** **

**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

** **

### **FORM 10-Q/A**

**AmendmentNo. 1**

 

| **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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**LIQUIDMETAL TECHNOLOGIES, INC.**

(Exact name of Registrantas specified in its charter)

 

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

 

**25800 Commercentre Drive, Suite100**

**Lake Forest, California 92630**

(address of principalexecutive office, zip code)

 

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

 

----

 

Indicate by check mark whether the registrant (1) hasfiled 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) hasbeen subject to such filing requirements for at least the past 90 days.

 

Yes  o    No  ý

 

Indicate by check markwhether the registrant is a large accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” Rule 12b-2of the Exchange Act.

 

| Large accelerated filer  o |   | Accelerated filer  ý |   | Non-accelerated filer  o |
|--------------------------------------|--------|-------------------------------------|--------|------------------------------------|

 

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

 

Yes  o    No  ý

 

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

 

 

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**LIQUIDMETAL TECHNOLOGIES, INC.AMENDMENT NO. 1 TO FORM 10-QFOR THE QUARTER ENDED****SEPTEMBER 30****, 2004**

 

**EXPLANATORY NOTE**

 

We are filing thisAmendment No. 1 to our Quarterly Report on Form 10-Q for the quarterended September 30, 2004, as filed with the U.S. Securities and ExchangeCommission (SEC) on January 13, 2005, to restate our financial statementsto properly account for the conversion feature of the senior convertible notesissued in March 2004 (see Note 7 to the condensed consolidated financialstatements). Additionally, reclassifications to our financial statements havebeen made for consistent presentation of our warrant liabilities, settlementpayable, and change in value of warrant liabilities. This amendment does not reflect events occurring after the filing of theoriginally filed Form 10-Q.

 

2

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**LIQUIDMETAL TECHNOLOGIES, INC.**

**FORM 10-Q/A Amendment No. 1FOR THE QUARTER ENDED****SEPTEMBER ****30, 2004****FORWARD-LOOKINGINFORMATION**

 

Statements in this report concerning the futuresales, expenses, profitability, financial resources, product mix, marketdemand, product development and other statements in this report concerning thefuture results of operations, financial condition and business of LiquidmetalTechnologies, Inc. are “forward-looking” statements as defined in theSecurities Act of 1933 and Securities Exchange Act of 1934. Investors arecautioned that the Company’s actual results in the future may differmaterially from those projected in the forward-looking statements due to risksand 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, containadditional information concerning many of these risk factors, and copies ofthese filings are available from the Company upon request and without charge.

 

3

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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**                                                                                    | ** ** | ** ** |
| ** **                                                                                                    | ** ** | ** ** |
| **Signatures**                                                                                                | ** ** | ** ** |
| ** **                                                                                                    | ** ** | ** ** |
| **Certifications**                                                                                            | ** ** | ** ** |

#### ** **

4

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**Item 1 – Financial Statements**

 

**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

 
| ** **                                                                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2004**               | ** ** | **2003**              | ** ** |
| ** **                                                                                                                                                  | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                  |       | **(Restated)**         |       |                  |       |
| **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                                                                                                                      |       | $                      | 5,477      |                  | $          | 3,683 |   |
| Settlement  payable                                                                                                                                         |       | 2,946                  |       | 2,765                 |       |
| Deferred  revenue                                                                                                                                           |       | 838                    |       | 1,435                 |       |
| Long-term  debt, current portion, net of debt discounts of $3,241 and $0                                                                                    |       | 3,563                  |       | 1,032                 |       |
| Warrant  liabilities                                                                                                                                        |       | 449                    |       | —                |       |
| Conversion  feature liabilities                                                                                                                             |       | 5,467                  |       | —                |       |
| Other  liabilities, current portion                                                                                                                         |       | 636                    |       | 1,940                 |       |
| Total  current liabilities                                                                                                                                  |       | 19,376                 |       | 10,855                |       |
|                                                                                                                                                        |       |                   |       |                  |       |
| Long-term  debt, net of current portion                                                                                                                     |       | 2,650                  |       | 3,015                 |       |
| Other  long-term liabilities, net of current portion                                                                                                        |       | 796                    |       | 814                   |       |
| Total  liabilities                                                                                                                                          |       | 22,822                 |       | 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                    |       |
| Additional  paid-in capital                                                                                                                                 |       | 129,650                |       | 128,581               |       |
| Unamortized  stock-based compensation                                                                                                                       |       | —                 |       | (128                  | )          |
| Accumulated  deficit                                                                                                                                        |       | (122,306               | )          | (112,587              | )          |
| Accumulated  other comprehensive income                                                                                                                     |       | 745                    |       | 255                   |       |
| Total  shareholders’ equity                                                                                                                            |       | 8,131                  |       | 16,163                |       |
|                                                                                                                                                        |       |                   |       |                  |       |
| Total  liabilities and shareholders’ equity                                                                                                            |       | $                      | 30,953     |                  | $          | 30,852 |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financialstatements.

 

5

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

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

**(inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                        | ** ** | **For the Three**               | ** ** | **For the Nine**                | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **Months Ended Sept. 30,** | ** ** | **Months Ended Sept. 30,** | ** ** |
| ** **                                                                                                                        | ** ** | **2004**                                  | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                        | ** ** | **(Restated)**                            | ** ** | ** **                                | ** ** | **(Restated)** | ** ** | **(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                                                                                                |       | (2,941                                    | )          | —                                    |       | (2,941 | ) | — |   |
| Change  in value of warrants, gain (loss)                                                                                         |       | (434                                      | )          | —                                    |       | 846 |   | — |   |
| Change  in value of conversion feature, gain (loss)                                                                               |       | (2,338                                    | )          | —                                    |       | 3,276 |   | — |   |
| Other  income                                                                                                                     |       | 302                                       |       | —                                    |       | 302 |   | — |   |
| Interest  expense                                                                                                                 |       | (3,283                                    | )          | (106                                      | )          | (5,934 | ) | (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                                         |       | (11,263                                   | )          | (6,009                                    | )          | (8,970 | ) | (19,259 | ) |
|                                                                                                                              |       |                                      |       |                                      |       |   |   |   |   |
| Income  taxes                                                                                                                     |       | —                                    |       | —                                    |       | — |   | — |   |
| Minority  interest in loss (income) of consolidated subsidiary                                                                    |       | —                                    |       | (23                                       | )          | — |   | (26 | ) |
|                                                                                                                              |       |                                      |       |                                      |       |   |   |   |   |
| Loss  from continuing operations                                                                                                  |       | (11,263                                   | )          | (5,986                                    | )          | (8,970 | ) | (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                                                                                                                         |       | (11,263                                   | )          | (6,101                                    | )          | (9,719 | ) | (19,658 | ) |
|                                                                                                                              |       |                                      |       |                                      |       |   |   |   |   |
| Other  comprehensive income (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                                                                                                               |       | $                                         | (11,195    | )                                         | $          | (5,414 | ) | $ | (9,229 | ) | $ | (20,480 | ) |
|                                                                                                                              |       |                                      |       |                                      |       |   |   |   |   |
| Net  loss per share – basic and diluted:                                                                                     |       |                                      |       |                                      |       |   |   |   |   |
| Loss  per share – continuing operations                                                                                      |       | $                                         | (0.27      | )                                         | $          | (0.14 | ) | $ | (0.21 | ) | $ | (0.46 | ) |
| Loss  per share – discontinued operations                                                                                    |       | $                                         | —     |                                      | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) |
| Loss  per share basic and diluted                                                                                                 |       | $                                         | (0.27      | )                                         | $          | (0.15 | ) | $ | (0.23 | ) | $ | (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 financialstatements.

 

6

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**

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

**(inthousands, except share data)**

 
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | **Unamortized** | ** ** | ** **     | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|------------------|------------|-----------------|------------|----------------|------------|-------------|------------|------------|------------|
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | **Stock-**      | ** ** | ** **     | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | **Based**       | ** ** | **Accumu-**    | ** ** | **Compre-** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid in** | ** ** | **Compen-**     | ** ** | **lated**      | ** ** | **hensive** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**      | ** ** | **sation**      | ** ** | **Deficit**    | ** ** | **Income**  | ** ** | **Total**  | ** ** |
| ** **                                                  | ** ** | ** ** | ** ** | ** ** |       | **(Restated)**   | ** ** | ** **      |       | **(Restated)** |       |        |       |       |       |
|                                                        |       |       |       |       |       |             |       |            |       |           |       |        |       |       |       |
| Balance,  December 31, 2003                            |       | 41,609,652 |       | $          | 42         |             | $          | 128,581         |       | $              | (128       | )           | $          | (112,587   | )          | $ | 255 |   | $ | 16,163 |   |
| Stock-based  compensation                                   |       | —     |       | —     |       | 261              |       | 15              |       | —         |       | —      |       | 276        |       |
| Unamortized  stock-based compensation                       |       | —     |       | —     |       | (113             | )          | 113             |       | —         |       | —      |       | —     |       |
| Redemption  of convertible notes payable                    |       | —     |       | —     |       | 914              |       | —          |       | —         |       | —      |       | 914        |       |
| Warrants  cancelled                                         |       | —     |       | —     |       | 7                |       | —          |       | —         |       | —      |       | 7          |       |
| Foreign  exchange translation gain                          |       | —     |       | —     |       | —           |       | —          |       | —         |       | 490         |       | 490        |       |
| Net  loss                                                   |       | —     |       | —     |       | —           |       | —          |       | (9,719         | )          | —      |       | (9,719     | )          |
| Balance,  September 30, 2004 (Unaudited) (As Restated) |       | 41,609,652 |       | $          | 42         |             | $          | 129,650         |       | $              | —     |        | $          | (122,306   | )          | $ | 745 |   | $ | 8,131 |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financialstatements.

 

7

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

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

**(inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                          | ** ** | **For the Nine Months** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                          | ** ** | **Ended Sept. 30,**          | ** ** |
| ** **                                                                                                          | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                                                                                                          | ** ** | **(Restated)**                         | ** ** | **(Restated)** | ** ** |
|                                                                                                                |       |                                   |       |   |   |
| **Operating Activities:**                                                                                           |       |                                   |       |   |   |
| Net  loss                                                                                                           |       | $                                      | (9,719     | ) | $ | (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                                                                                    |       | 2,941                                  |       | — |   |
| Amortization  of debt discount                                                                                      |       | 5,633                                  |       | — |   |
| Gain  from change in value of warrants                                                                              |       | (846                                   | )          | — |   |
| Gain  from change in value of conversion feature                                                                    |       | (3,276                                 | )          | — |   |
| 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                                                                                                       |       | (1,958                                 | )          | 174 |   |
| Accounts  payable and accrued expenses                                                                              |       | 2,356                                  |       | (5,139 | ) |
| Deferred  revenue                                                                                                   |       | (597                                   | )          | 62 |   |
| Other  liabilities                                                                                                  |       | (1,231                                 | )          | 291 |   |
| Net  cash used for continuing operations                                                                            |       | (6,462                                 | )          | (20,438 | ) |
|                                                                                                                |       |                                   |       |   |   |
| Net  cash provided by (used for) discontinued operations                                                            |       | 822                                    |       | (1,771 | ) |
| Net  cash used for operating activities                                                                             |       | (5,640                                 | )          | (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                                                                             |       | 238                                    |       | (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 |   |

 

(continued)

 

The accompanyingnotes are an integral part of the condensed consolidated financialstatements.

 

8

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During the nine monthsended September 30, 2004, the Company sold its 51% ownership interest inDongyang to the 49% minority shareholder, which resulted in a loss of $46 fromdisposal of discontinued operations.

 

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

 

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

 

During the nine months ended September 30, 2004, the Companycompleted a private exchange offer for its Senior debt. Under terms of theexchange offer, approximately $5.5 million in aggregate principal amount of thenotes 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 of10% Senior Secured Notes Due 2005 (the “Short-Term Notes”), collectivelyreferred to as “Exchange Notes” (see Note 7).

 

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

 

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

 

The accompanyingnotes are an integral part of the condensed consolidated financialstatements.

 

9

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

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

**(inthousands, except share data)**

**(unaudited)**

 

 

**1.****                                      Basisof Presentation 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 the information and notes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments (consisting only of normal recurringaccruals) considered necessary for a fair presentation have been included. Inaddition, certain reclassifications have been 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 unauditedcondensed consolidated financial statements should be read in conjunction withthe Company’s Form 10-K filed with the Securities and Exchange Commissionon November 10, 2004.

 

Liquidmetal Technologies, Inc. (“LiquidmetalTechnologies”) andits subsidiaries (collectively “the Company”) are in the business ofdeveloping, manufacturing, and marketing products made from amorphous alloys.Liquidmetal Technologies markets and sells Liquidmetal® alloy industrialcoatings and also manufactures, markets and sells products and components frombulk Liquidmetal alloys that can be incorporated into the finished goods of itscustomers across a variety of industries. The Company also partners withthird-party licensees and distributors to develop and commercialize Liquidmetalalloy products.

 

The Company classifies operations into two reportable segments:Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys. Liquidmetalalloy industrial coatings are used primarily as a protective coating forindustrial machinery and equipment, such as drill pipe used by the oil drillingindustry and boiler tubes used by coal-burning power plants. Bulk Liquidmetalalloys include potential market opportunities to manufacture and sell productsand components for electronic devices, medical devices, defense applications,and sporting goods. In addition, the bulk Liquidmetal alloys segment includestooling and prototype sampling, and the manufacture and sale of die castingequipment (see Note 5 for disclosure regarding the disposal of this segment).In addition, such alloys are used to generate research and development servicesrevenue for developing uses related primarily to defense and medicalapplications as well as potential license fees, royalties, and othercompensation 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 Liquidmetalis consolidated into Liquidmetal Technologies with all intercompanytransactions eliminated.

 

Stock-based compensation

 

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

 

Hadthe Company determined stock-based compensation cost based on the fair value atthe grant date for stock options consistent with the method of SFAS No. 123,the Company’s loss from continuing operations and basic and dilutedloss per share from continuing operations would have been as follows:

 

10

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| ** **                                       | ** **                                                                                                                                | **For the Three**               | ** ** | **For the Nine**                | ** ** |
|--------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** **                                                                                                                                | **Months Ended Sept. 30,** | ** ** | **Months Ended Sept. 30,** | ** ** |
| ** **                                       | ** **                                                                                                                                | **2004**                                  | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                       | ** **                                                                                                                                | **(Restated)**                            | ** ** | **(Restated)**                            | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
|                                             |                                                                                                                                      |                                      |       |                                      |       |   |   |   |   |
| Net  loss from continuing operations as reported |                                                                                                                                      | $                                         | (11,263    | )                                         | $          | (5,986 | ) | $ | (8,970 | ) | $ | (19,233 | ) |
|                                             |                                                                                                                                      |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| *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 net loss from continuing operations     |                                                                                                                                      | $                                         | (12,173    | )                                         | $          | (6,971 | ) | $ | (12,414 | ) | $ | (23,389 | ) |
|                                             |                                                                                                                                      |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic  and diluted loss per share:               |                                                                                                                                      |                                      |       |                                      |       |   |   |   |   |
| As  reported                                     |                                                                                                                                      | $                                         | (0.27      | )                                         | $          | (0.14 | ) | $ | (0.21 | ) | $ | (0.46 | ) |
| Proforma                                         |                                                                                                                                      | (0.29                                     | )          | (0.17                                     | )          | (0.30 | ) | (0.56 | ) |

 

**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 also restated our financial statements forthe fiscal year ended December 31, 2002 and related disclosures in ourannual report on Form 10-K to correct two similar premature revenuerecognition events with the same customer that were originally recorded in September andDecember 2002. Upon analysis of the transaction terms and certain relatedagreements undertaken by the Company to resolve a dispute with the customer, weconcluded that the transactions were contingent upon continued performance by asubsidiary of the Company, which would have precluded revenue recognition untilthe contingency ended. Under the terms of a Settlement Agreement reached withthe customer on January 10, 2004, the Company reacquired the equipmentassociated with the two fiscal 2002 transactions and recognized the revenueassociated with the March 2003 transaction in January 2004. Therestatement of our December 31, 2002 financial statements resulted in a$1.9 million reduction of revenue and a $1.0 million increase in net loss. Therestatement of our 2003 financial statements did not have any impact for thequarter ended September 30, 2003. The effect of the restatement during thenine months ended September 30, 2003 is a decrease in revenues by $3.0million and an increase in net loss by $1.4 million.

 

The Company has also restatedcertain previously issued financial statements due to an error related to theCompany’s accounting for embedded convertible feature of senior convertiblenotes issued in March 2004, which was exchanged in August 2004, inaccordance with Statement of Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments and Hedging Activities”, (SFAS 133). For furtherdiscussions on the impact of this restatement, please refer to Note 7.

 

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

 

Translation of ForeignCurrency

 

Upon consolidation of theCompany’s foreign subsidiaries into the Company’s consolidated financialstatements, any balances

 

11

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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).

 

NewAccounting Pronouncements

 

In October 2004,the Emerging Issues Task Force of the Financial Accounting Standards Boardissued its consensus opinion on EITF Issue No. 04-8, The Effect ofContingently Convertible Debt on Diluted Earnings Per Share (EITF No. 04-8).The Task Force reached a consensus that contingently convertible debtinstruments with embedded conversion features that are contingent upon marketprice triggers should be included in diluted earnings per share computations,if dilutive, regardless of whether the contingency has been met. The Companycurrently does not have any contingently convertible debt under the scope ofEITF Issue No. 04-8.

 

In November 2004,the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43,Chapter 4. The amendments made by Statement 151 clarify that abnormal amountsof idle facility expense, freight, handling costs, and wasted materials(spoilage) should be recognized as current-period charges and require theallocation of fixed production overheads to inventory based on the normalcapacity of the production facilities. The guidance is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. Earlierapplication is permitted for inventory costs incurred during fiscal yearsbeginning after November 23, 2004. The Company has evaluated the impact ofthe adoption of SFAS 151, and does not believe the impact will be significantto the Company’s overall results of operations or financial position.

 

In December 2004,the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an amendment ofAPB Opinion No. 29, Accounting for Nonmonetary Transactions.” Theamendments made by Statement 153 are based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged. Further, the amendments eliminate the narrow exception fornonmonetary exchanges of similar productive assets and replace it with abroader exception for exchanges of nonmonetary assets that do not havecommercial substance. Previously, Opinion 29 required that the accounting foran exchange of a productive asset for a similar productive asset or anequivalent interest in the same or similar productive asset should be based onthe recorded amount of the asset relinquished. Opinion 29 provided an exceptionto its basic measurement principle (fair value) for exchanges of similarproductive assets. The Board believes that exception required that somenonmonetary exchanges, although commercially substantive, be recorded on acarryover basis. By focusing the exception on exchanges that lack commercialsubstance, the Board believes this Statement produces financial reporting thatmore faithfully represents the economics of the transactions. The Statement iseffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. Earlier application is permitted for nonmonetaryasset exchanges occurring in fiscal periods beginning after the date ofissuance. The provisions of this Statement shall 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,the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment”. Statement123(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,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. Statement 123, as originally issued in1995, established as preferable a fair-value-based method of accounting forshare-based payment transactions with employees. However, that Statementpermitted entities the option of continuing to apply the guidance in Opinion25, as long as the footnotes to financial statements disclosed what net incomewould have been had the preferable

 

12

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fair-value-basedmethod been used. Public entities (other than those filing as small businessissuers) will be required to apply Statement 123(R) as of the first interim orannual reporting period that begins after June 15, 2005. The Company hasevaluated the impact of the adoption of SFAS 123(R), and does not believe theimpact will be significant to the Company’s overall results of operations orfinancial position.

 

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

 

TheCompany has experienced losses from continuing operations during the last twofiscal years and has an accumulated deficit of $122,306 as of September 30,2004. Cash used for continuing operations for the nine months ended September 30,2004 was $6.5 million and cash flow from continuing operations may benegative throughout the remaining fiscal year 2004. Such conditions raisesubstantial doubt that the Company will be able to continue as a going concernfor 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 requiredsignificant spending related to start-up costs and capital expenditures. Thesefactors have placed a significant strain on the financial resources of theCompany. The ultimate success of the Company depends on its ability to continuereducing operating costs, generate higher revenue, and achieve positive cashflow from continuing operations and profitability. The consolidated financialstatements do not include any adjustments that might result from the outcome ofthe uncertainty.

 

Our capital requirementsduring the next 12 months will depend on numerous factors, including thesuccess of our existing products, the development of new applications forLiquidmetal alloys, and the resources we devote to develop and support ourLiquidmetal alloy products. However, we anticipate our capital expenditures inthe next 12 months will be less than $0.5 million. We expect to continue todevote limited capital to our research and development activities, to furtherdevelop and strengthen our manufacturing capabilities, and for working capitaland other general corporate purposes.

 

We believe that ourcurrent cash and cash equivalents together with anticipated cash flow fromoperations will be sufficient to fund our working capital and capitalexpenditure requirements for at least the next 12 months. Our cash flowprojections from operations and, consequently, future cash needs are subject touncertainty. If our available funds and cash generated from operations areinsufficient to satisfy our liquidity requirements, we may need to raise additionalcapital to fund our operations and capital expenditure requirements. We cannotbe certain that additional capital, whether through selling additional debt orequity securities or obtaining a line of credit or other loan, will beavailable to us or, if available, will be on terms acceptable to us. If weissue additional securities to raise funds, these securities may haverights, preferences, or privileges senior to those of the rights of our commonstock and our stockholders may experience additional dilution.

 

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

 

*Dongyang*

 

On June 28, 2002, the Company acquired a 51%interest in Chusik Hoesa Dongyang Yudoro (“Dongyang”). During 2003, Dongyangexperienced net losses as a result of a continuing economic downturn in marketsfor its machinery products. These events, along with Dongyang’s operating loss,cash flow losses and uncertainty surrounding its future cash flows, led theCompany to evaluate its investment for recoverability 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 inthe amount of $184. This impairment loss was recorded in operating expenses forthe year ended December 31, 2003.

 

In March 2004,the Company sold its 51% investment in Dongyang to the 49% minority shareholder.The selling price of the Company’s 51% interest in Dongyang was $80, which wasequal to the Company’s net carrying value for the 51% ownership held. Further,the Company agreed to pay Dongyang $155 for the purchase of a receivablebalance from Growell. The transaction resulted in net payable to Dongyang of$75 and a loss of $46 from transfer of the Company’s interest in Donyang to theminority shareholder. The loss from operations for the three months ended March 31,2004 totaled $50 and was included in

 

13

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theloss from discontinued equipment manufacturing operations for that period. Thenet payable balance of $75 is to be paid in quarterly installments throughout2004. The outstanding amount payable to Dongyang is $25 as of September 30,2004 and is included in accounts payable and accrued liabilities.

 

TheCompany has adopted SFAS 144 and as a result the 2003 balances have been restatedin order to conform with the presentation of 2004 financial statements. Dongyangis reported as part of the assets available for sale on the balance sheetfor 2003.

 

AsDonyang was sold prior to March 31, 2004, there are no assets andliabilities of Dongyang as of March 31, 2004. The following is a listingof the 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      |   |

 

Summarizedoperating results 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*

 

On June 14, 2004, the Company entered into anAsset Purchase Agreement whereby all the assets and liabilities of its Taesungequipment manufacturing division in Korea were sold to a third party for $345which is payable by the third party in four equal installments with the lastinstallment 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. The loss from operations for the ninemonths ended September 30, 2004 totaled $749 and is included in the lossfrom discontinued equipment manufacturing operations for the period.

 

14

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TheCompany has adopted SFAS 144 and as a result the 2003 balances have beenrestated in order to conform with the presentation of 2004 financialstatements. Taesung is reported as part of the discontinued businessoperations as of March 31, 2004 as the Company’s plans for divesture ofTaesung was determined during the three months ended March 31, 2004.

 

AsTaesung was sold during the period ended June 30, 2004, there are noassets and liabilities of Taesung as of September 30, 2004. The followingis a listing of the major classes of assets and liabilities of Taesung as of December 31,2003.

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

 

Summarizedoperating results 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 | ) |
|                                                                        |            |                                                                        |              |                                                                       |            |  |  |  |  |  |  |  |  |

 

**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. During the three and nine months ended September 30,2004, the Company recorded $131 and $269 of warranty expense, respectively. Theproduct warranty accrual balance is included in accounts payable and accruedexpenses and the warranty expense is included in selling, general, andadministrative expenses.

 

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

 

Senior Convertible Note

 

On March 3,2004, the Company issued $9.9 million of 6.0% senior convertible notes due 2007(the “March Notes”) to investor groups in a transaction led by Michigan VentureCapital Co., Ltd, a South Korea-based institutional investment firm, and IndiGoVentures LLC, a New York-based investment firm (the “Placement Agents”) thatserved as a financial advisor to the Company for the transaction. The noteswere collateralized by the patents held by the Company and second prioritymortgage interest in plant facilities and certain equipment in South Korea. Thenotes were convertible at any time into

 

15

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commonstock at a price of $3.00 per share. Investors in the private placement and thePlacement Agents received warrants to purchase an aggregate amount of up toapproximately 1.2 million shares of common stock, exercisable at $3.00 pershare for varying periods but no later than 100 days following theeffectiveness of a registration statement covering the resale of sharesissuable upon exercise of the warrants. In addition, the investors had theright to call for repayment of the notes prior to maturity at any time afterthe second anniversary of the closing of the transaction.

 

Pursuantto Statement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities,” EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,” EITF 00-27, “Application of Issue No. 98-5 toCertain Convertible Instruments,” and EITF 05-2 “The Meaning of ‘ConventionalConvertible Debt Instrument’ in EITF Issue No. 00-19,” the original fairvalue of the embedded conversion feature of $7,595 have been recorded asconversion feature liabilities as the debt is considered non-conventionalconvertible debt. The original fair value was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 3 years; (2) volatilityof 82%; (3) risk free interest of 2.15% and dividend rate of 0%. The fairvalue of the conversion feature on the date of issuance has been recorded asdebt discount to be amortized over the life the debt.

 

Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the original fair value of the1.2 million warrants of $1,302 has been recorded as warrant liabilities as theshares issuable under the warrants have not been registered. The original fairvalue was computed using the Black-Scholes pricing model under the followingassumptions: (1) expected life of 3 years; (2) volatility of 82%, (3) riskfree interest of 0.95% and dividend rate of 0%.

 

In March 2004,the original fair value of the embedded conversion feature of $7,595 and the originalfair value of the 0.6 million warrants issued to investors of $584, and theoriginal fair value of 0.6 million warrants issued to Placement Agents of $718  were recorded as discounts of the convertiblenote. In addition, $ $581 direct costs incurred relating to issuance of theconvertible note were recorded as debt issuance cost in other assets.

 

From June throughAugust 2004, the Company redeemed $4,465 of the outstanding note balancein cash. The redemption resulted in a write down of debt issuance costs and debtdiscount of $2,277 and $3,571 to interest expense and a reduction in conversionfeature liabilities of $636 and $914 from cancellation of the embeddedconversion feature of the redeemed notes to additional paid in capital duringthe three and nine months ended September 30, 2004, respectively. Further,500,000 of warrants originally issued to a financial advisor for thetransaction expired during June 2004 and 163,748 of unexercised warrantsoriginally issued to investors were cancelled as a result of the Company’sredemption of the note balances during the quarter ended September 30,2004. The 663,748 total expired and canceled warrants immediately prior to theexpiration and cancellation resulted in a reduction of warrant liability of $7and $279 to additional paid in capital and change in value of warrants,respectively, during the three and nine months ended September 30, 2004.

 

On August 20,2004, the Company completed a private exchange offer for its March Noteswith the remaining holders after the redemption. Under terms of the exchangeoffer, approximately $5.5 million in aggregate principal amount of the March Noteshave been exchanged for an aggregate of (i) $2.75 million of 6% SeniorSecured Notes Due 2007 (the “Long-Term Notes”) and (ii) $2.75 million of10% Senior Secured Notes Due 2005 (the “Short-Term Notes”), collectivelyreferred to as “Exchange Notes”. The Exchange Notes are collateralized by thepatents held by the Company and second priority mortgage interest in plantfacilities and certain equipment in South Korea. The Short-Term Notes have amaturity date of July 29, 2005, and a conversion price of $2.00 per share(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 aconversion price of $1.00 per share. Further, the exchange notes areconvertible into Common Stock, at the option of the Company, if at any timeafter the issuance of the notes, the closing per share price of the CommonStock exceeds $4.00 (as adjusted for stock splits, reverse splits, stockdividends, and recapitalizations) for 30 consecutive trading days, and furtherprovided that there has been effective registration during such period. Holdersof the Long-Term Notes also have the right to call for repayment of theLong-Term Notes prior to maturity at any time after the second anniversary ofthe closing of the exchange offer.

 

16

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Inaddition, holders of both the Long-Term Notes and Short-Term Notes have theright to call for repayment of the notes if the Company does not, within 120days of the deemed closing date of the exchange (July 29, 2004), becomecompliant with its SEC reporting obligations and become listed or quoted on theOTC Bulletin Board, the Nasdaq Stock Market, or a national securities exchange.A total of 562,151 warrants to purchase our common stock at an exercise priceof $3.00 per share—all of which were previously issued in connection with thepurchase of the March Notes—have been amended to provide for an extendedexpiration date of March 1, 2006.

 

Theexchange offer was treated as an extinguishment of the March Notes inaccordance with Emerging Issues Task Force No. 96-19, “Debtors Accountingfor a Modification or Exchange of Debt Instruments.”  The exchange resulted in a $2,941 loss fromextinguishment of the March Notes, which consisted of write down of $352of deferred issue costs in other assets, $670 of debt discount, and an increaseof $1,919 in conversion feature liability as a result of the change in carryingvalue of exchanged notes.

 

Inconnection with the private exchange offer, the Company issued $250 of privateplacement notes to certain Placement Agents as issuance costs. Of the $250notes issued, $125 was paid in the form of long-term notes which is due in2007 with interest rate of 6% per annum (Long-Term Notes) and $125 was paid inthe form of short-term notes which is due in 2005 with interest rate of10% per annum (Short-Term Notes). The Short-Term and Long-Term Notes areconvertible into Common Stock at $2.00 and $1.00, respectively, and have thesame terms as the Exchange Notes issued to the investors. Further, $143 oforiginal fair value of the embedded conversion feature of the $250 notes issuedto Placement Agents was recorded as conversion feature liabilities during August 2004.

 

As of September 30,2004, our gross outstanding loan balance totaled $5,709, un-amortized discountsfor conversion feature and warrants totaled $3,241 and other asset debt issuancecosts totaled $221. Interest expense for the amortization of debt issuance costand discount on note was $1,695 and $3,314 for the three and nine months ended September 30,2004. As of September 30, 2004, the effective interest rates for the July 2005and 2007 Notes were 40% and 37%, respectively.

 

TheCompany was obligated, pursuant to a Registration Rights Agreement, as amendedby the Exchange Notes, between the Company, the Placement Agents and the noteholders to file a registration statement with the Securities and ExchangeCommission (“SEC”) to register the shares of Common Stock issuable uponconversion of the notes payable and the related warrants within 90 daysfollowing the effective closing date of the exchange notes (July 29,2004), and to use best efforts to cause such registration statement to becomeeffective within 60 days following the SEC’s first written comments on theregistration statement. Further, if the Company is not in compliance with theregistration 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 thenote and un-amortized discounts for conversion feature and warrants of $3,241 is presented as currentliability as of September 30, 2004 as the note holders have the right tocall for payment on demand as the registration statement has not been filed inaccordance with the amended Registration Rights Agreement. As of December 2004,the Company has not received any demands for payment from the note holders.

 

Pursuantto Statement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities,” the Company is required toreport a value of the conversion liability as a fair value and record thefluctuation to the fair value of the conversion feature liability to currentoperations. The change in the fair value of the conversion feature liabilityresulted in a loss of $2,338 and a gain of $3,276 for the three and nine monthsended September 30, 2004, respectively. The fair value of conversionfeature liability outstanding at September 30, 2004 was $5,467. The fairvalue of conversion features outstanding at September 30, 2004 wascomputed using the Black-Scholes model under the following assumptions: (1) 0.83~2.83years; (2) volatility of 124%, (3) risk free interest of 2.21%~2.89%and dividend rate of 0%.

 

Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the relative fair values of thewarrants of $1,302 have been recorded as other liability during March 2004as the Company has not yet filed the registration statement. In addition, theCompany is required to report a value of the warrant as

 

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a fairvalue and record the fluctuation to the fair value of the warrant liability tocurrent operations. The change in fair value of the warrants resulted in a lossof $434, and a gain of $846 for the three and nine months ended September 30,2004, respectively. The fair value of warrants outstanding at September 30,2004 was $449, which was computed using the Black-Scholes model under thefollowing assumptions: (1) expected life of 1.42 years; (2) volatilityof 124%, (3) risk free interest of 2.63% and dividend rate of 0%.

 

Kookmin Note

 

On February 4, 2003, the Company’s Koreansubsidiary 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 anannual rate of 7.1%. In the event of delayed repayment, the interest increasesto a maximum of 21%, depending on the length of time the repayment is delayed. Thisloan is collateralized by the plant facilities and certain equipment in SouthKorea. During the first eighteen months from the origination date, interest waspayable on a monthly basis. In October 2003, the Company paid $873 ofprincipal at the request of Kookmin Bank due to the sale of machines that hadbeen part of the collateral on the loan. Subsequent to October 31,2003, Kookmin Bank requested that the Company pay an additional $866 ofprincipal by February 2004 due to the Company’s current credit rating. TheCompany made two payments on the requested additional loan paydown in November andDecember 2003 of $320 and $205, respectively. The remaining payment of$341 was made in February 2004. Beginning in September 2004, theCompany will be required to make equal monthly installments of principal andinterest to repay the remaining balance of the loan over a 36-month period.

 

Becausethis note payable is denominated in South Korea Won, the balance will fluctuatewith the exchange rate between the U.S. Dollar and the South Korean Won,resulting in the recognition of foreign exchange gains or losses that areincluded in other comprehensive loss. At September 30, 2004, the balanceof the 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.

 

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

 

During the quarter ended September 30,2004, under the Company’s 2002 Equity Incentive Plan which provides for thegrant of stock options to officers, employees, consultants and directors, theCompany granted options to purchase 385,359 common shares of the Company for anaverage exercise price of $1.38. All options granted under this plan hadexercise prices that were equal to the fair market value on the date of grant.

 

During the quarter ended September 30,2004, under the Company’s 2002 Non-employee Director Stock Option Plan, whichprovides for the grant of stock options to non-employee directors, the Companygranted options to purchase 20,000 common shares of the Company for an averageexercise price of $1.42. All options granted under this plan had exerciseprices that were equal to the fair market value on the date of grant.

 

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

 

**9.****                                      SegmentReporting**

 

SFAS No. 131,*Disclosures aboutSegments of an Enterprise and Related Information,*requirescompanies to provide certain information about their operating segments. In April 2002,the Company began classifying operations into two reportable segments:Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys. TheLiquidmetal alloy industrial coatings are used primarily as a protectivecoating for industrial machinery and equipment, such as drill pipe used by theoil drilling industry and boiler tubes used by coal burning power plants. BulkLiquidmetal alloys include market opportunities to manufacture and sell casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment. Primarily,the expenses incurred by the bulk Liquidmetal alloy segment are research and

 

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development costs and selling expenses associated with identifying anddeveloping market opportunities. Bulk Liquidmetal alloy products can bedistinguished from Liquidmetal alloy coatings in that the bulk Liquidmetalalloy can have significant thickness, up to approximately one inch, whichallows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment. Revenue and expensesassociated with research and development services are included in the bulkLiquidmetal alloy segment. The accounting policies of the reportable segmentsare the same as those described in Note 18 to the consolidated financialstatements included in the Company’s Form 10-K filed with the Securitiesand Exchange Commission on November 10, 2004.

 

Summarized financial information concerning the Company’s reportablesegments is shown in the following tables:

 
| ** **                                               | ** ** | ** **   | ** ** | **Bulk Alloy** | ** ** | **Segment** | ** ** |
|----------------------------------------------------------|------------|--------------|------------|---------------------|------------|-------------|------------|
| ** **                                               | ** ** | **Coatings** | ** ** | **Products**        | ** ** | **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 ((Restated)): |       |         |       |                |       |        |       |
| 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 between reportable segments and the Company’s netloss is shown in the following table:

 
| ** **                                                                                                     | ** ** | **For the Three**               | ** ** | **For the Nine**                | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **Months Ended Sept. 30,** | ** ** | **Months Ended Sept. 30,** | ** ** |
| ** **                                                                                                     | ** ** | **2004**                                  | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                     | ** ** | **(Restated)**                            | ** ** | ** **                                | ** ** | **(Restated)** | ** ** | **(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 | ) |
| Consolidated  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                                                                               |       | (2,941                                    | )          | —                                    |       | (2,941 | ) | — |   |
| Change  in value of warrants, gain (loss)                                                                      |       | (434                                      | )          | —                                    |       | 846 |   | — |   |
| Change  in value of conversion feature, gain (loss)                                                            |       | (2,338                                    | )          | —                                    |       | 3,276 |   | — |   |
| Other  income                                                                                                  |       | 302                                       |       | —                                    |       | 302 |   | — |   |
| Interest  expense                                                                                              |       | (3,283                                    | )          | (106                                      | )          | (5,934 | ) | (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 | ) |
| Consolidated  net loss                                                                                         |       | $                                         | (11,263    | )                                         | $          | (6,101 | ) | $ | (9,719 | ) | $ | (19,658 | ) |

 

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

 

Revenuesfrom sales to companies in the United States of America were $1,215 and $2,006during the three months ended September 30, 2004 and 2003, respectively. Therevenue related to the United States of America was earned under threedefense-related research and development contracts and sales of coatingsproducts.

 

Duringthe three months ended September 30, 2004, the Company had revenue fromsales to companies outside of the United States of $3,400 of which $2,895 representedsales to companies located in South Korea. During the three months ended September 30,2003, the Company had revenues from companies outside of the United States of$1,518 of which $1,108 represented sales to companies located in South Korea. Ofthe $1,108 sales in South Korea, $243 was from our discontinued equipmentmanufacturing business for the three months ended September 30, 2003. Therevenue related to sales to companies outside of the United States was frombulk alloy products including equipment sales.

 

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

 

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Reconciling informationbetween reportable segments and the Company’s consolidated assets is shown inthe 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 include assets attributable to the Company’scorporate headquarters. The largest asset represents the Company’s cashbalances, primarily generated from the Company’s  proceeds from the senior convertible notesand Kookmin loan (See note 7).

 

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

 

Basic earnings per share (“EPS”) is computed by dividing earnings (loss)attributable to common shareholders by the weighted average number of commonshares outstanding for the periods. Diluted EPS reflects the potential dilutionof securities that could share in the earnings. 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 hascontingent obligations of $164 and $132, respectively, for notes receivablessold with recourse.

 

During September 2004,as part of a security agreement to finance certain insurance policy, theCompany used certificate of deposits with maturities of less than one year of$1,000 as collateral. The $1,000 of certificate of deposit is presented asrestricted cash at September 30, 2004.

 

Two separate lawsuitswere filed in July and September 2004 by two former employees of ourPyongtaek manufacturing facility in South Korea. The suits are based on a claimof wrongful termination and breach of employment contract. In November 2004,the Company entered into a settlement agreement with the employees whereby theCompany would pay $243 to the employees in exchange for all claims beingdismissed. The payable amount is included in accounts payable and accruedexpenses as of September 30, 2004 financial statement.

 

The Company is from timeto time a party to certain legal proceedings arising in the ordinary course ofbusiness. Although outcomes cannot be predicted with certainty, the Companydoes not believe that any legal proceeding to which it is a party will have amaterial adverse effect on the Company’s financial position, results ofoperations, and cash flows. (See Note 13)

 

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, allegingviolations of 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-5promulgated thereunder. The

 

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actionswere originally brought on behalf of those who purchased LiquidmetalTechnologies’ common stock between May 22, 2002, and March 30, 2004,inclusive. The complaints contain varying allegations, but generally allegethat the defendants engaged in improper revenue recognition with respect to theCompany’s transactions with Growell Metal Co., Ltd. and that the defendants issuedfalse and misleading statements concerning the Company’s business andoperations, including unrealistic but favorable information about market demandfor Liquidmetal products, with the result of artificially inflating the Company’sshare price. The complaints seek unspecified compensatory damages and otherrelief. In August 2004, four complaints were consolidated in the UnitedStates District Court for the Middle District of Florida under the caption *Primavera Investors v. Liquidmetal Technologies, Inc., et al.*,Case No. 8:04-CV-919-T-23EAJ. John Lee, Chris Cowley, Dwight Mamanteo,Scott Purcell and Mark Rabold, were appointed co-lead plaintiffs (the “LeadPlaintiffs”). In September 2004, the other five complaints filed in theCentral District of California were transferred to the Middle District ofFlorida 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 Technologiesand the other defendants will have 45 days from the service date to move todismiss or otherwise respond to the Consolidated Amended Class ActionComplaint. We intend to vigorously defend against the class action. We cannotcurrently predict the impact or resolution of this litigation or reasonablyestimate a range of possible loss, which could be material. The resolution ofthis lawsuit may harm our business and have a material adverse impact on ourfinancial condition.

 

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. Twoshareholder derivative complaints were filed in California state court styled *Brian Clair, Derivatively on Behalf of Liquidmetal Technologies, Inc.v. John Kang, et al.*, Case No. 04CC00551, and *Joseph Durgin Derivatively on Behalf of Liquidmetal Technologies, Inc.v. John Kang, et al.,*Case No. 04CC00553, both commenced in the Superior Court of Orange County,California. A third shareholder derivative complaint was filed in Floridafederal court styled *Robert Story v. John Kang,et al.*, Case No. 8:04-CV-1587-T23TBM, commenced in the MiddleDistrict of Florida, Tampa Division. These shareholder derivative lawsuitsallege that the defendants breached various fiduciary duties and otherwiseviolated state law based primarily upon the same underlying facts andcircumstances as the federal shareholder class action lawsuits. Theplaintiffs seek unspecified compensatory damages, restitution and disgorgementof profits, equitable and/or injunctive relief as permitted by law and otherrelief. The two shareholder derivative complaints in California state courthave been consolidated. Plaintiffs served a Consolidated Shareholder DerivativeComplaint on October 12, 2004. The defendants served a Demurrer to theConsolidated 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’s responseto the amended Florida derivative complaint was due on December 17, 2004. Weintend to vigorously defend against the derivative actions. We cannot currentlypredict the impact or resolution of this litigation or reasonably estimate arange of possible loss, which could be material. The resolution of theselawsuits may harm our business and have a material adverse impact on ourfinancial condition.

 

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

 

In June 2003, the Company entered into an exclusive, ten-year licenseagreement with LLPG, Inc. (“LLPG”), a corporation headed by a formerdirector of the Company. Under the terms of the agreement, LLPG has the rightto commercialize Liquidmetal alloys, particularly precious-metal basedcompositions, in jewelry and high-end luxury product markets. The Company, inturn, will receive royalty payments over the life of the contract on allLiquidmetal products produced and sold 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 aremaining receivable balance of $500 due from LLPG, which was paid in full in March 2004.

 

TheCompany is a party to a license agreement with California Institute of Technology(“Caltech”) under which the Company exclusively licenses from Caltech certaininventions and technology relating to amorphous alloys. Professor WilliamJohnson, a 

 

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memberof the Company’s Board of Directors, is a professor at Caltech, andsubstantially all of the amorphous alloy technology licensed to the Companyunder the Caltech license agreement was developed in Professor Johnson’sCaltech laboratory. During 2003, the Company paid $50 to Caltech representingthe second and final installments on the $150 aggregate fees related to thisagreement. Additionally, the Company reimburses Caltech for laboratory expensesincurred by Professor Johnson’s Caltech laboratory, which during the ninemonths ended September 30, 2004 and 2003, amounted to $0 and $22 inreimbursements, respectively.

 

A company managedand partially owned by one of the Company’s former directors provides technicalsupport services and computer equipment to the Company. During the nine monthsended September 30, 2003, the Company incurred $20 of expenses andequipment purchases related to this arrangement. There were no expenses andpayables to this Company as of and for the nine months ended September 30,2004.

 

We are a party toa consulting agreement with Chitnis Consulting, Inc., which is owned 100%by Shekhar Chitnis, a former director and executive officer of our company. Underthis agreement, we have engaged Chitnis Consulting to provide consultingservices on an as-needed basis through December 31, 2005. During 2003, weincurred $50 in consulting fees from Chitnis Consulting and incurred $13 duringthe quarter ended September 30, 2004, and $38 for the nine-month periodended September 30, 2004.

 

**13.****                               SubsequentEvents**

 

In November 2004, weentered into an agreement with John Kang, our Chairman, President, and ChiefExecutive Officer, in which Mr. Kang agreed that certain stocktransactions by him in 2002 involving our common stock should have resulted ina liability under Section 16(b) of the Securities Exchange Act of1934, as amended (“Section 16(b)”). These transactions include Mr. Kang’sprivate sale of 285,715 shares of his personal Liquidmetal Technologies commonstock to Growell Metal Co., Ltd. in February 2002, prior to our initialpublic offering. They also include Mr. Kang’s subsequent indirect purchaseand disposition of Liquidmetal Technologies common stock in order to satisfy apersonal agreement Mr. Kang made to Growell Metal in February 2002regarding the guaranteed minimum value of the stock purchased by Growell Metalin February 2002 (the purchases and dispositions incident to thisagreement occurred in August and November 2002, respectively). Lastly,the transactions include open-market purchases of an aggregate of 89,300 sharesof our common stock made by Mr. Kang in August 2002.

 

**The 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 has acknowledged this liability, and in anagreement negotiated between Mr. Kang and the Audit Committee and approvedby the full Board, Mr. Kang will pay this liability in 24 equal monthlyinstallments beginning in January 2005. As a result, the Company accruedfor the $302 receivable in other assets and other income during the quarterended September 30, 2004. The above-described transactions involvingGrowell Metal 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 and Analysis of Financial Condition andResults of Operations**

** **

*Thismanagement’s discussion and analysis should be read in conjunction with thecondensed consolidated financial statements and notes included elsewhere inthis report on Form 10-Q.*

 

*Thismanagement’s discussion and analysis, as well as other sections of this reporton Form 10-Q, may contain “forward-looking statements” that involverisks and uncertainties, including statements regarding our plans, futureevents, objectives, expectations, forecasts, or assumptions. Any statement thatis not a statement of historical fact is a forward-looking statement, and insome cases, words such as “believe,” “estimate,” “ project,” “expect,” “intend,”“may,” “anticipate,” “plans,” “seeks,” and similar expressions identifyforward-looking statements. These statements involve risks and uncertaintiesthat could cause actual outcomes and results to differ materially from theanticipated outcomes or results, and undue reliance should not be placed onthese statements. These risks and uncertainties include, but are not limitedto, the matters discussed under the caption “Factors Affecting Future Results”in our Annual Report on Form 10-K for the fiscal year ended December 31,2003 and other risks and uncertainties discussed in filings made with theSecurities and Exchange Commission (including risks described in subsequentreports on Form 10-Q, Form 10-K, Form 8-K, and other filings).Liquidmetal Technologies disclaims any intention or obligation to update orrevise 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. Our Liquidmetal® family of alloys consists of avariety of coatings, powders, bulk alloys, and composites that utilize theadvantages offered by amorphous alloy technology. We develop, manufacture, andsell products and components from bulk amorphous alloys that are incorporatedinto the finished goods of our customers, and we also market and sell amorphousalloy industrial coatings. We also partner with third-party licensees anddistributors to develop and commercialize Liquidmetal alloy products. We havethe exclusive right to develop, manufacture, and sell what we believe are theonly commercially viable bulk amorphous alloys.

 

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 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 in coal-burning power plants. The historical operatinginformation for fiscal year 2001 is based substantially on sales of Liquidmetalalloy coatings. In the second half of 2002, we began producing bulk Liquidmetalalloy components and products for incorporation into our customers’ finishedgoods. Bulk Liquidmetal alloy segment revenue includes sales of parts orcomponents of electronic devices, medical products, and sports and leisuregoods; tooling and prototype parts (including demonstration parts and testsamples) for customers with products in development; metal processing equipment(see Note 5 for disclosure regarding the disposal of our equipmentmanufacturing business); and research and development revenue relatingprimarily to defense and medical applications. We expect that these sources ofrevenue will continue to significantly change the character of our revenue mix.

 

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

 

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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 alloytechnologies. We believe that our research and development efforts will focuson the discovery of new alloy compositions, the development of improvedprocessing technology, and the identification of new applications for ouralloys.

 

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 PrinciplesBoard Opinion No. 30,*Reporting the Resultsof Operations — Reporting the Effects of Disposal of a Segment of a Business,and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,*we reclassified our consolidated financial statements to reflect thediscontinuation of our equipment manufacturing operations. The revenue, costsand expenses, assets and liabilities, and cash flows of the equipmentmanufacturing business were segregated in our accompanying Consolidated BalanceSheets, Consolidated Statements of Operations and Comprehensive Loss, andConsolidated Statements of Cash Flows.

 

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 intoLiquidmetal Technologies with all 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. These estimates and assumptions are based onhistorical experience and various other factors that are believed to bereasonable under the circumstances. Actual results could differ materially fromthese estimates under different assumptions or conditions.

 

We believe that the following accounting policies arethe most critical to our condensed consolidated financial statements sincethese policies require significant judgment or involve complex estimates thatare important to the portrayal of our financial condition and operatingresults:

 

•                  Exchange rate fluctuations 

•                  Warranty accrual

•                  Allowance for doubtful accounts

•                  Inventoriesat lower of cost or net realizable value

•                  Deferredtax assets

•                  Goodwillimpairment

•                  Valuationof derivatives of warrants and embedded conversion features 

 

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

 

**Resultsof Operations**

 

Comparison of thethree months ended September 30, 2004 and 2003 

 

*Revenue*.Revenue increased $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 to an increase of $2.0 million from the salesand prototyping of parts manufactured from bulk Liquidmetal alloys offset by adecrease of $0.8 million from research and development services relatedprimarily to defense and medical applications and an increase in our coatingsbusiness of $0.1 million.

 

*Cost ofSales*. Cost of sales decreased to $3.2 million, or 70%of revenue, for the three months ended September 30, 2004 from$4.6 million, or 140% of revenue, for the three months ended September 30,2003. This decrease was a result of the continued maturing of our manufacturingprocess and represents the Company’s efforts to manage costs and focus on ourcore business while continuing to build production pipeline and manufacturinginfrastructure required to prepare for and support the anticipated growth ofour 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, andadministrative expenses decreased to $3.6 million, or 77% of revenue, forthe three months ended September 30, 2004 from $3.7 million, or 112%of revenue, for the three months ended September 30, 2003. This decreaseof $0.1 million was primarily a result of decrease in wages and related expenseby $0.9 million, offset by an increase in professional fees, consultantfees, and contract services by $0.5 million, increase in insurance costsby $0.1 million, and increase in stock compensation by $0.2 million. These andother decreases in selling, general and administrative expenses represent theCompany’s efforts to manage costs and focus on our core business whilecontinuing to build our corporate infrastructure required to prepare for andsupport the anticipated growth of our bulk Liquidmetal alloy business.

 

*Researchand Development Expenses*. Research and development expensesdecreased to $0.4 million, or 8% of revenue, 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 the Company focusing primarily on our corebusiness associated with our bulk Liquidmetal alloy business while managing ourcosts. The Company continues to perform research and development effortson new Liquidmetal alloys and related processing capabilities, develop newmanufacturing techniques, and contract with consultants and provide researchgrants to various institutions to advance the development of Liquidmetal alloys.The decrease of $0.6 million was due to decreases in salaries, wages and therelated expenses by $0.3 million, decrease in laboratory and prototypingexpenses 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.

 

*Lossfrom Extinguishment of Debt.*Loss from extinguishment of debtwas $2.9 million, or 64% of revenue, during the three months ended September 30,2004 on the extinguishment of our March Notes from the exchange in August 2004.There was no such loss recorded during the three months ended September 30,2003.

 

*Changein Value of Warrants.*Change in value of warrants decreasedto a net loss of $0.4 million, or 9% of revenue, during the three months ended September 30,2004 due to the change in valuation of warrant payable issued related to thesenior convertible debt funded in March 2004. There was no change in valueof warrants recorded during the three months ended September 30, 2003.

 

*Changein Value of Conversion Feature.*Change in value of conversion feature liability from our seniorconvertible debt funded in March 2004 and exchanged in August 2004resulted in a change in value of conversion feature loss of $2.3 million, or 51% of revenue, for the three months ended September 30,2004, primarily due to fluctuations in our stock price. There was no suchamounts recorded for the three months ended September 30, 2003.

 

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*OtherIncome.*Other income was $0.3 million, or 7% of revenue,during the three months ended September 30, 2004 from certain stocktransactions with John Kang, our Chairman, President, and Chief Executive Officerduring 2002 (see note 13). There were no amounts recorded as other income forthe three months ended September 30, 2003.

 

*InterestExpense*. Interest expense was $3.3 million, or 71% of revenue, for the three months ended September 30,2004 and was $0.1 million, or 3% of revenue, for the three months ended September 30,2003. During the three months ended September 30, 2004, interest expenserelated to the interest accrued, amortization of debt discount and deferredissuance costs on new senior convertible debt originally sold in March 2004,and from accrued interest from the Kookmin Bank loan funded in February 2003.During the three months ended September 30, 2003, interest expense relatedto the interest accrued on the Kookmin Bank loan.

 

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

 

Comparison of thenine months ended September 30, 2004 and 2003 

 

*Revenue*.Revenue increased $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 to the increase in our bulk Liquidmetal alloysbusiness which consisted of an increase of $3.5 million from our Liquidmetalalloy parts sales, an increase of $0.3 million from our coatings business,offset by a decrease of $1.3 million from research and development servicesrelated primarily to defense and medical applications.

 

*Cost ofSales*. Cost of sales decreased to $9.2 million, or 62%of revenue, for the nine months ended September 30, 2004 from$11.4 million, or 104% of revenue, for the nine months ended September 30,2003. This decrease was a result of the continued maturing of our manufacturingprocess and represents the Company’s efforts to manage costs and focus on ourcore business while continuing to build production pipeline and manufacturinginfrastructure required to prepare for and support the anticipated growth ofour 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, andadministrative expenses decreased to $9.2 million, or 61% of revenue, forthe 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 was primarily a result of decrease in wages and related expense by$2.6 million, decrease in travel expenses by $0.5 million, decrease in productwarranty and bad debt expense by $0.2 million, decrease in property rentby $0.6 million, offset by an increase in professional fees, consultantfees, and contract services by $0.6 million, and increase in stock compensation by $0.1 million. Theseand other decreases in selling, general and administrative expenses representthe Company’s efforts to manage costs and focus on our core business whilecontinuing to build our corporate infrastructure required to prepare for andsupport the anticipated growth of our bulk Liquidmetal alloy business.

 

*Researchand Development Expenses*. Research and development expensesdecreased to $1.1 million, or 7% of revenue for the nine months ended September 30,2004 from $7.8 million, or 70% of revenue for the nine months ended September 30,2004. This decrease of $6.7 million was a result of the Company’s focusingprimarily on our core business associated with our bulk Liquidmetal alloybusiness while managing our costs. The Company continues to perform researchand development 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. The decrease of $6.7 million was due todecreases in salaries, wages and related expenses by $2.6 million,decrease in professional fees, consultant fees, and contract services by$0.6 million, decrease in research grants to institutions by $0.3 million,decrease in laboratory and prototyping expenses by $2.0 million, decreasein depreciation expense by $0.6 million, decrease in travel and relatedexpenses by $0.3 million, and a decrease in other miscellaneous expenses of$0.3 million.

 

*Lossfrom Extinguishment of Debt.*Loss from extinguishment of debtwas $2.9 million, or 20% of revenue, during the nine months ended September 30,2004 from extinguishment of our March Notes from the exchange in August 2004.There was

 

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no such loss recordedduring the nine months ended September 30, 2003.

 

*Changein Value of Warrants.*Change in value of warrants increasedto a net gain of $0.8 million, or 6% of revenue, during the nine months ended September 30,2004 due to the change in valuation of warrant payable issued related to thesenior convertible debt funded in March 2004. There was no change in valueof warrants recorded during the nine months ended September 30, 2003.

 

*Changein Value of Conversion Feature.*Change in value of conversion feature liability from our seniorconvertible debt funded in March 2004 and exchanged in August 2004resulted in a change in value of conversion feature gain of $3.3 million, or 22% of revenue, for the nine months ended September 30,2004 primarily due to fluctuations in our stock price. There were nosuch amounts recoded for the nine months ended September 30, 2003.

 

*OtherIncome.*Other income was $0.3 million, or 2% of revenue,during the nine months ended September 30, 2004 from certain stock transactionswith John Kang, our Chairman, President, and Chief Executive Officer during2002 (see note 13). There were no amounts recorded as other income for the ninemonths ended September 30, 2003.

 

*InterestExpense*. Interest expense was $5.9 million, or 40% ofrevenue, for the nine months ended September 30, 2004 and was $0.3million, or 3% of revenue, for the nine months ended September 30, 2003. Duringthe nine months ended September 30, 2004, the interest expense wasprimarily due to the interest accrued, amortization of debt discount anddeferred issuance costs on new senior convertible debt originally sold on March 3,2004, and interest accrued on Kookmin Bank loan funded on February 4, 2003.During the nine months ended September 30, 2003, the interest expense wasprimarily due to the interest accrued on the Kookmin Bank loan.

 

*InterestIncome.*Interest income was $34 thousand for the nine monthsended September 30, 2004 for interest earned on certificate of deposits. Interestincome was $0.3 million or 3% of revenue for the nine months ended September 30,2003 for interest earned on short-term, investment grade, interest-bearingsecurities.

 

**Liquidity and Capital Resources**

** **

Our cash used in operating activities was $5.6 million,which includes $0.8 million cash provided by our discontinued equipmentmanufacturing business, for the nine months ended September 30, 2004 and$22.2 million, which includes cash used in our discontinued equipmentmanufacturing and retail golf businesses of $1.7 million, for the nine monthsended September 30, 2003. Our working capital decreased from $1.0 million at December 31,2003 to ($6.2) million at September 30, 2004. The Company’s workingcapital decrease of $7.2 million was primarily attributable to decrease in cashof $1.7 million, decrease in accounts receivables of $0.2 million, decrease incurrent assets of our discontinued equipment manufacturing business of $0.8million, increase in accounts payable of $1.8 million, increase in settlementpayable of $0.1 million, increase in current portion of notes payable of $2.5million, increase in warrant liabilities of $0.4 million, increase inconversion feature liabilities of $5.5 million, offset by an increase inrestricted cash of $1.0 million, increase in inventories of $2.0 million,increase in prepaid and other current assets of $1.1 million, decrease indeferred revenue of $0.6 million, and decrease in other current liabilities of$1.3 million.

 

Our cash used ininvesting activities was $0.3 million for the nine months ended September 30,2004 for the acquisition of property and equipment, and investment in patents.

 

Our cash provided byfinancing activities was $3.9 million for the nine months ended September 30,2004, which consists of $9.9 million in proceeds from borrowings from oursenior convertible debt offset by $4.9 million on repayment of borrowings, $0.1million of other liabilities, and increase in restricted cash of $1.0 million.

 

TheCompany has experienced losses from continuing operations during the last twofiscal years and has an accumulated deficit of $122,306 as of September 30,2004. Cash used for continuing operations for the nine months ended September 30,2004 was $6.5 million and cash flow from continuing operations may benegative throughout the remaining fiscal year 2004. Such conditions raisesubstantial doubt about the ability of the Company continuing as a goingconcern for a reasonable period of time. These operating results occurred whilethe Company was developing and attempting to commercialize and manufactureproducts from an entirely new and unique technology. This business planrequired significant spending related

 

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tostart-up costs and capital expenditures. These factors have placed a significantstrain on the financial resources of the Company. 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 consolidated financial statements do not include anyadjustments that might result from the outcome of the uncertainty.

 

Our capital requirementsduring the next 12 months will depend on numerous factors, including thesuccess of our existing products, the development of new applications forLiquidmetal alloys, and the resources we devote to develop and support ourLiquidmetal alloy products. However, we anticipate our capital expenditureswill be less than $0.5 million in the next 12 months. We expect to continue todevote limited capital to our research and development activities, to furtherdevelop and strengthen our manufacturing capabilities, and for working capitaland other general corporate purposes.

 

We believe that ourcurrent cash and cash equivalents together with anticipated cash flow from ouroperations, will be sufficient to fund our working capital and capitalexpenditure requirements for at least the next 12 months. Our cash flowprojections from operations and, consequently, future cash needs are subject touncertainty. If our available funds and cash generated from operations areinsufficient to satisfy our liquidity requirements, we may need to raiseadditional capital to fund our working capital or capital expenditurerequirements. We cannot be certain that additional capital, whether throughselling additional debt or equity securities or obtaining a line of credit orother loan, will be available to us or, if available, will be on termsacceptable to us. If we issue additional securities to raise funds, thesesecurities may have rights, preferences, or privileges senior to those ofthe rights of our common stock and our stockholders may experienceadditional 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 – Quantitative and Qualitative Disclosures about Market Risk**

 

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

 

*InterestRates.*We are exposed to market risks relating to changes ininterest rates. Some of the proceeds of our initial public offering areinvested in short-term, interest-bearing, investment grade securities. Thevalue of these securities will be subject to interest rate risk and could fallin value if interest rates rise.

 

*CommodityPrices.*We are exposed to price risk related to anticipatedpurchases of certain commodities used 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 thefuture as our business grows and as our purchases of these raw materialsincrease.

 

*ForeignExchange Rates.*As a result of our operation of amanufacturing facility in South Korea, a substantial portion of our costs willbe denominated in the South Korean won. 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. Althoughwe do not currently enter into foreign exchange hedge transactions, we may doso in the future as our business grows.

 

**Item 4 – Controls and Procedures**

** **

Within the 90 days priorto the date of this quarterly report, Liquidmetal Technologies (the “Company”)carried out an evaluation, under the supervision and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures pursuant to Rule 13a-14under the Securities Exchange Act of 1934, as amended. Based on that evaluation,the Chief Executive Officer and Vice President Finance have concluded thatthese disclosure controls and procedures are effective in timely alerting themto material information relating to the Company, including its consolidatedsubsidiaries, required to be included in this quarterly report on Form 10-Q.There were no significant changes in our internal controls or in other factorsthat could significantly affect these controls subsequent to the date of ourevaluation.

 

(a)          Evaluation of disclosurecontrols and procedures. During the course of the audit of our financialstatements for the fiscal years ended December 31, 2001, 2002, and 2003,it was determined that revenues from certain equipment sales made by theCompany to Growell Metal Co., Ltd. in the third and fourth quarters of2002 and the first quarter of 2003 should not have been recognized inthose periods. It was also determined that certain amounts relating tosales made to Samsung in December 2002, to JS Technologies in September 2002,and AM Corporation in December 2002 should not have been recognized.  And lastly, it was determined that certainstock options granted in 2001 and 2002 were not calculated in accordance withguidelines under APB Opinion No. 25, SFAS No. 123, and EITF 00-23. Thesedeterminations and the associated restatement of previously issued financialstatements, are described more fully in the Form 10-K, suggest that, atthe time of the subject transactions and the preparation of our financialstatements for the relevant periods, the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15 under the SecuritiesExchange Act of 1934) did not ensure that all information required to bedisclosed by the Company was adequately accumulated and communicatedto the Company’s management. Since that time, the Companyhas made various improvements to enhance the reliability of its disclosurecontrols and procedures. Except for the foregoing, the Company’s principalexecutive officer and principal financial officer have concluded that theCompany’s disclosure controls and procedures were effective as of the end ofthe period covered by the Form 10-K based on their evaluation of thecontrols and procedures pursuant to Rule 13a-15 under the Securities andExchange Act of 1934.

 

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**PART II**

**OTHERINFORMATION**

 

**Item2 – Change in Securities and Use of Proceeds**

 

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

 

As of December 31,2003, we have used the $70.7 million of net proceeds from the Offering. In2002, we used approximately $7.8 million of the net proceeds from theOffering to 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 the third quarter of 2002, we used$2.0 million to invest in the common stock of Growell Metal, whichsupplies a portion of the Liquidmetal alloy ingots used in our manufacturingoperations in Korea. We have since sold such stock, realizing a gain on thesale. We used the remaining proceeds of $32.7 million for working capitalin 2002 and 2003, excluding $2.1 million paid to Paul Azinger in 2002 and2003 for amounts due under the terms of his terminated endorsement agreementwith our discontinued retail golf operations.

 

**Item6 – Exhibits**

 

The following documentsare filed as an exhibit to this Report:

 
| **Exhibit  Number** |   | **Description  of Document**                                                                                                                                                    |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                            |
| 31.1                |   | Certification of President & Chief  Executive Officer, Ricardo A. Salas, as required by Section 3.02 of  Sarbanes-Oxley Act of 2002                               |
|                |   |                                                                                                                                                                            |
| 31.1                |   | Certification of Chief Financial Officer, Young Ham,  as required by Section 3.02 of Sarbanes-Oxley Act of 2002                                                            |
|                |   |                                                                                                                                                                            |
| 32.1                |   | Certification  of Principal Executive Officer, Ricardo A. Salas, pursuant to 18 U.S.C Section 1350,  as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
|                |   |                                                                                                                                                                            |
| 32.2                |   | Certification  of Chief Financial Officer, Young Ham, pursuant to 18 U.S.C Section 1350,  as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002            |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                      |   | LIQUIDMETAL TECHNOLOGIES               |
|---------------------------|--------|----------------------------------------|
|                      |   | (Registrant)                           |
|                      |   |                                   |
| Date: July 20,  2006 |   | /s/ Ricardo A. Salas                   |   |
|                      |   | Ricardo A. Salas                       |
|                      |   | President and Chief  Executive Officer |
|                      |   | (Principal Executive  Officer)         |
|                      |   |                                   |
|                      |   |                                   |
| Date: July 20,  2006 |   | /s/ Young Ham                          |   |
|                      |   | Young Ham                              |
|                      |   | Chief Financial Officer                |
|                      |   | (Principal Financial  Officer)         |

 

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