** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

** **

### **FORM 10-Q**

### ** **

| **ý**                                                                                                                                                                                                                    | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                          |                                                                                          |
| **For the quarterly  period ended September 30, 2004**                                                                                                                                                                        |
| ** **                                                                                                                                                                                                                    |                                                                                          |
| **OR**                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                          | ** **                                                                                    |
| **o**                                                                                                                                                                                                                         | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                          |                                                                                          |
| **For the transition  period from                  to                ** |
| ** **                                                                                                                                                                                                                    | ** **                                                                                    |
| **Commission  File No**. **001-31332**                                                                                                                                                                                        |

 

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**LIQUIDMETALTECHNOLOGIES, INC.**

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

 

| **Delaware**                                                                 | **33-0264467**                        |
|------------------------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)              | (I.R.S. Employer  Identification No.) |
| * *                                                                     |                                  |
| **25800 Commercentre Drive, Suite 100Lake Forest, California 92630**         |
| (address of principal executive office, zip code)                            |
|                                                                         |                                  |
|                                                                         |                                  |
| Registrant’s telephone  number, including area code: **(949) 206-8000** |

 

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Indicate by check mark whether the registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for at least the past 90 days.

 

Yes o No ý

 

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

 

Yes ý No o

 

#### **As of December 31, 2004, there were 41,609,652 sharesof the registrant’s common stock, $.001 par value, outstanding.**

#### ** **

** **

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**FORM 10-Q**

 

**FOR THE QUARTER ENDED**

 

**SEPTEMBER****30, 2004**

 

**FORWARD-LOOKING INFORMATION**

 

Statements in this reportconcerning the future sales, expenses, profitability, financial resources,product mix, market demand, product development and other statements in thisreport concerning the future results of operations, financial condition andbusiness of Liquidmetal Technologies, Inc. are “forward-looking” statements asdefined in the Securities Act of 1933 and Securities Exchange Act of 1934.Investors are cautioned that the Company’s actual results in the future maydiffer materially from those projected in the forward-looking statements due torisks and uncertainties that exist in the Company’s operations and businessenvironment, including competition, need for increased acceptance of products,ability to continue to develop and extend our brand identity, ability toanticipate and adapt to a competitive market, ability to effectively managerapidly expanding operations, amount and timing of operating costs and capitalexpenditures relating to expansion of our business, operations andinfrastructure, ability to provide superior customer service, dependence uponkey personnel and the like. The Company’s most recent filings with theSecurities and Exchange Commission, including Form 10-K, contain additionalinformation concerning many of these risk factors, and copies of these filingsare available from the Company upon request and without charge.

 

2

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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 (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 2 –  Changes in Securities and Use of Proceeds**                                                   | ** **                                                                          |
| ** **                                                                                                     | ** **                                                                          | ** ** |
| **Item 6 – Exhibits  and Reports on Form 8-K**                                                            | ** **                                                                          |
| ** **                                                                                                     | ** **                                                                          | ** ** |
| **Signatures**                                                                                                 | ** **                                                                          |
| ** **                                                                                                     | ** **                                                                          | ** ** |
| **Certifications**                                                                                             | ** **                                                                          |

#### ** **

**ExplanatoryNote**

 

We have restated certain quarterly financialstatements previously reported and related disclosures to correct our prematurerecognition of revenues from one transaction with a single customer that weoriginally recorded in March 2003.  Wehave also restated our financial statements for the fiscal year ended December31, 2002 and related disclosures in our annual report on Form 10-K to correcttwo similar premature revenue recognition events with the same customer thatwere originally recorded in September and December 2002.  Upon analysis of the transaction terms andcertain related agreements undertaken by the Company to resolve a dispute withthe customer, we concluded that the transactions were contingent upon continuedperformance by a subsidiary of the Company, which would have precluded revenuerecognition until the contingency ended. Under the terms of a Settlement Agreementreached with the customer on January 10, 2004, the Company reacquired theequipment associated with the two fiscal 2002 transactions and recognized therevenue associated with the March 2003 transaction in January 2004.  The restatement of our December 31, 2002financial statements resulted in a $1.9 million reduction of revenue and a $1.0million increase in net loss.  Therestatement of our 2003 financial statements did not have any impact for thequarter ended September 30, 2003.  Theeffect of the restatement during the nine months ended September 30, 2003 is adecrease in revenues by $3.0 million and an increase in net loss by $1.4million.

 

3

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**Item 1 –Financial Statements**

 

**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(in thousands, except share data)**

 
| ** **                                                                                                                                             | ** ** | **September 30,****2004** | ** ** | **December 31,****2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                             | ** ** | **(unaudited)**           | ** ** | ** **               | ** ** |
|                                                                                                                                                   |       |                      |       |                     |       |
| **ASSETS**                                                                                                                                             | ** ** | ** **                | ** ** | ** **               | ** ** |
| ** **                                                                                                                                             | ** ** | ** **                | ** ** | ** **               | ** ** |
| Current Assets:                                                                                                                                        |       |                      |       |                     |       |
|                                                                                                                                                   |       |                      |       |                     |       |
| Cash and cash  equivalents                                                                                                                             |       | $                         | 1,396      |                     | $          | 3,127 |   |
| Restricted cash                                                                                                                                        |       | 1,000                     |       | —                   |       |
| Trade accounts  receivables, net of allowance for doubtful accounts of $203 and $127                                                                   |       | 3,590                     |       | 3,748                    |       |
| Inventories                                                                                                                                            |       | 5,681                     |       | 3,731                    |       |
| Prepaid expenses  and other current assets                                                                                                             |       | 1,506                     |       | 395                      |       |
| Assets available  for sale, net                                                                                                                        |       | —                    |       | 827                      |       |
| Total current assets                                                                                                                                   |       | 13,173                    |       | 11,828                   |       |
|                                                                                                                                                   |       |                      |       |                     |       |
| Property, plant  and equipment, net                                                                                                                    |       | 15,857                    |       | 17,743                   |       |
| Other  intangibles, net                                                                                                                                |       | 1,108                     |       | 984                      |       |
| Other assets                                                                                                                                           |       | 815                       |       | 297                      |       |
| Total assets                                                                                                                                           |       | $                         | 30,953     |                     | $          | 30,852 |   |
|                                                                                                                                                   |       |                      |       |                     |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                         |       |                      |       |                     |       |
|                                                                                                                                                   |       |                      |       |                     |       |
| Current  Liabilities:                                                                                                                                  |       |                      |       |                     |       |
|                                                                                                                                                   |       |                      |       |                     |       |
| Accounts payable  and accrued expenses                                                                                                                 |       | $                         | 8,423      |                     | $          | 3,683 |   |
| Deferred revenue                                                                                                                                       |       | 838                       |       | 1,435                    |       |
| Long-term debt,  current portion, net of discounts of $980                                                                                             |       | 5,826                     |       | 1,032                    |       |
| Other liabilities,  current portion                                                                                                                    |       | 636                       |       | 4,705                    |       |
| Total current  liabilities                                                                                                                             |       | 15,723                    |       | 10,855                   |       |
|                                                                                                                                                   |       |                      |       |                     |       |
| Long-term debt,  net of current portion                                                                                                                |       | 2,650                     |       | 3,015                    |       |
| Other long-term  liabilities, net of current portion                                                                                                   |       | 1,245                     |       | 814                      |       |
| Total  liabilities                                                                                                                                     |       | 19,618                    |       | 14,684                   |       |
|                                                                                                                                                   |       |                      |       |                     |       |
| Commitments and  Contingencies:                                                                                                                        |       |                      |       |                     |       |
|                                                                                                                                                   |       |                      |       |                     |       |
| Minority  interest                                                                                                                                     |       | —                    |       | 5                        |       |
|                                                                                                                                                   |       |                      |       |                     |       |
| Shareholders’  Equity:                                                                                                                            |       |                      |       |                     |       |
|                                                                                                                                                   |       |                      |       |                     |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized and 41,609,652 issued  and outstanding at September 30, 2004 and December 31, 2003 |       | 42                        |       | 42                       |       |
| Paid in capital                                                                                                                                        |       | 132,160                   |       | 128,581                  |       |
| Unamortized  stock-based compensation                                                                                                                  |       | —                    |       | (128                     | )          |
| Accumulated  deficit                                                                                                                                   |       | (121,612                  | )          | (112,587                 | )          |
| Accumulated  comprehensive income                                                                                                                      |       | 745                       |       | 255                      |       |
| Total  shareholders’ equity                                                                                                                       |       | 11,335                    |       | 16,163                   |       |
|                                                                                                                                                   |       |                      |       |                     |       |
| Total  liabilities and shareholders’ equity                                                                                                       |       | $                         | 30,953     |                     | $          | 30,852 |   |

 

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

 

4

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** **

**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

### **CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS AND COMPREHENSIVE LOSS**

**(In thousands, except per sharedata)**

**(unaudited)**

 
| ** **                                                                                                                   | ** ** | **For the  Three  Months Ended Sept. 30,** | ** ** | **For the  Nine  Months Ended Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                         |       |                                       |       |                                      |       |   |   | **restated** |   |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Revenue                                                                                                                      |       | $                                          | 4,615      |                                      | $          | 3,281 |   | $ | 14,958 |   | $ | 11,013 |   |
| Cost of sales                                                                                                                |       | 3,241                                      |       | 4,595                                     |       | 9,273 |   | 11,401 |   |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Gross profit  (loss)                                                                                                         |       | 1,374                                      |       | (1,314                                    | )          | 5,685 |   | (388 | ) |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Operating  Expenses:                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Selling,  general, and administrative                                                                                        |       | 3,569                                      |       | 3,661                                     |       | 9,178 |   | 12,294 |   |
| Research and  development                                                                                                    |       | 374                                        |       | 981                                       |       | 1,060 |   | 7,755 |   |
| Total expenses                                                                                                               |       | 3,943                                      |       | 4,642                                     |       | 10,238 |   | 20,049 |   |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Loss from  operations                                                                                                        |       | (2,569                                     | )          | (5,956                                    | )          | (4,553 | ) | (20,437 | ) |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Loss from  extinguishments of debt                                                                                           |       | (1,663                                     | )          | —                                    |       | (1,663 | ) | — |   |
| Other expense  (including $427 change in warrant value)                                                                      |       | (434                                       | )          | —                                    |       | (434 | ) | — |   |
| Other income                                                                                                                 |       | 302                                        |       | —                                    |       | 1,582 |   | — |   |
| Interest expense                                                                                                             |       | (1,805                                     | )          | (106                                      | )          | (3,242 | ) | (281 | ) |
| Interest income                                                                                                              |       | —                                     |       | 53                                        |       | 34 |   | 281 |   |
| Gain on sale of  marketable securities held-for-sale                                                                         |       | —                                     |       | —                                    |       | — |   | 1,178 |   |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Loss from  operations before minority interest, income taxes and discontinued operations                                     |       | (6,169                                     | )          | (6,009                                    | )          | (8,276 | ) | (19,259 | ) |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Income taxes                                                                                                                 |       | —                                     |       | —                                    |       | — |   | — |   |
| Minority  interest in loss (income) of consolidated subsidiary                                                               |       | —                                     |       | (23                                       | )          | — |   | (26 | ) |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Loss from  continuing operations                                                                                             |       | (6,169                                     | )          | (5,986                                    | )          | (8,276 | ) | (19,233 | ) |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Loss from  discontinued equipment manufacturing operations, (net of tax of $8 for the  nine months ended September 30, 2003) |       | —                                     |       | (115                                      | )     | (749 | )  | (425 | )  |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Net loss                                                                                                                     |       | (6,169                                     | )          | (6,101                                    | )          | (9,025 | ) | (19,658 | ) |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Other  comprehensive loss:                                                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Foreign exchange  translation gain                                                                                           |       | 68                                         |       | 687                                       |       | 490 |   | 846 |   |
| Net unrealized  loss on marketable securities held-for-sale (including transfer of realized  gain of $1,178)                 |       | —                                     |       | —                                    |       | — |   | (1,668 | )  |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Comprehensive  loss                                                                                                          |       | $                                          | (6,101     | )                                         | $          | (5,414 | ) | $ | (8,535 | ) | $ | (20,480 | ) |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Net loss per  common share – basic and diluted:                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Loss per share –  continuing operations                                                                                 |       | $                                          | (0.15      | )                                         | $          | (0.14 | ) | $ | (0.20 | ) | $ | (0.46 | ) |
| Loss per share –  discontinued operations                                                                               |       | $                                          | —     |                                      | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) |
| Loss per share  basic and diluted                                                                                            |       | $                                          | (0.15      | )                                         | $          | (0.15 | ) | $ | (0.22 | ) | $ | (0.47 | ) |
|                                                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Number of  weighted average shares – basic and diluted                                                                  |       | 41,610                                     |       | 41,610                                    |       | 41,610 |   | 41,532 |   |

 

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

 

5

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

###### **Forthe Nine months Ended September 30, 2004**

**(in thousands, except share data)**

**(unaudited)**

 
| ** **                                         | ** ** | **Common  Shares** | ** ** | **Common  Stock** |       | **Paid in  Capital** |       | **Unamortized  Stock-Based  Compensation** |       | **Accumulated  Deficit** |       | **Comprehensive  Income** |       | **Total**  |       |
|----------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------|------------|--------------------------------------------|------------|--------------------------|------------|---------------------------|------------|------------|------------|
| ** **                                         | ** ** | ** **         | ** ** | ** **        | ** ** | ** **           | ** ** | ** **                                 | ** ** | ** **               | ** ** | ** **                | ** ** | ** ** | ** ** |
| Balance,  December 31, 2003                   |       | 41,609,652         |       | $                 | 42         |                 | $          | 128,581                                    |       | $                        | (128       | )                         | $          | (112,587   | )          | $ | 255 |   | $ | 16,163 |   |
| Stock-based compensation                           |       | —             |       | —            |       | 261                  |       | 15                                         |       | —                   |       | —                    |       | 276        |       |
| Unamortized  stock-based compensation              |       | —             |       | —            |       | (113                 | )     | 113                                        |       | —                   |       | —                    |       | —     |       |
| Beneficial  conversion feature of convertible debt |       | —             |       | —            |       | 3,424                |       | —                                     |       | —                   |       | —                    |       | 3,424      |       |
| Warrants  cancelled                                |       | —             |       | —            |       | 7                    |       | —                                     |       | —                   |       | —                    |       | 7          |       |
| Foreign exchange  translation gain                 |       | —             |       | —            |       | —               |       | —                                     |       | —                   |       | 490                       |       | 490        |       |
| Net loss                                           |       | —             |       | —            |       | —               |       | —                                     |       | (9,025                   | )          | —                    |       | (9,025     | )          |
| Balance,  September 30, 2004                       |       | 41,609,652         |       | $                 | 42         |                 | $          | 132,160                                    |       | $                        | —     |                      | $          | (121,612   | )          | $ | 745 |   | $ | 11,335 |   |

 

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

 

6

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

### **CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(in thousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                          | ** ** | **For the Nine Months  Ended Sept. 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
| ** **                                                                                                          | ** ** | ** **                               | ** ** | **restated** | ** ** |
| ** **                                                                                                          | ** ** | ** **                               |       |   |   |
| **Operating  Activities:**                                                                                          |       |                                     |       |   |   |
| Net loss                                                                                                            |       | $                                        | (9,025     | ) | $ | (19,658 | ) |
|                                                                                                                |       |                                     |       |   |   |
| Adjustments to  reconcile loss from continuing operations to net cash provided by (used for)  operating activities: |       |                                     |       |   |   |
| Loss on disposal  of property and equipment                                                                         |       | 8                                        |       | — |   |
| Gain on sale of  marketable securities held-for-sale                                                                |       | —                                   |       | (1,178 | ) |
| Depreciation and  amortization                                                                                      |       | 2,585                                    |       | 3,462 |   |
| Loss on  extinguishments of debt                                                                                    |       | 1,663                                    |       | — |   |
| Amortization of  debt discount                                                                                      |       | 2,692                                    |       | — |   |
| Stock-based  compensation                                                                                           |       | 276                                      |       | 293 |   |
| Bad debt expense                                                                                                    |       | 111                                      |       | (134 | ) |
| Warranty expense                                                                                                    |       | 269                                      |       | 283 |   |
|                                                                                                                |       |                                     |       |   |   |
| Changes in  operating assets and liabilities:                                                                       |       |                                     |       |   |   |
| Accounts  receivable                                                                                                |       | 47                                       |       | 1,292 |   |
| Inventories                                                                                                         |       | (1,950                                   | )          | (1,650 | ) |
| Prepaid expenses  and other current assets                                                                          |       | (1,111                                   | )          | 1,464 |   |
| Other assets                                                                                                        |       | (877                                     | )          | 174 |   |
| Accounts payable  and accrued expenses                                                                              |       | 3,887                                    |       | (5,139 | ) |
| Deferred revenue                                                                                                    |       | (597                                     | )          | 62 |   |
| Other  liabilities                                                                                                  |       | (4,259                                   | )          | 291 |   |
| Net cash used  for continuing operations                                                                            |       | (6,281                                   | )          | (20,438 | ) |
|                                                                                                                |       |                                     |       |   |   |
| Net cash  provided by (used for) discontinued operations                                                            |       | 822                                      |       | (1,771 | ) |
| Net cash used  for operating activities                                                                             |       | (5,459                                   | )          | (22,209 | ) |
|                                                                                                                |       |                                     |       |   |   |
| **Investing  Activities:**                                                                                          |       |                                     |       |   |   |
| Purchases of  property and equipment                                                                                |       | (73                                      | )          | (1,961 | ) |
| Proceeds from  sale of property and equipment                                                                       |       | 11                                       |       | — |   |
| Proceeds from  sale of marketable securities held-for-sale                                                          |       | —                                   |       | 2,578 |   |
| Investment in  patents and trademarks                                                                               |       | (202                                     | )          | (252 | ) |
| Net cash  provided by (used) for investing activities                                                               |       | (264                                     | )          | 365 |   |
|                                                                                                                |       |                                     |       |   |   |
| **Financing  Activities:**                                                                                          |       |                                     |       |   |   |
| Proceeds from  borrowings                                                                                           |       | 9,924                                    |       | 5,488 |   |
| Repayment of  borrowings                                                                                            |       | (4,898                                   | )          | — |   |
| Repayment of  other liabilities                                                                                     |       | (91                                      | )          | (43 | ) |
| Stock warrants  exercised                                                                                           |       | —                                   |       | 5 |   |
| Stock options  exercised                                                                                            |       | —                                   |       | 391 |   |
| Restricted cash                                                                                                     |       | (1,000                                   | )          | — |   |
| Net cash  provided by financing activities                                                                          |       | 3,935                                    |       | 5,841 |   |
|                                                                                                                |       |                                     |       |   |   |
| Effect of  foreign exchange translation                                                                             |       | 57                                       |       | (469 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                               |       | (1,731                                   | )          | (16,472 | ) |
|                                                                                                                |       |                                     |       |   |   |
| Cash and cash  equivalents at beginning of period                                                                   |       | 3,127                                    |       | 25,058 |   |
| Cash and cash  equivalents at end of period                                                                         |       | $                                        | 1,396      |   | $ | 8,586 |   |
|                                                                                                                |       |                                     |       |   |   |
| **Supplemental  cash flow information:**                                                                            |       |                                     |       |   |   |
| Interest paid                                                                                                       |       | $                                        | 463        |   | $ | 145 |   |
| Taxes paid                                                                                                          |       | $                                        | —     |   | $ | 126 |   |

 

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

 

7

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During the nine monthsended September 30, 2004, the Company sold it’s 51%ownership interest in Dongyang to the 49% minority shareholder, which resultedin a loss of $46 from disposal of discontinued operations.

 

During the nine monthsended September 30, 2004, the Company sold assets and liabilities of itsTaesung equipment manufacturing division in Korea to a third party whichresulted in a loss of approximately $184.

 

During the nine months ended September 30, 2004, the change in the foreignexchange between the U.S. Dollar and the South Korean Won resulted in a $574gain related to property, plant and equipment, net and loss of $133 from notespayable.

 

During the nine months ended September 30, 2004, theCompany completed a private exchange offer for its Senior debt. Under terms of the exchange offer, approximately $5.5 million inaggregate principal amount of the notes have been exchanged for an aggregate of(i) $2.75 million of 6% Senior Secured Notes Due 2007 (the “Long-Term Notes”)and (ii) $2.75 million of 10% Senior Secured Notes Due 2005 (the “Short-TermNotes”), collectively referred to as “Exchange Notes” (see Note 7).

 

During the nine months ended September 30, 2003, the change in the foreignexchange between the U.S. Dollar and the South Korean Won resulted in a $166loss related to the note payable, a $1,249 gain related to property, plant andequipment and a $6 loss related to minority interest in consolidatedsubsidiary.

 

During the nine monthsended September 30, 2003, an option holder surrendered 93,758 shares of theCompany’s common stock in-lieu of cash payment for the option exercise price of$250 and income taxes payable by the option holder of $403.  The Company immediately canceled the commonshares received in lieu of cash payment upon receipt of the shares.

 

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

 

8

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** **

**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For theNine Months Ended September 30, 2004 and 2003**

**(in thousands, except share data)**

**(unaudited)**

** **

**1.****                                      Basis ofPresentation and Recent Accounting Pronouncements**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America (“generally accepted accounting principles”)for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of theinformation and notes required by generally accepted accounting principles forcomplete financial statements.  In theopinion of management, all adjustments (consisting only of normal recurringaccruals) considered necessary for a fair presentation have been included.  In addition, certain reclassifications havebeen made for consistent presentation. Operating results for the nine months ended September 30, 2004 are notnecessarily indicative of the results that may be expected for any futureperiods or the year ending December 31, 2004. 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 November 10, 2004.

 

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

 

The Company classifies operations into two reportable segments: Liquidmetalalloy industrial coatings and bulk Liquidmetal alloys. 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 potential market opportunities to manufacture and sell products andcomponents for electronic devices, medical devices, defense applications, andsporting goods.  In addition, the bulkLiquidmetal alloys segment includes tooling and prototype sampling, and themanufacture and sale of die casting equipment (see Note 5 for disclosureregarding the disposal of this segment). In addition, such alloys are used togenerate research and development services revenue for developing uses relatedprimarily to defense and medical applications as well as potential licensefees, royalties, and other compensation from strategic partnering transactions.

 

On August 4, 2004, the Company established asub-assembly plant in the city of Weihai in Shandong province of China underWeihai Liquidmetal Company Limited, which is 100 percent owned by LiquidmetalKorea, to facilitate our bulk alloy manufacturing business.  Weihai Liquidmetal is consolidated intoLiquidmetal Technologies with all intercompany transactions eliminated.

 

Stock-based compensation

 

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

 

Had the Companydetermined stock-based compensation cost based on the fair value at the grantdate for stock options consistent with the method of SFAS No. 123, theCompany’s loss from continuing operations and basic and dilutedloss per share from continuing operations would have been as follows:

 
| ** **                         | ** **                                                                                                                               | ** ** | **For the Three  Months Ended Sept. 30,** | ** ** | **For the Nine  Months Ended Sept. 30,** | ** ** |
|------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                         | ** **                                                                                                                               | **2004**   | ** **                                | **2003**   | ** **                               | **2004**   | ** ** | **2003** | ** ** |
| ** **                         | ** **                                                                                                                               | ** ** | ** **                                | ** ** | ** **                               | ** ** | ** ** | **Restated** | ** ** |
| ** **                         |                                                                                                                                     |       |                                      |       |                                     |       |   |   |   |
| Net loss as  reported              |                                                                                                                                     | $          | (6,169                                    | )          | $                                        | (6,101     | ) | $ | (9,025 | ) | $ | (19,658 | ) |
|                               |                                                                                                                                     |       |                                      |       |                                     |       |   |   |   |   |
| *Add:*                             | stock-based employee compensation expense included in  reported net loss, net of related tax effects                                     |       | —                                    |       | 5                                        |       | 276 |   | 188 |   |
|                               |                                                                                                                                     |       |                                      |       |                                     |       |   |   |   |   |
| *Deduct:*                          | total stock-based employee compensation expense determined  under the fair value based method for all awards, net of related tax effects |       | (910                                      | )          | (990                                     | )     | (3,720 | )  | (4,344 | )  |
|                               |                                                                                                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Proforma loss                      |                                                                                                                                     | $          | (7,079                                    | )          | $                                        | (7,086     | ) | $ | (12,469 | ) | $ | (23,814 | ) |
|                               |                                                                                                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Basic and  diluted loss per share: |                                                                                                                                     |       |                                      |       |                                     |       |   |   |   |
| As reported                        |                                                                                                                                     | $          | (0.15                                     | )          | $                                        | (0.15      | ) | $ | (0.22 | ) | $ | (0.47 | ) |
| Proforma                           |                                                                                                                                     | (0.17      | )                                         | (0.17      | )                                        | (0.30      | ) | (0.57 | ) |
|                                    |                                                                                                                                          |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

9

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**2.****                                     ****Restatement**

 

The Company has restated certain quarterly financial statements previouslyreported and related disclosures to correct our premature recognition ofrevenues from one transaction with a single customer that we originallyrecorded in March 2003.  We have alsorestated our financial statements for the fiscal year ended December 31, 2002and related disclosures in our annual report on Form 10-K to correct twosimilar premature revenue recognition events with the same customer that wereoriginally recorded in September and December 2002.  Upon analysis of the transaction terms andcertain related agreements undertaken by the Company to resolve a dispute withthe customer, we concluded that the transactions were contingent upon continuedperformance by a subsidiary of the Company, which would have precluded revenuerecognition until the contingency ended. Under the terms of a SettlementAgreement reached with the customer on January 10, 2004, the Company reacquiredthe equipment associated with the two fiscal 2002 transactions and recognizedthe revenue associated with the March 2003 transaction in January 2004.  The restatement of our December 31, 2002financial statements resulted in a $1.9 million reduction of revenue and a $1.0million increase in net loss.  Therestatement of our 2003 financial statements did not have any impact for thequarter ended September 30, 2003.  Theeffect of the restatement during the nine months ended September 30, 2003 is adecrease in revenues by $3.0 million and an increase in net loss by $1.4million.

 

**3.****                                     ****Basis of Presentationand Recent Accounting Pronouncements**

 

Translation of Foreign Currency

 

Upon consolidation of the Company’s foreign subsidiaries into theCompany’s consolidated financial statements, any balances with the subsidiariesdenominated in the foreign currency are translated at the exchange rate atperiod end. The financial statements of Liquidmetal Korea have been translatedbased upon Korean Won as the functional currency. Liquidmetal Korea’s assetsand liabilities were translated using the exchange rate at period end andincome and expense items were translated at the average exchange rate for thereporting period. The resulting translation adjustment was included in othercomprehensive income (loss).

 

10

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New AccountingPronouncements

 

In October 2004, theEmerging Issues Task Force of the Financial Accounting Standards Board issuedits consensus opinion on EITF Issue No. 04-8, The Effect of ContingentlyConvertible Debt on Diluted Earnings Per Share (EITFNo. 04-8). The Task Force reached a consensus that contingentlyconvertible debt instruments with embedded conversion features that arecontingent upon market price triggers should be included in diluted earningsper share computations, if dilutive, regardless of whether the contingency hasbeen met. The Company currently does not have any contingently convertible debtunder the scope of EITF Issue No. 04-8.

 

In November 2004, theFASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter4. The amendments made by Statement 151 clarify that abnormal amounts of idlefacility expense, freight, handling costs, and wasted materials (spoilage)should be recognized as current-period charges and require the allocation offixed production overheads to inventory based on the normal capacity of theproduction facilities. The guidance is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. Earlier application is permittedfor inventory costs incurred during fiscal years beginning after November 23,2004. The Company has evaluated the impact of the adoption of SFAS 151, anddoes not believe the impact will be significant to the Company’s overallresults of operations or financial position.

 

In December 2004, theFASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an amendment of APBOpinion No. 29, Accounting for Nonmonetary Transactions.”The amendments made byStatement 153 are based on the principle that exchanges of nonmonetary assetsshould be measured based on the fair value of the assets exchanged. Further,the amendments eliminate the narrow exception for nonmonetary exchanges of similarproductive assets and replace it with a broader exception for exchanges ofnonmonetary assets that do not have commercial substance. Previously, Opinion29 required that the accounting for an exchange of a productive asset for asimilar productive asset or an equivalent interest in the same or similarproductive asset should be based on the recorded amount of the assetrelinquished. Opinion 29 provided an exception to its basic measurementprinciple (fair value) for exchanges of similar productive assets. The Boardbelieves that exception required that some nonmonetary exchanges, althoughcommercially substantive, be recorded on a carryover basis. By focusing theexception on exchanges that lack commercial substance, the Board believes thisStatement produces financial reporting that more faithfully represents theeconomics of the transactions. The Statement is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005. Earlierapplication is permitted for nonmonetary asset exchanges occurring in fiscalperiods beginning after the date of issuance. The provisions of this Statementshall be applied prospectively. The Company has evaluated the impact ofthe adoption of SFAS 153, and does not believe the impact will be significantto the Company’s overall results of operations or financial position.

 

In December 2004, theFASB issued SFAS No.123 (revised 2004), “Share-Based Payment”. Statement 123(R)will provide investors and other users of financial statements with morecomplete and neutral financial information by requiring that the compensationcost relating to share-based payment transactions be recognized in financialstatements. That cost will be measured based on the fair value of the equity orliability instruments issued. Statement 123(R) covers a wide range ofshare-based compensation arrangements including share options, restricted shareplans, performance-based awards, share appreciation rights, and employee sharepurchase plans. Statement 123(R) replaces FASB Statement No. 123, Accountingfor Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting forStock Issued to Employees. Statement 123, as originally issued in 1995,established as preferable a fair-value-based method of accounting for share-basedpayment transactions with employees. However, that Statement permitted entitiesthe option of continuing to apply the guidance in Opinion 25, as long as thefootnotes to financial statements disclosed what net income would have been hadthe preferable fair-value-based method been used. Public entities (other thanthose filing as small business issuers) will be required to apply Statement123(R) as of the first interim or annual reporting period that begins afterJune 15, 2005. The Company has evaluated the impact of the adoption of SFAS123(R), and does not believe the impact will be significant to the Company’soverall results of operations or financial position.

 

11

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**4.****                                     ****Liquidity**

 

The Company has experiencedlosses from continuing operations during the last two fiscal years and has anaccumulated deficit of $121,612 as of September 30, 2004.  Cash used for continuing operations for thenine months ended September 30, 2004 was $6.3 million and cash flow fromcontinuing operations may be negative throughout the remaining fiscal year2004.  Such conditions raise substantialdoubt that the Company will be able to continue as a going concern for areasonable period of time.  Theseoperating results occurred while the Company was developing and attempting tocommercialize and manufacture products from an entirely new and uniquetechnology.  This business plan requiredsignificant spending related to start-up costs and capital expenditures.  These factors have placed a significantstrain on the financial resources of the Company.  The ultimate success of the Company dependson its ability to continue reducing operating costs, generate higher revenue,and achieve positive cash flow from continuing operations andprofitability.  The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of the uncertainty.

 

Our capital requirements during the next 12 months will depend onnumerous factors, including the success of our existing products, thedevelopment of new applications for Liquidmetal alloys, and the resources wedevote to develop and support our Liquidmetal alloy products.  However, we anticipate our capitalexpenditures in the next 12 months will be less than $0.5 million.  We expect to continue to devote limitedcapital to our research and development activities, to further develop andstrengthen our manufacturing capabilities, and for working capital and othergeneral corporate purposes.

 

We believe that our current cash and cash equivalents together withanticipated cash flow from operations will be sufficient to fund our workingcapital and capital expenditure requirements for at least the next 12months.  Our cash flow projections fromoperations and, consequently, future cash needs are subject touncertainty.  If our available funds andcash generated from operations are insufficient to satisfy our liquidityrequirements, we may need to raise additional capital to fund our operationsand capital expenditure requirements.  Wecannot be certain that additional capital, whether through selling additionaldebt or equity securities or obtaining a line of credit or other loan, will beavailable to us or, if available, will be on terms acceptable to us.  If we issue additional securities to raisefunds, these securities may have rights, preferences, or privileges senior tothose of the rights of our common stock and our stockholders may experienceadditional dilution.

 

**5.****                                     ****Discontinued Operations**

 

*Dongyang*

 

OnJune 28, 2002, the Company acquired a 51% interest in Chusik HoesaDongyang Yudoro (“Dongyang”).   During2003, Dongyang experienced net losses as a result of a continuing economicdownturn in markets for its machinery products. These events, along withDongyang’s operating loss, cash flow losses and uncertainty surrounding itsfuture cash flows, led the Company to evaluate its investment forrecoverability as of December 31, 2003. As a result, the Company determined that the carrying value of itsinvestment in Dongyang exceeded its fair value as of December 31, 2003 in theamount of $184.  This impairment loss wasrecorded in operating expenses for the year ended December 31, 2003.

 

In March 2004, theCompany 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 was equal to the Company’s net carryingvalue for the 51% ownership held. Further, the Company agreed to pay Dongyang $155 for the purchase of areceivable balance from Growell.  Thetransaction resulted in net payable to Dongyang of $75 and a loss of $46 fromtransfer of the Company’s interest in Donyang to the minority shareholder.  The loss from operations for the three monthsended March 31, 2004 totaled $50 and was included in the loss from discontinuedequipment manufacturing operations for that period.  The net payable balance of $75 is to be paidin quarterly installments throughout 2004. The outstanding amount payable to Dongyang is $25 as of September 30,2004 and is included in accounts payable and accrued liabilities.

 

12

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The Company has adoptedSFAS 144 and as a result the 2003 balances have been restated in order toconform with the presentation of 2004 financialstatements.  Dongyang is reported as partof the assets available for sale on the balance sheet for 2003.

 

As Donyang was sold priorto March 31, 2004, there are no assets or liabilities of Dongyang as of March31, 2004.  The following is a listing ofthe major classes of assets and liabilities of Dongyang as of December 31,2003.

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

 

Summarized operatingresults of Dongyang’s discontinued operations are as follows.

 
| ** **                                                             | ** ** | **For the Three months  Ended September 30,** | ** ** | **For the Nine months  Ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                                      | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                             | ** ** | ** **                                    | ** ** | ** **                                   | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| Revenue                                                                |       | $                                             | —     |                                         | $          | 212 |   | $ | 22 |   | $ | 859 |   |
| Loss from  discontinued equipment manufacturing operations, net of tax |       | —                                        |       | (59                                          | )          | (96 | ) | (251 | ) |
|                                                                        |            |                                               |            |                                              |            |  |  |  |  |  |  |  |  |

 

*Taesung*

 

OnJune 14, 2004, the Company entered into an Asset Purchase Agreement whereby allthe assets and liabilities of its Taesung equipment manufacturing division inKorea were sold to a third party for $345 which is payable by the third partyin four equal installments with the last installment being due on June 30,2005.  The sale resulted in a loss of$184 and is included in the loss from discontinued equipment manufacturingoperations at September 30, 2004.  Theloss from operations for the nine months ended September 30, 2004 totaled $749and is included in the loss from discontinued equipment manufacturingoperations for the period.

 

The Company has adoptedSFAS 144 and as a result the 2003 balances have been restated in order toconform with the presentation of 2004 financialstatements.  Taesung is reported as partof the discontinued business operations as of March 31, 2004 as the Company’splans for divesture of Taesung was determined during the three months endedMarch 31, 2004.

 

As Taesung was soldduring the period ended June 30, 2004, there are no assets and liabilities ofTaesung as of September 30, 2004.  The followingis a listing of the major classes of assets and liabilities of Taesung as ofDecember 31, 2003.

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

 

Summarized operatingresults of Taesung’s operations are as follows.

 
| ** **                                                             | ** ** | **For the Three months  Ended September 30,** | ** ** | **For the Nine months  Ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                                      | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                             | ** ** | ** **                                    | ** ** | ** **                                   | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| Revenue                                                                |       | $                                             | —     |                                         | $          | 31 |   | $ | 172 |   | $ | 1,667 |   |
| Loss from  discontinued equipment manufacturing operations, net of tax |       | —                                        |       | (56                                          | )          | (653 | ) | (174 | ) |
|                                                                        |            |                                               |            |                                              |            |  |  |  |  |  |  |  |  |

 

 

13

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**6.****                                     ****Product Warranty**

 

Due to the lack ofhistorical information for warranty expense related to bulk alloy products,management estimates product warranties as a percentage of bulk alloy productsales earned during the period.  Duringthe three and nine months ended September 30, 2004, the Company recorded $131and $269 of warranty expense, respectively. The product warranty accrual balance is included in accounts payable andaccrued expenses and the warranty expense is included in selling, general, andadministrative expenses.

 

**7.****                                      Long-termDebt**

 

Senior Convertible Note

 

OnMarch 3, 2004, the Company issued $9.9 million of 6.0% senior convertible notesdue 2007 (the “March Notes”) to investor groups in a transaction led byMichigan Venture Capital Co., Ltd, a South Korea-based institutional investmentfirm, and IndiGo Ventures LLC, a New York-based investment firm (the “PlacementAgents”) that served as a financial advisor to the Company for thetransaction.  The notes werecollateralized by the patents held by the Company and second priority mortgageinterest in plant facilities and certain equipment in South Korea.  The notes were convertible at any time intocommon stock at a price of $3.00 per share. Investors in the private placement and the Placement Agents receivedwarrants to purchase an aggregate amount of up to approximately 1.2 millionshares of common stock, exercisable at $3.00 per share for varying periods butno later than 100 days following the effectiveness of a registration statementcovering the resale of shares issuable upon exercise of the warrants.  In addition, the investors had the right tocall for repayment of the notes prior to maturity at any time after the secondanniversary of the closing of the transaction.

 

14

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The fair value of the 1.2 million warrantstotaled $1,883 and was computed using the Black-Scholes pricing model under thefollowing assumptions: (1) expected life of 3 years; (2) volatility of 82%, (3)risk free interest of 0.95% and dividend rate of 0%.  In addition, since this debt is convertibleinto equity at the option of the note holder at beneficial conversion rates, anembedded beneficial conversion feature was recorded as a debt discount and willbe amortized using the effective interest rate method over the life of the debtin accordance with Emerging Issues Task Force No. 00-27, “Application of IssueNo. 98-5 to Certain Convertible Instruments.” In March 2004, total cost of beneficial conversion feature of$3,395 and the relative fair value of the 0.6 million warrants issued toinvestors of $584 were recorded as discounts of the convertible note.  In addition, $718 relating to the fair valueof the 0.6 million warrants issued to the Placement Agents and $581 directcosts incurred relating to issuance of the convertible note were recorded asdebt issuance cost as a contra liability account in warrant liability and otherassets, respectively.

 

From June through August 2004, theCompany redeemed $4,465 of the outstanding note balance in cash.  The redemption resulted in a write down ofdebt issuance costs and debt discount of $1,407 and $2,071 to interest expenseduring the three and nine months ended September 30, 2004,respectively.  Further, 500,000 ofwarrants originally issued to a financial advisor for the transaction expiredduring June 2004 and 163,748 of unexercised warrants originally issued toinvestors were cancelled as a result of the Company’s redemption of the notebalances during the quarter ended September 30, 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 otherincome, respectively, during the three and nine months ended September 30,2004.

 

On August 20, 2004, the Company completed aprivate exchange offer for its March Notes with the remainingholders after the redemption.  Underterms of the exchange offer, approximately $5.5 million in aggregate principalamount of the March Notes have been exchanged for an aggregate of (i)$2.75 million of 6% Senior Secured Notes Due 2007 (the “Long-Term Notes”) and(ii) $2.75 million of 10% Senior Secured Notes Due 2005 (the “Short-Term Notes”),collectively referred to as “Exchange Notes”. The Exchange Notes are collateralized by the patents held by the Companyand second priority mortgage interest in plant facilities and certain equipmentin South Korea.  The Short-Term Noteshave a maturity date of July 29, 2005, and a conversion price of $2.00 pershare (compared to a conversion price of $3.00 per share under the March Notes).  The Long-Term Notes have a maturity date of July 29,2007, and a conversion price of $1.00 per share.   Further, the exchange notes are convertibleinto Common Stock, at the option of the Company, if at any time after theissuance of the notes, the closing per share price of the Common Stock exceeds$4.00 (as adjusted for stock splits, reverse splits, stock dividends, andrecapitalizations) for 30 consecutive trading days, and further provided thatthere has been effective registration during such period.  Holders of the Long-Term Notes also have theright to call for repayment of the Long-Term Notes prior to maturity at anytime after the second anniversary of the closing of the exchange offer.

 

In addition, holders of both the Long-TermNotes and Short-Term Notes have the right to call for repayment of the notes ifthe Company does not, within 120 days of the deemed closing date of theexchange (July 29, 2004), become compliant with its SEC reportingobligations and become listed or quoted on the OTC Bulletin Board, the NasdaqStock Market, or a national securities exchange.  A total of 562,151 warrants to purchase ourcommon stock at an exercise price of $3.00 per share—all of which werepreviously issued in connection with the purchase of the March Notes—havebeen amended to provide for an extended expiration date of March 1, 2006.

 

The exchange offer was treated as anextinguishment of the March Notes in accordance with Emerging Issues TaskForce No. 96-19, “Debtors Accounting for a Modification or Exchange of DebtInsturments.”  The exchange resulted in a$1,663 loss from extinguishment of the March Notes, write down of $352 ofdeferred issue costs in other assets, $189 of contra liability deferredissuance costs, and $1,122 of debt discount as a result of the change incarrying value of exchanged notes.

 

In connection with the private exchangeoffer, the Company issued $250 of private placement notes to certain PlacementAgents as issuance costs.  Of the $250notes issued, $125 was paid in the form of long-term notes which is due in 2007with interest rate of 6% per annum (Long-Term Notes) and $125 was paid in theform of short-term notes which is due in 2005 with interest rate of 10% perannum (Short-Term Notes).  The Short-Termand Long-Term Notes are convertible into

 

15

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Common Stock at $2.00 and $1.00,respectively, and have the same terms as the Exchange Notes issued to the investors.  Further, a beneficial conversion feature wasrecorded from the $125 Long-Term Notes issued to Placement Agents of $29 duringAugust 2004.

 

As of September 30, 2004, our grossoutstanding loan balance totaled $5,709, un-amortized discounts for beneficialconversion feature and warrants totaled $980 and other asset debt issuancecosts totaled $221.  Interest expense forthe amortization of debt issuance cost and discount on note was $217 and $622for the three and nine months ended September 30, 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 Company is not in compliancewith the registration or listing requirements, the holders have rights to lateregistration payments equal to 2 percent of the purchase price paid for theunconverted notes for the first 30 business days of late registration, and 1percent for each 30 business days thereafter, but no more than 10 percent ofthe purchase price of the unconverted note balance.  The $5,709 balance of the note andun-amortized discounts for beneficial conversion feature and warrants of $980is presented as short-term liability as of September 30, 2004 as the noteholders have the right to call for payment on demand as the registrationstatement has not been filed in accordance with the amended Registration RightsAgreement.  As of December 2004, theCompany has not received any demands for payment from the note holders.

 

Pursuant to EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the relative fair values of the warrants of $1,302 havebeen recorded as other liability during March 2004 as the Company has notyet filed the registration statement.  Inaddition, 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 therelative fair value of the warrants resulted in a loss of $434, which isincluded in other expense, and a net gain of $846, which is recorded as netother income, for the three and nine months ended September 30, 2004,respectively.  The fair value of warrantsoutstanding at September 30, 2004 of $449 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of 1.42years; (2) volatility of 124%, (3) risk free interest of 2.63% and dividendrate of 0%.

 

Kookmin Note

 

On February 4,2003, the Company’s Korean subsidiary received 6,500,000 in South Korean Won,or approximately $5,488, under a loan from Kookmin Bank of South Korea.  The loan bears interest at an annual rate of7.1%.  In the event of delayed repayment,the interest increases to a maximum of 21%, depending on the length of time therepayment is delayed.  This loan iscollateralized by the plant facilities and certain equipment in SouthKorea.  During the first eighteen monthsfrom the origination date, interest was payable on a monthly basis.  In October 2003, the Company paid $873of principal at the request of Kookmin Bank due to the sale of machines thathad been part of the collateral on the loan. Subsequent to October 31, 2003, Kookmin Bank requested that theCompany pay an additional $866 of principal by February 2004 due to theCompany’s current credit rating.  TheCompany made two payments on the requested additional loan paydown in November andDecember 2003 of $320 and $205, respectively.  The remaining payment of $341 was made in February 2004.  Beginning in September 2004, the Companywill be required to make equal monthly installments of principal and interestto repay the remaining balance of the loan over a 36-month period.

 

Because this note payable is denominated in South Korea Won, thebalance will fluctuate with the exchange rate between the U.S. Dollar and theSouth Korean Won, resulting in the recognition of foreign exchange gains orlosses that are included in other comprehensive loss.  At September 30, 2004, the balance ofthe note was $3,747 resulting in the recognition of a cumulative foreignexchange loss of $133, which is included in other comprehensive loss during thenine months ended September 30, 2004.

 

16

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**8.****                                      StockCompensation Plan**

 

During the quarter ended September 30, 2004, under the Company’s2002 Equity Incentive Plan which provides for the grant of stock options toofficers, employees, consultants and directors, the Company granted options topurchase 385,359 common shares of the Company for an average exercise price of$1.38.  All options granted under thisplan had exercise prices that were equal to the fair market value on the dateof grant.

 

During the quarter ended September 30, 2004, under the Company’s2002 Non-employee Director Stock Option Plan, which provides for the grant ofstock options to non-employee directors, the Company granted options topurchase 20,000 common shares of the Company for an average exercise price of$1.42.  All options granted under thisplan had exercise prices that were equal to the fair market value on the dateof grant.

 

Further, 4,808 options were forfeited during thequarter ended September 30, 2004 by terminated employees and directors.

 

**9.****                                      SegmentReporting**

 

SFAS No. 131,*Disclosures about Segments of an Enterprise and Related Information,*requirescompanies to provide certain information about their operating segments.  In April 2002, the Company beganclassifying operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used bycoal burning power plants.  BulkLiquidmetal alloys include market opportunities to manufacture and sell casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment.  Primarily, the expenses incurred by the bulkLiquidmetal alloy segment are research and development costs and sellingexpenses associated with identifying and developing market opportunities.  Bulk Liquidmetal alloy products can be distinguishedfrom Liquidmetal 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 andexpenses associated with research and development services are included in thebulk Liquidmetal alloy segment.  Theaccounting policies of the reportable segments are the same as those describedin Note 18 to the consolidated financial statements included in the Company’sForm 10-K filed with the Securities and Exchange Commission on November 10,2004.

 

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

 
| ** **                                             | ** ** | **Coatings** | ** ** | **Bulk Alloy  Products** | ** ** | **Segment  Totals** | ** ** |
|--------------------------------------------------------|------------|--------------|------------|--------------------------|------------|---------------------|------------|
| Three months  ended September 30, 2004:           |       |         |       |                     |       |                |       |
| Revenue from  external customers                       |       | $            | 988        |                     | $          | 3,627               |       | $ | 4,615 |   |
| Gross profit                                           |       | 466          |       | 908                      |       | 1,374               |       |
| Total  segment income                                  |       | 264          |       | 129                      |       | 393                 |       |
| Total  identifiable assets at end of period            |       | 814          |       | 23,202                   |       | 24,016              |       |
|                                                   |       |         |       |                     |       |                |       |
| Three months  ended September 30, 2003:           |       |         |       |                     |       |                |       |
| Revenue from  external customers                       |       | $            | 894        |                     | $          | 2,387               |       | $ | 3,281 |   |
| Gross profit  (loss)                                   |       | 435          |       | (1,749                   | )          | (1,314              | )          |
| Total  segment income (loss)                           |       | 275          |       | (3,669                   | )          | (3,394              | )          |
| Total  identifiable assets at end of period            |       | 865          |       | 28,329                   |       | 29,194              |       |
|                                                   |       |         |       |                     |       |                |       |
| Nine months  ended September 30, 2004:            |       |         |       |                     |       |                |       |
| Revenue from  external customers                       |       | $            | 2,710      |                     | $          | 12,248              |       | $ | 14,958 |   |
| Gross profit                                           |       | 1,260        |       | 4,425                    |       | 5,685               |       |
| Total  segment income                                  |       | 804          |       | 2,237                    |       | 3,041               |       |
| Total  identifiable assets at end of period            |       | 814          |       | 23,202                   |       | 24,016              |       |
|                                                   |       |         |       |                     |       |                |       |
| Nine months  ended September 30, 2003 (restated): |       |         |       |                     |       |                |       |
| Revenue from  external customers                       |       | $            | 2,374      |                     | $          | 8,639               |       | $ | 11,013 |   |
| Gross profit  (loss)                                   |       | 1,151        |       | (1,539                   | )          | (388                | )          |
| Total  segment income (loss)                           |       | 293          |       | (11,955                  | )          | (11,662             | )          |
| Total  identifiable assets at end of period            |       | 865          |       | 28,329                   |       | 29,194              |       |

 

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Reconciling information betweenreportable segments and the Company’s net loss is shown in the following table:

 
| ** **                                                                                        | ** ** | **For the Three  Months Ended Sept. 30,** | ** ** | **For the Nine  Months Ended Sept. 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** |   | **2003** |   |
|                                                                                              |       |                                      |       |                                     |       |   |   | **(restated)** |   |
|                                                                                              |       |                                      |       |                                     |       |   |   |   |   |
| Total  segment income (loss)                                                                      |       | $                                         | 393        |                                     | $          | (3,394 | ) | $ | 3,041 |   | $ | (11,662 | ) |
| General and  administrative expenses not allocated to segments                                    |       | (2,962                                    | )          | (2,562                                   | )          | (7,594 | ) | (8,775 | ) |
| Loss before  interest, other income, income taxes, minority interest and discontinued  operations |       | (2,569                                    | )          | (5,956                                   | )          | (4,553 | ) | (20,437 | ) |
|                                                                                              |       |                                      |       |                                     |       |   |   |   |   |
| Loss on  extinguishments of debt                                                                  |       | (1,663                                    | )          | —                                   |       | (1,663 | ) | — |   |
| Other  expense                                                                                    |       | (434                                      | )          | —                                   |       | (434 | ) | — |   |
| Other income                                                                                      |       | 302                                       |       | —                                   |       | 1,582 |   | — |   |
| Interest  expense                                                                                 |       | (1,805                                    | )          | (106                                     | )          | (3,242 | ) | (281 | ) |
| Interest  income                                                                                  |       | —                                    |       | 53                                       |       | 34 |   | 281 |   |
| Gain on sale  of marketable securities held-for-sale                                              |       | —                                    |       | —                                   |       | — |   | 1,178 |   |
| Income taxes                                                                                      |       | —                                    |       | —                                   |       | — |   | — |   |
| Minority  interest in loss of consolidated subsidiary                                             |       | —                                    |       | 23                                       |       | — |   | 26 |   |
| Loss from  discontinued operations, net                                                           |       | —                                    |       | (115                                     | )          | (749 | ) | (425 | ) |
| Net Loss                                                                                          |       | $                                         | (6,169     | )                                        | $          | (6,101 | ) | $ | (9,025 | ) | $ | (19,658 | ) |

 

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

 

Revenues from sales to companies in the UnitedStates of America were $1,215 and $2,006 during the three months ended September 30,2004 and 2003, respectively.  The revenuerelated to the United States of America was earned under three defense-relatedresearch and development contracts and sales of coatings products.

 

During the three months ended September 30,2004, the Company had revenue from sales to companies outside of the UnitedStates of $3,400 of which $2,895 represented sales to companies located inSouth Korea.  During the three monthsended September 30, 2003, the Company had revenues from companies outsideof the United States of $1,518 of which $1,108 represented sales to companieslocated in South Korea.  Of the $1,108sales in South Korea, $243 was from our discontinued equipment manufacturingbusiness for the three months ended September 30, 2003.  The revenue related to sales to companiesoutside of the United States was from bulk alloy products including equipmentsales.

 

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Long-lived assets include net property, plant, and equipment and netintangible assets. The Company had long-lived assets of $2,225 and $2,547located in the United States at September 30, 2004 and December 31,2003, respectively. The Company had long-lived assets of $14,695 and $16,395located in South Korea at September 30, 2004 and December 31, 2003,respectively.  Of the assets located inSouth Korea at December 31, 2003, $215 was from long-lived assets of ourdiscontinued equipment manufacturing business.  Further, the Company has long lived assets of $45 at September 30,2004 located in China as a result of a new sub-assembly plant opened during August 2004(See note 1).

 

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

 
| ** **                                 | ** ** | **September 30,  2004** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
|                                       |       |                         |       |
| Total  segment assets                      |       | $                            | 24,016     |   |
| Cash and  cash equivalents                 |       | 1,396                        |       |
| Restricted cash                            |       | 1,000                        |       |
| Prepaid  expenses and other current assets |       | 1,506                        |       |
| Other  property, plant and equipment, net  |       | 1,112                        |       |
| Other  intangible assets, net              |       | 1,108                        |       |
| Other assets                               |       | 815                          |       |
| Total  consolidated assets                 |       | $                            | 30,953     |   |

 

Assets excluded from segment assets includeassets attributable to the Company’s corporate headquarters.  The largest asset represents the Company’scash balances, primarily generated from the Company’s proceeds from the seniorconvertible notes and Kookmin loan (See note 7).

 

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

 

Basic earnings per share (“EPS”) iscomputed by dividing earnings (loss) attributable to common shareholders by theweighted average number of common shares outstanding for the periods. DilutedEPS reflects the potential dilution of securities that could share in theearnings.  Common stock equivalentsconsist of 8,526,068 and 6,875,601 equity instruments at September 30,2004 and 2003, respectively, and have not been included in the EPS calculationat September 30, 2004 and 2003 as the amounts are anti-dilutive.

 

**11.****                               Commitmentsand Contingencies**

 

As of September 30, 2004 and December 31,2003, the Company has contingent obligations of $164 and $132, respectively,for notes receivables sold with recourse.

 

During September 2004, as part of a security agreement to financecertain insurance policy, the Company used certificate of deposits withmaturities of less than one year of $1,000 as collateral.  The $1,000 of certificate of deposit ispresented as restricted cash at September 30, 2004.

 

Two separate lawsuits were filed in July and September 2004by two former employees of our Pyongtaek manufacturing facility in SouthKorea.  The suits are based on a claim ofwrongful termination and breach of employment contract.  In November 2004, the Company enteredinto a settlement agreement with the employees whereby the Company would pay$243 to the employees in exchange for all claims being dismissed.  The payable amount is included in accountspayable and accrued expenses as of September 30, 2004 financial statement.

 

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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. (See Note13)

 

LiquidmetalTechnologies and certain of its present and former officers and directors werenamed as defendants in nine purported class action complaints filed in theUnited States District Courts for the Middle District of Florida, TampaDivision, and the Central District of California, Southern Division, alleging violationsof Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgatedthereunder. The actions were originally brought on behalf of those whopurchased Liquidmetal Technologies’ common stock between May 22, 2002, and March 30,2004, inclusive. The complaints contain varying allegations, but generallyallege that the defendants engaged in improper revenue recognition with respectto the Company’s transactions with Growell Metal Co., Ltd. and that thedefendants issued false and misleading statements concerning the Company’sbusiness and operations, including unrealistic but favorable information aboutmarket demand for Liquidmetal products, with the result of artificially inflatingthe Company’s share price. The complaints seek unspecified compensatory damagesand other relief.  In August 2004,four complaints were consolidated in the United States District Court for theMiddle District of Florida under the caption *Primavera Investorsv. Liquidmetal Technologies, Inc., et al.*, Case No.8:04-CV-919-T-23EAJ.  John Lee, ChrisCowley, Dwight Mamanteo, Scott Purcell and Mark Rabold, were appointed co-leadplaintiffs (the “Lead Plaintiffs”).  In September 2004,the other five complaints filed in the Central District of California weretransferred to the Middle District of Florida for consolidation with the *Primavera Investors* action. The Consolidated Amended Class Action Complaint in the **PrimaveraInvestors** action is due on or before Monday, January 10,2005.  Liquidmetal Technologies and theother defendants will have 45 days from the service date to move to dismiss orotherwise respond to the Consolidated Amended Class Action Complaint. We intend to vigorously defend against theclass action.  We cannot currentlypredict the impact or resolution of this litigation or reasonably estimate arange of possible loss, which could be material. The resolution of this lawsuitmay harm our business and have a material adverse impact on our financialcondition.

 

Inaddition to the above, certain present and former officers and directors ofLiquidmetal Technologies, as well as Liquidmetal Technologies as a nominaldefendant, have been named in three shareholder derivative actions.  Two shareholder derivative complaints werefiled in California state court styled *Brian Clair, Derivativelyon Behalf of Liquidmetal Technologies, Inc. v. John Kang, et al.*,Case No. 04CC00551, and *Joseph Durgin Derivativelyon Behalf of Liquidmetal Technologies, Inc. v. John Kang, et al.,*Case No. 04CC00553, both commenced in the Superior Court of Orange County,California.  A third shareholderderivative complaint was filed in Florida federal court styled *Robert Story v. John Kang, et al.*, Case No.8:04-CV-1587-T23TBM, commenced in the Middle District of Florida, TampaDivision.  These shareholder derivativelawsuits allege that the defendants breached various fiduciary duties andotherwise violated state law based primarily upon the same underlying facts andcircumstances as the federal shareholder class action lawsuits. The plaintiffsseek unspecified compensatory damages, restitution and disgorgement of profits,equitable and/or injunctive relief as permitted by law and other relief.  The two shareholder derivative complaints inCalifornia state court have been consolidated. Plaintiffs served a ConsolidatedShareholder Derivative Complaint on October 12, 2004.  The defendants served a Demurrer tothe Consolidated Shareholder Derivative Complaint on November 22, 2004, seekingdismissal of that complaint. The Demurrer is set for hearing on February 10,2005. The Plaintiff in the Florida derivative action filed a First AmendedShareholder Derivative Complaint on November 22, 2004. The Company’sresponse to the amended Florida derivative complaint was due on December 17,2004. We intend to vigorouslydefend against the derivative actions. We cannot currently predict the impact or resolution of this litigationor reasonably estimate a range of possible loss, which could be material. Theresolution of these lawsuits may harm our business and have a material adverseimpact on our financial condition.

 

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**12.****                               RelatedParty Transactions**

 

In June 2003, the Company enteredinto an exclusive, ten-year license agreement with LLPG, Inc. (“LLPG”), acorporation headed by a former director of the Company.  Under the terms of the agreement, LLPG hasthe right to commercialize Liquidmetal alloys, particularly precious-metalbased compositions, in jewelry and high-end luxury product markets.  The Company, in turn, will receive royaltypayments over the life of the contract on all Liquidmetal products produced andsold by LLPG.  In conjunction with itstechnology licensing contract, LLPG purchased two proprietary Liquidmetal alloymelting machines and three proprietary Liquidmetal alloy casting machines for atotal purchase price of $2,000.  At December 31,2003, the Company had a remaining receivable balance of $500 due from LLPG,which was paid in full in March 2004.

 

The Company is a party to a license agreement withCalifornia Institute of Technology (“Caltech”) under which the Companyexclusively licenses from Caltech certain inventions and technology relating toamorphous alloys.  Professor WilliamJohnson, a member of the Company’s Board of Directors, is a professor atCaltech, and substantially all of the amorphous alloy technology licensed tothe Company under the Caltech license agreement was developed in ProfessorJohnson’s Caltech laboratory.   During2003, the Company paid $50 to Caltech representing the second and finalinstallments on the $150 aggregate fees related to this agreement.  Additionally, the Company reimburses Caltechfor laboratory expenses incurred by Professor Johnson’s Caltech laboratory,which during the nine months ended September 30, 2004 and 2003, amountedto $0 and $22 in reimbursements, respectively.

 

Acompany managed and partially owned by one of the Company’s former directorsprovides technical support services and computer equipment to the Company.  During the nine months ended September 30,2003, the Company incurred $20 of expenses and equipment purchases related tothis arrangement.  There were no expensesand payables to this Company as of and for the nine months ended September 30,2004.

 

Weare a party to a consulting agreement with Chitnis Consulting, Inc., which isowned 100% by Shekhar Chitnis, a former director and executive officer of ourcompany.  Under this agreement, we haveengaged Chitnis Consulting to provide consulting services on an as-needed basisthrough December 31, 2005.  During2003, we incurred $50 in consulting fees from Chitnis Consulting and incurred$13 during the quarter ended September 30, 2004, and $38 for thenine-month period ended September 30, 2004.

 

**13.****                              ****Subsequent Events**

 

In November 2004, we entered into an agreement with John Kang, ourChairman, President, and Chief Executive Officer, in which Mr. Kang agreed thatcertain stock transactions by him in 2002 involving our common stock shouldhave resulted in a liability under Section 16(b) of the SecuritiesExchange Act of 1934, as amended (“Section 16(b)”).  These transactions include Mr. Kang’s privatesale of 285,715 shares of his personal Liquidmetal Technologies common stock toGrowell Metal Co., Ltd. in February 2002, prior to our initial publicoffering.  They also include Mr. Kang’ssubsequent indirect purchase and disposition of Liquidmetal Technologies commonstock in order to satisfy a personal agreement Mr. Kang made to Growell Metalin February 2002 regarding the guaranteed minimum value of the stockpurchased by Growell Metal in February 2002 (the purchases anddispositions incident to this agreement occurred in August and November 2002,respectively).  Lastly, the transactionsinclude open-market purchases of an aggregate of 89,300 shares of our commonstock made by Mr. Kang in August 2002.

 

**The AuditCommittee of our Board of Directors conducted an independent inquiry into theabove-described transactions with the aid of independent legal counsel and, asa result of such inquiry, the Audit Committee concluded that the transactionsshould have resulted in a liability to the Company under Section 16(b) inthe amount of $302.  Mr. Kang hasacknowledged this liability, and in an agreement negotiated between Mr. Kangand the Audit Committee and approved by the full Board, Mr. Kang will pay thisliability in 24 equal monthly installments beginning in January 2005.  As a result, the Company accrued for the $302receivable in other assets and other income during the quarter ended September 30,2004. The above-described transactions involving GrowellMetal was reported on a new Form 4 filed by Mr. Kang on November 15,2004, and the open-market purchases were previously reported on a timely basisin August 2002.**

** **

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** **

**Item 2**.  Management’s Discussion andAnalysis of Financial 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 fiscal yearended December 31, 2003 and other risks and uncertainties discussed infilings 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 anyintention or obligation to update or revise any forward-looking statements,whether as a result of new information, future events, or otherwise.*

 

**OVERVIEW**

 

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

 

Amorphousalloys are unique materials that are distinguished by their ability to retain arandom atomic structure when they solidify, in contrast to the crystallineatomic structure that forms in ordinary metals and alloys when they solidify.Liquidmetal alloys possess a combination of performance, processing, and costadvantages that we believe makes them preferable to other materials in avariety of applications. The amorphous atomic structure of our alloys enablesthem to overcome certain performance limitations caused by inherent weaknessesin crystalline atomic structures, thus facilitating performance and processingcharacteristics superior in many ways to those of their crystallinecounterparts. For example, our zirconium-titanium Liquidmetal alloys areapproximately 250% stronger than commonly used titanium alloys, such asTi-6Al-4V, but they have processing characteristics similar in many respects toplastics. We believe these advantages could result in Liquidmetal alloyssupplanting other incumbent materials in a wide variety of applications.Moreover, we believe these advantages will enable the introduction of entirelynew products and applications that are not possible or commercially viable withother materials.

 

Ourrevenues are derived from two principal operating segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloy products.  Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used incoal-burning power plants. The historical operating information for fiscal year2001 is based substantially on sales of Liquidmetal alloy coatings. In thesecond half of 2002, we began producing bulk Liquidmetal alloy components andproducts for incorporation into our customers’ finished goods. Bulk Liquidmetalalloy segment revenue includes sales of parts or components of electronicdevices, medical products, and sports and leisure goods; tooling and prototypeparts (including demonstration parts and test samples) for customers withproducts in development; metal processing equipment (see Note 5 for disclosureregarding the disposal of our equipment manufacturing business); and researchand development revenue relating primarily to defense and medicalapplications.  We expect that thesesources of revenue will continue to significantly change the character of ourrevenue mix.

 

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

 

Selling,general, and administrative expenses 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 alloy technologies.We believe that our research and development efforts will focus on thediscovery of new alloy compositions, the development of improved processingtechnology, and the identification of new applications for our alloys.

 

Inconjunction with the divestiture of our Dongyang and Taesung subsidiaries in March andJune 2004, respectively, the Company decided to discontinue our equipmentmanufacturing business in order to conform our operations to our broadercorporate business strategy (see note 5). Pursuant to Accounting Principles Board Opinion No. 30,*Reporting the Results of Operations — Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,* we reclassified ourconsolidated financial statements to reflect the discontinuation of ourequipment manufacturing operations. The revenue, costs and expenses, assets andliabilities, and cash flows of the equipment manufacturing business weresegregated in our accompanying Consolidated Balance Sheets, ConsolidatedStatements of Operations and Comprehensive Loss, and Consolidated Statements ofCash Flows.

 

OnAugust 4, 2004, the Company established a sub-assembly plant in the cityof Weihai in Shandong province of China under Weihai Liquidmetal CompanyLimited, which is 100 percent owned by Liquidmetal Korea, to facilitate ourbulk alloy manufacturing business. Weihai Liquidmetal is consolidated into Liquidmetal Technologies withall intercompany transactions eliminated.

 

Thefollowing discussion and analysis of our financial condition and results ofoperations focuses on the historical results of our continuing operations andreflects the effect of restating our 2003 financial statements for equipmentsales made to Growell Metal Co., Ltd. (“Growell”) as disclosed in Note 2 in thenotes to condensed consolidated financial statements section of thisdocument.

 

**Critical Accounting Policies 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.  Theseestimates and assumptions are based on historical experience and various otherfactors that are believed to be reasonable 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:

 

•      Exchangerate fluctuations 

•      Warrantyaccrual

•      Allowancefor doubtful accounts

•      Inventoriesat lower of cost or net realizable value

•      Deferredtax assets

•      GoodwillImpairment

 

Our10-K Report as of December 31, 2003 contains further discussions on ourcritical accounting policies and estimates.

 

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**Results of Operations**

 

Comparison of thethree months ended September 30, 2004 and 2003 

 

*Revenue*. Revenueincreased $1.3 million to $4.6 million for the three months ended September 30,2004 from $3.3 million for the three months ended September 30,2003.  The increase was primarily due toan increase of $2.0 million from the sales and prototyping of partsmanufactured from bulk Liquidmetal alloys offset by a decrease of $0.8 millionfrom research and development services related primarily to defense and medicalapplications and an increase in our coatings business of $0.1 million.

 

*Cost of Sales*. Costof sales decreased to $3.2 million, or 70% of revenue, for the threemonths ended September 30, 2004 from $4.6 million, or 140% ofrevenue, for the three months ended September 30, 2003.  This decrease was a result of the continuedmaturing of our manufacturing process and represents the Company’s efforts tomanage costs and focus on our core business while continuing to buildproduction pipeline and manufacturing infrastructure required to prepare forand support the anticipated growth of our bulk Liquidmetal alloy business.  The cost of sales for the products sold bythe coatings business segment is generally consistent because the Liquidmetalcoatings products are produced by third parties and sold wholesale to variousindustries.

 

*Selling, General, and Administrative Expenses*.Selling, general, and administrative expenses decreased to $3.6 million,or 77% of revenue, for the three months ended September 30, 2004 from$3.7 million, or 112% of revenue, for the three months ended September 30,2003.  This decrease of $0.1 million wasprimarily a result of decrease in wages and related expense by$0.9 million, offset by an increase in professional fees, consultant fees,and contract services by $0.5 million, increase in insurance costs by $0.1million, and increase in stock compensation by $0.2 million.  These and other decreases in selling, generaland administrative expenses represent the Company’s efforts to manage costs andfocus on our core business while continuing to build our corporateinfrastructure required to prepare for and support the anticipated growth ofour bulk Liquidmetal alloy business.

 

*Research and Development Expenses*.Research and development expenses decreased to $0.4 million, or 8% ofrevenue, for the three months ended September 30, 2004 from$1.0 million, or 30% of revenue, for the three months ended September 30,2003.  This decrease was a result of theCompany focusing primarily on our core business associated with our bulk Liquidmetalalloy business while managing our costs. The Company continues to perform research and development efforts on newLiquidmetal alloys and related processing capabilities, develop newmanufacturing techniques, and contract with consultants and provide researchgrants to various institutions to advance the development of Liquidmetalalloys.  The decrease of $0.6 million wasdue to decreases in salaries, wages and the related expenses by$0.3 million, decrease in laboratory and prototyping expenses by$0.3 million, and a decrease in depreciation expense by $0.1 million,offset by an increase to other miscellaneous expenses of $0.1 million.

 

*Loss from Extinguishment of Debt.*Lossfrom extinguishment of debt was $1.7 million, or 36% of revenue, during thethree months ended September 30, 2004 on the extinguishment of our March Notesfrom the exchange in August 2004. There was no such loss recorded during the three months ended September 30,2003.

 

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*Other Expense.*Otherexpense was $0.4 million, or 9% of revenue, during the three months ended September 30,2004 due to loss from change in valuation of warrant payable issued related tothe senior convertible debt funded in March 2004.  There were no amounts recorded as otherexpense for the three months ended September 30, 2003.

 

*Other Income.*Otherincome was $0.3 million, or 7% of revenue, during the three months ended September 30,2004 from certain stock transactions with John Kang, our Chairman, President,and Chief Executive Officer during 2002 (see note 13).  There were no amounts recorded as otherincome for the three months ended September 30, 2003.

 

*Interest Expense*.Interest expense was  $1.8 million, or39% of revenue, for the three months ended September 30, 2004 and was $0.1million, or 3% of revenue, for the three months ended September 30,2003.  During the three months ended September 30,2004, interest expense related to the interest accrued, amortization of debtdiscount and deferred issuance costs on new senior convertible debt originallysold in March 2004, and from accrued interest from the Kookmin Bank loanfunded in February 2003. During the three months ended September 30,2003, interest expense related to the interest accrued on the Kookmin Bankloan.

 

*Interest Income.* Interest income was $53 for the three monthsended September 30, 2003 for interest earned on short-term, investmentgrade, interest-bearing securities. There was no interest income for the three months ended September 30,2004.

 

Comparison of thenine months ended September 30, 2004 and 2003 

 

*Revenue*. Revenueincreased $4.0 million to $15.0 million for the nine months ended September 30,2004 from $11.0 million for the nine months ended September 30,2003.  The increase was primarily due tothe increase in our bulk Liquidmetal alloys business which consisted of anincrease of $3.5 million from our Liquidmetal alloy parts sales, an increase of$0.3 million from our coatings business, offset by a decrease of $1.3 millionfrom research and development services related primarily to defense and medicalapplications.

 

*Cost of Sales*. Costof sales decreased to $9.2 million, or 62% of revenue, for the nine monthsended September 30, 2004 from $11.4 million, or 104% of revenue, forthe nine months ended September 30, 2003. This decrease was a result of the continued maturing of ourmanufacturing process and represents the Company’s efforts to manage costs andfocus on our core business while continuing to build production pipeline andmanufacturing infrastructure required to prepare for and support theanticipated growth of our bulk Liquidmetal alloy business.  The cost of sales for the products sold bythe coatings business segment is generally consistent because the Liquidmetalcoatings products are produced by third parties and sold wholesale to variousindustries.

 

*Selling, General, and Administrative Expenses*.Selling, general, and administrative expenses decreased to $9.2 million,or 61% of revenue, for the nine months ended September 30, 2004 from$12.3 million, or 112% of revenue for the nine months ended September 30,2003.  This decrease of $3.1 million wasprimarily a result of decrease in wages and related expense by $2.6 million,decrease in travel expenses by $0.5 million, decrease in product warranty andbad debt expense by $0.2 million, decrease in property rent by$0.6 million, offset by an increase in professional fees, consultant fees,and contract services by  $0.6 million,and increase in stock compensation by $0.1 million.  These and other decreases in selling, generaland administrative expenses represent the Company’s efforts to manage costs andfocus on our core business while continuing to build our corporateinfrastructure required to prepare for and support the anticipated growth ofour bulk Liquidmetal alloy business.

 

*Research and Development Expenses*.Research and development expenses decreased to $1.1 million, or 7% of revenuefor the nine months ended September 30, 2004 from $7.8 million, or70% of revenue for the nine months ended September 30, 2004.  This decrease of $6.7 million was a result ofthe Company’s focusing primarily on our core business associated with our bulkLiquidmetal alloy business while managing our costs.  The Company continues to perform research anddevelopment efforts on new Liquidmetal alloys and related processingcapabilities, develop new manufacturing techniques, and contract withconsultants and provide research grants to various institutions to advance thedevelopment of Liquidmetal alloys.  Thedecrease of $6.7 million was due to decreases in salaries, wages and relatedexpenses by $2.6 million, decrease in professional fees, consultant fees,and contract services by $0.6 million, decrease in research grants toinstitutions by $0.3 million, decrease in laboratory and prototyping expensesby $2.0 million, decrease in depreciation expense by $0.6 million,decrease in travel and related expenses by $0.3 million, and a decrease inother miscellaneous expenses of $0.3 million.

 

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*Loss from Extinguishment of Debt.*Lossfrom extinguishment of debt was $1.7 million, or 11% of revenue, during thenine months ended September 30, 2004 on the extinguishment of our March Notesfrom the exchange in August 2004. There was no such loss recorded during the nine months ended September 30,2003.

 

*Other Expense.*Otherexpense was $0.4 million, or 3% of revenue, during the nine months ended September 30,2004 due to loss from change in valuation of warrant payable issued related tothe senior convertible debt funded in March 2004.  There were no amounts recorded as otherexpense for the nine months ended September 30, 2003.

 

*Other Income.*Otherincome was $1.6 million, or 11% of revenue, during the nine months ended September 30,2004 due to $1.3 million gain from change in valuation of warrant payableissued related to the senior convertible debt funded in March 2004, and$0.3 million from certain stock transactions with John Kang, our Chairman, President,and Chief Executive Officer during 2002 (see note 13).  There were no amounts recorded as otherincome for the nine months ended September 30, 2003.

 

*Interest Expense*.Interest expense was  $3.2 million, or22% of revenue, for the nine months ended September 30, 2004 and was $0.3million, or 3% of revenue, for the nine months ended September 30,2003.  During the nine months ended September 30,2004, the interest expense was primarily due to the interest accrued,amortization of debt discount and deferred issuance costs on new seniorconvertible debt originally sold on March 3, 2004, and interest accrued onKookmin Bank loan funded on February 4, 2003.  During the nine months ended September 30,2003, the interest expense was primarily due to the interest accrued on theKookmin Bank loan.

 

*Interest Income.* Interest income was $34 for the nine monthsended September 30, 2004 for interest earned on certificate ofdeposits.  Interest income was $0.2million or 3% of revenue for the nine months ended September 30, 2003 forinterest earned on short-term, investment grade, interest-bearing securities.

 

**Liquidity and Capital Resources**

 

Our cash used in operating activities was$5.5 million, which includes $0.8 million cash provided by ourdiscontinued equipment manufacturing business, for the nine months ended September 30,2004 and $22.2 million, which includes cash used in our discontinuedequipment manufacturing and retail golf businesses of $1.7 million, for thenine months ended September 30, 2003. Our working capital decreased from $1.0 million at December 31,2003 to ($2.6) million at September 30, 2004.  The Company’s working capital decrease of$3.6 million was primarily attributable to decrease in cash of $1.7 million,decrease in accounts receivables of $0.2 million, decrease in current assets ofour discontinued equipment manufacturing business of $0.8 million, increase inaccounts payable of $4.8 million, and increase in current portion of notespayable of $4.8 million, offset by an increase in restricted cash of $1.0million, increase in inventories of $1.9 million, increase in prepaid and othercurrent assets of $1.1 million, decrease in deferred revenue of $0.6 million,and decrease in other current liabilities of $4.1 million.

 

Our cash used in investing activities was $264 for the nine monthsended September 30, 2004 for the acquisition of property and equipment,and investment in patents.

 

Our cash provided by financing activities was $3.9 million for the ninemonths ended September 30, 2004, which consists of $9.9 million inproceeds from borrowings from our senior convertible debt offset by $4.9million on repayment of borrowings, $0.1 million of other liabilities, andincrease in restricted cash of $1.0 million.

 

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The Company has experienced losses from continuingoperations during the last two fiscal years and has an accumulated deficit of$121,612 as of September 30, 2004. Cash used for continuing operations for the nine months ended September 30,2004 was $6.3 million and cash flow from continuing operations may be negativethroughout the remaining fiscal year 2004. Such conditions raise substantial doubt about the ability of the Companycontinuing as a going concern for a reasonable period of time.  These operating results occurred while theCompany was developing and attempting to commercialize and manufacture productsfrom an entirely new and unique technology. This business plan required significant spending related to start-upcosts and capital expenditures.  Thesefactors have placed a significant strain on the financial resources of theCompany.  The ultimate success of theCompany depends on its ability to continue reducing operating costs, generatehigher revenue, and achieve positive cash flow from continuing operations andprofitability.  The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of the uncertainty.

 

Our capital requirements during the next 12 months will depend onnumerous factors, including the success of our existing products, thedevelopment of new applications for Liquidmetal alloys, and the resources wedevote to develop and support our Liquidmetal alloy products.  However, we anticipate our capitalexpenditures will be less than $0.5 million in the next 12 months.  We expect to continue to devote limitedcapital to our research and development activities, to further develop andstrengthen our manufacturing capabilities, and for working capital and othergeneral corporate purposes.

 

We believe that our current cash and cash equivalents together withanticipated cash flow from our operations, will be sufficient to fund ourworking capital and capital expenditure requirements for at least the next 12months.  Our cash flow projections fromoperations and, consequently, future cash needs are subject touncertainty.  If our available funds andcash generated from operations are insufficient to satisfy our liquidityrequirements, we may need to raise additional capital to fund our workingcapital or capital expenditure requirements. We cannot be certain that additional capital, whether through sellingadditional debt or equity securities or obtaining a line of credit or otherloan, will be available to us or, if available, will be on terms acceptable tous.  If we issue additional securities toraise funds, these securities may have rights, preferences, or privilegessenior to those of the rights of our common stock and our stockholders mayexperience additional dilution.

 

**Contractual Obligations**

 

The following table summarizes the Company’sobligations and commitments as of September 30, 2004:

 

 
| ** **                       | ** ** | **Payments Due by Period (in  thousands)** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | **Total**                                  | ** ** | **Less Than 1  Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
|                             |       |                                       |       |   |   |   |   |   |   |   |   |
| Long-term  debt                  |       | $                                          | 9,456      |   | $ | 6,806 |   | $ | 2,650 |   | $ | — |   | $ | — |   |
| Capital  lease obligation        |       | 228                                        |       | 121 |   | 107 |   | — |   | — |   |
| Operating  leases and rents      |       | 1,927                                      |       | 850 |   | 909 |   | 22 |   | 146 |   |
| Growell  settlement payable      |       | 2,946                                      |       | 2,946 |   | — |   | — |   | — |   |
| Dongyang  payable                |       | 25                                         |       | 25 |   | — |   | — |   | — |   |
| Purchase  obligations            |       | 2,500                                      |       | — |   | 2,500 |   | — |   | — |   |
|                             |       | $                                          | 17,082     |   | $ | 10,748 |   | $ | 6,166 |   | $ | 22 |   | $ | 146 |   |

 

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**Item3****– Quantitativeand Qualitative Disclosures 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 mitigate losses associatedwith these risks, we may at times enter into derivative financial instruments,although we have not historically done so. These may take the form of forward sales contracts, option contracts,foreign currency exchange contracts, and interest rate swaps.  We have not, and do not intend to, engage inthe practice of trading derivative securities for profit.

 

*Interest Rates.*  We are exposed to market risks relating tochanges 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 securities will be subject to interest rate risk andcould fall in value if interest rates rise.

 

*CommodityPrices. *We areexposed to price risk related to anticipated purchases of certain commoditiesused as raw materials by our businesses, including titanium and zirconium.  Although we do not currently enter intocommodity future, forward, and option contracts to manage the fluctuations inprices of anticipated purchases, we may enter into such contacts in the futureas our business grows and as our purchases of these raw materials increase.

 

*Foreign ExchangeRates.*  As aresult of our operation of a manufacturing facility in South Korea, asubstantial portion of our costs will be denominated in the South Koreanwon.  Consequently, fluctuations in theexchange rates of the South Korean won to the U.S. dollar will affect our costsof goods sold and operating margins and could result in exchange losses.  Although we do not currently enter intoforeign exchange hedge transactions, we may do so in the future as our businessgrows.

 

**Item 4** – Controls and Procedures

 

Within the 90 days prior to the date of this quarterly report,Liquidmetal Technologies (the “Company”) carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to Rule 13a-14 under the Securities Exchange Act of1934, as amended.  Based on thatevaluation, the Chief Executive Officer and Vice President Finance haveconcluded that these disclosure controls and procedures are effective in timelyalerting them to material information relating to the Company, including itsconsolidated subsidiaries, required to be included in this quarterly report onForm 10-Q.  There were no significantchanges in our internal controls or in other factors that could significantlyaffect these controls subsequent to the date of our evaluation.

 

(a)     Evaluation of disclosure controls andprocedures.  During the course of theaudit of our financial statements for the fiscal years ended December 31,2001, 2002, and 2003, it was determined that revenues from certain equipmentsales made by the Company to Growell Metal Co., Ltd. in the third andfourth quarters of 2002 and the first quarter of 2003 should not have beenrecognized in those periods.  It was also determined that certainamounts relating to sales made to Samsung in December 2002, to JSTechnologies in September 2002, and AM Corporation in December 2002should not have been recognized.   And lastly, it was determined thatcertain stock options granted in 2001 and 2002 were not calculated in accordancewith guidelines under APB Opinion No. 25, SFAS No. 123, and EITF 00-23.** **These determinations and theassociated restatement of previously issued financial statements, are describedmore fully in the Form 10-K, 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) did not ensurethat all information required to be disclosed by the Company wasadequately accumulated and communicated to the Company’s management. Since that time, the Company has made various improvements to enhancethe reliability of its disclosure controls and procedures. Except for the foregoing, the Company’s principal executive officer andprincipal financial officer have concluded that the Company’s disclosurecontrols and procedures were effective as of the end of the period covered bythe Form 10-K based on their evaluation of the controls and procedurespursuant to Rule 13a-15 under the Securities and Exchange Act of 1934.

 

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**PART II**

**OTHERINFORMATION**

 

**Item 2 – Change in Securities and Use ofProceeds**

 

Pursuant to the our Registration Statementon Form S-1, as amended, initially filed with the Securities and ExchangeCommission on November 20, 2001 and declared effective May 21, 2002(Registration No. 333-73716), we closed an initial public offering of 5,000,000shares of common stock on May 28, 2002, plus an additional 229,000 shares on June 10,2002 pursuant to an overallotment option, at a price of $15.00 per share (whichsale is referred to herein as the “Offering”). The Offering generated aggregate cash proceeds during the second quarter2002 of $78.4 million.  The net proceedswere $70.7 million after deducting underwriting commissions of $5.5 million andother transaction fees of $2.2 million. The managing underwriters for the Offering were Merrill Lynch & Co.,UBS Warburg and Robert W. Baird & Co.

 

As of December 31, 2003, we have used the $70.7 million ofnet proceeds from the Offering.  In 2002,we used approximately $7.8 million of the net proceeds from the Offeringto repay all outstanding promissory notes and accrued interest,$11.1 million to fund the construction of our manufacturing facility inSouth Korea, $14.3 million to purchase equipment used to manufactureLiquidmetal parts, $0.4 million to purchase assets related to productionand sale of equipment used in the production process of Liquidmetal alloyproducts, and $0.3 million to purchase the 51% interest in our majorityowned Dongyang subsidiary.  During thethird quarter of 2002, we used $2.0 million to invest in the common stockof Growell Metal, which supplies a portion of the Liquidmetal alloy ingots usedin our manufacturing operations in Korea. We have since sold such stock, realizing a gain on the sale.  We used the remaining proceeds of$32.7 million for working capital in 2002 and 2003, excluding$2.1 million paid to Paul Azinger in 2002 and 2003 for amounts due underthe terms of his terminated endorsement agreement with our discontinued retailgolf operations.

 

**Item6****– Exhibits andReports on Form 8-K.**

 

(a)                                  Exhibits

 

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

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                          |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                 |
| 31.1                |       | Certification of President & Chief Executive  Officer, John Kang, as required by Section 3.02 of Sarbane-Oxley Act of  2002 |
|                |       |                                                                                                                                 |
| 31.2                |       | Certification of Vice President of Finance, Tony  Chung, as required by Section 3.02 of Sarbane-Oxley Act of 2002               |
|                |       |                                                                                                                                 |
| 32.1                |       | Certification of President & Chief Executive  Officer, John Kang, as required by Section 9.06 of Sarbane-Oxley Act of  2002 |
|                |       |                                                                                                                                 |
| 32.2                |       | Certification of Vice President of Finance, Tony  Chung, as required by Section 9.06 of Sarbane-Oxley Act of 2002               |
|                |       |                                                                                                                                 |
| (b)                 |       | Reports on Form 8-K                                                                                                                  |
|                |       |                                                                                                                                 |
|                |       | -Filed January 15, 2004                                                                                                         |
|                |       | -Filed January 16, 2004                                                                                                         |

 

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-Filed March 3 2004

-Filed March 4, 2004

-Filed March 30, 2004

-Filed April 30, 2004

-Filed May 13, 2004

-Filed May 18, 2004

-Filed May 24, 2004

-Filed June 28, 2004

-Filed July 2, 2004

-Filed July 15, 2004

-Filed July 16, 2004

-Filed August 20, 2004

-Filed September 27, 2004

-Filed November 10, 2004

-Filed November 23, 2004

-Filed December 23, 2004

 

 

**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 thereunto duly authorized.

 
|                         | LIQUIDMETAL  TECHNOLOGIES               |
|------------------------------|-----------------------------------------|
|                         | (Registrant)                            |
|                         |                                    |
| Date: December 27, 2004 | /s/ John Kang                           |   |
|                         | John Kang                               |
|                         | President & Chief Executive Officer |
|                         | (Principal Executive Officer)           |
|                         |                                    |
|                         |                                    |
| Date: December 27, 2004 | /s/ Tony Chung                          |   |
|                         | Tony Chung                              |
|                         | Vice President of Finance               |
|                         | (Principal Financial Officer)           |

 

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