**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q/A**

**Amendment No. 1**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly periodended September 30, 2005**

** **

**OR**

 

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

 

**For the transition periodfrom                to             **

** **

**CommissionFile No. ****001-31332**

 

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**LIQUIDMETALTECHNOLOGIES, INC.**

**(****Exact name of Registrant as specified in itscharter)**

 

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

 

**25800 Commercentre Drive, Suite 100**

**LakeForest, California 92630**

(addressof principal executive office, zip code)

 

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

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for atleast the past 90 days.

 

Yes ýNo o

 

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

 

Yes ýNo o

 

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

 

Yes oNo ý

 

#### **As of October 13, 2005, there were 42,164,121shares of the registrant’s common stock, $.001 par value, outstanding.**

 

 

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**LIQUIDMETALTECHNOLOGIES, INC.AMENDMENT NO. 1 TO FORM 10-QFOR THE QUARTER ENDED****SEPTEMBER 30, 2005**

 

**EXPLANATARYNOTE**

 

We are filing thisAmendment No. 1 to our Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2005, as filed with the U.S. Securities and Exchange Commission(SEC) on December 1, 2005, in response to (1) a request by the SEC to makecertain changes to the disclosure in Item 4 thereof; (2) revise thecertifications required by SEC Rule 13a-14(a) as contained therein;and (3) restate our financial statements to properly account for thebeneficial conversion feature of the senior convertible notes issued in August 2005and to recognize impairment charges to our long term assets.  This amendment does not reflect eventsoccuring after the filing of the originally filed Form 10-Q.

 

2

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**FORWARD-LOOKINGINFORMATION**

 

Statements inthis report concerning the future sales, expenses, profitability, financialresources, product mix, market demand, product development and other statementsin this report concerning the future results of operations, financial conditionand business of Liquidmetal Technologies, Inc. are “forward-looking”statements as defined in the Securities Act of 1933 and Securities Exchange Actof 1934. Investors are cautioned that the Company’s actual results in thefuture may differ materially from those projected in the forward-lookingstatements due to risks and uncertainties that exist in the Company’soperations and business environment, including competition, need for increasedacceptance of products, ability to continue to develop and extend our brandidentity, ability to anticipate and adapt to a competitive market, ability toeffectively manage rapidly expanding operations, amount and timing of operatingcosts and capital expenditures relating to expansion of our business,operations and infrastructure, ability to provide superior customer service,dependence upon key personnel and the like. The Company’s most recent filingswith the Securities and Exchange Commission, including Form 10-K, containadditional information concerning many of these risk factors, and copies ofthese filings are available from the Company upon request and without charge.

 

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#### **TABLE OF CONTENTS**

#### ** **

| **PART I**                                                                                               |       |
|---------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                          |       |
| **Item 1 – Financial Statements**                                                                        | ** ** |
| Condensed  Consolidated Balance Sheets (unaudited)                                                            |       |
| Condensed  Consolidated Statements of Operations and Comprehensive Loss (unaudited)                           |       |
| Condensed  Consolidated Statements of Shareholders’ Equity (Deficiency) (unaudited)                      |       |
| Condensed  Consolidated Statements of Cash Flows (unaudited)                                                  |       |
| Notes to Condensed  Consolidated Financial Statements (unaudited)                                             |       |
|                                                                                                          |       |
| **Item 2 – Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | ** ** |
| ** **                                                                                                    | ** ** |
| **Item 3 – Quantitative and  Qualitative Disclosures about Market Risk**                                 | ** ** |
| ** **                                                                                                    | ** ** |
| **Item 4 – Controls and Procedures**                                                                     | ** ** |
| ** **                                                                                                    | ** ** |
| **PART II – Other Information**                                                                     | ** ** |
| ** **                                                                                                    | ** ** |
| **Item 1 – Legal Proceedings**                                                                           | ** ** |
| ** **                                                                                                    | ** ** |
| **Item 2 – Unregistered Sales of  Equity Securities and Use of Proceeds**                                | ** ** |
| ** **                                                                                                    | ** ** |
| **Item 6 – Exhibits and Reports  on Form 8-K**                                                      | ** ** |
| ** **                                                                                                    | ** ** |
| **Signatures**                                                                                                | ** ** |
| ** **                                                                                                    | ** ** |
| **Certifications**                                                                                            | ** ** |

 

4

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### **PART I**

### **FINANCIALINFORMATION**

### ** **

**Item 1 – Financial Statements**

 

**LIQUIDMETAL TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

 
| ** **                                                                                                                                                                                        | ** ** | **(unaudited)  September 30,****2005** | ** ** | **December 31,****2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **(Restated)**                              | ** ** | ** **                    | ** ** |
| ** **                                                                                                                                                                                        | ** ** | ** **                                  | ** ** | ** **                    | ** ** |
| **ASSETS**                                                                                                                                                                                        | ** ** | ** **                                  | ** ** | ** **                    | ** ** |
| ** **                                                                                                                                                                                        | ** ** | ** **                                  | ** ** | ** **                    | ** ** |
| Current assets:                                                                                                                                                                                   |       |                                        |       |                          |       |
|                                                                                                                                                                                              |       |                                        |       |                          |       |
| Cash and  cash equivalents                                                                                                                                                                        |       | $                                           | 933        |                          | $          | 742 |   |
| Restricted  cash                                                                                                                                                                                  |       | —                                      |       | 754                           |       |
| Trade  accounts receivables, net of allowance for doubtful accounts of $82 and $108                                                                                                               |       | 2,193                                       |       | 1,668                         |       |
| Inventories                                                                                                                                                                                       |       | 1,499                                       |       | 2,353                         |       |
| Prepaid  expenses and other current assets                                                                                                                                                        |       | 1,363                                       |       | 930                           |       |
| Total current assets                                                                                                                                                                              |       | 5,988                                       |       | 6,447                         |       |
|                                                                                                                                                                                              |       |                                        |       |                          |       |
| Property,  plant and equipment, net                                                                                                                                                               |       | 13,889                                      |       | 16,434                        |       |
| Idle  equipment                                                                                                                                                                                   |       | 190                                         |       | 1,906                         |       |
| Long-term  inventory                                                                                                                                                                              |       | —                                      |       | 1,810                         |       |
| Other  intangibles, net                                                                                                                                                                           |       | 1,151                                       |       | 1,143                         |       |
| Other assets                                                                                                                                                                                      |       | 950                                         |       | 768                           |       |
| Total assets                                                                                                                                                                                      |       | $                                           | 22,168     |                          | $          | 28,508 |   |
|                                                                                                                                                                                              |       |                                        |       |                          |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                    |       |                                        |       |                          |       |
|                                                                                                                                                                                              |       |                                        |       |                          |       |
| Current  liabilities:                                                                                                                                                                             |       |                                        |       |                          |       |
|                                                                                                                                                                                              |       |                                        |       |                          |       |
| Accounts  payable and accrued expenses                                                                                                                                                            |       | $                                           | 5,701      |                          | $          | 4,969 |   |
| Settlement  payable                                                                                                                                                                               |       | 3,234                                       |       | 3,246                         |       |
| Deferred  revenue                                                                                                                                                                                 |       | 879                                         |       | 900                           |       |
| Short-term  debt                                                                                                                                                                                  |       | 237                                         |       | —                        |       |
| Long-term  debt, current portion, net of debt discount of $0 and $851                                                                                                                             |       | 1,204                                       |       | 5,991                         |       |
| Other  liabilities, current portion                                                                                                                                                               |       | 701                                         |       | 1,032                         |       |
| Warrant  liability                                                                                                                                                                                |       | 4,633                                       |       | 550                           |       |
| Beneficial  conversion feature liability                                                                                                                                                          |       | 3,826                                       |       | 0                             |       |
| Total  current liabilities                                                                                                                                                                        |       | 20,415                                      |       | 16,688                        |       |
|                                                                                                                                                                                              |       |                                        |       |                          |       |
| Long-term  debt, net of current portion and debt discount of $7,023 and $0                                                                                                                        |       | 5,463                                       |       | 2,618                         |       |
| Other  long-term liabilities, net of current portion                                                                                                                                              |       | 431                                         |       | 342                           |       |
| Total  liabilities                                                                                                                                                                                |       | 26,309                                      |       | 19,648                        |       |
|                                                                                                                                                                                              |       |                                        |       |                          |       |
| Shareholders’  equity (deficiency):                                                                                                                                                          |       |                                        |       |                          |       |
|                                                                                                                                                                                              |       |                                        |       |                          |       |
| Preferred  stock, $0.001 par value; 10,000,000 shares authorized and none issued  and  outstanding at September 30,  2005 and December 31, 2004                                    |       | —                                      |       | —                        |       |
| Common  stock, $0.001 par value; 100,000,000 shares authorized and 42,164,121 issued  and outstanding at September 30, 2005 and 41,609,652 issued and  outstanding at December 31, 2004 |       | 42                                          |       | 42                            |       |
| Additional  paid-in capital                                                                                                                                                                       |       | 132,838                                     |       | 132,160                       |       |
| Accumulated  deficit                                                                                                                                                                              |       | (139,070                                    | )          | (125,313                      | )          |
| Accumulated  other comprehensive income                                                                                                                                                           |       | 2,049                                       |       | 1,971                         |       |
| Total  shareholders’ equity (deficiency)                                                                                                                                                     |       | (4,141                                      | )          | 8,860                         |       |
|                                                                                                                                                                                              |       |                                        |       |                          |       |
| Total  liabilities and shareholders’ equity (deficiency)                                                                                                                                     |       | $                                           | 22,168     |                          | $          | 28,508 |   |

 

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

 

5

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**LIQUIDMETAL TECHNOLOGIES, INC. ANDSUBSIDIARIES**

 

### **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**

**(inthousands, except per share data)**

**(unaudited)**

 
| ** **                                                             | ** ** | **For the Three  Months Ended September 30,** | ** ** | **For the Nine  Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                                               | ** ** | **2004**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(Restated)**                                                         | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | ** **                                                             | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                |       | $                                                                      | 4,342      |                                                                  | $          | 4,615 |   | $ | 10,912 |   | $ | 14,958 |   |
| Cost of  sales                                                         |       | 3,756                                                                  |       | 3,241                                                                 |       | 10,553 |   | 9,273 |   |
|                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gross profit                                                           |       | 586                                                                    |       | 1,374                                                                 |       | 359 |   | 5,685 |   |
|                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Operating  expenses:                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling,  general, and administrative                                  |       | 2,364                                                                  |       | 3,569                                                                 |       | 6,521 |   | 9,178 |   |
| Research and  development                                              |       | 196                                                                    |       | 374                                                                   |       | 806 |   | 1,060 |   |
| Impairment  of long lived assets                                       |       | 833                                                                    |       | —                                                                |       | 4,227 |   | — |   |
| Total  expenses                                                        |       | 3,393                                                                  |       | 3,943                                                                 |       | 11,554 |   | 10,238 |   |
|                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Loss from  operations                                                  |       | (2,807                                                                 | )          | (2,569                                                                | )          | (11,195 | ) | (4,553 | ) |
|                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Loss from  extinguishments of debt                                     |       | (1,247                                                                 | )          | (1,663                                                                | )          | (1,247 | ) | (1,663 | ) |
| Other income                                                           |       | —                                                                 |       | 302                                                                   |       | — |   | 302 |   |
| Change in  value of warrants, net gain (loss)                          |       | 1,112                                                                  |       | (434                                                                  | )          | 1,145 |   | 846 |   |
| Change in  value of beneficial conversion feature                      |       | 982                                                                    |       | —                                                                |       | 982 |   | — |   |
| Interest  expense                                                      |       | (1,290                                                                 | )          | (1,805                                                                | )          | (3,456 | ) | (3,242 | ) |
| Interest  income                                                       |       | 7                                                                      |       | —                                                                |       | 14 |   | 34 |   |
| Loss from  continuing operations                                       |       | (3,243                                                                 | )          | (6,169                                                                | )          | (13,757 | ) | (8,276 | ) |
|                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Loss from  discontinued equipment manufacturing operations, net of tax |       | —                                                                 |       | —                                                                |       | — |   | (749 | ) |
| Net loss                                                               |       | (3,243                                                                 | )          | (6,169                                                                | )          | (13,757 | ) | (9,025 | ) |
|                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Other  comprehensive loss                                              |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Foreign  exchange translation gain (loss)                              |       | (306                                                                   | )          | 68                                                                    |       | 78 |   | 490 |   |
| Comprehensive  loss                                                    |       | $                                                                      | (3,549     | )                                                                     | $          | (6,101 | ) | $ | (13,679 | ) | $ | (8,535 | ) |
|                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net loss per  common share – basic and diluted:                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Loss per  share – continuing operations                           |       | $                                                                      | (0.08      | )                                                                     | $          | (0.15 | ) | $ | (0.33 | ) | $ | (0.20 | ) |
| Loss per  share – discontinued operations                         |       | $                                                                      | —     |                                                                  | $          | — |   | $ | — |   | $ | (0.02 | ) |
| Loss per  share basic and diluted                                      |       | $                                                                      | (0.08      | )                                                                     | $          | (0.15 | ) | $ | (0.33 | ) | $ | (0.22 | ) |
|                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Number of  weighted average shares – basic and diluted            |       | 41,933                                                                 |       | 41,610                                                                |       | 41,717 |   | 41,610 |   |

 

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

 

6

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**LIQUIDMETAL TECHNOLOGIES, INC. ANDSUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY (DEFICIENCY)**

###### **For the Nine Months Ended September 30, 2005**

**(inthousands, except per share data)**

**(unaudited)**

 
| ** **                             | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated Other  Comprehensive  Income** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | ** **         | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Balance,  December 31, 2004**   |       | 41,609,652         |       | $                 | 42         |                             | $          | 132,160                  |       | $                                                 | (125,313   | )          | $          | 1,971 |   | $ | 8,860 |   |
| Beneficial  conversion feature         |       |               |       | —            |       | —                           |       | —                   |       | —                                            |       | —     |       |
| Conversion  of notes payable           |       | 462,250            |       | —            |       | 462                              |       | —                   |       | —                                            |       | 462        |       |
| Common stock  issued as directors fees |       | 92,219             |       | —            |       | 175                              |       | —                   |       | —                                            |       | 175        |       |
| Stock based  compensation              |       | —             |       | —            |       | 41                               |       | —                   |       | —                                            |       | 41         |       |
| Foreign  exchange translation gain     |       | —             |       | —            |       | —                           |       | —                   |       | 78                                                |       | 78         |       |
| Net loss  (Restated)                   |       | —             |       | —            |       | —                           |       | (13,757                  | )          | —                                            |       | (13,757    | )          |
| **Balance,  September 30, 2005**  |       | 42,164,121         |       | $                 | 42         |                             | $          | 132,838                  |       | $                                                 | (139,070   | )          | $          | 2,049 |   | $ | (4,141 | ) |

 

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

 

7

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**LIQUIDMETAL TECHNOLOGIES, INC. ANDSUBSIDIARIES**

### ** **

### **CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands, except per share data)**

**(unaudited)**

 
| ** **                                                                                     | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                                                              | ** ** | **2004** | ** ** |
| ** **                                                                                     | ** ** | **(Restated)**                                                        | ** ** | ** ** | ** ** |
|                                                                                           |       |                                                                  |       |   |   |
| **Operating  activities:**                                                                     |       |                                                                  |       |   |   |
| Net loss                                                                                       |       | $                                                                     | (13,757    | ) | $ | (9,025 | ) |
|                                                                                           |       |                                                                  |       |   |   |
| Adjustments  to reconcile net loss from operations to net cash used for operating  activities: |       |                                                                  |       |   |   |
| Impairment  of long lived assets                                                               |       | 4,227                                                                 |       | — |   |
| (Gain) loss  on disposal of asset                                                              |       | (14                                                                   | )          | 8 |   |
| Depreciation  and amortization                                                                 |       | 2,516                                                                 |       | 2,585 |   |
| Loss on  extinguishments of debt                                                               |       | 1,247                                                                 |       | 1,663 |   |
| Amortization  of debt discount                                                                 |       | 1,578                                                                 |       | 2,692 |   |
| Stock-based  compensation                                                                      |       | 41                                                                    |       | 276 |   |
| Bad debt  (recovery) expense                                                                   |       | (21                                                                   | )          | 111 |   |
| Warranty  expense                                                                              |       | 126                                                                   |       | 269 |   |
|                                                                                           |       |                                                                  |       |   |   |
| Changes in  operating assets and liabilities:                                                  |       |                                                                  |       |   |   |
| Accounts  receivable                                                                           |       | (504                                                                  | )          | 47 |   |
| Inventories                                                                                    |       | 178                                                                   |       | (1,950 | ) |
| Prepaid  expenses and other current assets                                                     |       | (404                                                                  | )          | (1,111 | ) |
| Other assets                                                                                   |       | (632                                                                  | )          | (877 | ) |
| Accounts  payable and accrued expenses                                                         |       | 752                                                                   |       | 3,887 |   |
| Deferred  revenue                                                                              |       | (21                                                                   | )          | (597 | ) |
| Warrant  liabilities                                                                           |       | (1,145                                                                | )          | 449 |   |
| Beneficial  conversion feature liabilities                                                     |       | (982                                                                  | )          | — |   |
| Other  liabilities                                                                             |       | (142                                                                  | )          | (4,708 | ) |
| Net cash  used for continuing operations                                                       |       | (6,957                                                                | )          | (6,281 | ) |
|                                                                                           |       |                                                                  |       |   |   |
| Net cash  provided by discontinued operations                                                  |       | —                                                                |       | 822 |   |
| Net cash  used for operating activities                                                        |       | (6,957                                                                | )          | (5,459 | ) |
|                                                                                           |       |                                                                  |       |   |   |
| **Investing  Activities:**                                                                     |       |                                                                  |       |   |   |
| Purchases of  property and equipment                                                           |       | (153                                                                  | )          | (73 | ) |
| Proceeds  from sale of property and equipment                                                  |       | 69                                                                    |       | 11 |   |
| Investment  in patents and trademarks                                                          |       | (92                                                                   | )          | (202 | ) |
| Net cash  used for investing activities                                                        |       | (176                                                                  | )          | (264 | ) |
|                                                                                           |       |                                                                  |       |   |   |
| **Financing  Activities:**                                                                     |       |                                                                  |       |   |   |
| Proceeds  from borrowings                                                                      |       | 16,180                                                                |       | 9,924 |   |
| Repayment of  borrowings                                                                       |       | (9,850                                                                | )          | (4,898 | ) |
| Repayment of  other liabilities                                                                |       | (100                                                                  | )          | (91 | ) |
| Proceeds  from restricted cash                                                                 |       | 754                                                                   |       | (1,000 | ) |
| Net cash  provided by financing activities                                                     |       | 6,984                                                                 |       | 3,935 |   |
|                                                                                           |       |                                                                  |       |   |   |
| Effect of  foreign exchange translation                                                        |       | 340                                                                   |       | 57 |   |
| Net increase  in cash and cash equivalents                                                     |       | 191                                                                   |       | 1,731 |   |
|                                                                                           |       |                                                                  |       |   |   |
| Cash and  cash equivalents at beginning of period                                              |       | 742                                                                   |       | 3,127 |   |
| Cash and  cash equivalents at end of period                                                    |       | $                                                                     | 933        |   | $ | 1,396 |   |
| Supplemental  cash flow information:                                                           |       |                                                                  |       |   |   |
| Interest  paid                                                                                 |       | $                                                                     | 1,400      |   | $ | 463 |   |
| Taxes paid                                                                                     |       | $                                                                     | —     |   | $ | — |   |

 

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

 

8

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During the nine months ended September 30, 2004, the Company soldit’s 51% ownership interest in Dongyang to the 49% minority shareholder, whichresulted in a loss of $46 from disposal of discontinued operations as of September 30,2004.

 

During the nine months ended September 30, 2005, $462 of theCompany’s 6% senior convertible notes due July 2007 was converted into462,250 of the Company’s common stock at a conversion price of $1.00 per share.

 

The accompanying notes are anintegral part of the condensed consolidated financial statements

 

9

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### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Forthe Nine Months Ended September 30, 2005 and 2004**

**(inthousands, except share data)**

**(unaudited)**

 

**1.****                                      Basisof Presentation / Description of Business**

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America (“generallyaccepted accounting principles”) for interim financial information and with theinstructions to Form 10-Q. Accordingly, they do not include all of theinformation and notes required by generally accepted accounting principles forcomplete financial statements. In the opinion of management, all adjustments(consisting only of normal recurring accruals) considered necessary for a fairpresentation have been included. In addition, certain reclassifications havebeen made for consistent presentation. Operating results for the three and ninemonths ended September 30, 2005 are not necessarily indicative of theresults that may be expected for any future periods or the year ending December 31,2005. The accompanying unaudited condensed consolidated financial statementsshould be read in conjunction with the Company’s Form 10-K filed with theSecurities and Exchange Commission on March 30, 2005.

 

Liquidmetal Technologies, Inc.(“LiquidmetalTechnologies”) and its subsidiaries (collectively “the Company”) are in thebusiness of developing, manufacturing, and marketing products made fromamorphous alloys. Liquidmetal Technologies markets and sells Liquidmetal® alloyindustrial coatings and also manufactures, markets and sells products andcomponents from bulk Liquidmetal alloys that can be incorporated into thefinished goods of its customers across a variety of industries. The Companyalso partners with third-party licensees and distributors to develop andcommercialize Liquidmetal alloy products.

 

The Company classifies operations intotwo reportable segments: Liquidmetal alloy industrial coatings and bulkLiquidmetal alloys. Liquidmetal alloy industrial coatings are used primarily asa protective coating for industrial machinery and equipment, such as drill pipeused by the oil drilling industry and boiler tubes used by coal-burning powerplants. Bulk Liquidmetal alloys include potential market opportunities tomanufacture and sell products and components for electronic devices, medicaldevices, defense applications, and sporting goods. In addition, the bulkLiquidmetal alloys segment includes tooling and prototype sampling, and themanufacture and sale of die casting equipment (see Note 7). In addition, suchalloys 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.

 

Stock-based compensation

 

The Company applies Accounting Principles Board (“APB”)Opinion No. 25 for options when the exercise price of options granted toemployees is less than the fair value of the underlying stock on the date ofgrant. The Company applies Statement of Financial Accounting Standards (“SFAS”)No. 123 for options granted to non-employees who perform services forthe Company.

 

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

 

10

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| ** **                         | ** **                                                                                                                                | **For the Three  Months Ended September 30,** | ** ** | **For the Nine  Months Ended September 30,** | ** ** |
|------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                         | ** **                                                                                                                                | **2005**                                                               | ** ** | **2004**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                         | ** **                                                                                                                                | **(Restated)**                                                         | ** ** | ** **                                                            | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
|                               |                                                                                                                                      |                                                                   |       |                                                                  |       |   |   |   |   |
| Net loss as  reported              |                                                                                                                                      | $                                                                      | (3,243     | )                                                                     | $          | (6,169 | ) | $ | (13,757 | ) | $ | (9,025 | ) |
|                               |                                                                                                                                      |                                                                   |       |                                                                  |       |   |   |   |   |
| *Add:*                             | stock-based employee compensation expense  included in reported net loss, net of related tax effects                                      |                                                                   | 41         |                                                                  | —     |   | 41 |   | 276 |   |
|                               |                                                                                                                                      |                                                                   |       |                                                                  |       |   |   |   |   |
| *Deduct:*                          | total stock-based employee compensation expense  determined under the fair value based method for all awards, net of related  tax effects |                                                                   | (695       | )                                                                     | (910       | ) | (2,237 | ) | (3,720 | ) |
| Proforma net  loss:                |                                                                                                                                      | $                                                                      | (3,897     | )                                                                     | $          | (7,079 | ) | $ | (15,953 | ) | $ | (12,469 | ) |
|                               |                                                                                                                                      |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic and  diluted loss per share: |                                                                                                                                      |                                                                   |       |                                                                  |       |   |   |   |   |
| As reported                        |                                                                                                                                      | $                                                                      | (0.08      | )                                                                     | $          | (0.15 | ) | $ | (0.33 | ) | $ | (0.22 | ) |
| Proforma                           |                                                                                                                                      | $                                                                      | (0.09      | )                                                                     | $          | (0.17 | ) | $ | (0.38 | ) | $ | (0.30 | ) |

 

The fair value of each option grant isestimated on the date of the grant using the Black-Scholes option-pricing modelwith the following weighted-average assumptions used for grants for the ninemonths ended September 30, 2005 and 2004, respectively: expectedvolatility of approximately 100% for all periods; dividend yield of 0.0% forall periods; expected option life of approximately 5 years; and a risk-freeinterest rate ranging from 2.9% to 4.2%.

 

**2.****                                      Basisof Presentation and Recent Accounting Pronouncements**

 

Translation of Foreign Currency

 

The Company applies **FASB No. 52, Foreign Currency Translation**,for translating foreign currency into US dollars in ourconsolidation of the financial statements. 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 ofLiquidmetal Korea have been translated based upon Korean Won as the functionalcurrency. Liquidmetal Korea’s assets and liabilities were translated using theexchange rate at period end and income and expense items were translated at theaverage exchange rate for the reporting period. The resulting translationadjustment was included in other comprehensive income (loss).

 

Reclassifications

 

Certain amounts from the prior year have been reclassified to conform tocurrent year’s presentation.

 

Restatements

 

The Company restated its third quarter financial statements originallyfiled on form 10-Q on December 1, 2005, in this Form 10-Q to properly accountfor the beneficial conversion feature of the senior convertible notes issued inAugust 2005.  Accounting for this featureresulted in a gain of $982 from the change in value of beneficial conversionfeature and an increase to interest expense of $130 from additional amortizationof debt discounts related to the revaluation of the beneficial conversionfeature of the senior convertible debt issued in August 2005.  In addition, the company wrote-down $833 ofprimarlly raw material inventory considered to be long term as the carryingvalue of the inventory held as an impairment charge.  While we may use the excess raw materialsbeyond one year to fulfill future demand, we did not foresee use of thisinventory in the foreseeable future.

 

Recent Accounting Pronouncements

 

In March 2004, the Emerging Issues Task Force (“EITF”) reached aconsensus on recognition and measurement guidance previously discussed underEITF 03-01 The consensus clarifies the meaning of other-than-temporaryimpairment and its application to investments classified as eitheravailable-for-sale or held-to-maturity under FASB Statement No. 115, “Accountingfor Certain Investments in Debt and Equity Securities,” and other investmentsaccounted for under the cost method. The recognition and measurement guidancefor which the consensus was reached in March 2004 is to be applied toother-than-temporary impairment evaluations in reporting periods beginningafter June 15, 2004. In September 2004, the FASB issued a final FASBStaff Position that delays the effective date for the measurement and recognitionguidance for all investments within the scope of EITF Issue No. 03-01;however, the disclosure requirements remain effective for annual periods endingafter June 15, 2004. The Company does not believe that the adoption ofthis statement will have a material effect on the Company’s results ofoperation and financial position.

 

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In December 2004, the FASB issued SFAS No. 123R, “Share-BasedPayment”, which replaces SFAS No. 123. SFAS No. 123R requires publiccompanies to recognize an expense for share-based payment arrangementsincluding stock options and employee stock purchase plans. The statementeliminates a company’s ability to account for share-based compensationtransactions using APB 25, and generally requires instead that suchtransactions be accounted for using a fair value based method. SFAS No. 123Rrequires an entity to measure the cost of employee services received inexchange for an award of equity instruments based on the fair value of the awardon the date of grant, and to recognize the cost over the period during whichthe employee is required to provide service in exchange for the award. In April 2005,the SEC amended the compliance dates for SFAS 123(R), to allow companies toimplement the standard at the beginning of their next fiscal year, instead ofthe next reporting period beginning after June 15, 2005. SFAS No. 123Ris effective for the Company in the quarter ending March 31, 2006. Uponadoption of SFAS 123R, companies are allowed to select one of three alternativetransition methods, each of which has different financial reportingimplications. The Company is currently evaluating the transition methods,valuation methodologies and other assumptions for employee stock options inlight of SFAS No. 123R. Current estimates of option values using theBlack-Scholes method may not be indicative of results from valuationmethodologies ultimately implemented by the Company upon adoption of SFAS No. 123R.Although the Company has not yet fully quantified the impact this standard willhave on its financial statements, it is likely that the adoption of SFAS No. 123Rwill have a material impact on the Company’s financial position and results ofoperations. Stock-based Compensation under Note 1 included in these CondensedConsolidated Financial Statements provides the pro forma net income andearnings per share as if the Company had used a fair-value-based method similarto the methods required under SFAS 123(R) to measure the compensation expense foremployee stock awards during the three and six months ended June 30, 2005and 2004.

 

On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107(SAB 107) regarding the Staff’s interpretation of SFAS 123(R). Thisinterpretation expresses the views of the staff regarding the interactionbetween SFAS 123(R) and certain SEC rules and regulations and provides thestaff’s views regarding the valuation of share-based payment arrangements forpublic companies. In particular, this SAB provides guidance related toshare-based payment transactions with nonemployees, the transition fromnonpublic to public entity status, valuation methods, the accounting forcertain redeemable financial instruments issued under share-based paymentarrangements, the classification of compensation expense, non-GAAP financialmeasures, first-time adoption of SFAS 123(R) in an interim period,capitalization of compensation cost related to share-based paymentarrangements, the accounting for income tax effects of share-based paymentarrangements upon adoption of SFAS 123(R), the modification of employee shareoptions prior to adoption of Statement 123(R) and disclosures in Management’sDiscussion and Analysis subsequent to adoption of SFAS 123(R). The Company willadopt SAB 107 in connection with its adoption of SFAS 123(R).

 

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections – a replacement of APB Opinion No. 20 andFASB Statement No. 3.”  SFAS No. 154 replaces APB Opinion No. 20,“Accounting Changes,” and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements” and changes the requirements for theaccounting for and reporting of a change in accounting principle. Thisstatement applies to all voluntary changes in accounting principle. It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions.When a pronouncement includes specific transition provisions, those provisionsshould be followed. SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 31,2005. The Company does not believe the adoption of SFAS No. 154 will havea material effect on its consolidated financial position, results of operationsor cash flows.

 

In June 2005, the EITF reached a consensus on Issue No. 05-2 “TheMeaning of ‘Conventional Convertible Debt Instrument’ in EITF Issue No. 00-19,‘Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock.’” Issuers of convertible debt are requiredby Statement 133 to evaluate whether it is necessary to separate the “embedded”conversion feature from the debt contract and account for the conversion featureas if it were a separate derivative instrument. If the issuer determines thatthe embedded conversion feature would be classified in equity if it were afreestanding instrument, the conversion feature is not separated from the debtcontract. EITF 00-19’s criteria must be applied to determine whether aconversion feature qualifies for equity classification, but it exempts aconversion feature embedded in a “conventional convertible debt instrument”from some of the criteria. EITF 05-2 requires convertible instruments that may besettled in a combination of cash or shares, e.g., those referred to as “InstrumentC” in EITF 90-19, and instruments that may be convertible into a variablenumber of shares are not “conventional.” As a result, nonconventional instruments would need to satisfy all

 

12

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requirements of EITF 00-19 to support a conclusion that the conversionfeature does not require accounting separate from that for the debt contract. Theadoption of this Issue resulted in recognition of the beneficial conversionfeature from the senior convertible notes issued in August 2005 asliabilities of $3,826 as of September 30, 2005 and a gain of $982 from thechange in fair value of beneficial conversion feature liabilities for the yearended September 30, 2005 (see Note 8).

 

In June 2005, the EITF reached a consensus on Issue 05-6, “Determiningthe Amortization Period for Leasehold Improvements,” which requires thatleasehold improvements acquired in a business combination or purchasedsubsequent to the inception of a lease be amortized over the lesser of theuseful life of the assets or a term that includes renewals that are reasonablyassured at the date of the business combination or purchase. EITF 05-6 is effectivefor periods beginning after June 29, 2005. Earlier application ispermitted in periods for which financial statements have not been issued. Theadoption of this Issue did not have an impact on the Company’s financialstatements.

 

InSeptember 2005, the EITF reached a consensus on Issue 05-7 “Accountingfor Modifications to Conversion Options Embedded in Debt Instruments andRelated Issues,” which requiresthat a change in the fair value of a conversion option brought about bymodifying the debt agreement be included in analyzing in accordance with EITF96-19 “Debtor’s Accounting for a Modification or Exchange of DebtInstruments” whether a debt instrumentis considered extinguished. Under EITF 96-19’s requirements, an issuer whomodifies a debt instrument must compare the present value of the original debtinstrument’s cash flows to the present value of the cash flows of the modifieddebt. If the present value of those cash flows varies by more than 10 percent,the modification is considered significant and extinguishments accounting isapplied to the original debt. If the change in the present value of the cashflows is less than 10 percent, the debt is considered to be modified and issubject to EITF 96-19’s modification accounting. EITF 05-7’s Consensus requiresthat in applying the 10 percent test the change in the fair value of theconversion option be treated in the same manner as a current period cash flow.The Consensus also requires that, if a modification does not result in anextinguishment, the change in fair value of the conversion option be accountedfor as an adjustment to interest expense over the remaining term of the debt.The issuer should not recognize a beneficial conversion feature or reassess anexisting beneficial conversion feature upon modification of the conversionoption of a debt instrument that does not result in an extinguishment. EITF05-7 is effective for modifications of debt instruments beginning in thefirst interim or annual reporting period beginning after December 15, 2005. The Company does not expect the adoption ofthe EITF to have material impact on the Company’s financial statements.

 

In September 2005, the EITF reached a consensus on Issue No. 05-8,“Income Tax Consequences of Issuing Convertible Debt with a BeneficialConversion Feature.”  Under EITF 05-8, the issuance of convertibledebt with a beneficial conversion feature results in a temporary difference forpurposes of applying Statement 109. The deferred taxes recognized for thetemporary difference should be recorded as an adjustment to paid-in capital.EITF 98-5 “Accounting for Convertible Securities with BeneficialConversion Features or Contingently Adjustable Conversion Ratios” and EITF 00-27  “Application of Issue No. 98-5 to CertainConvertible Instruments” require thatthe nondetachable conversion feature of a convertible debt security beaccounted for separately if it is a beneficial conversion feature. A beneficialconversion feature is recognized and measured by allocating to additionalpaid-in capital a portion of the proceeds equal to the conversion feature’sintrinsic value. A discount on the convertible debt is recognized for theamount that is allocated to additional paid-in capital. The debt discount isaccreted from the date of issuance to the stated redemption date of theconvertible instrument or through the earliest conversion date if theinstrument does not have a stated redemption date. The U.S. Federal Income TaxCode includes the entire amount of proceeds received at issuance as the taxbasis of the convertible debt security. The EITF 05-8 Consensus should beapplied retrospectively to all instruments with a beneficial conversion featureaccounted for under EITF 98-5 and EITF 00-27 for periods beginning after December 15,2005. The Company does not expect the adoption of the EITF to have materialimpact on the Company’s financial statements.

 

Other recent accounting pronouncements issued by the FASB (includingits Emerging Issues Task Force), the AICPA and the SEC did not or are not believedby management to have a material impact on the Company’s present or futureconsolidated financial statements.

 

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**3.****                                     ****Liquidity**

 

The Company has experienced losses from continuingoperations during the last two fiscal years and has an accumulated deficit of$139,070 as of September 30, 2005. Cash used for continuing operations forthe nine months ended September 30, 2005 was $6,957 and cash flow fromcontinuing operations was negative through the 4th quarter of 2005.At September 30, 2005 working capital (deficit) was ($14,427). As of September 30,2005, the Company’s principal source of liquidity is $933 of cash and $2,193 oftrade accounts receivable. Such conditions raise substantial doubt that the Companywill be able to continue as a going concern. These operating results occurredwhile the Company was developing and continues to develop and to commercializeand manufacture products from an entirely new and unique technology. Thesefactors have placed a significant strain on the financial resources of theCompany. The ability of the Company to overcome these challenges depends on itsability to correct its production inefficiencies, continue to reduce itsoperating costs, generate higher revenue, and achieve positive cash flow fromcontinuing operations and profitability and continued sources of debt andequity financing. The consolidated financial statements do not include anyadjustments that might result from the outcome of the uncertainty.

 

The Company completed $3,250 private placement of 10%convertible debt on June 13, 2005, and $9,878 private placement of 7%convertible debt on August 9, 2005 for $5,000 aggregate cash received,$4,280 of previously issued notes, and satisfaction of accrued interest andfees of $598 from previously issued convertible notes (see Note 8). The Companyalso entered into a Factoring, Loan, and Security Agreement (“FactoringAgreement”) on April 21, 2005, which allows for borrowing up to $1,500, tomeet working capital needs of the Company (see Note 8). Borrowings made underthe Factoring Agreement are secured by the Company’s trade receivables. Suchborrowings totaled $2,855, which was offset by $2,618 of repayments made as September 30,2005. The Company has $1,263 available for future borrowings under theFactoring Agreement as of September 30, 2005, which is contingent onapproval of eligible receivables by the financing company.

 

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, the resourcesdevoted to develop and support Liquidmetal alloy products, and the cost ofsuccessful implementation of Section 404 of the Sarbanes-Oxley Act of 2002.If the available funds and cash generated from operations are insufficient tosatisfy liquidity requirements, the Company will need additional funds in thefuture to support working capital requirements and for other purposes, and willneed to raise additional funds through public or private equity financing, bankdebt financing, or from other sources. Adequate funds may not be availablewhen needed or may not be available on favorable terms. The Companyexpects to continue to devote limited capital to our research and developmentactivities, to further develop and strengthen our manufacturing capabilities,and for working capital and other general corporate purposes.

 

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the SEC has adopted rules requiringpublic companies to include a report of management on the company’s internalcontrols over financial reporting in their annual reports on Form 10-K. Inaddition, the public accounting firm auditing a public company’s financialstatements must attest to and report on management’s assessment of theeffectiveness of the company’s internal controls over financial reporting. Althoughthese requirements were first applicable to the Company’s annual report on Form 10-Kfor the fiscal year ended December 31, 2004, the Company did not complywith these requirements for such fiscal year as described in the followingparagraphs.

 

****The time********and resources committed to the restatement of prior periods’ financialstatements as aforementioned delayed our internal timetable with respect to ourdocumentation, assessment and evaluation of internal control over financialreporting. Due to the issues described in the foregoing paragraph, as well aslimitation on financial and internal resources, management’s assessment of theeffectiveness of our internal control over financial reporting had beensubstantially delayed, which in turn had delayed the Company’s independentregistered public accounting firm, Stonefield Josephson, Inc. inperforming its audit of management’s assessment of the effectiveness ofinternal control over financial reporting pursuant to SOX 404. Therefore, theCompany’s independent registered public accounting firm issued a disclaimer ofopinion with respect to the Company’s internal control over financial reportingas of December 31, 2004, and such disclaimer was filed with the Company’samended Form 10-K filed on May 10, 2005.****

 

****In addition,********whilemanagement has devoted as much financial and internal resources during 2005 tothe SOX 404 effort as possible for compliance as of fiscal year 2005,management believes that there is significant work remaining to be done in alimited amount of time. Thus, the Company will not be able to complete itsassessment of internal controls in accordance with SOX 404 requirements as of December 31,2005 (see “Item 4 – Controls and Procedures” on this quarterly report forfurther discussion on material deficiencies identified as of November 18,2005).****

 

****The Company has been advised by the SEC that thefiling of a disclaimer does not comply with the SEC’s rules andregulations under Section 404, and the SEC has further advised us thatthis noncompliance has resulted in the Company being in violation of Section 13(a) underthe Securities Exchange Act of 1934. Section 13(a) establishes thegeneral requirement that public companies must file with the SEC, in accordancewith such rules and regulations as the SEC may prescribe, suchinformation, documents, and reports as the SEC may from time to timerequire for the protection of investors, including Form 10-Ks and 10-Qs.****

 

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****In addition to the foregoing, although the Company’scommon stock was admitted to the OTC Bulletin Board for quotation on June 15,2005, the SEC has further advised that, as a result of our noncompliance with Section 404for the 2005 fiscal year, it may not have been appropriate for the OTCBulletin Board to admit our common stock for quotation on June 15, 2005. Consequently,there is no assurance that the Company’s common stock will remain eligible forquotation on the OTC Bulletin Board.****

 

**4. Inventories**

 

The Company maintains certain of its raw materialinventories in amounts in excess of our operating cycle of one year due to thenature of our manufacturing process, production lead time, and therecyclability of our raw material. These inventories were classified aslong-term inventory as of December 31, 2004. The Company determined thatits current and projected raw material requirements are not sufficient enoughto warrant the use of such raw materials in the foreseeable future.Accordingly, the Company reduced the carrying value of raw materials held byits subsidiary, Liquidmetal Korea, by the amounts considered to be excessiveduring the second quarter of 2005. The write-down during the three and ninemonths ended September 30, 2005 was $833 and$1,653, respectively, and isincluded in “Impairment of long lived assets” in the accompanying CondensedConsolidated Statement of Operations and Comprehensive Loss for the nine monthsended September 30, 2005. The total amount of long term inventory was $0and $1,810 as of September 30, 2005 and December 31, 2004,respectively.

 

Inventories were comprised of the following:

 
| ** **                 | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(Restated)**               | ** ** | ** **                  | ** ** |
|                       |       |                         |       |                        |       |
| Raw  materials             |       | $                            | 373        |                        | $          | 1,688 |   |
| Work in  process           |       | 735                          |       | 352                         |       |
| Finished  goods            |       | 391                          |       | 313                         |       |
| Total  current inventories |       | 1,499                        |       | 2,353                       |       |
| Long-term  inventories     |       | —                       |       | 1,810                       |       |
| Total  inventories         |       | $                            | 1,499      |                        | $          | 4,163 |   |

 

**5. Idle Equipment**

 

Idle equipment consists of certain equipment held bythe Company for use in expansion of bulk alloy parts manufacturing. Due toexcess manufacturing capacity, the Company classified the equipmentas idle equipment at December 31, 2004. While the equipment may beused internally to meet future capacity requirements, considering our currentrevenue and foreseeable production requirements, the Company does notanticipate utilizing this equipment internally in the near future. For thesereasons, during the quarter ended June 30, 2005, the Company determined towrite down the carrying value of the idle equipment held by its subsidiary,Liquidmetal Korea, to its net realizable value. The write-down amounted to$1,741 and is included in operating expenses as “Impairment of long livedassets” in the accompanying Condensed Consolidated Statement of Operations andComprehensive Loss for the three and nine months ended September 30, 2005.Total amount of idle equipment remaining was $190 and $1,906 as of September 30,2005 and December 31, 2004, respectively.

 

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**6.****                                     ****Discontinued Operations**

 

*Dongyang*

 

On June 28, 2002, the Company acquired a51% interest in Chusik Hoesa Dongyang Yudoro (“Dongyang”). In March 2004,the Company sold its 51% investment in Dongyang to the 49% minority shareholder.The selling price of the Company’s 51% interest in Dongyang was $80, which wasequal to the Company’s net carrying value for the 51% ownership held. Further,the Company agreed to pay Dongyang $155 for the purchase of a receivablebalance from Growell. The transaction resulted in net payable to Dongyang of$75 and a loss of $46 from transfer of the Company’s interest in Donyang to theminority shareholder. The loss from operations for the nine months ended September,2004 totaled $50 and is included in the loss from discontinued equipmentmanufacturing operations for the period. The net payable balance of $75 is tobe paid in quarterly installments throughout 2004, with $25 to be paidsubsequent to 2004. The outstanding amount payable to Dongyang is $11 and $25as of September 30, 2005 and December 31, 2004, respectively, and isincluded in accounts payable and accrued liabilities.

 

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

 
| ** **                                                             | ** ** | **For the Nine months  Ended September 30,** | ** ** | **For the Nine months  Ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                                              | ** ** | **2004**                                                              | ** ** |
|                                                                   |       |                                                                  |       |                                                                  |       |
| Revenue                                                                |       | $                                                                     | —     |                                                                  | $          | 22 |   |
| Loss from  discontinued equipment manufacturing operations, net of tax |       | —                                                                |       | (96                                                                   | )          |
|                                                                        |            |                                                                       |            |                                                                       |            |  |  |

 

*Taesung*

 

On June 14, 2004, the Company enteredinto an Asset Purchase Agreement whereby all the assets and liabilities of itsTaesung equipment manufacturing division in Korea were sold to a third partyfor $345 which is payable by the third party in four equal installments withthe last installment being due on June 30, 2005. As of March 31,2004, management determined that no impairment was anticipated on thedivestiture of its Taesung division. Ultimately, the sale resulted in a loss ofapproximately $184. The loss from operations for the three and ninemonths ended September 30, 2004 totaled $0 and $653 and is included in theloss from discontinued equipment manufacturing operations for the period.

 

Summarized operating results of Taesung’s operationsare as follows:

 
| ** **                                                              | ** ** | **For the Nine months  Ended September 30,** | ** ** | **For the Nine months  Ended September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                                              | ** ** | **2004**                                                              | ** ** |
|                                                                    |       |                                                                  |       |                                                                  |       |
| Revenue                                                                 |       | $                                                                     | —     |                                                                  | $          | 172 |   |
| Loss from  discontinued equipment manufacturing operations, net of tax. |       | —                                                                |       | (653                                                                  | )          |
|                                                                         |            |                                                                       |            |                                                                       |            |  |  |

 

**7.****                                      ProductWarranty**

 

Management estimates product warranties as a percentage of bulk alloyproduct sales earned during the period. As of September 30, 2005, theCompany used 5 percent of bulk alloy product sales as an estimate of warrantiesto be claimed. The percentage is based on industry averages and historicalinformation. During the three and nine months ended September 30, 2005,the Company recorded $50 and $126, respectively, of warranty expense. Duringthe three and nine months ended September 30, 2004, the Company recorded$131 and $269, respectively, of warranty expense. The product warranty accrualbalance is included in accounts payable and accrued expenses.

 

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**8.****                                      NotesPayable**

 

Senior ConvertibleNote

 

On March 3, 2004, the Company issued $9,924 of6.0% 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. The conversion and warrant exerciseprice are subject to price adjustments for anti-dilution purposes. In addition,the investors had the right to call for repayment of the notes prior tomaturity at any time after the second anniversary of the closing of thetransaction.

 

The fair value of the 1.2 million warrants totaled$1,883 and was computed using the Black-Scholes pricing model under thefollowing assumptions: (1) expected life of 3 years; (2) volatilityof 82%, (3) risk free interest of 0.95% and dividend rate of 0%. Inaddition, since this debt is convertible into equity at the option of the noteholder at beneficial conversion rates, an embedded beneficial conversionfeature was recorded as a debt discount and will be amortized using theeffective interest rate method over the life of the debt in accordance withEmerging Issues Task Force No. 00-27, “Application of Issue No. 98-5to Certain Convertible Instruments.”  In March 2004,total cost of beneficial conversion feature of $3,395 and the fair value of the0.6 million warrants issued to investors of $584 were recorded as discounts ofthe convertible note. In addition, $718 relating to the fair value of the 0.6million warrants issued to the Placement Agents and $581 direct costs incurredrelating to issuance of the convertible note were recorded as debt issuancecost as a contra liability account in warrant liability and other assets,respectively.

 

During 2004, the Company redeemed $4,465 of theoutstanding note balance in cash. The redemption resulted in a write down ofdebt issuance costs and debt discount of $2,071 to interest expense during theyear ended December 31, 2004. Further, 500,000 of warrants originallyissued to a financial advisor for the transaction expired during June 2004and 163,748 of unexercised warrants originally issued to investors werecancelled as a result of the Company’s redemption of the note balances duringthe year ended December 31, 2004. The 663,748 total expired and canceledwarrants immediately prior to the expiration and cancellation resulted in areduction of warrant liability of $7 and $279 to paid in capital and change invalue of warrants, respectively, during the year ended December 31, 2004.

 

On August 19, 2004, the Company completed aprivate exchange offer for its March Notes with the remaining holdersafter the redemption. Under terms of the exchange offer, approximately $5,459 inaggregate principal amount of the March Notes have been exchanged for anaggregate of (i) $2,729 million of 6% Senior Secured Notes Due 2007 (the “Long-TermNotes”) and (ii) $2,730 million of 10% Senior Secured Notes Due 2005 (the “Short-TermNotes”), collectively referred to as “Exchange Notes”. The Exchange Notes arecollateralized by certain patents owned by the Company and second prioritymortgage interest in plant facilities and certain equipment at our South Koreaplant. The Short-Term Notes have a maturity date of July 29, 2005, and aconversion price of $2.00 per share (compared to a conversion price of $3.00per share under the March Notes). The Short-Term Notes have been exchangedand redeemed subsequent to the close of the second quarter of 2005 (see 2005Senior Convertible Notes below). The Long-Term Notes have a maturity date of July 29,2007, and a conversion price of $1.00 per share. The conversion prices of the July 2007Notes and July 2005 Notes are subject to price adjustments foranti-dilution purposes. Further, the exchange notes are convertible into CommonStock, at the option of the Company, if at any time after the issuance of thenotes, the closing per share price of the Common Stock exceeds $4.00 (asadjusted 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 theLong-Term Notes also have the right to call for repayment of the Long-TermNotes prior to maturity at any time after the second anniversary of the closingof the exchange offer. The Long-Term Notes have been amended subsequent to theclose of the second quarter of 2005 to provide for an Amended RegistrationRights Agreement, and Amended and Restated Security Agreement (see 2005 SeniorConvertible Notes below).

 

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A total of 563,151 warrants to purchase our commonstock at an exercise price of $3.00 per share—all of which were previouslyissued in connection with the purchase of the March Notes—have beenamended to provide for an extended expiration date of March 1, 2006. Thewarrant exercise price is subject to price adjustment for anti-dilutionpurposes. As of September 30, 2005, the warrant price was determined to beexercisable at $2.73.

 

The exchange offer was treated as an extinguishmentof the March Notes in accordance with Emerging Issues Task Force No. 96-19,“Debtors Accounting for a Modification or Exchange of Debt Instruments.”  The exchange resulted in a $1,663 loss fromextinguishment of the March Notes, write down of $352 of deferred issuecosts in other assets, $189 of contra liability deferred issuance costs, and$1,122 of debt discount as a result of the change in carrying value ofexchanged notes.

 

In connection with the private exchange offer, theCompany issued $250 of private placement notes to certain Placement Agents asissuance 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 whichis due 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, a beneficial conversion feature was recorded from the$125 Long-Term Notes issued to Placement Agents of $29 during August 2004.

 

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 between 2 and 3 percent ofthe purchase price paid for the unconverted notes for the first 30 businessdays of late registration, and 1 and 3 percent for each 30 business daysthereafter, but no more than 18 percent of the purchase price of theunconverted note balance. Late registration fee of $0 and $1,028 has beenrecorded as interest expense during the three and nine months ended September 30,2005, respectively.

 

Interest payments are due quarterly, and failure tomake timely interest payments will result in increase in interest rate to 10%and 14% on the 6% and 10% senior convertible notes (“Default Rates”). TheDefault Rates became effective on April 1, 2005 from non-payment of ascheduled interest payment. As of September 30, 2005, the Company hascomplied with all scheduled interest payments.

 

On August 9, 2005, the Short-Term Notes,accrued interest and late registration fees were redeemed in cash and exchangedfor 7% Convertible Secured Promissory Notes due August 2007  (see 2005 Senior Convertible Notes below).

 

Subsequent to the closing of the 2005 SeniorConvertible Notes in August 2005, $462 of the Long-Term Notes wereconverted into 462,250 of the Company’s common stock at a conversion price of$1.00 per share as of September 30, 2005.

 

As of September 30, 2005, our gross outstandingloan balance of the Short-Term and Long-Term Notes totaled $0 and $2,392,respectively. As of December 31, 2004, our gross outstanding loanbalance of the Short-Term and Long-Term Notes totaled $2,854 and $2,855,respectively. As of September 30, 2005 and December 31, 2004, un-amortized discounts for beneficialconversion feature and warrants totaled $352 and $851, and other asset debt issuance costs totaled$49 and $183, respectively. Interestexpense for the amortization of debt issuance cost and discount on note was$225 and $633 for the three and nine months ended September 30, 2005, and$217 and $622 for the three and nine months ended September 30, 2004,respectively. As of September 30, 2005, the effective interest rate forthe Long-Term Notes was 32%.

 

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the original relative fair values of the warrants of $1,302 have beenrecorded as warrant liability as the Company has not yet filed the registrationstatement. In addition, the Company is required to report a value of the warrantas a fair value and record the fluctuation to the fair value of the warrantliability to current operations. The change in the fair value of the warrantsresulted in a net gain of $170 and $457 for the three and nine months ended September 30,2005, respectively, and a net loss of $434 and a net gain of $412 for the threeand nine months ended September 30, 2004, respectively. The fair value ofwarrants outstanding at September 30, 2005 of $93 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.42 years; (2) volatility of 90%, (3) risk free interest of 3.93%anddividend rate of 0%.

 

18

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Convertible Notes

 

On June 13, 2005, the Company completed a private placement (the “PrivatePlacement”) of 10% Convertible Unsecured Notes Due June 13, 2006 in theaggregate principal amount of $3,250 (the “Notes”), together with warrants topurchase up to an aggregate of 893,750 shares of the Company’s common stock(the “Warrants”).

 

The Notes issued by the Company in the Private Placement are unsecuredand was due on the earlier of June 13, 2006 or the consummation of afollow-on equity or debt offering or restructuring transaction pursuant towhich the Company receives gross proceeds of at least $4,000. Prior tomaturity, the Notes are interest-only, with interest payments due quarterly, atthe rate of 10% per year. The Notes can be prepaid by the Company at any timewithout penalty. If, within 120 days following the issue date of the Notes, theCompany either fails to redeem the notes for the principal amount and accruedinterest thereon or fails to close a “Qualified Financing,” then the Notes willthereafter be convertible at a conversion price equal to seventy five percent(75%) of the closing price of the Company’s common stock on the first tradingday immediately preceding the conversion date. A “Qualified Financing” isdefined in the Notes as any debt or equity financing of the Company resultingin aggregate gross proceeds to the Company of at least $5,000 and in which theholders of at least sixty percent (60%) of the aggregate principal amount ofthe Company’s Long Term Notes due July 2007 either (i) agree that theequity or debt securities to be issued in such financing shall be*pari passu* in order of payment to the2007 Notes held by them or (ii) exchange their 2007 Notes for newsecurities in the financing transaction. On August 9, 2005, the Companysuccessfully completed Qualified Financing, which resulted in exchange andredemption of the Convertible Notes (see 2005 Senior Convertible Debt). As aresult, the Notes never became convertible.

 

As a part of the Private Placement, the Company issued warrants tothe purchasers of the Notes giving them the right to purchase up to anaggregate of 812,500 shares of the Company’s common stock. In addition,warrants to purchase 81,250 shares of the Company’s common stock were issued tothe placement agent in the transaction. The warrants have an exercise price of$2.00 per share, provided that upon the consummation of the first ensuingpublic or private equity or debt offering or restructuring transaction in whichthe Company receives gross proceeds of at least $3,250 (including withoutlimitation any restructuring of the Company’s previously issued 10% SeniorSecured Notes Due July 29, 2005), the exercise price will be automaticallyadjusted downward (but not upward) as of the closing date of such offering orrestructuring transaction so that it is equal to the lowest effective commonstock purchase price paid for any securities issued by the Company to theinvestors in such offering or restructuring transaction. The warrants willexpire on June 13, 2010 and are subject to exercise price adjustments foranti-dilution purposes.

 

The fair value of the 893,750 warrantstotaled $1,160 and was computed using the Black-Scholes pricing model under thefollowing assumptions: (1) expected life of 5 years; (2) volatilityof 118%, (3) risk free interest of 3.87% and dividend rate of 0%. In accordancewith Emerging Issues Task Force No. 00-27, “Application of Issue No. 98-5to Certain Convertible Instruments” the embedded beneficial conversion featureof the debt was not recorded as the debt is considered contingently convertibleat the time of issuance, and as a result of the completion of the QualifiedFinancing the debt subsequent to the close of the second quarter, the debt wasdetermined to be not convertible. In June 2005, the fair value of the812,500 warrants issued to investors of $1,055 was recorded as discounts of theconvertible note. In addition $105 relating to the fair value of the 81,250warrants issued to the Placement Agents and $278 direct costs incurred relatingto issuance of the convertible note were recorded as debt issuance cost as acontra liability account in debt discount and other assets, respectively, andwill be amortized using the effective interest rate method over the life of theloan.

 

On August 9, 2005, the Notes wereredeemed in cash and exchanged for 7% Convertible Secured Promissory Notes due August 2007(see 2005 Senior Convertible Notes below). The exchange offer was treated as anextinguishment of the Notes in accordance with Emerging Issues Task Force No. 96-19,“Debtors Accounting for a Modification or Exchange of Debt Instruments.”  The exchange resulted in a $1,247 loss fromextinguishment of the Notes which consists of write down of $240 of deferredissue costs in other assets, $92 of contra liability deferred issuance costs,and $915 of debt discount as a result of the change in carrying value ofexchanged notes.

 

19

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Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the original fair values of the warrants of $1,160 have been recordedas other liability as the Company has not yet filed the registration statement.In addition, the Company is required to report a value of the warrant as a fairvalue and record the fluctuation to the fair value of the warrant liability tocurrent operations. The change in the fair value of the warrants resulted in anet gain of $349 and $95 for the three and nine months ended September 30,2005. The fair value of warrants outstanding at September 30, 2005 of$1,065 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 4.70 years; (2) volatility of 90%, (3) riskfree interest of 4.18%and dividend rate of 0%.

 

2005 Senior Convertible Debt

 

On August 9, 2005, the Company completeda private placement (the “Private Placement”) of $9,878 in principal amount ofnew 7% Convertible Secured Promissory Notes due August 2007 (the “2005Senior Notes”). The issuance consisted of $5,000 cash, exchange of $1,284 in principalamount of previously issued 10% Senior Secured Notes Due July 29, 2005(the “July 2005 Notes”), the exchange of $2,996 in principal amount ofpreviously issued 10% Convertible Unsecured Notes Due June 2006 (the “June 2006Notes”), satisfaction of accrued interest and late registration fees in theamount of $589 on the previously issued July 2005 Notes, and satisfactionof accrued interest of $9 previously issued June 2006 Notes. The 2005Senior Notes were issued pursuant to a Securities Purchase Agreement datedeffective as of August 2, 2005 among the Company, the purchasers of the2005 Senior Notes, and the holders of previously issued July 2005 Notesand June 2006 Notes of the Company due June 2006.

 

Interest payments are due quarterly, andfailure to make timely interest payments will result in an increase to theinterest rates to 14% per annum on the 2005 Senior Notes (“Default Rates”). Asof September 30, 2005, the Company has made timely interest payments.

 

The 2005 Senior Notes are convertible intoshares of the Company’s common stock at $2.00 per share pursuant to an Amendedand Restated Security Agreement. The convertible price of the 2005 Senior Notesis subject price adjustment for anti-dilution purposes. As of September 30,2005, the convertible price of 2005 Senior Notes remained unchanged at $2.00per share.

 

Further, pursuant to Statement of FinancialAccounting Standards No. 133, “Accounting for Derivative Instruments andHedging Activities,” EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock,”EITF 00-27, “Application of Issue No. 98-5 to Certain ConvertibleInstruments,” and EITF 05-2 “The Meaning of ‘Conventional Convertible DebtInstrument’ in EITF Issue No. 00-19,” the original fair value of theembedded beneficial conversion feature of $4,808 have been recorded asbeneficial conversion feature liability as the debt is considerednonconventional convertible debt. The original fair value was computed usingthe Black-Scholes model under the following assumptions: (1) expected lifeof 2 years; (2) volatility of 93%; (3) risk free interest of 4.06%and dividend rate of 0%. In addition, the Company is required to report a valueof the beneficial conversion liability as a fair value and record thefluctuation to the fair value of the beneficial conversion feature liability tocurrent operations. The change in the fair value of the beneficial conversionfeature liability resulted in a gain of $982 for the three and nine months September 30,2005. The fair value of the beneficial conversion features outstanding as of September 30,2005 of 3,826 was computed using the Black-Scholes model under the followingassumptions: (1) 1.84 years; (2) volatility of 90%, (3) riskfree interest of 4.18% and dividend rate of 0%.

 

The 2005 Senior Notes are secured bysubstantially all assets of the Company and rank senior to all otherobligations of the Company, other than the Company’s loan with Kookmin Bank ofSouth Korea (or any refinancing of such loan), the 6% Senior SecuredNotes Due July 29, 2007 (“July 2007Notes”), purchase money asset financing, trade creditors in the ordinary courseof business, and any inventory or receivables-based credit facility that theCompany may obtain in the future, provided that the amount of the creditfacility does not exceed 50% of eligible inventory and 80% of eligiblereceivables. The 2005 Senior Notes will automatically convert into common stockif the Company’s common stock has an average closing price of more than $5.00per share during 30 consecutive trading days.

 

The Company also issued warrants to thepurchasers of the 2005 Senior Notes and placement agents giving them the rightto purchase up to 2,469,470 and 414,495 shares of Company common stock,respectively, with an exercise price of $2.00 per share, which is subject toprice adjustment for anti-dilution purposes. The warrants will expire on August 2,2010.

 

20

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Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the original fair values of the warrants of $4,068 have been recordedas warrant liability as the Company has not yet filed the registrationstatement, which was computed using the Black-Scholes pricing model under the followingassumptions: (1) expected life of 5 years; (2) volatility of 93%; (3) riskfree interest of 4.17% and dividend rate of 0%. In addition, the Company is required to report a value of the warrantas a fair value and record the fluctuation to the fair value of the warrantliability to current operations. The change in the fair value of the warrantsresulted in a net gain of $593 for the three and nine months ended September 30,2005. The fair value of warrants outstanding at September 30, 2005 of$3,475 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 4.84 years; (2) volatility of 90%, (3) riskfree interest of 4.18%and dividend rate of 0%.

 

In connection with the transaction, the Company, allpurchasers of the 2005 Senior Notes, and all holders of previously issued notesentered into a single Amended and Restated Registration Rights Agreement thatreplaces the prior registration rights agreements entered into by the Companywith the various noteholders. Under the Amended and Restated RegistrationRights Agreement, the Company is required to file a resale registrationstatement for the shares underlying the 2005 Senior Notes, July 2007 Notes,and warrants within ninety (90) days of the closing of the 2005 Senior Notes.The Company is required to cause this registration statement to becomeeffective within 60 days after the Company receives the first written commentson the registration statement from the SEC, or if the SEC notifies the Companythat it will not review the registration statement, within five days after suchnotification. The Company will be subject to certain monetary penalties, as setforth in the registration rights agreement, if the registration statement isnot filed or does not become effective on a timely basis. Specifically,if the Company does not file the registration statement on a timely basis, wewill be obligated to pay a late filing fee to the selling stockholders in theamount of 3% of the warrant exercise price on each of the warrants held by themplus 3% of the principal amount of the outstanding notes held by them. This feewill be payable for each period of 30 business days that the filing of theregistration statement is made past the required filing date, and the paymentswill be due 10 business days following the end of each 30-day period. If theregistration statement has not been declared effective by the requiredeffective date, the Company will be obligated to pay a monthly lateregistration fee to the selling stockholders in the amount of 2% of theaggregate warrant exercise prices and aggregate note principal amounts for thefirst 30 business days after the required effective date, and 1% for each 30-businessday period thereafter until the registration statement is declared effective. Notwithstandingthe foregoing, the late filing fees and late registration fees will not exceed18% of the aggregate warrant exercise prices and aggregate note principal amounts

 

The Company received first written commentsfrom the SEC in January 2006 on the registration statement.  However the registration statement has notbeen made effective within the 60 day period called for by the registrationrights agreement and the Company may be subject to default notices by theholders of the convertible notes and warrants. As of the filling of this report, the Company’s management is not awareof any outstanding default notices.

 

As of September 30, 2005, our gross outstandingloan balance of the 2005 Senior Notes totaled $9,878. As of September 30,2005, un-amortized discounts forbeneficial conversion feature and warrants totaled $6,133, and other asset debt issuance costs totaled$434, and contra liability debt issuance cost totaled $538. Interest expensefor the amortization of debt issuance cost and discount on note was $622 andfor the three and nine months ended September 30, 2005. As of September 30,2005, the effective interest rate for the 2005 Senior Notes was 46%.

 

Factoring Agreement

 

The Company entered into a Factoring, Loan, and Security Agreement (the“Agreement”) with a financing company on April 21, 2005, which allows forborrowings of up to $1,500. The Agreement expires on April 21, 2006, andautomatically renews annually thereafter. All borrowings are secured byoutstanding receivables specifically assigned to the financing company. Assignedreceivables are considered “Approved” or “Non-Approved” by the financingcompany. Advances are made on 80% of Approved receivables assigned and 30% ofNon-Approved receivables assigned. Payments on assigned receivables arereceived directly by the financing company, and applied to outstanding advances.All outstanding advances and uncollected assigned receivables are subject tofees and interest charges ranging from 0.65 percent to 2 percent plus primerate as published by the Wall Street Journal, with a minimum annual fee of $30.All receivables assigned and advances made are subject to return and recall bythe financing company, respectively. As such, the advances have been classifiedas short-term secured borrowings in accordance with SFAS 140 “Accounting forTransfer and Servicing of Financial Assets and Extinguishments of Liabilities.”  As of September 30, 2005, the Company hasborrowed $2,855 and repaid $2,618. The total outstanding advance made under theagreement is $237 as of September 30, 2005, which is presented asshort-term debt. The Company has $1,263 available for future borrowings underthe Agreement as of September 30, 2005, which is contingent on approval ofeligible receivables by the financing company.

 

21

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Kookmin Note

 

On February 4, 2003, our Korean subsidiary received 6,500,000 inSouth Korean Won, or approximately $5,488, under a loan from Kookmin Bank ofSouth Korea. The loan bears interest at an annual rate of 7.1%. In the event ofdelayed repayment, the interest increases to a maximum of 21%, depending on thelength of time the repayment is delayed. As of September 30, 2005, theinterest rate was increased to 9.2% from delayed interest payments made. Thisloan is collateralized by the plant facilities and certain equipment in SouthKorea. During the first eighteen months from the origination date, interest waspayable on a monthly basis. In October 2003, the Company paid $873 ofprincipal at the request of Kookmin Bank due to the sale of machines that hadbeen part of the collateral on the loan. Subsequent to October 31,2003, Kookmin Bank requested that the Company pay an additional $866 ofprincipal by February 2004 due to the Company’s current credit rating. TheCompany made two payments on the requested additional loan pay down in November andDecember 2003 of $320 and $205, respectively. The remaining payment of$341 was subsequently made in February 2004. Beginning in September 2004,the Company is required to make equal monthly installments of principal andinterest to repay the remaining balance of the loan over a 36-month period. Principalpayments made to Kookmin Bank totaled $841 for the nine months ended September 30,2005, which includes $89 of foreign exchange translation loss. The outstandingloan balance totaled $2,910, of which $1,204 is included in current portion oflong-term debt, as of September 30, 2005.

 

**9.****                                      StockCompensation Plan**

 

During the three and nine months ended September 30, 2005, underthe Company’s 2002 Equity Incentive Plan which provides for the grant of stockoptions to officers, employees, consultants and directors, the Company grantedoptions to purchase 0 and 791,165 common shares of the Company for an averageexercise price of $0 and $2.16, respectively, which equaled the fair marketvalue on the date of grant

 

During the three and nine months ended September 30, 2005, underthe Company’s 2002 Non-employee Director Stock Option Plan which provides forthe grant of stock options to non-employee directors, the Company granted20,000 and 200,000 common shares of the Company for an average exercise priceof $1.87 and $2.28, respectively, under this plan. Further, all options grantedunder this plan had exercise prices that were equal to the fair market value onthe date of grant.

 

In September 2005, the non-employeedirectors of our company were given the opportunity to receive shares of stockunder the plan in lieu of past-due director and committee fees that were due tothem for periods through September 30, 2005. Such shares were issuable tosuch directors at an average price of $1.89 per share. As of September 30,2005, a total of 92,219 shares were issued to non-employee directors in lieu ofthese past-due fees.

 

The Company canceled 31,517 and 275,701 options during the three andnine months ended September 30, 2005, respectively, for terminatedemployees and directors.

 

**10.****                               SegmentReporting and Geographic Information**

 

SFAS No. 131,*Disclosures about Segments of an Enterprise andRelated Information,*requires companies to provide certaininformation about their operating segments. In April 2002, the Companybegan classifying operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys. The Liquidmetal alloyindustrial coatings are used primarily as a protective coating for industrialmachinery and equipment, such as drill pipe used by the oil drilling industryand boiler tubes used by coal burning power plants. Bulk Liquidmetal alloysinclude market opportunities to manufacture and sell casing components forelectronic devices, medical devices, sporting goods, tooling, prototype sampling,defense applications and metal processing equipment. Primarily, the expensesincurred by the bulk Liquidmetal alloy segment are research and developmentcosts and selling expenses associated with identifying and developing marketopportunities. Bulk Liquidmetal alloys products can be distinguished fromLiquidmetal alloy coatings in that the bulk Liquidmetal alloy can havesignificant thickness, up to approximately one inch, which allows for their usein a wider variety of applications other than a thin protective coating appliedto machinery and equipment. Revenue and expenses associated with research anddevelopment services and product licensing arrangements are included in thebulk Liquidmetal alloy segment. The accounting policies of the reportablesegments are the same as those described in Note 3 to the consolidatedfinancial statements included in the Company’s Form 10-K filed with theSecurities and Exchange Commission on March 30, 2005.

 

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

 
| ** **                                                            | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment  Totals** | ** ** |
|-----------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|---------------------|------------|
|                                                                  |       |         |       |                |       |                |       |
| Three months  ended September 30, 2005:                          |       |         |       |                |       |                |       |
| Revenue to  external customers                                        |       | $            | 1,549      |                | $          | 2,793               |       | $ | 4,342 |   |
| Gross profit  (loss)                                                  |       | 635          |       | (49                 | )          | 586                 |       |
| Income  (loss) before interest expense and discontinued operations    |       | 420          |       | (1,429              | )          | (1,009              | )          |
| Total  identifiable assets at end of period                           |       | 772          |       | 16,414              |       | 17,186              |       |
|                                                                  |       |         |       |                |       |                |       |
| Three months  ended September 30, 2004:                          |       |         |       |                |       |                |       |
| Revenue to  external customers                                        |       | $            | 988        |                | $          | 3,627               |       | $ | 4,615 |   |
| Gross profit                                                          |       | 466          |       | 908                 |       | 1,374               |       |
| Income  before interest expense, discontinued operations, and general |       | 264          |       | 129                 |       | 393                 |       |
| Total  identifiable assets at end of period                           |       | 814          |       | 23,202              |       | 24,016              |       |
|                                                                  |       |         |       |                |       |                |       |
| Nine months  ended September 30, 2005:                           |       |         |       |                |       |                |       |
| Revenue to  external customers                                        |       | $            | 3,930      |                | $          | 6,982               |       | $ | 10,912 |   |
| Gross profit                                                          |       | 1,691        |       | (1,332              | )          | 359                 |       |
| Income  (loss) before interest expense and discontinued operations    |       | 1,182        |       | (7,270              | )          | (6,088              | )          |
| Total  identifiable assets at end of period                           |       | 772          |       | 16,414              |       | 17,186              |       |
|                                                                  |       |         |       |                |       |                |       |
| Nine months  ended September 30, 2004:                           |       |         |       |                |       |                |       |
| Revenue to  external customers                                        |       | $            | 2,710      |                | $          | 12,248              |       | $ | 14,958 |   |
| Gross profit                                                          |       | 1,260        |       | 4,425               |       | 5,685               |       |
| Income  before interest expense and discontinued operations           |       | 804          |       | 2,237               |       | 3,041               |       |
| Total  identifiable assets at end of period                           |       | 814          |       | 23,202              |       | 24,016              |       |

 

Reconciling information betweenreportable segments and the Company’s consolidated totals is shown in thefollowing table:

 
| ** **                                                                                             | ** ** | **For the Three  Months Ended September 30,** | ** ** | **For the Nine  Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                                                               | ** ** | **2004**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                             | ** ** | **(Restated)**                                                         | ** ** | ** **                                                            | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
|                                                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Total  operating income (loss) before minority interest, interest expense and discontinued  operations |       | $                                                                      | (1,009     | )                                                                     | $          | 393 |   | $ | (6,088 | ) | $ | 3,041 |   |
| General and  administrative expenses not allocated to segments                                         |       | (1,798                                                                 | )          | (2,962                                                                | )          | (5,107 | ) | (7,594 | ) |
| Loss before  interest, other income, income taxes, minority interest and discontinued  operations      |       | (2,807                                                                 | )          | (2,569                                                                | )          | (11,195 | ) | (4,553 | ) |
| Loss from  extinguishments of debt                                                                     |       | (1,247                                                                 | )          | (1,663                                                                | )          | (1,247 | ) | (1,663 | ) |
| Other income                                                                                           |       | —                                                                 |       | 302                                                                   |       | — |   | 302 |   |
| Change in  value of warrants, net                                                                      |       | 1,112                                                                  |       | (434                                                                  | )          | 1,145 |   | 846 |   |
| Change in  value of beneficial conversion feature                                                      |       | 982                                                                    |       | —                                                                |       | 982 |   | — |   |
| Interest  expense                                                                                      |       | (1,290                                                                 | )          | (1,805                                                                | )          | (3,456 | ) | (3,242 | ) |
| Interest  income                                                                                       |       | 7                                                                      |       | —                                                                |       | 14 |   | 34 |   |
| Loss from  discontinued operations, net                                                                |       | —                                                                 |       | —                                                                |       | — |   | (749 | ) |
| Consolidated  net loss                                                                                 |       | $                                                                      | (3,243     | )                                                                     | $          | (6,169 | ) | $ | (13,757 | ) | $ | (9,025 | ) |

 

Excluded general and administrative expenses are attributable to theCompany’s corporate headquarters. These expenses primarily include corporatesalaries, consulting, professional fees and facility costs. Research anddevelopment expenses are included in the operating costs of the segment thatperformed the research and development.

 

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Revenues from sales to companies in the UnitedStates were $2,234 and $1,215 during the three months ended September 30,2005 and 2004, respectively. The revenue related to the United States ofAmerica was earned under defense-related research and development contracts andsales of coatings products.

 

As of September 30, 2005, two customersrepresented 32%, or $706, of the total outstanding trade accounts receivable. Asof December 31, 2004, two customers represented 30%, or $497, of the totaloutstanding trade accounts receivable. One customer represented 11%, or $1,199,of total sales for the nine months ended September 30, 2005. Fourcustomers represented 60%, or $9,036, of total sales for the nine months endedof September 30, 2004.

 

During the three months ended September 30,2005, the Company had revenues from companies outside of the United States of$2,108 of which $1,665 represented sales to companies located in South Korea. Duringthe three months ended September 30, 2004, the Company had revenue fromsales to companies outside of the United States of $3,400 of which $2,895represented sales to companies located in South Korea. The revenue related tosales to companies outside of the United States was from bulk alloy productsincluding equipment sales.

 

Long-lived assets include net property, plant, and equipment, and netintangible assets. The Company had long-lived assets of $1,742 and $1,594located in the United States at September 30, 2005 and December 31,2004, respectively. The Company had long-lived assets of $13,298 and $15,422located in South Korea at September 30, 2005 and December 31, 2004,respectively.

 

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

 
| ** **                                 | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
|                                       |       |                         |       |
| Total  segment assets                      |       | $                            | 17,186     |   |
| Cash and  cash equivalents                 |       | 933                          |       |
| Prepaid  expenses and other current assets |       | 1,363                        |       |
| Other  property, plant and equipment, net  |       | 585                          |       |
| Intangibles,  net                          |       | 1,151                        |       |
| Other assets                               |       | 950                          |       |
| Total  consolidated assets                 |       | $                            | 22,168     |   |

 

Assets excluded from segment assetsinclude assets attributable to the Company’s corporate headquarters. The largestasset represents the Company’s intangible assets, consisting primarily of theCompany’s patents and trademarks.

 

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

 

Basic earnings per share (“EPS”) is computedby dividing earnings (loss) attributable to common shareholders by the weightedaverage number of common shares outstanding for the periods. Diluted EPSreflects the potential dilution of securities that could share in the earnings.Common stock equivalents consist of 13,077,001 and 8,526,068 equity instrumentsand 11,672,051 and 4,844,903 senior equity convertible debt instruments at September 30,2005 and 2004, respectively, and have not been included in the EPS calculationat September 30, 2005 and 2004 as the amounts are anti-dilutive.

 

**12.****                               Commitmentsand Contingencies**

 

In September 2004, as part of a security agreement to financea certain insurance policy, the Company used certificates of deposits withmaturities of less than one year as collateral. The $754 held in certificatesof deposits is presented as restricted cash at December 31, 2004. Duringthe quarter ended March 31, 2005, the certificate of deposits wasliquidated and the proceeds were used to paydown the balance of the financingon the insurance policy.

 

In August 2004, the Company entered into a consulting agreementwhereby the Company was to receive services from a third party to improve theCompany’s bulk alloy manufacturing process. The service is to be provided from August 2004through October 2005. The total amount of service fees is $172, of which$9 was included in trade accounts payable as of September 30, 2005. As of December 31,2004, the total amount of outstanding balance included in trade accountspayable was $15.

 

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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.

 

The Company and certain ofits present and former officers and directors were named as defendants in ninepurported class action complaints filed in the United States DistrictCourts for the Middle District of Florida, Tampa Division, and the CentralDistrict of California, Southern Division, alleging violations of Sections 11and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.In August 2004, four complaints were consolidated in the United StatesDistrict Court for the Middle District 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 and Mark Rabold were appointed co-lead plaintiffs (the “LeadPlaintiffs”). In September 2004, the five complaints filed in the CentralDistrict of California were transferred to the Middle District of Florida forconsolidation with the *Primavera Investors*action. The Lead Plaintiffs served their Consolidated Amended Class ActionComplaint on January 12, 2005. The Amended Complaint alleges that theProspectus issued in connection with the Company’s initial public offering in May 2002contained material misrepresentations and omissions regarding the Company’shistorical financial condition and regarding a personal stock transaction bythe Company’s chief executive officer. The Lead Plaintiffs further generallyallege that during the proposed Class Period of May 21, 2002, throughMay 13, 2004, the defendants engaged in improper revenue recognition withrespect to certain of the Company’s business transactions, failed to maintainadequate internal controls, and knowingly disclosed unrealistic but favorableinformation about market demand for and commercial viability of the Company’sproducts to artificially inflate the value of the Company’s stock. The AmendedComplaint seeks unspecified compensatory damages and other relief. The Company,along with other defendants, filed a Motion to Dismiss Plaintiffs’ ConsolidatedAmended Class Action Complaint on March 28, 2005. The Lead Plaintiffsserved their Memorandum in Opposition to Defendants’ Motion to DismissConsolidated Amended Class Action Complaint on June 3, 2005. TheCompany cannot predict when the court will rule on the Motion to Dismiss. TheCompany intends to vigorously defend against the class action. The Companycannot currently predict the impact or resolution of this litigation orreasonably estimate a range of possible loss, which could be material. Theresolution of this lawsuit may harm our business and have a materialadverse impact on our financial condition.

 

In addition to the above,certain present and former officers and directors of Liquidmetal Technologies,as well as Liquidmetal Technologies as a nominal defendant, have been named inthree shareholder derivative actions. Two shareholder derivative complaintswere filed in California state court styled *Brian Clair, Derivativelyon Behalf of Liquidmetal Technologies, Inc. v. John Kang, et al.*,Case No. 04CC00551, and *Joseph Durgin,Derivatively on Behalf of Liquidmetal Technologies, Inc. v. John Kang, etal.*, Case No. 04CC00553, both commenced in the Superior Courtof 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-T-23TBM, commenced in the MiddleDistrict of Florida, Tampa Division. These shareholder derivative lawsuitsallege that the defendants breached various fiduciary duties and otherwiseviolated state law based primarily upon the same underlying facts andcircumstances as alleged in the federal shareholder class action. Theplaintiffs seek unspecified compensatory damages, restitution and disgorgementof profits, equitable and/or injunctive relief as permitted by law and otherrelief.

 

The two shareholderderivative complaints in California state court have been consolidated. Plaintiffsserved a Consolidated Shareholder Derivative Complaint on October 12, 2004.The defendants 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, dismissingthe Consolidated Shareholder Derivative Complaint but giving the plaintiffs 45days within which to amend the complaint. Plaintiffs filed their ConsolidatedAmended Shareholder Derivative Complaint on March 28, 2005. The Company,along with other defendants, filed a corrected demurrer on May 17, 2005,again seeking dismissal of the amended complaint. At a hearing on July 7,2005, the Court again sustained the demurrer, dismissing the ConsolidatedAmended Shareholder Derivative Complaint but giving the plaintiffs 40 dayswithin which to further amend the complaint. On August 16, 2005, theplaintiffs filed a Consolidated Second Amended Shareholder Derivative Complaint.The Company, along with the other defendants, filed a demurrer on September 15,2005, again seeking dismissal of the second amended complaint. A hearing onthat demurrer was held on October 19, 2005, but was continued pendingresolution of a dispute regarding the Company’s participation in discovery inthe California derivative action before the Motion to Dismiss the class actionis resolved. On October 28, 2005, the

 

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presiding judge in the class actionresolved the discovery dispute by denying the Company’s Motion to StayDiscovery in Related State Action, and the Company is now required to producediscovery materials in the California derivative action. Once those discoverymaterials are produced to and reviewed by the plaintiffs’ counsel in theCalifornia derivative action, the judge will reconvene the hearing to determinewhether the pending demurrer should be sustained without leave to amend.

 

In the Florida derivativeaction, the Plaintiff filed a First Amended Shareholder Derivative Complaint onNovember 22, 2004. The Company’s Motion to Dismiss, which was filed on December 20,2004, is fully briefed. The Company cannot predict when the court will rule onthe Motion to Dismiss. The Company intends to vigorously defend against thederivative actions. The Company 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 ourbusiness and have a material adverse impact on our financial condition.

 

As of September 30, 2005, the Company has accrued $835 asreceivables from insurance companies from excess legal costs incurred to defendagainst the class action and derivative lawsuits. The amount is includedin prepaid expenses and other current assets.

 

In March 1996, the Company entered into a distribution agreementwhereby it granted to a third party exclusive rights to market and sell golfproducts incorporating Liquidmetal Technology to certain Japanese sportingequipment companies. The third party paid the Company a $1.0 milliondistribution fee as part of this agreement, of which a portion wasrefundable according to a formula based on the gross profit earned by the thirdparty. On March 28, 2003, the distribution agreement was terminated andthe Company entered into a new agreement to pay to the same third party acommission on the net sales price of all Liquidmetal golf equipment that isshipped by the Company or its affiliates to Japanese golf companies for saleinto the Japanese end-market. This commission will apply to golf equipmentshipped by the Company or its affiliates during the period beginning on March 28,2003 and ending on March 28, 2006. If, by March 28, 2006, the Companyhas not paid $350 in commission payments, the balance between commission paidand $350 will be paid by April 30, 2006, thereby guaranteeing the thirdparty a $350 minimum payment during the term of the agreement. The Company willrecognize the unearned distribution fee of $830 as revenue proportionately withthe payment of commissions under the new agreement. As of September 30,2005 and December 31, 2004, the unearned distribution fee remainedunchanged at $830.

 

Under terms of the January 2004 settlement of the dispute overcertain sales transactions from 2003 and 2002 between Liquidmetal Korea andGrowell Metal Co., Ltd., a South Korean metals processing company (“Growell”),Liquidmetal Korea agreed to pay Growell $4,895 to purchase Growell’s investmentin alloy inventories, proprietary alloying equipment purchased from LiquidmetalKorea, and supporting equipment purchased from other suppliers. Also as part ofthe settlement, Growell satisfied in full a balance of $2,058 owed toLiquidmetal Korea for the die casting machines Growell purchased from LiquidmetalKorea in the first quarter of 2003 as part of a license agreement tomanufacture Liquidmetal alloy parts for the South Korean automotive industry. 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) by December 31,2004. As of December 31, 2004, the settlement payable of $3,246, net offoreign exchange translation loss, was not paid to Growell due to Growell’sbreach of warranty on equipment repurchased by Liquidmetal Korea. In January 2005,Growell was acquired by a third party. As of September 30, 2005, theoutstanding settlement payable to the third party of $3,234, net of foreignexchange translation gain, was not paid, and the Company is currently innegotiations to settle this balance with the third party.

 

**13.****                               RelatedParty Transactions**

 

In June 2003, the Company entered intoan exclusive, ten-year license agreement with LLPG, Inc. (“LLPG”), acorporation headed by a former director of the Company. 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, will receive royalty payments over the life ofthe contract on all Liquidmetal products produced and sold by LLPG. Inconjunction with its technology licensing contract, LLPG purchased twoproprietary Liquidmetal alloy melting machines and three proprietary Liquidmetalalloy 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 subsequently paid in full in March 2004.

 

We are a party to a consulting agreementwith Chitnis Consulting, Inc., which is owned 100% by Shekhar Chitnis, aformer director and executive officer of our company. Under this agreement, wehave engaged Chitnis Consulting to provide consulting services on an as-neededbasis through December 31, 2005. During the three and nine months ended September 30,2005, we incurred $14 and $39, in consulting fees from Chitnis Consulting,respectively. During the three and nine months ended September 30, 2004,we incurred $13 and $38, in consulting fees from Chitnis Consulting,respectively.

 

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We are a party to a consulting agreement with William Johnson, a boardmember. Under this agreement, Mr. Johnson provides consulting services onan as-needed basis through 2004 as it relates to marketing and developmentLiquidmetal alloy. The agreement currently continues on a month-to-month basis.During the three and nine months ended September 30, 2005, we incurred $15and $25 in consulting fees from Mr. Johnson, respectively. During thethree and nine months ended September 30, 2004, we incurred $40 and $54 inconsulting fees from Mr. Johnson, respectively.

 

In November 2004, we entered into an agreementwith John Kang, our Chairman , 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 of1934, as amended (“Section 16(b)”). These transactions include Mr. Kang’sprivate sale of 285,715 shares of his personal Liquidmetal Technologies commonstock to Growell Metal Co., Ltd. in February 2002, prior to our initialpublic offering. They also include Mr. Kang’s subsequent indirect purchaseand disposition of Liquidmetal Technologies common stock in order to satisfy apersonal 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 thisagreement occurred in August and November 2002, respectively). Lastly,the transactions include open-market purchases of an aggregate of 89,300 sharesof our common stock made by Mr. Kang in August 2002.

 

The Audit Committee of our Board of Directorsconducted an independent inquiry into the above-described transactions with theaid of independent legal counsel and, as a result of such inquiry, the AuditCommittee concluded that the transactions should have resulted in a liabilityto the Company under Section 16(b) in the amount of $302. Mr. Kanghas acknowledged this liability, and in an agreement negotiated between Mr. Kangand the Audit Committee and approved by the full Board, Mr. Kang will paythis liability through periodic installments in 2005 and 2006. As a result, theCompany accrued for the $302 receivable in other assets and other income as of December 31,2004. The above-described transactions involving GrowellMetal was reported on a new Form 4 filed by Mr. Kang onNovember 15, 2004, and the open-market purchases were previously reportedon a timely basis in August 2002. As of September 30, 2005, theoutstanding amount of the receivable was $235, which is included in otherassets. Mr. Kang has paid $0 and $67 for the three and nine months endedof September 30, 2005. The Company has agreed to defer Mr. Kang’spayment schedule until 2006 as Mr. Kang has agreed accept reducedcompensation for the remainder of 2005. The remaining outstanding balance of$235 will be due before the end of 2006.

 

During the period ended September 30, 2005, theCompany executed a $198 promissory note with CK Cho, member of our Board ofDirectors, for working capital purposes. The note was due and paid in full asof June 30, 2005. The note has an annual rate of interest of 6% resultingin the Company paying approximately $2 in interest. Mr. Cho also is aChief Executive Officer of Winvest Venture Partners Inc., who holds $500of Senior Convertible Notes as of June 30, 2005 (see Note 8). Further,during the three months ended September 30, 2005, Mr. Cho advancedapproximately $387 to cover short-term liquidity needs. The advances were madewithout interest and were repaid as of September 30, 2005.

 

** 14. Subsequent Events**

 

In connection with the senior convertible debtfunded in August 2005, the Company, all purchasers of the senior notes,and all holders of previously issued convertible notes entered into a singleAmended and Restated Registration Rights Agreement that replaces the priorregistration rights agreements entered into by the Company with the variousnoteholders (see Note 8). Under the Amended and Restated Registration RightsAgreement, the Company is required to file a resale registration statement forthe shares underlying the convertible notes and warrants within 90 days of theclosing of the August 2005 senior convertible debt. The Company isrequired to cause this registration statement to become effective within 60days after the Company receives the first written comments on the registrationstatement from the SEC, or if the SEC notifies the Company that it will notreview the registration statement, within five days after such notification. Ifthe Company is not in compliance with the registration filing requirements, theholders of the convertible notes and warrants have rights to late registrationfiling payments equal to 3 percent of a) warrant exercise price multiplied bythe number of outstanding warrants; plus b) the outstanding principle balancefor each 30 business days of late registration, but on more than 18% of a)warrant exercise price multiplied by the number of outstanding warrants; plusb) the outstanding principle balance.

 

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On December 6, 2005, the Companyreceived a letter from a representative of the holders of the August 2007Notes demanding the payment of a late filing fee by us for the period followingOctober 31, 2005, but under the terms of the amended and restatedregistration rights agreement, the Company does not believe that it isobligated to pay any late filing fees unless and until the Company fails tofile the registration statement by December 13, 2005, which is the lastday of the first 30-business day period following October 31, 2005. Theletter also stated that the letter was serving as a notice of default under theSenior Notes as a result of our failure to file a registration statement by October 31,2005, although under the terms of the Senior Notes, the Company has thirty daysafter delivery of the letter in which to cure such default. On December 9,2005 the Company filed the registration statement, which was within the 30-dayperiod and has cured the default notice.

 

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

** **

*This management’s discussion and analysisshould be read in conjunction with the condensed consolidated financialstatements and notes included elsewhere in this report on Form 10-Q.*

 

*This management’s discussion and analysis, aswell as other sections of this report on Form 10-Q, 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 our Annual Report on Form 10-K for the fiscalyear ended December 31, 2004 and other risks and uncertainties discussedin filings made with the Securities and Exchange Commission (including risksdescribed in subsequent reports on Form 10-Q, Form 10-K, Form 8-K,and other filings). Liquidmetal Technologies disclaims any intention orobligation to update or revise any forward-looking statements, whether as a resultof new information, future events, or otherwise.*

 

**Overview**

 

Weare a materials technology company that develops and commercializes productsmade from amorphous alloys. Our Liquidmetal® family of alloys consists of avariety of coatings, powders, bulk alloys, and composites that utilize theadvantages offered by amorphous alloy technology. 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 also partner with third-party licensees anddistributors to develop and commercialize Liquidmetal alloy products. We havethe exclusive right to develop, manufacture, and sell what we believe are theonly 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, ourzirconium-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.

 

Our revenues are derived from two principal operatingsegments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloyproducts. Liquidmetal alloy industrial coatings are used primarily as aprotective coating for industrial machinery and equipment, such as drill pipeused by the oil drilling industry and boiler tubes used in coal-burning powerplants. The historical operating information for fiscal year 2001 is basedsubstantially on sales of Liquidmetal alloy coatings. In the second half of2002, we began producing bulk Liquidmetal alloy components and products forincorporation into our customers’ finished goods. Bulk Liquidmetal alloysegment revenue includes sales of parts or components of electronic devices,medical products, and sports and leisure goods; tooling and prototype parts(including demonstration parts and test samples) for customers with products indevelopment, product licensing and arrangements, and research and developmentrevenue relating primarily to defense and medical applications. We expect thatthese sources of revenue will continue to significantly change the character ofour revenue 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.

 

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Selling,general, and administrative expenses currently consist primarily of salariesand related benefits, severance costs, travel, consulting and professionalfees, depreciation and amortization, insurance, office and administrativeexpenses, and other expenses related to our operations.

 

Researchand development expenses represent salaries, related benefits expense,stock-based compensation, depreciation of research equipment, consulting andcontract services, expenses incurred for the design and testing of newprocessing methods, expenses for the development of sample and prototypeproducts, and other expenses related to the research and development ofLiquidmetal alloys. Costs associated with research and development activitiesare expensed as incurred. We plan to enhance our competitive position byimproving our existing technologies and developing advances in amorphous alloytechnologies. We believe that our research and development efforts will focuson the discovery of new alloy compositions, the development of improvedprocessing technology, and the identification of new applications for ouralloys.

 

OnAugust 4, 2004, the Company established a plant in the city of Weihai inShandong province of China under Weihai Liquidmetal Company Limited, which is100 percent owned by Liquidmetal Korea, to facilitate our bulk alloymanufacturing business. Weihai Liquidmetal is consolidated into LiquidmetalTechnologies with all intercompany transactions eliminated.  The following discussion and analysis of ourfinancial condition and results of operations focuses on the historical resultsof our continuing operations.

 

We have restated our third quarter financial statements originallyfiled on form 10-Q on December 1, 2005, in this Form 10-Q to properly accountfor the beneficial conversion feature of the senior convertible notes issued inAugust 2005, Accounting for this feature resulted in a gain of $1.0 millionfrom the change in value of beneficial conversion feature and an increase tointerest expense of $0.1 million from additional amortization of debt discountsrelated to the revaluation of the beneficial conversion feature of the seniorconvertible debt issued in August 2005. In addition, the company wrote-down $0.8 million of primarily rawmaterial inventory considered to be long term as the carrying value of theinventory held as an impairment change. While we may use the excess raw materials beyond one year to fulfillfuture demand, we did not foresee use of this inventory in the foreseeablefuture.

 

**Critical AccountingPolicies and Estimates**

** **

Thepreparation of condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States requires us tomake estimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. These estimates and assumptions are based onhistorical 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 believethat the following accounting policies are the most critical to our condensedconsolidated financial statements since these policies require significantjudgment or involve complex estimates that are important to the portrayal ofour financial condition and operating results:

 
|   | • |   | Exchange rate fluctuations                           |
|--------|--------|--------|------------------------------------------------------|
|   | • |   | Warranty accrual                                     |
|   | • |   | Allowance for doubtful accounts                      |
|   | • |   | Inventories at lower of cost or net realizable value |
|   | • |   | Deferred tax assets                                  |

 

Ourannual Report on Form 10-K for the year ended December 31, 2004 containsfurther discussions on our critical accounting policies and estimates.

 

**Results of Operations**

 

Comparison of thethree months ended September 30, 2005 and 2004

 

*Revenue*. Revenuedecreased $0.3 million to $4.3 million for the three months ended September 30,2005 from $4.6 million for the three months ended September 30, 2004.The decrease consisted of a decrease of $0.8 million from the sales and prototypingof parts manufactured from bulk Liquidmetal alloys to consumer electronicscustomers as a result of decreased demand for conventional hinge componentsused in certain cellular phone models, which is offset by an increase of $0.6million from sales of our coatings products.

 

*Cost of Sales*. Costof sales increased to $3.8 million, or 87% of revenue, for the three monthsended September 30, 2005 from $3.2 million, or 70% of revenue, forthe three months ended September 30, 2004.  The increase was a result of decreases in bulkLiquidmetal alloy business. Cost of sales as a percentage of revenue hasincreased as a result of lower business volumes generated from our bulkLiquidmetal alloys.  Significant portionsof our manufacturing costs continue to remain fixed. We believe that highermanufacturing volumes and greater mix of higher-margin products in the futurewill cause the gross profit to improve over time. The cost to manufacture partsfrom our bulk Liquidmetal alloys is variable and differs based on the uniquedesign of each product. However, the cost of sales for the products sold by thecoatings business segment is generally consistent because the Liquidmetalcoatings products are produced by third parties and sold wholesale to variousindustries.

 

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*Selling, General, and Administrative Expenses*.Selling, general, and administrative expenses decreased to $2.4 million,or 54% of revenue, for the three months ended September 30, 2005 from$3.6 million, or 77% of revenue, for the three months ended September 30,2004. This decrease was primarily a result of decrease professional services by$0.8 million, decrease in insurance costs of $0.4 million, decrease in productwarranty costs of $0.1 million, and decrease in depreciation and travelexpenses of $0.1 million, offset by an increase in wages and compensation of$0.3 million primarily from severance costs. These and other decreases inselling, general and administrative expenses represent the Company’s efforts tomanage costs and focus on our core business while continuing to build ourcorporate infrastructure required to prepare for and support the anticipatedgrowth of our bulk Liquidmetal alloy business.

 

*Research and Development Expenses*.Research and development expenses decreased to $0.2 million, or 5% ofrevenue, for the three months ended September 30, 2005 from$0.4 million, or 8% of revenue, for the three months ended September 30,2004. The Company continues to perform research and development of newLiquidmetal alloys and related processing capabilities, develop newmanufacturing techniques, and contract with consultants to advance thedevelopment of Liquidmetal alloys. The decrease was primarily due to decreasesin salaries, wages and the related costs of $0.1 million and decreases inother miscellaneous expenses of $0.1 million.

 

*Impairment of Long Lived Assets*.Impairment of long lived assets increased to $0.8 million, or 19% of revenue,for the three months ended September 30, 2005 from $0 for the three monthsended September 31, 2004. Impairment expense represents primarilywrite-down of $0.8 million of raw materials considered to be long terminventory. While we may use the excess raw materials beyond one year tofulfill future customer order, we have determined that our current capacity wasnot significant enough to warrant holding this inventory as a long term asset. Assuch, we have reduced the carrying values of the excess raw material equipment.

 

*Loss from Extinguishments of Debt.*Lossfrom extinguishments of debt decreased to $1.2 million, or 29% of revenue, forthe three months ended September 30, 2005 from $1.7 million, or 36% ofrevenue, for the three months ended September 30, 2004. The $1.2 millionloss from extinguishments of debt was recognized from the exchange of our 6%Convertible Notes due 2006 in August 2005. The $1.7 million loss fromextinguishments of debt was recognized during the three months ended September 30,2004 from exchange of our 6% Senior Convertible Notes due March 2007 in August 2004.

 

*Change in value of warrants, net.*Changein value of warrants increased to net gain of $1.1 million, or 26% of revenue,during the three months ended September 30, 2005 from a net loss of $0.4million, or 9% of revenue, during the three months ended September 30,2004. The increase was from the change in value of warrants issued from thesenior convertible debt funded in March 2004 and exchanged in August 2004,convertible debt funded in June 2005, and senior convertible debt fundedin August 2005 primarily as a result of fluctuations in our stock price.

 

*Change in value of beneficial conversionfeature.*Change in value of beneficial conversionfeature was a gain of $0.1 million, or 23% of revenue, during the three monthsended September 30, 2005 from the change in value of beneficial conversionfeature liability from the senior convertible debt funded in August 2005primarily as a result of fluctuations in our stock price. There were no amountsrecorded as change in value of beneficial conversion feature for the threemonths ended September 30, 2004.

 

*Interest Expense*.Interest expense was $1.3 million, or 30% of revenue, for the three monthsended September 30, 2005 and was $1.8 million, or 39% of revenue, for thethree months ended September 30, 2004. During each of the three monthsended September 30, 2005 and 2004, the interest expense was primarily dueto the interest accrued on the Kookmin Bank loan funded on February 4,2003, senior convertible debt funded on March 3, 2004 and exchanged in August 2004,convertible debt funded on June 13, 2005, and senior convertible debtfunded on August 9, 2005, as well as amortization of debt issuance costsand discount on the convertible debt. The decrease was primarily due toacceleration of amortization of debt issuance costs and discount on debt duringthe three months ended September 30, 2004 from principal payments made.

 

*Interest Income.*Interestincome was $7 thousand for the three months ended September 30, 2005 frominterest earned on cash deposits. There was no interest income earned for thethree months ended September 30, 2004.

 

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Comparison of thenine months ended September 30, 2005 and 2004

 

*Revenue*. Revenuedecreased $4.1 million to $10.9 million for the nine months ended September 30,2005 from $15.0 million for the nine months ended September 30, 2004.The decrease included a $2.6 million decrease from restatement of revenues from2003 to 2004 as a part of our 2003 financial statement restatement whichresulted in one-time recognition of revenues during the first quarter of 2004,a decrease of $1.7 million from the sales and prototyping of parts manufacturedfrom bulk Liquidmetal alloys to consumer electronics customers as a result ofdecreased demand for conventional hinge components used in certain cellularphone models, and a decrease of $1.0 million from decreased activity fromresearch and development services related primarily to defense, leisure, andluxury goods applications, offset by an increase of $1.2 million from sale ofour coatings products.

 

*Cost of Sales*. Costof sales increased to $10.6 million, or 97% of revenue, for the nine monthsended September 30, 2005 from $9.3 million, or 62% of revenue, forthe nine months ended September 30, 2004. The increase was a result ofdecreases in bulk Liquidmetal alloy business. Cost of sales as a percentage ofrevenue has increased as a result of lower business volumes generated from ourbulk Liquidmetal alloys. Significant portion of our manufacturing costscontinue to remain fixed. We believe that higher manufacturing volumes andgreater mix of higher-margin products in the future will cause the gross profitto improve over time. The cost to manufacture parts from our bulk Liquidmetalalloys is variable and differs based on the unique design of each product. However,the cost of sales for the products sold by the coatings business segment isgenerally consistent because the Liquidmetal coatings products are produced bythird parties and sold wholesale to various industries.

 

*Selling, General, and Administrative Expenses*.Selling, general, and administrative expenses decreased to $6.5 million,or 60% of revenue, for the nine months ended September 30, 2005 from$9.2 million, or 61% of revenue, for the nine months ended September 30,2004. This decrease was primarily a result of decrease in professional andcontracted services of $1.9 million, decrease in advertising and promotionsexpense of $0.2 million, decrease in bad debt expenses of $0.1 million,decrease in product warrant expense of 0.1 million, decrease in insurance costsof $0.1 million, decrease in amortization and depreciation costs of $0.1million, and decrease in travel costs of $0.1 million. These and otherdecreases in selling, general and administrative expenses represent the Company’sefforts to manage costs and focus on our core business while continuing tobuild our corporate infrastructure required to prepare for and support theanticipated growth of our bulk Liquidmetal alloy business.

 

*Research and Development Expenses*.Research and development expenses decreased to $0.8 million, or 7% ofrevenue, for the nine months ended September 30, 2005 from$1.1 million, or 7% of revenue, for the nine months ended September 30,2004. The Company continues to perform research and development of newLiquidmetal alloys and related processing capabilities, develop newmanufacturing techniques, and contract with consultants to advance thedevelopment of Liquidmetal alloys. The decrease was primarily due to decreasein laboratory and prototype supplies used by $0.1 million and decrease inwages and related expenses by $0.1 million.

 

*Impairment of Long Lived Assets*.Impairment of long lived assets increased to $4.0 million, or 39% of revenue,for the nine months ended September 30, 2005 from $0 for the nine monthsended September 30, 2004. Impairment expense represents write-down of $2.5million of raw materials considered to be long term inventory and $1.7 millionof idle equipment. While we may use the excess raw materials beyond oneyear to fulfill future customer order, we have determined that our currentcapacity was not significant enough to warrant holding this inventory as a longterm asset. Further, while we have actively marketed the idle equipment forultimate sale since early 2004, we were unable to sell this equipment. Inaddition, while the equipment may be used internally to meet futurecapacity requirements, considering our current revenue, we do not anticipateutilizing this equipment internally in the near future. As such, we havereduced the carrying values of the excess raw material and idle equipment.

 

*Loss from Extinguishments of Debt.*Lossfrom extinguishments of debt decreased to $1.2 million, or 11% of revenue, forthe nine months ended September 30, 2005 from $1.7 million, or 11% ofrevenue, for the nine months ended September 30, 2004. The $1.2 millionloss from extinguishments of debt was recognized from the exchange of our 6%Convertible Notes due 2006 in August 2005. The $1.7 million loss fromextinguishments of debt was recognized during the three months ended September 30,2004 from exchange of our 6% Senior Convertible Notes due March 2007 in August 2004.

 

*Change in value of warrants, net.*Changein value of warrants increased to net gain of $1.1 million, or 10% of revenue,during the nine months ended September 30, 2005 from a net gain of $0.8million, or 6% of revenue, during the nine months ended September 30, 2004.The increase was from the change in value of warrants issued from the seniorconvertible debt funded in March 2004 and exchanged in August 2004,convertible debt funded in June 2005, and senior convertible debt fundedin August 2005 primarily as a result of fluctuations in our stock price.

 

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*Change in value of beneficial conversionfeature.*Change in value of beneficial conversionfeature was a gain of $0.1 million, or 9% of revenue, during the nine monthsended September 30, 2005 from the change in value of beneficial conversionfeature liability from the senior convertible debt funded in August 2005primarily as a result of fluctuations in our stock price. There were no amountsrecorded as change in value of beneficial conversion feature for the ninemonths ended September 30, 2004.

 

*Interest Expense*.Interest expense was $3.5 million, or 32% of revenue, for the nine months endedSeptember 30, 2005 and was $3.2 million, or 22% of revenue, for the ninemonths ended September 30, 2004. During each of the nine months ended September 30,2005 and 2004, the interest expense was primarily due to the interest accruedon the Kookmin Bank loan funded on February 4, 2003, senior convertibledebt funded on March 3, 2004 and exchanged in August 2004, convertibledebt funded on June 13, 2005, and senior convertible debt funded in August 9,2005, as well as amortization of debt issuance costs and discount on theconvertible debt. As of September 30, 2005, $0.1 million of interestexpense was accrued from default interest rates applied to the seniorconvertible notes effective April 1, 2005 from non payment of quarterlyscheduled interest payments and $1.0 million of late registration penalty feeof our senior convertible debt was accrued as interest expense.

 

*Interest Income.*Interestincome was $14 thousand for the nine months ended September 30, 2005, and$34 thousand for the nine months ended September 30, 2004 from interestearned on cash deposits.

 

**Liquidity and CapitalResources**

** **

Our cash used for operating activities was$7.0 million for the nine months ended September 30, 2005 and$5.5 million, which includes cash used in our discontinued equipmentmanufacturing business of $0.8 million, for the nine months ended September 30,2004. Our working deficit increased from $(10.2) million at December 31,2004 to $(14.4) million at September 30, 2005. The Company’s workingdeficit decrease of $4.2 million was primarily attributable to increase in cashand cash equivalents of $0.2 million, increase in trade accounts receivable of$0.5 million, increase in prepaid and other current assets of $0.4 million,decrease in current portion of long term debt of $4.8 million, decrease incurrent portion of other liabilities of $0.3 million, offset by decrease inrestricted cash of $0.8 million, decrease in inventories of $0.9 million,increase in accounts payable and accrued liability of $0.7 million, increase inshort-term debt of $0.2 million, increase in warrant liabilities of $4.0million, and increase in beneficial conversion feature liabilities of $3.8million.

 

Our cash used in investing activities was $0.2million for the nine months ended September 30, 2005 for the acquisitionof property and equipment and investments in patents and trademarks.

 

Our cash provided by financing activities was $7.0million for the nine months ended September 30, 2005, which consists of$0.8 million in proceeds from restricted cash and $3.25 million and $9.9million in proceeds from convertible debt funded in June 2005 and seniorconvertible debt funded in August 2005, respectively, $0.2 million inproceeds from borrowings from our short term debt executed in March 2005,$2.9 million in proceeds from factoring agreement executed in April 2005,offset by $10.0 million on repayment of borrowings. The proceeds from theconvertible and senior convertible debt funded in June 2005 and August 2005,respectively have been used to meet working capital requirements.

 

We anticipate that our capital expenditures will be approximately lessthan $0.5 million for the full year 2005 for the acquisition of furniture,fixtures, and other business equipment. This amount is subject to change,however, depending upon the nature and the amount of the product orders that weactually receive from customers.

 

Our capital requirements during the next twelve months will dependon numerous factors, including the success of existing products either inmanufacturing or development, the development of new applications forLiquidmetal alloys, the resources we devote to develop and support ourLiquidmetal alloy products, the success of pursuing strategic licensing andfunded product development relationships with external partners, and the costof successful implementation of Section 404 of the Sarbanes-Oxley Act of2002. During the next twelve months, based on our current business plan,we expect to have sufficient resources to continue to devote limited capital toour research and development activities, to further develop and strengthen ourmanufacturing technology, and to provide for working capital and other generalcorporate purposes. However, based on our historical operating results and thecontinued development of our manufacturing capabilities and alloy compositions,there exists the possibility that these resources will not be adequate tooperate at the proposed business plan levels. These expenses and capitalexpenditures could consume a material amount of our cash resources, but theamount of these requirements will depend on the nature and amount of orders wereceive for the purchase of our bulk Liquidmetal alloy products.

 

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Our business is based on commercializing an entirelynew and unique technology, and our current business plan contains a variety ofassumptions and expectations that are subject to uncertainty, includingassumptions and expectations about order flow, unit volumes, manufacturingefficiencies, product cost and pricing, continuing technology improvements,customer adoption practices, strategic licensing relationships and otherrelevant matters. These assumptions take into account recent significant costreductions, as well as recent improvements to our manufacturing processes. Wehave experienced losses from continuing operations during the last two fiscalyears and have an accumulated deficit of $139.1 million as of September 30,2005. At September 30, 2005, our principal source of liquidity was $0.9million of cash and cash equivalents and $2.2 million of trade accountsreceivables. Such conditions raise substantial doubt that our Company will beable to continue as a going concern for a reasonable period of time withoutreceiving additional funding. These operating results occurred while we weredeveloping and attempting to commercialize and manufacture products from anentirely new and unique technology. This business plan required significantspending related to start-up costs and capital expenditures. These factors haveplaced a significant strain on our financial resources. The ultimate success ofthe Company depends on our ability to continue to reduce operating costs,generate higher revenue, achieve positive cash flow from continuing operationsand achieve profitability.

 

Our future success depends on our ability tocontinue reducing operating costs and ultimately to generate higher revenue andattain profitability. We cannot be certain that additional capital, whetherthrough selling additional debt or equity securities or obtaining a line ofcredit or other loan, will be available to us or, if available, will be onterms acceptable to us. If we issue additional securities to raise funds, thesesecurities may have rights, preferences, or privileges senior to those ofour common stock, and our current stockholders may experience dilution.

 

**Contractual Obligations**

** **

The following tablesummarizes the Company’s obligations and commitments as of September 30,2005:

 
| ** **                                          | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Contractual Cash Obligations (1)** | ** ** | **Total**                                                          | ** ** | **Less Than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5 Years** | ** ** |
|                                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Long-term  debt (2)                                 |       | $                                                                  | 15,180     |   | $ | 1,204 |   | $ | 13,976 |   | $ | — |   | $ | — |   |
| Short-term  debt (3)                                |       | 237                                                                |       | 237 |   | — |   | — |   | — |   |
| Capital  lease obligation (4)                       |       | 108                                                                |       | 33 |   | 75 |   | — |   | — |   |
| Operating  leases and rents                         |       | 1,062                                                              |       | 120 |   | 763 |   | 178 |   | 1 |   |
| Growell settlement  payable (5)                     |       | 3,234                                                              |       | 3,234 |   | — |   | — |   | — |   |
| Consulting  services payable                        |       | 68                                                                 |       | 68 |   | — |   | — |   | — |   |
| Dongyang  payable                                   |       | 11                                                                 |       | 11 |   | — |   | — |   | — |   |
|                                                |       | $                                                                  | 19,900     |   | $ | 4,907 |   | $ | 14,814 |   | $ | 178 |   | $ | 1 |   |

 

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(1) Contractualcash obligations include Long-Term Debt comprised of $2,392 of SeniorConvertible Notes issued in 2004, $9,878 of Convertible Notes issued in 2005,and $2,910 of Kookmin Notes, Short-Term Debt comprised of $237 advancesreceived under factoring, loan, and security agreement, and future minimumlease payments under capital and operating leases, liabilities incurred fromsettlement with a former customer (Growell) and divesture of our equipmentmanufacturing business, and purchase commitments from a consultant.

(2) Doesnot include interest payments of $1,869, un-amortized discounts for beneficialconversion feature and warrants, deferred issuance costs of $7,507 of ourconvertible notes.

(3) Doesnot include minimum interest and fee payments of $30.

(4) Includesimputed interest of $4.

(5) In January 2005Growell was acquired by a third party, and we****are currently in negotiations to settle thisbalance with the third party.****

 

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**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 acontingent interest in transferred assets, (3) an obligation underderivative instruments classified as equity, or (4) any obligation arisingout of a material variable interest in an unconsolidated entity that providesfinancing, liquidity, market risk or credit risk support to the company, orthat engages in leasing, hedging, or research and development arrangements withthe company.

 

We have made no arrangements of the typesdescribed in any of the categories that may have a material current orfuture effect on our financial condition, liquidity or results of operations.

 

**Item 3 – Quantitative and QualitativeDisclosures about Market Risk**

 

We are exposed to various markets risksin conducting the business of the Company, and we anticipate that this exposurewill increase as a result of our planned growth. In an effort to mitigatelosses associated with these risks, we may at times enter into derivativefinancial instruments, although we have not historically done so. These may takethe form of forward sales contracts, option contracts, foreign currencyexchange contracts, and interest rate swaps. We have not, and do not intend to,engage in the practice of trading derivative securities for profit.

 

*Interest Rates.*Weare exposed to market risks relating to changes in interest rates. Some of theproceeds of our initial public offering are invested in short-term,interest-bearing, investment grade securities. The value of these securitieswill be subject to interest rate risk and could fall in value if interest ratesrise.

 

*Commodity Prices.*Weare exposed to price risk related to anticipated purchases of certain commoditiesused as raw materials by our businesses, including titanium and zirconium. Althoughwe do not currently enter into commodity future, forward, and option contractsto manage the fluctuations in prices of anticipated purchases, we may enterinto such contacts in the future as our business grows and as our purchases ofthese raw materials increase.

 

*Foreign ExchangeRates.*As a result of our operation of a manufacturingfacility in South Korea, a substantial portion of our costs will be denominatedin the South Korean won. Consequently, fluctuations 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. Although we do notcurrently enter into foreign exchange hedge transactions, we may do so inthe future as our business grows.

 

**Item 4 – Controls and Procedures**

** **

Evaluation of disclosurecontrols and procedures**.**During the course of the re-audit of our financial statements ofLiquidmetal Technologies, Inc. (the “Company”) for the fiscal years ended December 31,2001, 2002, and 2003, it was determined that revenues from certain salesmade by the Company to various customers were either not recognizedin the proper periods or should not have been recognized as revenue. It ****was also determinedthat compensation expense related to certain stock options granted in 2001 and2002 were not calculated in accordance with generally accepted accountingprinciples under APB Opinion No. 25, SFAS No. 123, and EITF 00-23.****Thesedeterminations and the associated restatement of previously issued financialstatements in the Form 10-K for the year ended December 31, 2003,filed on November 10, 2004, suggest that, at the time of the subjecttransactions and the preparation of our financial statements for the relevantperiods, the Company’s disclosure controls and procedures (as definedin Rule 13a-15 under the Securities Exchange Act of 1934) wereineffective as of the end of the period covered by such Form 10-K filed onNovember 10, 2004 for purposes of ensuring that all information requiredto be disclosed by the Company was adequately accumulated andcommunicated to the Company’s management at such time

 

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the SEC has adopted rules requiringpublic companies to include a report of management on the company’s internalcontrols over financial reporting in their annual reports on Form 10-K asof the Company’s fiscal year-ended December 31, 2004. SOX 404 alsorequires the public accounting firm auditing a public company’s financialstatements to attest and report on management’s assessment of the effectivenessof the company’s internal controls over financial reporting. Although theserequirements were first applicable to the Company’s annual report on Form 10-Kfor the fiscal year ended December 31, 2004, the Company did not complywith these requirements for such fiscal year as described in the followingparagraphs. ****Therefore,****theCompany’s independent registered public accounting firm issued a disclaimer ofopinion with respect to the Company’s internal control over financial reportingas of December 31, 2004, and such disclaimer was filed with the Company’samended Form 10-K filed on May 10, 2005.

 

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The Company carried out an evaluation underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of, as of September 30, 3005, the design and operation of theCompany’s disclosure controls and procedures pursuant to Rule 13a-15 underthe Securities Exchange Act of 1934, as amended. Based on that evaluation, theChief Executive Officer and Chief Financial Officer have concluded that thesedisclosure controls and procedures, as of September 30, 2005, were not effective.This determination was based primarily on the material weaknesses in internalcontrol over financial reporting identified below.

 

 Updateon Management’s Assessment of Internal Control Over Financial Reporting. ****Thetime********and resources committed tothe restatement of prior periods’ financial statements (as aforementioned)delayed management in commencing and completing its documentation, assessmentand evaluation of internal control over financial reporting. Due to the issuesdescribed in the foregoing paragraph, as well as limitation on financial andinternal resources, management’s assessment of the effectiveness of ourinternal control over financial reporting had been substantially delayed, whichin turn prohibited the Company’s independent registered public accounting firm,Stonefield Josephson, Inc., in performing its audit of management’sassessment of the effectiveness of internal control over financial reportingpursuant to SOX 404.****

 

****The Companyhas been advised by the SEC that the filing of the above mentioned disclaimerdoes not comply with the SEC’s rules and regulations under Section 404,and the SEC has further advised us that this noncompliance has resulted in theCompany being in violation of Section 13(a) under the SecuritiesExchange Act of 1934.  Section 13(a) establishesthe general requirement that public companies must file with the SEC, inaccordance with such rules and regulations as the SEC may prescribe,such information, documents, and reports as the SEC may from time to timerequire for the protection of investors, including Form 10-Ks and 10-Qs.****

 

****During 2005, the Company has taken steps to complywith Section 404, as of December 31, 2005 including hiring independentconsulting firms, Assurance Consulting 3 in January 2005 and LoginFinancial in July 2005, to assist the Company with its Section 404compliance and to identify and propose remedial actions to address and mitigatedeficiencies in internal controls over financial reporting. In addition,beginning July 2005 the Company has devoted additional internal resourcesincluding having an executive manager lead the SOX 404 compliance effort on afull time basis. Also, beginning August 2005, management allocated aconsultant from Login Financial to our South Korean operations and re-evaluatedour controls as well as implemented additional control procedures. The Company’sevaluation included revising our documentation, re-performing walkthroughs andre-testing our internal controls. In addition, on November 14, 2005management hired an additional “Big 4” third party consultant who isexperienced in the SOX 404 effort for companies operating in South Korea toaddress and mitigate material deficiencies during the fourth quarter of 2005and into 2006. Even though the Company devoted these resources, considering the********nature of the Company’s operations having substantial presence in South Koreain addition to the Company’s US operations in Texas and California as well asthe amount of time, financial resources, complexity associated with Section 404compliance, limited financial resources of the Company and management’s latestart in identifying and documenting it’s internal controls, the Company’sauditors advised the Company and the Audit Committee of the Board of Directorsthat they believed it was highly unlikely that the Company’s management wouldbe able to finish its testing and assessment of the Company’s internal controlsin time for them to begin their testing of management’s assertions overinternal controls by the end of fiscal year 2005 in accordance with thestandards of Section 404.****

 

****In the ongoing process of making our assessment of internal control overfinancial reporting, management used the criteria established in “InternalControl - Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Although our work isincomplete, as of the date of this quarterly report. of the various controlprocedures that we have documented, performed walkthroughs, and tested as of November 18,2005, management has identified several control deficiencies, some of whichhave been determined to be material weaknesses in internal control overfinancial reporting as follows.****

 

****1.********              *********Lack of adequate segregation ofduties in the Company’s South Korean Operations in accounts receivableinvolving cash receipts, shipping, delivery of products and customer invoicereconciliations.*****

 

****This deficiency resulted from the fact that the processesutilized at the Company’s Korean Operations were designed to meet certainKorean business practices whereby invoices are created once a month, theinvoices are confirmed by the customer prior to being sent to and received bythe customer, and payments of invoices are done only through wire transfers. Aspart of these Korean business practices,, “tax invoices” are generated bysellers of goods and are issued to customers as formal documents required bythe Korean government to immediately document and report sales for income taxpurposes.****

 

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****Previously, these processes were handled by the accountingand sales departments in the Korean Operations, and to mitigate the risk offraud or error, the Company relied on the fact that all invoices were confirmedwith the customer prior to recognizing revenue, all cash receipts were receivedvia wire transfer, and revenue accounts were reconciled by accounting on amonthly basis. Nevertheless, the Company’s former auditor has informed theCompany that these processes lacked certain formal documentation andsegregation of duties. To remediate these weaknesses, the Company implementedthe following changes in its Korean Operations during November 2005****

 

****•********                 *********Segregationof Duties*********: The tax invoices are nowbeing created by a sales accountant, an individual who has dual duties in bothAccounting and Sales in the Korean Operations, whereas previously, tax invoiceswere created by the Assistant Sales Manager responsible for delivery of theproducts to the customer. This segregation of the tax invoicing function fromproduct deliveries is an additional control procedure to mitigate the risk offraud or error.****

 

****•********                 *********SequentialDocuments*********:  The Company has created an internal,sequential invoice system tracked directly by the Company’s SAP system whichsummarizes the tax invoice created by the accounting department, deliveryrequisitions created by the production department, and the sales transactionreport created by the sales department. This three-way matching system is anadditional control to ensure that revenues are properly documented andreconciled at the end of each month.****

 

****•********                 *********AdditionalResources*********:  In November 2005, the Company begandevoting additional internal resources to the Korean accounting department tosegregate duties further. This included having (1) the sales accountantcreate all tax invoices as mentioned under “Segregation of Duties” above, (2) theAssistant Sales Manager reconcile the delivery requisitions maintained in theProduction Department, and (3) the Accounting Department control vendorcreation in the purchasing module of our SAP reporting system. In addition, theCompany is currently conducting a search for an accountant for the Koreanoperations to further augment control procedures.****

 

****2.********              *********Lack of adequate segregation ofduties in the Company’s Coatings Division in Texas in order processing andinvoicing*********.****

 

****The Company’s coatings business in Texas (the “CoatingsBusiness”) is managed by two individuals, the Vice President of Coatings andthe General Accountant. The accountant handles all of the “front end”processes, including purchase orders, sales orders, order fulfillment, andinvoicing. To mitigate the risk of fraud or error, the Company previouslyrelied on the fact that the “back end” processes for all orders (such as cashreceipts, vendor management, customer management, collections, and review ofthe results of operations) are all handled by the Company’s corporate office. Inaddition, the Company also relied on the fact that all sales orders, inventorymanagement, and order fulfillment are handled through the Company’s SAP system,which provides real-time monitoring and review.****

 

****Despite these measures, the Company’s former auditorconcluded that the lack of segregation of duties in the Coatings Businessconstituted a material weakness in the Company’s internal controls overfinancial reporting. As a result, in September 2005, the Companyinstituted additional internal control procedures in its Coatings Business,including the following: (1) requiring that all orders be supported by awritten purchase order containing the customer’s letterhead and address, the part numberand description, and the signature of the purchaser with terms and conditions, (2) requiringthat all 3rd party vendor “drop shipments” be supported by shipping documentsfaxed or mailed to the Company by the vendor, (3) periodically performingon-site audits of the accounting procedures at the Coating Business by theCompany’s central corporate accounting group, the first of which has beenperformed in December 2005 and (4) hiring an additional AccountingManager in December 2005 in the Corporate Accounting Group to furthermonitor the Coatings Business and other accounting functions.****

 

****3.********              *********Lack of adequate controls anddocumentation in the Company’s South Korean Operations to evidence propercustomer invoicing and revenue recognition in the proper period*********.****

 

****The measures taken to remedy the deficiency described innumber 1 above also served to remediate this deficiency.****

 

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****4.********              *********Lack of progress in documenting,assessing and evaluating our internal controls in our South Korean Operationsevidenced by aforementioned deficiencies of which remediations will need to becompleted as of December 31, 2005*********.****

 

****The Company’s overall assessment of its internal controls,including documentation, walkthroughs, and testwork, commenced in February of2005. Management believes that the Company’s assessment of its controls in itsU.S. operations has been substantially completed in December 2005,although due to limited financial resources, the Company was unable to beginits assessment of its Korean Operations until mid-to late 2005. The Companyidentified and, beginning in August of 2005, retained a bi-lingualconsultant from Login Financial to work in the Company’s Korean Operations on afull time basis to help with the SOX 404 compliance effort. In addition, toexpedite the implementation process, the Company hired, in November 2005,an consultant from Price Waterhouse Coopers-Korea who is familiar with SOX 404implementation for Korean companies. Nevertheless, the Company’s former auditorinformed the Company that they believed that progress at the Korean Operationson the SOX 404 process has not been sufficient to enable the Company tocomplete the process in time for compliance. Although the disclosure in thisparagraph may not be characterized as a material weakness in internal controlsper se (but instead constitutes an update on the Company’s efforts regardingSOX 404 compliance), the Company has disclosed this information based on formerauditor’s recommendation.****

 

****5.********              *********Lack of controls over internalaccess to the Company’s SAP system of reporting by unauthorized users*********.****

 

****SAP is the Company’s global enterprise resource planning(ERP) software that handles the Company’s financial reporting on a real-timebasis. Historically, access to SAP was controlled on an ad hoc basis by the Controllerand the Vice President of Operations of the Company, and formal IT proceduresfor SAP administration were lacking. During September 2005, the Companyhired an independent IT consultant specializing in SOX implementationsspecifically for the Company’s global IT cycle. The Company has substantiallycompleted its assessment of IT system controls, including improving the Company’sinternal access controls to its SAP system.****

 

****6.********              *********Manual performance of numerousprocedures that could be automated using current reporting systems*********.****

 

****Current manual procedures include (1) creating excelspreadsheet invoices to bill customers; (2) performing manual currencytranslations (“FX translation”) for financial reporting in U.S. dollars; and (3) usinga manual purchase requisition system. While these procedures may beautomated through modules in the SAP system, due to the significant financialinvestment necessary to automate these procedures in SAP, the Company is notable to automate these procedures at this time. However, beginning in August 2005,the Company implemented control procedures to mitigate risks associated withmanual procedures including (1) requiring additional authorizations forall purchases, journal entries, and requisitions and (2) creatingchecklists for month end, customer/vendor creation, human resource filing, andrevenue support to ensure propriety and completeness of the Company’saccounting records.****

 

****The Company has devoted significant amount offinancial and internal resources during 2005 and early part of 2006 toensure compliance with SOX 404, and on January 16, 2006, Company’smanagement believes that the Company has substantially completed itsdocumentation, assessment and evaluation of its internal controls overfinancial reporting as of December 31, 2005. However, our independentauditors, Stonefield Josephson Inc., resigned on December 1, 2005, and on January 20,2006, the Company hired Choi, Kim & Park LLP (“CKP”) as its newindependent registered public accounting firm. While the Company has advisedCKP of the foregoing weaknesses in internal controls, due to the untimelinessof the foregoing events, CKP was unable to satisfactorily complete their auditof the Company’s internal control over financial reporting pursuant to SOX 404,and thus, have issued a disclaimer of an opinion on the company’s internalcontrol over financial reporting as of December 31, 2005 in the fiscal2005 annual report on Form 10-K. The Company’s management will continue tomonitor potential changes in the legal and regulatory requirements of SOX 404,particularly the requirements for small public companies.****

 

****In general, the SEC has broad authority underthe Securities Exchange Act of 1934 to institute investigations, to seekinjunctions, to seek monetary penalties, and to otherwise pursue enforcementactions for violations of Section 13(a), including a failure to file a Form 10-Kor for the omission of necessary statements in a Form 10-K. Therefore, aviolation under Section 404 could potentially subject a company to thesesame investigations and penalties. Section 404 is a relatively new legalrequirement, and there is very little precedent establishing the consequencesor appropriate response to a public company’s failure to comply with Section 404.Accordingly, although the Company has discussed its Section 404noncompliance for 2004 and 2005 with the SEC, the Company cannot predict whataction, if any, the SEC may take against the Company as a result of afailure to be compliant with its obligations under Section 404.****

 

Changes in internal controls.The Company has made various changes to the internal controls over financialreporting during the third quarter ended September 30, 2005. Thesematerial changes are described in paragraphs 2, 5, and 6 above under the caption“Update on Management’s Assessment of Internal Control Over FinancialReporting.” In addition the Company has previously disclosed as a materialweakness a lack of adequate controls and monitoring of payroll process, as suchfunction was outsourced to a third-party payroll processor that was notcertified under SAS 70 (Type II). In August 2005, the Company remediatedthis weakness by retaining the services of ADP for payroll processing. ADP iscertified under SAS 70 (Type II).

 

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### **PART II**

**OTHERINFORMATION**

 

**Item 1 – Legal Proceedings**

 

There were no material developments in our legal proceedings during thecurrent quarter.

 

**Item 2 – Unregistered Sales of Equity Securities andUse of Proceeds**

 

On August 9, 2005, we completed aprivate placement (the “Private Placement”) of $9.9 million in principal amountof new 7% Convertible Secured Promissory Notes due August 2007 (the “2005Senior Notes”). The issuance consisted of $5.0 million cash, exchange of $1.3million in principal amount of previously issued 10% Senior Secured Notes Due July 29,2005 (the “July 2005 Notes”), the exchange of $3.0 million in principalamount of previously issued 10% Convertible Unsecured Notes Due June 2006(the “June 2006 Notes”), satisfaction of accrued interest and lateregistration fees in the amount of $0.6 million on the previously issued July 2005Notes, and satisfaction of accrued interest of $9 thousand previously issued June 2006Notes. The 2005 Senior Notes were issued pursuant to a Securities PurchaseAgreement dated effective as of August 2, 2005 among the Company, thepurchasers of the 2005 Senior Notes, and the holders of previously issued July 2005Notes and June 2006 Notes of the Company due June 2006.

 

The 2005 Senior Notes are convertible intoshares of the Company’s common stock at $2.00 per share pursuant to an Amendedand Restated Security Agreement. The 2005 Senior Notes are secured bysubstantially all assets of the Company and rank senior to all otherobligations of the Company, other than the Company’s loan with Kookmin Bank ofSouth Korea (or any refinancing of such loan), the 6% Senior SecuredNotes Due July 29, 2007 (“July 2007Notes”), purchase money asset financing, trade creditors in the ordinary courseof business, and any inventory or receivables-based credit facility that theCompany may obtain in the future, provided that the amount of the creditfacility does not exceed 50% of eligible inventory and 80% of eligiblereceivables. The 2005 Senior Notes will automatically convert into common stockif the Company’s common stock has an average closing price of more than $5.00per share during 30 consecutive trading days.

 

The Company also issued warrants to thepurchasers of the 2005 Senior Notes and placement agents giving them the rightto purchase up to 2,469,470 and 414,495 shares of Company common stock,respectively, with an exercise price of $2.00 per share. The Warrants willexpire on August 2, 2010.

 

In connection with the transaction, the Company, allpurchasers of the 2005 Senior Notes, and all holders of previously issued notesentered into a single Amended and Restated Registration Rights Agreement thatreplaces the prior registration rights agreements entered into by the Companywith the various noteholders. Under the Amended and Restated RegistrationRights Agreement, the Company is required to file a resale registrationstatement for the shares underlying the 2005 Senior Notes and July 2007Notes and warrants within ninety (90) days of the closing of the 2005 SeniorNotes. The Company is required to cause this registration statement to becomeeffective within 60 days after the Company receives the first written commentson the registration statement from the SEC, or if the SEC notifies the Company thatit will not review the registration statement, within five days after suchnotification. The Company will be subject to certain monetary penalties, as setforth in the registration rights agreement, if the registration statement isnot filed or does not become effective on a timely basis.

 

As of September 30, 2005, we have used $1.0million of the net proceeds from the Private Placement for working capitalpurposes and used $2.6 million to repay principal and accrued interest from thepreviously issued notes.

 

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**Item 6 – Exhibits**

 

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

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                            |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                   |
| 31.1                |       | Certification of the President and Chief  Executive Officer, John Kang, as required by Section 3.02 of  Sarbane-Oxley Act of 2002 |
|                |       |                                                                                                                                   |
| 31.2                |       | Certification of Chief Financial Officer,  Young Ham, as required by Section 3.02 of Sarbane-Oxley Act of 2002                    |
|                |       |                                                                                                                                   |
| 32.1                |       | Certification of Principal Executive  Officer, John Kang, as required by Section 9.06 of Sarbane-Oxley Act of  2002               |
|                |       |                                                                                                                                   |
| 32.2                |       | Certification of Chief Financial Officer,  Young Ham, as required by Section 9.06 of Sarbane-Oxley Act of 2002                    |
|                |       |                                                                                                                                   |

 

40

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

 
|                      | LIQUIDMETAL  TECHNOLOGIES                     |
|---------------------------|-----------------------------------------------|
|                      | (Registrant)                                  |
|                      |                                          |
| Date: March 16, 2006 | /s/ Ricardo Salas                             |   |
|                      | Ricardo Salas                                 |
|                      | President and Chief Executive Officer         |
|                      | (Principal Executive Officer)                 |
|                      |                                          |
|                      |                                          |
| Date: March 16, 2006 | /s/ Young Ham                                 |   |
|                      | Young  Ham                                    |
|                      | Chief Financial Officer                       |
|                      | (Principal Financial and Accounting  Officer) |

 

41

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