumes while ensuring high quality and consistency. Althoughwe currently own and operate a 166,000 square feet and a 14,400 square feetmanufacturing facilities in South Korea and China, respectively, we cannotguarantee that these facilities will be able to produce the intended productswith production yields, quality controls, and production costs that provide uswith acceptable margins or profitability or satisfy the requirements of ourcustomers.

**We expect to derive asubstantial portion of our revenue from sales outside the United States, andproblems associated with international business operations could affect ourability to manufacture and sell our products.**

We expect that we will continue to manufacture asubstantial portion of our initial bulk Liquidmetal alloy products in our SouthKorean facility. As a result, our manufacturing operations are subject to risksof political instability, including the risk of conflict between North Koreaand South Korea and tensions between the United States and North Korea. Inaddition, we anticipate that sales to customers located outside of the UnitedStates will account for a significant portion of our revenue in future periodsand that the trend of foreign customers accounting for an increasing portion ofour total sales may continue. Specifically, we expect to continue to derive asignificant amount of revenue from sales to customers located in Asia. Adownturn in the economies of Asian countries where our products will be sold,particularly South Korea’s economy, could materially harm our business.

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

·                    staffingand managing our manufacturing facility located in South Korea andpost-processing facility located in China;

·                    productor material transportation delays or disruption, including the availability andcosts of air and other transportation between our South Korean and Chinesefacilities and the United States;

·                    politicaland economic instability, including instability involving North Korea;

·                    potentiallyadverse tax consequences;

·                    burdenof complying with complex foreign laws and treaties; and

·                    tradeprotection laws, policies, and measures and other regulatory requirementsaffecting trade and investment, including loss or modification of exemptionsfor taxes and tariffs.  Moreover,customers may sell finished goods that incorporate our components and productsoutside of the United States, which exposes us indirectly to additional foreigncommerce risks.

**Our business is subject to thepotential adverse consequences of exchange rate fluctuations.**

We expect to conductbusiness in various foreign currencies and will be exposed to market risk fromchanges in foreign currency exchange rates and interest rates. Fluctuations inexchange rates between the U.S. dollar and such foreign currencies may have amaterial adverse effect on our business, results of operations, and financialcondition and could specifically result in foreign exchange gains and losses.The impact of future exchange rate fluctuations on our operations cannot beaccurately predicted. To the extent that the percentage of our non-U.S. dollarrevenue derived from international sales increases in the future, our exposureto risks associated with fluctuations in foreign exchange rates will increasefurther. Moreover, as a result of operating a manufacturing facility in SouthKorea, a substantial portion of our costs are and will continue to bedenominated in the South Korean won. Adverse changes in the exchange rates ofthe South Korean won to the U.S. dollar will affect our costs of goods sold andoperating margins and could result in exchange losses.

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

We have an exclusive license from Caltech toseveral patents and patent applications relating to amorphous alloy technology,and we have obtained several of our own patents. We also have the exclusiveright to Caltech’s inventions, proprietary information, know-how, and othertechnology relating to bulk amorphous alloys existing as of September 1,2001. Our success depends in part on our ability to obtain and maintain patentand other proprietary right protection for our technologies and products in theUnited States and other countries. If we are unable to obtain or maintain theseprotections, we may not be able to prevent third parties from using ourproprietary rights. Specifically, we must:

·             protectand enforce our license agreement with Caltech and our own patents andintellectual property;

·             exploitour license of the patented technology under our license agreement with Caltechas well as our own patents; and

·             operateour business without infringing on the intellectual property rights of thirdparties.

Caltech owns several issued United Statespatents covering the composition and method of manufacturing of the family ofLiquidmetal alloys. We also hold several United States and correspondingforeign patents covering the manufacturing processes of Liquidmetal alloys andtheir use. The patents relating to our coatings expire on various dates between2005 and 2017, and those relating to our bulk amorphous alloys between 2013 and2021. If we are unable to protect our proprietary rights prior to theexpiration of these patents, we may lose the advantage we have established asbeing the first to market bulk amorphous alloy products. In addition, the lawsof some foreign countries do not protect proprietary rights to the same extentas the laws of the United States, and we may encounter significant problems andcosts in protecting our proprietary rights in these foreign countries.

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

**Other companies may claim thatwe infringe their intellectual property rights, which could cause us to incursignificant expenses or prevent us from selling our products.**

Our success depends, in part, on our ability tooperate without infringing on valid, enforceable patents or proprietary rightsof third parties and not breaching any licenses that may relate to our technologyand products. Future patents issued to third parties may contain claims thatconflict with our patents and that compete with our products and technologies,and third parties could assert infringement claims against us. Any litigationor interference proceedings, regardless of their outcome, may be costly and mayrequire significant time and attention of our management and technicalpersonnel. Litigation or interference proceedings could also force us to:

·       stopor delay using our technology;

·       stopor delay our customers from selling, manufacturing or using products thatincorporate the challenged intellectual property;

·       paydamages; or

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

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**The time and cost associated with complying withgovernment regulations to which we could become subject could have a materialadverse effect on our business.**

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

In addition, the processing of beryllium, aminor constituent element of some of our alloys, can result in the release ofberyllium into the workplace and the environment and in the creation ofberyllium oxide as a by-product. Beryllium is classified as a hazardous airpollutant, a toxic substance, a hazardous substance, and a probable humancarcinogen under environmental, safety, and health laws, and various acute andchronic health effects may result from exposure to beryllium. We are required tocomply with certain regulatory requirements and to obtain a permit from theU.S. Environmental Protection Agency or other government agencies to processberyllium. Our failure to comply with present or future governmentalregulations related to the processing of beryllium could result in suspensionof manufacturing operations and substantial fines or criminal penalties.

To the extent that our products have thepotential for dual use, such as military and non-military applications, theymay be subject to import and export restrictions of the U.S. government, aswell as other countries. The process of obtaining any required U.S. or foreignlicenses or approvals could be time-consuming, costly, and uncertain. Failureto comply with import and export regulatory requirements can lead tosubstantial fines, civil and criminal penalties, and the loss of governmentcontracting and export privileges.

**We may require additionalfunding, which may not be available on favorable terms or at all.**

Our future capital requirements will depend onthe amount of cash generated by our operations. Our projections of cash flowsfrom operations and, consequently, future cash needs are subject to substantialuncertainty. If our available funds and cash generated from operations are insufficientto satisfy our liquidity requirements, we may need additional funds in thefuture to support our working capital requirements and for other purposes, andwe may seek to raise additional funds through public or private equityfinancing, bank debt financing, or from other sources. Adequate funds may notbe available when needed or may not be available on favorable terms. If weraise additional funds by issuing equity securities, existing shareholders maybe diluted. If funding is insufficient at any time in the future, we may not beable to develop or enhance our products or services, take advantage of businessopportunities, or respond to competitive pressures, any of which could harm ourbusiness.

**Antitakeover provisions of ourcertificate of incorporation and bylaws and provisions of applicable corporatelaw could delay or prevent a change of control that you may favor.**

Provisions in our certificate of incorporation,our bylaws, and Delaware law could make it more difficult for a third party toacquire us, even if doing so would be beneficial to our shareholders. Theseprovisions could discourage potential takeover attempts and could adverselyaffect the market price of our shares. Because of these provisions, you mightnot be able to receive a premium on your investment. These provisions:

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

·       limitshareholders’ ability to call a special meeting of our shareholders;

·       providefor a classified board of directors; and

·       establishadvance notice requirements to nominate directors for election to our board ofdirectors or to propose matters that can be acted on by shareholders atshareholder meetings.

The provisions describedabove could delay or make more difficult transactions involving a change incontrol of us or our management.

19

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**Ourbulk amorphous alloy technology is still at an early stage of commercializationrelative to many other materials**.

Our bulk amorphous alloy technology is a relatively newtechnology as compared to many other material technologies, such as plasticsand widely-used high-performance crystalline alloys.  Historically, the successfulcommercialization of a new materials technology has required the persistentimprovement and refining of the technology over a sometimes lengthy period oftime.  Accordingly, we believe that ourCompany’s future success will be dependent on our ability to continue expandingand improving our technology platform by, among other things, constantlyrefining and improving our manufacturing processes, optimizing our existingamorphous alloy compositions for various applications, and developing andimproving new bulk amorphous alloy compositions.  Our failure to further expand our technologybase could limit our growth opportunities and hamper our commercialization efforts.

**Ourstock price may experience volatility.**

The trading price of ourcommon stock could fluctuate widely due to:

·       quarter-to-quartervariations in results of operations; 

·       lossof a major customer; 

·       announcementsof technological innovations by us or our potential competitors; 

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

·       newproducts offered by us or our competitors; 

·       announcementsof strategic relationships or strategic partnerships; or 

·       otherevents or factors that may be beyond our control. 

In addition, the securities markets in general haveexperienced extreme price and trading volume volatility in the past. Thetrading prices of securities of many companies at our stage of growth havefluctuated broadly, often for reasons unrelated to the operating performance ofthe specific companies. These general market and industry factors may adverselyaffect the trading price of our common stock, regardless of our actualoperating performance.  If our stock priceis volatile, we could face securities class action litigation, which couldresult in substantial costs and a diversion of management’s attention andresources and could cause our stock price to fall.

**Item 2.Properties**

Our principal executive offices and principalresearch and development offices are located in Lake Forest, California andconsist of approximately 30,000 square feet. This facility is occupied pursuantto a lease agreement that expires in June 2007. Prior to December 31, 2003, ourprincipal executive offices were located in Tampa, Florida; however, as anoutgrowth of various cost reduction measures in the fourth quarter of 2003,activities of the Tampa office were transferred to and consolidated with theLake Forest office.  In Conroe, Texas, welease an office and warehouse for our coatings business segment. This facility,which is approximately 10,000 square feet, is leased through September 2006.

Our principalprototyping and manufacturing facility is in Pyongtaek, South Korea, andconsists of approximately 166,000 square feet. We lease the land on which thisfacility is located, although we own the buildings, fixtures, and all personalproperty located on the land. The parcel of land consists of approximately fouracres and is leased through 2022. We currently expect that this facility willmeet our anticipated internal manufacturing needs for the foreseeablefuture.  Until June 2004 we also leased afacility in Incheon, South Korea, where an equipment manufacturing division ofthe Company assembled die casting equipment. This facility is approximately22,430 square feet, and its lease expired in February 2005; however, that diecasting equipment division was divested as of June 14, 2004 and the lease wasterminated.   On August 2004, we enteredinto a 3 year lease for a post-processing facility located in Wehai, China,which consists of approximately 14,400 square feet, to facilitate our bulkalloy manufacturing.

20

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**Item 3. LegalProceedings**

Liquidmetal Technologies and certain of its presentand former officers and directors were named as defendants in nine purportedclass action complaints filed in the United States District Courts for theMiddle District of Florida, Tampa Division, and the Central District ofCalifornia, Southern Division, alleging violations of Sections 11 and 15 of theSecurities Act of 1933 and Sections 10(b) and 20(a) of the Securities ExchangeAct of 1934 and Rule 10b-5 promulgated thereunder. In August 2004, fourcomplaints were consolidated in the United States District Court for the MiddleDistrict of Florida under the caption *Primavera Investors v.Liquidmetal Technologies, Inc., et al.*, Case No.8:04-CV-919-T-23EAJ.  John Lee, ChrisCowley, Dwight Mamanteo, Scott Purcell and Mark Rabold, were appointed co-leadplaintiffs (the “Lead Plaintiffs”).  InSeptember 2004, the other five complaints filed in the Central District ofCalifornia were transferred to the Middle District of Florida for consolidationwith the *Primavera Investors* action.  The Lead Plaintiffs served their ConsolidatedAmended Class Action Complaint on January 12, 2005.  TheAmended Complaint alleges that the Prospectus issued in connection with theCompany’s initial public offering in May 2002 contained materialmisrepresentations and omissions regarding the Company’s historical financialcondition and regarding a personal stock transaction by the Company’s chiefexecutive officer.  The Lead Plaintiffsfurther generally allege that during the proposed Class Period of May 21, 2002,through May 13, 2004, the defendants engaged in improper revenue recognitionwith respect to certain of the Company’s business transactions, failed tomaintain adequate internal controls, and knowingly disclosed unrealistic butfavorable information about market demand for and commercial viability of theCompany’s products to artificially inflate the value of the Company’sstock.  The Amended Complaint seeks unspecified compensatory damages and otherrelief.  Defendants’ motion to dismiss will be due on March 28, 2005.  We intend to vigorously defend against the class action.  We cannot currently predict the impact orresolution of this litigation or reasonably estimate a range of possible loss,which could be material. The resolution of this lawsuit may harm our businessand have a material adverse impact on our financial condition.

**In addition to the above, certainpresent and former officers and directors of Liquidmetal Technologies, as wellas Liquidmetal Technologies as a nominal defendant, have been named in threeshareholder derivative actions.  Twoshareholder derivative complaints were filed in California state court styled *Brian Clair, Derivatively on Behalf of Liquidmetal Technologies, Inc.v. John Kang, et al.*, Case No. 04CC00551, and *JosephDurgin Derivatively on Behalf of Liquidmetal Technologies, Inc.  v. John Kang, et al.,* Case No. 04CC00553, bothcommenced in the Superior Court of Orange County, California.  A third shareholder derivative complaint wasfiled in Florida federal court styled *Robert Story v. John Kang,et al.*, Case No. 8:04-CV-1587-T23TBM, commenced in the MiddleDistrict of Florida, Tampa Division. These shareholder derivative lawsuits allege that the defendantsbreached various fiduciary duties and otherwise violated state law basedprimarily upon the same underlying facts and circumstances as alleged in thefederal shareholder class action. The plaintiffs seek unspecified compensatorydamages, restitution and disgorgement of profits, equitable and/or injunctiverelief as permitted by law and other relief. The two shareholder derivative complaints in California state court havebeen consolidated.  Plaintiffs served aConsolidated Shareholder Derivative Complaint on October 12, 2004.  The defendants served a Demurrer to theConsolidated Shareholder Derivative Complaint on November 22, 2004, seekingdismissal of that complaint.  At ahearing on February 10, 2005, the court sustained the demurrer, dismissing theConsolidated Shareholder Derivative Complaint but giving the plaintiffs 45 dayswithin which to amend the complaint.  Theamended complaint is due on March 28, 2005. In the Florida derivative action, the Plaintiff filed a First AmendedShareholder Derivative Complaint on November 22, 2004.  The Company’s Motion to Dismiss was filed onDecember 20, 2004.  Plaintiff’s Responseand Objection to the Motion to Dismiss was filed on February 4, 2005.  We cannot anticipate when the Court will ruleon the Motion to Dismiss.  We intend tovigorously defend against the derivative actions.  We cannot currently predict the impact orresolution of this litigation or reasonably estimate a range of possible loss,which could be material. The resolution of these lawsuits may harm our businessand have a material adverse impact on our financial condition.**

**Item 4.Submission of Matters to a Vote of Security Holders**

No matters weresubmitted to a vote of our security holders during the fourth quarter of 2004.

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**PART II**

**Item 5.Market For Registrant’s Common Equity and Related Stockholder Matters**

Prior to July 16, 2004, our common stock was quoted onthe Nasdaq National Market under the symbol “LQMT.”  On July 14, 2004, the Company was notified bythe Nasdaq Listing Qualifications Panel that the Company’s common stock wouldbe delisted from the Nasdaq National Market effective with the open of businesson Friday, July 16, 2004.   The Companywas delisted for its failure to comply with Marketplace Rule 4310(c)(14) due tothe Company’s inability to file its Form 10-K for the fiscal year 2003 and Form10-Q for the first quarter of 2004.  Asof July 19, 2004, the shares of Liquidmetal Technologies, Inc. common stockcommenced trading in the Over the Counter (OTC) Pink Sheets Market under thesymbol “LQMT.PK”.  On January 13, 2005,the Company filed its Form 10-Q for the third quarter of 2004 and thus, becamecurrent on its filings.  Subsequently,the Company filed the necessary forms with Nasdaq and is currently working withthem to be listed on the Nasdaq (OTC) bulletin boards.

The following table setsforth, for the periods indicated, the high and low sale prices for our commonstock as reported by The Nasdaq National Market:

|                     | ** ** | **Fiscal 2004** | ** ** |
|---------------------|------------|----------------------|------------|
| ** **          | ** ** | **High**             | ** ** | **Low** | ** ** |
| Fourth Quarter      |       | $                    | 4.00       |   | $ | 1.75 |   |
| Third Quarter  |       | $                    | 2.33       |   | $ | 0.71 |   |
| Second Quarter |       | $                    | 3.68       |   | $ | 0.55 |   |
| First Quarter       |       | $                    | 4.52       |   | $ | 2.50 |   |

 

The closing price of our common stock asreported on The OTC Pink Sheets Market on February 1, 2005 was $1.55 per share.As of February 1, 2005, there were 238 holders of record of our common stock.

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

**Item 6.Selected Consolidated Financial Data**

We derived the selectedconsolidated financial data below as of and for each of the three years in theperiod ended December 31, 2004 from our audited consolidated financialstatements and related notes thereto included elsewhere in this annual reporton Form 10-K.  The followingselected consolidated financial data should be read in conjunction withLiquidmetal Technologies, Inc.’s consolidated financial statements and therelated notes thereto, and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included elsewhere in this annual reporton Form 10-K   In addition, readersshould note the following information regarding the selected historicalconsolidated financial data presented below.

We have restated ourpreviously reported consolidated financial statements for the fiscal year endedDecember 31, 2004 toproperly account for the conversion feature of the senior convertible notes.  The restatement adjustments resulted in acumulative net reduction of shareholders’ equity by $4.7 million as of December31, 2004 and an increase in previously reported net loss by $2.2 million forthe year ended December 31, 2004 (see Note 15). We have restated our previously reported consolidated financialstatements for the fiscal years ended December 31, 2002 and 2001.  The restatement adjustments resulted in acumulative net reduction to shareholders’ equity of $2.0 million as of December31, 2002 and an increase in previously reported net loss of $1.1 million and$0.9 million for the years ended December 31, 2002 and 2001, respectively.  Further, the 2003, 2002, and 2001 balancesfrom our 10-K filed on November 10, 2004 have been restated in order to conformwith the presentation of 2004 financial statements as a result of applicationof SFAS 144 over discontinued operations of our equipment manufacturingbusiness (see Note 18).  The selectedconsolidated financial data presented below includes all such restatements.

See Note 2 in the notes to consolidated financial statements includedin this annual report on Form 10-K and in the fiscal 2003 annual report on Form10-K filed on November 10, 2004, which reflects the restatements of prior yeartransactions.

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| ** **                                                                                                                   | ** ** | **For the Years Ended December 31,**      | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                                                                   | ** ** | **(Restated)**                                                     | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Unaudited)** | ** ** |
| ** **                                                                                                                   | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated  Statement of Operations Data:**                                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue                                                                                                                      |       | $                                                                  | 17,429     |   | $ | 13,658 |   | $ | 9,138 |   | $ | 3,882 |   | $ | 4,200 |   |
| Cost of sales                                                                                                                |       | 12,168                                                             |       | 18,162 |   | 5,656 |   | 1,924 |   | 1,983 |   |
| Gross profit  (loss)                                                                                                         |       | 5,261                                                              |       | (4,504 | ) | 3,482 |   | 1,958 |   | 2,217 |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating  expenses:                                                                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative                                                                                          |       | 11,591                                                             |       | 17,729 |   | 13,099 |   | 5,239 |   | 1,449 |   |
| Research and development                                                                                                     |       | 1,467                                                              |       | 8,780 |   | 11,825 |   | 1,726 |   | 455 |   |
| Impairment of goodwill                                                                                                       |       | —                                                             |       | 184 |   | — |   | — |   | — |   |
| Impairment of long lived assets                                                                                              |       | —                                                             |       | 2,684 |   | — |   | — |   | — |   |
| Total operating expenses                                                                                                     |       | 13,058                                                             |       | 29,377 |   | 24,924 |   | 6,965 |   | 1,904 |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| (Loss) income  before interest, other income, income taxes, minority interest and  discontinued operations                   |       | (7,797                                                             | )          | (33,881 | ) | (21,442 | ) | (5,007 | ) | 313 |   |
| Loss from  extinguishments of debt                                                                                           |       | (2,941                                                             | )          | — |   | — |   | — |   | — |   |
| Change in value  of warrants, gain                                                                                           |       | 747                                                                |       | — |   | — |   | — |   | — |   |
| Change in value  of conversion feature, gain                                                                                 |       | 2,093                                                              |       | — |   | — |   | — |   | — |   |
| Other income                                                                                                                 |       | 302                                                                |       | — |   | — |   | — |   | — |   |
| Interest  expense, net                                                                                                       |       | (6,540                                                             | )          | (86 | ) | (603 | ) | (1,095 | ) | (188 | ) |
| Gain on sale of  marketable securities held-for-sale                                                                         |       | —                                                             |       | 1,178 |   | 832 |   | — |   | — |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| (Loss) before  income taxes, minority interest and discontinued operations                                                   |       | (14,136                                                            | )          | (32,789 | ) | (21,213 | ) | (6,102 | ) | 125 |   |
| Income taxes                                                                                                                 |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Minority  interest in loss of consolidated subsidiary                                                                        |       | —                                                             |       | 21 |   | 118 |   | — |   | — |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| (Loss) income  from continuing operations                                                                                    |       | (14,136                                                            | )          | (32,768 | ) | (21,095 | ) | (6,102 | ) | 125 |   |
| (Loss) income  from operations of discontinued operations, net                                                               |       | (749                                                               | )          | (964 | ) | 83 |   | (5,973 | ) | (8,938 | ) |
| Gain (loss) from  disposal of discontinued operations, net                                                                   |       | —                                                             |       | 127 |   | 1,556 |   | (11,949 | ) | — |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net (loss)                                                                                                                   |       | $                                                                  | (14,885    | ) | $ | (33,605 | ) | $ | (19,456 | ) | $ | (24,024 | ) | $ | (8,813 | ) |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| (Loss) income  per share from continuing operations – basic and diluted                                                 |       | $                                                                  | (0.34      | ) | $ | (0.79 | ) | $ | (0.54 | ) | $ | (0.18 | ) | $ | 0.00 |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average common  shares used to compute income (loss) per share from continuing operations –  basic and diluted |       | 41,610                                                             |       | 41,505 |   | 38,714 |   | 33,323 |   | 30,884 |   |

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| ** **                                                    | ** ** | **As of December 31,**                              | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                    | ** ** | **(Restated)**                                                     | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Unaudited)** | ** ** |
| ** **                                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated  Balance Sheet Data:**                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| ** **                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                    |       | $                                                                  | 742        |   | $ | 3,127 |   | $ | 25,058 |   | $ | 2,230 |   | $ | 124 |   |
| Restricted cash                                               |       | 754                                                                |       | — |   | — |   | — |   | — |   |
| Marketable  securities held-for-sale                          |       | —                                                             |       | — |   | 3,068 |   | — |   | — |   |
| Working capital  (deficiency)                                 |       | (14,910                                                            | )          | (698 | ) | 24,845 |   | (9,573 | ) | (1,960 | ) |
| Total assets                                                  |       | 28,508                                                             |       | 30,852 |   | 27,772 |   | 6,680 |   | 1,945 |   |
| Long-term debt  and capital leases, including current portion |       | 9,672                                                              |       | 4,360 |   | 93 |   | 2,988 |   | 2,506 |   |
| Shareholders’ equity  (deficiency)                       |       | 4,191                                                              |       | 16,163 |   | (50,599 | ) | (7,504 | ) | (3,680 | ) |
|                                                               |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

*This management’s discussion and analysis, as well as othersections of this report on Form 10-K, may contain “forward-lookingstatements” that involve risks and uncertainties, including statementsregarding our plans, future events, objectives, expectations, forecasts, orassumptions. Any statement that is not a statement of historical fact is aforward-looking statement, and in some cases, words such as “believe,” “estimate,”“ project,” “expect,” “intend,” “may,” “anticipate,” “plans,” “seeks,” andsimilar expressions identify forward-looking statements. These statementsinvolve risks and uncertainties that could cause actual outcomes and results todiffer materially from the anticipated outcomes or results, and undue relianceshould not be placed on these statements. These risks and uncertaintiesinclude, but are not limited to, the matters discussed under the caption “FactorsAffecting Future Results” in Item 1 of this report and other risks anduncertainties discussed in filings made with the Securities and ExchangeCommission (including risks described in subsequent reports on Form 10-Q,Form 10-K, Form 8-K, and other filings). Liquidmetal Technologies,Inc. disclaims any intention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events, orotherwise.*

**OVERVIEW**

 

Weare a materials technology company that develops and commercializes productsmade from amorphous alloys.  OurLiquidmetal® family of alloys consists of a variety of coatings, powders, bulkalloys, and composites that utilize the advantages offered by amorphous alloytechnology.  We develop, manufacture, andsell products and components from bulk amorphous alloys that are incorporatedinto the finished goods of our customers, and we also market and sell amorphousalloy industrial coatings.  We alsopartner with third-party licensees and distributors to develop andcommercialize Liquidmetal alloy products. We have the exclusive right to develop, manufacture, and sell what webelieve are the only commercially viable bulk amorphous alloys.

Amorphous alloys are unique materials that aredistinguished by their ability to retain a random atomic structure when theysolidify, in contrast to the crystalline atomic structure that forms inordinary metals and alloys when they solidify. Liquidmetal alloys possess acombination of performance, processing, and cost advantages that we believemakes them preferable to other materials in a variety of applications. Theamorphous atomic structure of our alloys enables them to overcome certainperformance limitations caused by inherent weaknesses in crystalline atomicstructures, thus facilitating performance and processing characteristicssuperior in many ways to those of their crystalline counterparts. For example,our zirconium-titanium Liquidmetal alloys are approximately 250% stronger thancommonly used titanium alloys, such as Ti-6Al-4V, but they have processingcharacteristics similar in many respects to plastics. We believe theseadvantages could result in Liquidmetal alloys supplanting other incumbentmaterials in a wide variety of applications. Moreover, we believe theseadvantages will enable the introduction of entirely new products andapplications that are not possible or commercially viable with other materials.

Ourrevenues are derived from two principal operating segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloy products.  Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used incoal-burning power plants. The historical operating information for fiscal year2001 is based substantially on sales of Liquidmetal alloy coatings. In thesecond half of 2002, we began producing bulk Liquidmetal alloy components andproducts for incorporation into our customers’ finished goods. Bulk Liquidmetalalloy segment revenue includes sales of parts or components of electronicdevices, medical products, and sports and leisure goods; tooling and prototypeparts (including demonstration parts and test samples) for customers withproducts in development; metal processing equipment (see Note 18 for disclosureregarding the disposal of our equipment manufacturing business); and researchand development revenue relating primarily to defense and medicalapplications.  We expect that thesesources of revenue will continue to significantly change the character of ourrevenue mix.

Thecost of sales for our Liquidmetal coatings segment consists primarily of thecosts of outsourcing our manufacturing to third parties. Consistent with ourexpectations, our cost of sales has been increasing over historical results aswe further build our bulk Liquidmetal alloy business. Although we plan tocontinue outsourcing the manufacturing of our coatings, we will internallymanufacture many products derived from our bulk Liquidmetal alloys.

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

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Research and development expensesrepresent salaries, related benefits expense, stock-based compensation,depreciation of research equipment, consulting and contract services, expensesincurred for the design and testing of new processing methods, expenses for the development of sample andprototype products, and other expenses related to the research and developmentof Liquidmetal alloys. Costs associated with research and developmentactivities are expensed as incurred. We plan to enhance our competitiveposition by improving our existing technologies and developing advances inamorphous alloy technologies. We believe that our research and developmentefforts will focus on the discovery of new alloy compositions, the developmentof improved processing technology, and the identification of new applicationsfor our alloys.

Impairmentof goodwill represents the write-down of the goodwill balance of DongyangYudoro (“Dongyang”), our 51% owned subsidiary in South Korea.  During 2003, Dongyang experienced net lossesas a result of a continuing economic downturn in markets for its machineryproducts. These events, along with Dongyang’s operating cash flow losses anduncertainty surrounding its future cash flows, led us to evaluate ourinvestment for recoverability as of December 31, 2003.  As a result, we determined that the carryingvalue of our investment in Dongyang exceeded its fair value as of December 31,2003 in the amount of $184.  In March2004, we sold our 51% investment in Dongyang to the 49% minority shareholder.

Impairmentof Long-Lived Assets consists of a write-down of the building of ourmanufacturing facility in South Korea on the basis that the fair value of thisbuilding was determined to be less than the book value as of December 31,2003.  Our significant operational difficultiesin 2003 along with our history of operating or cash flow losses and uncertaintysurrounding our future cash flows, led us to evaluate our long-lived assets forrecoverability as of December 31, 2003. As a result, we determined that the carrying value of our manufacturingplant in Pyongtaek, South Korea exceeded its fair value as of December 31, 2003in the amount of $2,684.  The fair valueof the building was based on the average of two independent appraisals of thebuilding obtained in the first quarter of 2004.

Inconjunction with the divestiture of our Dongyang and Taesung subsidiaries inMarch and June 2004, respectively, the Company decided to discontinue ourequipment manufacturing business in order to conform our operations to ourbroader corporate business strategy (see Note 18).  Pursuant to Accounting Principles BoardOpinion No. 30,*Reporting the Resultsof Operations — Reporting the Effects of Disposal of a Segment of a Business,and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,*we reclassified our consolidated financial statements to reflect thediscontinuation of our equipment manufacturing operations. The revenue, costsand expenses, assets and liabilities, and cash flows of the equipmentmanufacturing business were segregated in our accompanying Consolidated BalanceSheets, Consolidated Statements of Operations and Comprehensive Loss, andConsolidated Statements of Cash Flows.

Wehave restated our previously issued financial statements for the fiscal year endedDecember 31, 2004 due to an error related to our accounting for the embeddedconvertible feature of the senior convertible notes issued in March 2004, whichwere exchanged in August 2004, in accordance with Statement of FinancialAccounting Standards No. 133, “Accounting for Derivative Instruments andHedging Activities,” (SFAS 133).

The correction of the error toproperly state the fair value of the embedded conversion feature of the seniorconvertible notes in accordance with SFAS 133 resulted in recognition of $7.6million as a conversion feature liability as of the issuance of the seniorconvertible notes in March 2004 as the convertible notes are considered anon-conventional convertible debt instrument. The correction resulted in recognition of the change in fair value ofthe embedded conversion feature in the our earnings as a gain of $2.1 millionfor the year ended December 31, 2004, as well as adjustments to amortization ofdebt discount as interest expense of $3.0 million for the year ended December31, 2004, and an additional loss on extinguishment of debt of $1.9 million forthe year ended December 31, 2004. Additionally, we recognized $0.9 million inadditional paid in capital from redemption and conversion of convertible notesas of December 31, 2004, respectively.

Change in Value of Warrantsconsists of changes to the fair value of warrants outstanding at eachperiod.  The warrants have been accountedfor as a liability in accordance with Emerging Issues Task Force Issue No. 00-19,“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock,” with the change in fair values reported inearnings. The fair values are determined using a Black-Scholes pricing modeland fluctuations in our stock price have had the greatest impact on thevaluation of outstanding warrants.

Change in Value of Conversion Feature consists of changes tothe fair value of the embedded conversion feature of our senior convertiblenotes.  The embedded conversion featurehas been accounted for as a separate derivative instrument in accordance withSFAS 133.  The change in fair values aredetermined using a Black-Scholes pricing model and fluctuations in our stockprice have had the greatest impact on the valuation of the conversion features.

On May 21, 2003, we completed areincorporation by transitioning from a California corporation to a Delawarecorporation. The reincorporation was effected through the merger of the formerCalifornia entity into a newly created wholly owned Delaware subsidiary. Thereincorporation changed the legal domicile of our company but did not result inany change to our business, management, employees, fiscal year, assets orliabilities, or location of facilities. As part of the reincorporation, eachshare of the California corporation was automatically converted into one shareof the Delaware corporation.  Inaddition, total authorized shares decreased from 200,000,000 shares to100,000,000 shares.

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OnAugust 4, 2004, the Company established a sub-assembly plant in the city ofWeihai in Shandong province of China under Weihai Liquidmetal Company Limited,which is 100 percent owned by Liquidmetal Korea, to facilitate our bulk alloymanufacturing business.  WeihaiLiquidmetal is consolidated into Liquidmetal Technologies with all intercompanytransactions eliminated.

Thefollowing discussion and analysis of our financial condition and results ofoperations focuses on the historical results of our continuing operations andreflects the effect of restating our 2002 and 2003 (2003 quarterly filings)financial statements for proper revenue recognition as disclosed in Note 2 inthe notes to the consolidated financial statements in the fiscal 2003 annualreport on Form 10-K filed on November 10, 2004.

***Results of Operations***

***Comparison of the years endedDecember 31, 2004 and 2003***

*Revenue*. Revenue increased to $17.4 million in the twelve months endedDecember 31, 2004 from $13.7 million in the twelve months endedDecember 31, 2003. The increase was due to increases in revenue earned by ourbulk Liquidmetal alloy and coatings segments in the twelve months endedDecember 31, 2004. This increase in revenue consisted of $3.8 millionfrom the sale and prototyping of parts manufactured from bulk Liquidmetalalloys, offset by a decrease of $1.9 million from research and developmentservices related primarily from reduced activity from defense and medicalapplications.  Our coatings businesscontributed $1.0 million to the increase in revenues as compared to the twelvemonths ended December 31, 2003 from increased demand for drill pipecoatings.

*Cost of Sales*. Cost of sales decreased to $12.2 million, or 70% of revenue,during the twelve months ended December 31, 2004 from $18.2 million,or 133% of revenue, in the twelve months ended December 31, 2003. Thisdecrease was a result of the continued maturing of our manufacturing processand represents the Company’s efforts to manage costs and focus on our corebusiness while continuing to build production pipeline and manufacturinginfrastructure required to prepare for and support the anticipated growth ofour bulk Liquidmetal alloy business.  Thecost of sales for the products sold by the coatings business segment isgenerally consistent from year to year because the Liquidmetal coatingsproducts are produced by third parties and sold wholesale to variousindustries.

*Selling, General, and Administrative Expenses*. Selling, general, and administrativeexpenses decreased to $11.6 million, or 66% of revenue, in the twelvemonths ended December 31, 2004 from $17.7 million, or 130% ofrevenue, in the twelve months ended December 31, 2003.  This decrease was primarily a resultof decrease in wages and related expense by $5.0 million, decreases intravel and communication expenses by $0.8 million, decreases in rent by $0.8million, decrease in relocation expenses by $0.7 million, offset by an increasein professional fees, consultant fees, and contract services by$0.8 million, and an increase in insurance costs by $0.4 million.  These and other decreases in selling, generaland administrative expenses represent the Company’s efforts to manage costs andfocus on our core business while continuing to build our corporateinfrastructure required to prepare for and support the anticipated growth ofour bulk Liquidmetal alloy business.

*Research and Development Expenses*. Research and development expenses decreasedto $1.5 million, or 8% of revenue, in the twelve months endedDecember 31, 2004 from $8.8 million, or 64% of revenue, in the twelvemonths ended December 31, 2003.  Thedecrease was primarily a result of decreases in salaries, wages and the relatedexpenses by $3.0 million, decrease in laboratory and prototyping expensesby $2.0 million, decrease in depreciation expense by $0.7 million,decrease in professional fees, consultant fees, and contract services by $0.6,decrease in research grants by $0.3 million, and decrease in travel relatedexpenses by $0.2 million.  The decreaseswere a result of the Company focusing primarily on our core business associatedwith our bulk Liquidmetal alloy business while managing our costs.  The Company continues to perform research anddevelopment efforts on new Liquidmetal alloys and related processingcapabilities, develop new manufacturing techniques, and contract withconsultants and provide research grants to various institutions to advance thedevelopment of Liquidmetal alloys.

*Impairment of Goodwill*. Impairment of goodwill was $184, or 1% of revenue, in the twelve months ended December 31,2003.  Impairment of goodwill represents the write-down of the goodwill balanceof Dongyang Yudoro (“Dongyang”), our 51% owned subsidiary in South Korea.  During 2003, Dongyang experienced netlosses as a result of a continuing economic downturn in the market for itsmachinery products. These events along with Dongyang’s operating, and cash flowlosses, and uncertainty surrounding its future cash flows, led us to evaluateour investment for recoverability as of December 31, 2003.  As a result, we determined that the carryingvalue of our investment in Dongyang exceeded its fair value as of December 31,2003 in the amount of $184.  In March2004, we sold our 51% investment in Dongyang to the 49% minority shareholder(see Note 18).  There was no impairmentcharge to goodwill in the twelve monthsended December 31, 2004.

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*Impairmentof Long Lived Assets*.  Impairment of long lived assets was $2.7million, or 20% of revenue, in the twelve months ended December 31, 2003.  Impairment expense represents a write-down ofthe building of our manufacturing facility in South Korea.  Due to the decreased production and usage ofour Pyongtaek manufacturing operation, we decided to obtain independentappraisals as to the fair value of this building.  Accordingly, the fair value of the buildingas determined by the average of the two independent appraisals was less thanthe carrying value of the building as of December 31, 2003.   There was no impairment charge to long livedassets in the twelve months ended December 31, 2004.

*Loss fromExtinguishment of Debt.*Loss from extinguishment of debt was$2.9 million, or 17% of revenue, during the twelve months ended December 31,2004 due to the extinguishment of our March Notes as it relates to the exchangein August 2004.  There was no such lossrecorded during twelve months ended December 31, 2003.

*Changein Value of Warrants.*Change in value of warrants was a netgain of $0.7 million, or 4% of revenue, during the twelve months ended December31, 2004  from the change in valuation ofwarrant payable issued related to the senior convertible debt funded in March2004, which was exchanged in August 2004 (see Note 15).  There were no such amounts recorded for thetwelve months ended December 31, 2003.

*Changein Value of Conversion Feature.*Change in the value of ourconversion feature liability from our senior convertible debt funded in March2004 and exchanged in August 2004 resulted in a Change in value of conversionfeature gain of $2.1 million, or 12% of revenue, during the twelve months endedDecember 31, 2004, primarily due to fluctuations in our stock price (See Note15).  There were no such amounts recordedfor the twelve months ended December 31, 2003.

*OtherIncome.*Other income was $0.3 million, or 2% of revenue,during the twelve months ended December 31, 2004 from certain stocktransactions with John Kang, our Chairman, President, and Chief ExecutiveOfficer during 2002 (see Note 24).  Therewere no amounts recorded as other income for the twelve months ended December31, 2003.

*Interest Expense*. Interest expense was $6.6 million, or 38% of revenue, in thetwelve months ended December 31, 2004 and was $0.4 million, or 3% ofrevenue, in the twelve months ended December 31, 2003.  During the twelve months ended December 31,2004, the interest expense was primarily due to the interest accrued,amortization of debt discount and deferred issuance costs on new seniorconvertible debt originally sold on March 3, 2004 and exchanged in August 2004,and interest accrued on Kookmin Bank loan funded on February 4, 2003.  Duringthe twelve months ended December 31, 2003, interest expense was primarilydue to interest accrued on the Kookmin Bank loan to our South Korean subsidiarymade on February 4, 2003.

*Interest Income.* Interest income was $37 for the twelve months ended December 31,2004 for interest earned on certificate of deposits.  Interest income was $0.3 million or 2% ofrevenue for the twelve months ended December 31, 2003 for interest earned onshort-term, investment grade, interest-bearing securities.

*Gain from Sale of Investment.*In April 2003 we sold our remaining shares of Growell Metal Co., Ltd. that werepurchased in July 2002. We recognized a $1.2 million gain on the sale ofthese shares during the twelve months ended December 31, 2003.  There were no such gains in the twelve monthsended December 31, 2004.

 

***Comparison of the years endedDecember 31, 2003 and 2002***

*Revenue*. Revenue increased to $13.7 million in the twelve months endedDecember 31, 2003 from $9.1 million in the twelve months endedDecember 31, 2002. The increase was due to increases in revenue earned by ourbulk Liquidmetal alloy segment in the twelve months ended December 31,2003. This increase in our bulk Liquidmetal alloy segment revenue consisted ofa revenue increase of $1.8 million from the sale of metal processingequipment in the US, an increase of $0.1 million from the sale andprototyping of parts manufactured from bulk Liquidmetal alloys, and an increaseof $2.2 million from research and development services related primarily todefense and medical applications. The increase in revenue earned by our bulkLiquidmetal alloy segment was offset by a decrease of $1.6 million in therevenue earned by our coatings business as compared to the twelve months endedDecember 31, 2002 due to a slowdown in demand for drill pipe coatings.

*Cost of Sales*. Cost of sales increased to $18.2 million, or 133% of revenue,during the twelve months ended December 31, 2003 from $5.7 million,or 62% of revenue, in the twelve months ended December 31, 2002. The costof sales as a percentage of revenue increased due to three primary factors:first, a higher percentage of plant operating costs allocated to manufacturingin the current period, as opposed to the same twelve month period in 2002 whenour manufacturing facility was in the final stages of construction andsignificant in-plant spending was directed to research and development tosupport the ramp-up of manufacturing operations; second, the impact ofunprofitable electronic casing components and prototypes moving through ourmanufacturing mix; and third, the impact of the write-down of excess rawmaterial in the amount of $1.0 million and the write-down of raw material andequipment inventory in the amount of $2.8 million in connection with asettlement of a dispute with Growell which was finalized in January 2004.

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Although the cost tomanufacture parts from our bulk Liquidmetal alloys is variable and differsbased on the unique design of each product, we expect gross margin to improveas we limit production and prototyping to select products that require thehigh-performance qualities of Liquidmetal alloys and can be priced accordingly.Furthermore, we believe that strategic licensing agreements and otherrelationships to advance the development of our technology and processes thatwe will pursue could also contribute to improved gross margins. The cost ofsales for the products sold by the coatings business is expected to remaingenerally consistent because Liquidmetal coatings products are produced bythird parties and sold wholesale to various industries.

*Selling, General, and Administrative Expenses*. Selling, general, and administrativeexpenses increased to $17.7 million, or 130% of revenue, in the twelvemonths ended December 31, 2003 from $13.1 million, or 143% ofrevenue, in the twelve months ended December 31, 2002. This increase wasprimarily a result of costs incurred for closing our Tampa, Florida offices,which included: an increase in severance costs of $2.2 million for releasing asubstantial number of these employees as well as our expense and accrual of$0.8 million for terminating our office lease, due to the determination that wewill be unable to sublease this space over the remaining term; an increase inprofessional fees, consultant fees, and contract services of $0.8 million;an increase in insurance expense of $0.5 million; an increase in datacommunications expense of $0.2 million; an increase in depreciationexpense of $0.3 million; an increase of warranty expense of $0.5 million;and a $0.3 million increase in expenses associated with the disposition ofcertain assets in the twelve months ended December 31, 2003. The increasein selling, general and administrative expenses are associated with theaforementioned cost reduction measures, including the consolidation of offices,the staff reductions, and a corresponding shift in strategy for the continueddevelopment of our bulk Liquidmetal alloy business.  This was partially offset by a decrease inadvertising expense of $0.1 million; a decrease in bad debt expense of $0.9million; and a $0.7 million decrease in stock compensation expense.

*Research and Development Expenses*. Research and development expenses decreasedto $8.8 million, or 64% of revenue, in the twelve months endedDecember 31, 2003 from $11.8 million, or 129% of revenue, in thetwelve months ended December 31, 2002. This decrease was partially aresult of the maturing of our manufacturing process and related processingcapabilities, the consolidation of our facilities into our CaliforniaTechnology Center, and the discontinuation of certain prototyping anddevelopmental activities that occurred extensively while the Company wasidentifying our current technology capabilities and limitations.  These decreases were partially offset byincreases in providing research grants to various institutions to advance thedevelopment of Liquidmetal alloys. In the category of research and developmentexpenses: travel decreased by $0.2 million; professional fees, consultantfees, and contract services decreased by $1.6 million; laboratory andprototyping expenses decreased by $0.9 million; and stock compensationexpense decreased by $1.4 million.  Theseexpenses were partially offset by increases in depreciation of research equipmentof $0.4 million, increased research grants to educational institutions of$0.1 million, and increase to salaries, wages and severance net of $0.5million.

*Impairment of Goodwill*. Impairment of goodwill representsthe write-down of the goodwill balance of Dongyang Yudoro (“Dongyang”), our 51%owned subsidiary in South Korea.  During2003, Dongyang experienced net losses as a result of a continuing economicdownturn in the market for its machinery products. These events along withDongyang’s operating, and cash flow losses, and uncertainty surrounding itsfuture cash flows, led us to evaluate our investment for recoverability as ofDecember 31, 2003.  As a result, wedetermined that the carrying value of our investment in Dongyang exceeded itsfair value as of December 31, 2003 in the amount of $184.  In March 2004, we sold our 51% investment inDongyang to the 49% minority shareholder.

*Impairment of Long Lived Assets*. Impairment expense represents a write-down of the building of ourmanufacturing facility in South Korea. Due to the decreased production and usage of our Pyongtaek manufacturingoperation, we decided to obtain independent appraisals as to the fair value ofthis building.  Accordingly, the fairvalue of the building as determined by the average of the two independentappraisal was less than the carrying value of the building as of December 31,2003.

*Interest Expense*. Interest expense was $0.4 million, or 3% of revenue, in thetwelve months ended December 31, 2003 and was $1.1 million, or 12% ofrevenue, in the twelve months ended December 31, 2002. During the twelvemonths ended December 31, 2003, interest expense was primarily due tointerest accrued on the Kookmin Bank loan to our South Korean subsidiary madeon February 4, 2003. During the twelve months ended December 31, 2002,interest expense was primarily due to the amortization of the fair value ofwarrants granted in connection with subordinated promissory notes we issued inFebruary 2001.

*Interest Income.* Interest income was $0.3 million, or 2% of revenue, in the twelvemonths ended December 31, 2003 due to interest earned on short-term,investment grade, interest-bearing securities. During the twelve months endedDecember 31, 2002, interest income was $0.5 million, or 6% ofrevenue, which was interest earned from the proceeds of our May 22, 2002initial public offering.

*Gain from Sale of Investment.* In April 2003 we sold our remaining shares ofGrowell Metal Co., Ltd. that were purchased in July 2002. We recognized a$1.2 million gain on the sale of these shares.

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**QUARTERLY RESULTS**

 

The following information presents our unaudited quarterlyoperating results for 2004 and 2003. The data has been prepared by LiquidmetalTechnologies, Inc. on a basis consistent with the Consolidated FinancialStatements included elsewhere in this Form 10-K, and includes alladjustments, consisting of normal recurring accruals, that we considernecessary for a fair presentation thereof.  Included in our 2003 fourth quarter results are costs charged to ourcost of sales for the write-down of raw materials of $1.0 million and a $2.8million write-down of inventory and equipment recorded in connection with adispute settlement with Growell.  Inaddition, as a result of the Company’s cost reduction measures taken in thefourth quarter, our selling, general, and administrative expenses includeseverance costs of $2.4 million and office relocation costs of $0.8million.  These operating results are notnecessarily indicative of our future performance.

Duringthe fourth quarter of 2004, although our revenues were comparable to prioryear, we had a decrease in revenue of $2.1 million compared to the thirdquarter due to an unanticipated and temporary decrease in orders from one ofour customers, Samsung.  In addition,included in our fourth quarter cost of sales is a $0.4 million charge relatedto certain hinge finished goods used in Samsung’s cell phone models which werenearing its end of life.  The Companyexperienced a gross loss of $0.4 million for the fourth quarter due to the onetime charge of cost of sales and also due to the fact that our cost of salesfrom our Liquidmetal bulk alloy segment includes primarily fixed costs from ourlabor and equipment expenses.

These statements should be read in conjunction with Note 2in the notes to the consolidated financial statements hereto and Note 2 inthe notes to consolidated financial statements in the fiscal 2003 annual reporton Form 10-K filed on November 10, 2004, which reflects the restatements ofprior year transactions.

Pursuant to Accounting Principles BoardOpinion No. 30,*Reporting the Resultsof Operations — Reporting the Effects of Disposal of a Segment of a Business,and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,*we reclassified our consolidated financial statements to reflect thediscontinuation of our equipment manufacturing operations and retail golfbusiness. The revenue, costs and expenses, assets and liabilities, and cashflows of the equipment manufacturing and our retail golf businesses weresegregated in our accompanying Consolidated Balance Sheets, ConsolidatedStatements of Operations and Comprehensive Loss, and Consolidated Statements ofCash Flows.  The net operating results,net assets, and net cash flows of the equipment manufacturing and retail golfbusinesses were reported as discontinued operations in our annual consolidatedfinancial statements and in the condensed consolidated financial statementsincluded in this report on Form 10-K. (see Note 18)

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**ConsolidatedStatements of Operations Data:**

 
| ** **                                                                                                                   | ** ** | **For the Three Months Ended**                 | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **12/31/04**                                                       | ** ** | **9/30/04** | ** ** | **6/30/04** | ** ** | **3/31/04** | ** ** |
| ** **                                                                                                                   | ** ** | **(Restated)**                                                     | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ** **                                                                                                                   | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                                                                                                   | ** ** | **(Unaudited)**                                                    | ** ** |
| Revenue                                                                                                                      |       | $                                                                  | 2,471      |   | $ | 4,615 |   | $ | 4,055 |   | $ | 6,288 |   |
| Cost of sales                                                                                                                |       | 2,895                                                              |       | 3,241 |   | 2,475 |   | 3,557 |   |
| Gross profit (loss)                                                                                                          |       | (424                                                               | )          | 1,374 |   | 1,580 |   | 2,731 |   |
| Operating  expense:                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Selling, general, and administrative                                                                                         |       | 2,413                                                              |       | 3,569 |   | 2,544 |   | 3,065 |   |
| Research and development                                                                                                     |       | 407                                                                |       | 374 |   | 345 |   | 341 |   |
| Total operating expenses                                                                                                     |       | 2,820                                                              |       | 3,943 |   | 2,889 |   | 3,406 |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |
| Loss from  operations                                                                                                        |       | (3,244                                                             | )          | (2,569 | ) | (1,309 | ) | (675 | ) |
| Loss on extinguishments of debt                                                                                              |       | —                                                             |       | (2,941 | ) |   |   |   |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |
| Change in value of warrants, (loss) gain                                                                                     |       | (99                                                                | )          | (434 | ) | 694 |   | 586 |   |
| Change in value of conversion feature, (loss) gain                                                                           |       | (1,183                                                             | )          | (2,338 | ) | 3,904 |   | 1,710 |   |
| Other income (expense), net                                                                                                  |       | —                                                             |       | 302 |   | — |   | — |   |
| Interest income (expense), net                                                                                               |       | (640                                                               | )          | (3,283 | ) | (2,233 | ) | (384 | ) |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |
| Income (loss)  from operation before income taxes and discontinued operations                                                |       | (5,166                                                             | )          | (11,263 | ) | 1,056 |   | 1,237 |   |
| Income taxes                                                                                                                 |       | —                                                             |       | — |   | — |   | — |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |
| Income  (loss) from continuing operations                                                                               |       | (5,166                                                             | )          | (11,263 | ) | 1,056 |   | 1,237 |   |
| Loss from  discontinued operations, net of tax                                                                               |       | —                                                             |       | — |   | (356 | ) | (393 | ) |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |
| Net income  (loss)                                                                                                           |       | $                                                                  | (5,166     | ) | $ | (11,263 | ) | $ | 700 |   | $ | 844 |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |
| Income (loss)  per share from continuing operations – basic and diluted                                                 |       | $                                                                  | (0.12      | ) | $ | (0.27 | ) | $ | 0.03 |   | $ | 0.03 |   |
|                                                                                                                         |       |                                                               |       |   |   |   |   |   |   |
| Weighted average common  shares used to compute income / loss per share from continuing operations –  basic and diluted |       | 41,610                                                             |       | 41,610 |   | 41,610 |   | 41,610 |   |

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| ** **                                                                                                          | ** ** | **For the Three Months Ended**                 | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **12/31/03**                                                       | ** ** | **9/30/03** | ** ** | **6/30/03** | ** ** | **3/31/03** | ** ** |
| ** **                                                                                                          | ** ** | ** **                                                         | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ** **                                                                                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                                                                                          | ** ** | **(Unaudited)**                                                    | ** ** |
| Revenue                                                                                                             |       | $                                                                  | 2,645      |   | $ | 3,281 |   | $ | 4,533 |   | $ | 3,199 |   |
| Cost of sales                                                                                                       |       | 6,761                                                              |       | 4,595 |   | 4,146 |   | 2,660 |   |
| Gross profit (loss)                                                                                                 |       | (4,116                                                             | )          | (1,314 | ) | 387 |   | 539 |   |
| Operating  expense:                                                                                                 |       |                                                               |       |   |   |   |   |   |   |
| Selling, general, and administrative                                                                                |       | 5,435                                                              |       | 3,661 |   | 4,571 |   | 4,062 |   |
| Research and development                                                                                            |       | 1,025                                                              |       | 981 |   | 2,736 |   | 4,038 |   |
| Impairment of goodwill                                                                                              |       | 184                                                                |       | — |   | — |   | — |   |
| Impairment of long-lived assets                                                                                     |       | 2,684                                                              |       | — |   | — |   | — |   |
| Total operating expenses                                                                                            |       | 9,328                                                              |       | 4,642 |   | 7,307 |   | 8,100 |   |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Loss from  operations                                                                                               |       | (13,444                                                            | )          | (5,956 | ) | (6,920 | ) | (7,561 | ) |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Interest income (expense), net                                                                                      |       | (86                                                                | )          | (53 | ) | (12 | ) | 65 |   |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Gain on sale of marketable securities held-for-sale                                                                 |       | —                                                             |       | — |   | 1,178 |   | — |   |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Loss from  operations before income taxes, minority interest and discontinued operations                            |       | (13,530                                                            | )          | (6,009 | ) | (5,754 | ) | (7,496 | ) |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Income taxes                                                                                                        |       | —                                                             |       | — |   | — |   | — |   |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Minority interest in loss (income) of  consolidated subsidiary                                                 |       | (5                                                                 | )          | 23 |   | 10 |   | (7 | ) |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Loss from  continuing operations                                                                               |       | (13,535                                                            | )          | (5,986 | ) | (5,744 | ) | (7,503 | ) |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Income (loss)  from discontinued operations                                                                         |       | (412                                                               | )          | (115 | ) | (317 | ) | 7 |   |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Net loss                                                                                                            |       | $                                                                  | (13,947    | ) | $ | (6,101 | ) | $ | (6,061 | ) | $ | (7,496 | ) |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Loss per share  from continuing operations – basic and diluted                                                 |       | $                                                                  | (0.33      | ) | $ | (0.14 | ) | $ | (0.14 | ) | $ | (0.18 | ) |
|                                                                                                                |       |                                                               |       |   |   |   |   |   |   |
| Weighted average common  shares used to compute loss per share from continuing operations – basic and  diluted |       | 41,610                                                             |       | 41,610 |   | 41,597 |   | 41,390 |   |

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Ouroperating activities, including our discontinued equipment manufacturingoperations, used cash of $6.3 million for the year ended December 31,2004.  Our operating activities,including our discontinued equipment manufacturing and retail golf operations,used cash of $26.5 million for the year ended December 31, 2003. Cash usedin operating activities for the year ended December 31, 2004 resulted fromnet cash used by continuing operations of $6.4 million offset by net cashprovided by discontinued operations of $0.1 million. Cash used in operatingactivities for the year ended December 31, 2003 resulted from net cashused by discontinued operations of $2.4 million and net cash used bycontinuing operations of $24.1 million. Our working capital (deficit) was$(14.9) million as of December 31, 2004.

Ourinvesting activities used cash of $0.3 million for the year endedDecember 31, 2004 for the acquisition of property and equipment of $0.1million and investment in patents and trademarks of $0.3 million.  These expenditures were offset by proceedsfrom sale of property and equipment of $0.1 million.

Our cash provided by financing activities was $3.9 millionfor the year ended December 31, 2004, which consists of $9.9 million inproceeds from borrowings from our senior convertible debt offset by $5.2million on repayment of borrowings, $0.1 million of repayment of otherliabilities, and increase in restricted cash of $0.8 million.

Weanticipate that our capital expenditures will be approximately less than $0.5million for the full year 2005 for the acquisition of furniture, fixtures, andother business equipment. This amount is subject to change, however, dependingupon the nature and the amount of the product orders that we actually receivefrom customers.

Ourcapital requirements during the next twelve months will depend on numerousfactors, including the success of existing products either in manufacturing ordevelopment, the development of new applications for Liquidmetal alloys, theresources we devote to develop and support our Liquidmetal alloy products, andthe success of pursuing strategic licensing and funded product developmentrelationships with external partners. During the next twelve months, basedon our current business plan, we expect to have sufficient resources tocontinue to devote limited capital to our research and development activities,to further develop and strengthen our manufacturing technology, and to providefor working capital and other general corporate purposes.  However, based on our historical operatingresults and the continued development of our manufacturing capabilities andalloy compositions, there exists the possibility that these resources will notbe adequate to operate at the proposed business plan levels.  These expenses and capital expenditures couldconsume a material amount of our cash resources, but the amount of these requirementswill depend on the nature and amount of orders we receive for the purchase ofour bulk Liquidmetal alloy products.

Ourbusiness is based on commercializing an entirely new and unique technology, andour current business plan contains a variety of assumptions and expectationsthat are subject to uncertainty, including assumptions and expectations aboutorder flow, unit volumes, manufacturing efficiencies, product cost and pricing,continuing technology improvements, customer adoption practices, strategiclicensing relationships and other relevant matters. These assumptions take intoaccount recent significant cost reductions, as well as recent improvements toour manufacturing processes. We have experienced losses from continuingoperations during the last two fiscal years and have an accumulated deficit of$127.5 million as of December 31, 2004. Cash used in continuing operationsfor the years ended December 31, 2004 and December 31, 2003 was $6.4million and $24.1 million, respectively. At December 31, 2004, our principal source of liquidity was $0.7 millionof cash and cash equivalents and trade accounts receivables of $1.7million.   Such conditions raisesubstantial doubt that our Company will be able to continue as a going concernfor a reasonable period of time without receiving additional funding.  These operating results occurred while wewere developing and attempting to commercialize and manufacture products froman entirely new and unique technology. This business plan required significant spendingrelated to start-up costs and capital expenditures. These factors have placed asignificant strain on our financial resources. The ultimate success of theCompany depends on our ability to continue to reduce operating costs, generatehigher revenue, achieve positive cash flow from continuing operations andachieve profitability.

OnMarch 3, 2004, we sold $9.9 million of 6.0% senior convertible notes due 2007(the “March Notes”) to investor groups in a transaction led by Michigan VentureCapital Co., Ltd, a South Korea-based institutional investment firm, and IndiGoVentures LLC, a New York-based investment firm that served as a financialadvisor to the Company for the transaction. The notes were convertible at any time into our common stock at a priceof $3.00 per share.  Investors in theprivate placement received warrants to purchase an aggregate amount of up toapproximately 1.2 million shares of common stock, exercisable at $3.00 pershare for varying periods but no later than 100 days following theeffectiveness of a registration statement covering the resale of sharesissuable upon exercise of the warrants. In addition, the investors had the right to call for repayment of thenotes prior to maturity at any time after the second anniversary of the closingof the transaction. (see Note 15 to the Consolidated Financial Statements)

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On August 19, 2004, the Company completed aprivate exchange offer for its March Notes. Under terms of the exchange offer, approximately $5.5 million inaggregate principal amount of the March Notes have been exchanged for anaggregate of (i) $2.75 million of 6% Senior Secured Notes Due 2007 (the“Long-Term Notes”) and (ii) $2.75 million of 10% Senior Secured Notes Due 2005(the “Short-Term Notes”), collectively referred to as “Exchange Notes”.  In addition, the Company redeemedapproximately $4.5 million of the March Notes in cash.  The Exchange Notes are collateralized bycertain patents owned by the Company and second priority mortgage interest inplant facilities and certain equipment at our plant in South Korea.  The Short-Term Notes have a maturity date ofJuly 29, 2005, and a conversion price of $2.00 per share (compared to aconversion price of $3.00 per share under the March Notes).  The Long-Term Notes have a maturity date ofJuly 29, 2007, and a conversion price of $1.00 per share.   Further, the exchange notes are convertibleinto Common Stock, at the option of the Company, if at any time after theissuance of the notes, the closing per share price of the Common Stock exceeds$4.00 (as adjusted for stock splits, reverse splits, stock dividends, andrecapitalizations) for 30 consecutive trading days, and further provided thatthere has been effective registration during such period.  Holders of the Long-Term Notes also have theright to call for repayment of the Long-Term Notes prior to maturity at anytime after the second anniversary of the completion of the exchange offer.  A total of 563,151 warrants to purchase ourcommon stock at an exercise price of $3.00 per share—all of which werepreviously issued in connection with the purchase of the March Notes—have beenamended to provide for an extended expiration date of March 1, 2006.  As of December 31, 2004, we were in breach ofa covenant in the Note Exchange Agreement requiring us to become current in ourSEC filings, as well as file a registration statement with the SEC for theshares into which the notes are convertible, within 90 days of the issue dateof the new notes.  If written notice ofdefault is delivered to us for breach of this covenant, then we will have aperiod of 30 days to cure the breach before it becomes an event of defaultunder the notes, and if the breach is not cured during such time period, theholders of the notes will become entitled to accelerate the remaining balanceof their respective notes and declare them immediately due and payable.  As of the date of the filing of this Form10-K, we have not received a notice for demand for payment as a result of notmeeting the registration and listing requirements.

 

Ourfuture success depends on our ability to continue reducing operating costs andultimately to generate higher revenue and attain profitability. We cannot becertain that additional capital, whether through selling additional debt orequity securities or obtaining a line of credit or other loan, will beavailable to us or, if available, will be on terms acceptable to us. If weissue additional securities to raise funds, these securities may have rights,preferences, or privileges senior to those of our common stock, and our currentstockholders may experience dilution.

In March 1996, we entered into a distribution agreementwhereby we granted to a third party exclusive rights to market and sell golfproducts incorporating Liquidmetal technology to certain Japanese sportingequipment companies. The third party paid us a $1.0 million distributionfee as part of this agreement, of which a portion was refundable according to aformula based on the gross profit earned by the third party. The remainingunearned distribution fee of $0.8 million has not been refunded as ofDecember 31, 2004, and we do not believe the third party is entitled to arefund. On March 28, 2003, the distribution agreement was terminated andwe entered into a new agreement to pay to the same third party a commission onthe net sales price of all Liquidmetal golf equipment that is shipped by ourCompany or its affiliates to Japanese golf companies for sale into the Japaneseend-market. This commission will apply to golf equipment shipped by our Companyor its affiliates during the period beginning on March 28, 2003 and endingon March 28, 2006. If, by March 28, 2006, we have not paid$0.4 million in commission payments, the balance between commissions paidand $0.4 million will be paid by April 30, 2006, thereby guaranteeingthe third party a $0.4 million minimum payment during the term of theagreement. We will recognize the unearned distribution fee of $0.8 millionas revenue proportionately with the payment of commissions under the letteragreement.

**USE OF PROCEEDS**

 

Pursuant to our Registration Statement on Form S-1(Registration No. 333-73716), as amended, initially filed with the Securitiesand Exchange Commission on November 20, 2001 and declared effectiveMay 21, 2002, we closed an initial public offering of 5,000,000 shares ofcommon stock on May 28, 2002, plus an additional 229,000 shares onJune 10, 2002 pursuant to an over allotment option, at a price of $15.00per share (which sale is referred to herein as the “Offering”). The Offeringgenerated aggregate cash proceeds during the second quarter 2002 of$78.4 million. The net proceeds were $70.7 million after deductingunderwriting commissions of $5.5 million and other transaction fees of$2.2 million. The managing underwriters for the Offering were MerrillLynch & Co., UBS Warburg, and Robert W. Baird & Co.

As of December 31, 2003, we have used the$70.7 million of net proceeds from the Offering. In 2002, we usedapproximately $7.8 million of the net proceeds from the Offering to repayall outstanding promissory notes and accrued interest, $11.1 million tofund the construction of our manufacturing facility in South Korea,$14.3 million to purchase equipment used to manufacture Liquidmetal parts,$0.4 million to purchase assets related to production and sale ofequipment used in the production process of Liquidmetal alloy products, and$0.3 million to purchase the 51% interest in our majority owned Dongyangsubsidiary. During the third quarter of 2002, we used $2.0 million toinvest in the common stock of Growell Metal, which supplied a portion of theLiquidmetal alloy ingots used in our manufacturing operations in Korea. We havesince sold such stock, realizing a gain on the sale. We used the remainingproceeds of $32.7 million for working capital in 2002 and 2003, excluding$2.1 million paid to Paul Azinger in 2002 and 2003 for amounts due underthe terms of his terminated endorsement agreement with our discontinued retailgolf operations.

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On March 3, 2004,the Company issued $9.9 million of 6.0% senior convertible notes due 2007,which was exchanged in August 2004, to investor groups in a transaction led byMichigan Venture Capital Co., Ltd, a South Korea-based institutional investmentfirm, and IndiGo Ventures LLC, a New York-based investment firm (the “PlacementAgents”) that served as a financial advisor to the Company for the transaction(see Note 15).  The Company used $0.6million of the proceeds to pay various agents as issuance costs of the notes inMarch 2004.  From June through August2004, the Company redeemed $4.5 million of the outstanding note balance incash.   We used the remaining proceeds of$3.3 million for working capital needs and used $0.8 million as collateral heldin certificate of deposit to finance acertain insurance policy.   As ofDecember 31, 2004, $0.7 million of the proceeds are held as cash and cashequivalents.  The remaining proceeds of$0.7 million will be used for working capital needs.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

An off-balance sheet arrangement is any transaction,agreement or other contractual arrangement involving an unconsolidated entityunder which a company has (1) made guarantees, (2) a retained or a contingentinterest in transferred assets, (3) an obligation under derivative instrumentsclassified as equity, or (4) any obligation arising out of a material variableinterest in an unconsolidated entity that provides financing, liquidity, marketrisk or credit risk support to the company, or that engages in leasing, hedging,or research and development arrangements with the company.

We have made no arrangements of the types described in any of thecategories that may have a material current or future effect on our financialcondition, liquidity or results of operations. See Note 13 to the ConsolidatedFinancial Statements contained in this Annual Report on Form 10-K.

 

**CONTRACTUAL OBLIGATIONS**

 

The following table ofmaterial debt and lease commitments at December 31, 2004, summarizes the effectthese obligations are expected to have on our cash flow in the future periodsset forth below (in thousands):

|                              | ** ** | **Payments due by period**                          | ** ** |
|------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                   | ** ** | ** **                                                         | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                   | ** ** | **Total**                                                          | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **5 years** | ** ** |
| ** **                   | ** ** | **(in thousands, except per share data)** | ** ** |
| **Contractual  Obligations** | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt               |       | $                                                                  | 9,460      |   | $ | 6,842 |   | $ | 2,618 |   | $ | — |   | $ | — |   |
| Capital lease  obligation    |       | 212                                                                |       | 134 |   | 78 |   | — |   | — |   |
| Operating leases  and rents  |       | 2,240                                                              |       | 1,215 |   | 952 |   | 73 |   | — |   |
| Growell  settlement payable  |       | 3,246                                                              |       | 3,246 |   | — |   | — |   | — |   |
| Consulting services  payable |       | 172                                                                |       | 172 |   |   |   |   |   |   |   |
| Dongyang payable             |       | 28                                                                 |       | 28 |   | — |   | — |   | — |   |
| Total                        |       | $                                                                  | 15,358     |   | $ | 11,637 |   | $ | 3,648 |   | $ | 73 |   | $ | — |   |

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The preparation of consolidated financial statements inconformity with accounting principles generally accepted in the United Statesrequires us to make estimates and assumptions that affect reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. These estimates and assumptions are basedon historical experience and various other factors that are believed to bereasonable under the circumstances. Actual results could differ materially fromthese estimates under different assumptions or conditions.

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

·                    Our earnings and cash flows are subject to fluctuations due to changesin non-U.S. currency exchange rates. We are exposed to non-U.S. exchange ratefluctuations as the financial results of non-U.S. subsidiaries are translatedinto U.S. dollars. As exchange rates vary, those results, when translated, mayvary from expectations and adversely impact overall expected profitability. Thecumulative translation effects for subsidiaries using functional currenciesother than the U.S. dollar are included in accumulated foreign exchangetranslation in shareholders’ equity. Movements in non-U.S. currency exchangerates may affect our competitive position, as exchange rate changes may affectbusiness practices and/or pricing strategies of non-U.S. based competitors.

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

 

·                    We record an allowance for doubtful accounts as a contra-asset to ourtrade receivables for estimated uncollectible accounts. Management estimatesthe amount of potentially uncollectible accounts by reviewing significantly pastdue customer balances relative to historical information available for thosecustomers. In the event, in future periods, actual uncollectible accountsexceed the estimate for uncollectible accounts, an adjustment would be made andincome would decrease in the period of such determination. Likewise, in theevent, in future periods, actual uncollectible accounts are lower than theestimate for uncollectible accounts, an adjustment would be made and incomewould increase in the period of such determination.

 

·                    We value inventories at lower of cost or net realizable value.Management has determined net realizable value to be equal to the selling priceof the products to be produced and sold less the cost of disposal. In theevent, in future periods, the actual selling prices exceed the estimate forselling prices less cost to sell, an adjustment would be made and income wouldincrease in the period of such determination. Likewise, in the event, in futureperiods, actual selling prices are lower than the estimate for selling prices,an adjustment would be made and income would decrease in the period of suchdetermination.  During 2003 wereduced the carrying value of raw materials held by our subsidiary, LiquidmetalKorea, by the amounts considered to be obsolete.  During 2003 we reduced the carrying value ofour inventories by $1.0 million as we determined that certain raw material andinventories exceeded their net realizable value as of December 31, 2003.   Additionally, we recorded a write-down of$2.8 million of raw material and machine inventory associated with thesettlement of a dispute with a customer, Growell, in December 2003.  Such write-down adjustments are includedwithin Cost of Sales. (see Note 7)

 

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

 

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

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2003, the Securities and Exchange Commission (“SEC”) issuedStaff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” SAB 104supersedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’sprimary purpose is to rescind accounting guidance contained in SAB 101 relatedto multiple element revenue arrangements, superseded as a result of theissuance of EITF 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.” Additionally, SAB 104 rescinds the SEC’s Revenue Recognition inFinancial Statements Frequently Asked Questions and Answers (“the FAQ”) issuedwith SAB 101 that had been codified in SEC Topic 13, Revenue Recognition.Selected portions of the FAQ have been incorporated into SAB 104. While thewording of SAB 104 has changed to reflect the issuance of EITF 00-21, therevenue recognition principles of SAB 101 remain largely unchanged by theissuance of SAB 104, which was effective upon issuance. The adoption of SAB 104did not impact the consolidated financial statements.

 

In March 2004, the FASB approved the consensus reached on the Emerging IssuesTask Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments.” The objective of thisIssue is to provide guidance for identifying impaired investments. EITF 03-1also provides new disclosure requirements for investments that are deemed to betemporarily impaired. In September 2004, the FASB issued a FASB Staff Position(FSP) EITF 03-1-1 that delays the effective date of the measurement andrecognition guidance in EITF 03-1 until after further deliberations by theFASB. The disclosure requirements are effective only for annual periods endingafter June 15, 2004. The Company has evaluated the impact of the adoption ofthe disclosure requirements of EITF 03-1 and does not believe the impact willbe significant to the Company’s overall results of operations or financialposition. Once the FASB reaches a final decision on the measurement andrecognition provisions, the company will evaluate the impact of the adoption ofEITF 03-1.

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In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, anamendment of ARB No. 43, Chapter 4. The amendments made by Statement 151clarify that abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials (spoilage) should be recognized as current-periodcharges and require the allocation of fixed production overheads to inventorybased on the normal capacity of the production facilities. The guidance iseffective for inventory costs incurred during fiscal years beginning after June15, 2005. Earlier application is permitted for inventory costs incurred duringfiscal years beginning after November 23, 2004. The Company has evaluated theimpact of the adoption of SFAS 151, and does not believe the impact will besignificant to the Company’s overall results of operations or financialposition.

 

In December 2004, the FASB issued SFAS No.153, “Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29, Accounting forNonmonetary Transactions.” The amendments made by Statement 153 are based onthe principle that exchanges of nonmonetary assets should be measured based onthe fair value of the assets exchanged. Further, the amendments eliminate thenarrow exception for nonmonetary exchanges of similar productive assets andreplace it with a broader exception for exchanges of nonmonetary assets that donot have commercial substance. Previously, Opinion 29 required that theaccounting for an exchange of a productive asset for a similar productive assetor an equivalent interest in the same or similar productive asset should bebased on the recorded amount of the asset relinquished. Opinion 29 provided anexception to its basic measurement principle (fair value) for exchanges ofsimilar productive assets. The Board believes that exception required that somenonmonetary exchanges, although commercially substantive, be recorded on acarryover basis. By focusing the exception on exchanges that lack commercialsubstance, the Board believes this Statement produces financial reporting that morefaithfully represents the economics of the transactions. The Statement iseffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. Earlier application is permitted for nonmonetary assetexchanges occurring in fiscal periods beginning after the date of issuance. Theprovisions of this Statement shall be applied prospectively. The Company hasevaluated the impact of the adoption of SFAS 153, and does not believe theimpact will be significant to the Company’s overall results of operations orfinancial position.

 

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-BasedPayment”. Statement 123(R) will provide investors and other users of financialstatements with more complete and neutral financial information by requiringthat the compensation cost relating to share-based payment transactions berecognized in financial statements. That cost will be measured based on thefair value of the equity or liability instruments issued. Statement 123(R) coversa wide range of share-based compensation arrangements including share options,restricted share plans, performance-based awards, share appreciation rights,and employee share purchase plans. Statement 123(R) replaces FASB Statement No.123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No.25, Accounting for Stock Issued to Employees. Statement 123, as originallyissued in 1995, established as preferable a fair-value-based method ofaccounting for share-based payment transactions with employees. However, thatStatement permitted entities the option of continuing to apply the guidance inOpinion 25, as long as the footnotes to financial statements disclosed what netincome would have been had the preferable fair-value-based method been used.Public entities (other than those filing as small business issuers) will berequired to apply Statement 123(R) as of the first interim or annual reportingperiod that begins after June 15, 2005. The Company has evaluated the impact ofthe adoption of SFAS 123(R), and does not believe the impact will besignificant to the Company’s overall results of operations or financialposition.

 

In December 2004 theFinancial Accounting Standards Board issued two FASB Staff Positions—FSPFAS 109-1, *Application of FASBStatement 109 “Accounting for Income Taxes” to the Tax Deduction on QualifiedProduction Activities Provided by the American Jobs Creation Act of 2004*,and FSP FAS 109-2 *Accounting and DisclosureGuidance for the Foreign Earnings Repatriation Provision within the AmericanJobs Creation Act of 2004.* Neither of these affected the Company asit does not participate in the related activities.

**Item 7A.Quantitative and Qualitative Disclosures About Market Risks**

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

 

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

*Commodity Prices.*We areexposed to price risk related to anticipated purchases of certain commoditiesused as raw materials by our businesses, including titanium and zirconium.Although we do not currently enter into commodity future, forward, and optioncontracts to manage the fluctuations in prices of anticipated purchases, we mayenter into such contacts in the future as our business grows and as ourpurchases of these raw materials increases.

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*Foreign Exchange Rates.*Asa result of our manufacturing presence in South Korea, a substantial portion ofour costs will be denominated in South Korean won. Consequently, fluctuationsin the exchange rates of the South Korean won to the U.S. dollar will affectour costs of goods sold and operating margins and could result in exchangelosses. Although we do not currently enter into foreign exchange hedgetransactions, we may do so in the future as our business grows.

 

**Item 8.Financial Statements and Supplementary Data**

The financial statements required by this itemare located beginning on page 30 of this report. The supplementary financialinformation required by this item is located under the caption “QUARTERLYRESULTS” in Item 7 of this report.

**Item 9.Changes in and Disagreements with Accountants on Accounting and financialDisclosures**

Information required by this Item may be found in our Form8-K filed May 6, 2004 in connection with the resignation of Deloitte &Touche LLP as our independent auditors and our Form 8-K filed on May 21, 2004,in connection with our appointment of Stonefield Josephson Inc. as ourindependent auditors.  Following is Item 4 of the respective Form 8-Ks:

**May 6, 2004**

OnMay 6, 2004, Deloitte & Touche LLP (“Deloitte”), the Registrant’sindependent auditors, notified the Registrant that they were resigning from theclient-auditor relationship with the Registrant effective as of that date.

Deloittewas engaged by Registrant to serve as the Registrant’s independent auditors forthe fiscal year ended December 31, 2003, although Deloitte has not issued areport on the financial statements of the Registrant and its subsidiaries forthe 2003 fiscal year. The reports of Deloitte with respect to the Registrant’sfinancial statements for the fiscal years ended December 31, 2002 and 2001contained no adverse opinion or disclaimer of opinion and were not qualified ormodified as to uncertainty, audit scope or accounting principles. During thefiscal years ended December 31, 2003 and 2002 and the period from December 31,2003 through the date of Deloitte’s resignation, there were no disagreementsbetween the Registrant and Deloitte on any matter of accounting principles orpractices, financial statement disclosure, or auditing scope or procedure,which disagreements, if not resolved to the satisfaction of Deloitte, wouldhave caused Deloitte to make reference to the subject matter of thedisagreements in connection with its report on the Registrant’s financialstatements for such year.

TheRegistrant previously announced that it expects to restate revenues and resultsof operations for the third and fourth quarters of 2002 and the first quarterof 2003 in connection with the Registrant’s sales of alloy melting and castingequipment during such quarters to Growell Metal Co., Ltd., a South Korea metalsprocessing company (“Growell”). The Registrant’s Audit Committee conducted aninternal inquiry at the request of Deloitte into the Registrant’s transactionswith Growell and found that the original revenue recognition on the Growellequipment sales did not take into account all relevant documentation relatingto the transactions. The Registrant announced in January 2004 that it enteredinto a dispute settlement agreement with Growell to resolve various outstandingclaims between the parties relating to the Registrant’s transactions withGrowell.

In connection with the Audit Committee’s inquiry into theGrowell equipment sales and dispute settlement, the Audit Committee alsoreviewed the facts and circumstances relating to a personal stock transactionbetween the Registrant’s CEO and Growell. In this transaction, as reported bythe CEO, the CEO undertook a private sale of personal shares of Registrantcommon stock to Growell in February 2002, prior to the Registrant’s initialpublic offering. As part of the inquiry, the CEO reported that this saleincluded a previously undisclosed personal agreement to ensure that thepurchase price of the stock purchased by Growell would be at a thirty percentdiscount to the Registrant’s initial public offering price, and he alsoprovided information regarding his fulfillment of this personal agreement.

Asof May 6, 2004, certain details of the foregoing transactions had not beenresolved to Deloitte’s satisfaction, and the audit for the 2003 fiscal year hastherefore not been completed. As a result of the expected restatements andthese unresolved issues, the Registrant’s previously issued financialstatements for the year ended December 31, 2002 and Deloitte’s audit reportthereon, as well as the Registrant’s quarterly financial statements for thethird quarter of 2002 and the first, second, and third quarters of 2003 (andDeloitte’s related review reports thereon), should no longer be relied upon.

Deloitte has communicated to the Registrantthat it is unwilling to continue to rely on the representations of theRegistrant’s CEO. Deloitte has also previously communicated to the Registrantthat, in light of the facts and circumstances surrounding the expectedrestatement, there were material weaknesses in the Registrant’s internalaccounting controls relating to the execution, administration, and accountingfor contracts, particularly in the Registrant’s South Korean operations. TheRegistrant has taken and is continuing to take steps to improve these internalcontrols.

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Otherthan the foregoing, none of the reportable events described under Item304(a)(1)(v) of Regulation S-K occurred within the two most recent fiscal yearsof the Registrant ended December 31, 2003 and 2002 or within the subsequentinterim period through the date of Deloitte’s resignation.

TheRegistrant’s Audit Committee has discussed with Deloitte the matters disclosedabove. The Registrant has authorized Deloitte to respond fully to the inquiriesof the Registrant’s successor accountant concerning the matters disclosedabove.

TheRegistrant has provided Deloitte with a copy of the foregoing disclosure andhas requested that Deloitte furnish it with a letter addressed to the SECstating whether or not it agrees with the above statements. A copy of thatletter will be filed with the SEC promptly upon receipt.  The Registrant’s Audit Committee has begunthe process of selecting new independent certified public accountants and willfile a Form 8-K upon the engagement of a new auditing firm.

**May 21, 2004**

OnMay 21, 2004, the Audit Committee of Liquidmetal Technologies, Inc. (the “Registrant”)appointed Stonefield Josephson, Inc. (“Stonefield Josephson”) as the Registrant’sindependent auditors. A copy of the press release announcing the engagement ofStonefield Josephson is filed as Exhibit 99.1 to this Current Report on Form8-K.

Duringthe two most recent fiscal years and through the date of this Current Report onForm 8-K, the Registrant did not consult Stonefield Josephson regarding (i) theapplication of accounting principles to a specific transaction, eithercompleted or proposed, or the type of audit opinion that may be rendered on theRegistrant’s financial statements, and neither a written report nor oral advicewas provided to the Registrant that Stonefield Josephson concluded was animportant factor considered by the Registrant in reaching a decision as to anyaccounting, auditing or financial reporting issue; or (ii) any matter that waseither the subject of a “disagreement” (as defined in Item 304(a)(1)(iv) ofRegulation S-K and the related instructions thereto) or a “reportable event”(as defined in Item 304(a)(1)(v) of Regulation S-K).

**Item 9A. Controlsand Procedures**

Evaluation ofdisclosure controls and procedures.  During the courseof the audit of the financial statements of Liquidmetal Technologies, Inc. (the“Company”) for the fiscal years ended December 31, 2001, 2002, and 2003, it wasdetermined that revenues from certain equipment sales made by the Companyto Growell Metal Co., Ltd. in the third and fourth quarters of 2002 and thefirst quarter of 2003 should not have been recognized in those periods****.  It was also**** determinedthat certain amounts relating to sales made to Samsung in December 2002, to JSTechnologies in September 2002, and AM Corporation in December 2002 should nothave been recognized.  It also ****was determined thatcompensation expense related to certain stock options granted in 2001 and 2002were not calculated in accordance with generally accepted accounting principlesunder APB Opinion No. 25, SFAS No. 123, and EITF 00-23.** **These determinations and the associated restatement of previouslyissued financial statements, as described more fully elsewhere in the Form 10-Kfor the year ended December 31, 2003, filed on November 10, 2004, suggest that,at the time of the subject transactions and the preparation of the Company’sfinancial statements for the relevant periods, the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15 under the SecuritiesExchange Act of 1934) were not effective as of the end of the periodcovered by such Form 10-K.

Liquidmetal Technologies, Inc. (the “Company”) carried outan evaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Vice Presidentof Finance, of the effectiveness as of December 31, 2004 of the design andoperation of the Company’s disclosure controls and procedures pursuant to Rule13a-15 under the Securities Exchange Act of 1934, as amended.  Based on that evaluation, the Chief Executive Officer andVice President of Finance have concluded that these disclosure controls andprocedures, as of December 31, 2004, were not effective.  This determination was based primarily on therestatement described above and the material weaknesses in internal controlsover financial reporting identified below. 

Management’s Report on Internal Control OverFinancial Reporting. The time and resources committed to therestatement of prior periods’ financial statements (as aforementioned) delayedthe Company’s internal timetable with respect to its documentation, assessmentand evaluation of internal control over financial reporting, which are requiredto be undertaken to comply with Section 404 of the Sarbanes-Oxley Act of 2002(“SOX 404”).  Due in part to the issuesdescribed in the foregoing paragraph, management’s assessment of theeffectiveness of the Company’s internal control over financial reporting hasbeen substantially delayed and is not complete, which in turn has prevented theCompany’s independent registered public accounting firm, Stonefield Josephson,Inc. (“Stonefield”) from being able to satisfactorily complete an audit of theCompany’s internal control over financial reporting pursuant to SOX 404.  Based on the foregoing, Stonefield hasdisclaimed an opinion on the Company’s internal control over financialreporting.

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In attempting tocomplete its assessment of internal control over financial reporting,management used the criteria established in “Internal Control - IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  Although managementhas not yet completed its review and assessment of all of the Company’sinternal controls over financial reporting, based on the review and assessmentefforts that have actually been completed, management has identified severalcontrol deficiencies that existed during and as of the year ended December 31,2004, some of which have been determined to be material weaknesses in internalcontrol over financial reporting.  As aresult of the following material weaknesses, management has concluded that itdid not maintain effective internal control over financial reporting as of December31, 2004, based on the criteria established in COSO (and the followingparagraphs also describe the specific steps that the Company has taken toremediate these material weaknesses):

 

**1.*****Lack ofadequate segregation of duties in accounts payable and accounts receivableinvolving cash receipts and deposits, bank reconciliations, cash disbursements,purchasing, and accounts receivable reconciliations*****:**

Afterthe Company completely moved its accounting function from Tampa, Florida toLake Forest, California in July 2004 and reduced the size of its accountingstaff, duties such as booking of cash receipts, bank reconciliations andjournal entries for corporate accounting were primarily being done by twoaccountants.  During the course of theCompany’s audit for its 2004 fiscal year (which audit occurred during the firstthree months of 2005) and in the course of the Company’s efforts to completethe assessment required by SOX 404 at the same time, it was determined thatthis lack of segregation could contribute to preventing detection of potentialfraud or misstatements of financial information.  Accordingly, beginning in the second quarterof 2005, the Company started taking steps to evaluate its overall accountingduties and segregate these functions for better internal controlstructure.  For example, the Companybegan segregating the cash receipts booking and bank reconciliation among thetwo accountants, as well as segregating invoice entry and check runfunction.  Additionally, as discussedbelow, beginning in the second quarter of 2005, the Company augmented itssupervisory review process to mitigate the potential for fraud andmisstatements.  The Company has notidentified any adjustments as a result of this lack of segregation of duties.

**2.*****Lack ofadequate controls and monitoring of payroll processing, currently outsourced toa third party provider:***

Thismaterial weakness existed throughout 2004 as the Company utilized the servicesof a third party payroll processor that was not certified under SAS 70 (TypeII). During the course of the Company’s audit for its 2004 fiscal year, it wasdetermined that the risk of using a third party payroll provider that is notSAS 70 certified may contribute to misstatements of payroll and relatedfinancial information.  The Companyintends to remediate this weakness by retaining the services of ADP for payrollprocessing.  ADP is certified under SAS70 (Type II).

**3.*****Lack ofdocumentation to evidence reviews of certain reconciliations*****:**

Duringthe course of the Company’s audit for the 2004 fiscal year, which auditoccurred in January 2005, the Company discovered that certain reconciliations,including bank statements and general ledger accounts, were not fullydocumented because the supervisors performing the review on suchreconciliations occasionally omitted their signature evidencing theirreview.  It was determined at the timethat this lack of documentation may result in certain accounting documents notbeing properly reviewed or there being no evidence of review.  Beginning in the second quarter of 2005, theCompany began taking steps to require that all reviews of reconciliations bysupervisors are evidenced by a supervisor signature and that that allaccounting documents are subject to proper review.  For example, the Company started utilizing a “Preparedby, Reviewed by, Checked by” stamp and required all reconciliations to haveevidence of the review prior to closing month end.

**4.*****Lack ofdocumentation of authorization of transactions*****:**

Duringthe course of the Company’s audit for the 2004 fiscal year, the Companydiscovered that, although accounting transactions may have been authorized bythe appropriate persons, the authorizing person occasionally omitted hissignature on the relevant documents or approval forms to evidence hisauthorization.  This lack ofdocumentation on invoices, purchase requisitions and expense reports may resultin certain transactions not being properly approved, so in the second quarterof 2005, the Company began implementing additional procedures for ensuring thatall accounting documents are subject to proper approval as well as indicationof the approval.  For example, theCompany began utilizing a “Prepared by, Reviewed by, Checked by” stamp andrequired that all documents have evidence of the approval prior to entry intothe Company’s accounting system.

**5.*****Manualperformance of numerous procedures that could be automated using currentreporting systems*****:**

The Company uses the SAP system for financialreporting.  During the course of theaudit for the 2004 fiscal year, it was determined that the Company was manuallyperforming numerous procedures that could be automated by using the current SAPsystem.  For example, a sales ordermodule in SAP could be utilized to automate the entire order fulfillmentprocess.  While SAP contains many modulesand features which would allow the Company to automate certain operational andaccounting procedures and thereby minimize the potential for human error,utilization of such modules would require significant investment in upgradingand maintaining the SAP system. Considering the Company’s current size andlimited resources, management has determined that it is not prudent to makethis investment at the current time. Nevertheless, beginning in the second quarter of 2005 and continuingthereafter, the Company has been taking various steps to minimize the potentialfor human error caused by manual procedures. For example, the Company has established specific procedures for properreview and approval of transactions as outlined in paragraphs 3 and 4 above andexpanded utilization of other software tools such as programmed spreadsheets.

40

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**6.*****Materialadjustments to the accounting records and financial statements as of and forthe year ended December 31, 2004 that were not initially identified by the Company’sinternal control over financial reporting:***

Duringthe course of the Company’s SOX 404 assessment efforts during the first severalmonths of 2005, the Company and its auditors identified a number of necessarymaterial adjustments to the Company’s accounting records for 2004.  For example, certain adjustments were bookedto properly value complex debt instruments associated with the refinancing ofthe Company’s debt.  In addition, certainadjustments were booked to impair the Company’s assets which are based onManagement forecasts and overall assessment of the Company’s business.  The Company believes that these adjustmentswere a result of the Company’s focus during 2004 on completing the Company’sthree-year re-audit of its 2001, 2002, and 2003 fiscal years.  As a result of the Company’s SOX 404assessment efforts, the Company has identified these adjustments and hasimplemented additional controls to timely review and assess accounting issuesand prevent the need for such adjustments. While there can be no assurance thatadjustments to financial statements will not occur in the future, with thecompletion of the three-year re-audit, the Company believes that it will beable to devote its resources to completing its accounting assessments and entriestimely and effectively.

**7.*****Management’sdocumentation of the evaluation of the significance of numerous controldeficiencies and significant deficiencies identified, which could rise to thelevel of a material weakness, has not been completed:***

TheCompany is continuing to diligently work to document and evaluate its internalcontrols under the requirements of SOX 404 during 2005.

**8.*****The companyhad inadequate controls related to timely performance of its assessment ofinternal control over financial reporting:***

TheCompany is diligently working to complete its assessment of its internalcontrols over financial reporting under the requirements of SOX 404 during2005.

**9. *AssuranceConsulting 3, the independent third party engaged to help document and assessthe Company’s internal controls, has identified numerous and significantdeficiencies, including those identified above, which management has notcompleted evaluating whether they would rise to the level of a materialweakness in accordance to the PCAOB Audit Standard No. 2.***

The Company will review these deficiencies during its assessment ofinternal controls under the requirements of SOX 404 during 2005.

 

Management believes that it is taking appropriate steps to addressthese material deficiencies subsequent to December 31, 2004, including hiringan independent consulting firm, Assurance Consulting 3, who has helped toidentify the material weaknesses disclosed above and to propose remedialactions to address and mitigate the deficiencies.  We cannot assure you that we will notdiscover additional material weaknesses in the future; however, management willcontinue to work with the independent consulting firm and to work towardscompliance with SOX 404 as of December 31, 2005.

 

Changes in Internal Control over FinancialReporting.  During the quarter ended December 31, 2004,there were no changes in the Company’s internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting (althoughvarious changes made after December 31, 2004 are described above).

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders of Liquidmetal Technologies,Inc.

 

We were engaged to auditmanagement’s assessment included in the accompanying Management’s Report onInternal Control Over Financial Reporting, that Liquidmetal Technologies, Inc.(the “Company”) maintained effective internal control over financial reportingas of December 31, 2004, based on criteria established in**Internal Control—Integrated Framework**issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).** LiquidmetalTechnologies, Inc.’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting.

Amaterial weakness is a significant deficiency, or combination of significantdeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.  Management hasnot completed its assessment of internal control over financial reporting, whichhas prevented us from being able to satisfactorily complete an audit of theCompany’s internal control over financial reporting.   However, management has identified thefollowing material weaknesses during their assessment:  lack of adequate segregation of duties inaccounts payable and accounts receivable involving cash receipts and deposits,bank reconciliations, cash disbursements, purchasing, and accounts receivablereconciliations; lack of adequate controls and monitoring of payrollprocessing, currently outsourced to a third party provider; lack ofdocumentation to evidence reviews of certain reconciliations; lack ofdocumentation of authorization of transactions; manual performance of numerousprocedures that could be automated using current reporting systems; materialadjustments to the accounting records and financial statements as of and forthe year ended December 31, 2004 that were not initially identified by theCompany’s internal control over financial reporting; management’s documentationof the evaluation of the significance of numerous control deficiencies andsignificant deficiencies identified, which could rise to the level of amaterial weakness, has not been completed; and the Company had inadequatecontrols related to timely performance of its assessment of internal controlover financial reporting.   The existenceof one or more material weaknesses as of December 31, 2004 would preclude aconclusion that the Company’s internal control over financial reporting waseffective as of that date.  Thesematerial weaknesses were considered in determining the nature, timing andextent of audit tests applied in our audit of the 2004 consolidated financialstatements, and our disclaimer of opinion regarding the effectiveness of theCompany’s internal control over financial reporting does not affect our opinionon those consolidated financial statements.

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

Since management has notcompleted all the steps necessary to enable us to satisfactorily complete anaudit of their internal control over financial reporting, and we were unable toapply other procedures to satisfy ourselves as to the effectiveness of the company’sinternal control over financial reporting, the scope of our work was notsufficient to enable us to express, and we do not express, an opinion either onmanagement’s assessment or on the effectiveness of the company’s internalcontrol over financial reporting.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements of LiquidmetalTechnologies, Inc. and our report dated March 3, 2005 expressed an unqualifiedopinion including an explanatory paragraph on the Company’s ability to continueas a going concern.

We do not express an opinion or any other form of assurance onmanagement’s statement referring to steps taken to address material weaknessessubsequent to December 31, 2004 or compliance with SOX 404 as of December 31,2005.

 

 
| /s/ Stonefield Josephson,  Inc. |   |
|---------------------------------|--------|
| Irvine,  California             |
| May 9, 2005                     |

 

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**PART III**

**Item 10.Directors and Executive Officers of the Registrant**

Set forth below is atable identifying our current directors and executive officers:

| Name                   | ** ** | **Age** | ** ** | **Position**                                           |
|------------------------|------------|---------|------------|--------------------------------------------------------|
|                   |       |    |       |                                                   |
| John Kang              |       | 42      |       | Chairman of the Board                                  |
|                   |       |    |       |                                                   |
| John Thorne            |       | 64      |       | President and Chief Executive Officer                  |
|                   |       |    |       |                                                   |
| James Kang             |       | 44      |       | Director and Founder                                   |
|                   |       |    |       |                                                   |
| William Johnson, Ph.D. |       | 56      |       | Director                                               |
|                   |       |    |       |                                                   |
| Dean Tanella           |       | 44      |       | Director                                               |
|                   |       |    |       |                                                   |
| Vincent Addonisio      |       | 49      |       | Director (Audit Committee Chairman)                    |
|                   |       |    |       |                                                   |
| Robert Biehl           |       | 61      |       | Director                                               |
|                   |       |    |       |                                                   |
| CK Cho                 |       | 49      |       | Director                                               |
|                   |       |    |       |                                                   |
| David Binnie           |       | 55      |       | Senior Vice President of Administration and  Secretary |
|                   |       |    |       |                                                   |
| Tony Chung             |       | 35      |       | Vice President of Finance                              |

 

*John Kang* wasre-elected as Chairman of our Board of Directors in August 2003.   He has been a director of our Company since1994.  From December 1994 to December2000, he served as Chairman of our Board of Directors in a non-employeecapacity, and from December 2000 to June 2001 he served as Chairman of ourBoard of Directors in an employee capacity. From June 2001 to December 2004, he served as our Chief ExecutiveOfficer and President. From July 1996 to September 2000, Mr. Kang servedvariously as Chief Executive Officer, President, and a director of MedicalManager Corporation, a public company traded on the Nasdaq National Marketuntil its sale in September 2000 to WebMD Corporation. From 1988 to 1995, hewas Chairman of the board of directors of Clayton Group, Inc., a privatecompany engaged in the distribution of waterworks equipment.  Mr. Kang received a B.A. degree in Economicsfrom Harvard College in 1985.  Mr. Kangis the brother of James Kang, the former Chairman of our board of directors.

 *John Thorne*joined Liquidmetal in November 2004 and began serving as our President andChief Executive Officer in January 2005. Mr. Thorne has more than 35 years of leadership and managementexperience in fabrication, casting, product development, technical managementand P&L responsibility with high-performance alloy and specialty metals companies,including Ruger Investment Casting Division of Sturm, Ruger & Co., Inc.,IMI Titanium, Inc., Precision Castparts Corporation and Howmet Corporation.Currently, he is President and CEO of Thorne Technologies, LLC, anArizona-based metallurgical engineering and management consulting firm servinghigh technology metals industries. He holds a bachelor degree in MetallurgicalEngineering and an MBA in Business Administration from Cornell University, andan MSE and Ph.D. in Metallurgical Engineering from the University of Michigan.

*James Kang*has served as adirector since December 1994 and as executive Founder of our company sinceAugust 2003.  From December 1994 to June2001, he served variously as our Chief Executive Officer, President, andChairman.  Mr. Kang received a B.A.degree in Marketing from the University of Illinois in 1983, and an M.B.A.degree from the Kellogg School of Management at Northwestern University in1985.  Mr. Kang is the brother of JohnKang, our Chairman of the Board of Directors, who was also our Chief ExecutiveOfficer and President during 2004.

*WilliamJohnson, Ph.D*.*,*has served asa director since June 2000.  From October2001 to September 2003, he was employed as our executive Vice Chairman ofTechnology.  Since 1997, ProfessorJohnson has been the Mettler Professor of Engineering and Applied Physics atCaltech.  He held a Visiting Professorappointment at the Metal Physics Institute in Gottingen, Germany (1983) andreceived a Von Humbolt Distinguished Scientist Fellowship in Gottingen(1988).  He is the 1995 recipient of theTMS/AIME Hume Rothery Award for his experimental work.  He received a B.A. degree in Physics fromHamilton College and a Ph.D. degree in Applied Physics from Caltech.  He spent two years at IBM’s Research Center(1975-1977).  At Caltech, ProfessorJohnson directed the research that led to the discovery of our bulk Liquidmetalalloy.  Professor Johnson is currently aconsultant to the Company.

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*Dean G. Tanella* was elected as a director in February 2004.  Mr. Tanella is a 20-year veteran of theinstitutional investment business and has worked for such leading firms asRaymond James & Associates, CS First Boston Corp., Adams Harkness &Hill, Drexel Burnham Lanbert, Inc., Kidder Peabody & Co. and the VanguardGroup.  Since 1999, Mr. Tanella hasserved as President of Safe Harbor Capital, LLC and HarborLight Capital, LLC,both of which are private investment firms. Mr. Tanella received his bachelors degree from Princeton University andhis MBA from the Harvard Graduate School of Business Administration.

*Vincent Addonisio* was elected as a director in May 2004. Mr. Addonisio is President and CEO of Regency Strategic Advisors,Inc., a firm he founded to advise select corporate clients on strategy,business development, and mergers and acquisitions. Previously, he served as adirector, executive vice president and chief administrative officer forIMRglobal Corp., a public company that was subsequently acquired in 2001.   Prior to joining IMRglobal, he was a director,executive vice president and chief financial officer for ABR InformationServices, Inc., a public company which he also helped lead through initial andsecondary public offerings and strategic acquisitions. A CPA, Addonisio beganhis career with an international accounting firm and subsequently joined W.R.Grace, where he held positions of progressive management responsibility.  He holds a BS degree in accounting fromBinghamton University and earned an MSM from Georgia Institute of Technology inAtlanta.

*RobertBiehl* has served as a director since January 2005.  Mr. Biehl founded the Masterplanning GroupInternational and as President, personally consulted over 400 clients andmentored over 2,500 executives and world leaders.  Prior to starting Masterplanning Group, Mr.Biehl was an executive staff of World Vision International where he designedand developed the Love Loaf Program, which has raised millions of dollarsworldwide.  He has also published manybooks in the area of personal and organizational development.  Mr. Biehl received his B.A. degree inpsychology and a Masters Degree in Counseling from Michigan State University.

*CK Cho*was elected as a director in January 2005. Mr. Cho has over 18 years of experience with Samsung Electronics andmanaged over $700 million annual procurement budget responsible forsemi-conductor and telecommunication equipment and other electroniccomponents.  He is also the CEO ofWinvest Venture Partners Inc.  Mr. Choreceived his bachelors degree majoring in Business Administration and MaterialSciences from the Korea University of Seoul.

*David Binnie*has been Senior VicePresident-Administration and Corporate Secretary since December 2003.Previously, he served as Senior Vice President for Human Resources, a position hehad held since October 2001.  Prior tojoining Liquidmetal Technologies, Binnie was a senior official with the SchoolDistrict of Hillsborough County, Florida, where he served as the AssistantSuperintendent for Human Resources. Hillsborough County is currently the 10thlargest school system in the United States with over 191,000 students and over32,000 employees.  Mr. Binnie earneddegrees at the Bachelors (Education 1971), Masters (Education, 1973) andDoctorate (Education Leadership, 1985) levels at the University of SouthFlorida.

**Tony Chung**has been our Vice President of Finance since October 2004, prior to which heserved as our Director of Finance upon joining the Company in May 2004. From September 1992 to May 2004, Mr. Chung served in a variety of seniorfinance capacities at various companies including Everdream Corporation, astartup venture specializing in IT outsourcing, and MAI SystemsCorporation, a publicly traded company that develops andlicenses hotel management software.  Mr. Chung is a Certified PublicAccountant and served eight years at KPMG as an Audit and Consulting Managerfor several large multinational companies.  He received his B.S. degreespecializing in accounting and finance from the University ofCalifornia at Berkeley in 1992 at The Haas School of Business. Mr. Chung iscurrently pursuing a Juris Doctorate Degree with Pacific Coast UniversitySchool of Law and expects to receive his degree in June 2006.

**Change in Principal Financial Officer**

On November 3, 2004, David Nail resigned as our VicePresident of Finance and ceased to be our principal financial officer.  On the same day, our board elected Tony Chungto serve as our Vice President of Finance and become our company’s principalfinancial officer.  Additional informationregarding Mr. Chung is set forth above in this Item 10.

###### **BOARD OF DIRECTORS**

**Terms of Directors**

**Our boardof directors is divided into three classes (designated “CLASS I,” “CLASS II,”and “CLASS III”), as nearly equal in number as possible, with each classserving three-year terms expiring at the third annual meeting of stockholdersafter their elections or until their respective successors have been electedand qualified.  CLASS I currently consistof the following directors whose term is scheduled to expire at the 2005 annualmeeting of stockholders: John Kang, William Johnson, and Robert Biehl.  CLASS II currently consists of the followingdirectors whose term is scheduled to expire at the 2006 annual meeting of stockholders:  Dean Tanella and CK Cho.  CLASS III currently consists of the followingdirectors whose term will expire at the 2007 annual meeting ofstockholders:  James Kang and VincentAddonisio.**

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**Audit Committee**

Our board of directorshas an Audit Committee that is currently comprised of Mr. Addonisio andMr. Tanella.  The Audit Committee isresponsible for reviewing the independence, qualifications, and activities ofour independent certified accountants and our financial policies, controlprocedures, and accounting staff.  TheAudit Committee is also responsible for the review of transactions between usand any officer, director, or entity in which an officer or director ofLiquidmetal has a material interest.  Ourboard of directors has determined that Mr. Addonisio and Mr. Tanella each qualifyas “audit committee financial experts” as defined by the regulations of theSecurities and Exchange Commission.  TheAudit Committee is governed by a written charter approved by the board ofdirectors.

**CompensationCommittee**

The Compensation Committee is comprised of Mr. Cho and Mr.Biehl. All of the members of the Compensation Committee are “independentdirectors,” as defined by the rules applicable to members of the CompensationCommittee. The Compensation Committee is responsible for establishing thecompensation of our senior management, including salaries, bonuses, terminationarrangements, and other executive officer benefits. The Compensation Committeealso administers our equity incentive plans.

**Corporate Governance andNominating Committee**

A Corporate Governanceand Nominating Committee (“the Committee”) was formed on February 18,2003, and is comprised of Mr. Tanella and Mr. Biehl.  All members of the Committee are “independentdirectors,” as defined by the rules applicable to members of the Committee. TheCommittee is generally responsible for adopting policies, procedures, andpractices designed to help ensure that our corporate governance policies,procedures, and practices continue to assist the board and our management ineffectively and efficiently promoting the best interests of our shareholders. The Committee is also responsible for selectingand recommending for approval by the Board and the Company’sshareholders a slate of director nominees forelection at each of the Company’s annual meetings of shareholders, andotherwise for determining the Board committee members and chairmen, subject toBoard ratification, as well as recommending to the Board director nominees tofill vacancies or new positions on the Board or its committees that may occuror be created from time to time, all in accordance with the Company’s Bylawsand applicable law.

The Corporate GovernanceCommittee’s principal functions include:

·       developing and maintainingour corporate governance policy guidelines;

 

·       developing and maintainingour codes of conduct and ethics;

 

·       overseeing theinterpretation and enforcement of our Code of Conduct and our Code of Ethicsfor Chief Executive Officer and Senior Financial and Accounting Officers; and

 

·       evaluating the performanceof our board, its committees, and committee chairmen and our directors.

 

·       selecting and recommendinga slate of director nominees for election at each of the Company’s annualmeeting of the shareholders and recommending to the Board director nominees tofill vacancies or new positions on the Board or its committees that may occurfrom time to time.

 

**Code of Ethics**

Our board of directorshas adopted a Code of Ethics that is applicable to its principal executiveofficer, principal financial officer, principal accounting officer orcontroller, and persons performing similar functions. The Code of Ethics isattached as Exhibit 14 to the Annual Report on Form 10-K filed on November 10,2004.

###### **BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS**

During the year ended December 31, 2004, our executiveofficers and directors filed with the Securities and Exchange Commission on atimely basis all required reports relating to transactions involving shares ofour common stock beneficially owned by them, except that John Kang, Chairman,disposed of 188,700 shares during various dates in 2004 as gifts to variousindividuals and organizations and James Kang, Director and Founder, disposed of67,320 shares on January 5, 2004 as gifts to various individuals andorganization.  These disposals werereported in John Kang’s Form 5 filed on February 17, 2005 and James Kang’s Form4 filed on January 28, 2005.

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**Item 11.Executive Compensation**

The following table sets forthcertain information regarding compensation paid by us for each of our lastthree years to our Chief Executive Officer and each of our other executiveofficers during 2004 (collectively, the “named executive officers”).
|                                  | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation** | ** ** | ** **                      | ** ** |
|----------------------------------|------------|------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **Name and Positions** | ** ** | **Year**   | ** ** | **Salary**                   | ** ** | **Bonus**                   | ** ** | **Other  Annual  Compensation** | ** ** | **Shares  Underlying  Options  Granted** | ** ** | **All Other  Compensation** | ** ** |
| John Kang (1)                    |       | 2004       |       | $                            | 208,586    |                        | —     |                            | —     |   | — |   | — |   |
| Chairman of the Board            |       | 2003       |       | $                            | 300,007    |                        | —     |                            | —     |   | — |   | — |   |
|                                  |       | 2002       |       | $                            | 116,671    |                        | —     |                            | —     |   | — |   | — |   |
|                             |       |       |       |                         |       |                        |       |                            |       |   |   |   |   |
| John Thorne (2)                  |       | 2004       |       | $                            | 37,500     |                        | —     |                            | —     |   | — |   | — |   |
| Chief Executive Officer          |       | 2003       |       | —                       |       | —                      |       | —                          |       | — |   | — |   |
| and President                    |       | 2002       |       | —                       |       | —                      |       | —                          |       | — |   | — |   |
|                             |       |       |       |                         |       |                        |       |                            |       |   |   |   |   |
| James Kang (3)                   |       | 2004       |       | $                            | 300,004    |                        | —     |                            | —     |   | — |   | — |   |
| Founder and Director             |       | 2003       |       | $                            | 280,011    |                        | —     |                            | —     |   | — |   | — |   |
|                                  |       | 2002       |       | $                            | 373,334    |                        | —     |                            | —     |   | 2,877,420 |   | — |   |
|                             |       |       |       |                         |       |                        |       |                            |       |   |   |   |   |
| David Binnie (4)                 |       | 2004       |       | $                            | 142,506    |                        | —     |                            | —     |   | — |   | — |   |
| Senior VP of Administration      |       | 2003       |       | $                            | 140,005    |                        | —     |                            | —     |   | 150,000 |   | — |   |
| and Secretary                    |       | 2002       |       | $                            | 150,005    |                        | —     |                            | —     |   | — |   | — |   |
|                             |       |       |       |                         |       |                        |       |                            |       |   |   |   |   |
| Tony Chung (5)                   |       | 2004       |       | $                            | 73,544     |                        | —     |                            | —     |   | 80,000 |   | — |   |
| VP of Finance                    |       | 2003       |       | —                       |       | —                      |       | —                          |       | — |   | — |   |
|                                  |       | 2002       |       | —                       |       | —                      |       | —                          |       | — |   | — |   |

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**(1)**          As of August 22, 2003, John Kang was named Chairman of our board ofdirectors, in addition to already serving as Chief Executive Officer andPresident.  Mr.  Kang ceased to be our Chief Executive Officeras of January 14, 2005

**(2)**          As of January 14, 2005, John Thorne was named Chief Executive Officer andPresident of the Company.  Previouslyduring 2004, Mr. Thorne served as a consultant.

**(3)**          As of August 22, 2003, James Kang became the executive Founder of theCompany and ceased to be the Chairman of our board of directors.

**(4)**          Mr. Binnie joined Liquidmetal in October 2001 as Vice President of HumanResources and assumed the position of Senior Vice President of Administrationand Secretary effective December 2003.

**(5)**          Mr. Chung joined Liquidmetal in May 2004 as Director of Finance andassumed the position of Vice President of Finance effective November 2004.

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The following table sets forth information with respect tothe aggregate stock option exercises by the executive officers named in theSummary Compensation Table during 2004 and the year-end value of unexercisedoptions held by such executive officers.

**Aggregate Option Exercises in Last Year andYear-End Values**

|              | ** ** | **Shares  Acquired  on** | ** ** | **Value**             | ** ** | **Number of Unexercised  Options at Year End** | ** ** |
|--------------|------------|--------------------------|------------|-----------------------|------------|-------------------------------------------------------------------------|------------|
| ** **   | ** ** | **Exercise**             | ** ** | **Realized (1)** | ** ** | **Exercisable**                                                         | ** ** | **Unexercisable** | ** ** |
| John Kang    |       | —                   |       | —                |       | 1,612,904                                                               |       | — |   |
| John Thorne  |       | —                   |       | —                |       | —                                                                  |       | — |   |
| James Kang   |       | —                   |       | —                |       | 2,845,162                                                               |       | 32,258 |   |
| David Binnie |       | —                   |       | —                |       | 69,355                                                                  |       | 112,904 |   |
| Tony Chung   |       | —                   |       | —                |       | —                                                                  |       | 80,000 |   |

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(1)             Representsthe difference between the fair market value of the underlying shares at thetime of exercise and the exercise price of the options exercised.

**EMPLOYMENT AGREEMENTS**

We have entered intoemployment agreements with the executive officers identified in Item 11 above,as follows:

*John Kang. *On December 31, 2000, weentered into an employment agreement with John Kang that, as amended, providesfor his employment as our Chief Executive Officer and President, and on August22, 2003, Mr. Kang was named Chairman of our Board of Directors.  Mr. Kang’s employment agreement expires onDecember 31, 2005.  Mr. Kang receives anannual base salary equal to $200,000 per year, and his employment willterminate upon the earlier of his death, resignation, disability, ortermination by the board of directors for any reason.  If we terminate Mr. Kang’s employment withoutcause, or if Mr. Kang terminates his own employment upon a change of control ofour company or for other good reason, as defined in the agreement, we areresponsible for paying Mr. Kang a lump-sum cash payment equal to 200% of Mr.Kang’s annual base salary plus the average cash bonus during the two fullfiscal years immediately preceding the termination.  Pursuant to the agreement, Mr. Kang wasissued options to purchase 1,612,904 shares of our common stock at an exerciseprice of $4.65 per share.  The optionsexpire on December 31, 2010 and vested immediately upon grant.  In addition, Mr. Kang is prohibited, duringhis employment with us and for one year after he is no longer employed by us,from soliciting any of our employees or competing with us in any manner.  Starting in May 2003, Mr. Kang and othermembers of senior management took a 10% voluntary decrease in their base salaryand returned to full salary in June 2004. Mr. Kang ceased to be our President and Chief Executive Officer as ofJanuary 14, 2005.

*John Thorne.*  On January 14, 2005, we entered into anemployment agreement with John Thorne, which provides for his employment as thenamed Chief Executive Officer and President of our company.  Mr. Thorne’s employment expires April 30,2005, and his term may continue subsequent to the expiration date on amonth-to-month basis at the same salary if mutually agreed in writing at least2 weeks prior to each extension.  Hismonthly salary is $20,834, and will receive 10,000 stock options on April 30,2005, contingent on remaining as an employee until that time.

*James Kang. *OnMay 1, 2001, we entered into an employment agreement with James Kang that, asamended, provides for his employment as the named executive Founder of ourcompany.  Mr. Kang’s employment agreementexpires on May 1, 2006.  Mr. Kangreceives an annual base salary equal to $300,000 per year, and his employmentwill terminate upon the earlier of his death, resignation, disability, ortermination by the board of directors for any reason.  If we terminate Mr. Kang’s employment withoutcause, or if Mr. Kang terminates his own employment upon a change of control ofour company or for other good reason, as defined in the agreement, we areresponsible for paying Mr. Kang a severance benefit equal to a lump-sum cashpayment equal to 200% of Mr. Kang’s annual base salary plus the average cashbonus during the two full fiscal years immediately preceding thetermination.  Pursuant to the agreement,Mr. Kang was issued options to purchase 2,580,646 shares of our common stock atan exercise price of $6.20 per share. The options expire on April 30, 2011 and vest at a rate of 33% per yearfor three years, with the first 33% vesting on May 21, 2002 and an additional33% on May 21, 2003 and 2004.  Inaddition, Mr. Kang is prohibited, during his employment with us and for twoyears after he is no longer employed by us, from soliciting any of ouremployees or customers.  Starting in May2003, Mr. Kang and other members of senior management took a 10% voluntarydecrease in their base salary and returned to full salary in June 2004.

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*DavidBinnie.*  On October 1,2001, we entered into an employment agreement with David Binnie, which providesfor his employment as the named Senior Vice President for Human Resources.  Mr. Binnie’s employment expires September 30,2006, and his term may continue subsequent to the expiration date on amonth-to-month basis at the same salary. His annual salary is $150,000, and he received 100,000 stock options aspart of the employment agreement.  InDecember 2003, Mr. Binnie was named as our Senior Vice President of Administrationand Secretary.

*TonyChung.*  On November 3,2004, we entered into an employment agreement with Tony Chung, which providesfor his employment as the named Vice President of Finance.  Mr. Chung’s employment expires November 2,2007, and his term may continue subsequent to the expiration date on amonth-to-month basis at the same salary. His annual salary is $125,000, and he received 20,000 stock options aspart of the employment agreement.

###### **REPORT ON EXECUTIVE COMPENSATION**

**General**

The Compensation Committee of our Board of Directors wasestablished in 2002 and currently consists of CK Cho and Robert Biehl.  The Compensation Committee is comprisedentirely of non-employee directors and is responsible for establishing thecompensation of our senior management, including salaries, bonuses, terminationarrangements, and other executive officer benefits.  The Compensation Committee also administersour equity incentive plans.  TheCompensation Committee also annually reviews and approves the compensation ofJohn Thorne, our Chief Executive Officer and President.

**Compensation Philosophy**

**TheCompensation Committee’s goal is to establish and maintain compensationpolicies that will enable us to attract, motivate, and retain high-qualityexecutives and to ensure that their individual interests are aligned with ourlong-term interests and our stockholders. The committee places heavy emphasis on paying for performance andbelieves that a significant portion of an executive’s total compensationopportunity should be at risk and tied to company performance.  Our compensation package consists of threeprincipal components:**

·     Basesalaries, subject to minimums set forth in individual employment agreements;

·     Annualincentive bonus eligibility; and

·     Stockoption grants and other forms of equity-based compensation.

**Base Salary***. *Base salary is the largest portionof the cash compensation package received by each of our executiveofficers.  The base salary of each of ourexecutive officers is governed by employment agreements that were entered intoduring 2000 through 2005. Subject to the minimum amounts set forth in theirrespective employment agreements, we generally establish the base salary ofeach executive officer based, among other factors, on the Compensation Committee’sassessment of that executive officer’s position, responsibilities, experience,and performance.  Our philosophy is topay base salaries sufficient to attract and retain highly qualifiedexecutives.  An executive officer’s levelof responsibility is the primary factor used in determining base salary.  Individual performance also is considered indetermining any salary adjustment.

The Compensation Committee reviews and approves allexecutive officer salary adjustments as recommended by the Chief ExecutiveOfficer and determines whether to increase the base salary above the amount setforth in their employment agreements. The Compensation Committee reviews annually the performance of the ChiefExecutive Officer and establishes his base salary, subject to the minimum$250,000 annual base salary set forth in his employment agreement.   In 2004 and 2003, the Compensation Committeedid not increase the base salary of any of the executive officers.

**Annual Bonus***. *Our executive officers areeligible for an annual cash bonus under our Performance Bonus Plan.  The plan is designed to:

·                  put asignificant portion of an executive officer’s total cash compensationopportunity at risk based on the performance of the Company;

·                  be aligned withour mission, values and culture;

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·                  be cost-effective and appropriatelybudgeted to allow for growth of our revenue as well as growth of individualcompensation plans;

·                  be externally competitive by matching orleading competitors; and

·                  be internally equitable through alignmentwith level of contribution, performance-based rewards, and administrativecapabilities.

Awards of incentive bonuses generally are based onachieving corporate goals and a subjective evaluation of the contributions ofindividual executives toward the achievement of our business goals.  Eligibility for the bonus will be contingentupon the Company meeting or exceeding company-wide financial goals andsuccessful attainment of individual goals for the position.  Both elements must be successfully met in orderto be eligible for the bonus.  None ofour executive officers received bonuses for 2003 and 2004 because thecompany-wide financial goals were not satisfied.

**Equity-Based Compensation***.*

**Ourequity-based awards to our executive officers consist principally of stockoptions granted from time to time under our 2002 Equity Incentive Plan and our1996 Stock Option Plan.  Stock optiongrants are based on various factors, including the executive officer’sposition, responsibility and tenure, each executive officer’s ability tocontribute to our future success, and the other elements of such executiveofficer’s compensation. Generally, we use equity-based compensation to betteralign the interests of our executive officers with those of ourstockholders.  For 2004, the CompensationCommittee approved awards of options to executive officers and certain membersof senior management, with the sizes of the awards determined with reference tothe scope of the position and the employees’ relative contributions to the Company.  In addition, three of our executive officers,John Kang, our Chief Executive Officer, James Kang, our executive Founder, andWilliam Johnson, our Vice Chairman, own a significant amount of our commonstock.**

**CEO Compensation**

John Kang’s base salary for2003, as our President and Chief Executive Officer, was originally set at$200,000, although Mr. Kang and other members of senior management took a 10%voluntary decrease in their base salary starting in May 2003, at which time Mr.Kang’s base salary was reduced to $180,000 per year.  This represents a decrease over Mr. Kang’s2002 salary of $200,000.  Mr. Kang’scompensation reflects his status as a significant stockholder of theCompany.  Accordingly, his base salary islower than the base salary of CEOs of comparable companies.  Mr. Kang voluntarily waived his base salaryfrom January 2004 through May 2004 in support of the Company’s strategic cashobjectives.  In June 2004, Mr. Kangreturned to his base salary of $200,000 and received his differentialretroactive pay in equal installments over the remaining months of 2004.  As a significant stockholder in the Company,his overall compensation is tied directly to sustained increases in the Company’svalue.

No bonus payments were made to Mr. Kang for 2003 and 2004because the Compensation Committee determined not to pay any bonuses to any ofour executive officers due to the Company missing its financial goals.  In addition, no options were granted to Mr.Kang in 2003 and 2004.  As of December31, 2004, Mr. Kang held options and warrants to purchase 1,935,485 shares ofour common stock, all of which were fully vested.

John Thorne’s base salary, as our President and Chief ExecutiveOfficer, effective January 14, 2005, is$250,008.  As of December 31, 2004, Mr.Thorne did not hold any options  topurchase our common stock.

**The Internal Revenue Code imposes a limitation onthe deduction under Section 162(m) for certain executive officers’ compensationunless certain requirements are met. Our policy is to have all compensationfully deductible; however, we reserve the right to pay compensation that is notdeductible if it is in our best interests.**

Compensation Committee ofthe Board of Directors

CK ChoRobert BiehlDecember 31, 2004

**Thereport of the Compensation Committee shall not be deemed incorporated byreference by any general statement incorporating by reference this AnnualReport on Form 10-K into any filing under the Securities Act of 1933 or underthe Securities Exchange Act of 1934, except to the extent that we specificallyincorporate this information by reference, and shall not otherwise be deemedfiled under such acts.**

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**DIRECTOR COMPENSATION**

Our non-employee directors receive an annual fee of $10,000for their service to our board and are reimbursed for expenses incurred inattending board and committee meetings. Non-employee directors are also entitled to receive a $10,000 annualcash stipend for each standing board committee (excluding the Audit Committee) onwhich the director serves.  For AuditCommittee service, the Audit Committee chairman is entitled to a $35,000 annualstipend, and the other members of the Audit Committee are entitled to a $27,500annual stipend.  In addition to theannual stipends, each non-employee director is entitled to receive aper-meeting fee of $1,000 for each meeting of the board of directors or anyboard committee attended in person. Effective May 2004, Vincent Addonisio was elected as the leadindependent director of the Company.  Thelead independent director is entitled to a $30,000 annual stipend.

We also have a 2002 Non-employee DirectorStock Option Plan pursuant to which our non-employee directors are entitled toreceive stock options.  Under this plan,when a director is first elected or appointed to our board of directors, thenon-employee director is entitled to receive an initial stock option grant topurchase 50,000 shares of our common stock. Thereafter, on the first business day of January of each year in which thedirector continues to serve as a member of our board, the director is entitledto an annual stock option grant to purchase 10,000 shares of our commonstock.  All options granted under theplan have an exercise price equal to the fair market value of our common stockon the date of the grant.  These stockoptions have a 10-year term, vest, and are exercisable pursuant to an equal5-year vesting schedule, and remain exercisable for certain periods of timeafter a person is no longer a director.

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

**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

**The followingtable sets forth certain information regarding the beneficial ownership of ourcommon stock as of December 31, 2004 by:**

·     each of our directors and the executiveofficers identified in Item 10 above;

·     alldirectors and executive officers as a group, and

·     eachperson known by us to own beneficially more than 5% of the common stock.

**Beneficialownership is determined under the rules of the Securities and ExchangeCommission and generally includes voting or investment power with respect tosecurities.  Unless otherwise indicated,each of the stockholders has sole voting and investment power with respect tothe shares beneficially owned, subject to applicable community property laws.  As of December 31, 2004, there were 238holders of record of our common stock. For purposes of calculating amounts beneficially owned by a stockholder,the number of shares deemed outstanding includes 41,609,652 shares of commonstock outstanding as of December 31, 2004. In addition, shares of common stock subject to options or warrants thatare currently exercisable or exercisable within 60 days of December 31, 2004are deemed to be outstanding and to be beneficially owned by the person holdingthe options or warrants for the purpose of computing the beneficial ownershipof that person but are not treated as outstanding for the purpose of computingthe beneficial ownership of any other person.**

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|                                                                   | ** ** | **Beneficially Owned** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| **Name**                                                          | ** ** | **Shares**                  | ** ** | **Percent** | ** ** |
| ** **                                                        |       |                        |       |   |   |
| John Kang (1)                                                     |       | 5,600,474                   |       | 13 | % |
|                                                              |       |                        |       |   |   |
| James Kang (2)                                                    |       | 7,003,904                   |       | 17 | % |
|                                                              |       |                        |       |   |   |
| William Johnson                                                   |       | 1,195,650                   |       | 3 | % |
|                                                              |       |                        |       |   |   |
| David Binnie (3)                                                  |       | 75,115                      |       | * |   |
|                                                              |       |                        |       |   |   |
| Dean Tanella (4)                                                  |       | 26,120                      |       | * |   |
|                                                              |       |                        |       |   |   |
| Vincent Addonisio (5)                                             |       | —                      |       | * |   |
|                                                              |       |                        |       |   |   |
| Robert Biehl                                                      |       | 25,000                      |       | * |   |
|                                                              |       |                        |       |   |   |
| CK Cho (6)                                                        |       | 185,102                     |       | * |   |
|                                                              |       |                        |       |   |   |
| John Thorne                                                       |       | —                      |       | * |   |
|                                                              |       |                        |       |   |   |
| Tony Chung (7)                                                    |       | 47,250                      |       | * |   |
|                                                              |       |                        |       |   |   |
| All directors and executive officers as a group — 10 persons |       |                        |       | 34 | % |

 

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*                    Lessthan one percent.

(1)          As of August 22, 2003,John Kang was named Chairman of our board of directors, in addition to alreadyserving as Chief Executive Officer and President.  As of January 14, 2005, John Kang ceased tobe our Chief Executive Officer and President. The beneficial shares include:

(a) 1,612,904 shares thatare issuable pursuant to outstanding stock options that are exercisablecurrently or within 60 days of December 31, 2004.

(b) 322,581 sharesissuable pursuant to a warrant held jointly by John Kang and Ricardo Salas (aformer director of the company) that is currently exercisable; and(c) 127,800 shares held by Mr. Kang’s minor children.

(2)          Includes2,845,162 shares issuable pursuant to outstanding stock options that areexercisable currently or within 60 days of December 31, 2004.  Also includes 969 shares held by James Kang’sminor children. Does not include 32,258 shares issuable pursuant to outstandingstock options that are not exercisable currently or within 60 days of December31, 2004.

(3)          Includes69,355 shares issuable pursuant to outstanding stock options that areexercisable currently or within 60 days of December 31, 2004.  Also includes 760 shares held by Mr. Binnie’sfamily. Does not include 112,904 shares issuable pursuant to outstanding stockoptions that are not exercisable currently or within 60 days of December 31,2004.

(4)          Includes 16,130 sharesheld by Mr. Tanella’s investment firm, HarborLight Diversified Fund, LP.  Also, includes 1,390 shares held by Mr.Tanella’s family.  Does not include50,000 shares that are issuable pursuant to outstanding stock options that arenot exercisable within 60 days.

(5)          Does not include 70,000shares that are issuable pursuant to outstanding stock options that are notexercisable within 60 days.

(6)          Includes 109,678 shares held by Mr. Cho’s Investment firm, Winvest.

(7)          Doesnot include 80,000 shares that are issuable pursuant to outstanding stockoptions that are not exercisable within 60 days.

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**Equity Compensation PlanInformation**

The following table sets forth certain informationregarding the securities authorized for issuance under our equity compensationplans as of December 31, 2004.
| **Plan Category**                                       | ** ** | **Number of Securities To be  Issued upon Exercise of  Outstanding Options,  Warrants, and Rights** | ** ** | **Weighted Average Exercise  Price of Outstanding  Options,   Warrants, and Rights** | ** ** | **Number of Securities  Remaining Available for  Future Issuance** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
|                                                         |       |                                                                                                                                                  |       |                                                                                                                    |       |                                                                                        |       |
| Equity compensation  plans approved by security holders:     |       | 6,899,164                                                                                                                                             |       | $                                                                                                                       | 4.95       |                                                                                        | 10,232,001 |   |
|                                                         |       |                                                                                                                                                  |       |                                                                                                                    |       |                                                                                        |       |
| Equity compensation  plans not approved by security holders: |       | —                                                                                                                                                |       | —                                                                                                                  |       | —                                                                                      |       |
|                                                         |       |                                                                                                                                                  |       |                                                                                                                    |       |                                                                                        |       |
| **Total**                                                    |       | 6,899,164                                                                                                                                             |       | $                                                                                                                       | 4.95       |                                                                                        | 10,232,001 |   |

 

**Item 13.Certain Relationships and Related Transactions**

**In June2003, the Company entered into an exclusive, ten-year license agreement withLLPG, Inc. (“LLPG”), a corporation headed by a former director of theCompany.  Under the terms of theagreement, LLPG has the right to commercialize Liquidmetal alloys, particularlyprecious-metal based compositions, in jewelry and high-end luxury productmarkets.  The Company, in turn, willreceive royalty payments over the life of the contract on all Liquidmetal productsproduced and sold by LLPG.  Inconjunction with its technology licensing contract, LLPG purchased twoproprietary Liquidmetal alloy melting machines and three proprietaryLiquidmetal alloy casting machines for a total purchase price of $2,000,000.  At December 31, 2003, the Company had aremaining receivable balance of approximately $500,000 due from LLPG, which waspaid in full in March 2004.**

TheCompany is a party to a license agreement with California Institute ofTechnology (“Caltech”) under which the Company exclusively licenses fromCaltech certain inventions and technology relating to amorphous alloys.  Professor William Johnson, a member of theCompany’s Board of Directors, is a professor at Caltech, and substantially allof the amorphous alloy technology licensed to the Company under the Caltechlicense agreement was developed in Professor Johnson’s Caltech laboratory.   During 2003, the Company paid approximately$50,000 to Caltech representing the second and final installments on the approximately$150,000 aggregate fees related to this agreement.  Additionally, the Company reimburses Caltechfor laboratory expenses incurred by Professor Johnson’s Caltech laboratory,which during the years ended December 31, 2004 and 2003, amounted to $0 andapproximately $22,000, respectively.

A company managed and partiallyowned by one of the Company’s former directors provides technical supportservices and computer equipment to the Company. During the year ended December 31, 2003, the Company incurred approximately$20,000 of expenses and equipment purchases related to this arrangement.  There were no expenses and payables to thisCompany as of December 31, 2004.

We are a party to aconsulting agreement with Chitnis Consulting, Inc., which is owned 100% byShekhar Chitnis, a former director and executive officer of our company.  Under this agreement, we have engaged ChitnisConsulting to provide consulting services on an as-needed basis throughDecember 31, 2005.  During 2003, weincurred approximately $50,000 in consulting fees from Chitnis Consulting andincurred approximately $54,000 as of December 31, 2004.

**SooBuchanan, the sister of John Kang and James Kang, was employed by our companyand was paid aggregate compensation of approximately $76,000 and $43,000 as ofDecember 31, 2003 and 2004. Additionally, Otis Buchanan, the husband of Ms. Buchanan, was employedby the Company and was paid aggregate compensation of approximately $90,000 and$54,000 as of December 31, 2003 and 2004, respectively.**

In November2004, we entered into an agreement with John Kang, our Chairman, President, andChief Executive Officer, in which Mr. Kang agreed that certain stocktransactions by him in 2002 involving our common stock should have resulted ina liability under Section 16(b) of the Securities Exchange Act of 1934, asamended (“Section 16(b)”).  Thesetransactions include Mr. Kang’s private sale of 285,715 shares of his personalLiquidmetal Technologies common stock to Growell Metal Co., Ltd. in February2002, prior to our initial public offering. They also include Mr. Kang’s subsequent indirect purchase anddisposition of Liquidmetal Technologies common stock in order to satisfy apersonal agreement Mr. Kang made to Growell Metal in February 2002 regardingthe guaranteed minimum value of the stock purchased by Growell Metal inFebruary 2002 (the purchases and dispositions incident to this agreementoccurred in August and November 2002, respectively).  Lastly, the transactions include open-marketpurchases of an aggregate of 89,300 shares of our common stock made by Mr. Kangin August 2002.

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TheAudit Committee of our Board of Directors conducted an independent inquiry intothe above-described transactions with the aid of independent legal counsel and,as a result of such inquiry, the Audit Committee concluded that thetransactions should have resulted in a liability to the Company under Section16(b) in the amount of approximately $302,000. Mr. Kang has acknowledged this liability, and in an agreement negotiatedbetween Mr. Kang and the Audit Committee and approved by the full Board, Mr.Kang will pay this liability through periodic installments in 2005 and2006.  . As a result, the Company accrued the $302,000 receivable in other assetsand other income as of December 31, 2004. The above-described transactions involving GrowellMetal were reported on a new Form 4 filed by Mr. Kang onNovember 15, 2004, and the open-market purchases were previously reported on a timelybasis in August 2002.

**Item14. Principal Accounting Fees and Services**

Prior to May 2004, Deloitte & Touche LLP was ourindependent public accountant; however, effective May 2004, Deloitte &Touche LLP resigned as our independent accountant.  Liquidmetal Technologies subsequently engagedStonefield Josephson, Inc.  Item 14includes the principal accounting fees and services for both Deloitte &Touche LLP and Stonefield Josephson, Inc.

Stonefield Josephson,Inc.

Stonefield Josephson, Inc. was engaged in May 2004 and hasserved as our independent public accountants during the year ended December 31,2003 and 2004.

Thefollowing table summarizes the aggregate fees billed to the Company byStonefield for professional services:

| Fees           | ** ** | **2003, 2002, and 2001** | ** ** | **2004** | ** ** |
|----------------|------------|-----------------------------------------|------------|----------|------------|
| Audit Fees (1) |       | $                                       | 760,000    |     | $          | 150,000 |   |
|                |            |                                         |            |          |            |  |  |

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(1)*Audit Fees*. Fees for auditservices billed in 2004 consisted of:

·                  Auditof the Company’s annual financial statements for 2003, 2002, and 2001;

·                  Reviewand audit of the Company’s quarterly and annual financial statements for 2004,respectively.

Deloitte & Touche LLP

Thefollowing table summarizes the aggregate fees billed to the Company by Deloitte& Touche LLP for professional services performed in 2003:

| Fees           | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|
| Audit Fees (1) |       | $        | 296,021    |   |
| Tax Fees (2)   |       | 68,435   |       |
|           |       |     |       |
| Total          |       | $        | 364,456    |   |

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(1) *Audit Fees.*Fees for audit services billed in 2003 consisted of:

·                  Auditof the Company’s annual financial statements;

·                  Reviewsof the Company’s quarterly financial statements;

·                  Comfortletters, statutory and regulatory audits, consents and other services relatedto Securities and Exchange Commission matters;

·                  Consultationsabout accounting for settlement and fund raising; and

·                  Reviewsof Securities and Exchange Commission documents associated with financing and restructuring.

(2)Tax Fees. Fees for tax services billed in 2003 and 2002 consisted of taxcompliance and tax planning/advice

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The Audit Committeepre-approves all audit and permissible non-audit services provided by theindependent directors on a case-by-case basis. The Audit Committee approved 100% of the services performed by Deloitte& Touche LLP and Stonefield Josephson, Inc. in 2004, 2003, and 2002 asidentified above.

**PART IV**

**Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K**

(a)          Thefollowing documents are filed as a part of this report:

1. *Financial Statements*.The Index to our Consolidated Financial Statements is set forth on page 60 ofthis report.

2. *Financial Statement Schedules*.See the last page of Consolidated Financial Statements.

3. *Exhibits*. SeeItem 15(c) below.

(b)        *Reports on Form 8-K*. The following reports on Form 8-K were filed during thequarter ended December 31, 2004:

 
| **Date Filed**    | ** ** | **Date of Report** | ** ** | **Item**                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-------------------|------------|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |       |               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| October 19, 2004  |       | October 18, 2004   |       | The Company filed a news release under Item 7.01 of  Form 8-K announcing the status of the company’s external audit and Form 10-K  filing.                                                                                                                                                                                                                                                                                        |
|              |       |               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| November 10, 2004 |       | November 10, 2004  |       | The Company filed a news release under Item 7.01 of  Form 8-K announcing the status of the company’s external audit and Form 10-K  filing.                                                                                                                                                                                                                                                                                        |
|              |       |               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| November 23, 2004 |       | November 22, 2004  |       | The Company announced under Item 8.01 of Form 8-K  that in a letter and decision dated November 18, 2004, the Listing Council  notified the Company that it affirms the Panel’s decision to delist the  Company’s securities from The Nasdaq National Market.                                                                                                                                                                |
|              |       |               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| December 17, 2004 |       | December 17, 2004  |       | The Company filed a news  release under Item 5.02 of Form 8-K announcing the appointment of John K.  Thorne as Interim President and Chief Executive Officer.  Also included in the press release is the  stepping down of Thian-Song Tjoa as a member of our Board of Directors, and  the elections of Robert J. Biehl and C.K. Cho to the Board.  The appointment and elections will become  effective on January 1, 2005. |
|              |       |               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| December 23, 2004 |       | December 23, 2004  |       | The Company filed a news  release under Item 2.02 of Form 8-K announcing the results of operations for  the quarter ended March 31, 2004.                                                                                                                                                                                                                                                                                              |

 

(c)         *Exhibits*. The exhibits listed on the Exhibit Index,which appears at the end of this Item 15, are filed as part of, orincorporated by reference into, this report.

(d)         *Financial Statement Schedules*. SeeItem 15(a)(2) above.

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**EXHIBITINDEX**
| Exhibit    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                           | ** ** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                          | ** ** |
| 2.1        | —     | Agreement and Plan of Merger, dated May 21, 2003,  between Liquidmetal Technologies, Inc. and Liquidmetal Technologies  (incorporated by reference to Exhibit 2.1 to the Form 10-Q filed on August  14, 2003).                                                                                                                                                                       |       |
| 3.1        | —     | Certificate of Incorporation (incorporated by  reference to Exhibit 3.1 to the Form 10-Q filed on August 14, 2003)                                                                                                                                                                                                                                                                   |       |
| 3.2        | —     | Bylaws (incorporated by reference to Exhibit 3.2 to  the Form 10-Q filed on August 14, 2003)                                                                                                                                                                                                                                                                                         |       |
| 4.1        | —     | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                                                                                           |       |
| 4.2        | —     | Form of Common Stock Certificate (incorporated by  reference to Exhibit 4.2 to the Form 10-Q filed on August 14, 2003)                                                                                                                                                                                                                                                               |       |
| 10.1       | —     | Amended and Restated License Agreement, dated  September 1, 2001, between Liquidmetal Technologies, Inc. and California  Institute of Technology (incorporated by reference to Exhibit 10.1 to  the Registration Statement on Form S-1 filed on November 20, 2001  (Registration No. 333-73716)).                                                           |       |
| 10.2       | —     | Improved Property Commercial Lease, dated  September 11, 2002, between Liquidmetal Technologies, Inc. and P & S  Properties (incorporated by reference to Exhibit 10.2 of Form 10-K filed on  March 31, 2003).                                                                                                                                                              |       |
| 10.3       | —     | Lease, dated October 4, 2001, between Plaza IV  Associates, Ltd. and Liquidmetal Technologies, Inc. (incorporated by  reference to Exhibit 10.1 to the Registration Statement on Form S-1  filed on November 20, 2001 (Registration No. 333-73716)).                                                                                                        |       |
| 10.4       | —     | Second Amendment of Lease, dated October 3, 2003,  between Liquidmetal Technologies, Inc. and Plaza Associates IV, Ltd.  (incorporated by reference to Exhibit 10.1 of Form 10-Q filed on November 14,  2003).                                                                                                                                                                       |       |
| 10.5       | —     | Standard Lease, dated May 27, 2001, between  Investors Equity Fund, Inc. and Amorphous Technologies International (now  known as Liquidmetal Technologies, Inc.) (incorporated by reference to  Exhibit 10.1 to the Registration Statement on Form S-1 on  November 20, 2001 (Registration No. 333-73716)).                                                 |       |
| 10.6*      | —     | 1996 Stock Option Plan, as amended, together with  form of Stock Option Agreement (incorporated by reference to  Exhibit 10.7 to the Registration Statement on Form S-1 filed on  November 20, 2001 (Registration No. 333-73716)).                                                                                                                               |       |
| 10.7*      | —     | 2002 Equity Incentive Plan (incorporated by  reference to Exhibit 10.23 to the Registration Statement on  Form S-1 (Amendment No. 2) filed on April 5, 2002 (Registration  No. 333-73716)).                                                                                                                                                                 |       |
| 10.8*      | —     | 2002 Non-Employee Director Stock Option Plan  (incorporated by reference to Exhibit 10.24 to the Registration  Statement on Form S-1 (Amendment No. 2) filed on April 5, 2002  (Registration No. 333-73716)).                                                                                                                                               |       |
| 10.9*      | —     | Employment Agreement, dated December 31, 2000,  between Liquidmetal Technologies, Inc. and John Kang, as amended by Amendment  No. 1 to Employment Agreement, dated June 28, 2001 (incorporated by  reference to Exhibit 10.8 to the Registration Statement on Form S-1 filed  on November 20, 2001 (Registration No. 333-73716)).                     |       |
| 10.10*     | —     | Employment Agreement, dated May 1, 2001,  between Liquidmetal Technologies, Inc. and James Kang, as amended by  Amendment No. 1 to Employment Agreement, dated June 28, 2001  (incorporated by reference to Exhibit 10.9 to the Registration Statement  on Form S-1 (Amendment No. 2) filed on April 5, 2002  (Registration No. 333-73716)). |       |
| 10.11*     | —     | Amendment No. 2 to Employment Agreement, dated  September 1, 2003, between James Kang and Liquidmetal Technologies, Inc.  (incorporated by reference to Exhibit 10.2 of Form 10-Q filed on November 14,  2003).                                                                                                                                                                      |       |
| 10.12*     | —     | Employment Agreement, dated October 1, 2001,  between Liquidmetal Technologies, Inc. and William Johnson, Ph.D.  (incorporated by reference to Exhibit 10.10 to the Registration  Statement on Form S-1 filed on November 20, 2001 (Registration  No. 333-73716))                                                                                           |       |
| 10.13*     | —     | Employment Agreement, dated October 1, 2001, between  Liquidmetal Technologies, Inc., and David Binnie. (incorporated by reference  to Exhibit 10.13 to the Form 10-K filed on November 10, 2004)                                                                                                                                                                                    |       |
| 10.14*     | —     | Employment Agreement, dated November 3, 2004,  between Liquidmetal Technologies, Inc. and Tony Chung. (incorporated by  reference to Exhibit 10.14 to the Form 10-K filed on November 10, 2004)                                                                                                                                                                                      |       |

 

55

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| 10.15* | — | Employment Agreement, dated December 31, 2000,  between Liquidmetal Technologies, Inc. and T. Scott Wiggins (incorporated by  reference to Exhibit 10.11 to the Registration Statement on  Form S-1 filed on November 20, 2001 (Registration  No. 333-73716)).                                                                                                  |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.16* | — | Employment Agreement, dated May 21, 2001,  between Liquidmetal Technologies, Inc. and Brian McDougall (incorporated by  reference to Exhibit 10.12 to the Registration Statement on  Form S-1 filed on November 20, 2001 (Registration  No. 333-73716)).                                                                                                        |   |
| 10.17* | — | Employment Separation Agreement, dated December 31,  2003, between Liquidmetal Technologies, Inc. and Brian McDougall.  (incorporated by reference to Exhibit 10.17 to the Form 10-K filed on  November 10, 2004)                                                                                                                                                                        |   |
| 10.18* | — | Letter Agreement, dated February 26, 2004, between  Brian McDougall and Liquidmetal Technologies, Inc. (incorporated by reference  to Exhibit 10.18 to the Form 10-K filed on November 10, 2004)                                                                                                                                                                                         |   |
| 10.19* | — | Employment Agreement, December 1, 2002, between Liquidmetal  Technologies, Inc. and Thomas Trotter. (incorporated by reference to Exhibit  10.19 to the Form 10-K filed on November 10, 2004)                                                                                                                                                                                            |   |
| 10.20* | — | Employment Separation Agreement, dated November 6,  2003, between Liquidmetal Technologies, Inc. and Thomas Trotter.  (incorporated by reference to Exhibit 10.20 to the Form 10-K filed on  November 10, 2004)                                                                                                                                                                          |   |
| 10.21* | — | Separation and Consulting Agreement, dated  November 15, 2001, between Liquidmetal Technologies, Inc. and Shekhar  Chitnis, together with Consulting Agreement attached as Exhibit A  (incorporated by reference to Exhibit 10.14 to the Registration  Statement on Form S-1 (Amendment No. 2) filed on April 5, 2002  (Registration No. 333-73716)). |   |
| 10.22  | — | Warrant for Purchase of Shares of Common Stock,  dated February 21, 2001, granted by Liquidmetal Technologies, Inc. to  John Kang and Ricardo Salas (incorporated by reference to Exhibit 10.18 to  the Registration Statement on Form S-1 filed on November 20, 2001  (Registration No. 333-73716)).                                                                     |   |
| 10.23  | — | Warrant for Purchase of Shares of Common Stock,  dated February 21, 2001, granted by Liquidmetal Technologies, Inc. to  Tjoa Thian Song (incorporated by reference to Exhibit 10.19 to the  Registration Statement on Form S-1 filed on November 20, 2001 (Registration  No. 333-73716)).                                                                            |   |
| 10.24  | — | Non-Qualified Stock Option Agreement, dated  January 1, 2001, between Liquidmetal Technologies, Inc. and Paul Azinger  (incorporated by reference to Exhibit 10.19 to the Registration  Statement on Form S-1 filed on November 20, 2001 (Registration  No. 333-73716)).                                                                                        |   |
| 10.25  | — | Foreign Corporation Lease Zone Occupancy (Lease)  Agreement, dated March 5, 2002, between Kyonggi Local Corporation and  Liquidmetal Korea Co., Ltd. (incorporated by reference to Exhibit 10.22  to the Registration Statement on Form S-1 (Amendment No. 2) filed  by Liquidmetal Technologies on April 5, 2002 (Registration  No. 333-73716)).          |   |
| 10.26  | — | Credit Service Agreement, dated February 2003,  between Liquidmetal Korea Co., Ltd. and Kookmin Bank (incorporated by  reference to Exhibit 10.20 to the Form 10-K filed on March 31, 2003).                                                                                                                                                                                             |   |
| 10.27  | — | Agreement for Rent dated February, 2003, between  Liquidmetal Korea Co., Ltd. and Dong Myung Seo Bank (incorporated by  reference to Exhibit 10.21 to the Form 10-K filed on March 31, 2003).                                                                                                                                                                                            |   |
| 10.28  | — | Share Transfer Agreement, dated February 28, 2004,  among Liquidmetal Korea Co. Ltd., Sun Joo Ho, and Dongyang Induction Co. Ltd.  (incorporated by reference to Exhibit 10.28 to the Form 10-K filed on  November 10, 2004)                                                                                                                                                             |   |
| 10.29  | — | Settlement Agreement, dated January 10, 2004,  between Liquidmetal Korea Co., Ltd. and Growell Metal Co., Ltd. (incorporated  by reference to Exhibit 10.29 to the Form 10-K filed on November 10, 2004)                                                                                                                                                                                 |   |
| 10.30  | — | Amended and Restated Securities Purchase Agreement,  dated March 1, 2004, among Liquidmetal Technologies, Inc., Michigan Venture  Capital Co., Ltd., and the investors identified as “Purchasers” therein  (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on July 2,  2004).                                                                                 |   |
| 10.31  | — | Form of 6% Senior Convertible Note issued under  Amended and Restated Securities Purchase Agreement (incorporated by reference  to Exhibit 10.2 to the Form 8-K filed on July 2, 2004).                                                                                                                                                                                                  |   |
| 10.32  | — | Registration Rights Agreement, dated March 1, 2004,  among Liquidmetal Technologies, Inc. and the purchasers under Amended and  Restated Securities Purchase Agreement (incorporated by reference to Exhibit  10.3 to the Form 8-K filed on July 2, 2004).                                                                                                                               |   |
| 10.33  | — | Common Stock Purchase Warrant, dated March 1, 2004,  granted by Liquidmetal Technologies, Inc. to Michigan Venture Capital Co.,  Ltd. (incorporated by reference to Exhibit 10.4 to the Form 8-K filed on July  2, 2004).                                                                                                                                                                |   |
| 10.34  | — | Factory Mortgage Agreement, dated March 1, 2004,  among Liquidmetal Korea Co., Ltd., Michigan Venture Capital Co., Ltd., and the  other parties identified therein (incorporated by reference to Exhibit 10.5  to the Form 8-K filed on July 2, 2004).                                                                                                                                   |   |

 

56

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| 10.35     | — | Securities Purchase Agreement, dated March 1, 2004,  among Liquidmetal Technologies, Inc. and the investors identified as  “Purchasers” therein (incorporated by reference to Exhibit 10.6 to the Form  8-K filed on July 2, 2004).     |   |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.36     | — | Form of 6% Senior Convertible Note issued under  Securities Purchase Agreement (incorporated by reference to Exhibit 10.7 to  the Form 8-K filed on July 2, 2004).                                                                                |   |
| 10.37     | — | Registration Rights Agreement, dated March 1, 2004,  among Liquidmetal Technologies, Inc. and the purchasers under Securities  Purchase Agreement (incorporated by reference to Exhibit 10.8 to the Form 8-K  filed on July 2, 2004).             |   |
| 10.38     | — | Form of Common Stock Purchase Warrant granted to  purchasers under Securities Purchase Agreement (incorporated by reference to  Exhibit 10.9 to the Form 8-K filed on July 2, 2004).                                                              |   |
| 10.39     | — | Form of Placement Agent Common Stock Purchase  Warrant, dated March 1, 2004 (incorporated by reference to Exhibit 10.10 to  the Form 8-K filed on July 2, 2004).                                                                                  |   |
| 10.40     | — | Security Agreement, dated March 1, 2004, between  Liquidmetal Technologies, Inc. and Middlebury Capital LLC, as agent (incorporated  by reference to Exhibit 10.11 to the Form 8-K filed on July 2, 2004).                                        |   |
| 10.41     | — | Note Exchange Agreement, dated July 29, 2004, among  Liquidmetal Technologies, Inc. and certain individuals identified as  “Noteholders” therein (incorporated by reference to Exhibit 10.1 to the Form  8-K filed on August 20, 2004). |   |
| 10.42     | — | Form of 10% Senior Secured Notes Due 2005 of  Liquidmetal Technologies, Inc. issued pursuant to Note Exchange Agreement  filed as Exhibit 10.2 hereto (incorporated by reference to Exhibit 10.2 to  the Form 8-K filed on August 20, 2004).      |   |
| 10.43     | — | Form of 6% Senior Security Note Due 2007 of  Liquidmetal Technologies, Inc. issued pursuant to Note Exchange Agreement  filed as Exhibit 10.3 hereto (incorporated by reference to Exhibit 10.3 to the  Form 8-K filed on August 20, 2004).       |   |
| 10.44     | — | Note Exchange Agreement, dated July 29, 2004, among  Liquidmetal Technologies, Inc and Winvest Venture Partners Inc. (incorporated  by reference to Exhibit 10.4 to the Form 8-K filed on August 20, 2004).                                       |   |
| 10.45     | — | 10% Senior Secured Notes Due 2005 of Liquidmetal  Technologies, Inc. issued to Winvest Venture Partners Inc. (incorporated by  reference to Exhibit 10.5 to the Form 8-K filed on August 20, 2004).                                               |   |
| 10.46     | — | Form of 6% Senior Security Note Due 2007 of Liquidmetal  Technologies, Inc. issued to Winvest Venture Partners Inc. (incorporated by  reference to Exhibit 10.6 to the Form 8-K filed on August 20, 2004).                                        |   |
| 10.47 (1) | — | Employment Agreement, dated January 14, 2005,  between Liquidmetal Technologies, Inc. and John Thorne.                                                                                                                                            |   |
| 14        | — | Code of Ethics for Chief Executive Officer and  Senior Financial and Accounting Officers. (incorporated by reference to  Exhibit 14 to the Form 10-K filed on November 10, 2004)                                                                  |   |
| 21        | — | Subsidiaries of the Registrant. (incorporated by  reference to Exhibit 21 to the Form 10-K filed on November 10, 2004)                                                                                                                            |   |
| 23.1      | — | Consent of Stonefield Josephson                                                                                                                                                                                                                   |   |
| 23.2      |   | Consent of Choi, Kim, & Park, LLP                                                                                                                                                                                                             |   |
| 24.1      | — | Power of Attorney relating to subsequent amendments  (included on the signature page(s) of this report).                                                                                                                                          |   |
| 31.1      | — | Certification of Principal Executive Officer  pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of  1934, as amended.                                                                                                        |   |
| 31.2      | — | Certification of Principal Financial Officer  pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of  1934, as amended.                                                                                                        |   |
| 32.1      | — | Certification of Pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                               |   |

----

*                    Denotesa management contract or compensatory plan or arrangement required to be filedas an exhibit this Form 10-K.   

(1)             Previously filed

57

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                     |   |   |   | Liquidmetal Technologies, Inc.        |
|---------------------|--------|--------|--------|---------------------------------------|
|                |   |   |   |                                  |
|                |   |   |   |                                  |
|                |   |   | By:    | /s/ Ricardo A. Salas                  |   |
|                |   |   |   | Ricardo A. Salas                      |
|                |   |   |   | President and Chief Executive Officer |
|                |   |   |   |                                  |
| Date: July 20, 2006 |   |   |   |                                  |
|                |   |   |   |                                  |
|                |   |   | By:    | /s/ Young Ham                         |   |   |
|                |   |   |   | Young Ham                             |
|                |   |   |   | Chief Financial Officer               |
|                |   |   |   |                                  |
| Date: July 20, 2006 |   |   |   |                                  |
|                     |        |        |        |                                       |  |  |

 

58

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**POWEROF ATTORNEY**

KNOW ALL THESE PERSONS BY THESE PRESENTS, thateach person whose signature appears below constitutes and appoints Ricardo A.Salas and Young Ham and each of them, jointly and severally, hisattorneys-in-fact, each with full power of substitution, for him in any and allcapacities, to sign any and all amendments to this Report on Form 10-K,and to file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each said attorneys-in-fact or his substitute orsubstitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report on Form 10-K/A has been signed below bythe following persons on behalf of the Registrant and in the capacities and onthe dates indicated: 
| Signature              | ** ** | **Title**                             | ** ** | **Date**      | ** ** |
|------------------------|------------|---------------------------------------|------------|---------------|------------|
|                   |       |                                  |       |          |       |
| /s/ John Kang          |       | Chairman of the Board and Director    |       | July 20, 2006 |       |
| John Kang              |       |                                  |       |          |       |
|                   |       |                                  |       |          |       |
| /s/ Ricardo A. Salas   |       | Chief Executive Officer and President |       | July 20, 2006 |       |
| Ricardo A. Salas       |       | (Principal Executive Officer)         |       |          |       |
|                   |       |                                  |       |          |       |
| /s/ James Kang         |       | Founder and Director                  |       | July 20, 2006 |       |
| James Kang             |       |                                  |       |          |       |
|                   |       |                                  |       |          |       |
| /s/ William Johnson    |       | Director                              |       | July 20, 2006 |       |
| William Johnson        |       |                                  |       |          |       |
|                   |       |                                  |       |          |       |
| /s/ Robert Biehl       |       | Director                              |       | July 20, 2006 |       |
| Robert Biehl           |       |                                  |       |          |       |
|                   |       |                                  |       |          |       |
| /s/ Dean Tanella  |       | Director                              |       | July 20, 2006 |       |
| Dean Tanella           |       |                                  |       |          |       |
|                   |       |                                  |       |          |       |
| /s/ CK Cho             |       | Director                              |       | July 20, 2006 |       |
| CK Cho                 |       |                                  |       |          |       |

 

Certificationsprovided as Exhibits.

 

59

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                    | ** ** | Page   |
|--------------------------------------------------------------------|------------|--------|
| Report  of Independent Registered Public Accounting Firm           |       |   |
| Consolidated Financial Statements:                                 |       |   |
| Consolidated Balance Sheet                                         |       |   |
| Consolidated Statements of  Operations and Comprehensive Loss      |       |   |
| Consolidated Statements of  Shareholders’ Equity (Deficiency) |       |   |
| Consolidated Statements of  Cash Flows                             |       |   |
| Notes to Consolidated  Financial Statements                        |       |   |

 

60

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Shareholders ofLiquidmetal Technologies, Inc.

We have audited, beforethe effects of the adjustments for the correction of the error described inNote 2, the accompanying consolidated balance sheets of LiquidmetalTechnologies, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and2003, and the related consolidated statements of operations and comprehensiveloss, shareholders’ equity (deficiency), and cash flows for each of the threeyears in the period ended December 31, 2004 (the 2004 financial statementsbefore the effects of the adjustments discussed in Note 2 are not presentedherein). Our audit also included the financial statement schedule listed atindex in Item 15(a), except for the correction of the error described in Note2, as of and for the years ended December 31, 2004. Our responsibility is toexpress an opinion on the financial statements and financial statement schedulebased on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, exceptfor the error described in Note 2, such consolidated financial statementspresent fairly, in all material respects, the financial position of LiquidmetalTechnologies, Inc. and subsidiaries as of December 31, 2004 and 2003, and theresults of their operations and cash flows for each of the three years in theperiod ended December 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, suchfinancial statement schedule, except for the error described in Note 2, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly in all material respects the information set forththerein.

We were not engaged toaudit, review, or apply any procedures to the adjustments for the correction ofthe error described in Note 2, and accordingly, we do not express an opinion orany other form of assurance about whether such adjustments are appropriate andhave been properly applied. Those adjustments were audited by Choi, Kim &Park LLP.

The accompanying consolidatedfinancial statements have been prepared assuming that the Company will continueas a going concern. As discussed in Note 3 to the consolidated financialstatements, the Company’s significant operating losses and working capitaldeficit raise substantial doubt about its ability to continue as a goingconcern. Management’s plans regarding those matters also are described in Note3. The consolidated financial statements do not include any adjustments thatmight result from the outcome of this uncertainty.
| /s/ Stonefield Josephson,  Inc. |   |
|---------------------------------|--------|
|                            |
| Irvine,  California             |
| Certified Public  Accountants   |
|                            |
| March 3, 2005                   |

 

61

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Shareholders ofLiquidmetal Technologies, Inc.

We have audited the effects of the adjustments for thecorrection of the error described in Note 2 as of and for the year endedDecember 31, 2004. We werenot engaged to audit, review, or apply any procedures to the 2004 financialstatements of the Company other than with respect to the adjustments and,accordingly, we do not express an opinion or any other form of assurance on the2004 financial statements taken as a whole.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, theeffects of the adjustments for the correction of the error described in Note 2as of and for the year ended December 31, 2004, in conformity with accountingprinciples generally accepted in the United States of America.
| /s/ Choi, Kim & Park  LLP. |   |
|--------------------------------|--------|
|                           |
| Los Angeles,  California       |
| Certified Public  Accountants  |
|                           |
| July 17, 2006                  |

 

62

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share data)**
| ** **                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                          | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                          | ** ** | **(Restated)**        | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                          |       |                  |       |   |   |
| **ASSETS**                                                                                                                                                          |       |                  |       |   |   |
| ** **                                                                                                                                                          |       |                  |       |   |   |
| CURRENT ASSETS:                                                                                                                                                     |       |                  |       |   |   |
|                                                                                                                                                                |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                           |       | $                     | 742        |   | $ | 3,127 |   |
| Restricted cash                                                                                                                                                     |       | 754                   |       | — |   |
| Trade accounts receivable, net of allowance for  doubtful accounts of $108 and $127                                                                                 |       | 1,668                 |       | 3,748 |   |
| Inventories                                                                                                                                                         |       | 2,353                 |       | 2,060 |   |
| Prepaid expenses and other current assets                                                                                                                           |       | 930                   |       | 395 |   |
| Assets available for sale, net                                                                                                                                      |       | —                |       | 827 |   |
| Total current assets                                                                                                                                                |       | 6,447                 |       | 10,157 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| PROPERTY, PLANT  AND EQUIPMENT, NET                                                                                                                                 |       | 16,434                |       | 17,743 |   |
| IDLE EQUIPMENT                                                                                                                                                      |       | 1,906                 |       | 1,671 |   |
| LONG-TERM  INVENTORY                                                                                                                                                |       | 1,810                 |       | — |   |
| OTHER INTANGIBLE  ASSETS, NET                                                                                                                                       |       | 1,143                 |       | 984 |   |
| OTHER ASSETS                                                                                                                                                        |       | 768                   |       | 297 |   |
| Total assets                                                                                                                                                        |       | $                     | 28,508     |   | $ | 30,852 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                      |       |                  |       |   |   |
| ** **                                                                                                                                                          |       |                  |       |   |   |
| CURRENT  LIABILITIES:                                                                                                                                               |       |                  |       |   |   |
|                                                                                                                                                                |       |                  |       |   |   |
| Accounts payable and accrued expenses                                                                                                                               |       | $                     | 4,969      |   | $ | 3,683 |   |
| Settlement payable                                                                                                                                                  |       | 3,246                 |       | 2,765 |   |
| Deferred revenue                                                                                                                                                    |       | 900                   |       | 1,435 |   |
| Long-term debt, current portion                                                                                                                                     |       | 4,010                 |       | 1,032 |   |
| Warrant liabilities                                                                                                                                                 |       | 550                   |       | — |   |
| Conversion feature liabilities                                                                                                                                      |       | 6,650                 |       | — |   |
| Other current liabilities                                                                                                                                           |       | 1,032                 |       | 1,940 |   |
| Total current liabilities                                                                                                                                           |       | 21,357                |       | 10,855 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| LONG-TERM DEBT,  NET OF CURRENT PORTION                                                                                                                             |       | 2,618                 |       | 3,015 |   |
| OTHER LIABILITIES                                                                                                                                                   |       | 342                   |       | 814 |   |
| Total liabilities                                                                                                                                                   |       | 24,317                |       | 14,684 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                      |       |                  |       |   |   |
|                                                                                                                                                                |       |                  |       |   |   |
| MINORITY  INTEREST                                                                                                                                                  |       | —                |       | 5 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| SHAREHOLDERS’  EQUITY:                                                                                                                                         |       |                  |       |   |   |
|                                                                                                                                                                |       |                  |       |   |   |
| Common stock, $0.001 par value per share,  100,000,000 shares authorized; 41,609,652 shares issued and outstanding at  December 31, 2004 and December 31, 2003 |       | 42                    |       | 42 |   |
| Additional paid in capital                                                                                                                                          |       | 129,650               |       | 128,581 |   |
| Unamortized stock-based compensation                                                                                                                                |       | —                |       | (128 | ) |
| Accumulated deficit                                                                                                                                                 |       | (127,472              | )          | (112,587 | ) |
| Accumulated other comprehensive income                                                                                                                              |       | 1,971                 |       | 255 |   |
| Total shareholders’ equity                                                                                                                                     |       | 4,191                 |       | 16,163 |   |
| Total  liabilities and shareholders’ equity                                                                                                                    |       | $                     | 28,508     |   | $ | 30,852 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

63

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except per share data)**
| ** **                                                               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                               | ** ** | **(Restated)**                              | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                                                     |       |                                        |       |   |   |   |   |
| REVENUE, Net                                                             |       | $                                           | 17,429     |   | $ | 13,658 |   | $ | 9,138 |   |
| COST OF SALES                                                            |       | 12,168                                      |       | 18,162 |   | 5,656 |   |
| Gross profit  (loss)                                                     |       | 5,261                                       |       | (4,504 | ) | 3,482 |   |
| OPERATING  EXPENSES:                                                     |       |                                        |       |   |   |   |   |
| Selling, general and administrative                                      |       | 11,591                                      |       | 17,729 |   | 13,099 |   |
| Research and development                                                 |       | 1,467                                       |       | 8,780 |   | 11,825 |   |
| Impairment of goodwill                                                   |       | —                                      |       | 184 |   | — |   |
| Impairment of long lived assets                                          |       | —                                      |       | 2,684 |   | — |   |
| Total operating expenses                                                 |       | 13,058                                      |       | 29,377 |   | 24,924 |   |
| LOSS BEFORE  INTEREST, OTHER INCOME, INCOME TAXES                   |       |                                        |       |   |   |   |   |
| MINORITY INTEREST AND DISCONTINUED OPERATIONS                            |       | (7,797                                      | )          | (33,881 | ) | (21,442 | ) |
| Loss from extinguishments of debt                                        |       | (2,941                                      | )          | — |   | — |   |
| Change in value of warrants, gain                                        |       | 747                                         |       | — |   | — |   |
| Change in value of conversion feature, gain                              |       | 2,093                                       |       | — |   | — |   |
| Other income                                                             |       | 302                                         |       | — |   | — |   |
| Interest expense                                                         |       | (6,577                                      | )          | (390 | ) | (1,109 | ) |
| Interest income                                                          |       | 37                                          |       | 304 |   | 506 |   |
| Gain on sale of marketable securities held-for-sale                      |       | —                                      |       | 1,178 |   | 832 |   |
| LOSS BEFORE  INCOME TAXES, MINORITY INTEREST AND DISCONTINUED OPERATIONS |       | (14,136                                     | )          | (32,789 | ) | (21,213 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Income taxes                                                             |       | —                                      |       | — |   | — |   |
|                                                                     |       |                                        |       |   |   |   |   |
| LOSS BEFORE  MINORITY INTEREST AND DISCONTINUED OPERATIONS               |       | (14,136                                     | )          | (32,789 | ) | (21,213 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Minority  interest in loss of consolidated subsidiary                    |       | —                                      |       | 21 |   | 118 |   |
|                                                                     |       |                                        |       |   |   |   |   |
| LOSS FROM  CONTINUING OPERATIONS                                         |       | (14,136                                     | )          | (32,768 | ) | (21,095 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| DISCONTINUED  OPERATIONS:                                                |       |                                        |       |   |   |   |   |
| (Loss) income from operations of discontinued operations,  net           |       | (749                                        | )          | (964 | ) | 83 |   |
| Gain from disposal of discontinued operations, net                       |       | —                                      |       | 127 |   | 1,556 |   |
| NET LOSS                                                                 |       | (14,885                                     | )          | (33,605 | ) | (19,456 | ) |
| OTHER  COMPREHENSIVE GAIN (LOSS):                                        |       |                                        |       |   |   |   |   |
| Foreign exchange translation gain (loss) during the  period              |       | 1,716                                       |       | 211 |   | (28 | ) |
| Net unrealized (loss) gain on marketable securities  available-for-sale  |       | —                                      |       | (1,668 | ) | 1,668 |   |
| COMPREHENSIVE  LOSS                                                      |       | $                                           | (13,139    | ) | $ | (35,062 | ) | $ | (17,816 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| PER COMMON SHARE  BASIC and DILUTED:                                     |       |                                        |       |   |   |   |   |
| (Loss) from continuing operations                                        |       | $                                           | (0.34      | ) | $ | (0.79 | ) | $ | (0.54 | ) |
| (Loss) from discontinued operations                                      |       | $                                           | (0.02      | ) | $ | (0.02 | ) | $ | 0.04 |   |
| Net (loss)                                                               |       | $                                           | (0.36      | ) | $ | (0.81 | ) | $ | (0.50 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Number of weighted  average shares – basic and diluted              |       | 41,610                                      |       | 41,505 |   | 38,714 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

64

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**LIQUIDMETAL TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIENCY)**

**(in thousands, except share data)**
| ** **                                                             | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | **Unamortized** | ** ** | ** **     | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|------------------|------------|-----------------|------------|----------------|------------|------------------------|------------|------------|------------|
| ** **                                                             | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional**   | ** ** | **Stock-based** | ** ** | **Accumu-**    | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Preferred** | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid in** | ** ** | **Compen-**     | ** ** | **lated**      | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Shares**    | ** ** | **Stock**     | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**      | ** ** | **sation**      | ** ** | **Deficit**    | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| ** **                                                             | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)**   | ** ** | **(Restated)**  | ** ** | **(Restated)** | ** ** | ** **             | ** ** | ** ** | ** ** |
|                                                                   |       |          |       |          |       |       |       |       |       |             |       |            |       |           |       |                   |       |       |       |
| Balance,  December 31, 2001 (As Restated)                         |       | 456,857       |       | $             | 5,577      |       | 35,023,515 |       | $          | 29,752           |       | $               | 23,915     |           | $          | (7,294                 | )          | $          | (59,526    | ) | $ | 72 |   | $ | (7,504 | ) |
| Common stock issued                                                    |       | —        |       | —        |       | 5,229,000  |       | 78,435     |       | —           |       | —          |       | —         |       | —                 |       | 78,435     |       |
| Transaction expenses of initial public offering including  commissions |       | —        |       | —        |       | —     |       | (7,714     | )          | —           |       | —          |       | —         |       | —                 |       | (7,714     | )          |
| Stock options exercised                                                |       | —        |       | —        |       | 299,873    |       | 504        |       | —           |       | —          |       | —         |       | —                 |       | 504        |       |
| Conversion of preferred stock to common stock                          |       | (456,857      | )          | (5,577        | )          | 456,857    |       | 5,577      |       | —           |       | —          |       | —         |       | —                 |       | —     |       |
| Stock-based compensation                                               |       | —        |       | —        |       | —     |       | —     |       |             |       | 4,694           |       | —         |       | —                 |       | 4,694      |       |
| Unamortized stock option based compensation                            |       | —        |       | —        |       | —     |       | —     |       | (2,340           | )          | 2,340           |       | —         |       | —                 |       | —     |       |
| Foreign exchange translation loss                                      |       | —        |       | —        |       | —     |       | —     |       | —           |       | —          |       | —         |       | (28                    | )          | (28        | )          |
| Net unrealized gain on marketable securities                           |       | —        |       | —        |       | —     |       | —     |       | —           |       | —          |       | —         |       | 1,668                  |       | 1,668      |       |
| Net loss (as restated)                                                 |       | —        |       | —        |       | —     |       | —     |       | —           |       | —          |       | (19,456        | )          | —                 |       | (19,456    | )          |
|                                                                   |       |          |       |          |       |       |       |       |       |             |       |            |       |           |       |                   |       |       |       |
| Balance,  December 31, 2002 (As Restated)                         |       | —        |       | $             | —     |       | 41,009,245 |       | $          | 106,554          |       | $               | 21,575     |           | $          | (260                   | )          | $          | (78,982    | ) | $ | 1,712 |   | $ | 50,599 |   |
|                                                                   |       |          |       |          |       |       |       |       |       |             |       |            |       |           |       |                   |       |       |       |
| Stock options exercised                                                |       | —        |       | —        |       | 684,165    |       | 1,149      |       | —           |       | —          |       | —         |       | —                 |       | 1,149      |       |
| Repurchase of shares                                                   |       | —        |       | —        |       | (93,758    | )          | (653       | )          | —           |       | —          |       | —         |       | —                 |       | (653       | )          |
| Change in par value due to Reincorporation                             |       | —        |       | —        |       | —     |       | (107,008   | )          | 107,008          |       | —          |       | —         |       | —                 |       | —     |       |
| Stock-based compensation                                               |       | —        |       | —        |       | 10,000     |       | —     |       | 100              |       | 25              |       | —         |       | —                 |       | 125        |       |
| Unamortized stock option based compensation                            |       | —        |       | —        |       | —     |       | —     |       | (107             | )          | 107             |       | —         |       | —                 |       | —     |       |
| Purchase of common stock of subsidiaries                               |       | —        |       | —        |       | —     |       | —     |       | 5                |       | —          |       | —         |       | —                 |       | 5          |       |
| Foreign exchange translation gain                                      |       | —        |       | —        |       | —     |       | —     |       | —           |       | —          |       | —         |       | 211                    |       | 211        |       |
| Reclassification for net realized gain                                 |       | —        |       | —        |       | —     |       | —     |       | —           |       | —          |       | —         |       | (1,668                 | )          | (1,668     | )          |
| Net loss                                                               |       | —        |       | —        |       | —     |       | —     |       | —           |       | —          |       | (33,605        | )          | —                 |       | (33,605    | )          |
|                                                                   |       |          |       |          |       |       |       |       |       |             |       |            |       |           |       |                   |       |       |       |
| Balance, December  31, 2003                                            |       | —        |       | $             | —     |       | 41,609,652 |       | $          | 42               |       | $               | 128,581    |           | $          | (128                   | )          | $          | (112,587   | ) | $ | 255 |   | $ | 16,163 |   |
|                                                                   |       |          |       |          |       |       |       |       |       |             |       |            |       |           |       |                   |       |       |       |
| Stock-based compensation                                               |       | —        |       | —        |       | —     |       | —     |       | 261              |       | 15              |       | —         |       | —                 |       | 276        |       |
| Unamortized stock-based compensation                                   |       | —        |       | —        |       | —     |       | —     |       | (113             | )          | 113             |       | —         |       | —                 |       | —     |       |
| Redemption of convertible notes payable                                |       | —        |       | —        |       | —     |       | —     |       | 914              |       | —          |       | —         |       | —                 |       | 914        |       |
| Warrants cancelled                                                     |       | —        |       | —        |       | —     |       | —     |       | 7                |       | —          |       | —         |       | —                 |       | 7          |       |
| Foreign exchange translation gain                                      |       | —        |       | —        |       | —     |       | —     |       | —           |       | —          |       | —         |       | 1,716                  |       | 1,716      |       |
| Net loss                                                               |       | —        |       | —        |       | —     |       | —     |       | —           |       | —          |       | (14,885        | )          | —                 |       | (14,885    | )          |
|                                                                   |       |          |       |          |       |       |       |       |       |             |       |            |       |           |       |                   |       |       |       |
| Balance, December 31,  2004 (As Restated)                              |       | —        |       | $             | —     |       | 41,609,652 |       | $          | 42               |       | $               | 129,650    |           | $          | —                 |       | $          | (127,472   | ) | $ | 1,971 |   | $ | 4,191 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

65

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**LIQUIDMETAL TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands, except share data)**
| ** **                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                          | ** ** | **(Restated)**                              | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                                                                |       |                                        |       |   |   |   |   |
| OPERATING  ACTIVITIES:                                                              |       |                                        |       |   |   |   |   |
| Net (loss)                                                                          |       | $                                           | (14,885    | ) | $ | (33,605 | ) | $ | (19,456 | ) |
| Add (gain) loss from operations and loss on  disposition of discontinued operations |       | 749                                         |       | 837 |   | (1,639 | ) |
| Loss from continuing operations                                                     |       | (14,136                                     | )          | (32,768 | ) | (21,095 | ) |
| Adjustments to reconcile net loss to net cash used  by operating activities:        |       |                                        |       |   |   |   |   |
| Impairment of long lived assets                                                     |       | —                                      |       | 2,684 |   | — |   |
| Impairment of goodwill                                                              |       | —                                      |       | 184 |   | — |   |
| Loss from Growell settlement                                                        |       | —                                      |       | 2,765 |   | — |   |
| Gain on sale of marketable securities held-for-sale                                 |       | —                                      |       | (1,178 | ) | (832 | ) |
| Gain on disposal of property and equipment                                          |       | 4                                           |       | — |   | — |   |
| Minority interest                                                                   |       | —                                      |       | (21 | ) | (118 | ) |
| Bad debt expense                                                                    |       | 84                                          |       | (28 | ) | 921 |   |
| Warranty expense                                                                    |       | 288                                         |       | (297 | ) | 237 |   |
| Depreciation and amortization                                                       |       | 3,444                                       |       | 4,354 |   | 1,513 |   |
| Loss on extinguishments of debt                                                     |       | 2,941                                       |       | — |   | — |   |
| Amortization of debt discount                                                       |       | 5,834                                       |       | — |   | 912 |   |
| Stock-based compensation                                                            |       | 276                                         |       | 123 |   | 2,203 |   |
| Gain from change in value of warrants                                               |       | (747                                        | )          | — |   | — |   |
| Loss (gain) from change in value of conversion feature                              |       | (2,093                                      | )          | — |   | — |   |
| Changes in operating assets and liabilities:                                        |       |                                        |       |   |   |   |   |
| Trade accounts receivable                                                           |       | 1,996                                       |       | 1,660 |   | (5,319 | ) |
| Inventories                                                                         |       | (2,103                                      | )          | (100 | ) | (1,432 | ) |
| Prepaid expenses and other current assets                                           |       | (535                                        | )          | 1,689 |   | (990 | ) |
| Other assets                                                                        |       | (869                                        | )          | 83 |   | (189 | ) |
| Accounts payable and accrued expenses                                               |       | 998                                         |       | (5,969 | ) | 5,990 |   |
| Deferred revenue                                                                    |       | (535                                        | )          | 38 |   | 567 |   |
| Other liabilities                                                                   |       | (1,244                                      | )          | 2,661 |   | — |   |
| Net cash used by  continuing operations                                             |       | (6,397                                      | )          | (24,120 | ) | (17,632 | ) |
| Net cash  provided (used) by discontinued operations                                |       | 73                                          |       | (2,429 | ) | (2,756 | ) |
| Net cash used by  operating activities                                              |       | (6,324                                      | )          | (26,549 | ) | (20,388 | ) |
| INVESTING  ACTIVITIES:                                                              |       |                                        |       |   |   |   |   |
| Purchases of property and equipment                                                 |       | (73                                         | )          | (2,329 | ) | (23,527 | ) |
| Proceeds from sale of property and equipment                                        |       | 38                                          |       | — |   | — |   |
| Purchase of marketable securities held-for-sale                                     |       | —                                      |       | — |   | (2,000 | ) |
| Proceeds from sale of marketable securities  held-for-sale                          |       | —                                      |       | 2,578 |   | 1,432 |   |
| Acquisition of subsidiary, net of cash received                                     |       | —                                      |       | — |   | 74 |   |
| Investment in patents and trademarks                                                |       | (273                                        | )          | (298 | ) | (144 | ) |
| Net cash used by  investing activities                                              |       | (308                                        | )          | (49 | ) | (24,165 | ) |
| FINANCING  ACTIVITIES:                                                              |       |                                        |       |   |   |   |   |
| Proceeds from borrowings                                                            |       | 9,924                                       |       | 5,488 |   | 3,500 |   |
| Repayment of borrowings                                                             |       | (5,184                                      | )          | (1,441 | ) | (7,400 | ) |
| Repayment of other liabilities                                                      |       | (135                                        | )          | (72 | ) | (14 | ) |
| Restricted cash                                                                     |       | (754                                        | )          | — |   | — |   |
| Proceeds from issuance of common stock, net of  offering costs                      |       | —                                      |       | — |   | 70,721 |   |
|                                                                                |       |                                        |       |   |   |   |   |
| Stock options exercised                                                             |       | —                                      |       | 899 |   | 504 |   |
| Proceeds from issuance (repurchase) of common stock  by subsidiaries, net           |       | —                                      |       | 5 |   | — |   |
| Net cash  provided by financing activities                                          |       | 3,851                                       |       | 4,879 |   | 67,311 |   |
| EFFECT OF  FOREIGN EXCHANGE TRANSLATION                                             |       | 396                                         |       | (212 | ) | 70 |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                               |       | (2,385                                      | )          | (21,931 | ) | 22,828 |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                   |       | 3,127                                       |       | 25,058 |   | 2,230 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                         |       | $                                           | 742        |   | $ | 3,127 |   | $ | 25,058 |   |
|                                                                                |       |                                        |       |   |   |   |   |
| SUPPLEMENTAL  CASH FLOW INFORMATION                                                 |       |                                        |       |   |   |   |   |
| Interest paid                                                                       |       | $                                           | 640        |   | $ | 443 |   | $ | 52 |   |
| Taxes paid                                                                          |       | $                                           | —     |   | $ | — |   | $ | — |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

66

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In 2004, the Company sold its 51%ownership interest in Dongyang to the 49% minority shareholder, which resultedin a loss of $46 from disposal of discontinued operations.

In 2004, the Company sold assets and liability of itsTaesung equipment manufacturing division in Korea to a third party whichresulted in a loss of approximately $184.

In 2003, an optionholder surrendered 93,758 shares of the Company’s common stock in lieu of cashpayment for the option exercise price of $250 and income taxes payable by theoption holder of $403. The Company immediately canceled the common sharesreceived in lieu of cash payment upon receipt of the shares.

In 2003 the Companyreclassified $1,477 of machines from property, plant and equipment to machinesheld by customer.

In 2003, the Companyentered into a lease agreement for $291 of laboratory equipment that wasrecorded as a capital lease obligation.

In 2002, $2,570 in notespayable and accrued interest were converted to the Company’s common stock.

In 2002, the Companyrecorded a net addition to shareholders’ equity of $2,492 comprised of stockcompensation and discounts on convertible notes payable in the discontinuedretail golf operations. In 2002, there was a $98 foreign exchange loss effectin the discontinued retail golf operations.

In 2002, the Companyentered into a lease agreement for $107 of office furniture that was recordedas a capital lease obligation.

The accompanying notesare an integral part of the consolidated financial statements.

 

67

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**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**Forthe Years Ended December 31, 2004, 2003, and 2002**

**(inthousands, except share data)**

** **

 

**1. Description of Business**

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

The Company classifiesoperations into two reportable segments: Liquidmetal alloy industrial coatingsand bulk Liquidmetal alloys. Liquidmetal alloy industrial coatings are usedprimarily as a protective coating for industrial machinery and equipment, suchas drill pipe used by the oil drilling industry and boiler tubes used bycoal-burning power plants. Bulk Liquidmetal alloys include potential marketopportunities to manufacture and sell products and components for electronicdevices, medical devices, defense applications, and sporting goods. Inaddition, the bulk Liquidmetal alloys segment includes tooling and prototypesampling, and the manufacture and sale of die casting and VIM equipment (seeNote 4 for disclosure regarding the disposal of this segment). In addition,such alloys are used to generate research and development services revenue fordeveloping uses related primarily to defense and medical applications as wellas potential license fees, royalties, and other compensation from strategicpartnering transactions.

OnAugust 4, 2004, the Company established a post-processing plant in the city ofWeihai in Shandong province of China under Weihai Liquidmetal Company Limited,which is 100 percent owned by Liquidmetal Korea, to facilitate our bulk alloymanufacturing business. Weihai Liquidmetal is consolidated into LiquidmetalTechnologies with all intercompany transactions eliminated.

**2. Restatement**

As a part of the accompanying consolidated financial statements and thenotes thereto, the Company has restated certain previously issued financialstatements due to an error related to the Company’s accounting for embeddedconvertible feature of senior convertible notes issued in March 2004, which wasexchanged in August 2004, in accordance with Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” (SFAS 133).

The Company previouslyhad incorrectly accounted for the conversion feature of senior convertiblenotes during 2004 and 2005 in additional paid in capital for the beneficialconversion feature of the notes under Emerging Issues Task Force (EITF) 00-19,“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock”, and EITF 00-27 “Application of Issue No.98-5, ‘Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Ratios,’ to Certain ConvertibleInstruments.” The Company had failed to identify and account for the conversionfeature as an embedded derivative in accordance with SFAS 133.

The correction of the error to properly state the fair value of theembedded conversion feature of senior convertible notes in accordance with SFAS133 resulted in recognition of $7,595 as a conversion feature liability as ofthe issuance of the senior convertible note in March 2004 as the convertiblenotes are considered non-conventional convertible debt instrument. Thecorrection resulted in recognition of the change in fair value of the embeddedconversion feature in the Company’s earnings as a gain of $2,093 for the yearended December 31, 2004, as well as adjustments to amortization of debtdiscount as interest expense of $2,974 for the year ended December 31, 2004,and an additional loss on extinguishment of debt of $1,278 for the year endedDecember 31, 2004. Additionally, the Company recognized $914 in additional paidin capital from redemption and conversion of convertible notes as of December 31,2004 (see Note 15). As part of the restatement, reclassifications to priorperiod consolidated financial statements have been made for consistentpresentation of our warrant liabilities, settlement payable, and change invalue of warrant liabilities.

68

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The effects of the restatements are as follows:
| ** **                                                                                                                 | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **2004**                              | ** ** | **2004** | ** ** |
| ** **                                                                                                                 | ** ** | **Previously**                        | ** ** | **Restated** | ** ** |
| ** **                                                                                                                 | ** ** | **Reported**                          | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                 | ** ** | ** **                            | ** ** | ** ** | ** ** |
|                                                                                                                       |       |                                  |       |   |   |
| Current Assets:                                                                                                            |       |                                  |       |   |   |
| Cash and cash  equivalents                                                                                                 |       | $                                     | 742        |   | $ | 742 |   |
| Restricted cash                                                                                                            |       | 754                                   |       | 754 |   |
| Trade accounts  receivables, net of allowance for doubtful accounts                                                        |       | 1,668                                 |       | 1,668 |   |
| Inventories                                                                                                                |       | 2,353                                 |       | 2,353 |   |
| Prepaid expenses  and other current assets                                                                                 |       | 930                                   |       | 930 |   |
| Total current  assets                                                                                                      |       | 6,447                                 |       | 6,447 |   |
|                                                                                                                       |       |                                  |       |   |   |
| Property, plant and  equipment, net                                                                                        |       | 16,434                                |       | 16,434 |   |
| Idle equipment                                                                                                             |       | 1,906                                 |       | 1,906 |   |
| Long-term inventory                                                                                                        |       | 1,810                                 |       | 1,810 |   |
| Other intangibles, net                                                                                                     |       | 1,143                                 |       | 1,143 |   |
| Other assets                                                                                                               |       | 768                                   |       | 768 |   |
| Total assets                                                                                                               |       | $                                     | 28,508     |   | $ | 28,508 |   |
|                                                                                                                       |       |                                  |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                             | ** ** | ** **                            | ** ** | ** ** | ** ** |
|                                                                                                                       |       |                                  |       |   |   |
| Current liabilities:                                                                                                       |       |                                  |       |   |   |
| Accounts payable  and accrued expenses                                                                                     |       | $                                     | 4,969      |   | $ | 4,969 |   |
| Settlement  payable                                                                                                        |       | 3,246                                 |       | 3,246 |   |
| Deferred revenue                                                                                                           |       | 900                                   |       | 900 |   |
| Short-term debt                                                                                                            |       | —                                |       | — |   |
| Long-term debt,  current portion, net of debt discount                                                                     |       | 5,991                                 |       | 4,010 |   |
| Other  liabilities, current portion                                                                                        |       | 1,032                                 |       | 1,032 |   |
| Warrant  liabilities                                                                                                       |       | 550                                   |       | 550 |   |
| Conversion  feature liabilities                                                                                            |       | —                                |       | 6,650 |   |
| Total current  liabilities                                                                                                 |       | 16,688                                |       | 21,357 |   |
|                                                                                                                       |       |                                  |       |   |   |
| Long-term debt, net of  current portion and debt discount                                                                  |       |                                  |       |   |   |
| March 31, 2006,  December 31, 2005 and 2004, respectively                                                                  |       | 2,618                                 |       | 2,618 |   |
| Other long-term  liabilities, net of current portion                                                                       |       | 342                                   |       | 342 |   |
| Total  liabilities                                                                                                         |       | 19,648                                |       | 24,317 |   |
|                                                                                                                       |       |                                  |       |   |   |
| Shareholder’s equity  (deficiency):                                                                                   |       |                                  |       |   |   |
| Common stock,  $0.001 par value; 100,000,000 shares authorized and 41,609,652 issued and  outstanding at December 31, 2004 |       | 42                                    |       | 42 |   |
| Additional  paid-in capital                                                                                                |       | 132,160                               |       | 129,650 |   |
| Accumulated  deficit                                                                                                       |       | (125,313                              | )          | (127,472 | ) |
| Accumulated  other comprehensive income                                                                                    |       | 1,971                                 |       | 1,971 |   |
| Total  shareholder’ equity (deficiency)                                                                               |       | 8,860                                 |       | 4,191 |   |
|                                                                                                                       |       |                                  |       |   |   |
| Total liabilities and  shareholders’ equity (deficiency)                                                              |       | $                                     | 28,508     |   | $ | 28,508 |   |

 

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| ** **                                                                                         | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2004**                                    | ** ** | **2004** | ** ** |
| ** **                                                                                         | ** ** | **Previously**                              | ** ** | **Restated** | ** ** |
| ** **                                                                                         | ** ** | **Reported**                                | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Revenue                                                                                            |       | $                                           | 17,429     |   | $ | 17,429 |   |
| Cost of sales                                                                                      |       | 12,168                                      |       | 12,168 |   |
| Gross (loss) profit                                                                                |       | 5,261                                       |       | 5,261 |   |
|                                                                                               |       |                                        |       |   |   |
| Operating  expenses                                                                                |       |                                        |       |   |   |
| Selling, general, and administrative                                                               |       | 11,591                                      |       | 11,591 |   |
| Research and development                                                                           |       | 1,467                                       |       | 1,467 |   |
| Impairment of goodwill                                                                             |       | —                                      |       | — |   |
| Impairment of long lived assets                                                                    |       | —                                      |       | — |   |
| Total operating expenses                                                                           |       | 13,058                                      |       | 13,058 |   |
|                                                                                               |       |                                        |       |   |   |
| Loss before  interest, other income, income taxes, minority interest, and discontinued  operations |       | (7,797                                      | )          | (7,797 | ) |
| Loss from extinguishments of debt                                                                  |       | (1,663                                      | )          | (2,941 | ) |
| Change in value of warrants, gain                                                                  |       | 747                                         |       | 747 |   |
| Change in value of conversion feature, gain                                                        |       | —                                      |       | 2,093 |   |
| Other income                                                                                       |       | 302                                         |       | 302 |   |
| Interest expense                                                                                   |       | (3,603                                      | )          | (6,577 | ) |
| Interest income                                                                                    |       | 37                                          |       | 37 |   |
| Gain on sale of marketable securities held-for-sale                                                |       | —                                      |       | — |   |
| Loss before income taxes, minority interest and discontinued  operations                           |       | (11,977                                     | )          | (14,136 | ) |
|                                                                                               |       |                                        |       |   |   |
| Income taxes                                                                                       |       | —                                      |       | — |   |
|                                                                                               |       |                                        |       |   |   |
| Loss before minority interest and discontinued  operations                                         |       | (11,977                                     | )          | (14,136 | ) |
|                                                                                               |       |                                        |       |   |   |
| Minority  interest in loss of consolidated subsidiary                                              |       | —                                      |       | — |   |
|                                                                                               |       |                                        |       |   |   |
| Loss from continuing operations                                                                    |       | (11,977                                     | )          | (14,136 | ) |
|                                                                                               |       |                                        |       |   |   |
| Discontinued  operations:                                                                          |       |                                        |       |   |   |
| Income (loss) from operations of discontinued  operations, net                                     |       | (749                                        | )          | (749 | ) |
| Gain (loss) from disposal of discontinued  operations, net                                         |       | —                                      |       | — |   |
| Net Loss                                                                                           |       | (12,726                                     | )          | (14,885 | ) |
| Other  comprehensive gain (loss):                                                                  |       |                                        |       |   |   |
| Foreign exchange translation gain during the period                                                |       | 1,716                                       |       | 1,716 |   |
| Net unrealized gain (loss) on marketable securities  available-for-sale                            |       | —                                      |       | — |   |
| Comprehensive loss                                                                                 |       | $                                           | (11,010    | ) | $ | (13,169 | ) |
|                                                                                               |       |                                        |       |   |   |
| Per common share  basic and diluted:                                                               |       |                                        |       |   |   |
| Loss per share - continuing operations                                                             |       | (0.29                                       | )          | (0.34 | ) |
| Loss per share - discontinuing operations                                                          |       | (0.02                                       | )          | (0.02 | ) |
| Loss per share basic and diluted                                                                   |       | (0.31                                       | )          | (0.36 | ) |
|                                                                                               |       |                                        |       |   |   |
| Number of  weighted average shares - basic and diluted                                             |       | 41,610                                      |       | 41,610 |   |

 

**3. Going Concern / Liquidity**

The Company has experienced losses from continuingoperations during the last two fiscal years and has an accumulated deficit of$127,472 as of December 31, 2004. Cash used for continuing operations for theyear ended December 31, 2004 was $6,397 and cash flow from continuing operationsmay be negative throughout fiscal year 2005. At December 31, 2004, the Company’sprincipal source of liquidity is $742 of cash and cash equivalents and tradeaccounts receivable of $1,668. Such conditions raise substantial doubt that theCompany will be able to continue as a going concern for a reasonable period oftime. These operating results occurred while the Company was developing andattempting to commercialize and manufacture products from an entirely new andunique technology. This business plan required significant spending related tostart-up costs and capital expenditures. These factors have placed asignificant strain on the financial resources of the Company. The ultimatesuccess of the Company depends on its ability to continue reducing operatingcosts, generate higher revenue, and achieve positive cash flow from continuingoperations and profitability. The consolidated financial statements do notinclude any adjustments that might result from the outcome of the uncertainty.

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Capital requirements during the next 12 monthswill depend on numerous factors, including the success of existing products,the development of new applications for Liquidmetal alloys, and the resourcesdevoted to develop and support Liquidmetal alloy products. However, the Companyanticipates capital expenditures in the next 12 months will be less than $0.5million. The Company expects to continue to devote limited capital to ourresearch and development activities, to further develop and strengthen ourmanufacturing capabilities, and for working capital and other general corporatepurposes.

Our cash flow projections from operations and,consequently, future cash needs are subject to uncertainty. If our availablefunds and cash generated from operations are insufficient to satisfy ourliquidity requirements, we may need to raise additional capital to fund ouroperations and capital expenditure requirements. We cannot be certain thatadditional capital, whether through selling additional debt or equitysecurities or obtaining a line of credit or other loan, will be available to usor, if available, will be on terms acceptable to us. If we issue additionalsecurities to raise funds, these securities may have rights, preferences, orprivileges senior to those of the rights of our common stock and ourstockholders may experience additional dilution.

**4. Summary of SignificantAccounting Policies**

*Principles of Consolidation.*Theconsolidated financial statements include the accounts of LiquidmetalTechnologies, Inc. and its wholly-owned subsidiaries, Liquidmetal Korea Co.,Ltd. (“LMT Korea”), located in South Korea, Chusik Hoesa Dongyang Yudoro (“Dongyang”),now accounted for as a discontinued operations, and Liquidmetal Golf and itssubsidiaries, which included the retail golf segment, now accounted for as adiscontinued operations. The Company acquired its 51% interest in Dongyang in2002. The aggregate purchase price was $333 in cash. As of March 2004, theCompany divested of its 51% ownership in Dongyang to the minority shareholder. In June 2004, the Company sold assets andliability of its Taesung equipment manufacturing division in Korea to athird party. Accordingly, the results of Dongyang and Taesung’s operations havebeen reclassified in the consolidated financial statements as discontinuedoperations (see Note 18). Previously, the results of Donyang and Taesung’soperations have been included in the consolidated financial statements from theacquisition date. All intercompany balances and transactions have beeneliminated. A minority interest in Liquidmetal Golf is included in theconsolidated financial statements as a component of the loss from operations ofthe discontinued retail golf segment (see Note 18). Effective in 2003,management closed the Japan operations and the Seoul office, which did notresult in a significant impact on the financial position or results ofoperations for any of the periods presented. Also, effective in December 2003,management closed the Tampa office (see Note 13). InAugust 2004, the Company established a post-processing plant in the city ofWeihai in Shandong province of China under Weihai Liquidmetal Company Limited,which is 100 percent owned by Liquidmetal Korea, to facilitate our bulk alloymanufacturing business.

*Sales of Stock by Subsidiaries.*Gainson sales of stock by Liquidmetal Golf are recognized as components of theCompany’s shareholders’ equity (deficiency).

*Revenue Recognition.*Revenue isrecognized pursuant to applicable accounting standards including Securities andExchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101 (SAB101), *“Revenue Recognition in FinancialStatements”*, and *SAB 104, RevenueRecognition*. SAB 101 as amended and SAB 104 summarize certain pointsof the SEC staff’s views in applying generally accepted accounting principlesto revenue recognition in financial statements and provides guidance on revenuerecognition issues in the absence of authoritative literature addressing aspecific arrangement or a specific industry. The Company’s revenue recognitionpolicy complies with the requirements of SAB 101 and SAB 104. Revenue isrecognized at the time the Company ships its products, as this is when titlepasses to the customer and all other incidences of a sale have occurred.Revenue is deferred and included in liabilities when the Company receives cashin advance for services not yet performed or goods not yet delivered. Revenuefrom research and development contracts is recognized under the percentage ofcompletion method.

*Cash and Cash Equivalents.*The Companyconsiders all highly liquid investments with maturity dates of three months orless when purchased to be cash equivalents. The Company limits the amount ofcredit exposure to each individual financial institution and places itstemporary cash into investments of high credit quality. There are nosignificant concentrations of credit risk to the Company associated with cashand cash equivalents.

*Restricted Cash.* The Companyconsiders all cash and cash equivalents held under restrictive accounts asrestricted cash.

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*Marketable Securities.*The Companyfollows Statement of Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*, and classifies all of its investment securities asavailable -for-sale. Available-for-sale securities are carried at fair value,with the unrealized gains and losses reported in Shareholders’ Equity(Deficiency) under the caption “Accumulated Other Comprehensive Income.”

*Trade Accounts Receivables.*The Companygrants credit to its customers generally in the form of short-term tradeaccounts receivable. The creditworthiness of customers is evaluated prior tothe sale of inventory. As of December 31, 2004, two customers represented 30%,or $497, of the total outstanding trade accounts receivable. Two customersrepresent 95%, or $3,540, of total outstanding trade accounts receivable as ofDecember 31, 2003.

The allowance for doubtful accounts reflectsmanagement’s best estimate of probable losses inherent in the trade accountsreceivable. Management primarily determines the allowance based on theaging of accounts receivable balances, historical write-off experience,customer concentrations, customer creditworthiness and current industry andeconomic trends. The Company’s provisions for uncollectible receivablesare included in selling, general and administrative expense in the accompanyingconsolidated statements of operations and comprehensive loss.

*Inventories.*Inventoriesare accounted for using the moving average basis and reported at the lower ofcost or market. Inventories consist of raw materials, work in process, andfinished goods. The Company records write-offs for inventory obsolescence whenit is deemed that there is impairment of the value of the inventories on hand.

*Property, Plant and Equipment.*Property,plant and equipment are stated at cost less accumulated depreciation andamortization. Additions and major renewals are capitalized. Repairs andmaintenance are charged to expense as incurred. Upon disposal, the related costand accumulated depreciation are removed from the accounts, with the resultinggain or loss included in operating income. Depreciation is provided principallyon the straight-line method over the estimated useful lives of the assets, whichrange from two to twenty years.

Leased property meeting certain criteria iscapitalized and the present value of the related lease payments is recorded asa liability. Amortization of capitalized leased assets is provided on thestraight-line method over the estimated useful lives of the assets, which isfive years.

*Intangible Assets.*Intangibleassets consist of the costs incurred to purchase patent rights and costsincurred to internally develop patents and trademarks. Intangible assets arereported net of accumulated amortization. Patents and trademarks are amortizedusing the straight-line method over a period based on their contractual livesranging from eleven to seventeen years.

*Goodwill.*Beginning January 1, 2002, the Company adopted Statementof Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*(See “NewAccounting Pronouncements”). According to this statement, goodwill and otherintangible assets are no longer subject to amortization, but instead must bereviewed annually for impairment by applying a fair value-based test.

*Impairment of Long-livedAssets.*The Company reviews long-lived assets to be held and used inoperations for impairment whenever events or changes in circumstances indicatethat the carrying value of an asset may be impaired. An impairment loss isrecognized when the estimated fair value of the assets is less than thecarrying value of the assets. During 2003, the Company recognized an impairmentof long-lived assets in the amount of $2,684 (see Note 8). There were no suchimpairment losses in 2004.

*Fair Value of FinancialInstruments.*The estimated fair value of amountsreported in the consolidated financial statements have been determined usingavailable market information and valuation methodologies, as applicable. Thecarrying amount of cash and cash equivalents, accounts receivable, accountspayable, and all other current assets and liabilities approximate their fairvalue because of their short term maturities at December 31, 2004 and 2003,unless otherwise stated. The fair value of non-current assets and liabilitiesapproximate their carrying value unless otherwise stated. The fair value of theCompany’s long-term debt is based on interest rates that would be available tothe Company for the issuance of debt with similar terms.

*Research and DevelopmentExpenses.*Research and development expensesrepresent salaries, related benefits expense, expenses incurred for the designand testing of new processing methods and other expenses related to theresearch and development of Liquidmetal alloys. Development costs incurred inresearch and development activities are expensed as incurred.

*Advertising and PromotionExpenses.*Advertising and promotion expenses areexpensed when incurred. Advertising and promotion expenses were $239, $136, and$127 for the years ended December 31, 2004, 2003 and 2002, respectively.

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*Debt Discount Amortization.*Debtdiscounts for notes payable are amortized to interest expense, using a methodthat approximates the interest method over the term of the related debtinstruments.

*Stock-Based Compensation.*The Companyapplies Accounting Principles Board (“APB”) Opinion No. 25 for options when theexercise price of options granted to employees is less than the fair value ofthe underlying stock on the date of grant. The Company applies Statement ofFinancial Accounting Standards (“SFAS”) No. 123 for options granted tonon-employees who perform services for the Company.

Had the Company determined employee stock-basedcompensation cost based on the fair value at the grant date for stock optionsconsistent with the method of SFAS No. 123, the Company’s net loss and basicand diluted net loss per share would have been as follows:

|                                                                                                                      | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2004**                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                           | ** ** | **(Restated)**                                                | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                                                                                                 |       |                                                          |       |   |   |   |   |
| Net loss from  Continuing Operations:                                                                                |       |                                                          |       |   |   |   |   |
| As reported                                                                                                          |       | $                                                             | (14,136    | ) | $ | (32,768 | ) | (21,095 | ) |
| Add: stock-based employee compensation expense included  in reported net loss, net of related tax effects            |       | 276                                                           |       | 123 |   | 2,203 |   |
| Deduct: total stock-based employee compensation  expense determined under the fair value based method for all awards |       | (4,201                                                        | )          | (5,427 | ) | (7,664 | ) |
| Proforma net loss from continuing operations                                                                         |       | $                                                             | (18,061    | ) | $ | (38,072 | ) | $ | (26,556 | ) |
|                                                                                                                 |       |                                                          |       |   |   |   |   |
| Basic and  diluted net loss per share:                                                                               |       |                                                          |       |   |   |   |   |
| As reported                                                                                                          |       | $                                                             | (0.34      | ) | (0.79 | ) | (0.54 | ) |
| Proforma                                                                                                             |       | (0.43                                                         | )          | (0.92 | ) | (0.69 | ) |
|                                                                                                                      |            |                                                               |            |  |  |  |  |  |  |  |

* *

*Income Taxes.*Income taxesare provided under the asset and liability method as required by SFASNo. 109, *Accounting for Income Taxes*.Under this method, deferred income taxes are recognized for the taxconsequences of “temporary differences” by applying enacted statutory tax ratesapplicable to future years to differences between the financial statementcarrying amounts and the tax basis of existing assets and liabilities. Theeffect of a tax rate change on deferred taxes is recognized in operations inthe period that the change in the rate is enacted. Valuation allowances areestablished when necessary to reduce net deferred tax assets to the amountexpected to be realized.

*Translationof Foreign Currency.*Upon consolidation of the Company’sforeign subsidiaries into the Company’s consolidated financial statements, anybalances with the subsidiaries denominated in the foreign currency aretranslated at the exchange rate at year end. The financial statements of LMTKorea have been translated based upon Korean Won as the functional currency.LMT Singapore’s and LMT Korea’s assets and liabilities were translated usingthe exchange rate at year end and income and expense items were translated atthe average exchange rate for the year. The resulting translation adjustmentwas included in other comprehensive income (loss).

The Companyapplies *FASB No. 52, Foreign CurrencyTranslation*, for translating foreign currency into US dollars inour consolidation of the financial statements. Due to our restatement of2002 financial statements, certain footnote disclosures and previously reportedfinancial statements were adjusted to conform to retroactive applications ofFASB No. 52. These adjustments did not have a material impact in thefinancial statements. See Note 2 in the notes to consolidated financialstatements in the fiscal 2003 annual report on Form 10-K filed on November 10, 2004,which reflects the restatements of prior year transactions.

*Earnings Per Share.*Basicearnings per share (“EPS”) is computed by dividing earnings(losses) attributable to common shareholders by the weighted averagenumber of common shares outstanding for the periods. Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock.

*Use of Estimates.*Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reported periods. Actual results could differ from those estimates.These management estimates are primarily related to impairment of long-livedassets, inventory valuation, product warranty, and the allowance for bad debtaccount balances.

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*Reclassifications.*Certainamounts from prior years have been reclassified to conform to the current year’spresentation.

*New Accounting Pronouncements.*

In December 2003, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition.” SAB 104 supersedes SAB 101, “Revenue Recognition in FinancialStatements.” SAB 104’s primary purpose is to rescind accounting guidancecontained in SAB 101 related to multiple element revenue arrangements,superseded as a result of the issuance of EITF 00-21, “Accounting for RevenueArrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds theSEC’s Revenue Recognition in Financial Statements Frequently Asked Questionsand Answers (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic13, Revenue Recognition. Selected portions of the FAQ have been incorporatedinto SAB 104. While the wording of SAB 104 has changed to reflect the issuanceof EITF 00-21, the revenue recognition principles of SAB 101 remain largelyunchanged by the issuance of SAB 104, which was effective upon issuance. Theadoption of SAB 104 did not impact the consolidated financial statements.

In March 2004, the FASB approved the consensusreached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments.”The objective of this Issue is to provide guidance for identifying impaired investments.EITF 03-1 also provides new disclosure requirements for investments that aredeemed to be temporarily impaired. In September 2004, the FASB issued a FASBStaff Position (FSP) EITF 03-1-1 that delays the effective date of themeasurement and recognition guidance in EITF 03-1 until after furtherdeliberations by the FASB. The disclosure requirements are effective only forannual periods ending after June 15, 2004. The Company has evaluated the impactof the adoption of the disclosure requirements of EITF 03-1 and does notbelieve the impact will be significant to the Company’s overall results ofoperations or financial position. Once the FASB reaches a final decision on themeasurement and recognition provisions, the company will evaluate the impact ofthe adoption of EITF 03-1.

In November 2004, the FASB issued SFAS No. 151 “InventoryCosts, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement151 clarify that abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials (spoilage) should be recognized as current-periodcharges and require the allocation of fixed production overheads to inventorybased on the normal capacity of the production facilities. The guidance iseffective for inventory costs incurred during fiscal years beginning after June15, 2005. Earlier application is permitted for inventory costs incurred duringfiscal years beginning after November 23, 2004. The Company has evaluated theimpact of the adoption of SFAS 151, and does not believe the impact will besignificant to the Company’s overall results of operations or financialposition.

In December 2004, the FASB issued SFAS No.153, “Exchangesof Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting forNonmonetary Transactions.” The amendments made by Statement 153 are based onthe principle that exchanges of nonmonetary assets should be measured based onthe fair value of the assets exchanged. Further, the amendments eliminate thenarrow exception for nonmonetary exchanges of similar productive assets andreplace it with a broader exception for exchanges of nonmonetary assets that donot have commercial substance. Previously, Opinion 29 required that theaccounting for an exchange of a productive asset for a similar productive assetor an equivalent interest in the same or similar productive asset should bebased on the recorded amount of the asset relinquished. Opinion 29 provided anexception to its basic measurement principle (fair value) for exchanges ofsimilar productive assets. The Board believes that exception required that somenonmonetary exchanges, although commercially substantive, be recorded on acarryover basis. By focusing the exception on exchanges that lack commercialsubstance, the Board believes this Statement produces financial reporting thatmore faithfully represents the economics of the transactions. The Statement iseffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. Earlier application is permitted for nonmonetary assetexchanges occurring in fiscal periods beginning after the date of issuance. Theprovisions of this Statement shall be applied prospectively. The Company hasevaluated the impact of the adoption of SFAS 153, and does not believe theimpact will be significant to the Company’s overall results of operations orfinancial position.

In December 2004, the FASB issued SFAS No.123(revised 2004), “Share-Based Payment”. Statement 123(R) will provide investorsand other users of financial statements with more complete and neutralfinancial information by requiring that the compensation cost relating toshare-based payment transactions be recognized in financial statements. Thatcost will be measured based on the fair value of the equity or liability instrumentsissued. Statement 123(R) covers a wide range of share-based compensationarrangements including share options, restricted share plans, performance-basedawards, share appreciation rights, and employee share purchase plans. Statement123(R) replaces FASB Statement No. 123, Accounting for Stock-BasedCompensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued toEmployees. Statement 123, as originally issued in 1995, established aspreferable a fair-value-based method of accounting for share-based paymenttransactions with employees. However, that Statement permitted entities theoption of continuing to apply the guidance in Opinion 25, as long as thefootnotes to financial statements disclosed what net income would have been hadthe preferable fair-value-based method been used. Public entities (other thanthose filing as small business issuers) will be required to apply Statement123(R) as of the first interim or annual reporting period that begins afterJune 15, 2005. The Company has evaluated the impact of the adoption of SFAS123(R), and does not believe the impact will be significant to the Company’soverall results of operations or financial position.

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In December 2004 the Financial AccountingStandards Board issued two FASB Staff Positions—FSP FAS 109-1, *Application of FASB Statement 109 “Accounting forIncome Taxes” to the Tax Deduction on Qualified Production Activities Providedby the American Jobs Creation Act of 2004*, and FSP FAS 109-2 *Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004.*Neither of these affected the Company as it does not participate in the relatedactivities.

**5. Marketable Securities**

On July 29, 2002, the Company invested$2,000 in Growell Metal, Inc. (“Growell”), a metals processing company locatedin South Korea and publicly traded on South Korea’s KOSDAQ stock market. TheCompany acquired 891,100 shares (or approximately 5%) of Growell’soutstanding common stock in this transaction. During the fourth quarter of2002, Growell’s spin-off of its electronics division resulted in the creationof a new company named Growell Electronics, Inc. (“Growell Electronics”). As aresult of the spin-off, 30% of the Company’s 891,100 common shares of Growellwere exchanged for an equal number of shares in the common stock of GrowellElectronics. During the year ended December 31, 2002, the Company sold itsshares in Growell Electronics for approximately $1,432, which was based on themarket price of the stock on the KOSDAQ stock market on the date of sale. Thissale resulted in a realized gain of $832. At December 31, 2002, the changein fair value of the remaining investment in Growell resulted in an unrealizedgain of $1,668, which is reported as other comprehensive income in theaccompanying consolidated financial statements. In April 2003, the Company soldthe stock owned in Growell, which resulted in a realized gain of $1,178. Areclassification adjustment of ($1,668) for net realized gains included in netloss is included in “Other comprehensive loss” on the accompanying Statement ofOperations and Comprehensive Loss for the year ended December 31, 2003.

**6. Trade accounts receivable**

Trade accounts receivables from continuingoperations were comprised of the following:

|                                        | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                   |       |                  |       |   |   |
| Trade accounts  receivable             |       | $                     | 1,776      |   | $ | 3,875 |   |
| Less: Allowance  for doubtful accounts |       | (108                  | )          | (127 | ) |
| Trade accounts  receivable, net        |       | $                     | 1,668      |   | $ | 3,748 |   |

** **

**7. Inventories**

Inventories were comprised of the following:

|                            | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                       |       |                  |       |   |   |
| Raw materials              |       | $                     | 1,688      |   | $ | 643 |   |
| Work in process            |       | 352                   |       | 284 |   |
| Finished goods             |       | 313                   |       | 442 |   |
| Machines held by  customer |       | —                |       | 691 |   |
| Total current inventories  |       | 2,353                 |       | 2,060 |   |
| Long-term  inventories     |       | 1,810                 |       | — |   |
| Total  inventories         |       | $                     | 4,163      |   | $ | 2,060 |   |

 

During 2003, the Companyexperienced significant operational difficulties as a result of problems anddelays encountered in manufacturing bulk amorphous parts. These issues led theCompany to begin assessing its long-term strategy. As a result of changes madeto the Company’s manufacturing objectives, the Company determined that it heldexcessive volumes of certain raw materials at December 31, 2003. Accordingly,the Company reduced the carrying value of raw materials held by its subsidiary,Liquidmetal Korea, by the amounts considered to be obsolete. The write-downsamounted to $1,004 and are included in “Cost of Sales” in the accompanyingStatement of Operations and Comprehensive Loss for the year ended December 31,2003. As of December 31, 2004, the write-downs included in “Cost of Sales” inthe accompanying Statement of Operations and Comprehensive Loss amounted to$605, which includes a $406 charge incurred during the fourth quarter of 2004related to certain hinge finished goods used in our customer’s cell phonemodels which were nearing its end of life.

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Machines held by customerrepresent machines conditionally sold to Growell in 2002 and 2003. Thesemachines are subject to put options whereby Growell has the right to requirethe Company to buy back the machines if certain conditions are not met. TheCompany recorded a write-down of $2,765 of raw material and machine inventoryassociated with the settlement of a dispute with Growell in December 2003 (seeNote 12). These amounts are included in “Cost of Sales” in the accompanyingStatement of Operations and Comprehensive Loss for the years ended December 31,2003 and 2002 respectively.

The Company maintains certain of its raw materialinventory in amounts excess of our operating cycle of one year due to thenature of our manufacturing process, production lead time, and therecyclability of our raw material. Therefore, the Company has determined andallocated $1,810 of raw material as long term inventory in 2004. Long terminventory was $0 in 2003 as our business strategy of selling Liquidmetal ingotsthat were included in raw material inventory were within our one year operatingcycle.

**8. Property, Plant and Equipment**

Property, plant and equipment consists of thefollowing:

|                                                 | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                            |       |                  |       |   |   |
| Machinery and  equipment                        |       | $                     | 12,600     |   | $ | 11,122 |   |
| Computer  equipment                             |       | 1,357                 |       | 1,355 |   |
| Office  equipment, furnishings and improvements |       | 1,910                 |       | 1,838 |   |
| Buildings                                       |       | 9,719                 |       | 8,503 |   |
| Total                                           |       | 25,586                |       | 22,818 |   |
| Accumulated  depreciation                       |       | (9,152                | )          | (5,075 | ) |
| Total property,  plant and equipment, net       |       | $                     | 16,434     |   | $ | 17,743 |   |

 

Depreciation expense is classified as follows:

|                                      | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                           | ** ** | ** **                                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                 |       |                                        |       |   |   |   |   |
| Cost of sales                        |       | $                                           | 2,623      |   | $ | 2,908 |   | $ | 403 |   |
| Selling, general  and administrative |       | 700                                         |       | 627 |   | 229 |   |
| Research and  development            |       | 8                                           |       | 730 |   | 799 |   |
| Total  depreciation expense          |       | $                                           | 3,331      |   | $ | 4,265 |   | $ | 1,431 |   |

 

During 2003, the Company experienced significantoperational difficulties as a result of problems and delays encountered inmanufacturing bulk amorphous parts. These events, along with the Company’shistory of operating or cash flow losses and uncertainty surrounding its futurecash flows, led the Company to evaluate its long-lived assets forrecoverability as of December 31, 2003. As a result, the Company determinedthat the carrying value of its manufacturing plant in Pyongtaek, South Koreaexceeded its fair value as of December 31, 2003 in the amount of $2,684. Thefair value of the building was based on the average of two independentappraisals of the building. This impairment loss is recorded in operatingexpenses as “Impairment of long lived assets” in the accompanying ConsolidatedStatement of Operations and Comprehensive Loss for the year ended December 31,2003.

**9. Idle Equipment**

Idle equipment consists of certain equipmentheld by the Company for use in expansion of bulk alloy parts manufacturing in2005. The equipment was presented as machines held by a customer in 2003 asinventory, which represented machines conditionally sold to Growell in 2002 and2003 (see Note 7). The equipment was included in inventory as of December 31,2003 as the Company was anticipating the sale of the equipment to a customer in2004. However, the anticipated sale did not take place during 2004. While theCompany is actively marketing the equipment for ultimate sale, the equipmentmay be used internally to meet future capacity requirements for expansion ofour business. As of December 31, 2004, the idled equipment includes a foreigncurrency translation gain of $235.

76

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**10. Other Intangible Assets**

Intangible assetsconsist of the following:

|                                       | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                  |       |                  |       |   |   |
| Purchased and  licensed patent rights |       | $                     | 555        |   | $ | 517 |   |
| Internally  developed patents         |       | 1,056                 |       | 824 |   |
| Trademarks                            |       | 85                    |       | 83 |   |
| Total                                 |       | 1,696                 |       | 1,424 |   |
| Accumulated  amortization             |       | (553                  | )          | (440 | ) |
| Total intangible  assets, net         |       | $                     | 1,143      |   | $ | 984 |   |

 

Amortization expense was $113, $100, and $82,for the years ended December 31, 2004, 2003, and 2002, respectively. Theestimated aggregate amortization expense for each of the five succeeding yearsis as follows:

| December 31, | ** ** | **Aggregate Amortization Expense** | ** ** |
|-------------------|------------|----------------------------------------------|------------|
| 2005              |       | $                                            | 107        |   |
| 2006              |       | 104                                          |       |
| 2007              |       | 102                                          |       |
| 2008              |       | 100                                          |       |
| 2009              |       | 98                                           |       |
|              |       |                                         |       |
|                   |            |                                              |            |  |

 

Accumulated Amortization for the years endedDecember 31, 2004 and 2003 is as follows:

|                                       | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                  |       |                  |       |   |   |
| Purchased and  licensed patent rights |       | $                     | (181       | ) | $ | (126 | ) |
| Internally  developed patents         |       | (352                  | )          | (302 | ) |
| Trademarks                            |       | (20                   | )          | (12 | ) |
| Total                                 |       | $                     | (553       | ) | $ | (440 | ) |

 

The weighted average amortization periods foreach of the years ended December 31, 2004, 2003, and 2002 is as follows:

|                                      | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Purchased and  licensed patent right |       | 17.0                  |       | 17.0 |   | 17.0 |   |
| Internally  developed patents        |       | 17.0                  |       | 17.0 |   | 17.0 |   |
| Trademarks                           |       | 10.0                  |       | 10.0 |   | 10.0 |   |
| Total weighted                       |       | 13.5                  |       | 13.5 |   | 13.5 |   |

 

Purchased patent rights represent the exclusiveright to commercialize the bulk amorphous alloy and other amorphous alloytechnology acquired from California Institute of Technology (“Caltech”), ashareholder, through a license agreement with Caltech (“License Agreement”).Under the License Agreement, the Company has the exclusive right to make, use,and sell products from all of Caltech’s inventions, proprietary information,know-how, and other technology relating to amorphous alloys in existence as ofSeptember 1, 2001. The Company also has an exclusive license to nineissued patents and four patent applications held by Caltech relating toamorphous alloy technology, as well as all related foreign counterpart patentsand patent applications. Of the patents currently issued to Caltech andlicensed by the Company, the earliest expiration date is 2013 and the latestexpiration date is 2021. Furthermore, the license agreement gives the Companythe exclusive right to make, use, and sell products from substantially allamorphous alloy technology that is developed in Professor William Johnson’sCaltech laboratory during the period September 1, 2001 throughAugust 31, 2005. All fees and other amounts payable by the Company forthese rights and licenses have been paid or accrued in full, and no furtherroyalties, license fees or other amounts will be payable in the future underthe License Agreements.

In addition to the patents and patentapplications under the License Agreement with Caltech, the Company hasinternally developed patents. Internally developed patents include legal andregistration costs incurred to obtain the respective patents. The Companycurrently holds various patents and numerous pending patent applications in theUnited States, as well as numerous foreign counterparts to these patentsoutside of the United States.

77

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**11. Goodwill**

During 2002, the Companycompleted an impairment review and did not recognize any impairment ofgoodwill. Accordingly, for 2002, the Company has forgone all related goodwillamortization expense. During 2003, Dongyang experienced net losses as a resultof a continuing economic downturn in markets for its machinery products. Theseevents, along with Dongyang’s operating loss, cash flow losses and uncertaintysurrounding its future cash flows, led the Company to evaluate its investmentfor recoverability as of December 31, 2003. As a result, the Company determinedthat the carrying value of its investment in Dongyang exceeded its fair valueas of December 31, 2003 in the amount of $184. This impairment loss is recordedin operating expenses as “Impairment of Goodwill” in the accompanying Statementof Operations and Comprehensive Loss for the year ended December 31, 2003.

In March 2004, theCompany sold its 51% investment in Dongyang to the 49% minority shareholder(see Note 18).

**12. Settlement Payable**

The settlement payablebalance consists of payables to Growell Metal Co., Ltd., a South Korean metalsprocessing company (“Growell”), as a result of a settlement agreement executedin January 2004. Under terms of the January 2004 settlement of the dispute overcertain sales transactions from 2003 and 2002 between Liquidmetal Korea andGrowell, Liquidmetal Korea agreed to pay Growell $4,895 to purchase Growell’sinvestment in alloy inventories, proprietary alloying equipment purchased fromLiquidmetal Korea, and supporting equipment purchased from other suppliers.Also as part of the settlement, Growell satisfied in full a balance of $2,058owed to Liquidmetal Korea for the die casting machines Growell purchased fromLiquidmetal Korea in the first quarter of 2003 as part of a license agreementto manufacture Liquidmetal alloy parts for the South Korean automotiveindustry. ****Theremaining settlement payable of $2,837 and trade accounts payable of $14 wereto be paid to Growell (in cash or stock at the Company’s discretion) byDecember 31, 2004. As of December 31, 2004, the settlement payable was not paidto Growell due to Growell’s breach of warranty on equipment repurchased byLiquidmetal Korea. The outstanding balance of payables to Growell from thesettlement as of December 31, 2004 was $3,246, net of foreign exchangetranslation loss. In January 2005, Growell was acquired by a third party andthe Company is currently in negotiations to settle this balance with the thirdparty.****

**TheCompany recorded a loss on the settlement at December 31, 2003 of $2,765 whichis included in “Cost of Sales” in the December 31, 2003 Consolidated Statementsof Operations and Comprehensive Loss. The loss on settlement reflects thewrite-down of the assets received in the settlement to their fair market value.The sale of the die casting machines to Growell was reflected in the firstquarter of 2004. Under the settlement agreement between the parties, theCompany and Growell granted to the other party (and the other party’saffiliates) a release of all known and unknown claims of any nature arisingbetween the parties through the date of settlement, as well as a releaseagainst future claims under agreements between the parties that were terminatedas a part of the settlement. The settlement agreement provided that allagreements of any nature between the parties and their respective affiliateswere terminated as of the date of settlement, with the exception of certainconfidentiality agreements, a Liquidmetal coatings distribution agreement, andfuture rights under the die casting agreement pursuant to which Growellpurchased the die casting machines and obtained a license to make auto partsfrom Liquidmetal alloys. The settlement agreement also includes**, as an accommodation to Growell,if the Company becomes aware of any prospectivecustomer that desires to purchase a proprietary Company casting machine at atime when Growell desires to sell any of its Liquidmetal die casting machines,then the Company will not sell such die casting machine to the prospectivecustomer unless the Company first directs the prospective customer to Growelland encourages the prospective customer to purchase the machine from Growell.

**13. Other Liabilities**

The other liabilities balance consists ofaccrued severance and operating lease costs associated with the Company’s costreduction measures for the Tampa, Florida executive offices, a capital leaseobligation for office furniture and furnishings and capital lease obligationsfor a SEM Microscope and a JSM Electron Microscope used in the laboratory inLake Forest, California.

|                                                    | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Accrued  severance                                 |       | $                     | 579        |   | $ | 1,683 |   |
| Accrued  operating lease costs                     |       | 596                   |       | 758 |   |
| Accrued capital  lease costs                       |       | 213                   |       | 348 |   |
| Total                                              |       | 1,388                 |       | 2,789 |   |
|                                               |       |                  |       |   |   |
| Imputed interest                                   |       | (14                   | )          | (35 | ) |
| Total                                              |       | 1,374                 |       | 2,754 |   |
| Less current  portion                              |       | (1,032                | )          | (1,940 | ) |
| Other long term  liabilities, less current portion |       | $                     | 342        |   | $ | 814 |   |

 

78

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During 2003, the Companyinitiated activities to substantially reduce the number of employees andconsolidate manufacturing and administrative facilities to improve operationaleffectiveness and efficiency and reduce expenses. During the year endedDecember 31, 2003, there was a total of 225 employees terminated. The totalamount of severance granted to the terminated employees is $2,718 which isincluded in Cost of Sales in the amount of $199, Selling, general andadministrative in the amount of $2,253, and Research and Development in theamount of $266 in the accompanying Consolidated Statement of Operations for theyear ended December 31, 2003. The amount of severance paid was $1,104, and$1,035 as of December 31, 2004 and 2003, respectively. The remaining severanceowed to the terminated employees is $579 and $1,683 as of December 31, 2004 and2003, respectively. The total severance granted to terminated employees of$2,718 is separated into the following reportable segments as of December 31,2003: Coatings at $75 and Bulk alloy at $2,643. The categories of employeesthat were eliminated include the following: Product management positions atvarious levels, including Vice President; entry level technicians; accountingand finance positions from entry level through executive; marketing mid tosenior level positions; engineering mid to senior levels positions; informationtechnology support; administrative, legal and executive support; seniorinternal legal counsel; human resources and senior executives. Also, there areother relocation expenses associated with relocating the Tampa, Florida officeto Lake Forest, California totaling $759, which includes the accrual of allremaining facility and telecommunication lease payments for the Tampa, Floridaoffice. Total liability accrued from the relocation and terminations in 2003,including the severance and lease accruals, were $1,175 and $2,441 as ofDecember 31, 2004 and 2003, respectively. The Company has substantiallyconcluded all cost reduction and restructuring activities as of March 31, 2004.The current portion of the 2003 termination and relocation liability is $909and the long-term portion of the liability is $266 at December 31, 2004. AtDecember 31, 2003, the current portion of the 2003 termination and relocationliability was $1,826 and the long-term portion of the liability was $615.

All leases with an initial term greater than oneyear are accounted for under SFAS No. 13 *Accountingfor Leases.*These leases are classified as either capital leases oroperating leases, as appropriate. Assets under capital leases are capitalizedusing interest rates appropriate at the inception of each lease. At December31, 2004, the cost recorded for the office furniture and furnishings, the SEMMicroscope and the JSM 6360 Electron Microscope under the capital lease was$107, $47 and $289, respectively, and the accumulated amortization was $57, $22and $89, respectively. At December 31, 2003, the cost recorded for theoffice furniture and furnishings, the SEM Microscope and the JSM 6360 ElectronMicroscope under the capital lease was $107, $47 and $289, respectively and theaccumulated amortization was $36, $17 and $31, respectively. Future minimumlease payments for the above assets under capital leases during subsequent yearsare as follows.

|                                                   | ** ** | **Minimum**  | ** ** |
|---------------------------------------------------|------------|--------------|------------|
| **December 31,**                             | ** ** | **Payments** | ** ** |
|                                              |       |         |       |
| 2005                                              |       | $            | 134        |   |
| 2006                                              |       | 71           |       |
| 2007                                              |       | 7            |       |
| Total                                             |       | 212          |       |
| Imputed interest                                  |       | (14          | )          |
| Total                                             |       | 198          |       |
| Less current  portion                             |       | (123         | )          |
| Capital lease  obligation, net of current portion |       | $            | 75         |   |

** **

**14. Product Warranty**

Management estimates product warranties as apercentage of bulk alloy product revenues. During the years endedDecember 31, 2003 and 2004, the Company’s product warranty accrual balancehad the following activity:

| Balance, December 31, 2002  |   | $    | 237    |   |
|-----------------------------|--------|------|--------|--------|
| Expense accrual             |   | (297 | )      |
| Warranty charges            |   | 363  |   |
| Balance,  December 31, 2003 |   | $    | 303    |   |
| Expense accrual             |   | 288  |   |
| Warranty charges            |   | (72  | )      |
| Balance, December 31,  2004 |   | $    | 519    |   |

 

79

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The product warranty accrual balance wasincluded in accounts payable and accrued expenses at December 31, 2004 andDecember 31, 2003.

**15. Notes Payable**

Senior ConvertibleNote

On March 3, 2004, the Company issued $9.9million of 6.0% senior convertible notes due 2007 (the “March Notes”) to investorgroups in a transaction led by Michigan Venture Capital Co., Ltd, a SouthKorea-based institutional investment firm, and IndiGo Ventures LLC, a NewYork-based investment firm (the “Placement Agents”) that served as a financialadvisor to the Company for the transaction. The notes were collateralized bythe patents held by the Company and second priority mortgage interest in plantfacilities and certain equipment in South Korea. The notes were convertible atany time into common stock at a price of $3.00 per share. Investors in theprivate placement and the Placement Agents received warrants to purchase anaggregate amount of up to approximately 1.2 million shares of common stock,exercisable at $3.00 per share for varying periods but no later than 100 daysfollowing the effectiveness of a registration statement covering the resale ofshares issuable upon exercise of the warrants. In addition, the investors hadthe right to call for repayment of the notes prior to maturity at any timeafter the second anniversary of the closing of the transaction.

Pursuant to Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock,” EITF 00-27, “Applicationof Issue No. 98-5 to Certain Convertible Instruments,” and EITF 05-2 “TheMeaning of ‘Conventional Convertible Debt Instrument’ in EITF Issue No. 00-19,”the original fair value of the embedded conversion feature of $7,595 have beenrecorded as conversion feature liabilities as the debt is considerednon-conventional convertible debt. The original fair value was computed usingthe Black-Scholes model under the following assumptions: (1) expected life of 3years; (2) volatility of 82%; (3) risk free interest of 2.15% and dividend rateof 0%. The fair value of the conversion feature on the date of issuance hasbeen recorded as debt discount to be amortized over the life the debt.

Pursuant to EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the original fair value of the 1.2 million warrants of$1,302 has been recorded as warrant liabilities as the shares issuable underthe warrants have not been registered. The original fair value was computedusing the Black-Scholes pricing model under the following assumptions: (1)expected life of 3 years; (2) volatility of 82%, (3) risk free interest of0.95% and dividend rate of 0%.

In March 2004, the original fair value of theembedded conversion feature of $7,595 and the original fair value of the 0.6million warrants issued to investors of $584, and the original fair value of0.6 million warrants issued to Placement Agents of $718 were recorded asdiscounts of the convertible note. In addition, $581 direct costs incurredrelating to issuance of the convertible note were recorded as debt issuancecost in other assets.

From June through August 2004, the Companyredeemed $4,465 of the outstanding note balance in cash. The redemptionresulted in a write down of debt issuance costs and debt discount of $3,571 tointerest expense and a reduction in conversion feature liabilities of $914 fromcancellation of the embedded conversion feature of the redeemed notes toadditional paid in capital during the year ended December 31, 2004. Further,500,000 of warrants originally issued to a financial advisor for thetransaction expired during June 2004 and 163,748 of unexercised warrantsoriginally issued to investors were cancelled as a result of the Company’sredemption of the note balances during the year ended December 31, 2004. The663,748 total expired and canceled warrants immediately prior to the expirationand cancellation resulted in a reduction of warrant liability of $7 and $279 toadditional paid in capital and change in value of warrants, respectively,during the year ended December 31, 2004.

OnAugust 19, 2004, the Company completed a private exchange offer for its March Noteswith the remaining holders after the redemption. Under terms of the exchangeoffer, approximately $5.5 million in aggregate principal amount of the MarchNotes have been exchanged for an aggregate of (i) $2.75 million of 6% SeniorSecured Notes Due 2007 (the “Long-Term Notes”) and (ii) $2.75 million of 10%Senior Secured Notes Due 2005 (the “Short-Term Notes”), collectively referredto as “Exchange Notes”. The Exchange Notes are collateralized by certainpatents owned by the Company and second priority mortgage interest in plantfacilities and certain equipment at our South Korea plant. The Short-Term Noteshave a maturity date of July 29, 2005, and a conversion price of $2.00 pershare (compared to a conversion price of $3.00 per share under the MarchNotes). The Long-Term Notes have a maturity date of July 29, 2007, and aconversion price of $1.00 per share. Further, the exchange notes areconvertible into Common Stock, at the option of the Company, if at any timeafter the issuance of the notes, the closing per share price of the CommonStock exceeds $4.00 (as adjusted for stock splits, reverse splits, stockdividends, and recapitalizations) for 30 consecutive trading days, and furtherprovided that there has been effective registration during such period. Holdersof the Long-Term Notes also have the right to call for repayment of theLong-Term Notes prior to maturity at any time after the second anniversary ofthe closing of the exchange offer.

80

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A total of 563,151 warrants to purchase ourcommon stock at an exercise price of $3.00 per share—all of which werepreviously issued in connection with the purchase of the March Notes—have beenamended to provide for an extended expiration date of March 1, 2006.

The exchange offer was treated as anextinguishment of the March Notes in accordance with Emerging Issues Task ForceNo. 96-19, “Debtors Accounting for a Modification or Exchange of DebtInstruments.” The exchange resulted in a $2,941 loss from extinguishment of theMarch Notes, which consisted of write down of $352 of deferred issue costs inother assets, $670 of debt discount, and an increase of $1,919 in conversionfeature liability as a result of the change in carrying value of exchangednotes.

In connection with the private exchange offer,the Company issued $250 of private placement notes to certain Placement Agentsas issuance costs. Of the $250 notes issued, $125 was paid in the form oflong-term notes which is due in 2007 with interest rate of 6% per annum(Long-Term Notes) and $125 was paid in the form of short-term notes which isdue in 2005 with interest rate of 10% per annum (Short-Term Notes). TheShort-Term and Long-Term Notes are convertible into Common Stock at $2.00 and$1.00, respectively, and have the same terms as the Exchange Notes issued tothe investors. Further, $143 of original fair value of the embedded conversionfeature of $250 notes issued to Placement Agents was recorded during August2004.

As of December 31, 2004, our gross outstandingloan balance totaled $5,709, un-amortized discounts for beneficial conversionfeature and warrants totaled $2,831 and other asset debt issuance costs totaled$183. Interest expense for the amortization of debt issuance cost and discounton note was $789 for the year ended December 31, 2004. As of December 31, 2004,the effective interest rates for the Short-Term and the Long-Term Notes were40% and 37%, respectively.

The Company was obligated, pursuant to aRegistration Rights Agreement, as amended by the Exchange Notes, between theCompany, the Placement Agents and the note holders to file a registrationstatement with the Securities and Exchange Commission (“SEC”) to register theshares of Common Stock issuable upon conversion of the notes payable and therelated warrants within 90 days following the effective closing date of theexchange notes (July 29, 2004), and to use best efforts to cause suchregistration statement to become effective within 60 days following the SEC’sfirst written comments on the registration statement. Further, if the Companyis not in compliance with the registration or listing requirements, the holdershave rights to late registration payments equal to 2 percent of the purchaseprice paid for the unconverted notes for the first 30 business days of lateregistration, and 1 percent for each 30 business days thereafter, but no morethan 10 percent of the purchase price of the unconverted note balance. The$5,709 balance of the note and un-amortized discounts for beneficial conversionfeature and warrants of $2,831 is presented as short-term liability as ofDecember 31, 2004 as the note holders have the right to call for payment ondemand as the registration statement has not been filed in accordance with theamended Registration Rights Agreement. As of the filing of this report, the Companyhas not received any demands for payment from the note holders.

Pursuant to Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” the Company is required to report a value of the conversion liabilityas a fair value and record the fluctuation to the fair value of the conversionfeature liability to current operations. The change in the fairvalue of the conversion feature liability resulted in a gain of $2,093 for theyear ended December 31, 2004. The fair value of conversion feature liabilityoutstanding at December 31, 2004 was $6,650. The fair value of conversionfeatures outstanding at December 31, 2004 was computed using the Black-Scholesmodel under the following assumptions: (1) 0.58~2.58 years; (2) volatility of124%, (3) risk free interest of 2.75%~3.25%and dividend rate of 0%.

Pursuant to EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the original relative fair values of the warrants of$1,302 have been recorded as other liability as the Company has not yet filedthe registration statement. In addition, the Company is required to report avalue of the warrant as a fair value and record the fluctuation to the fairvalue of the warrant liability to current operations. The change in therelative fair value of the warrants resulted in a net gain of $747 for the yearended December 31, 2004. The fair value of warrants outstanding at December 31,2004 of $550 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 1.17 years; (2) volatility of 124%, (3) riskfree interest of 3.08% and dividend rate of 0%.

81

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** **

The following is arepayment schedule of the Short-Term and Long-Term Notes based on maturity dateof the notes:

 

| Senior Convertible Notes | ** ** | ** **   | ** ** |
|------------------------------------|------------|--------------|------------|
| **Repayment Schedule**        | ** ** | **Minimum**  | ** ** |
| **December 31,**              | ** ** | **Payments** | ** ** |
| 2005                               |       | $            | 2,854      |   |
| 2006                               |       | —       |       |
| 2007                               |       | 2,855        |       |
| Total                              |       | $            | 5,709      |   |

 

Kookmin Note

On February 4, 2003, our Korean subsidiaryreceived 6,500,000 in South Korean Won, or approximately $5,488, under a loanfrom Kookmin Bank of South Korea. The loan bears interest at an annual rate of7.1%. In the event of delayed repayment, the interest increases to a maximum of21%, depending on the length of time the repayment is delayed. This loan iscollateralized by the plant facilities and certain equipment in South Korea.During the first eighteen months from the origination date, interest waspayable on a monthly basis. In October 2003, the Company paid $873 of principalat the request of Kookmin Bank due to the sale of machines that had been partof the collateral on the loan. Subsequent to October 31, 2003, Kookmin Bankrequested that the Company pay an additional $866 of principal by February 2004due to the Company’s current credit rating. The Company made two payments onthe requested additional loan pay down in November and December 2003 of $320and $205, respectively. The remaining payment of $341 was subsequently made inFebruary 2004. Beginning in September 2004, the Company is required to makeequal monthly installments of principal and interest to repay the remainingbalance of the loan over a 36-month period. For the year ended December 31,2004, principal payments made to Kookmin Bank totaled $296, which includes $422of foreign exchange translation loss.

The notes payable from Kookmin Loan as ofDecember 31, 2004 and 2003 and the activity for the year endedDecember 31, 2004 is shown in the following table:
| ** **                           | ** ** | **December 31,** | ** ** | ** **     | ** ** | ** **     | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------|------------|----------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2003**              | ** ** | **Borrowings** | ** ** | **Repayments** | ** ** | **2004**              | ** ** |
| Kookmin Loan  7.1%, principal $5,488 |       | $                     | 4,047      |           | $          | —         |       | $                     | (296       | ) | $ | 3,751 |   |
|                                      |            |                       |            |                |            |                |            |                       |            |  |  |  |  |

 

| Kookmin Repayment Schedule | ** ** | **Minimum**  | ** ** |
|--------------------------------------|------------|--------------|------------|
| **December 31,**                | ** ** | **Payments** | ** ** |
| 2005                                 |       | $            | 1,208      |   |
| 2006                                 |       | 1,208        |       |
| 2007                                 |       | 1,208        |       |
| 2008                                 |       | 127          |       |
| Total                                |       | $            | 3,751      |   |

 

ShinhanCredit Agreement

On August 23, 2003, the Company entered into ashort-term credit agreement with Shinhan Bank of South Korea in the amount of$1,000, which expired on May 30, 2004. The credit agreement is solely for theissuance of a letter of credit to vendors when the Company’s Korean subsidiaryimports raw materials and other goods into South Korea. The facility is securedby any raw material or goods financed through the credit facility. As ofDecember 31, 2003, there were no borrowings outstanding under this agreement,and the Company has not renewed the agreement as of December 31, 2004.

**16. Shareholders’ Equity(Deficiency)**

*Initial Public Offering.*Pursuant tothe Company’s Registration Statement (Registration No. 333-73716) onForm S-1, as amended, initially filed with the Securities and ExchangeCommission on November 20, 2001 and declared effective May 21, 2002,the Company closed an initial public offering of 5,000,000 registered shares ofcommon stock on May 28, 2002, plus an additional 229,000 shares onJune 10, 2002 pursuant to an over allotment option, at a price of $15.00per share (which sale is referred to herein as the “Offering”). The Offeringgenerated net cash proceeds for the Company during the second quarter 2002 ofapproximately $70,721, net of underwriting commissions of $5,490 and othertransaction fees of approximately $2,224.

82

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*Stock Split.*OnJune 29, 2001 the Company declared a ten-for-one stock split to its commonshareholders of record on June 29, 2001. This stock split was effected inthe form of a stock dividend. On April 4, 2002, the Company declared aone-for-3.1 reverse stock split to its common shareholders of record onApril 4, 2002. The consolidated financial statements and accompanyingnotes have been retroactively adjusted to reflect the effects of the split andreverse split.

*Reincorporation*.  On May 21, 2003, the Company completed areincorporation by transitioning from a California corporation to a Delawarecorporation. The reincorporation was effected though the merger of the formerCalifornia entity into its newly created wholly owned Delaware subsidiary. Inconnection with the reincorporation, the number of authorized common shares wasreduced from 200,000,000 to 100,000,000. Additionally, the par value of thecommon stock was changed from no par value common stock to common stock with apar value of $0.001 per share. For purposes of these notes, the term “Company”refers to the former California entity with respect to periods prior toMay 21, 2003.

*Preferred Stock.*As ofDecember 31, 2001, the Company received net proceeds of $5,577 from thesale of the preferred stock at a per share price of $12.40, as adjusted for therevised stock split. Upon the completion of the Offering, each share ofpreferred stock was converted automatically into one share of Class Acommon stock pursuant to the terms of the preferred stock issued.

 

83

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Warrants

As of December 31,2004, outstanding warrants to acquire shares of the Company’s common stock areas follows:

| Number of  Shares | ** ** | **Exercise  Price** | ** ** | **Expiration Date** | ** ** |
|------------------------|------------|---------------------|------------|--------------------------|------------|
| 645,162                |       | 4.65                |       | December 31, 2005   |       |
| 563,151                |       | 3.00                |       | March 1,  2006      |       |
| 1,208,313              |       |                |       |                     |       |

 

**17. Stock Compensation Plan**

Under the Company’s 1996 Stock Option Plan (“1996Company Plan”) the Company could grant to employees, directors or consultantsoptions to purchase up to 12,903,226 shares of common stock as adjusted for thereverse stock split. The stock options are exercisable over a period determinedby the Board of Directors or the Compensation Committee, but no longer than10 years.

On April 4, 2002, our shareholders and board ofdirectors adopted the 2002 Equity Incentive Plan (“2002 Equity Plan”). The 2002Equity Plan provides for the grant of stock options to officers, employees,consultants and directors of the Company and its subsidiaries. In addition, theplan permits the granting of stock appreciation rights with, or independentlyof, options, as well as stock bonuses and rights to purchase restricted stock.A total of 10,000,000 shares of our common stock may be granted under the 2002Equity Plan. As of December 31, 2004, there are 1,505,379 optionsoutstanding under the 2002 Equity Plan.

Prior to the approval of the 2002 Equity Plan, optionswere primarily granted under the Company’s 1996 Stock Option Plan (“1996Company Plan”). On April 4, 2002, our board of directors terminated the1996 Company Plan. The termination will not affect any outstanding optionsunder the 1996 Company Plan and all such options will continue to remainoutstanding and be governed by the Plan. No additional options may be grantedunder the 1996 Company Plan. As of December 31, 2004, there were 3,426,622options outstanding under the 1996 Company Plan.

On April 4, 2002, our shareholders and board ofdirectors adopted the 2002 Non-employee Director Stock Option Plan (“2002Director Plan”). Only non-employee directors are eligible for grants under the2002 Director Plan. A total of 1,000,000 shares of the Company’s Common Stockmay be granted under the 2002 Director Plan. There are 122,000 optionsoutstanding under the 2002 Director Plan as of December 31, 2004.

Additionally, the Company has 1,845,163 optionsoutstanding at December 31, 2004 which were granted outside the 1996 CompanyPlan, 2002 Equity Plan and 2002 Director Plan.

The Company applies APB Opinion No. 25 foroptions when the exercise price of options granted to employees is less thanthe fair value of the underlying stock on the date of grant. The Companyapplies SFAS No. 123 for options granted to non-employees who performservices for the Company. Stock-based compensation expense was recognized asfollows for the year ended December 31, 2004:

|                             | ** ** | **In accordance with** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **APB Opinion**             | ** ** | **SFAS** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **No. 25**                  | ** ** | **No. 123** | ** ** | **Total** | ** ** |
|                        |       |                             |       |   |   |   |   |
| General and  administrative |       | $                                | —     |   | $ | 240 |   | $ | 240 |   |
| Research and  development   |       | —                           |       | 36 |   | 36 |   |
| Total                       |       | $                                | —     |   | $ | 276 |   | $ | 276 |   |

 

Stock-based compensation expense was recognizedas follows for the year ended December 31, 2003:

|                             | ** ** | **In accordance with** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **APB Opinion**             | ** ** | **SFAS** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **No. 25**                  | ** ** | **No. 123** | ** ** | **Total** | ** ** |
|                        |       |                             |       |   |   |   |   |
| General and  administrative |       | $                                | 50         |   | $ | 5 |   | $ | 55 |   |
| Research and development    |       | 6                                |       | 62 |   | 68 |   |
| Total                       |       | $                                | 56         |   | $ | 67 |   | $ | 123 |   |

 

84

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Stock-based compensation expense was recognizedas follows for the year ended December 31, 2002 (as restated):

|                             | ** ** | **In accordance with** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **APB Opinion**             | ** ** | **SFAS** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **No. 25**                  | ** ** | **No. 123** | ** ** | **Total** | ** ** |
|                        |       |                             |       |   |   |   |   |
| General and  administrative |       | $                                | 50         |   | $ | 655 |   | $ | 705 |   |
| Research and  development   |       | —                           |       | 1,498 |   | 1,498 |   |
| Total                       |       | $                                | 50         |   | $ | 2,153 |   | $ | 2,203 |   |

 

The fair value of each option grant is estimated onthe date of the grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions used for grants for the years ended December 31,2004, 2003, and 2002, respectively: expected volatility of 100% for allperiods; dividend yield of 0.0% for all periods; expected option life ofapproximately 5 years; and  risk-freeinterest rate ranging from 2.57% and 6.38%, as appropriate.

The following table summarizes the Company’s stockoption transactions for the three years ended December 31, 2004:

|                                                | ** ** | ** **         | ** ** | **Weighted** | ** ** |
|------------------------------------------------|------------|--------------------|------------|--------------|------------|
| ** **                                     | ** ** | ** **         | ** ** | **Average**  | ** ** |
| ** **                                     | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| ** **                                     | ** ** | **Shares**         | ** ** | **Price**    | ** ** |
|                                           |       |               |       |         |       |
| Options outstanding at  December 31, 2001 |       | 8,053,155          |       | $            | 4.55       |   |
| Granted                                        |       | 643,202            |       | 13.71        |       |
| Exercised                                      |       | (299,873           | )          | 1.68         |       |
| Forfeited                                      |       | (79,297            | )          | 8.39         |       |
| Options outstanding at  December 31, 2002 |       | 8,317,187          |       | 5.33         |       |
| Granted                                        |       | 1,810,920          |       | 3.07         |       |
| Exercised                                      |       | (684,165           | )          | 1.68         |       |
| Forfeited                                      |       | (1,272,481         | )          | 5.43         |       |
| Options outstanding at  December 31, 2003 |       | 8,171,461          |       | 5.11         |       |
| Granted                                        |       | 695,843            |       | 1.82         |       |
| Exercised                                      |       | —             |       | —       |       |
| Forfeited                                      |       | (1,968,140         | )          | 4.54         |       |
| Options outstanding at December 31, 2004  |       | 6,899,164          |       | $            | 4.95       |   |

 

The weighted average fair value of options grantedduring the years ended December 31, 2004, 2003, and 2002 was $1.29, $2.41,and $10.42 respectively. There were 5,752,412 options with a weighted averageexercise price of $5.22 exercisable at December 31, 2004, 5,080,557options with a weighted average exercise price of $5.12 exercisable at December 31,2003 and 4,353,030 options with a weighted average exercise price of $4.36exercisable at December 31, 2002.

Included in the above tables are certain optionsgranted where their exercise prices were below the fair market value of thecommon stock at the grant date (measurement date). Such options totaled 358,582with a weighted average fair value of $11.22 were outstanding at December 31,2004; 1,327,314 with a weighted average fair value of $4.96 were outstanding atDecember 31, 2003; and 1,343,444 with a weighted average fair value of$5.01 were outstanding at December 31, 2002.

Thefollowing table summarizes the Company’s stock options outstanding andexercisable by ranges of option prices as of December 31, 2004:
| **Options Outstanding** | ** **                          | **Options Exercisable**    | ** ** |
|------------------------------|-------------------------------------|---------------------------------|------------|
| ** **                   | ** **                          | ** **                      | ** ** | **Weighted Average** | ** ** | **Weighted** | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| **Range of**            | ** **                          | **Number of options** | ** ** | **Remaining Contractual** | ** ** | **Average** | ** ** | **Options** | ** ** | **Average** | ** ** |
| **Exercise Prices**     | ** **                          | **Outstanding**                 | ** ** | **Life (Years)** | ** ** | **Exercise Price** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
|                         |                                |                            |       |   |   |   |   |   |   |   |   |   |
| $                            |   0.00 -   1.55 |                            | 380,359    |   | 9.5 |   | $ | 1.34 |   | 0 |   | $ | — |   |
|                         |   1.56 -   3.10 |                            | 1,713,024  |   | 6.9 |   | 2.52 |   | 1,202,026 |   | 2.54 |   |
|                         |   3.11 -   4.65 |                            | 1,853,357  |   | 6.2 |   | 4.61 |   | 1,766,485 |   | 4.65 |   |
|                         |   4.66 -   6.20 |                            | 2,592,810  |   | 6.4 |   | 6.20 |   | 2,559,853 |   | 6.20 |   |
|                         |   7.76 -   9.30 |                            | 11,507     |   | 7.9 |   | 8.80 |   | 4,602 |   | 8.80 |   |
|                         |   9.31 -  10.85           |                            | 12,613     |   | 6.4 |   | 9.83 |   | 4,613 |   | 9.87 |   |
|                         | 10.86 - 12.40                       |                            | 222,585    |   | 6.6 |   | 12.40 |   | 165,803 |   | 12.40 |   |
|                         | 13.95 - 15.50                       |                            | 112,909    |   | 6.9 |   | 15.00 |   | 49,030 |   | 15.00 |   |
| Total                        |                                | 6,899,164                       |       |   |   |   |   | 5,752,412 |   |   |   |
|                              |                                     |                                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

85

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**18. Discontinued Operations**

*Dongyang*

On June 28, 2002, the Company acquired a 51% interestin Chusik Hoesa Dongyang Yudoro (“Dongyang”). During 2003, Dongyang experienced net losses as a result of a continuingeconomic downturn in markets for its machinery products. These events, alongwith Dongyang’s operating loss, cash flow losses and uncertainty surroundingits future cash flows, led the Company to evaluate its investment for recoverabilityas of December 31, 2003. As a result, the Company determined that the carryingvalue of its investment in Dongyang exceeded its fair value as of December 31,2003 in the amount of $184. This impairment loss was recorded in operatingexpenses for the year ended December 31, 2003.

In March 2004, the Company sold its 51% investment inDongyang to the 49% minority shareholder. The selling price of the Company’s51% interest in Dongyang was $80, which was equal to the Company’s net carryingvalue for the 51% ownership held. Further, the Company agreed to pay Dongyang$155 for the purchase of a receivable balance from Growell. The transactionresulted in net payable to Dongyang of $75 and a loss of $46 from transfer ofthe Company’s interest in Donyang to the minority shareholder. The net payablebalance of $75 is to be paid in quarterly installments throughout 2004,with  $25 to be paid subsequent to 2004.The outstanding amount payable to Dongyang is $25 as of December 31, 2004 andis included in accounts payable and accrued liabilities.

The Company has adopted SFAS 144 and as a result the2003 balances have been restated in order to conform with the presentation of2004 financial statements. Dongyang is reported as part of the assets availablefor sale on the balance sheet for 2003.

As Donyang was sold prior to December 31, 2004,and there are no assets and liabilities of Dongyang as of December 31,2004. The following is a listing of the major classes of assets and liabilitiesof Dongyang as of December 31, 2003.

|                                            | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2003**              | ** ** |
| **Current Assets:**                        | ** ** | ** **            | ** ** |
| Cash and cash  equivalents                 |       | $                     | 1          |   |
| Accounts  receivable, net                  |       | 181                   |       |
| Inventories                                |       | 1,572                 |       |
| Prepaid expenses  and other current assets |       | 56                    |       |
| Total current  assets                      |       | 1,810                 |       |
| Property, plant  and equipment, net        |       | $                     | 58         |   |
| Other Assets                               |       | 29                    |       |
| Total assets                               |       | $                     | 1,897      |   |
| Current  Liabilities:                      |       |                  |       |
| Accounts payable  and accrued expenses     |       | $                     | 233        |   |
| Deferred revenue                           |       | 1,583                 |       |
| Total current  liabilities                 |       | $                     | 1,816      |   |

 

Summarized operating results of Dongyang’s discontinuedoperations are as follows.

|                                                                       | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                            | ** ** | **2004**                     | ** ** | **2003** | ** ** |
| ** **                                                            | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Revenue                                                               |       | $                            | 22         |   | $ | 1,019 |   |
| Loss from discontinued equipment manufacturing operations, net of tax |       | (96                          | )          | (268 | ) |
|                                                                       |            |                              |            |  |  |  |  |

 

*Taesung*

On June 14, 2004, the Company entered into anAsset Purchase Agreement whereby all the assets and liabilities of its Taesungequipment manufacturing division in Korea were sold to a third party for $345which is payable by the third party in four equal installments with the last installmentbeing due on June 30, 2005. The sale resulted in a loss of $184 and isincluded in the loss from discontinued equipment manufacturing operations as ofDecember 31, 2004. The loss from operations for the year ended December 31,2004 totaled $653 and is included in the loss from discontinued equipmentmanufacturing operations for the period.

86

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The Company has adopted SFAS 144 and as a result the2003 balances have been restated in order to conform with the presentation of2004 financial statements.

As Taesung was sold during the period ended June 30,2004, there are no assets and liabilities of Taesung as of December 31,2004. The following is a listing of the major classes of assets and liabilitiesof Taesung as of December 31, 2003.

|                                            | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2003**              | ** ** |
| **Current Assets:**                        | ** ** | ** **            | ** ** |
| Cash and cash  equivalents                 |       | $                     | 1          |   |
| Accounts  receivable, net                  |       | 256                   |       |
| Inventories                                |       | 477                   |       |
| Prepaid expenses  and other current assets |       | 113                   |       |
| Total current  assets                      |       | 847                   |       |
| Property, plant  and equipment, net        |       | $                     | 157        |   |
| Other Assets                               |       | 100                   |       |
| Total assets                               |       | $                     | 1,104      |   |
| Current  Liabilities:                      |       |                  |       |
| Accounts payable and  accrued expenses     |       | $                     | 358        |   |

** **

Summarized operating results of Taesung’s operationsare as follows.
|                                                                       | ** ** | **Year Ended  Ended December,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| ** **                                                            | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Revenue                                                               |       | $                               | 172        |   | $ | 2,177 |   |
| Loss from discontinued equipment manufacturing operations, net of tax |       | (653                            | )          | (696 | ) |
|                                                                       |            |                                 |            |  |  |  |  |

 

*Liquidmetal Golf*

 

On April 30, 2002, management terminated theoperations of the retail golf segment by means of liquidating substantially allof the retail golf assets and liabilities. The disposition of the retail golfoperations represents the disposal of a business segment. Accordingly, theaccompanying consolidated financial statements reflect the retail golf segmentas a discontinued operation for all periods presented.

For the year ended December 31, 2003, there was anet gain of $127 in the estimate of expenses associated with the disposal ofthe discontinued retail golf operations. The change resulted from reducing thenet liabilities of the discontinued operations to $0 as there are no additionalexpenditures associated with the discontinued retail golf operations. Therewere no assets associated with discontinued retail golf operations at December 31,2003 and 2004.

For the year ended December 31, 2002, the Companyhad a net gain change in estimate of $1,556 on the disposal of the discontinuedretail golf segment that was primarily due to a change in estimated value ofstock-based compensation. The change in estimated value of the stock-basedcompensation was a result of the cumulative decrease in the fair market valueof the common shares underlying the options granted to Paul Azinger of $2,129and a decrease of $250 in the estimate of fees related to the termination of theendorsement agreement. Additionally, there was a $98 gain due to the reversalof the accumulated foreign exchange gains after the liquidation of LiquidmetalGolf Europe Inc, and a decrease in the estimated warranty cost of $128. Thesegains were partially offset by other changes in the estimated loss on disposalthat included $530 of additional operating expenses, a $57 increase in theallowance for doubtful accounts and $462 primarily for the reduction of theestimated disposal value of work-in-process inventory and equipment.

87

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The results of operations for all periods presentedhave been restated for discontinued operations. The operating results of thediscontinued operations are as follows:

|                                                             | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                  | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net gain (loss) on  disposal                                | ** ** | **—**                                  | ** ** | **127** | ** ** | **1,556** | ** ** |
| Foreign exchange  translation gain (loss) during the period |       | —                                      |       | — |   | (98 | ) |
| Comprehensive gain  (loss)                                  |       | $                                           | —     |   | $ | 127 |   | $ | 1,458 |   |
|                                                             |            |                                             |            |  |  |  |  |  |  |  |

 

*Stock Compensation Plan.*Historically,Liquidmetal Golf granted its own options to employees, directors andconsultants under a stock option plan (“1997 Golf Plan”) approved byLiquidmetal Golf’s Board of Directors pursuant to which Liquidmetal Golf couldhave granted stock options exercisable over a period determined by the Board ofDirectors to purchase up to 500,000 shares of common stock of Liquidmetal Golf.In connection with the Company’s plan to discontinue the retail golfoperations, the Company does not intend to issue additional options under the1997 Golf Plan.

Liquidmetal Golf applies APB Opinion No. 25 andrelated interpretations in accounting for its plans. Accordingly, LiquidmetalGolf recognized compensation when the exercise price of the options was lessthan the fair value of the underlying stock on the date of grant. There was nocompensation expense recorded during the years ended December 31, 2004,2003, and 2002.

Had compensation cost been determined based on thefair value at the grant dates for awards under those plans consistent with themethod of SFAS No. 123, Liquidmetal Golf’s net loss would have beenas follows:

|             | ** ** | **Years ended December 31,** | ** ** |
|-------------|------------|---------------------------------------------|------------|
| ** **  | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|        |       |                                        |       |   |   |   |   |
| As reported |       | $                                           | —     |   | $ | 127 |   | $ | 1,556 |   |
| Pro forma   |       | $                                           | —     |   | $ | 15 |   | $ | 1,405 |   |

 

The fair value of each option grant is estimated onthe date of the grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions used for grants for the fiscal yearsended December 31, 2004, 2003, and 2002: expected volatility of 100% forall periods; dividend yield of 0.0% for all periods; expected option life ofapproximately 5 years; and a risk-free interest rate ranging from 5.2% to 6.2%,as appropriate.

The following table summarizes Liquidmetal Golf’sstock option transactions for the three years ended December 31, 2004:

|                                                | ** ** | ** **         | ** ** | **Weighted** | ** ** |
|------------------------------------------------|------------|--------------------|------------|--------------|------------|
| ** **                                     | ** ** | **Number of** | ** ** | **Average**  | ** ** |
| ** **                                     | ** ** | **Shares**         | ** ** | **Price**    | ** ** |
|                                           |       |               |       |         |       |
| Options outstanding at  December 31, 2001 |       | 253,000            |       | 5.71         |       |
| Granted                                        |       | —             |       | —       |       |
| Exercised                                      |       | —             |       | —       |       |
| Forfeited                                      |       | (137,500           | )          | 3.53         |       |
| Options outstanding at  December 31, 2002 |       | 115,500            |       | 8.31         |       |
| Granted                                        |       | —             |       | —       |       |
| Exercised                                      |       | (300               | )          | 16.00        |       |
| Forfeited                                      |       | (16,500            | )          | 5.73         |       |
| Options outstanding at  December 31, 2003 |       | 98,700             |       | 8.72         |       |
| Granted                                        |       | —             |       | —       |       |
| Exercised                                      |       | —             |       | —       |       |
| Forfeited                                      |       | (10,000            | )          | 8.00         |       |
| Options outstanding at December 31, 2004  |       | 88,700             |       | $            | 8.80       |   |
|                                                |            |                    |            |              |            |  |

 

There were 88,700 options with a weighted averageexercise price of $8.80 exercisable at December 31, 2004. There were98,700 options with a weighted average exercise price of $8.72 exercisable at December 31,2003 and 115,500 options with a weighted average exercise price of $8.31exercisable at December 31, 2002.

88

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Included in the above tables are certain optionsgranted where their exercise prices were below the fair market value of thecommon stock at the grant date. Such options totaled 10,000, 131,250 and131,250 with weighted average fair values of $5.74, $5.74 and $5.74 wereoutstanding at December 31, 2004, 2003 and 2002, respectively.

The following summarizes Liquidmetal Golf’s stockoptions outstanding and exercisable by the different exercise prices at December 31,2004:

|                         | ** **       | **Number of Options** | ** ** | **Weighted Average**   | ** ** | **Number of Options** | ** ** |
|-------------------------|------------------|---------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **              | ** **       | **Outstanding at**         | ** ** | **Remaining Contract** | ** ** | **Exercisable at**         | ** ** |
| **Exercise Price** | ** **       | **December 31, 2003** | ** ** | **Life (Years)**       | ** ** | **December 31, 2004** | ** ** |
| $                       |   0.50      |                            | 10,000     |                        | 2.33       |                            | 10,000     |   |
| $                       |   8.00 |                            | 63,000     |                        | 4.81       |                            | 63,000     |   |
| $                       | 16.00            |                            | 13,200     |                        | 3.33       |                            | 13,200     |   |
| $                       | 24.00            |                            | 2,500      |                        | 3.58       |                            | 2,500      |   |
|                    |             |                            | 88,700     |                        |       |                            | 88,700     |   |

 

**19. Income Taxes**

For all financial statement periods presented, therewas no provision for domestic income taxes. However, there was approximately $8and $123 of tax expense during the twelve months ended December 31, 2003and 2002, respectively, related to foreign taxes incurred by Dongyang, a 51%owned subsidiary, which is included as part of loss from discontinuedoperations on the consolidated statements of operations and comprehensive loss(see Note 18).

The Company has restated certain previously issuedfinancial statements for due to an error related to the Company’s accountingfor embedded convertible feature of senior convertible notes (see Note 2).

The significant components of deferred tax assets wereas follows:

|                                    | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                               |       |                                        |       |   |   |   |   |
| Non-employee stock  compensation   |       | $                                           | 109        |   | $ | 51 |   | $ | 103 |   |
| Allowance for bad debt             |       | 37                                          |       | 44 |   | 52 |   |
| Loss from discontinued  operations |       | —                                      |       | — |   | — |   |
| Loss carry forwards                |       | 32,087                                      |       | 27,202 |   | 24,175 |   |
| Other                              |       | 1,244                                       |       | 1,569 |   | 1,071 |   |
| Total deferred  tax asset          |       | 33,477                                      |       | 28,866 |   | 25,401 |   |
| Valuation  allowance               |       | (33,477                                     | )          | (28,866 | ) | (25,401 | ) |
| Total deferred tax  asset, net     |       | $                                           | —     |   | $ | — |   | $ | — |   |

 

The following tableaccounts for the differences between the actual tax provision and the amountsobtained by applying the statutory U.S. Federal income tax rate of 34% toincome (loss) before income taxes:

|                                           | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                      |       |                                        |       |   |   |   |   |
| Federal tax  expense                      |       | (34.00                                      | )%         | (34.00 | )% | (34.00 | )% |
| State tax  expense, net                   |       | (4.91                                       | )%         | (1.62 | )% | (3.40 | )% |
| Foreign income  not subject to income tax |       | 4.24                                        | %          | 24.16 | % | 13.36 | % |
| Other                                     |       | 0.68                                        | %          | 0.36 | % | 1.26 | % |
| Increase in  valuation allowance          |       | 33.99                                       | %          | 11.13 | % | 22.82 | % |
|                                      |       |                                        |       |   |   |   |   |
| Total tax provision                       |       | 0.0                                         | %          | 0.03 | % | 0.04 | % |

 

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As of December 31, 2004, the Company hadapproximately $88,000 of net operating loss (“NOL”) carry forwards for U.S.federal income tax purposes expiring in 2005 through 2024. In addition, theCompany has state NOL carryforwards of approximately $40,000 expiring in 2005through 2009. The Company and Liquidmetal Golf filed on a separate companybasis for federal income tax purposes. Accordingly, the federal NOLcarryforwards of one legal entity are not available to offset federal taxableincome of the other. As of December 31, 2004, Liquidmetal Technologies, Inc.had approximately $50,000 in federal NOL carryforwards, expiring in 2005through 2024 and approximately $17,000 in state NOL carryforwards, expiring in2005 through 2009. Liquidmetal Golf, Inc. had approximately $38,000 offederal NOL carryforwards, expiring in 2012 through 2023 and approximately$23,000 in state NOL carryforwards expiring in 2004 through 2008.

As of December 31, 2004, the Company hadapproximately $317 of Research & Development (“R&D”) creditcarryforwards for U.S. federal income tax purposes expiring in 2016 through2018. In addition, the Company has California R&D credit carryforwards ofapproximately $279, which do not expire under current California law.

Section 382 of the Internal Revenue Code (“IRC”)imposes limitations on the use of NOL’s and credits following changes inownership as defined in the IRC. The limitation could reduce the amount ofbenefits that would be available to offset future taxable income each year,starting with the year of an ownership change. The Company has not completedthe complex analysis required by the IRC to determine if an ownership changehas occurred.

The ability to realize the tax benefits associatedwith deferred tax assets, which includes benefits related to NOL’s, isprincipally dependent upon the Company’s ability to generate future taxable incomefrom operations. The Company has provided a full valuation allowance for itsnet deferred tax assets due to the Company’s net operating losses.

**20. Segment Reporting and Geographic Information**

SFAS No. 131,*Disclosures about Segments of an Enterprise and Related Information,*requirescompanies to provide certain information about their operating segments. In April 2002,the Company began classifying operations into two reportable segments:Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys. TheLiquidmetal alloy industrial coatings are used primarily as a protectivecoating for industrial machinery and equipment, such as drill pipe used by theoil drilling industry and boiler tubes used by coal burning power plants. BulkLiquidmetal alloys include market opportunities to manufacture and sell casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment. Theexpenses incurred by the bulk Liquidmetal alloy segment are manufacturing,research and development costs, and selling expenses associated withidentifying and developing market opportunities. Bulk Liquidmetal alloyproducts can be distinguished from Liquidmetal alloy coatings in that the bulkLiquidmetal alloy can have significant thickness, up to approximately one inch,which allows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.  Revenue and expenses associated with researchand development services are included in the bulk Liquidmetal alloy segment. Theaccounting policies of the reportable segments are the same as those describedin Note 4 above.

The Company has restated certain previously issuedfinancial statements for due to an error related to the Company’s accountingfor embedded convertible feature of senior convertible notes (see Note 2).

Summarized financial information concerning theCompany’s reportable segments is shown in the following tables:
| ** **                                                                            | ** ** | ** **   | ** ** | ** **          | ** ** | **Segment** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|-------------|------------|
| ** **                                                                            | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Totals**  | ** ** |
|                                                                                  | ** ** | ** **   | ** ** | ** **          | ** ** | ** **  | ** ** |
| Year ended  December 31, 2004:                                                   | ** ** | ** **   | ** ** | ** **          | ** ** | ** **  | ** ** |
| Revenue to  external customers                                                        |       | $            | 3,956      |                | $          | 13,473      |       | $ | 17,429 |   |
| Gross profit                                                                          |       | 1,807        |       | 3,454               |       | 5,261       |       |
| Total segment  income                                                                 |       | 1,227        |       | 2,330               |       | 3,557       |       |
| Total  identifiable assets at end of period                                           |       | 842          |       | 22,635              |       | 23,477      |       |
| Year ended  December 31, 2003:                                                   | ** ** | ** **   | ** ** | ** **          | ** ** | ** **  | ** ** |
| Revenue to  external customers                                                        |       | $            | 2,997      |                | $          | 10,661      |       | $ | 13,658 |   |
| Gross profit (loss)                                                                   |       | 1,466        |       | (5,970              | )          | (4,504      | )          |
| Total segment  income (loss)                                                          |       | 369          |       | (21,140             | )          | (20,771     | )          |
| Total  identifiable assets at end of period                                           |       | 959          |       | 23,832              |       | 24,791      |       |
| Year ended  December 31, 2002 (restated):                                        | ** ** | ** **   | ** ** | ** **          | ** ** | ** **  | ** ** |
| Revenue to  external customers                                                        |       | $            | 4,587      |                | $          | 4,551       |       | $ | 9,138 |   |
| Gross profit                                                                          |       | 2,171        |       | 1,311               |       | 3,482       |       |
| Income (loss)  before minority interest, interest expense and discontinued operations |       | 1,425        |       | (13,179             | )          | (11,754     | )          |
| Total identifiable  assets at end of period                                           |       | 1,969        |       | 29,441              |       | 31,410      |       |

 

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Reconciling information for the statements ofoperations between reportable segments and the Company’s consolidated totals isshown in the following table:
| ** **                                                                                                     | ** ** | **For the Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2004**                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                     | ** ** | **(Restated)**                                                | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Total segment income  (loss) before minority interest, interest expense and discontinued operations            |       | $                                                             | 3,557      |   | $ | (20,771 | ) | $ | (11,754 | ) |
| General and  administrative expenses, excluded                                                                 |       | (11,354                                                       | )          | (13,110 | ) | (9,688 | ) |
| Consolidated loss  before interest, other income, income taxes, minority interest and discontinued  operations |       | (7,797                                                        | )          | (33,881 | ) | (21,442 | ) |
| Loss from  extinguishments of debt                                                                             |       | (2,941                                                        | )          | — |   | — |   |
| Change in value  of warrants, gain                                                                             |       | 747                                                           |       | — |   | — |   |
| Change in value  of conversion feature, gain                                                                   |       | 2,093                                                         |       | — |   | — |   |
| Other income                                                                                                   |       | 302                                                           |       | — |   | — |   |
| Interest expense                                                                                               |       | (6,577                                                        | )          | (390 | ) | (1,109 | ) |
| Interest income                                                                                                |       | 37                                                            |       | 304 |   | 506 |   |
| Gain on sale of  marketable securities held-for-sale                                                           |       | —                                                        |       | 1,178 |   | 832 |   |
| Income taxes                                                                                                   |       | —                                                        |       | — |   | — |   |
| Minority  interest in loss of consolidated subsidiary                                                          |       | —                                                        |       | 21 |   | 118 |   |
| Gain (loss) from  discontinued operations, net                                                                 |       | (749                                                          | )          | (837 | ) | 1,639 |   |
| Consolidated net loss                                                                                          |       | $                                                             | (14,885    | ) | $ | (33,605 | ) | $ | (19,456 | ) |

 

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

Included in our bulk alloy revenue to externalcustomers are equipment sales from our Dongyang subsidiary and Taesungequipment division in Korea, both of which were divested in March and June 2004respectively. External revenue from our discontinued equipment manufacturingoperations includes $3.2 million and $0.2 million for the years ended December31, 2003 and 2004, respectively.

Reconciling information for the balance sheetsbetween reportable segments and the Company’s consolidated totals is shown inthe following table:
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| Total segment  assets                     |       | $                     | 23,477     |   | $ | 24,791 |   |
| Cash and cash equivalents                 |       | 742                   |       | 3,127 |   |
| Restricted cash                           |       | 754                   |       | — |   |
| Prepaid expenses and other current assets |       | 801                   |       | 322 |   |
| Other property, plant and equipment       |       | 975                   |       | 1,563 |   |
| Intangibles, net                          |       | 1,143                 |       | 984 |   |
| Other assets                              |       | 616                   |       | 65 |   |
| Total Consolidated  Assets                |       | $                     | 28,508     |   | $ | 30,852 |   |

 

Assets excluded from segments include assetsattributable to the Company’s corporate headquarters. The largest assetrepresents the Company’s intangible assets, consisting primarily of the Company’spatents and trademarks.

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Certain customers accounted for more than 10% ofrevenues from continuing operations as follows:

|                           | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(restated)** | ** ** |
|                      | ** ** | ** **                                 |       |   |   |   |   |
| Samsung                   |       | 5                                          | %          | 10 | % | 15 | % |
| Charm Tech                |       | 32                                         | %          | — |   | — |   |
| Pntel                     |       | 30                                         | %          | 2 | % | — |   |
| United States  Government |       | 10                                         | %          | 16 | % | 16 | % |
| Growell Metal             |       | 12                                         | %          | — |   | — |   |
| LLPG                      |       | —                                     |       | 12 | % | — |   |

 

The revenue related to the United StatesGovernment was earned under three defense-related research and developmentcontracts.

Revenues from sales to companies in the UnitedStates of America were $5,546 and $6,050 during the years ended December 31,2004 and 2003, respectively. The revenue related to the United States ofAmerica was earned under three defense-related research and developmentcontracts and sales of coatings products.

During the year ended December 31, 2004,the Company had revenue on sales to companies outside of the United States of$11,883 of which $9,545 represented sales to companies located in South Korea.During the year ended December 31, 2003, the Company had revenue on salesto companies outside of the United States of $7,608, of which $4,559represented sales to companies located in South Korea. During the year endedDecember 31, 2002, the Company did not generate significant sales tocompanies located outside of the United States.

Long-lived assets include net property, plant,and equipment and net intangible assets. The Company had long-lived assets of$1,594 and $2,547 located in the United States at December 31, 2004 and2003, respectively. The Company had long-lived assets of $15,422 and $16,395located in South Korea at December 31, 2004 and December 31, 2003,respectively. Of the assets located in South Korea at December 31, 2003, $215was from long-lived assets of our discontinued equipment manufacturingbusiness. Further, the Company has long lived assets of $47 at December 31,2004 located in China as a result of a new plant opened during August 2004 (seeNote 1).

**21. Income (Loss) Per Common Share**

Basic EPS is computed by dividing earnings(loss) attributable to common shareholders by the weighted average numberof common shares outstanding for the periods. Diluted EPS reflects thepotential dilution of securities that could share in the earnings. Areconciliation of the number of common shares used in calculation of basic anddiluted EPS is presented below:
| ** **                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Weighted average  basic shares   |       | 41,609,652                                  |       | 41,505,218 |   | 38,713,878 |   |
| Effect of  dilutive securities:  |       |                                        |       |   |   |   |   |
| Stock options                    |       | —                                      |       | — |   | — |   |
| Conversion of notes payable      |       | —                                      |       | — |   | — |   |
| Weighted average  diluted shares |       | 41,609,652                                  |       | 41,505,218 |   | 38,713,878 |   |

 

Options to purchase approximately 6,899,164shares of common stock at prices ranging from $1.18 to $15.00 per share wereoutstanding at December 31, 2004, but were not included in the computationof diluted EPS for the same period because the inclusion would have beenantidilutive. Options to purchase approximately 8,171,461 shares of commonstock at prices ranging from $1.16 to $15.50 per share were outstanding atDecember 31, 2003, but were not included in the computation of diluted EPSfor the same period because the inclusion would have been antidilutive. Optionsto purchase approximately 8,317,187 shares of common stock at prices rangingfrom $0.78 to $15.50 per share were outstanding at December 31, 2002, butwere not included in the computation of diluted EPS for the same period becausethe inclusion would have been antidilutive.

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Warrants to purchase 1,208,313 shares of commonstock between $3.00 and $4.65 per share were outstanding at December 31,2004 but were not included in the computation of diluted EPS for the sameperiod because the inclusion would have been antidilutive. Warrants to purchase645,162 shares of common stock at $4.65 per share were outstanding at December31, 2003 and December 31, 2002.

**22. Commitments andContingencies**

DuringSeptember 2004, as part of a security agreement to finance a certain insurancepolicy, the Company used certificates of deposits with maturities of less thanone year as collateral. The $754 held in certificates of deposits is presentedas restricted cash at December 31, 2004.

The Company is from time to time a party to certain legal proceedingsarising in the ordinary course of business. Although outcomes cannot bepredicted with certainty, the Company does not believe that any legalproceeding to which it is a party will have a material adverse effect on theCompany’s financial position, results of operations, and cash flows.

Liquidmetal Technologies and certain of its presentand former officers and directors were named as defendants in nine purportedclass action complaints filed in the United States District Courts for theMiddle District of Florida, Tampa Division, and the Central District ofCalifornia, Southern Division, alleging violations of Sections 11 and 15 of theSecurities Act of 1933 and Sections 10(b) and 20(a) of the Securities ExchangeAct of 1934 and Rule 10b-5 promulgated thereunder. In August 2004, fourcomplaints were consolidated in the United States District Court for the MiddleDistrict of Florida under the caption *Primavera Investors v.Liquidmetal Technologies, Inc., et al.*, Case No.8:04-CV-919-T-23EAJ. John Lee, Chris Cowley, Dwight Mamanteo, Scott Purcell andMark Rabold, were appointed co-lead plaintiffs (the “Lead Plaintiffs”). InSeptember 2004, the other five complaints filed in the Central District ofCalifornia were transferred to the Middle District of Florida for consolidationwith the *Primavera Investors* action. The Lead Plaintiffsserved their Consolidated Amended Class Action Complaint on January 12, 2005. The Amended Complaint alleges that theProspectus issued in connection with the Company’s initial public offering inMay 2002 contained material misrepresentations and omissions regarding theCompany’s historical financial condition and regarding a personal stocktransaction by the Company’s chief executive officer. The Lead Plaintiffsfurther generally allege that during the proposed Class Period of May 21, 2002,through May 13, 2004, the defendants engaged in improper revenue recognitionwith respect to certain of the Company’s business transactions, failed tomaintain adequate internal controls, and knowingly disclosed unrealistic butfavorable information about market demand for and commercial viability of theCompany’s products to artificially inflate the value of the Company’s stock. The Amended Complaint seeks unspecifiedcompensatory damages and other relief. Defendants’ motion to dismiss will be due on March 28, 2005. The Company intends to vigorously defendagainst the class action. The Company cannot currently predict the impact orresolution of this litigation or reasonably estimate a range of possible loss,which could be material.

In addition to the above, certain present and former officers anddirectors of Liquidmetal Technologies, as well as Liquidmetal Technologies as anominal defendant, have been named in three shareholder derivative actions. Twoshareholder derivative complaints were filed in California state court styled *Brian Clair, Derivatively on Behalf of Liquidmetal Technologies, Inc.v. John Kang, et al.*, Case No. 04CC00551, and *JosephDurgin Derivatively on Behalf of Liquidmetal Technologies, Inc. v. John Kang,et al.,* Case No.04CC00553, both commenced in the Superior Court of Orange County, California. Athird shareholder derivative complaint was filed in Florida federal courtstyled *Robert Story v. John Kang, et al.*, CaseNo. 8:04-CV-1587-T23TBM, commenced in the Middle District of Florida, TampaDivision. These shareholder derivative lawsuits allege that the defendantsbreached various fiduciary duties and otherwise violated state law basedprimarily upon the same underlying facts and circumstances as alleged in thefederal shareholder class action. The plaintiffs seek unspecified compensatorydamages, restitution and disgorgement of profits, equitable and/or injunctiverelief as permitted by law and other relief. The two shareholder derivative complaintsin California state court have been consolidated. Plaintiffs served aConsolidated Shareholder Derivative Complaint on October 12, 2004. Thedefendants served a Demurrer to the Consolidated Shareholder DerivativeComplaint on November 22, 2004, seeking dismissal of that complaint. At ahearing on February 10, 2005, the court sustained the demurrer, dismissing theConsolidated Shareholder Derivative Complaint but giving the plaintiffs 45 dayswithin which to amend the complaint. The amended complaint is due on March 28,2005. In the Florida derivative action, the Plaintiff filed a First AmendedShareholder Derivative Complaint on November 22, 2004. The Company’s Motion toDismiss was filed on December 20, 2004. Plaintiff’s Response and Objection tothe Motion to Dismiss was filed on February 4, 2005. The Company cannotanticipate when the Court will rule on the Motion to Dismiss. The Companyintends to vigorously defend against the derivative actions. We cannotcurrently predict the impact or resolution of this litigation or reasonablyestimate a range of possible loss, which could be material.

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In March 1996, theCompany entered into a distribution agreement whereby it granted to a thirdparty exclusive rights to market and sell golf products incorporatingLiquidmetal Technology to certain Japanese sporting equipment companies. Thethird party paid the Company a $1.0 million distribution fee as part of thisagreement, of which a portion was refundable according to a formula based onthe gross profit earned by the third party. The remaining unearned distributionfee of $830 has not been refunded as of December 31, 2004. On March 28, 2003,the distribution agreement was terminated and the Company entered into a newagreement to pay to the same third party a commission on the net sales price ofall Liquidmetal golf equipment that is shipped by the Company or its affiliatesto Japanese golf companies for sale into the Japanese end-market. Thiscommission will apply to golf equipment shipped by the Company or itsaffiliates during the period beginning on March 28, 2003 and ending on March28, 2006. If, by March 28, 2006, the Company has not paid $350 in commissionpayments, the balance between commission paid and $350 will be paid by April30, 2006, thereby guaranteeing the third party a $350 minimum payment duringthe term of the agreement. The Company will recognize the unearned distributionfee of $830 as revenue proportionately with the payment of commissions underthe new agreement. As of December 31, 2004, the unearned distribution feeremained unchanged at $830.

In August 2004, the Company entered into aconsulting agreement whereby the Company was to receive services from a thirdparty to improve the Company’s bulk alloy manufacturing process. The service isto be provided from 2004 through February 2006. The total amount of servicefees is $172, of which $15 was included in trade accounts payable as ofDecember 31, 2004.

***Operating Leases***

The Company leases its offices and warehousefacilities under various lease agreements, certain of which are subject toescalations based upon increases in specified operating expenses or increasesin the Consumer Price Index. Future minimum lease payments under non-cancelableoperating leases during subsequent years are as follows:

|                       | ** ** | **Minimum**  | ** ** |
|-----------------------|------------|--------------|------------|
| **December 31,** | ** ** | **Payments** | ** ** |
|                  |       |         |       |
| 2005                  |       | $            | 1,215      |   |
| 2006                  |       | 530          |       |
| 2007                  |       | 317          |       |
| 2008                  |       | 105          |       |
| 2009                  |       | 73           |       |
| Total                 |       | $            | 2,240      |   |

 

Rent expense was $479, $1,419, and $955 for theyears ended December 31, 2004, 2003, and 2002, respectively.

**23. 401(k) Savings Plan**

The Company has a tax-qualified employee savingsand retirement plan, or 401(k) plan, which covers all of its United States-based employees. Our Korean employees are covered under a government sponsoredpension program and do not participate in the U.S. based 401(k) program.

Under the U.S. based 401 (k) plan, participantsmay elect to reduce their current compensation, on a pre-tax basis, by up to15% of their taxable compensation or of the statutorily prescribed annuallimit, whichever is lower, and have the amount of the reduction contributed tothe 401(k) plan. The 401(k) plan permits the Company, in its sole discretion,to make additional employer contributions to the 401(k) plan. However, theCompany did not make employer contributions to the 401(k) plan during any ofthe periods presented in the accompanying consolidated financial statements.

**24. Related Party Transactions**

**In June2003, the Company entered into an exclusive, ten-year license agreement withLLPG, Inc. (“LLPG”), a corporation headed by a former director of the Company.Under the terms of the agreement, LLPG has the right to commercializeLiquidmetal alloys, particularly precious-metal based compositions, in jewelryand high-end luxury product markets. The Company, in turn, will receive royaltypayments over the life of the contract on all Liquidmetal products produced andsold by LLPG. In conjunction with its technology licensing contract, LLPGpurchased two proprietary Liquidmetal alloy melting machines and threeproprietary Liquidmetal alloy casting machines for a total purchase price of$2,000. At December 31, 2003, the Company had a remaining receivable balance of$500 due from LLPG, which was paid in full in March 2004.**

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TheCompany is a party to a license agreement with California Institute ofTechnology (“Caltech”) under which the Company exclusively licenses fromCaltech certain inventions and technology relating to amorphous alloys.Professor William Johnson, a member of the Company’s Board of Directors, is aprofessor at Caltech, and substantially all of the amorphous alloy technologylicensed to the Company under the Caltech license agreement was developed inProfessor Johnson’s Caltech laboratory. During 2003, the Company paid $50 toCaltech representing the second and final installments on the $150 aggregatefees related to this agreement. Additionally, the Company reimburses Caltechfor laboratory expenses incurred by Professor Johnson’s Caltech laboratory,which during the years ended December 31, 2004 and 2003, amounted to $0 and $22in reimbursements, respectively.

A company managed and partially owned by oneof the Company’s former directors provides technical support services andcomputer equipment to the Company. During the year ended December 31, 2003, theCompany incurred $20 of expenses and equipment purchases related to thisarrangement. There were no expenses and payables to this Company as of December31, 2004.

We are a party to aconsulting agreement with Chitnis Consulting, Inc., which is owned 100% byShekhar Chitnis, a former director and executive officer of our company. Underthis agreement, we have engaged Chitnis Consulting to provide consultingservices on an as-needed basis through December 31, 2005. During 2003, we incurred$50 in consulting fees from Chitnis Consulting and incurred $54 as of December31, 2004.

**SooBuchanan, the sister of John Kang and James Kang, was employed by our companyand was paid aggregate compensation of $76 and $43 as of December 31, 2003 and2004. Additionally, Otis Buchanan, the husband of Ms. Buchanan, was employed bythe Company and was paid aggregate compensation of $90 and $54 as of December31, 2003 and 2004, respectively.**

In November 2004, we entered into an agreement with JohnKang, our Chairman, President, and Chief Executive Officer, in which Mr. Kangagreed that certain stock transactions by him in 2002 involving our commonstock should have resulted in a liability under Section 16(b) of the SecuritiesExchange Act of 1934, as amended (“Section 16(b)”). These transactions includeMr. Kang’s private sale of 285,715 shares of his personal LiquidmetalTechnologies common stock to Growell Metal Co., Ltd. in February 2002, prior toour initial public offering. They also include Mr. Kang’s subsequent indirectpurchase and disposition of Liquidmetal Technologies common stock in order tosatisfy a personal agreement Mr. Kang made to Growell Metal in February 2002regarding the guaranteed minimum value of the stock purchased by Growell Metalin February 2002 (the purchases and dispositions incident to this agreementoccurred in August and November 2002, respectively). Lastly, the transactionsinclude open-market purchases of an aggregate of 89,300 shares of our commonstock made by Mr. Kang in August 2002.

TheAudit Committee of our Board of Directors conducted an independent inquiry intothe above-described transactions with the aid of independent legal counsel and,as a result of such inquiry, the Audit Committee concluded that thetransactions should have resulted in a liability to the Company under Section16(b) in the amount of $302. Mr. Kang has acknowledged this liability, and inan agreement negotiated between Mr. Kang and the Audit Committee and approvedby the full Board, Mr. Kang will pay this liability through periodicinstallments in 2005 and 2006. As a result, the Company accrued for the $302receivable in other assets and other income as of December 31, 2004. Theabove-described transactions involving Growell Metal was reported ona new Form 4 filed by Mr. Kang on November 15, 2004, and the open-marketpurchases were previously reported on a timely basis in August 2002.

**25. Fourth Quarter Adjustmentsand Transactions**

During the fourth quarterof 2004, the Company recognized $406 write-downs of inventory included in “Costof Sales” in the accompanying Statement of Operations and Comprehensive Lossrelated to certain hinge finished goods used in our customer’s cell phonemodels which were nearing its end of life (see Note 7).

Further, the Companyamended its quarterly financial statements originally filed on Form 10-Q forfiscal year 2004, to properly account for the conversion feature of the senior convertible notes issued in March2004, which were exchanged in August 2004 (see Note 2).

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**Schedule II — Valuation and Qualifying Accounts**
| ** **                                | ** ** | **Balance at** | ** ** | **Additions**       | ** ** | **Write-offs** | ** ** | **Balance at** | ** ** |
|-------------------------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|---------------------|------------|
| ** **                                | ** ** | **Beginning**       | ** ** | **Charged to** | ** ** | **and**        | ** ** | **End of**     | ** ** |
| ** **                                | ** ** | **of Period**  | ** ** | **Expenses**        | ** ** | **Payments**   | ** ** | **Period**          | ** ** |
| Allowance for  doubtful accounts          |       |                |       |                |       |           |       |                |       |
| Year ended  December 31, 2004             |       | $                   | 127        |                | $          | 84             |       | $                   | (103       | ) | $ | 108 |   |
| Year ended December 31, 2003              |       | 450                 |       | (28                 | )          | (295           | )          | 127                 |       |
| Year ended December 31, 2002              |       | 30                  |       | 921                 |       | (501           | )          | 450                 |       |
|                                      |       |                |       |                |       |           |       |                |       |
| Product warranty  accrual                 |       |                |       |                |       |           |       |                |       |
| Year ended  December 31, 2004             |       | $                   | 303        |                | $          | 288            |       | $                   | (72        | ) | $ | 519 |   |
| Year ended December 31, 2003              |       | 237                 |       | (297                | )          | 363            |       | 303                 |       |
| Year ended December 31, 2002              |       | —              |       | —              |       | —         |       | —              |       |
|                                      |       |                |       |                |       |           |       |                |       |
| Deferred tax  asset valuation allowance * |       |                |       |                |       |           |       |                |       |
| Year ended  December 31, 2004             |       | $                   | 28,866     |                | $          | 4,611          |       | $                   | —     |   | $ | 33,477 |   |
| Year ended December 31, 2003              |       | 25,401              |       | 3,465               |       | —         |       | 28,866              |       |
| Year ended  December 31, 2002             |       | 23,796              |       | 1,605               |       | —         |       | 25,401              |       |

 

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*              Thedeferred tax asset valuation allowance represents a 100% reserve against thedeferred tax asset accounts at December 31, 2004, 2003 and 2002,respectively.

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