** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q/A**

**AmendmentNo. 3**

 

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

 

**For thequarterly period ended June 30, 2005**

 

**OR**

 

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

 

**For thetransition period from                         to                        **

 

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

 

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**LIQUIDMETALTECHNOLOGIES, 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, Suite 100**                                 |
| **Lake  Forest, California 92630**                                           |
| (address of principal executive office, zip code)                            |
|                                                                         |   |                |
| Registrant’s  telephone number, including area code: **(949) 206-8000** |

 

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Indicate by check mark whether the registrant (1) 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 ýNo o

 

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                                                             Acceleratedfiler ý                                                                                          Non-acceleratedfiler o

 

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

 

Yes oNo ý

 

#### **As of July 11, 2005, there were 41,609,652 sharesof the registrant’s common stock, $.001 par value, outstanding.**

 

 

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**LIQUIDMETAL TECHNOLOGIES, INC.AMENDMENT NO. 3 TO FORM 10-QFOR THE QUARTER ENDED June 30, 2005**

 

**EXPLANATORY NOTE**

 

We arefiling this Amendment No. 3 to our Quarterly Report on Form 10-Q forthe quarter ended June 30, 2005, as filed with the U.S. Securities andExchange Commission (SEC) on August 15, 2005, as amended on August 30,2005 and  March 16, 2006, to restateour financial statements to properly account for the conversion feature of thesenior convertible notes issued in March 2004 (see Note 8 to the condensedconsolidated financial statements). Additionally, reclassifications to our financialstatements have been made for consistent presentation of our change in value ofwarrant liabilities.

 

Otherthan the changes referred to above, all other information included in the abovedescribed Form 10-Q, remains unchanged.  This amendment does notreflect events occurring after the filing of such Form 10-Q and does notmodify or update the disclosures therein in any way other than as required toreflect the amendment as described above and set forth below.

 

2

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**FORWARD-LOOKING INFORMATION**

 

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 differ materiallyfrom those projected in the forward-looking statements due to risks anduncertainties that exist in the Company’s operations and business environment,including competition, need for increased acceptance of products, ability tocontinue to develop and extend our brand identity, ability to anticipate andadapt to a competitive market, ability to effectively manage rapidly expandingoperations, amount and timing of operating costs and capital expendituresrelating to expansion of our business, operations and infrastructure, abilityto provide superior customer service, dependence upon key personnel and thelike. The Company’s most recent filings with the Securities and ExchangeCommission, including Form 10-K, contain additional information concerningmany of these risk factors, and copies of these filings are available from theCompany upon request and without charge.

 

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#### **TABLE OF CONTENTS**

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

 

4

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### **PART I**

### **FINANCIALINFORMATION**

 

**Item 1 – Financial Statements**

 

**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

 
| ** **                                                                                                                                             | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                             | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                             | ** ** | **(Restated)**    | ** ** | **(Restated)**        | ** ** |
| **ASSETS**                                                                                                                                             | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                                   |       |              |       |                  |       |
| Current Assets:                                                                                                                                        |       |              |       |                  |       |
|                                                                                                                                                   |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                                             |       | $                 | 1,256      |                  | $          | 742 |   |
| Restricted  cash                                                                                                                                       |       | —            |       | 754                   |       |
| Trade  accounts receivables, net of allowance for doubtful accounts of $69 and $108                                                                    |       | 2,359             |       | 1,668                 |       |
| Inventories                                                                                                                                            |       | 2,190             |       | 2,353                 |       |
| Prepaid  expenses and other current assets                                                                                                             |       | 954               |       | 930                   |       |
| Total current assets                                                                                                                                   |       | 6,759             |       | 6,447                 |       |
|                                                                                                                                                   |       |              |       |                  |       |
| Property, plant and  equipment, net                                                                                                                    |       | 14,996            |       | 16,434                |       |
| Idle equipment                                                                                                                                         |       | 193               |       | 1,906                 |       |
| Long term inventory                                                                                                                                    |       | —            |       | 1,810                 |       |
| Other intangibles, net                                                                                                                                 |       | 1,158             |       | 1,143                 |       |
| Other assets                                                                                                                                           |       | 816               |       | 768                   |       |
| Total  assets                                                                                                                                          |       | $                 | 23,922     |                  | $          | 28,508 |   |
|                                                                                                                                                   |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                                   |       |              |       |                  |       |
| Current Liabilities:                                                                                                                                   |       |              |       |                  |       |
|                                                                                                                                                   |       |              |       |                  |       |
| Accounts  payable and accrued expenses                                                                                                                 |       | $                 | 7,095      |                  | $          | 4,969 |   |
| Settlement  payable                                                                                                                                    |       | 3,294             |       | 3,246                 |       |
| Deferred  revenue                                                                                                                                      |       | 934               |       | 900                   |       |
| Short-term  debt                                                                                                                                       |       | 493               |       | —                |       |
| Long-term  debt, current portion, net of debt discount of $3,082 and $2,831                                                                            |       | 7,102             |       | 4,010                 |       |
| Warrant  liabilities                                                                                                                                   |       | 1,677             |       | 550                   |       |
| Conversion  feature liabilities                                                                                                                        |       | 4,368             |       | 6,650                 |       |
| Other  liabilities, current portion                                                                                                                    |       | 752               |       | 1,032                 |       |
| Total  current liabilities                                                                                                                             |       | 25,715            |       | 21,357                |       |
|                                                                                                                                                   |       |              |       |                  |       |
| Long-term debt, net of  current portion                                                                                                                |       | 2,044             |       | 2,618                 |       |
| Other long-term  liabilities, net of current portion                                                                                                   |       | 373               |       | 342                   |       |
| Total  liabilities                                                                                                                                     |       | 28,132            |       | 24,317                |       |
|                                                                                                                                                   |       |              |       |                  |       |
| Shareholders’ Equity  (Deficiency):                                                                                                               |       |              |       |                  |       |
|                                                                                                                                                   |       |              |       |                  |       |
| Common  stock, $0.001 par value; 100,000,000 shares authorized and 41,609,652 issued  and outstanding at June 30, 2005 and December 31, 2004 |       | 42                |       | 42                    |       |
| Additional  paid-in capital                                                                                                                            |       | 129,650           |       | 129,650               |       |
| Accumulated  deficit                                                                                                                                   |       | (136,256          | )          | (127,472              | )          |
| Accumulated  other comprehensive income                                                                                                                |       | 2,354             |       | 1,971                 |       |
| Total  shareholders’ equity (deficiency)                                                                                                          |       | (4,210            | )          | 4,191                 |       |
|                                                                                                                                                   |       |              |       |                  |       |
| Total  liabilities and shareholders’ equity (deficiency)                                                                                          |       | $                 | 23,922     |                  | $          | 28,508 |   |

 

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

 

5

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

### **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

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

**(unaudited)**

 
| ** **                                                               | ** ** | **For the Three**              | ** ** | **For the Six**                | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                               | ** ** | **Months Ended June 30,** | ** ** | **Months Ended June 30,** | ** ** |
| ** **                                                               | ** ** | **2005**                       | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                               | ** ** | **(Restated)**                 | ** ** | **(Restated)**                 | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
|                                                                     |       |                           |       |                           |       |   |   |   |   |
| Revenue                                                                  |       | $                              | 3,727      |                           | $          | 4,055 |   | $ | 6,570 |   | $ | 10,343 |   |
| Cost  of sales                                                           |       | 3,962                          |       | 2,475                          |       | 6,797 |   | 6,032 |   |
|                                                                     |       |                           |       |                           |       |   |   |   |   |
| Gross  (loss) profit                                                     |       | (235                           | )          | 1,580                          |       | (227 | ) | 4,311 |   |
|                                                                     |       |                           |       |                           |       |   |   |   |   |
| Operating  Expenses:                                                     |       |                           |       |                           |       |   |   |   |   |
| Selling,  general, and administrative                                    |       | 1,567                          |       | 2,544                          |       | 4,157 |   | 5,609 |   |
| Research  and development                                                |       | 213                            |       | 345                            |       | 610 |   | 686 |   |
| Impairment  of long lived assets                                         |       | 3,394                          |       | —                         |       | 3,394 |   | — |   |
| Total  expenses                                                          |       | 5,174                          |       | 2,889                          |       | 8,161 |   | 6,295 |   |
|                                                                     |       |                           |       |                           |       |   |   |   |   |
| (Loss)  from operations                                                  |       | (5,409                         | )          | (1,309                         | )          | (8,388 | ) | (1,984 | ) |
|                                                                     |       |                           |       |                           |       |   |   |   |   |
| Change  in value of warrants, gain (loss)                                |       | (100                           | )          | 694                            |       | 33 |   | 1,280 |   |
| Change  in value of conversion feature, gain                             |       | 1,167                          |       | 3,904                          |       | 2,282 |   | 5,614 |   |
| Interest  expense                                                        |       | (1,181                         | )          | (2,255                         | )          | (2,718 | ) | (2,651 | ) |
| Interest  income                                                         |       | 1                              |       | 22                             |       | 7 |   | 34 |   |
| (Loss)  income from continuing operations                                |       | (5,522                         | )          | 1,056                          |       | (8,784 | ) | 2,293 |   |
|                                                                     |       |                           |       |                           |       |   |   |   |   |
| (Loss)  from discontinued equipment manufacturing operations, net of tax |       | —                         |       | (356                           | )          | — |   | (749 | ) |
|                                                                     |       |                           |       |                           |       |   |   |   |   |
| Net  (loss) income                                                       |       | (5,522                         | )          | 700                            |       | (8,784 | ) | 1,544 |   |
|                                                                     |       |                           |       |                           |       |   |   |   |   |
| Other  comprehensive (loss) income                                       |       |                           |       |                           |       |   |   |   |   |
| Foreign  exchange translation gain                                       |       | 62                             |       | 43                             |       | 383 |   | 422 |   |
| Comprehensive  (loss) income                                             |       | $                              | (5,460     | )                              | $          | 743 |   | $ | (8,401 | ) | $ | 1,966 |   |
|                                                                     |       |                           |       |                           |       |   |   |   |   |
| Net  (loss) income per share basic and diluted:                          |       |                           |       |                           |       |   |   |   |   |
| (Loss)  income per share – continuing operations                    |       | $                              | (0.13      | )                              | $          | 0.03 |   | $ | (0.21 | ) | $ | 0.06 |   |
| (Loss)  per share – discontinued operations                         |       | $                              | —     |                           | $          | (0.01 | ) | $ | — |   | $ | (0.02 | ) |
| (Loss)  income per share basic and diluted                               |       | $                              | (0.13      | )                              | $          | 0.02 |   | $ | (0.21 | ) | $ | 0.04 |   |
|                                                                     |       |                           |       |                           |       |   |   |   |   |
| Number  of weighted average shares – basic and diluted              |       | 41,610                         |       | 41,610                         |       | 41,610 |   | 41,610 |   |

 

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

 

6

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

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

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

**(unaudited)**

 
| ** **                                                                                     | ** ** | **For the Six Months**  | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                     | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                                     | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                                                     | ** ** | **(Restated)**          | ** ** | **(Restated)** | ** ** |
|                                                                                           |       |                    |       |   |   |
| **Operating activities:**                                                                      |       |                    |       |   |   |
| Net  income (loss)                                                                             |       | $                       | (8,784     | ) | $ | (1,544 | ) |
|                                                                                           |       |                    |       |   |   |
| Adjustments  to reconcile net loss from operations to net cash used for operating  activities: |       |                    |       |   |   |
| Impairment  of long lived assets                                                               |       | 3,394                   |       | — |   |
| Loss  on disposal of asset                                                                     |       | 1                       |       | — |   |
| Depreciation  and amortization                                                                 |       | 1,694                   |       | 1,823 |   |
| Amortization  of debt discount                                                                 |       | 1,031                   |       | 2,283 |   |
| Gain  from change in value of warrants                                                         |       | (33                     | )          | (1,280 | ) |
| (Loss)  gain from change in value of conversion feature                                        |       | (2,282                  | )          | 5,614 |   |
| Stock-based  compensation                                                                      |       | —                  |       | 276 |   |
| Bad  debt (recovery) expense                                                                   |       | (43                     | )          | 105 |   |
| Warranty  expense                                                                              |       | 76                      |       | 137 |   |
|                                                                                           |       |                    |       |   |   |
| Changes  in operating assets and liabilities:                                                  |       |                    |       |   |   |
| Accounts  receivable                                                                           |       | (648                    | )          | (521 | ) |
| Inventories                                                                                    |       | 320                     |       | (2,235 | ) |
| Prepaid  expenses and other current assets                                                     |       | (24                     | )          | 189 |   |
| Other  assets                                                                                  |       | (169                    | )          | (575 | ) |
| Accounts  payable and accrued expenses                                                         |       | 2,050                   |       | (201 | ) |
| Deferred  revenue                                                                              |       | 34                      |       | (597 | ) |
| Other  liabilities                                                                             |       | (182                    | )          | (927 | ) |
| Net  cash used for continuing operations                                                       |       | (3,565                  | )          | (5,593 | ) |
|                                                                                           |       |                    |       |   |   |
| Net  cash provided by discontinued operations                                                  |       | —                  |       | 822 |   |
| Net  cash used for operating activities                                                        |       | (3,565                  | )          | (4,771 | ) |
|                                                                                           |       |                    |       |   |   |
| **Investing Activities:**                                                                      |       |                    |       |   |   |
| Purchases  of property and equipment                                                           |       | (63                     | )          | — |   |
| Proceeds  from sale of property and equipment                                                  |       | 1                       |       | — |   |
| Investment  in patents and trademarks                                                          |       | (70                     | )          | (102 | ) |
| Net  cash used for investing activities                                                        |       | (132                    | )          | (102 | ) |
|                                                                                           |       |                    |       |   |   |
| **Financing Activities:**                                                                      |       |                    |       |   |   |
| Proceeds  from borrowings                                                                      |       | 4,669                   |       | 9,924 |   |
| Repayment  of borrowings                                                                       |       | (1,613                  | )          | (1,841 | ) |
| Proceeds  from restricted cash                                                                 |       | 754                     |       | (58 | ) |
| Net  cash provided by financing activities                                                     |       | 3,810                   |       | 8,025 |   |
|                                                                                           |       |                    |       |   |   |
| Effect  of foreign exchange translation                                                        |       | 401                     |       | 77 |   |
| Net  increase in cash and cash equivalents                                                     |       | 514                     |       | 3,229 |   |
|                                                                                           |       |                    |       |   |   |
| Cash and cash  equivalents at beginning of period                                              |       | 742                     |       | 3,127 |   |
| Cash and cash equivalents  at end of period                                                    |       | $                       | 1,256      |   | $ | 6,356 |   |
|                                                                                           |       |                    |       |   |   |
| Supplemental cash flow  information:                                                           |       |                    |       |   |   |
| Interest  paid                                                                                 |       | $                       | 229        |   | $ | 208 |   |
| Taxes  paid                                                                                    |       | $                       | —     |   | $ | — |   |

 

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

 

7

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During the six monthsended June 30, 2004, the Company sold it’s 51% ownership interest inDongyang to the 49% minority shareholder, which resulted in a loss of $46 fromdisposal of discontinued operations as of June 30, 2004.

 

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

 

8

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**LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

 

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

**For theSix Months Ended June 30, 2005 and 2004**

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

**(unaudited)**

 

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

 

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 three and six months ended June 30, 2005 are notnecessarily indicative of the results that may be expected for any futureperiods or the year ending December 31, 2005. The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withthe Company’s Form 10-K filed with the Securities and Exchange Commissionon March 30, 2005.

 

Liquidmetal Technologies, Inc. (“Liquidmetal Technologies”) and itssubsidiaries (collectively “the Company”) are in the business of developing,manufacturing, and marketing products made from amorphous alloys. LiquidmetalTechnologies markets and sells Liquidmetal® alloy industrial coatings and alsomanufactures, markets and sells products and components from bulk Liquidmetalalloys that can be incorporated into the finished goods of its customers acrossa variety of industries. The Company also partners with third-party licensees anddistributors to develop and commercialize Liquidmetal alloy 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 7). In addition, such alloys are used to generate researchand development services revenue for developing uses related primarily todefense and medical applications as well as potential license fees, royalties,and other compensation from strategic partnering transactions.

 

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

 

9

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| ** **                                                | ** **                                            | **For the Three**              | ** ** | **For the Six**                | ** ** |
|-----------------------------------------------------------|-------------------------------------------------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** **                                            | **Months Ended June 30,** | ** ** | **Months Ended June 30,** | ** ** |
| ** **                                                | ** **                                            | **2005**                       | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                | ** **                                            | **(Restated)**                 | ** ** | **(Restated)**                 | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ** **                                                |                                                  |                           |       |                           |       |   |   |   |   |
| Net  income (loss) from continuing operations as reported |                                                  | $                              | (5,522     | )                              | $          | 1,056 |   | $ | (8,784 | ) | $ | 2,293 |   |
|                                                      |                                                  |                           |       |                           |       |   |   |   |   |
| *Add:*                                                    | stock-based employee  compensation expense included   |                           |       |                           |       |   |   |   |   |   |
|                                                      | in reported net loss,  net of related tax effects     |                           | —     |                           | 7          |   | — |   | 276 |   |
|                                                      |                                                  |                           |       |                           |       |   |   |   |   |   |
| *Deduct:*                                                 | total stock-based  employee compensation expense      |                           |       |                           |       |   |   |   |   |   |
|                                                      | determined under the  fair value based method for all |                           |       |                           |       |   |   |   |   |   |
|                                                      | awards, net of related  tax effects                   |                           | (736       | )                              | (1,100     | ) | (1,519 | ) | (2,809 | ) |
|                                                      |                                                  |                           |       |                           |       |   |   |   |   |   |
| Proforma  net loss from continuing operations:            |                                                  | $                              | (6,258     | )                              | $          | (44 | ) | $ | (10,303 | ) | $ | (240 | ) |
|                                                      |                                                  |                           |       |                           |       |   |   |   |   |
| Basic  and diluted loss per share:                        |                                                  |                           |       |                           |       |   |   |   |   |
| As  reported                                              |                                                  | $                              | (0.13      | )                              | $          | 0.03 |   | $ | (0.21 | ) | $ | 0.06 |   |
| Proforma                                                  |                                                  | $                              | (0.15      | )                              | $          | (0.00 | ) | $ | (0.25 | ) | $ | (0.01 | ) |

 

The fair value of eachoption grant is estimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants for the six months ended June 30, 2005 and 2004, respectively:expected volatility of approximately 100% for all periods; dividend yield of0.0% for all periods; expected option life of approximately 5 years; and arisk-free interest rate ranging from 2.9% to 4.2%.

 

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

 

Translation of Foreign Currency

 

The Company applies **FASB No. 52,Foreign Currency Translation**, for translating foreigncurrency into US dollars in our consolidation of the financialstatements.  Upon consolidation of the Company’s foreign subsidiaries intothe Company’s consolidated financial statements, any balances with thesubsidiaries denominated in the foreign currency are translated at the exchangerate at year-end. The financial statements of Liquidmetal Korea have beentranslated based upon Korean Won as the functional currency. Liquidmetal Korea’sassets and liabilities were translated using the exchange rate at period endand income and expense items were translated at the average exchange rate forthe reporting period. The resulting translation adjustment was included inother comprehensive income (loss).

 

Reclassifications

 

Certain amounts from theprior year have been reclassified to conform to current year’s presentation.

 

Restatements

 

*SFAS 133 – Accounting forDerivative Instruments and Hedging Activities*

 

As a part of theaccompanying consolidated financial and the notes thereto, the Company hasrestated certain previously issued financial statements due to an error relatedto the Company’s accounting for embedded convertible feature of seniorconvertible notes issued in March 2004 in accordance with Statement ofFinancial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, (SFAS 133) (see Note 8).

 

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Recent Accounting Pronouncements

 

In March 2004, theEITF reached a consensus on recognition and measurement guidance previouslydiscussed under EITF 03-01 The consensus clarifies the meaning ofother-than-temporary impairment and its application to investments classifiedas either available-for-sale or held-to-maturity under FASB Statement No. 115,“Accounting for Certain Investments in Debt and Equity Securities,” and otherinvestments accounted for under the cost method. The recognition andmeasurement  guidance for which theconsensus was reached in March 2004 is to be applied toother-than-temporary impairment evaluations in reporting  periods beginning after June 15, 2004.In September 2004, the FASB issued a final FASB Staff Position that delaysthe effective date for the measurement and recognition guidance for allinvestments within the scope of EITF Issue No. 03-01; however, thedisclosure requirements remain effective for annual periods ending after June 15,2004. The Company does not believe that the adoption of this statement willhave a material effect on the Company’s results of operation and financial position.

 

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

 

On March 29, 2005,the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding theStaff’s interpretation of SFAS 123(R). This interpretation expresses the viewsof the staff regarding the interaction between SFAS 123(R) and certain SEC rules andregulations and provides the staff’s views regarding the valuation ofshare-based payment arrangements for public companies. In particular, this SABprovides guidance related to share-based payment transactions withnonemployees, the transition from nonpublic to public entity status, valuation methods,the accounting for certain redeemable financial instruments issued undershare-based payment arrangements, the classification of compensation expense,non-GAAP financial measures, first-time adoption of SFAS 123(R) in an interimperiod, capitalization of compensation cost related to share-based paymentarrangements, the accounting for income tax effects of share-based paymentarrangements upon adoption of SFAS 123(R), the modification of employee shareoptions prior to adoption of Statement 123(R) and disclosures in Management’sDiscussion and Analysis subsequent to adoption of SFAS 123(R). The Company willadopt SAB 107 in connection with its adoption of SFAS 123(R).

 

In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections – areplacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes,” andFASB Statement No. 3, “Reporting Accounting Changes in Interim FinancialStatements” and changes the requirements for the accounting for and reportingof a change in accounting principle.  This statement applies to allvoluntary changes in accounting principle.  It also applies to changesrequired by an accounting pronouncement in the unusual instance that thepronouncement does not include specific transition provisions.  When apronouncement includes specific transition provisions, those provisions shouldbe followed.  SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 31,2005.  The Company does not believe the adoption of SFAS No. 154 willhave a material effect on its consolidated financial position, results ofoperations or cash flows.

 

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Other recent accountingpronouncements issued by the FASB (including its Emerging Issues  Task Force), the AICPA and the SEC did not orare not believed by management to have a material impact on the Company’spresent or future consolidated financial statements.

 

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

 

TheCompany has experienced losses from continuing operations during the last twofiscal years and has an accumulated deficit of $136,256 as of June 30,2005. Cash used for continuing operations for the six months ended June 30,2005 was $3,565 and cash flow from continuing operations may be negativethroughout fiscal year 2005. As of June 30, 2005, the Company’s principalsource of liquidity is $1,256 of cash and trade accounts receivable of $2,359. Suchconditions raise substantial doubt that the Company will be able to continue asa going concern for a reasonable period of time. These operating resultsoccurred while the Company was developing and attempting to commercialize andmanufacture products from an entirely new and unique technology. This businessplan required significant spending related to start-up costs and capitalexpenditures. These factors have placed a significant strain on the financialresources of the Company. The ultimate success of the Company depends on itsability to continue reducing operating costs, generate higher revenue, andachieve positive cash flow from continuing operations and profitability. Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of the uncertainty.

 

Additionally, the Company is not in compliance with certain covenantrequirements of the senior convertible debt as of June 30, 2005. Althoughthere has been no formal notice of default received from the note holders, asthe note holders have the right to call for repayment of the outstandingbalance of the senior convertible debt, the total outstanding debt balance of$5,709 have been included as current liabilities as of June 30, 2005 (seeNote 8).

 

The Company completed $3,250 private placement of 10% convertible debt on June 13,2005 and Factoring, Loan, and Security Agreement (“Factoring Agreement”) on April 21,2005, which allows for borrowing up to $1,500, to meet working capital needs ofthe Company (see Note 8). Borrowings made under the Factoring Agreement aresecured by the Company’s trade receivables. Such borrowings totaled $1,222,which was offset by $729 of repayments made as June 30, 2005.

 

Capital requirements during the next 12 months will depend onnumerous factors, including the success of existing products, the developmentof new applications for Liquidmetal alloys, the resources devoted to developand support Liquidmetal alloy products, and the cost of successfulimplementation of Section 404 of the Sarbanes-Oxley Act of 2002. If the availablefunds and cash generated from operations are insufficient to satisfy liquidityrequirements, the Company may need additional funds in the future to supportworking capital requirements and for other purposes, and may need to raiseadditional funds through public or private equity financing, bank debtfinancing, or from other sources. Subsequent to the close of the second quarterof 2005, the Company completed a private placement of $9,877 of 7% convertibledebt in consideration for $5,000 aggregate cash received, $4,280 exchange ofpreviously issued notes, and satisfaction of accrued interest and fees of $597from the previously issued notes (see Note 14). Adequate funds may not beavailable when needed or may not be available on favorable terms. However, theCompany anticipates capital expenditures in the next 12 months will be lessthan $0.5 million. The Company expects to continue to devote limited capital toour research and development activities, to further develop and strengthen ourmanufacturing capabilities, and for working capital and other general corporatepurposes.

 

Ourcash flow projections from operations and, consequently, future cash needs aresubject to uncertainty. If our available funds and cash generated fromoperations are insufficient to satisfy our liquidity requirements, we may needto raise additional capital to fund our operations and 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 of therights of our common stock and our stockholders may experience additionaldilution.

 

**4. Inventories**

 

TheCompany maintains certain of its raw material inventories in amounts in excessof our operating cycle of one year due to the nature of our manufacturing process,production lead time, and the recyclability of our raw material. Theseinventories

 

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wereclassified as long-term inventory as of December 31, 2004. The Companydetermined that its current and projected raw material requirements are notsufficient enough to warrant the use of such raw materials in the foreseeablefuture. Accordingly, the Company reduced the carrying value of raw materialsheld by its subsidiary, Liquidmetal Korea, by the amounts considered to beexcessive. The write-down amounted to $1,653 is included in “Impairment of longlived assets” in the accompanying Condensed Consolidated Statement ofOperations and Comprehensive Loss for the three and six months ended June 30,2005. The total amount of long term inventory was $0 and $1,810 as of June 30,2005 and December 31, 2004, respectively.

 

| ** **                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ** **                 | ** ** | ** **        | ** ** | ** **            | ** ** |
| Raw materials              |       | $                 | 1,515      |                  | $          | 1,688 |   |
| Work in process            |       | 412               |       | 352                   |       |
| Finished goods             |       | 263               |       | 313                   |       |
| Total  current inventories |       | 2,190             |       | 2,353                 |       |
| Long-term inventories      |       | —            |       | 1,810                 |       |
| Total  inventories         |       | $                 | 2,190      |                  | $          | 4,163 |   |

 

**5. Idle Equipment**

 

Idleequipment consists of certain equipment held by the Company for use inexpansion of bulk alloy parts manufacturing.  Due to excess manufacturingcapacity, the Company classified the equipment as idle equipment at December 31,2004.  While the equipment may be used internally to meet future capacityrequirements, considering our current revenue and foreseeable productionrequirements, the Company does not anticipate utilizing this equipmentinternally in the near future. For these reasons, during the quarter ended June 30,2005, the Company determined to write down the carrying value of the idleequipment held by its subsidiary, Liquidmetal Korea, to its net realizablevalue. The write-down amounted to $1,741 and is included in operating expensesas “Impairment of long lived assets” in the accompanying Condensed ConsolidatedStatement of Operations and Comprehensive Loss for the three and six monthsended June 30, 2005. Total amount of idle equipment remaining was $194 and$1,906 as of June 30, 2005 and December 31, 2004, respectively.

 

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

 

*Dongyang*

 

On June 28, 2002, the Company acquired a 51%interest in Chusik Hoesa Dongyang Yudoro (“Dongyang”). In March 2004, the Company sold its51% investment in Dongyang to the 49% minority shareholder. The selling priceof the Company’s 51% interest in Dongyang was $80, which was equal to theCompany’s net carrying value for the 51% ownership held. Further, the Companyagreed to pay Dongyang $155 for the purchase of a receivable balance fromGrowell. The transaction resulted in net payable to Dongyang of $75 and a lossof $46 from transfer of the Company’s interest in Donyang to the minorityshareholder. The loss from operations for the six months ended June, 2004totaled $50 and is included in the loss from discontinued equipmentmanufacturing operations for the period. The net payable balance of $75 is tobe paid in quarterly installments throughout 2004, with $25 to be paidsubsequent to 2004. The outstanding amount payable to Dongyang is $11 and $25as of June 30, 2005 and December 31, 2004, respectively, and isincluded in accounts payable and accrued liabilities.

 

Summarizedoperating results of Dongyang’s discontinued operations are as follows.

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

 

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*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. As of March 31, 2004,management determined that no impairment was anticipated on the divestiture ofits Taesung division. Ultimately, the sale resulted in a loss of approximately$184. The loss fromoperations for the three and six months ended June 30, 2004 totaled $179and $469 and is included in the loss from discontinued equipment manufacturingoperations for the period.

 

Summarizedoperating results of Taesung’s operations are as follows:

 
| ** **                                                             | ** ** | **For the Three months  Ended June 30,** | ** ** | **For the Six months  Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                   |       |                                          |       |                                        |       |   |   |   |   |
| Revenue                                                                |       | $                                             | —     |                                        | $          | 72 |   | $ | — |   | $ | 172 |   |
| Loss  from discontinued equipment manufacturing operations, net of tax |       | —                                        |       | (356                                        | )          | — |   | (653 | ) |
|                                                                        |            |                                               |            |                                             |            |  |  |  |  |  |  |  |  |

 

**7.****                                     ****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 six months ended June 30,2005, the Company recorded $34 and $76, respectively, of warranty expense. Duringthe three and six months ended June 30, 2004, the Company recorded $79 and$137, respectively, of warranty expense. The product warranty accrual balanceis included in accounts payable and accrued expenses.

 

**8.****                                     ****Notes Payable**

 

Senior ConvertibleNote

 

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 MichiganVenture Capital Co., Ltd, a South Korea-based institutional investment firm,and IndiGo Ventures LLC, a New York-based investment firm (the “PlacementAgents”) that served as a financial advisor to the Company for the transaction.The notes were collateralized by the patents held by the Company and secondpriority mortgage interest in plant facilities and certain equipment in SouthKorea. The notes were convertible at any time into common stock at a price of$3.00 per share. Investors in the private placement and the Placement Agentsreceived warrants to purchase an aggregate amount of up to approximately 1.2million shares of common stock, exercisable at $3.00 per share for varyingperiods but no later than 100 days following the effectiveness of aregistration statement covering the resale of shares issuable upon exercise ofthe warrants. In addition, the investors had the right to call for repayment ofthe notes prior to maturity at any time after the second anniversary of theclosing 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.

 

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the original fairvalue of the 1.2 million warrants of $1,302 has been recorded as warrantliabilities as the shares

 

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issuableunder the warrants have not been registered. The original fair value wascomputed using the Black-Scholes pricing model under the following assumptions:(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 $718were recorded as discounts of the convertible note. In addition, $581 directcosts incurred relating to issuance of the convertible note were recorded asdebt issuance cost in other assets.

 

During2004, the Company redeemed $4,465 of the outstanding note balance in cash. Theredemption resulted in a write down of debt issuance costs and debt discount of$3,571 to interest expense and a reduction in conversion feature liabilities of$914 from cancellation of the embedded conversion feature of the redeemed notesto additional paid in capital during the year ended December 31, 2004. Further,500,000 of warrants originally issued to a financial advisor for thetransaction expired during June 2004 and 163,748 of unexercised warrantsoriginally issued to investors were cancelled as a result of the Company’sredemption of the note balances during the year ended December 31, 2004. The663,748 total expired and canceled warrants immediately prior to the expirationand cancellation resulted in a reduction of warrant liability of $7 and $279 toadditional paid in capital and change in value of warrants, respectively,during the year ended December 31, 2004.

 

On August 19,2004, the Company completed a private exchange offer for its March Noteswith the remaining holders after the redemption. Under terms of the exchangeoffer, approximately $5.5 million in aggregate principal amount of the 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 bycertain patents owned by the Company and second priority mortgage interest inplant facilities and certain equipment at our South Korea plant. The Short-TermNotes have a maturity 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 Short-Term Notes have been exchanged and redeemed subsequent to the closeof the second quarter of 2005 (see Note 14). The Long-Term Notes have amaturity date of July 29, 2007, and a conversion price of $1.00 per share.Further, the exchange notes are convertible into Common Stock, at the option ofthe Company, if at any time after the issuance of the notes, the closing pershare price of the Common Stock exceeds $4.00 (as adjusted for stock splits,reverse splits, stock dividends, and recapitalizations) for 30 consecutivetrading days, and further provided that there has been effective registrationduring such period. Holders of the Long-Term Notes also have the right to callfor repayment of the Long-Term Notes prior to maturity at any time after thesecond anniversary of the closing of the exchange offer. The Long-Term Noteshave been amended subsequent to the close of the second quarter of 2005 toprovide for an Amended Registration Rights Agreement, and Amended and RestatedSecurity Agreement (see Note 14).

 

Atotal of 563,151 warrants to purchase our common stock at an exercise price of$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 $1919 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 in 2007with interest rate of 6% per annum (Long-Term Notes) and $125 was paid in theform of short-term notes which is due in 2005 with interest rate of 10% perannum (Short-Term Notes). The Short-Term and Long-Term Notes are convertibleinto Common Stock at $2.00 and $1.00, respectively, and have the same terms asthe Exchange Notes issued to the investors. Further, $143 of original fairvalue of the embedded conversion feature was recorded as conversion featureliabilities during August 2004.

 

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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 between 2 and 3 percent of the purchase pricepaid for the unconverted notes for the first 30 business days of lateregistration, and 1 and 3 percent for each 30 business days thereafter, but nomore than 18 percent of the purchase price of the unconverted note balance. Lateregistration fee of $1,028 has been accrued as interest expense, and is includedin accounts payable and accrued liabilities as of June 30, 2005. The$5,709 balance of the note and un-amortized discounts for conversion featureand warrants of $3,082 is presented as current liability as of June 30,2005 as the note holders have the right to call for payment on demand as theregistration statement has not been filed in accordance with the amendedRegistration Rights Agreement. As of the filing of this report, the Company hasnot received any demands for payment from the note holders.

 

Interestpayments are due quarterly, and failure to make timely interest payments willresult in increase in interest rate to 10% and 14% on the 6% and 10% seniorconvertible notes (“Default Rates”). The Default Rates became effective on April 1,2005 from non-payment of a scheduled interest payment. As such, the Companyaccrued $171 of additional interest from the default rates applied to the loanbalance as of June 30, 2005, which is included in accounts payable andaccrued liabilities.

 

As of June 30,2005 and December 31, 2004, our gross outstanding loan balance of theShort-Term and Long-Term Notes totaled $5,709, un-amortized discounts for beneficialconversion feature and warrants totaled $3,082 and $2,831, and other asset debt issuance costs totaled$75 and $183, respectively.Interest expense for the amortization of debt issuance cost and discount onnote was $483 and $960 for the three and six months ended June 30, 2005,and $1,360 and $1,549 for the three and six months ended June 30, 2004, respectively.As of June 30, 2005, the effective interest rates for the Short-Term andLong-Term Notes were 40% and 37%, respectively.

 

Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the original relative fairvalues of the warrants of $1,302 have been recorded as other liability as theCompany has not yet filed the registration statement. In addition, the Companyis required to report a value of the warrant as a fair value and record thefluctuation to the fair value of the warrant liability to current operations. Thechange in the fair value of the warrants resulted in a gain of $154 and $287for the three and six months ended June 30, 2005, and a gain of $694 and$1,280 for the three and six months ended June 30, 2004. The fair value ofwarrants outstanding at June 30, 2005 of $263 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.67 years; (2) volatility of 117%, (3) risk free interest of3.45%and dividend rate of 0%.

 

ConvertibleNotes

 

On June 13, 2005,the Company completed a private placement (the “Private Placement”) of 10%Convertible Unsecured Notes Due June 13, 2006 in the aggregate principalamount of $3,250 (the “Notes”), together with warrants to purchase up to anaggregate of 893,750 shares of the Company’s common stock (the “Warrants”).

 

The Notes issued by theCompany in the Private Placement are unsecured and will become due on theearlier of June 13, 2006 or the consummation of a follow-on equity or debtoffering or restructuring transaction pursuant to which the Company receivesgross proceeds of at least $4,000.  Prior to maturity, the Notes will beinterest-only, with interest payments due quarterly, at the rate of 10% peryear.  The Notes can be prepaid by the Company at any time withoutpenalty.  If, within 120 days following the issue date of the Notes, theCompany either fails to redeem the notes for the principal amount and accruedinterest thereon or fails to close a “Qualified Financing,” then the Notes willthereafter be convertible at a conversion price equal to seventy five percent(75%) of the closing price of the Company’s common stock on the first tradingday immediately preceding the conversion date.  A “Qualified Financing “is defined in the Notes as any debt or equity financing of the Companyresulting in aggregate gross proceeds to the Company of at least $5,000 and inwhich the holders of at least sixty percent (60%) of the aggregate principalamount of the Company’s Long Term Notes due July 2007 either (i) agreethat the equity or debt securities to be issued in such financing shall be*pari passu* in order of payment to the2007 Notes held by them or (ii) exchange their 2007 Notes for new securitiesin the financing transaction. Subsequent to the close of the second

 

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quarter of 2005, theCompany successfully completed Qualified Financing, which resulted in exchangeand redemption of the Convertible Notes (see Note 14). As a result, the Notesnever become convertible.

 

The holders of the Noteswill have the right to call for early repayment of the Notes if, on the datethat is 180 days of the issue date of the Notes (i) the Company is not thencompliant with its SEC reporting obligations, or (ii) the Company’s commonstock is not then listed or quoted on the OTC Bulletin Board, Nasdaq StockMarket, New York Stock Exchange, or American Stock Exchange.

 

As a part of the PrivatePlacement, the Company issued Warrants to the purchasers of the Notes givingthem the right to purchase up to an aggregate of 812,500 shares of the Company’scommon stock.  In addition, Warrants to purchase 81,250 shares of theCompany’s common stock were issued to the placement agent in thetransaction.  The Warrants have an exercise price of $2.00 per share,provided that upon the consummation of the first ensuing public or privateequity or debt offering or restructuring transaction in which the Companyreceives gross proceeds of at least $3,250 (including without limitation anyrestructuring of the Company’s previously issued 10% Senior Secured Notes Due July 29,2005), the exercise price will be automatically adjusted downward (but notupward) as of the closing date of such offering or restructuring transaction sothat it is equal to the lowest effective common stock purchase price paid forany securities issued by the Company to the investors in such offering orrestructuring transaction.  The Warrants will expire on June 13,2010.

 

The fair value of the 893,750 warrants totaled $1,160 and was computedusing the Black-Scholes pricing model under the following assumptions: (1) expectedlife of 5 years; (2) volatility of 118%, (3) risk free interest of3.87% and dividend rate of 0%. In accordance with Emerging Issues Task Force No. 00-27,“Application of Issue No. 98-5 to Certain Convertible Instruments” theembedded beneficial conversion feature of the debt was not recorded as the debtis considered contingently  convertibleat the time of issuance, and as a result of the completion of the QualifiedFinancing the debt subsequent to the close of the second quarter, the debt wasdetermined to be not convertible. In June 2005, the fair value of the812,500 warrants issued to investors of $1,055 was recorded as discounts of theconvertible note. In addition $105 relating to the fair value of the 81,250warrants issued to the Placement Agents and $278 direct costs incurred relatingto issuance of the convertible note were recorded as debt issuance cost as acontra liability account in debt discount and other assets, respectively, andwill be amortized using the effective interest rate method over the life of theloan. As of June 30, 2005, the gross outstanding loan balance of the Notestotaled $3,250, un-amortized discounts for warrants totaled $1,003, and otherasset debt issuance costs totaled $264, and contra liability debt issuance costtotaled $100. Interest expense for the amortization of debt issuance cost anddiscount on note was $71 for the three months ended June 30, 2005. As of June 30,2005, the effective interest rates for Notes was 54%.

 

Under a registrationrights agreement entered into between the Company and the purchasers of theNotes, the Company is required, within 90 days of the date of the issuance ofthe Notes, to file a registration statement with the SEC covering the resale ofthe shares of Company common stock into which the Notes are convertible and forwhich the Warrants are exercisable.  The Company is required to cause thisregistration statement to become effective within 60 days after the Companyreceives the first written comments on the registration statement from the SEC,or if the SEC notifies the Company that it will not review the registration statement,within five days after such notification.  The Company will be subject tocertain monetary penalties, as set forth in the registration rights agreement,if the registration statement is not filed or does not become effective on atimely basis. As the Company was unable to complete the documentation,assessment and evaluation of internal control over financial reporting, whichare required to be undertaken to comply with Section 404 of theSarbanes-Oxley Act of 2002 (“SOX 404”) as of December 31, 2004, theCompany cannot determine the impact of the non-compliance as of December 31,2004 on the registration statement and cannot ensure that the registrationstatements will be completed in a timely manner. The Company has taken steps toensure compliance with SOX 404 requirements as of December 31, 2005. Therecan be no assurance, however, that the Company will be in compliance with Section 404as of December 31, 2005 and 2004 and/or that the Company will have theRegistration statement declared effective by the SEC prior to such compliance.

 

Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the original relative fairvalues of the warrants of $1,160 have been recorded as other liability as theCompany has not yet filed the registration statement. In addition, the Companyis required to report a value of the warrant as a fair value and record thefluctuation to the fair value of the warrant liability to current operations. Thechange in the fair value of

 

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thewarrants resulted in a net loss of $254 for the three months ended June 30,2005. The fair value of warrants outstanding at June 30, 2005 of $1,414was computed using the Black-Scholes model under the following assumptions: (1) expectedlife of 4.96 years; (2) volatility of 117%, (3) risk free interest of3.72%and dividend rate of 0%.

 

Factoring Agreement

 

The Company entered intoa Factoring, Loan, and Security Agreement (the “Agreement”) with a financingcompany on April 21, 2005, which allows for borrowings of up to $1,500. TheAgreement expires on April 21, 2006, and automatically renews annuallythereafter. All borrowings are secured by outstanding receivables specificallyassigned to the financing company. Assigned receivables are considered “Approved”or “Non-Approved” by the financing company. Advances are made on 80% ofApproved receivables assigned and 30% of receivables assigned. Payments onassigned receivables are received directly by the financing company, andapplied to outstanding advances. All outstanding advances and uncollectedassigned receivables are subject to fees and interest charges ranging from 0.65percent to 2 percent plus prime rate as published by the Wall Street Journal,with a minimum annual fee of $30. All receivables assigned and advances madeare subject to return and recall by the financing company, respectively. Assuch, the advances have been classified as short-term secured borrowings inaccordance with FAS 140 “Accounting for Transfer and Servicing of FinancialAssets and Extinguishments of Liabilities.” As of June 30, 2005, the Company has borrowed $1,222 and repaid$729. The total outstanding advance made under the agreement is $493 as of June 30,2005, which is presented as short-term debt.

 

Kookmin Note

 

On February 4, 2003,our Korean subsidiary received 6,500,000 in South Korean Won, or approximately$5,488, under a loan from Kookmin Bank of South Korea. The loan bears interestat an annual rate of 7.1%. In the event of delayed repayment, the interestincreases to a maximum of 21%, depending on the length of time the repayment isdelayed. This loan is collateralized by the plant facilities and certainequipment in South Korea. During the first eighteen months from the originationdate, interest was payable on a monthly basis. In October 2003, theCompany paid $873 of principal at the request of Kookmin Bank due to the saleof machines that had been part of the collateral on the loan. Subsequent to October 31,2003, Kookmin Bank requested that the Company pay an additional $866 ofprincipal by February 2004 due to the Company’s current credit rating. TheCompany made two payments on the requested additional loan pay down in November andDecember 2003 of $320 and $205, respectively. The remaining payment of$341 was subsequently made in February 2004. Beginning in September 2004,the Company is required to make equal monthly installments of principal andinterest to repay the remaining balance of the loan over a 36-month period. Principalpayments made to Kookmin Bank totaled $621 for the six months ended June 2005,which includes $65 of foreign exchange translation loss. The outstanding loanbalance totaled $3,270, of which $1,226 is included in current portion oflong-term debt, as of June 30, 2005.

 

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

 

During the three and sixmonths ended June 30, 2005, under the Company’s 2002 Equity Incentive Planwhich provides for the grant of stock options to officers, employees,consultants and directors, the Company granted options to purchase 7,500 and891,165 common shares of the Company for an average exercise price of $1.63 and$2.21, respectively, which equaled the fair market value on the date of grant

 

During the three monthsended June 30, 2005, under the Company’s 2002 Non-employee Director StockOption Plan which provides for the grant of stock options to non-employeedirectors, the Company did not grant any options. During the six months ended June 30,2005, the Company granted 180,000 common shares of the Company for an averageexercise price of $2.33 under this plan. Further, all options granted underthis plan had exercise prices that were equal to the fair market value on thedate of grant.

 

The Company canceled84,582 and 244,184 options during the three and six months ended June 30,2005, respectively, for terminated employees and directors.

 

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**10.          Segment Reporting and Geographic Information**

 

SFAS No. 131,*Disclosures aboutSegments of an Enterprise and Related Information,*requirescompanies to provide certain information about their operating segments. InApril 2002, the Company began classifying operations into two reportablesegments: 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 anddevelopment costs and selling expenses associated with identifying anddeveloping market opportunities. Bulk Liquidmetal alloys 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 and product licensingarrangements are included in the bulk Liquidmetal alloy segment. The accountingpolicies of the reportable segments are the same as those described in Note 3to the consolidated financial statements included in the Company’s Form 10-Kfiled with the Securities and Exchange Commission on March 30, 2005.

 

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

 
| ** **                                                            | ** ** | ** **   | ** ** | ** **     | ** ** | **Segment** | ** ** |
|-----------------------------------------------------------------------|------------|--------------|------------|----------------|------------|-------------|------------|
| ** **                                                            | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Totals**  | ** ** |
|                                                                  |       |         |       |           |       |        |       |
| Three months  ended June 30, 2005:                                    |       |         |       |           |       |        |       |
| Revenue to  external customers                                        |       | $            | 1,332      |           | $          | 2,395       |       | $ | 3,727 |   |
| Gross profit  (loss)                                                  |       | 574          |       | (809           | )          | (235        | )          |
| Income (loss)  before interest expense and discontinued operations    |       | 435          |       | (4,691         | )          | (4,256      | )          |
| Total  identifiable assets at end of period                           |       | 1,170        |       | 17,228         |       | 18,398      |       |
|                                                                  |       |         |       |           |       |        |       |
| Three months  ended June 30, 2004:                                    |       |         |       |           |       |        |       |
| Revenue to  external customers                                        |       | $            | 706        |           | $          | 3,349       |       | $ | 4,055 |   |
| Gross profit                                                          |       | 327          |       | 1,253          |       | 1,580       |       |
| Income before  interest expense, discontinued operations, and general |       | 192          |       | 619            |       | 811         |       |
| Total  identifiable assets at end of period                           |       | 821          |       | 24,702         |       | 25,523      |       |
|                                                                  |       |         |       |           |       |        |       |
| Six months ended  June 30, 2005:                                      |       |         |       |           |       |        |       |
| Revenue to  external customers                                        |       | $            | 2,381      |           | $          | 4,189       |       | $ | 6,570 |   |
| Gross profit                                                          |       | 1,056        |       | (1,283         | )          | (227        | )          |
| Income (loss)  before interest expense and discontinued operations    |       | 762          |       | (5,840         | )          | (5,078      | )          |
| Total  identifiable assets at end of period                           |       | 1,170        |       | 17,228         |       | 18,398      |       |
|                                                                  |       |         |       |           |       |        |       |
| Three months  ended June 30, 2004:                                    |       |         |       |           |       |        |       |
| Revenue to  external customers                                        |       | $            | 1,722      |           | $          | 8,621       |       | $ | 10,343 |   |
| Gross profit                                                          |       | 795          |       | 3,516          |       | 4,311       |       |
| Income before  interest expense and discontinued operations           |       | 540          |       | 2,100          |       | 2,640       |       |
| Total  identifiable assets at end of period                           |       | 821          |       | 24,702         |       | 25,523      |       |

 

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

 
| ** **                                                                                                     | ** ** | **For the Three  Months Ended June 30,** | ** ** | **For the Six  Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2005**                                 | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                     | ** ** | **(Restated)**                           | ** ** | **(Restated)**                         | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ** **                                                                                                     | ** ** | ** **                               | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total operating  income (loss) before minority interest, interest expense and discontinued  operations         |       | $                                        | (4,256     | )                                      | $          | 811 |   | $ | (5,078 | ) | $ | 2,640 |   |
| General and  administrative expenses not allocated to segments                                                 |       | 1,153                                    |       | (2,120                                 | )          | 3,310 |   | (4,624 | ) |
| Consolidated  loss before interest, other income, income taxes, minority interest and discontinued  operations |       | (5,409                                   | )          | (1,309                                 | )          | (8,388 | ) | (1,984 | ) |
| Change in value  of warrants, gain (loss)                                                                      |       | (100                                     | )          | 694                                    |       | 33 |   | 1,280 |   |
| Change in value  of conversion feature, gain                                                                   |       | 1,167                                    |       | 3,904                                  |       | 2,282 |   | 5,614 |   |
| Interest expense                                                                                               |       | (1,181                                   | )          | (2,255                                 | )          | (2,718 | ) | (2,651 | ) |
| Interest income                                                                                                |       | 1                                        |       | 22                                     |       | 7 |   | 34 |   |
| Loss from  discontinued operations, net                                                                        |       | —                                   |       | (356                                   | )          | — |   | (749 | ) |
| Consolidated net  income (loss)                                                                                |       | $                                        | (5,522     | )                                      | $          | 700 |   | $ | (8,784 | ) | $ | 1,544 |   |

 

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.

 

Revenues from sales tocompanies in the United States were $1,925 and $1,328 during the three monthsended June 30, 2005 and 2004, respectively. The revenue related to the UnitedStates of America was earned under three defense-related research and developmentcontracts and sales of coatings products.

 

As of June 30, 2005, onecustomer represented 11%, or $263, of the total outstanding trade accountsreceivable. As of December 31, 2004, two customers represented 30%, or $497, ofthe total outstanding trade accounts receivable. Two customers represented 23%,or $1,535, of total sales for the six months ended June 30, 2005. Threecustomers represented 55%, or $5,692, of total sales for the six months endedof June 30, 2004.

 

During the three monthsended June 30, 2005, the Company had revenues from companies outside ofthe United States of $1,802 of which $971 represented sales to companieslocated in South Korea. During the three months ended June 30, 2004, theCompany had revenue from sales to companies outside of the United States of$2,799 of which $2,006 represented sales to companies located in South Korea. Ofthe sales in South Korea, $72 was from our discontinued equipment manufacturingbusiness. The revenue related to sales to companies outside of the UnitedStates was from bulk alloy products including equipment sales.

 

Long-lived assets includenet property, plant, and equipment, and net intangible assets. The Company hadlong-lived assets of $1,874 and $1,594 located in the United States at June 30,2005 and December 31, 2004, respectively. The Company had long-lived assets of$14,279 and $15,422 located in South Korea at June 30, 2005 andDecember 31, 2004, respectively.

 

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

 
| ** **                                 | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|--------------|------------|
| ** **                                 | ** ** | **2005**     | ** ** |
|                                       |       |         |       |
| Total segment assets                       |       | $            | 18,398     |   |
| Cash and cash  equivalents                 |       | 1,256        |       |
| Prepaid expenses  and other current assets |       | 954          |       |
| Other property,  plant and equipment, net  |       | 710          |       |
| Intangibles, net                           |       | 1,158        |       |
| Other assets                               |       | 816          |       |
| Total consolidated assets                  |       | $            | 23,292     |   |

 

Assets excluded from segment assets include assets attributable to theCompany’s corporate headquarters. The largest asset represents the Company’sintangible assets, consisting primarily of the Company’s patents andtrademarks.

 

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

 

Basicearnings per share (“EPS”) is computed by dividing earnings (loss) attributableto common shareholders by the weighted average number of common sharesoutstanding for the periods. Diluted EPS reflects the potential dilution ofsecurities that could share in the earnings. Common stock equivalents consistof 9,828,208 and 8,308,922 equity instruments and 6,973,877 and 3,457,894senior equity convertible debt instruments at June 30, 2005 and 2004,respectively, and have not been included in the EPS calculation at June 30,2005 and 2004 as the amounts are anti-dilutive.

 

**12.          Commitmentsand Contingencies**

 

In September 2004, as part of a security agreementto finance a certain insurance policy, the Company used certificates ofdeposits with maturities of less than one year as collateral. The $754 held incertificates of deposits is presented as restricted cash at December 31, 2004. Duringthe quarter ended March 31, 2005, the certificate of deposits was liquidatedand the proceeds were used to paydown the balance of the financing on theinsurance policy.

 

In August 2004, the Company entered into aconsulting agreement whereby the Company was to receive services from a thirdparty to improve the Company’s bulk alloy manufacturing process. The service isto be provided from August 2004 through October 2005. The total amount ofservice fees is $172, of which $15 was included in trade accounts payable as ofJune 30, 2005. As of December 31, 2004, the total amount of outstanding balanceincluded in trade accounts payable was $15.

 

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.

 

Liquidmetal Technologies and certain of its presentand former officers and directors were named as defendants in nine purportedclass action complaints filed in the United States District Courts for theMiddle District of Florida, Tampa Division, and the Central District ofCalifornia, Southern Division, alleging violations of Sections 11 and 15 of theSecurities Act of 1933 and Sections 10(b) and 20(a) of the Securities ExchangeAct of 1934 and Rule 10b-5 promulgated thereunder. In August 2004, four complaintswere consolidated in the United States District Court for the Middle Districtof 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, wereappointed co-lead plaintiffs (the “Lead Plaintiffs”). In September 2004, theother five complaints filed in the Central District of California weretransferred to the Middle District of Florida for consolidation with the *Primavera Investors* action. The Lead Plaintiffs served theirConsolidated Amended Class Action Complaint on January 12, 2005. The AmendedComplaint alleges that the Prospectus issued in connection with the Company’sinitial public offering in May 2002 contained material misrepresentations andomissions regarding the Company’s historical financial condition and regardinga personal stock transaction by the Company’s chief executive officer. The LeadPlaintiffs further generally allege that

 

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during the proposed Class Period of May 21, 2002,through May 13, 2004, the defendants engaged in improper revenue recognitionwith respect to certain of the Company’s business transactions, failed tomaintain adequate internal controls, and knowingly disclosed unrealistic butfavorable information about market demand for and commercial viability of theCompany’s products to artificially inflate the value of the Company’s stock. TheAmended Complaint seeks unspecified compensatory damages and other relief. Wefiled a Motion to Dismiss on March 29, 2005. Plaintiffs’ response to our Motionto Dismiss was filed on June 3, 2005. The Company cannot anticipate when theCourt will rule on the Motion to Dismiss. The Company intends to vigorouslydefend against the class action. The Company cannot currently predict theimpact or resolution of this litigation or reasonably estimate a range ofpossible loss, which could be material.

 

In addition to the above, certain present and former officers anddirectors of Liquidmetal Technologies, as well as Liquidmetal Technologies as anominal defendant, have been named in three shareholder derivative actions. Twoshareholder derivative complaints were filed in California state court styledBrian Clair, Derivatively on Behalf of Liquidmetal Technologies, Inc. v. JohnKang, et al., Case No. 04CC00551, and Joseph Durgin, Derivatively on Behalf ofLiquidmetal Technologies, Inc. v. John Kang, et al., Case No. 04CC00553, bothcommenced in the Superior Court of Orange County, California. A thirdshareholder derivative complaint was filed in Florida federal court styledRobert Story v. John Kang, et al., Case No. 8:04-CV-1587-T23TBM, commenced inthe Middle District of Florida, Tampa Division. These shareholder derivativelawsuits allege that the defendants breached various fiduciary duties andotherwise violated state law based primarily upon the same underlying facts andcircumstances as alleged in the federal shareholder class action. Theplaintiffs seek unspecified compensatory damages, restitution and disgorgementof profits, equitable and/or injunctive relief as permitted by law and otherrelief. The two 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. At a hearing on February 10, 2005, the courtsustained the demurrer, dismissing the Consolidated Shareholder DerivativeComplaint but giving the plaintiffs 45 days within which to amend the complaint.Plaintiffs filed their Consolidated Amended Shareholder Derivative Complaint onMarch 28, 2005. The Company, along with other defendants, filed a Demurrer onMay 17, 2005. The Court sustained the demurrer at a hearing on July 7, 2005,again dismissing the complaint but giving the plaintiffs 40 days within whichto further amend the complaint. Separately, the plaintiffs moved to compel theCompany to respond to certain written discovery on March 7, 2005. The Motion toCompel was granted on April 28, 2005. The class action defendants subsequentlyfiled a Motion to Stay Discovery in Related State Action on June 9, 2005. Theplaintiffs filed a Memorandum of Law in Opposition to the Defendants’ Motion toStay on June 20, 2005. The Motion to Stay is pending. By stipulation, if theMotion to Stay is denied, the Company will be required to respond to thewritten discovery and produce documents within 10 days of the court’s ruling onthe Motion. In the Florida derivative action, the Plaintiff filed a FirstAmended Shareholder Derivative Complaint on November 22, 2004. The Company’sMotion to Dismiss, which was filed on December 20, 2004, is fully briefed. TheCompany cannot anticipate when the Court will rule on the Motion to Dismiss. TheCompany intends to vigorously defend against the derivative actions. We cannotcurrently predict the impact or resolution of this litigation or reasonablyestimate a range of possible loss, which could be material.

 

As of June 30, 2005, the Company has accrued $626 as receivables frominsurance companies from excess legal costs incurred to defend against theclass action and derivative lawsuits. The amount is included in prepaidexpenses and other current assets.

 

In March 1996, theCompany entered into a distribution agreement whereby it granted to a thirdparty exclusive rights to market and sell golf products incorporating LiquidmetalTechnology to certain Japanese sporting equipment companies. The third partypaid the Company a $1.0 million distribution fee as part of this agreement, ofwhich a portion was refundable according to a formula based on the gross profitearned by the third party. On March 28, 2003, the distribution agreement wasterminated and the Company entered into a new agreement to pay to the samethird party a commission on the net sales price of all Liquidmetal golfequipment that is shipped by the Company or its affiliates to Japanese golfcompanies for sale into the Japanese end-market. This commission will apply togolf equipment shipped by the Company or its affiliates during the periodbeginning on March 28, 2003 and ending on March 28, 2006. If, by March 28,2006, the Company has not paid $350 in commission payments, the balance betweencommission paid and $350 will be paid by April 30, 2006, thereby guaranteeingthe third party a $350 minimum payment during the term of the agreement. TheCompany will recognize the

 

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unearned distribution feeof $830 as revenue proportionately with the payment of commissions under thenew agreement. As of June 30, 2005 and December 31, 2004, the unearneddistribution fee remained unchanged at $830.

 

Under terms of the January 2004 settlement of the dispute over certainsales transactions from 2003 and 2002 between Liquidmetal Korea and GrowellMetal Co., Ltd., a South Korean metals processing company (“Growell”),Liquidmetal Korea agreed to pay Growell $4,895 to purchase Growell’s investmentin alloy inventories, proprietary alloying equipment purchased from LiquidmetalKorea, and supporting equipment purchased from other suppliers. Also as part ofthe settlement, Growell satisfied in full a balance of $2,058 owed toLiquidmetal Korea for the die casting machines Growell purchased from LiquidmetalKorea in the first quarter of 2003 as part of a license agreement tomanufacture Liquidmetal alloy parts for the South Korean automotive industry. Theremaining settlement payable of $2,837 and trade accounts payable of $14 wereto be paid to Growell (in cash or stock at the Company’s discretion) byDecember 31, 2004. As of December 31, 2004, the settlement payable of $3,246,net of foreign exchange translation loss, was not paid to Growell due toGrowell’s breach of warranty on equipment repurchased by Liquidmetal Korea. InJanuary 2005, Growell was acquired by a third party. As of June 30, 2005, theoutstanding settlement payable to the third party of $3,294, net of foreignexchange translation loss, was not paid, and the Company is currently innegotiations to settle this balance with the third party.

 

**13.          Related Party Transactions**

 

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

 

We are a party to a consulting agreement withChitnis Consulting, Inc., which is owned 100% by Shekhar Chitnis, a formerdirector and executive officer of our company. Under this agreement, we haveengaged Chitnis Consulting to provide consulting services on an as-needed basisthrough December 31, 2005. During each of the three and six months ended June30, 2005 and 2004, we incurred $13 and $25, respectively, in consulting feesfrom Chitnis Consulting.

 

We are a party to a consulting agreement with William Johnson, a boardmember. Under this agreement, Mr. Johnson provides consulting services on anas-needed basis through 2004 as it relates to marketing and developmentLiquidmetal alloy. During the three and six months ended June30, 2005, weincurred $5 and $10 in consulting fees from Mr. Johnson, respectively. Duringthe three and six months ended June30, 2004, we incurred $14 in consulting feesfrom Mr. Johnson, respectively.

 

In November 2004, we entered intoan agreement with John Kang, our Chairman, President, and Chief ExecutiveOfficer, in which Mr. Kang agreed that certain stock transactions by him in2002 involving our common stock should have resulted in a liability underSection 16(b) of the Securities Exchange Act of 1934, as amended (“Section16(b)”). These transactions include Mr. Kang’s private sale of 285,715 sharesof his personal Liquidmetal Technologies common stock to Growell Metal Co.,Ltd. in February 2002, prior to our initial public offering. They also includeMr. Kang’s subsequent indirect purchase and disposition of LiquidmetalTechnologies common stock in order to satisfy a personal agreement Mr. Kangmade to Growell Metal in February 2002 regarding the guaranteed minimum valueof the stock purchased by Growell Metal in February 2002 (the purchases anddispositions incident to this agreement occurred in August and November 2002,respectively). Lastly, the transactions include open-market purchases of anaggregate of 89,300 shares of our common stock made by Mr. Kang in August 2002.

 

The Audit Committee ofour 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) in theamount of $302. Mr. Kang has acknowledged this liability, and in an agreementnegotiated between Mr. Kang and the Audit Committee and approved by the fullBoard, Mr. Kang will pay this liability through periodic installments in 2005and 2006. As a result, the Company accrued for the $302

 

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receivable in otherassets and other income as of December 31, 2004. The above-describedtransactions involving Growell Metal was reported on a new Form 4filed by Mr. Kang on November 15, 2004, and the open-market purchases werepreviously reported on a timely basis in August 2002. As of June 30, 2005, theoutstanding amount of the receivable was $235, which is included in otherassets. Mr. Kang has paid approximately $67 as of June 30, 2005 and will makemonthly installments of approximately $12 to pay down the outstanding balance.

 

During the period endedJune 30, 2005, the Company borrowed approximately $198 from  CK Cho, a member of our Board of Directorsfor working capital purposes. The note was due and paid in full as of June 30,2005. The note has an  annual rate ofinterest of 6% resulting in the Company paying approximately $2 in interest. Mr.Cho also is a Chief Executive Officer of Winvest Venture PartnersInc., who holds $500 of Senior Convertible Notes as of June 30, 2005 (see Note8).

 

**14.Subsequent Events**

 

OnAugust 9, 2005, the Company completed a private placement (the “PrivatePlacement”) of $9,877 in principal amount of new 7% Convertible SecuredPromissory Notes due August 2007 (the “Notes”). The issuance consisted of$5,000 cash, exchange of $1,284 in principal amount of previously issued 10%Senior Secured Notes Due July 29, 2005 (the “July 2005 Notes”), the exchange of$2,996 in principal amount of previously issued 10% Convertible Unsecured NotesDue June 2006 (the “June 2006 Notes”), and satisfaction of accrued interest andlate registration fees in the amount of $597 on the previously issued notes bythe Company. The Notes were issued pursuant to a Securities Purchase Agreementdated effective as of August 2, 2005 among the Company, the purchasers of theNotes, and the holders of previously issued Senior Convertible Notes andConvertible Notes of the Company (see Note 8). The Notes are convertible intoshares of the Company’s common stock at $2.00 per share Pursuant to an Amendedand Restated Security Agreement. The Notes are secured by substantially allassets of the Company and rank senior to all other obligations of the Company,other than the Company’s loan with Kookmin Bank of South Korea (or anyrefinancing of such loan), the 6% Senior Convertible Notes due July 2007, andthe receivable based financing arrangement. The Company also issued Warrants tothe purchasers of the Notes and placement agents giving them the right topurchase up to 2,469,175 and 384,808 shares of Company common stock,respectively, with an exercise price of $2.00 per share. The Warrants will expire on August 2, 2010. The fairvalue of the warrants issued totaled $4,024 as of effective date of the Notes,and was computed using the Black-Scholes pricing model under the followingassumptions: (1) expected life of 5 years; (2) volatility of 93%; (3) risk freeinterest of 4.12% and dividend rate of 0% . Further, the beneficial conversionfeature of the Notes approximated $3,185 as of the effective date of the Note. Asof the date of the report, the Company has not yet completed the analysis forthe accounting treatment of the Notes on its financial statements. The Company estimates write-downs and netloss in regards to this transaction to be approximately $1,500 to $2,000.

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

** **

*This management’s discussion andanalysis should be read in conjunction with the condensed consolidatedfinancial statements and notes included elsewhere in this report on Form 10-Q.*

 

*This management’s discussion andanalysis, as well as other sections of this report on Form 10-Q, maycontain “forward-looking statements” that involve risks and uncertainties,including statements regarding our plans, future events, objectives, expectations,forecasts, or assumptions. Any statement that is not a statement of historicalfact is a forward-looking statement, and in some cases, words such as “believe,”“estimate,” “ project,” “expect,” “intend,” “may,” “anticipate,” “plans,” “seeks,”and similar expressions identify forward-looking statements. These statementsinvolve risks and uncertainties that could cause actual outcomes and results todiffer materially from the anticipated outcomes or results, and undue relianceshould not be placed on these statements. These risks and uncertaintiesinclude, but are not limited to, the matters discussed under the caption “FactorsAffecting Future Results” in our Annual Report on Form 10-K for the fiscal yearended December 31, 2004 and other risks and uncertainties discussed in filingsmade with the Securities and Exchange Commission (including risks described insubsequent reports on Form 10-Q, Form 10-K, Form 8-K, and otherfilings). Liquidmetal Technologies disclaims any intention or obligation to updateor revise any forward-looking statements, whether as a result of newinformation, future events, or otherwise.*

 

**Overview**

 

We are a materials technology company thatdevelops and commercializes products made from amorphous alloys. OurLiquidmetal® family of alloys consists of a variety of coatings, powders, bulkalloys, and composites that utilize the advantages offered by amorphous alloytechnology. We develop, manufacture, and sell products and components from bulkamorphous alloys that are incorporated into the finished goods of ourcustomers, and we also market and sell amorphous alloy industrial coatings. Wealso partner with third-party licensees and distributors to develop andcommercialize Liquidmetal alloy products. We have the exclusive right todevelop, manufacture, and sell what we believe are the only commercially viablebulk 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, product licensing andarrangements, and research and development revenue relating primarily todefense and medical applications. We expect that these sources of revenue willcontinue to significantly change the character of our revenue mix.

 

The cost of sales for our Liquidmetal coatingssegment consists primarily of the costs of outsourcing our manufacturing tothird parties. Consistent with our expectations, our cost of sales has beenincreasing over historical results as we further build our bulk Liquidmetalalloy business. Although we plan to continue outsourcing the manufacturing ofour coatings, we will internally manufacture many products derived from ourbulk Liquidmetal alloys.

 

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Selling, general, and administrative expensescurrently consist primarily of salaries and related benefits, severance costs,travel, consulting and professional fees, depreciation and amortization,insurance, office and administrative expenses, and other expenses related toour operations.

 

Research and development expenses representsalaries, related benefits expense, stock-based compensation, depreciation ofresearch equipment, consulting and contract services, expenses incurred for thedesign and testing of new processing methods, expenses for the development ofsample and prototype products, and other expenses related to the research anddevelopment of Liquidmetal alloys. Costs associated with research anddevelopment activities are expensed as incurred. We plan to enhance ourcompetitive position by improving our existing technologies and developingadvances in amorphous alloy technologies. We believe that our research anddevelopment efforts will focus on the discovery of new alloy compositions, thedevelopment of improved processing technology, and the identification of newapplications for our alloys.

 

On August 4, 2004, the Company established aplant in the city of Weihai in Shandong province of China under WeihaiLiquidmetal Company Limited, which is 100 percent owned by Liquidmetal Korea,to facilitate our bulk alloy manufacturing business. Weihai Liquidmetal isconsolidated into Liquidmetal Technologies with all intercompany transactionseliminated.

 

The following discussion and analysis of ourfinancial condition and results of operations focuses on the historical resultsof our continuing operations.

 

**CriticalAccounting Policies and Estimates**

** **

The preparation of condensed consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States requires us to make estimates and assumptionsthat affect reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Theseestimates and assumptions are based on historical experience and various otherfactors that are believed to be reasonable under the circumstances. Actualresults could differ materially from these estimates under differentassumptions or conditions.

 

We believe that thefollowing accounting policies are the most critical to our condensedconsolidated financial statements since these policies require significantjudgment or involve complex estimates that are important to the portrayal ofour financial condition and operating results:

 
|   | • |   | Exchange rate fluctuations                                             |
|--------|--------|--------|------------------------------------------------------------------------|
|   | • |   | Warranty accrual                                                       |
|   | • |   | Allowance for doubtful  accounts                                       |
|   | • |   | Inventories at lower of  cost or net realizable value                  |
|   | • |   | Deferred tax assets                                                    |
|   | • |   | Valuation of derivatives of  warrants and embedded conversion features |

 

Our 10-K Report as of December 31, 2004contains further discussions on our critical accounting policies and estimates.

 

**Results of Operations**

 

Comparison of the threemonths ended June 30, 2005 and 2004

 

*Revenue*. Revenuedecreased $0.3 million to $3.7 million for the three months ended June 30, 2005from $4.0 million for the three months ended June 30, 2004. The decreaseconsisted of a decrease of $0.6 million from the sales and prototyping of partsmanufactured from bulk Liquidmetal alloys to consumer electronics customers asa result of decreased demand for conventional hinge components used in certaincellular phone models, and a decrease of $0.2 million from decreased activityfrom research and development services related primarily to defenseapplications, offset by an increase of $0.6 million from sales of our coatingsproducts.

 

*Cost of Sales*.Cost of sales increased to $4.0 million, or 106% of revenue, for the threemonths ended June 30, 2005 from $2.5 million, or 61% of revenue, for thethree months ended June 30, 2004. The increase was a result of decreases inbulk Liquidmetal alloy business. Cost of sales as a percentage of revenue hasincreased as a result of lower business volumes generated from our bulkLiquidmetal alloys. Significant portion of our manufacturing costs continue toremain fixed. We

 

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believe that higher manufacturing volumes and greater mix ofhigher-margin products in the future will cause the gross profit to improveover time. The cost to manufacture parts from our bulk Liquidmetal alloys isvariable and differs based on the unique design of each product. However, thecost of sales for the products sold by the coatings business segment isgenerally consistent because the Liquidmetal coatings products are produced bythird parties and sold wholesale to various industries.

 

*Selling, General, and AdministrativeExpenses*. Selling, general, and administrative expensesdecreased to $1.6 million, or 42% of revenue, for the three months endedJune 30, 2005 from $2.5 million, or 63% of revenue, for the three monthsended June 30, 2004. This decrease was primarily a result of decreaseprofessional services by $0.8 million, decrease in bad debt expense of $0.1 million,and decrease in depreciation, travel expenses, and product warranty costs of$0.1 million , offset by an increase in insurance costs 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.

 

*Research and Development Expenses*.Research and development expenses decreased to $0.2 million, or 6% ofrevenue, for the three months ended June 30, 2005 from $0.3 million, or 9%of revenue, for the three months ended June 30, 2004. The Company continues toperform research and development of new Liquidmetal alloys and relatedprocessing capabilities, develop new manufacturing techniques, and contractwith consultants to advance the development of Liquidmetal alloys. The decreasewas primarily due to decreases in salaries, wages and the related costs by$0.1 million.

 

*Impairment of Long Lived Assets*.Impairment of long lived assets increased to $3,394, or 91% of revenue, for the three months ended June 30, 2005 from$0 for the three months ended June 30, 2004. Impairment expense representswrite-down of $1,653 of raw materials considered to be long term inventory and$1,741 of idle equipment. While we may use the excess raw materials beyond oneyear to fulfill future demand, we cannot currently foresee use of thisinventory in the foreseeable future. Further, while we have marketed the idleequipment for ultimate sale since early 2004, we were unable to sell thisequipment. In addition, while the equipment may be used internally to meetfuture capacity requirements, considering our current revenue, we do notanticipate utilizing this equipment internally in the near future. As such, wehave reduced the carrying values of the excess raw material and idle equipment.

 

*Change in Value of Warrants.*Changein value of warrants was  a loss of $0.1 million, or 3% of revenue, anda gain of 0.7 million, or 17% of revenue, for the three months ended June 30,2005 and 2004, respectively, from change in valuation of warrant liabilitiesfrom the warrants issued from the senior convertible debt funded in March 2004and exchanged in August 2004 and convertible debt issued in June 2005 primarilyas a result of fluctuations in our stock price.

 

*Change in Value of Conversion Feature*.Change in value of  our conversionfeature liability from our senior convertible debt funded in March 2004 andexchanged in August 2004 resulted in a change in value of conversion featuregain of $1.2 million, or 31% of revenue, and a gain of $3.9 million, or 96% ofrevenue, during the three months ended June 30, 2005 and 2004, respectively,primarily due to  fluctuation in ourstock price.

 

*Interest Expense*.Interest expense was $1.2 million, or 32% of revenue, for the three monthsended June 30, 2005 and was $2.3 million, or 56% of revenue, for the threemonths ended June 30, 2004. During each of the three months ended June 30, 2005and 2004, the interest expense was primarily due to the interest accrued on theKookmin Bank loan funded on February 4, 2003, senior convertible debt funded onMarch 3, 2004 and exchanged in August 2004, and convertible debt funded on June13, 2005, as well as amortization of debt issuance costs and discount on thesenior convertible debt funded in March 2004 and exchanged in August 2004 andconvertible debt funded on June 13, 2005. The decrease was primarily due to accelerationof amortization of debt issuance costs and discount on debt during the threemonths ended June 30, 2004 from principal payments made. During the threemonths ended June 30, 2005, $0.2 million of interest expense was accrued fromdefault interest rates applied to the senior convertible notes effective April1, 2005 from non payment of quarterly scheduled interest payments (see Item 3Defaults Upon Senior Securities, Part II).

 

*Interest Income.*Interestincome was $1 thousand for the three months ended June 30, 2005, and $22thousand for the three months ended June 30, 2004 from interest earned on cashdeposits. The decrease was primarily due to decrease in deposits held.

 

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Comparison of the sixmonths ended June 30, 2005 and 2004

 

*Revenue*. Revenuedecreased $3.8 million to $6.6 million for the six months ended June 30, 2005from $10.3 million for the six months ended June 30, 2004. The decreaseincluded a $2.6 million decrease from restatement of revenues from 2003 to 2004as a part of our 2003 financial statement restatement which resulted inone-time recognition of revenues during the first quarter of 2004, a decreaseof $1.2 million from the sales and prototyping of parts manufactured from bulkLiquidmetal alloys to consumer electronics customers as a result of decreaseddemand for conventional hinge components used in certain cellular phone models,and a decrease of $0.6 million from decreased activity from research anddevelopment services related primarily to defense applications, offset by anincrease of $0.6 million from sale of our coatings products.

 

*Cost of Sales*.Cost of sales increased to $6.8 million, or 103% of revenue, for the sixmonths ended June 30, 2005 from $6.0 million, or 58% of revenue, for thesix months ended June 30, 2004. The increase was a result of decreases in bulkLiquidmetal alloy business. Cost of sales as a percentage of revenue hasincreased as a result of lower business volumes generated from our bulkLiquidmetal alloys. Significant portion of our manufacturing costs continue toremain fixed. We believe that higher manufacturing volumes and greater mix ofhigher-margin products in the future will cause the gross profit to improveover time. The cost to manufacture parts from our bulk Liquidmetal alloys isvariable and differs based on the unique design of each product. However, thecost of sales for the products sold by the coatings business segment isgenerally consistent because the Liquidmetal coatings products are produced bythird parties and sold wholesale to various industries.

 

*Selling, General, and AdministrativeExpenses*. Selling, general, and administrative expensesdecreased to $4.2 million, or 63% of revenue, for the six months endedJune 30, 2005 from $5.6 million, or 54% of revenue, for the six monthsended June 30, 2004. This decrease was primarily a result of decrease in wagesand related expense by $0.2 million, decrease in bad debt expenses by $0.1million, decrease in professional and contracted services of $0.7 million,decrease in advertising and promotions expense by $0.2 million, anddecrease in telephone and communication expense by $0.1 million, offset by anincrease in insurance costs by $0.2 million. These and other decreases inselling, general and administrative expenses represent the Company’s efforts tomanage costs and focus on our core business while continuing to build ourcorporate infrastructure required to prepare for and support the anticipatedgrowth of our bulk Liquidmetal alloy business.

 

*Research and Development Expenses*.Research and development expenses decreased to $0.6 million, or 9% ofrevenue, for the six months ended June 30, 2005 from $0.7 million, or 7%of revenue, for the six months ended June 30, 2004. The Company continues toperform research and development of new Liquidmetal alloys and relatedprocessing capabilities, develop new manufacturing techniques, and contractwith consultants to advance the development of Liquidmetal alloys. The decreasewas primarily due to decrease in laboratory and prototype supplies used by$0.1 million.

 

*Impairment of Long Lived Assets*.Impairment of long lived assets increased to $3,394, or 91% of revenue, for the six months ended June 30, 2005 from$0 for the six months ended June 30, 2004. Impairment expense representswrite-down of $1,653 of raw materials considered to be long term inventory and$1,741 of idle equipment. While we may use the excess raw materials beyond oneyear to fulfill future customer order, we have determined that our currentcapacity was not significant enough to warrant holding this inventory as a longterm asset. Further, while we have actively marketed the idle equipment forultimate sale since early 2004, we were unable to sell this equipment. Inaddition, while the equipment may be used internally to meet future capacityrequirements, considering our current revenue, we do not anticipate utilizingthis equipment internally in the near future. As such, we have reduced thecarrying values of the excess raw material and idle equipment.

 

*Change in Value of Warrants.*Changein value of warrants was a gain of $33 thousand, or 1% of revenue, and a gainof $1.3 million, or 12% of revenue, during the six months ended June 30, 2005and 2004, respectively, from change in valuation of warrant liabilities fromthe warrants issued from the senior convertible debt funded in March 2004 andexchanged in August 2004, and convertible debt funded in June 2005 primarily asa result of fluctuations in our stock price.

 

*Change in Value of Conversion Feature*.Change in value of our conversion feature liability from our senior convertibledebt funded in March 2004 and exchanged in August 2004 resulted in a change invalue of conversion feature gain of $2.3 million, or 35% of revenue, and a gainof $5.6 million, or 54% of revenue, during the six months ended June 30, 2005and 2004, respectively, primarily due to fluctuation in our stock price.

 

*Interest Expense*.Interest expense was  $2.7 million, or 41%of revenue, for the six months ended June 30, 2005 and was $2.7 million, or 26%of revenue, for the six months ended June 30, 2004. During each of the sixmonths ended June 30, 2005 and 2004, the interest expense was primarily due tothe interest accrued on the Kookmin Bank loan funded on February 4, 2003,senior convertible debt funded on March 3, 2004 and exchanged in August 2004,and convertible debt funded on June 13, 2005, as well as amortization of debtissuance costs and discount on the senior convertible debt funded in March 2004and exchanged in August 2004, and convertible debt funded on June 13, 2005. Asof June 30, 2005, $0.2 million of interest

 

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expense was accrued from default interest rates applied to the seniorconvertible notes effective April 1, 2005 from non payment of quarterlyscheduled interest payments and $1.0 million of late registration penalty feeof our senior convertible debt was accrued as interest expense (see Item 3 Defaults Upon Senior Securities, PartII). The increase in interest expense was primarily due to increases costsaccrued for penalties during the six months ended June 30, 2005.

 

*Interest Income.*Interestincome was $7 thousand for the six months ended June 30, 2005, and $34 thousandfor the six months ended June 30, 2004 from interest earned on cash deposits. Thedecrease was primarily due to decrease in deposits held.

 

**Liquidityand Capital Resources**

** **

Our cash used inoperating activities was $3.6 million for the six months ended June 30,2005 and $5.6 million, which includes cash used in our discontinuedequipment manufacturing business of $0.8 million, for the six months ended June30, 2004. Our working deficit increased from $14.9 million at December 31, 2004to $19.0 million at June 30, 2005. The Company’s working deficit increase of $4.1million was primarily attributable to decrease in restricted cash of $0.8million, decrease in current inventories of $0.2 million, increase in accountspayable and accrued liability of $2.1 million, increase in current portion of long term debt of $3.1 million, increasein short-term debt of $0.5 million, increase in warrant liabilities of $1.1 million, increase in deferred revenues andsettlement payable of $0.1 million, offset by increase in cash of $0.5 million,increase in accounts receivable of $0.7 million, decrease in conversion featureliabilities of $2.3 million, and a decrease in current portion of otherliability of $0.3 million.

 

Our cash used ininvesting activities was $0.1 million for the six months ended June 30, 2005for the acquisition of property and equipment and investments in patents andtrademarks.

 

Our cash provided byfinancing activities was $3.8 million for the six months ended June 30, 2005,which consists of $0.8 million in proceeds from restricted cash and $3.2million in proceeds from convertible debt funded on June 13, 2005, $1.2 millionin proceeds from factoring agreement executed in April 2005, and $0.2 millionin proceeds from borrowings from our short term debt executed in March 2005,offset by $1.6 million on repayment of borrowings.

 

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

 

Our capital requirements during the next twelve months will dependon numerous factors, including the success of existing products either inmanufacturing or development, the development of new applications forLiquidmetal alloys, the resources we devote to develop and support ourLiquidmetal alloy products, the success of pursuing strategic licensing andfunded product development relationships with external partners, and the costof successful implementation of Section 404 of the Sarbanes-Oxley Act of 2002.During the next twelve months, based on our current business plan, weexpect to have sufficient resources to continue to devote limited capital toour research and development activities, to further develop and strengthen ourmanufacturing technology, and to provide for working capital and other generalcorporate purposes. However, based on our historical operating results and thecontinued development of our manufacturing capabilities and alloy compositions,there exists the possibility that these resources will not be adequate tooperate at the proposed business plan levels. These expenses and capitalexpenditures could consume a material amount of our cash resources, but theamount of these requirements will depend on the nature and amount of orders wereceive for the purchase of our bulk Liquidmetal alloy products.

 

Our business is based oncommercializing an entirely new and unique technology, and our current businessplan contains a variety of assumptions and expectations that are subject touncertainty, including assumptions and expectations about order flow, unitvolumes, manufacturing efficiencies, product cost and pricing, continuingtechnology improvements, customer adoption practices, strategic licensingrelationships and other relevant matters. These assumptions take into accountrecent significant cost reductions, as well as recent improvements to ourmanufacturing processes. We have experienced losses from continuing operationsduring the last two fiscal years and have an accumulated deficit of $135.8million as of June 30, 2005. At June 30, 2005, our principal source ofliquidity was $1.3 million of cash and cash equivalents and trade accountsreceivables of $2.4 million. Such conditions raise substantial doubt that ourCompany will be able to continue as a going concern for a reasonable period oftime without receiving additional funding. These operating results occurredwhile we were developing and attempting to commercialize and manufactureproducts from an entirely new and unique technology. This business planrequired significant spending related to start-up costs and capitalexpenditures. These factors have placed a

 

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significant strain on ourfinancial resources. The ultimate success of the Company depends on our abilityto continue to reduce operating costs, generate higher revenue, achievepositive cash flow from continuing operations and achieve profitability.

 

Additionally, the Companyis not in compliance with certain covenant requirements of our seniorconvertible debt as of June 30, 2005. Although there has been no formal noticeof default received from the note holders, as the note holders have the rightto call for repayment of the outstanding balance of the senior convertibledebt, the total outstanding debt balance of $5,709 have been included ascurrent liabilities as of June 30, 2005. Further, $0.2 million of interestexpense was accrued from default interest rates applied to the seniorconvertible notes effective April 1, 2005 from non-payment of quarterlyscheduled interest payments as of June 30, 2005. (See Item 3 DefaultsUpon Senior Securities,Part II)

 

Our future successdepends on our ability to continue reducing operating costs and ultimately togenerate higher revenue and attain profitability. We cannot be certain thatadditional capital, whether through selling additional debt or equitysecurities or obtaining a line of credit or other loan, will be available to usor, if available, will be on terms acceptable to us. If we issue additionalsecurities to raise funds, these securities may have rights, preferences, orprivileges senior to those of our common stock, and our current stockholdersmay experience dilution.

 

**ContractualObligations**

 

The following table summarizes the Company’sobligations and commitments as of June 30, 2005:

 
| ** **                            | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Cash Obligations  (1)** | ** ** | **Total**                                 | ** ** | **Less Than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5 Years** | ** ** |
|                                  |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt  (2)                   |       | $                                         | 12,229     |   | $ | 10,185 |   | $ | 2,044 |   | $ | — |   | $ | — |   |
| Short-term debt  (3)                  |       | 493                                       |       | 493 |   | — |   | — |   |   |   |
| Capital lease  obligation (4)         |       | 142                                       |       | 67 |   | 75 |   | — |   | — |   |
| Operating leases  and rents           |       | 1,180                                     |       | 239 |   | 762 |   | 178 |   | 1 |   |
| Growell  settlement payable (5)       |       | 3,294                                     |       | 3,294 |   | — |   | — |   | — |   |
| Consulting  services payable          |       | 60                                        |       | 60 |   | — |   | — |   | — |   |
| Dongyang payable                      |       | 11                                        |       | 11 |   | — |   | — |   | — |   |
|                                  |       | $                                         | 17,409     |   | $ | 14,349 |   | $ | 2,881 |   | $ | 178 |   | $ | 1 |   |

 

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(1) Contractual cashobligations include Long-Term Debt comprised of $5,709 of Senior ConvertibleNotes issued in 2004, $3,250 of Convertible Notes issued in 2005, and $3,270 ofKookmin Notes, Short-Term Debt comprised of $493 advances received underfactoring, loan, and security agreement, and future minimum lease paymentsunder capital and operating leases, liabilities incurred from settlement with aformer customer (Growell) and divesture of our equipment manufacturingbusiness, and purchase commitments from a consultant.

(2) Does not includeinterest payments of $1,369, un-amortized discounts for conversion feature andwarrants of $3,082 of our convertible notes.

(3) Does not includeminimum interest and fee payments of $30.

(4) Includes imputedinterest of $7.

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

 

#### **Off Balance Sheet Arrangements**

 

Anoff-balance sheet arrangement is any transaction, agreement or othercontractual arrangement involving an unconsolidated entity under which acompany has (1) made guarantees, (2) a retained or a contingent interest intransferred assets, (3) an obligation under derivative instruments classifiedas equity, or (4) any obligation arising out of a material variable interest inan unconsolidated entity that provides financing, liquidity, market risk orcredit risk support to the company, or that engages in leasing, hedging, orresearch and development arrangements with the company.

 

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We have made no arrangements of the types describedin any of the categories that may have a material current or future effect onour financial condition, liquidity or results of operations.

 

**Item 3 –Quantitative and Qualitative Disclosures about Market Risk**

 

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

 

*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 the futureas our business grows and as our purchases of these raw materials increase.

 

*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.

 

**Item4 – Controls and Procedures**

 

Evaluation ofdisclosure controls and procedures.  During the courseof the audit of the financial statements of Liquidmetal Technologies, Inc. (the“Company”) for the fiscal years ended December 31, 2001, 2002, and 2003, it wasdetermined that revenues from certain equipment sales made by the Companyto Growell Metal Co., Ltd. in the third and fourth quarters of 2002 and thefirst quarter of 2003 should not have been recognized in thoseperiods.  It was also determined that certain amounts relating tosales made to Samsung in December 2002, to JS Technologies in September 2002, andAM Corporation in December 2002 should not have been recognized.  It alsowas determined that compensation expense related to certain stock optionsgranted in 2001 and 2002 were not calculated in accordance with generallyaccepted accounting principles under APB Opinion No. 25, SFAS No. 123, and EITF00-23.** **These determinationsand the associated restatement of previously issued financial statements, asdescribed more fully elsewhere in the Form 10-K for the year ended December 31,2003, filed on November 10, 2004, suggest that, at the time of the subjecttransactions and the preparation of the Company’s financial statements for therelevant periods, the Company’s disclosure controls and procedures(as defined in Rule 13a-15 under the Securities Exchange Act of 1934) werenot effective as of the end of the period covered by such Form 10-K.

 

LiquidmetalTechnologies, Inc. (the “Company”) carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Vice President of Finance, of theeffectiveness as of June 30, 2005 of the design and operation of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15 under the SecuritiesExchange Act of 1934, as amended.  Based on that evaluation, the ChiefExecutive Officer and Vice President of Finance have concluded that thesedisclosure controls and procedures, as of June 30, 2005, were noteffective.  This determination was based primarily on the materialweaknesses in internal controls over financial reporting identified below.

 

Update onManagement’s Assessment of Internal Control Over Financial Reporting.The time and resources committed to the restatement of prior periods’ financialstatements (as aforementioned) delayed the Company’s internal timetable withrespect to its documentation, assessment and evaluation of internal controlover financial reporting, which are required to be undertaken to comply withSection 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”).  Due in part tothe issues described in the foregoing paragraph, management’s assessment of theeffectiveness of the Company’s internal control over financial reporting hasbeen substantially delayed and is not complete, which in turn has prevented theCompany’s independent registered public accounting firm, Stonefield Josephson,Inc. (“Stonefield”) from being able to satisfactorily complete an audit

 

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of the Company’sinternal control over financial reporting pursuant to SOX 404.  Based onthe foregoing, Stonefield has disclaimed an opinion on the Company’s internalcontrol over financial reporting.

 

In attempting tocomplete its assessment of internal control over financial reporting,management used the criteria established in “Internal Control - IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  Although management has not yet completed its reviewand assessment of all of the Company’s internal controls over financialreporting, based on the review and assessment efforts that have actually beencompleted, management has identified several control deficiencies that existedduring and as of the year ended December 31, 2004, some of which have beendetermined to be material weaknesses in internal control over financialreporting.  As a result of the material weaknesses identified below,management has concluded that it did not maintain effective internal controlover financial reporting as of December 31, 2004, based on the criteriaestablished in COSO.

 

We have identifiedthe following material weaknesses in connection with our ongoing assessment ofinternal controls as follows:

 

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

 

After the Companycompletely moved its accounting function from Tampa, Florida to Lake Forest,California in July 2004 and reduced the size of its accounting staff, dutiessuch as booking of cash receipts, bank reconciliations and journal entries forcorporate accounting were primarily being done by two accountants.  Duringthe course of the Company’s audit for its 2004 fiscal year (which auditoccurred during the first three months of 2005) and in the course of theCompany’s efforts to complete the assessment required by SOX 404 at the sametime, it was determined that this lack of segregation could contribute topreventing detection of potential fraud or misstatements of financialinformation.  Accordingly, beginning in the second quarter of 2005, theCompany started taking steps to evaluate its overall accounting duties andsegregate these functions for better internal control structure.  Forexample, the Company began segregating the cash receipts booking and bankreconciliation among the two accountants, as well as segregating invoice entryand  check run function.  Additionally, as discussed below, beginningin the second quarter of 2005, the Company augmented its supervisory reviewprocess to mitigate the potential for fraud and misstatements.  TheCompany has not identified any adjustments as a result of this lack ofsegregation of duties.

 

**2.*****Lack of adequate controlsand monitoring of payroll processing, currently outsourced to a third partyprovider:***

 

This materialweakness existed throughout 2004 as the Company utilized the services of athird party payroll processor that was not certified under SAS 70 (Type II).During the course of the Company’s audit for its 2004 fiscal year, it wasdetermined that the risk of using a third party payroll provider that is notSAS 70 certified may contribute to misstatements of payroll and relatedfinancial information.  The Company intends to remediate this weakness byretaining the services of ADP for payroll processing.  ADP is certifiedunder SAS 70 (Type II).

 

**3.*****Lack of documentation toevidence reviews of certain reconciliations***:

 

During the courseof the Company’s audit for the 2004 fiscal year, which audit occurred inJanuary 2005, the Company discovered that certain reconciliations, includingbank statements and general ledger accounts, were not fully documented becausethe supervisors performing the review on such reconciliations occasionallyomitted their signature evidencing their review.  It was determined at thetime that this lack of documentation may result in certain accounting documentsnot being properly reviewed or there being no evidence of review. Beginning in the second quarter of 2005, the Company began taking steps torequire that all reviews of reconciliations by supervisors are evidenced by asupervisor signature and that that all accounting documents are subject toproper review.  For example, the Company started utilizing a “Prepared by,Reviewed by, Checked by” stamp and required all reconciliations to haveevidence of the review prior to closing month end.

 

**4.*****Lack of documentation ofauthorization of transactions***:

 

During the courseof the Company’s audit for the 2004 fiscal year, the Company discovered that,although accounting transactions  may have been authorized by theappropriate persons, the authorizing person occasionally omitted his signatureon the relevant documents or approval forms to evidence hisauthorization.  This lack of documentation on invoices, purchaserequisitions and expense reports may result in certain transactions not beingproperly approved, so in the second quarter of

 

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2005, the Companybegan implementing additional procedures for ensuring that all accountingdocuments are subject to proper approval as well as indication of theapproval.  For example, the Company began utilizing a “Prepared by,Reviewed by, Checked by” stamp and required that all documents have evidence ofthe approval prior to entry into the Company’s accounting system.

 

**5.*****Manual performance ofnumerous procedures that could be automated using current reporting systems***:

 

The Company usesthe SAP system for financial reporting.  During the course of the auditfor the 2004 fiscal year, it was determined that the Company was manuallyperforming numerous procedures that could be automated by using the current SAPsystem.  For example, a sales order module in SAP could be utilized toautomate the entire order fulfillment process.  While SAP contains manymodules and features which would allow the Company to automate certainoperational and accounting procedures and thereby minimize the potential forhuman error, utilization of such modules would require significant investmentin upgrading and maintaining the SAP system. Considering the Company’s currentsize and limited resources, management has determined that it is not prudent tomake this investment at the current time.  Nevertheless, beginning in thesecond quarter of 2005 and continuing thereafter, the Company has been takingvarious steps to minimize the potential for human error caused by manualprocedures.  For example, the Company has established specific proceduresfor proper review and approval of transactions as outlined in paragraphs 3 and4 above  and expanded utilization of other software tools such asprogrammed spreadsheets.

 

**6.*****Material adjustments tothe accounting records and financial statements as of and for the year endedDecember 31, 2004 that were not initially identified by the Company’s internalcontrol over financial reporting:***

 

During the courseof the Company’s SOX 404 assessment efforts during the first several months of2005, the Company and its auditors identified a number of necessary materialadjustments to the Company’s accounting records for 2004.  For example,certain adjustments were booked to properly value complex debt instrumentsassociated with the refinancing of the Company’s debt.  In addition,certain adjustments were booked to impair the Company’s assets which are basedon Management forecasts and overall assessment of the Company’s business. The Company believes that these adjustments were a result of the Company’sfocus during 2004 on completing the Company’s three-year re-audit of its 2001,2002, and 2003 fiscal years.  As a result of the Company’s SOX 404assessment efforts, the Company has identified these adjustments and hasimplemented additional controls to timely review and assess accounting issuesand prevent the need for such adjustments. While there can be no assurance thatadjustments to financial statements will not occur in the future, with thecompletion of the three-year re-audit, the Company believes that it will beable to devote its resources to completing its accounting assessments andentries timely and effectively.

 

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

 

The Company iscontinuing to diligently work to document and evaluate its internal controlsunder the requirements of SOX 404 during 2005.

 

**8.*****The company hadinadequate controls related to timely performance of its assessment of internalcontrol over financial reporting:***

 

The Company isdiligently working to complete its assessment of its internal controls overfinancial reporting under the requirements of SOX 404 during 2005.

 

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**9.*****Assurance Consulting 3,the independent third party engaged to help document and assess the Company’sinternal controls, has identified numerous and significant deficiencies,including those identified above, which management has not completed evaluatingwhether they would rise to the level of a material weakness in accordance tothe PCAOB Audit Standard No. 2.***

 

The Company willreview these deficiencies during its assessment of internal controls under therequirements of SOX 404 during 2005.

 

Managementbelieves that it has taken appropriate steps to address these materialdeficiencies subsequent to March 31, 2005, including hiring an independentconsulting firm (Assurance Consulting 3) to identify and propose remedialactions to address and mitigate the deficiencies.

 

Changes ininternal controls.  The Company made various materialchanges in its internal control over financial reporting during the secondquarter ended June 30, 2005.  These material changes are described inparagraphs 1, 3, 4, and 5 above under the caption “Update on Management’sAssessment of Internal Control Over Financial Reporting.”

 

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### **PART II**

### ** **

**OTHER INFORMATION**

 

**Item 1 –Legal Proceedings**

 

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

 

**Item2 – Unregistered Sales of Equity Securities and Use of Proceeds**

** **

On June 13, 2005, we completed a private placement (the “PrivatePlacement”) of 10% Convertible Unsecured Notes Due June 13, 2006 in theaggregate principal amount of $3,250 (the “Notes”), together with warrants topurchase up to an aggregate of 893,750 shares of the Company’s common stock(the “Warrants”).   The net proceedswere $3.0 million after deducting transaction fees and expenses of $0.25million.

 

The Notes issued in the Private Placement are unsecured and will becomedue on the earlier of June 13, 2006 or the consummation of a follow-onequity or debt offering or restructuring transaction pursuant to which theCompany receives gross proceeds of at least $4,000.  Prior to maturity,the Notes will be interest-only, with interest payments due quarterly, at therate of 10% per year.  The Notes can be prepaid at any time withoutpenalty.  If, within 120 days following the issue date of the Notes, theCompany either fails to redeem the notes for the principal amount and accruedinterest thereon or fails to close a “Qualified Financing,” then the Notes willthereafter be convertible at a conversion price equal to seventy five percent(75%) of the closing price of our common stock on the first trading dayimmediately preceding the conversion date.  A “Qualified Financing “ isdefined in the Notes as any debt or equity financing of the Company resultingin aggregate gross proceeds to the Company of at least $5,000 and in which theholders of at least sixty percent (60%) of the aggregate principal amount ofthe Company’s 6% Senior Secured Notes due July 2007 Notes either(i) agree that the equity or debt securities to be issued in suchfinancing shall be*pari passu* inorder of payment to the 2007 Notes held by them or (ii) exchange their2007 Notes for new securities in the financing transaction.

 

The Notes rank senior to all other debt, except for indebtedness inexistence on the issue date of the Notes (including the convertible notesissued in July 2004), purchase money loans for future acquired assets, tradedebt incurred in the ordinary course of business, and loans used to refinanceindebtedness with Kookmin Bank.   The holders of the Notes will havethe right to call for early repayment of the Notes if, on the date that is 180days of the issue date of the Notes (i) the we are not then compliant with itsSEC reporting obligations, or (ii) our common stock is not then listed orquoted on the OTC Bulletin Board, Nasdaq Stock Market, New York Stock Exchange,or American Stock Exchange.

 

As a part of the Private Placement, we issued Warrants to thepurchasers of the Notes giving them the right to purchase up to an aggregate of812,500 shares of the Company’s common stock.  In addition, Warrants topurchase 81,250 shares of our common stock were issued to the placement agentin the transaction.  The Warrants have an exercise price of $2.00 per share,provided that upon the consummation of the first ensuing public or privateequity or debt offering or restructuring transaction in which the Companyreceives gross proceeds of at least $3,250 (including without limitation anyrestructuring of the Company’s previously issued 10% Senior Secured Notes DueJuly 29, 2005), the exercise price will be automatically adjusted downward(but not upward) as of the closing date of such offering or restructuringtransaction so that it is equal to the lowest effective common stock purchaseprice paid for any securities issued by the Company to the investors in suchoffering or restructuring transaction.  The Warrants will expire onJune 13, 2010.

 

As of June 30, 2005, we have used $1.7 million of the net proceeds fromthe Private Placement for working capital uses.

 

**Item3 – Defaults Upon Senior Securities**

 

On March3, 2004, we sold $9.9 million of 6.0% senior convertible notes due 2007 (the “MarchNotes”) to investor groups in a transaction led by Michigan Venture CapitalCo., Ltd, a South Korea-based institutional investment firm, and IndiGoVentures LLC, a New York-based investment firm that served as a financialadvisor to the Company for the transaction. The notes were convertible at anytime into our common stock at a price of $3.00 per share. Investors in theprivate placement received warrants to purchase an aggregate amount of up toapproximately 1.2 million shares of common stock, exercisable at $3.00 pershare for varying periods but no later than 100 days following theeffectiveness of a registration statement covering the resale of sharesissuable upon exercise of the warrants. In addition, the investors had theright to call for repayment of the notes prior to maturity at any time afterthe second anniversary of the closing of the transaction.

 

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On August 19, 2004, the Company completed a private exchange offer forits March Notes. Under terms of the exchange offer, approximately $5.5 millionin aggregate principal amount of the March Notes have been exchanged for anaggregate of (i) $2.75 million of 6% Senior Secured Notes Due 2007 (the“Long-Term Notes”) and (ii) $2.75 million of 10% Senior Secured Notes Due 2005(the “Short-Term Notes”), collectively referred to as “Exchange Notes”. Inaddition, the Company redeemed approximately $4.5 million of the March Notes incash. The Exchange Notes are collateralized by certain patents owned by theCompany and second priority mortgage interest in plant facilities and certainequipment at our plant in South Korea.

 

In connection with the private exchange offer, the Company issued $250thousand of private placement notes to certain Placement Agents as issuancecosts. Of the $250 thousand notes issued, $125 thousand was paid in the form oflong-term notes which is due in 2007 with interest rate of 6% per annum(Long-Term Notes) and $125 thousand was paid in the form of short-term noteswhich is due in 2005 with interest rate of 10% per annum (Short-Term Notes).

 

Interest payments are due quarterly, and failure tomake timely interest payments will result in increase in interest rate to 10%and 14% on the 6% and 10% senior convertible notes. The default interest ratesbecame effective on April 1, 2005 from non-payment of a scheduled interestpayment. As such, the Company accrued $171 of additional interest from thedefault rates applied to the loan balance as of June 30, 2005, which isincluded in accounts payable and accrued liabilities.

 

The Short-Term Notes have a maturity date of July29, 2005, and a conversion price of $2.00 per share (compared to a conversionprice of $3.00 per share under the March Notes). The Long-Term Notes have amaturity date of July 29, 2007, and a conversion price of $1.00 per share. Further,the exchange notes are convertible into Common Stock, at the option of theCompany, if at any time after the issuance of the notes, the closing per shareprice of the Common Stock exceeds $4.00 (as adjusted for stock splits, reversesplits, stock dividends, and recapitalizations) for 30 consecutive tradingdays, and further provided that there has been effective registration duringsuch period. Holders of the Long-Term Notes also have the right to call forrepayment of the Long-Term Notes prior to maturity at any time after the secondanniversary of the completion of the exchange offer. A total of 563,151warrants to purchase our common stock at an exercise price of $3.00 pershare—all of which were previously issued in connection with the purchase ofthe March Notes—have been amended to provide for an extended expiration date ofMarch 1, 2006. As of June 30, 2005, we were in breach of a covenant inthe Note Exchange Agreement requiring us to become current in our SECfilings, as well as file a registration statement with the SEC forthe shares into which the notes are convertible, within 90 days of the issuedate of the new notes.  Late registration fee of $1.0 million has beenaccrued as interest expense, and is included in accounts payable and accruedliabilities as of June 30, 2005. If written notice of default is delivered tous for breach of this covenant, then we will have a period of 30 days tocure the breach before it becomes an event of default under the notes, andif the breach is not cured during such time period, the holders of thenotes will become entitled to accelerate the remaining balance oftheir respective notes and declare them immediately due and payable. Further, As of the date of the filing of this Form 10-Q, we havenot received a notice for demand for payment as a result of not meetingthe registration and listing requirements.

 

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**Item 6 –Exhibits**

 

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

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                           |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                  |
| 10.1 (1)            |       | Securities  Purchase Agreement dated August 2, 2005, among the registrant and the  parties identified as “Purchasers” therein.                         |
|                |       |                                                                                                                                                                  |
| 10.2 (1)            |       | Form of 7%  Senior Secured Convertible Note, dated August 2, 2005.                                                                                          |
|                |       |                                                                                                                                                                  |
| 10.3 (1)            |       | Form of Common  Stock Purchase Warrant, dated August 2, 2005.                                                                                               |
|                |       |                                                                                                                                                                  |
| 10.4 (1)            |       | Amended and  Restated Registration Rights Agreement, dated August 2, 2005, among the  registrant and the parties identified as “Purchasers” therein.        |
|                |       |                                                                                                                                                                  |
| 10.5 (1)            |       | Amended and  Restated Security Agreement, dated August 2, 2005, among the registrant  and the parties identified as the “Secured Parties” therein.     |
|                |       |                                                                                                                                                                  |
| 31.1                |       | Certification of the President and Chief Executive  Officer, Ricardo A. Salas, as required by Section 3.02 of Sarbanes-Oxley Act  of 2002                             |
|                |       |                                                                                                                                                                  |
| 31.2                |       | 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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(1) Previously filed

 

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**SIGNATURES**

 

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

 
|                 | LIQUIDMETAL TECHNOLOGIES                     |
|----------------------|----------------------------------------------|
|                 | (Registrant)                                 |
|                 |                                         |
| Date: 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 and Accounting Officer) |

 

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