**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q/A**

**Amendment No. 1**
| **x**                                              | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)  OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|----------------------------------------------------|------------------------------------------------------------------------------------------------|
| ** **                                         | ** **                                                                                     |
| **For the  quarterly period ended March 31, 2006** |
|                                               |                                                                                           |
| **OR**                                             |
|                                               |                                                                                           |
| **o**                                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**For the transition period from         to        **

 

**Commission File No. 001-31332**

 

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**LIQUIDMETAL TECHNOLOGIES, INC.**

(Exact name of Registrantas specified in its charter)

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

 

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

(address of principal executive office, zip code)

 

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

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for at least the past 90 days.

 

Yes  x    No  o

Indicate by check whether the registrant is a large accelerated filer,an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b 2 of the Exchange Act). Yes  o    No  x

 

As of April 26, 2006, there were 44,056,058 shares of the registrant’scommon stock, $.001 par value, outstanding.

 

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**LIQUIDMETAL TECHNOLOGIES, INC.AMENDMENT NO. 1 TO FORM 10-QFOR THE QUARTER ENDED****MARCH 31, 2006**

**EXPLANATORY NOTE**

We are filing this Amendment No. 1 to ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2006,as filed with the U.S. Securities and Exchange Commission (SEC) on May 10,2006, to restate our financial statements to properly account for theconversion feature of the senior convertible notes issued in March 2004.

Otherthan the changes referred to above, all other information included in the abovedescribed Form 10-Q remains unchanged. This amendment does not reflectevents 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**

Statementsin this report concerning the future sales, expenses, profitability, financialresources, product mix, market demand, product development and other statementsin this report concerning the future results of operations, financial conditionand business of Liquidmetal Technologies, Inc. are “forward-looking”statements as defined in the Securities Act of 1933 and Securities Exchange Actof 1934. Investors are cautioned that the Company’s actual results in thefuture may differ materially from those projected in the forward-lookingstatements due to risks and uncertainties that exist in the Company’soperations and business environment, including competition, need for increasedacceptance of products, ability to continue to develop and extend our brandidentity, ability to anticipate and adapt to a competitive market, ability toeffectively manage rapidly expanding operations, amount and timing of operatingcosts and capital expenditures relating to expansion of our business,operations and infrastructure, ability to provide superior customer service,dependence upon key personnel and the like. The Company’s most recent filingswith the Securities and Exchange Commission, including Form 10-K,contain additional information concerning many of these risk factors, andcopies of these filings are available from the Company upon request and withoutcharge.

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#### **TABLE OF CONTENTS**

| **PART I**                           |                                                                                                      |                                                                                |
|-------------------------------------------|-----------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|
|                                      | Item 1 – Financial Statements                                                                        |                                                                                |   |
|                                      |                                                                                                      | Condensed Consolidated Balance Sheets (unaudited)                                   |   |   |
|                                      |                                                                                                      | Condensed Consolidated Statements of Operations and  Comprehensive Loss (unaudited) |   |   |
|                                      |                                                                                                      | Condensed Consolidated Statements of Shareholders’  Deficiency (unaudited)     |   |   |
|                                      |                                                                                                      | Condensed Consolidated Statements of Cash Flows (unaudited)                         |   |   |
|                                      |                                                                                                      | Notes to Condensed  Consolidated Financial Statements (unaudited)                   |   |   |
|                                      | Item 2 – Management’s Discussion and Analysis of  Financial Condition and Results of Operations |                                                                                |   |
|                                      | Item 3 – Quantitative and Qualitative Disclosures  about Market Risk                                 |                                                                                |   |
|                                      | Item  4 – Controls and Procedures                                                                    |                                                                                |   |
| **PART II – Other Information** |                                                                                                      |                                                                                |
|                                      | Item  1 – Legal Proceedings                                                                          |                                                                                |   |
|                                      | Item 1A  – Risk Factors                                                                              |                                                                                |   |
|                                      | Item 2 – Unregistered Sales of Equity Securities and  Use of Proceeds                                |                                                                                |   |
|                                      | Item 3 – Defaults Upon Senior Securities                                                             |                                                                                |   |
|                                      | Item 4 – Submission of Matters to a Vote of Security  Holders                                        |                                                                                |   |
|                                      | Item 5 – Other Information                                                                           |                                                                                |   |
|                                      | Item 6 – Exhibits                                                                                    |                                                                                |   |
| Signatures                                |                                                                                                      |                                                                                |
| Certifications                            |                                                                                                      |                                                                                |
|                                           |                                                                                                           |                                                                                     |  |  |  |

4

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### **PART I**

### **FINANCIAL INFORMATION**

**Item 1 – Financial Statements**

**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share data)**
| ** **                                                                                                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                        | ** ** | **(Restated)**     | ** ** | **(Restated)**        | ** ** |
| ** **                                                                                                                                                                                        | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                        | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                                                                                   |       |               |       |                  |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                  | 1,263      |                  | $          | 1,392 |   |
| Trade accounts receivables, net of allowance for  doubtful accounts of $69 and $61                                                                                                                |       | 3,506              |       | 2,360                 |       |
| Inventories                                                                                                                                                                                       |       | 1,764              |       | 1,748                 |       |
| Prepaid expenses and other current assets                                                                                                                                                         |       | 561                |       | 609                   |       |
| Total current assets                                                                                                                                                                              |       | 7,094              |       | 6,109                 |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Property, plant  and equipment, net                                                                                                                                                               |       | 13,300             |       | 13,437                |       |
| Idle equipment                                                                                                                                                                                    |       | 199                |       | 193                   |       |
| Other  intangibles, net                                                                                                                                                                           |       | 1,196              |       | 1,185                 |       |
| Other assets                                                                                                                                                                                      |       | 547                |       | 639                   |       |
| Total assets                                                                                                                                                                                      |       | $                  | 22,336     |                  | $          | 21,563 |   |
|                                                                                                                                                                                              |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIENCY**                                                                                                                                                | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                                                             |       |               |       |                  |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Accounts payable and accrued expenses                                                                                                                                                             |       | 7,977              |       | $                     | 6,530      |   |
| Settlement payable                                                                                                                                                                                |       | —             |       | 3,331                 |       |
| Deferred revenue                                                                                                                                                                                  |       | 407                |       | 1,275                 |       |
| Short-term debt                                                                                                                                                                                   |       | 2,286              |       | 550                   |       |
| Long-term debt, current portion                                                                                                                                                                   |       | 1,391              |       | 1,343                 |       |
| Other liabilities, current portion                                                                                                                                                                |       | 300                |       | 483                   |       |
| Warrant liabilities                                                                                                                                                                               |       | 3,165              |       | 1,792                 |       |
| Conversion feature liabilities                                                                                                                                                                    |       | 3,554              |       | 1,798                 |       |
| Total current liabilities                                                                                                                                                                         |       | 19,080             |       | 17,102                |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Long-term debt,  net of current portion and debt discount of $7,004 and $8,259                                                                                                                    |       | 6,359              |       | 5,433                 |       |
| Other long-term  liabilities, net of current portion                                                                                                                                              |       | 391                |       | 348                   |       |
| Total liabilities                                                                                                                                                                                 |       | 25,830             |       | 22,883                |       |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Shareholder’s  equity (deficiency):                                                                                                                                                          |       |               |       |                  |       |
| Common stock, $0.001 par value; 100,000,000 shares  authorized and 43,956,621 issued and outstanding at March 31, 2006 and  42,187,621 issued and outstanding at December 31, 2005 |       | 44                 |       | 42                    |       |
| Additional paid-in capital                                                                                                                                                                        |       | 134,666            |       | 130,893               |       |
| Accumulated deficit                                                                                                                                                                               |       | (140,574           | )          | (134,525              | )          |
| Accumulated other comprehensive income                                                                                                                                                            |       | 2,370              |       | 2,270                 |       |
| Total shareholder’ deficiency                                                                                                                                                                |       | (3,494             | )          | (1,320                | )          |
|                                                                                                                                                                                              |       |               |       |                  |       |
| Total liabilities and shareholders’ deficiency                                                                                                                                               |       | $                  | 22,336     |                  | $          | 21,563 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

5

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

### **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS****(in thousands, except per share data)(unaudited)**

| ** **                                             | ** ** | **For the Three Months** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **Ended March 31,**           | ** ** |
| ** **                                             | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **(Restated)**                          | ** ** |
| ** **                                             | ** ** | **(Unaudited**                          | ** ** |
|                                                   |       |                                    |       |   |   |
| Revenue                                                |       | $                                       | 6,555      |   | $ | 2,843 |   |
| Cost of sales                                          |       | 5,324                                   |       | 2,835 |   |
|                                                   |       |                                    |       |   |   |
| Gross profit                                           |       | 1,231                                   |       | 8 |   |
|                                                   |       |                                    |       |   |   |
| Operating  expenses                                    |       |                                    |       |   |   |
| Selling, general, and administrative                   |       | 2,705                                   |       | 2,590 |   |
| Research and development                               |       | 203                                     |       | 397 |   |
| Total operating expenses                               |       | 2,908                                   |       | 2,987 |   |
| (Loss) from  operations                                |       | (1,677                                  | )          | (2,979 | ) |
|                                                   |       |                                    |       |   |   |
| Change in value  of warrants, (loss) gain              |       | (1,289                                  | )          | 133 |   |
| Change in value  of conversion feature, (loss) gain    |       | (1,783                                  | )          | 1,115 |   |
| Other income                                           |       | 480                                     |       | — |   |
| Interest expense                                       |       | (1,782                                  | )          | (1,537 | ) |
| Interest income                                        |       | 2                                       |       | 6 |   |
|                                                   |       |                                    |       |   |   |
| Loss from  continuing operations                       |       | (6,049                                  | )          | (3,262 | ) |
|                                                   |       |                                    |       |   |   |
| Net (Loss)                                             |       | (6,049                                  | )          | (3,262 | ) |
|                                                   |       |                                    |       |   |   |
| Other  comprehensive gain (loss):                      |       |                                    |       |   |   |
| Foreign exchange translation gain                      |       | 100                                     |       | 321 |   |
| Comprehensive (loss)                                   |       | $                                       | (5,949     | ) | $ | (2,941 | ) |
|                                                   |       |                                    |       |   |   |
| Per common share  basic and diluted:                   |       |                                    |       |   |   |
| Net (loss) per share basic and diluted                 |       | (0.14                                   | )          | (0.08 | ) |
|                                                   |       |                                    |       |   |   |
| Number of  weighted average shares - basic and diluted |       | 42,817                                  |       | 41,610 |   |

 

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

6

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’DEFICIENCY****For the Three Months Ended March 31, 2006(in thousands, except per share data)**
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **      | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Income (loss)** | ** ** | **Total**  | ** ** |
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)**  | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Balance,  December 31, 2005 (As Restated)**          |       | 42,187,621 |       | $          | 42         |           | $          | 130,893         |       | $                      | (134,525   | )          | $          | 2,270 |   | $ | (1,320 | ) |
| Conversion of notes payable                                 |       | 59,000     |       | —     |       | 86             |       | —          |       | —                 |       | 86         |       |
| Common stock issued as director’s fees                 |       | 10,000     |       | —     |       | 15             |       | —          |       | —                 |       | 15         |       |
| Common stock issued to Innometal                            |       | 1,700,000  |       | 2          |       | 3,448          |       | —          |       | —                 |       | 3,450      |       |
| Stock-based compensation                                    |       | —     |       | —     |       | 224            |       | —          |       | —                 |       | 224        |       |
| Foreign exchange translation gain                           |       | —     |       | —     |       | —         |       | —          |       | 100                    |       | 100        |       |
| Net loss                                                    |       | —     |       | —     |       | —         |       | (6,049          | )          | —                 |       | (6,049     | )          |
| **Balance,  March 31, 2006 (Unaudited) (As Restated)** |       | $          | 43,956,621 |       | $          | 44             |       | $               | 134,666    |                   | $          | (140,574   | )          | $ | 2,370 |   | $ | (3,494 | ) |
|                                                             |            |            |            |            |            |                |            |                 |            |                        |            |            |            |  |  |  |  |  |  |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

7

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

### **CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS****(in thousands, except per share data)**

| ** **                                                                                | ** ** | **For the Three Months** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                                                | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                                                                | ** ** | **(Restated)**                          | ** ** |
| ** **                                                                                | ** ** | **(Unaudited)**                         | ** ** |
| **Operating activities:**                                                            | ** ** |                                    |       |
| Net loss                                                                                  |       | $                                       | (6,049     | ) | $ | (3,262 | ) |
|                                                                                      |       |                                    |       |   |   |
| Adjustments to reconcile loss from operations to net  cash used for operating activities: |       |                                    |       |   |   |
| (Gain) on disposal of asset                                                               |       | —                                  |       | (1 | ) |
| Depreciation and amortization                                                             |       | 782                                     |       | 843 |   |
| Amortization of debt discount                                                             |       | 1,413                                   |       | 477 |   |
| Stock-based compensation                                                                  |       | 224                                     |       | — |   |
| Bad debt expense (recovery)                                                               |       | 28                                      |       | (20 | ) |
| Warranty expense                                                                          |       | 74                                      |       | 42 |   |
| Loss (gain) from change in value of warrants                                              |       | 1,289                                   |       | (133 | ) |
| Loss (gain) from change in value of conversion  feature                                   |       | 1,783                                   |       | (1,115 | ) |
|                                                                                      |       |                                    |       |   |   |
| Changes in operating assets and liabilities:                                              |       |                                    |       |   |   |
| Trade accounts receivable                                                                 |       | (1,174                                  | )          | (97 | ) |
| Inventories                                                                               |       | (16                                     | )          | 198 |   |
| Prepaid expenses and other current assets                                                 |       | 48                                      |       | 496 |   |
| Other assets                                                                              |       | 17                                      |       | 16 |   |
| Accounts payable and accrued expenses                                                     |       | 1,388                                   |       | 1,546 |   |
| Deferred revenue                                                                          |       | (868                                    | )          | (20 | ) |
| Other liabilities                                                                         |       | (107                                    | )          | (81 | ) |
| Net cash used for operating activities                                                    |       | (1,168                                  | )          | (1,111 | ) |
|                                                                                      |       |                                    |       |   |   |
| **Investing  Activities:**                                                                | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Purchases of property and equipment                                                       |       | (145                                    | )          | — |   |
| Investment in patents and trademarks                                                      |       | (39                                     | )          | (45 | ) |
| Net cash used for investing activities                                                    |       | (184                                    | )          | (45 | ) |
|                                                                                      |       |                                    |       |   |   |
| **Financing  Activities:**                                                                | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Proceeds from borrowings                                                                  |       | 3,995                                   |       | 158 |   |
| Repayment of borrowings                                                                   |       | (2,581                                  | )          | (308 | ) |
| Repayment of other liabilities                                                            |       | (33                                     | )          | (33 | ) |
| Proceeds from restricted cash                                                             |       | —                                  |       | 754 |   |
| Net cash provided by financing activities                                                 |       | 1,381                                   |       | 571 |   |
| Effect of foreign exchange translation                                                    |       | (158                                    | )          | 184 |   |
| Net (decrease) in cash and cash equivalents                                               |       | (129                                    | )          | (401 | ) |
|                                                                                      |       |                                    |       |   |   |
| Cash and cash  equivalents at beginning of period                                         |       | 1,392                                   |       | 742 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                       | 1,263      |   | $ | 341 |   |
|                                                                                      |       |                                    |       |   |   |
| Supplemental  cash flow information                                                       |       |                                    |       |   |   |
| Interest paid                                                                             |       | $                                       | 293        |   | $ | 88 |   |
| Taxes paid                                                                                |       | $                                       | —     |   | $ | — |   |

 

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

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During the three months ended March 31, 2006, the$59 of the Company’s 6% senior convertible notes due July 2007 wasconverted into 59,000 shares of the Company’s common stock at a conversionprice of $1.00 per share.

During the three months ended March 31, 2006, theCompany fulfilled its settlement payable to Innometal (formerly known asGrowell Metal) of $3,450, net of foreign exchange translation loss, throughstock issuance of 1,700,000 shares of the Company’s common stock at aconversion price of $1.00 per share.

The accompanying notes are an integral part of the condensedconsolidated financial statements

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFor the Three Months Ended March 31, 2006 and 2005(in thousands, except share data)(unaudited)**

**1.         Basis of Presentation / Description ofBusiness**

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America (“generally accepted accounting principles”) for interim financialinformation and with the instructions to Form 10-Q.  Accordingly, they do not include all of theinformation and notes required by generally accepted accounting principles forcomplete financial statements.  In theopinion of management, all adjustments (consisting only of normal recurringaccruals) considered necessary for a fair presentation have been included.  All intercompany balances and transactionshave been eliminated.  In addition,certain reclassifications have been made for consistent presentation.  Operating results for the three months endedMarch 31, 2006 are not necessarily indicative of the results that may beexpected for any future periods or the year ending December 31, 2006.  The accompanying unaudited condensed consolidatedfinancial statements should be read in conjunction with the Company’s Form 10-Kfiled with the Securities and Exchange Commission on March 16, 2006, as amendedby Form 10-K/A filed on April 25, 2006.

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

The Companyclassifies operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys. Liquidmetal alloy industrialcoatings are used primarily as a protective coating for industrial machineryand equipment, such as drill pipe used by the oil drilling industry and boilertubes used by coal-burning power plants. Bulk Liquidmetal alloys includepotential market opportunities to manufacture and sell products and componentsfor electronic devices, medical devices, defense applications, and sportinggoods.  In addition, the bulk Liquidmetalalloys segment includes tooling and prototype sampling, and the manufacture andsale of die casting equipment (see Note 10). In addition, such alloys are used to generate research and developmentservices revenue for developing uses related primarily to defense and medicalapplications as well as potential license fees, royalties, and othercompensation from strategic partnering transactions.

Stock-based compensation

The Company previously applied Accounting PrinciplesBoard (“APB”) Opinion No. 25 for options when the exercise price of optionsgranted to employees is less than the fair value of the underlying stock on thedate of grant.  As permitted, the Companyhad previously elected to adopt provisions of Statement of Financial AccountingStandard (“SFAS”) No. 123, *Accounting for Stock-BasedCompensation* for options granted to non-employees who performservices for the Company and the disclosure-only provisions of options grantedto employees.

In December 2004, the FASB issued SFASNo. 123 (revised 2004), *Share-BasedPayment* (“SFAS 123R”), which replaces SFAS No. 123, *Accounting for Stock-BasedCompensation*, (“SFAS 123”) and supersedes APB OpinionNo. 25, *Accounting for Stock Issued toEmployees*, (“APB 25”). SFAS 123R requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values. Under SFAS123R, the Company is required to measure the cost of employee services receivedin exchange for stock options and similar awards based on the grant-date fairvalue of the award and recognize this cost in the income statement over theperiod during which an employee is required to provide service in exchange forthe award. The pro forma disclosures previously permitted under SFAS 123are no longer an alternative to financial statement recognition. The Companyadopted SFAS 123R on January 1, 2006 using the modified prospectivemethod and recorded $224 of non-cash charges for stock compensation related toamortization of the fair value of restricted stock and unvested stock optionsrepresenting a $224 increase from the stock compensation that would have beenrecorded under APB 25 and SFAS 123. Under this method, the Company willrecognize compensation cost, on a prospective basis, for the portion ofoutstanding awards for which the requisite service has not yet been rendered asof January 1, 2006 and any new grants, based upon the grant-date fairvalue of those awards calculated under SFAS 123 for pro forma disclosurepurposes. Accordingly, we have not restated prior period amounts. The following

10

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table illustrates the proforma effect on net income for periods prior to the adoption of SFAS 123R as ifwe had applied the fair value recognition provisions of SFAS 123 during suchperiods:
|                                                                                                                                                                      | ** ** | **For the Three**               | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                                           | ** ** | **Months Ended March 31,** | ** ** |
| ** **                                                                                                                                                           | ** ** | **2005**                                  | ** ** |
| Net loss as  reported                                                                                                                                                |       | $                                         | (6,049     | ) |
| * *                                                                                                                                                             |       |                                      |       |
| *Add:       *stock-based  employee compensation expense included in reported net loss, net of related  tax effects                |       | —                                    |       |
|                                                                                                                                                                 |       |                                      |       |
| *Deduct:   *total  stock-based employee compensation expense determined under the fair value  based method for all awards, net of related tax effects |       | (783                                      | )          |
| * *                                                                                                                                                             |       |                                      |       |
| Proforma net loss:                                                                                                                                                   |       | $                                         | (6.,832    | ) |
| Basic and  diluted loss per share:                                                                                                                                   |       |                                      |       |
| As reported                                                                                                                                                          |       | $                                         | (0.14      | ) |
| Proforma                                                                                                                                                             |       | $                                         | (0.16      | ) |

 

The fair value ofeach option 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 three months ended March 31, 2006 and 2005, 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 3.6% to 4.3%.

**2.         Basis of Presentation and RecentAccounting Pronouncements**

Translationof Foreign Currency

The Companyapplies **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 amountsfrom the prior year have been reclassified to conform to current year’spresentation.

Restatements

*SFAS 133 — Accounting for Derivative Instruments and HedgingActivities*

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 Derivative Instrumentsand Hedging Activities”, (SFAS 133) (see Note 8).

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Recent Accounting Pronouncements

 

InFebruary 2006, the FASB issued SFAS No. 155, (“SFAS No. 155”),“Accounting for Certain Hybrid Instruments,” which amendsSFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities,” and SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities.”SFAS No. 155 allows financial instruments that have embeddedderivatives to be accounted for as a whole (eliminating the need to bifurcatethe derivative from its host) if the holder elects to account for the wholeinstrument on a fair value basis. SFAS No. 155 also clarifies andamends certain other provisions of SFAS No. 133 and SFAS No. 140.This statement is effective for all financial instruments acquired or issued infiscal years beginning after September 15, 2006. The Company does notexpect the adoption of this new standard to have a material impact on itsfinancial position, results of operations or cash flows.

**3.         Liquidity**

The Company has experienced losses from continuingoperations during the last three fiscal years and has an accumulated deficit of$140,574 as of March 31, 2006.  Cash usedfor operations for the three months ended March 31, 2006 was $1,168 and cashflow from operations will likely be negative throughout fiscal year 2006.  As of March 31, 2006, the Company’s principalsource of liquidity is $1,263 of cash and $3,506 of trade accountsreceivable.  Such conditions raisesubstantial doubt that the Company will be able to continue as a goingconcern.  These operating resultsoccurred while the Company was developing and continues to develop and tocommercialize and manufacture products from an entirely new and uniquetechnology.  These factors have placed asignificant strain on the financial resources of the Company.  The ability of the Company to overcome thesechallenges depends on its ability to correct its production inefficiencies,continues to reduce its operating costs, generate higher revenue, and achievepositive cash flow from continuing operations and profitability and continuedsources of debt and equity financing. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of the uncertainty.

The Company completed a $1,000 10%subordinated promissory note on March 17, 2006 for $1,000 aggregate cashreceived.  Further, the Company borrowed$2,995, offset by repayments of $2,259, under a factoring, loan, and securityagreement executed on April 21, 2005 during the three months ended March 31,2006 to fund our working capital requirements. (See Note 8)

Capital requirements during the next 12 monthswill depend on numerous factors, including the success of existing products,the development of new applications for Liquidmetal alloys, the resourcesdevoted to develop and support Liquidmetal alloy products.  Specifically, we anticipate thatwe could need $1,000 to $5,000 over the next twelve months to pursueour current operating plan, although this amount may be lower depending on theorders we receive for our products. The amount of funding that we plan to seek and the timing of suchfundraising efforts will depend on the extent to which we are able to increaserevenues through obtaining additional purchase orders for our products,particularly components for cellular phones and flash memory drive casings, andour ability to continue to improve our manufacturing processes.  We evaluate our working capital needs andoperating plan assumptions on a monthly basis to determine whether anyadjustment to our cash and liquidity outlook is warranted, and wealso review potential sources of financing on an ongoing basis.  However, adequate funds may not be available whenneeded, and if we raise additional funds by issuing equity securities, existingstockholders may be diluted.  If we don’treceive sufficient funding to operate under our current plan, we intend toreduce operations and expenses and shift our focus to the pursuit of licensingtransactions and other strategic transactions that are less capital intensive.

**4. Inventories**

Inventories are accounted for using the moving averagebasis and at standard cost, which approximate cost on a first-in, first-outbasis and are valued at the lower of cost or market.  Inventories were comprised of the following:

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|                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Raw materials      |       | $                  | 659        |                  | $          | 565 |   |
| Work in process    |       | 587                |       | 763                   |       |
| Finished goods     |       | 518                |       | 420                   |       |
| Total  inventories |       | $                  | 1,764      |                  | $          | 1,748 |   |

 

**5. Idle Equipment**

Idle equipment consists of certain equipment held bythe Company for use in expansion of bulk alloy parts manufacturing.  Whilethe equipment may be used internally to meet future capacity requirements,considering our current revenue and foreseeable production requirements, theCompany does not anticipate utilizing this equipment internally in the nearfuture. Total amount of idle equipment remaining was $199 and $193 as of March31, 2006 and December 31, 2005, respectively.

**6.  Settlement Payable**

The settlementpayable balance consists of payables to Growell Metal Co., Ltd. (“Growell”), a SouthKorean metals processing company, as a result of a settlement agreementexecuted in January 2004.  Under terms ofthe January 2004 settlement of the dispute over certain sales transactions from2003 and 2002 between Liquidmetal Korea and Growell, Liquidmetal Korea agreed to pay Growell $4,895 topurchase Growell’sinvestment in alloy inventories, proprietary alloying equipment purchased fromLiquidmetal Korea, and supporting equipment purchased from othersuppliers.  Also as part of thesettlement, Growellsatisfied in full a balance of $2,058 owed to Liquidmetal Korea for the diecasting machines Growellpurchased from Liquidmetal Korea in the first quarter of 2003 as part of alicense agreement to manufacture Liquidmetal alloy parts for the South Koreanautomotive industry.  The remaining settlement payable of $2,837was to be paid to Growell (in cash orstock at the Company’s discretion) by December 31, 2004.  As of December 31, 2005, the settlementpayable was not paid to Growell dueto Growell’s breach of warranty onequipment repurchased by Liquidmetal Korea. The outstanding balance of payables to Growellfrom the settlement was $3,331 as of December 31, 2005, net of foreign exchangetranslation loss.

Under thesettlement agreement between the parties, the Company and Growell granted tothe other party (and the other party’s affiliates) a release of all known andunknown claims of any nature arising between the parties through the date ofsettlement, as well as a release against future claims under agreements betweenthe parties that were terminated as a part of the settlement.  The settlement agreement provided that all agreementsof any nature between the parties and their respective affiliates wereterminated as of the date of settlement, with the exception of certainconfidentiality agreements, a Liquidmetal coatings distribution agreement, andfuture rights under the die casting agreement pursuant to which Growellpurchased the die casting machines and obtained a license to make auto partsfrom Liquidmetal alloys.  The settlementagreement also includes, as an accommodation to Growell, if the Company becomesaware of any prospective customer that desires to purchase a proprietaryCompany casting machine at a time when Growell desires to sell any of itsLiquidmetal die casting machines, then the Company will not sell such diecasting machine to the prospective customer unless the Company first directsthe prospective customer to Growell and encourages the prospective customer topurchase the machine from Growell.

In January 2005,Growell was acquired by a third party, Innometal Co., Ltd., and on March 21,2006, the Company entered into an Amendment to Settlement Agreement (the “SettlementAmendment”) with Innometal Co., Ltd. (“Innometal”).  Under the Settlement Amendment, Innometal andthe Company have agreed that the Company’s obligation of $3,331 under theSettlement Agreement will be fully satisfied through the issuance to Innometalof 1,700,000 shares of our common stock. The Company issued 1,700,000 shares to Innometal on March 22, 2006. Theshares were issued to Innometal in a private placement exempt from registrationunder the Securities Act of 1933, as amended (the “Securities Act”).Specifically, the shares were issued by virtue of Section 4(2) of theSecurities Act in that the issuance did not involve a public offering,Innometal has adequate access to information about the company, and appropriaterestrictive legends were affixed to all certificates representing the sharesissued to Innometal. The shares received by Innometal under the SettlementAmendment

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are “restrictedsecurities” within the meaning of Rule 144 under the Securities Act, andInnometal has not been granted any registration rights by the company withrespect to such shares.

As an inducementfor Innometal to enter into the Settlement Amendment, James Kang, a directorand founder of the Company, has entered into a buy-sell agreement withInnometal whereby Mr. Kang has agreed to personally purchase from Innometal,and Innometal has agreed to sell to Mr. Kang, the 1,700,000 shares issued toInnometal under the Settlement Amendment, with such purchase and sale to takeplace on October 31, 2006. The aggregate purchase price for the shares payableby Mr. Kang under this buy-sell agreement will be approximately $2,800. Inorder to secure his obligations under the buy-sell agreement, Mr. Kang haspledged to Innometal 500,000 shares of the company’s common stock currentlyheld by him. Mr. Kang will receive no consideration from us in connection withhis entering into this buy-sell agreement, and Mr. Kang will not have anyregistration rights with respect to the shares purchased under the buy-sell agreement.

**7.  Product Warranty**

Managementestimates product warranties as a percentage of bulk alloy product sales earnedduring the period.  As of March 31, 2006,the Company used 5% of bulk alloy product sales as an estimate of warranties tobe claimed.  The percentage is based onindustry averages and historical information. During the three months ended March 31, 2006 and 2005, the Companyrecorded $74 and $42, respectively, of warranty expense.  The product warranty accrual balance isincluded in accounts payable and accrued expenses.

**8.  Notes Payable**

Senior Convertible Note

On March 3, 2004, the Company issued $9,924 of 6.0%senior convertible notes due 2007 (the “March Notes”) to investor groups in atransaction led by Michigan Venture Capital Co., Ltd, a South Korea-basedinstitutional investment firm, and IndiGo Ventures LLC, a New York-basedinvestment firm (the “Placement Agents”) that served as a financial advisor tothe Company for the transaction.  Thenotes 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 anytime into common stock at a price of $3.00 per share.  Investors in the private placement and thePlacement Agents received warrants to purchase an aggregate amount of up toapproximately 1.2 million shares of common stock, exercisable at $3.00 pershare for varying periods but no later than 100 days following theeffectiveness of a registration statement covering the resale of sharesissuable upon exercise of the warrants. In addition, the investors had the right to call for repayment of thenotes prior to maturity at any time after the second anniversary of the closingof the transaction.

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

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the original fair value of the 1.2 million warrants of $1302 has beenrecorded as warrant liabilities as the shares issuable under the warrants havenot been registered.  The original fairvalue was computed using the Black-Scholes pricing model under the followingassumptions: (1) expected life of 3 years; (2) volatility of 82%, (3) risk freeinterest of 0.95% and dividend rate of 0%.

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In March 2004, theoriginal fair value of the embedded conversion feature of $7,595, 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 direct costs incurredrelating to issuance of the convertible note were recorded as debt issuancecost in other assets.

During 2004, the Company redeemed $4,465 of theoutstanding 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 originallyissued to a financial advisor for the transaction expired during June 2004 and163,748 of unexercised warrants originally issued to investors were cancelledas a result of the Company’s redemption of the note balances during the yearended December 31, 2004.  The 663,748total expired and canceled warrants immediately prior to the expiration andcancellation 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 privateexchange offer for its March Notes with the remaining holders after theredemption.  Under terms of the exchangeoffer, approximately $5,460 in aggregate principal amount of the March Noteshave been exchanged for an aggregate of (i) $2,730 of 6% Senior Secured NotesDue 2007 (the “July 2007 Notes”) and (ii) $2,730 of 10% Senior Secured NotesDue 2005 (the “July 2005 Notes”), collectively referred 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 July 2005 Notes have a maturity date ofJuly 29, 2005, and a conversion price of $2.00 per share (compared to aconversion price of $3.00 per share under the March Notes).  The July 2005 Notes have been exchanged andredeemed subsequent to the close of the second quarter of 2005 (see 2005 SeniorConvertible Notes below). The July 2007 Notes have a maturity date of July 29,2007, and a conversion price of $1.00 per share.   Further, the exchange notes are convertibleinto Common Stock, at the option of the Company, if at any time after theissuance of the notes, the closing per share price of the Common Stock exceeds$4.00 (as adjusted for stock splits, reverse splits, stock dividends, andrecapitalizations) for 30 consecutive trading days, and further provided thatthere has been effective registration during such period.  Holders of the July 2007 Notes also have theright to call for repayment of the July 2007 Notes prior to maturity at anytime after the second anniversary of the closing of the exchange offer.   The July 2007 Notes have been amendedsubsequent to the close of the second quarter of 2005 to provide for an AmendedRegistration Rights Agreement, and Amended and Restated Security Agreement (see2005 Senior Convertible Notes below).

A total of 563,151 warrants to purchase our commonstock at an exercise price of $3.00 per share—all of which were previouslyissued in connection with the purchase of the March Notes—have been amended toprovide for an extended expiration date of March 1, 2006.  The warrants issued to placement agents areto expire the later of March 1, 2006 or 100 days after the effectiveness ofregistration of shares issuable under the warrants and senior convertibledebt.  The warrant exercise price issubject to price adjustment for anti-dilution purposes. As of March 31, 2006,there were 149,894 warrants outstanding and the exercise price of the warrantswas $2.73 per share.

The exchange offer was treated as an extinguishment ofthe March Notes in accordance with Emerging Issues Task Force No. 96-19, “DebtorsAccounting for 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 $352 ofdeferred issue costs in other assets, $670 of debt discount, and an increase of$1,919 in conversion feature liability as a result of the change in carryingvalue of exchanged notes.

In connection with the private exchange offer, theCompany issued $250 of private placement notes to certain Placement Agents asissuance costs.  Of the $250 notesissued, $125 was paid in the form of long-term notes which is due in 2007 withinterest rate of 6% per annum (July 2007 Notes) and $125 was paid in the formof short-term notes which is due in 2005 with interest rate of 10% per annum(July 2005 Notes).  The Short-Term andJuly 2007 Notes are convertible into Common Stock at $2.00 and $1.00,respectively, and have the same terms as the Exchange Notes issued to theinvestors.  Further, $143 of originalfair value of the embedded conversion feature of the $250 notes issued toPlacement Agents was recorded as conversion feature liabilities during August2004.

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The Company was obligated, pursuant to a RegistrationRights Agreement, as amended by the Exchange Notes, between the Company, thePlacement Agents and the note holders to file a registration statement with theSecurities and Exchange Commission (“SEC”) to register the shares of CommonStock issuable upon conversion of the notes payable and the related warrantswithin 90 days following the effective closing date of the exchange notes (July29, 2004), and to use best efforts to cause such registration statement tobecome effective within 60 days following the SEC’s first written comments onthe registration statement.  Further, ifthe Company is not in compliance with the registration or listing requirements,the holders have rights to late registration payments equal to between 2% and3% of the purchase price paid for the unconverted notes for the first 30business days of late registration, and 1% and 3% for each 30 business daysthereafter, but no more than 18% of the purchase price of the unconverted notebalance.  Late registration fee of $856has been accrued as interest expense as of March 31, 2005.

Interest payments are due quarterly, and failure tomake timely interest payments will result in increase in interest rate to 10%and 14% on the 6% and 10% senior convertible notes (“Default Rates”).  The Default Rates became effective on April1, 2005 from non-payment of a scheduled interest payment.  The Company became compliant with timelyinterest payments during the third quarter of fiscal year 2005, and as of March31, 2006, the Company has complied with all scheduled interest payments.

On August 9, 2005, the July 2005 Notes, accruedinterest and late registration fees were redeemed in cash and exchanged for 7%Convertible Secured Promissory Notes due August 2007  (see 2005 Senior Convertible Notes below).

During the year end December 31, 2005, $485 of theJuly 2007 Notes were converted into 485,750 of the Company’s common stock at aconversion price of $1.00 per share. Additionally, during the three months ended March 31, 2006, $59 of theJuly 2007 Notes were converted into 59,000 of the Company’s common stock at aconversion price of $1.00 per share.  Theconversion resulted in reduction of conversion feature liabilities of $541 and$27 to additional pain in capital or the year ended December 31, 2005 and forthe three months ended March 31, 2006.

The Company’s gross outstanding loan balance of theJuly 2007 Notes totaled $2,310 and $2,369 as of March 31, 2006 and December 31,2005, respectively.   As of March 31,2006 and December 31, 2005, un-amortized discounts for conversion feature andwarrants totaled $992 and $1,207, respectively and other asset debt issuancecosts totaled $35 and $43, respectively. Interest expense for the amortization of debt issuance cost and discounton note was $223 and $477, respectively, for the three months ended March 31, 2006 and 2005.  As of March 31, 2006, the effective interestrate for the July 2007 Notes was 37%.

Pursuant toStatement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” the Company is required to report a valueof the conversion liability as a fair value and record the fluctuation to thefair value of the conversion feature liability to current operations.  The change in the fair value of theconversion feature liability resulted in a loss of $802 and a gain of $1,115for the three months ended March 31, 2006 and 2005 respectively.  The fair value of conversion liabilityoutstanding at March 31, 2006 and December 31, 2005 was $1,615 and $840.  The fair value of conversion featuresoutstanding March 31, 2006 was computed using the Black-Scholes model under thefollowing assumptions: (1) 1.33 years; (2) volatility of 82%, (3) risk freeinterest of 4.82% and dividend rate of 0%.

Pursuant to EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock”, the original relative fair values of thewarrants of $1,302 have been recorded as warrant liability as the Company hasnot yet filed the registration statement. In addition, the Company is required to report a value of the warrant asa fair value and record the fluctuation to the fair value of the warrantliability to current operations.  Thechange in the fair value of the warrants resulted in a loss of $3 and a gain of$133 for the three months ended March 31, 2006 and 2005, respectively.  The fair value of warrants outstanding  was $­3 and $0 as of March 31, 2006 andDecember 31, 2005, respectively.  Thefair value of warrants outstanding as of March 31, 2006 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of 0.27years; (2) volatility of 82%, (3) risk free interest of 4.63%and dividend rateof 0%.

Convertible Notes

On June 13,2005, the Company completed a private placement (the “June 2005 PrivatePlacement”) of 10% Convertible Unsecured Notes Due June 13, 2006 in theaggregate principal amount of $3,250 (the “June 2006 Notes”), together with 

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warrants topurchase up to an aggregate of 893,750 shares of the Company’s common stock(the “Warrants”).

The June 2006Notes issued by the Company in the June 2005 Private Placement are unsecuredand was due on the earlier of June 13, 2006 or the consummation of afollow-on equity or debt offering or restructuring transaction pursuant towhich the Company receives gross proceeds of at least $4,000.  Prior tomaturity, the June 2006 Notes are interest-only, with interest payments duequarterly, at the rate of 10% per year.  The June 2006 Notes can beprepaid by the Company at any time without penalty.  If, within 120 daysfollowing the issue date of the June 2006 Notes, the Company either fails toredeem the notes for the principal amount and accrued interest thereon or failsto close a “Qualified Financing,” then the June 2006 Notes will thereafter beconvertible at a conversion price equal to seventy five percent (75%) of theclosing price of the Company’s common stock on the first trading dayimmediately preceding the conversion date.  A “Qualified Financing “ isdefined in the June 2006 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) 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.  On August 9, 2005, the Company successfullycompleted Qualified Financing, which resulted in exchange and redemption of theConvertible Notes (see 2005 Senior Convertible Debt).  As a result, the Notes never becameconvertible.

As a part of theJune 2005 Private Placement, the Company issued warrants to the purchasers ofthe Notes giving them the right to purchase up to an aggregate of 812,500shares of the Company’s common stock.  In addition, warrants to purchase81,250 shares of the Company’s common stock were issued to the placement agentin the transaction.  The warrants have an exercise price of $2.00 pershare, provided that upon the consummation of the first ensuing public orprivate equity or debt offering or restructuring transaction in which theCompany receives gross proceeds of at least $3,250 (including withoutlimitation any restructuring of the Company’s previously issued 10% SeniorSecured Notes Due July 29, 2005), the exercise price will be automaticallyadjusted downward (but not upward) as of the closing date of such offering orrestructuring transaction so that it is equal to the lowest effective commonstock purchase price paid for any securities issued by the Company to theinvestors in such offering or restructuring transaction.  The warrantswill expire on June 13, 2010 and are subject to exercise price adjustmentfor anti-dilution purposes.  The exerciseprice of the warrants remained unchanged at $2.00 per share as of March 31,2006.

The fairvalue of the 893,750 warrants totaled $1,160 and was computed using theBlack-Scholes pricing model under the following assumptions: (1) expected lifeof 5 years; (2) volatility of 118%, (3) risk free interest of 3.87% anddividend rate of 0%.  In accordance withEmerging Issues Task Force No. 00-27, “Application of Issue No. 98-5 to CertainConvertible Instruments” the embedded beneficial conversion feature of the debtwas not recorded as the debt is considered contingently  convertible at the time of issuance, and as aresult of the completion of the Qualified Financing the debt subsequent to the closeof the second quarter, the debt was determined to be not convertible. In June2005, the fair value of the 812,500 warrants issued to investors of $1,055 wasrecorded as discounts of the convertible note. In addition $105 relating to the fair value of the 81,250 warrantsissued to the Placement Agents and $278 direct costs incurred relating toissuance of the convertible note were recorded as debt issuance cost as acontra liability account in debt discount and other assets, respectively, andwill be amortized using the effective interest rate method over the life of theloan.

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

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the original fair values of the warrants of $1,160 have been recordedas warrant liability as the Company has not yet filed the registrationstatement.  In addition, the Company isrequired to report a value of the warrant as a fair value and record thefluctuation to the fair value of the warrant liability to currentoperations.  The change in the fair valueof the warrants resulted in a loss of $302 and $0 for the three months endedMarch 31, 2006 and 2005.  The fair valueof warrants

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outstanding at March 31, 2006 of $719 was computedusing the Black-Scholes model under the following assumptions: (1) expectedlife of 4.20 years; (2) volatility of 82%, (3) risk free interest of 4.82%anddividend rate of 0%.

2005 Senior Convertible Debt

On August 9, 2005, the Company completed a privateplacement (the “August 2005 Private Placement”) of $9,878 in principal amountof new 7% Convertible Secured Promissory Notes due August 2007 (the “August2007 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”), satisfaction of accrued interest andlate registration fees in the amount of $589 on the previously issued July 2005Notes, and satisfaction of accrued interest of $9 previously issued June 2006Notes.  The August 2007 Notes were issuedpursuant to a Securities Purchase Agreement dated effective as of August 2,2005 among the Company, the purchasers of the August 2007 Notes, and theholders of previously issued July 2005 Notes and June 2006 Notes of the Companydue June 2006.

Interest payments are due quarterly, and failure tomake timely interest payments will result in increase in interest rates to 14%per annum on the August 2007 Notes (“Default Rates”).  As of March 31, 2006, the Company has madetimely interest payments.

The August 2007 Notes are convertible into shares ofthe Company’s common stock at $2.00 per share pursuant to an Amended andRestated Security Agreement.  Theconvertible price of the August 2007 Notes is subject to price adjustment foranti-dilution purposes.  As of March 31,2006, the convertible price of the August 2007 Notes remained unchanged at$2.00 per share.

Further, pursuant to Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock,” EITF 00-27, “Applicationof Issue No. 98-5 to Certain Convertible Instruments,” and EITF 05-2 “TheMeaning of ‘Conventional Convertible Debt Instrument’ in EITF Issue No. 00-19,”the original fair value of the embedded conversion feature of $4,808 have beenrecorded as conversion feature liability as the debt is considered nonconventionalconvertible debt. The original fair value was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 2 years; (2)volatility of 93%; (3) risk free interest of 4.06% and dividend rate of 0%.  In addition, the Company is required toreport a value of the conversion liability as a fair value and record thefluctuation to the fair value of the conversion feature liability to currentoperations.  The change in the fair valueof the conversion feature liability resulted in a loss of $981 for the threemonths ended March 31, 2006.  The fairvalue of the conversion features outstanding as of March 31, 2006 of $1,940 wascomputed using the Black-Scholes model under the following assumptions: (1)1.34 years; (2) volatility of 82%, (3) risk free interest of 4.82% and dividendrate of 0%.  The fair value of conversionfeatures outstanding at December 31, 2005 of $959 was computed using theBlack-Scholes model under the following assumptions: (1) 1.59 years; (2)volatility of 88%, (3) risk free interest of 4.41%and dividend rate of 0%.

The August 2007 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 July 2007 Notes, purchase money asset financing,trade creditors in the ordinary course of business, and any inventory orreceivables-based credit facility that the Company may obtain in the future,provided that the amount of the credit facility does not exceed 50% of eligibleinventory and 80% of eligible receivables. The August 2007 Notes willautomatically convert into common stock if the Company’s common stock has anaverage closing price of more than $5.00 per share during 30 consecutivetrading days.

The Company also issued warrants to the purchasers ofthe August 2007 Notes and placement agents giving them the right to purchase upto 2,469,470 and 414,495 shares of Company common stock, respectively, with anexercise price of  $2.00 per share, whichis subject to price adjustment for anti-dilution purposes.  As of March 31, 2006, the convertible priceof the August 2007 Notes remained unchanged at $2.00 per share. The warrantswill expire on August 2, 2010.

Pursuant to EITF 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the original fair values of the warrants of $4,068 havebeen recorded as warrant liability as the Company has not yet

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filed the registration statement,which 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 4.17% and dividend rate of 0%. In addition, the Company is required to report a value of the warrant asa fair value and record the fluctuation to the fair value of the warrantliability to current operations.  Thechange in the fair value of the warrants resulted in a net loss of $985 for thethree months ended March 31, 2006.  Thefair value of warrants outstanding was $2,359 as of March 31, 2006, which wascomputed using the Black-Scholes model under the following assumptions: (1)expected life of 4.34 years; (2) volatility of 82%, (3) risk free interest of4.82% and dividend rate of 0%.  The fairvalue of warrants outstanding at December 31, 2005 of $1,375 was computed usingthe Black-Scholes model under the following assumptions: (1) expected life of4.59 years; (2) volatility of 88%, (3) risk free interest of 4.35% and dividendrate of 0%.

Inconnection with the August 2005 Private Placement, the Company entered into anamended and restated registration rights agreement with the holders of the July2007 Notes, the holders of the August 2007 Notes, and the holders of theabove-described outstanding warrants. This amended and restated registration rights agreement replaced allother registration rights agreements previously entered into by us inconnection with the private sale by us of convertible notes and warrants.  Under the amended and restated registrationrights agreement, the Company is required to file a resale registrationstatement for the shares underlying all of our outstanding convertible notesand warrants, as described above, by October 31, 2005, to enable the resale ofsuch shares by the selling stockholders on a delayed or continuous basis underRule 415 of the Securities Act.  TheCompany is then required to cause such registration statement to becomeeffective within 60 days after we receive the first written comments on theregistration statement from the SEC, or if the SEC notifies us that it will notreview the registration statement, within five days after suchnotification.  The Company will besubject to certain monetary penalties, as set forth in the registration rightsagreement, if the registration statement is not filed or does not becomeeffective on a timely basis. Specifically, if the Company does not file the registration statement ona timely basis, we will be obligated to pay a late filing fee to the sellingstockholders in the amount of 3% of the warrant exercise price on each of thewarrants held by them plus 3% of the principal amount of the outstanding notesheld by them.  This fee will be payablefor each period of 30 business days that the filing of the registrationstatement is made past the required filing date, and the payments will be due10 business days following the end of each 30-day period.  If the registration statement has not beendeclared effective by the required effective date, the Company will beobligated to pay a monthly late registration fee to the selling stockholders inthe amount of 2% of the aggregate warrant exercise prices and aggregate noteprincipal amounts for the first 30 business days after the required effectivedate, and 1% for each 30-business day period thereafter until the registrationstatement is declared effective. Notwithstanding the foregoing, the late filing fees and lateregistration fees will not exceed 18% of the aggregate warrant exercise pricesand aggregate note principal amounts.

OnDecember 6, 2005, the Company received a letter from a representative of theholders of the August 2007 Notes demanding the payment of a late filing fee byus for the period following October 31, 2005, but under the terms of theamended and restated registration rights agreement, the Company does notbelieve that it is obligated to pay any late filing fees unless and until theCompany fails to file the registration statement by December 13, 2005, which isthe last day of the first 30-business day period following October 31,2005.  The letter also stated that theletter was serving as a notice of default under the Senior Notes as a result ofour failure to file a registration statement by October 31, 2005, althoughunder the terms of the Senior Notes, the Company has thirty days after deliveryof the letter in which to cure such default. On December 9, 2005 the Company filed the registration statement, whichwas within the 30-day period and has cured the default notice.

The Company has received first written comments inJanuary 2006.  However, the registrationstatement has not been made effective within the 60 day period called for bythe registration rights agreement and the Company may be subject to defaultnotices by the holders of the convertible notes and warrants.  As of the filing of this report, the Company’smanagement is not aware of any outstanding default notices.

Our gross outstanding loan balance of the August 2007Notes totaled $9,878 as of March 31, 2006 and December 31, 2005.  As of March 31, 2006 and December 31, 2005,un-amortized discounts for beneficial conversion feature and warrants totaled$5,551 and $6,587, and other asset debt issuance costs totaled $316 and $384,and contra liability debt issuance cost totaled $391 and $464,respectively.  Interest expense for theamortization of debt issuance cost and discount on note was $1,177 for thethree months ended March 31, 2006.  As ofMarch 31, 2006, the effective interest rate for the August 2007 Notes was 54%.

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SubordinatedPromissory Note

OnMarch 17, 2006, the Company issued a $1,000 10% subordinated promissory notedue October 16, 2006 (the “October 2006 Note”) to Atlantic Realty Group, Inc.,a company controlled by Jack Chitayat, a former director of the Company. The October 2006 Note is unsecured and subordinated to all prior indebtednessof the Company.  All accrued interest and unpaid principal under the notewill be due October 16, 2006.  The proceeds from the October 2006 Note isto be used solely for working capital purposes.  In connection with theOctober 2006 Note, the Company issued warrants to purchase an aggregate amountof up to 125,000 shares of common stock, exercisable at $2.00 per share. The warrants will expire on March 17, 2009, and include price adjustmentprovisions for anti-dilution purposes.  As of March 31, 2006, the exerciseprice of the warrants remained unchanged at $2.00 per share. There are noregistration rights of the shares issuable from the exercise of thewarrants.  Further, cashless exercise of the warrants is permitted.

Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock,” the original fair value of thewarrants of $84 have been recorded as warrant liability as the warrant holderscan elect to settle the warrants in cash, which was computed usingBlack-Scholes pricing model under the following assumptions: (1) expected lifeof 2.96 years; (2) volatility of 84%; (3) risk free interest of 4.64% anddividend rate of 0%.  In addition, the Company is required to report avalue of the warrant as a fair value and record the fluctuation to the fairvalue of the warrant liability to current operations.  The change in thefair value of the warrants resulted in a net gain of $1 which is recorded aschange in value of warrants for the three months ended March 31, 2006. The fair value of warrants outstanding at March 31, 2006 of $83 was computedusing the Black-Scholes model under the following assumptions: (1) expectedlife of  2.96 years; (2) volatility of82%, (3) risk free interest of 4.83%and dividend rate of 0%.

Our gross outstanding loan balance of the October 2006Note totaled $1,000 as of March 31, 2006. As of March 31, 2006, un-amortized discounts for warrants totaled$71.  Interest expense for theamortization of discount on the note was $13 for the three months ended March31, 2006.  As of March 31, 2006, theeffective interest rate for the October 2006 Note was 22%.

Factoring Agreement

The Companyentered into a Factoring, Loan, and Security Agreement (the “Agreement”) with afinancing company on April 21, 2005, which allows for borrowings of up to$1,500.  The Agreement expires on April21, 2006, and automatically renews annually thereafter. All borrowings aresecured by outstanding receivables specifically assigned to the financingcompany.  Assigned receivables areconsidered “Approved” or “Non-Approved” by the financing company.  On January 27, 2006, the terms of theagreement were amended whereas advances are made on 85% of Approved receivablesassigned and 50% of Non-Approved receivables assigned.  Payments on assigned receivables are receiveddirectly by the financing company, and applied to outstanding advances.  All outstanding advances and uncollectedassigned receivables are subject to fees and interest charges ranging from0.55% to 1.5% plus prime rate as published by the Wall Street Journal, with aminimum annual fee of $30. All receivables assigned and advances made aresubject to return and recall by the financing company, respectively.  As such, the advances have been classified asshort-term secured borrowings in accordance with SFAS 140 “Accounting forTransfer and Servicing of Financial Assets and Extinguishments of Liabilities.”  As of March 31, 2006, the Company hasborrowed $2,995 and repaid $2,259 during the three months ended March 31,2006.  The total outstanding advance madeunder the agreement is $1,286 and $550 as of March 31, 2006 and December 31,2005, which is presented as short-term debt.  The weighted average rate of interest for borrowings made under theAgreement was 9% for the three months ended March 31, 2006.  The Company has $214 available for futureborrowings under the Agreement as of March 31, 2006, which is contingent onapproval of eligible receivables by the financing company.  

Kookmin Note

On February 4, 2003, our Korean subsidiary received6,500,000 in South Korean Won, or approximately $5,488, under a loan fromKookmin Bank of South Korea.  The loanbears interest at an annual rate of 7.1%. In the event of delayed repayment, the interest increases to a maximumof 21%, depending on the length of time the repayment is delayed.  As of March 31, 2006, the interest rate was increasedto 9.2% from delayed interest payments made. This loan is collateralized by the plant facilities and certainequipment in South Korea.  During thefirst eighteen months from the origination date, interest was payable on amonthly 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 Bankrequested

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that the Company pay an additional $866 of principalby February 2004 due to the Company’s current credit rating.  The Company made two payments on therequested additional loan pay down in November and December 2003 of $320 and$205, respectively.  The remaining paymentof $341 was subsequently made in February 2004. Beginning in September 2004, the Company is required to make equalmonthly installments of principal and interest to repay the remaining balanceof the loan over a 36-month period. Principal payments made to Kookmin Bank totaled $221 for the threemonths ended March 31, 2006, which includes $100 of foreign exchangetranslation loss.  The outstanding loanbalance totaled $2,568 and $2,790, of which $1,391 and $1,343 is included incurrent portion of long-term debt, as of March 31, 2006 and December 31, 2005,respectively.

**9.     Stock Compensation Plan**

During the three months ended March 31, 2006, under the Company’s 2002Non-employee Director Stock Option Plan which provides for the grant of stockoptions to non-employee directors, the Company granted 60,000 common shares of the Company for an average exerciseprice of $0.77.  Further, all optionsgranted under this plan had exercise prices that were equal to the fair marketvalue on the date of grant.

In March2006, one of the former non-employee directors of our company were given theopportunity to receive shares of stock under the plan in lieu of past-duedirector and committee fees that were due to him for periods through December31, 2005.  Such shares were issuable tohim at an average price of $1.50 per share. As of March 31, 2006, a total of 10,000 shares were issued tonon-employee directors in lieu of these past-due fees.

The Company canceled 423,032 options during the three months ended March31, 2006, for terminated employees and directors.

**10.      SegmentReporting and Geographic Information**

SFAS No. 131,*Disclosures about Segments of an Enterprise andRelated Information,*requires companies to provide certaininformation about their operating segments. In April 2002, the Company began classifying operations into tworeportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetalalloys.  The Liquidmetal alloy industrialcoatings are used primarily as a protective coating for industrial machineryand equipment, such as drill pipe used by the oil drilling industry and boilertubes used by coal burning power plants. Bulk Liquidmetal alloys include market opportunities to manufacture andsell casing components for electronic devices, medical devices, sporting goods,tooling, prototype sampling, defense applications and metal processingequipment.  Primarily, the expensesincurred by the bulk Liquidmetal alloy segment are research and developmentcosts and selling expenses associated with identifying and developing marketopportunities.  Bulk Liquidmetal alloysproducts can be distinguished from Liquidmetal alloy coatings in that the bulkLiquidmetal alloy can have significant thickness, up to approximately one inch,which allows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.   Revenue and expenses associated withresearch and development services and product licensing arrangements areincluded in the bulk Liquidmetal alloy segment. The accounting policies of the reportable segments are the same as thosedescribed in Note 3 to the consolidated financial statements included in theCompany’s Form 10-K filed with the Securities and Exchange Commission on March16, 2006, as amended by Form 10-K/A filed on April 25, 2006.

Summarizedfinancial information concerning the Company’s reportable segments is shown inthe following tables:

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|                                                                    | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|-------------------------|------------|
| Three months  ended March 31, 2006                                 |       |         |       |                |       |                    |       |
| Revenue to external customers                                      |       | $            | 2,384      |                | $          | 4,171                   |       | $ | 6,555 |   |
| Gross profit                                                       |       | 990          |       | 241                 |       | 1,231                   |       |
| Total segment income                                               |       | 805          |       | (385                | )          | 419                     |       |
| Total identifiable assets at end of period                         |       | 878          |       | 17,488              |       | 18,366                  |       |
|                                                               |       |         |       |                |       |                    |       |
| Three months  ended March 31, 2005                                 |       |         |       |                |       |                    |       |
| Revenue to external customers                                      |       | $            | 1,049      |                | $          | 1,794                   |       | $ | 2,843 |   |
| Gross profit (loss)                                                |       | 568          |       | (560                | )          | 8                       |       |
| Income (loss) before interest expense and  discontinued operations |       | 327          |       | (1,149              | )          | (822                    | )          |
| Total  identifiable assets at end of period                        |       | 701          |       | 22,054              |       | 22,755                  |       |

 

Reconciling information betweenreportable segments and the Company’s consolidated totals is shown in thefollowing table:
|                                                                                   | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| ** **                                                                        | ** ** | **(Restated)**                            | ** ** |
| Total segment income  (loss) before minority interest, interest expense           |       | $                                         | 419        |   | $ | (822 | ) |
| General and  administrative expenses, excluded                                    |       | (1,616                                    | )          | (2,157 | ) |
| Consolidated loss  before interest, other income, income taxes, minority interest |       | (1,197                                    | )          | (2,979 | ) |
| Change in value  of warrants, net                                                 |       | (1,289                                    | )          | 133 |   |
| Change in value  of conversion feature                                            |       | (1,783                                    | )          | 1,115 |   |
| Interest expense                                                                  |       | (1,782                                    | )          | (1,537 | ) |
| Interest income                                                                   |       | 2                                         |       | 6 |   |
| Consolidated net loss                                                             |       | $                                         | (6,049     | ) | $ | (3,262 | ) |

 

Included in bulkalloy segment net income for the three months ended March 31, 2006 is $480 ofother income recognized from termination of a distribution agreement in March2006 (see Note 12).

Excluded generaland administrative expenses are attributable to the Company’s corporateheadquarters.  These expenses primarilyinclude corporate salaries, consulting, professional fees and facilitycosts.  Research and development expensesare included in the operating costs of the segment that performed the researchand development.

Revenues from sales to companies in the United Stateswere $2,266 and $1,401 during the three months ended March 31, 2006 and 2005,respectively.  The revenue related to theUnited States of America was earned under defense-related research anddevelopment contracts and sales of coatings products.

As of December 31, 2005, one customer represented 12%,or $288, of the total outstanding trade accounts receivable.  There are no customers with greater than 10%of accounts receivable as of March 31, 2006. One customer represented 13%, or $845 of total sales for the threemonths ended March 31, 2006.   Threecustomers represented 80%, or $2,266, of total sales for the three months endedof March 31, 2005.

During the three months ended March 31, 2006, theCompany had revenues from companies outside of the United States of $4,289 ofwhich $3,087 represented sales to companies located in South Korea.  During the three months ended March 31, 2005,the Company had revenue from sales to companies outside of the United States of$1,442 of which $934 represented sales to companies located in SouthKorea.  The revenue related to sales tocompanies outside of the United States was from bulk alloy products.

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Long-lived assetsinclude net property, plant, and equipment, and net intangible assets. TheCompany had long-lived assets of $1,604 and $2,107 located in the United Statesat March 31, 2006 and December 31, 2005, respectively. The Company hadlong-lived assets of $12,678 and $12,846 located in South Korea at March 31,2006 and December 31, 2005, respectively.

Reconcilinginformation between reportable segments and the Company’s consolidated totalsis shown in the following table:
|                                            | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2006**           | ** ** |
| Total segment assets                       |       | $                  | 18,366     |   |
| Cash and cash  equivalents                 |       | 1,263              |       |
| Prepaid expenses  and other current assets |       | 561                |       |
| Other property, plant  and equipment       |       | 403                |       |
| Intangibles, net                           |       | 1,196              |       |
| Other assets                               |       | 547                |       |
| Total Consolidated  Assets                 |       | $                  | 22,336     |   |

 

Assets excluded from segment assets include assetsattributable to the Company’s corporate headquarters.  The Company’s largest assets consist of cashand intangible assets, which consist primarily of the Company’s patents andtrademarks.

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

Basic earnings per share (“EPS”) is computed bydividing earnings (loss) attributable to common shareholders by the weighted averagenumber of common shares outstanding for the periods. Diluted EPS reflects thepotential dilution of securities that could share in the earnings.

Options to purchase 7,630,723 shares of common stockat prices ranging from $0.77 to $15.00 per share were outstanding at March 31,2006, but were not included in the computation of diluted EPS for the sameperiod because the inclusion would have been antidilutive.  Warrants to purchase 3,777,715 shares ofcommon stock at $2.00 per share outstanding at March 31, 2006 were not includedin the computation of diluted EPS for the same period because the inclusionwould have been antidilutive.  7,248,685of convertible shares from the senior convertible debt were not included in thecomputation of diluted EPS for the same period because the inclusion would havebeen antidilutive.

**12.      Commitmentsand Contingencies**

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

The Company andcertain of the present and former officers and directors were named asdefendants in nine purported class action complaints filed in the United StatesDistrict Court for the Middle District of Florida, Tampa Division, and theCentral District of California, Southern Division, alleging violations ofSections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)of the Securities Exchange Act of 1934 and Rule 10b-5 promulgatedthereunder.  In August 2004, fourcomplaints were consolidated in the Middle District of Florida under thecaption*Primavera Investors v. LiquidmetalTechnologies, Inc., et al.*, Case No. 8:04-CV-919-T-23EAJ. John Lee,Chris Cowley, Dwight Mamanteo, Scott Purcell and Mark Rabold were appointedco-lead plaintiffs (the “Lead Plaintiffs”), but Mr. Mamanteo laterwithdrew.  In September 2004, the fivecomplaints filed in the Central District of California were transferred to theMiddle District of Florida for consolidation with the*Primavera Investors* action. The Lead Plaintiffs served their Consolidated Amended Class ActionComplaint on January 12, 2005.  TheAmended Complaint alleges that the Prospectus issued in connection with ourinitial public offering in May 2002 contained material misrepresentations andomissions regarding our historical financial condition

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and regarding apersonal stock transaction by our former chief executive officer.  The Lead Plaintiffs further generally allegethat during the proposed Class Period of May 21, 2002, through May 13, 2004,the defendants engaged in improper revenue recognition with respect to certainof our business transactions, failed to maintain adequate internal controls,and knowingly disclosed unrealistic but favorable information about marketdemand for and commercial viability of our products to artificially inflate thevalue of our stock. The Amended Complaint seeks unspecified compensatorydamages and other relief.  The Company,along with other defendants, filed a Motion to Dismiss Plaintiffs’ ConsolidatedAmended Class Action Complaint in March 2005.  TheMotion to Dismiss was denied in December 2005, and the defendants servedtheir Answer and Affirmative Defenses to the Consolidated Amended Class ActionComplaint on December 16, 2005.  The Lead Plaintiffs Motion for ClassCertification was presently due in April 2006.

In addition to theabove, certain of present and former officers and directors, as wellas the Company as a nominal defendant, have been named in threeshareholder derivative actions.  Twoshareholder derivative complaints were filed in California state court styled*Brian Clair, Derivatively on Behalf of LiquidmetalTechnologies, Inc. v. John Kang, et al.*, Case No. 04CC00551, and*Joseph Durgin, Derivatively on Behalf of LiquidmetalTechnologies, Inc. v. John Kang, et al.*, Case No. 04CC00553, both commencedin the Superior Court of Orange County, California.   A thirdshareholder derivative complaint was filed in the United States DistrictCourt for the Middle District of Florida, Tampa Division, styled*Robert Story v. John Kang, et al.*, CaseNo. 8:04-CV-1587-T-23TBM.  Theseshareholder derivative lawsuits allege that the defendants breached variousfiduciary duties and otherwise violated state law based primarily upon the sameunderlying facts and circumstances as alleged in the federal shareholder classaction.  The plaintiffs seek unspecifiedcompensatory damages, restitution and disgorgement of profits, equitable and/orinjunctive relief as permitted by law and other relief.

The twoshareholder derivative complaints in California state court have beenconsolidated.  The Company, along withother defendants, have thrice succeeded in having the Plaintiffs’ complaintsdismissed for their failure to adequately plead demand futility. Most recently, on September 15, 2005, we, along with other defendants, filed ademurrer to the Plaintiffs’ Consolidated Second Amended ShareholderDerivative Complaint dated August 16, 2005.  In hearingson October 19, 2005, and January 20, 2006, the presiding judgesustained the demurrer, dismissing the second amended complaint but giving theplaintiffs until February 3, 2006, within which to serve a thirdamended complaint.  The plaintiffs filed their Consolidated Third AmendedShareholder Derivative Complaint on February 3, 2006.  The Company anticipates filing a demurer, seekingdismissal of the third amended complaint.

In the Floridaderivative action, the Plaintiff filed a First Amended Shareholder DerivativeComplaint on November 22, 2004.  The Company, along withother defendants, filed a Motion to Dismiss in December 2004, towhich the Plaintiff responded in opposition in February 2005.  On January20, 2006, the presiding judge granted our Motion to Dismiss, dismissing thecomplaint based upon the plaintiff’s failure to adequately plead futility.  On February 17, 2006, the plaintiff filed itsNotice of Appeal of the Court’s Order granting the Motion toDismiss.  The plaintiff’s initial brief is presently due on April 4,2006.

In April 2006, theCompany reached agreements in principal to settle the Company’s consolidatedsecurities class action and shareholder derivative actions (see Note 14).

In March 1996, the Company entered into a distributionagreement whereby it granted to a third party exclusive rights to market andsell golf products incorporating Liquidmetal Technology to certain Japanesesporting equipment companies.  The thirdparty paid the Company a $1,000 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.  The remainingunearned distribution fee of $830 has not been refunded.  On March 28, 2003, the distribution agreementwas terminated 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 was to be applied to golfequipment shipped by the Company or its affiliates during the period beginningon March 28, 2003 and ending on March 28, 2006. If, by March 28, 2006, the Company has not paid $350 in commissionpayments, the balance between commission paid and $350 will be paid by April30, 2006, thereby guaranteeing the third party a $350 minimum payment duringthe term of the agreement.  As ofDecember 31, 2005, the unearned distribution fee remained unchanged at$830.  As of March 31, 2006, the Companyhas not paid the minimum commission and accrued $350 from the unearneddistribution fee for minimum payments due in accounts payable and accruedliabilities.  Further, the Companyrecognized net balance of the

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unearned distribution fee of $480 as other incomeduring the three months ended March 31, 2006. The Company is currently is inthe process of renegotiating the distribution agreement with the same thirdparty to settle the balance.

**13.    RelatedParty Transactions**

In June 2003, the Company entered into an exclusive,ten-year license agreement with LLPG, Inc. (“LLPG”), a corporation headed by,Jack Chitayat, a former director of the Company.  Under the terms of the agreement, LLPG hasthe right to commercialize Liquidmetal alloys, particularly precious-metalbased compositions, in jewelry and high-end luxury product markets.  The Company, in turn, will receive royaltypayments over the life of the contract on all Liquidmetal products produced andsold by LLPG.

We are aparty to a consulting agreement with Chitnis Consulting, Inc., which is owned100% by Shekhar Chitnis, a former director and executive officer of ourcompany.  Under this agreement, we haveengaged Chitnis Consulting to provide consulting services on an as-needed basisthrough December 31, 2005.  On January 1,2006, the term of the agreement was extended to December 31, 2006.  During the three months ended March 31, 2006and 2005, we incurred $0 and $13 in consulting fees from Chitnis Consulting.

We are a party toa consulting agreement with William Johnson, a board member.  Under this agreement, Mr. Johnson providesconsulting services on an as-needed basis through 2004 as it relates tomarketing and development Liquidmetal alloy. In April 2006, the Company entered into an agreement with Mr. Johnsoneffective from January 1, 2006 through December 31, 2006.  During the three months ended March 31, 2006and 2005, we incurred $15 and $15 in consulting fees from Mr. Johnson,respectively.

In November 2004, we entered into anagreement with John Kang, our Chairman, President, and Chief Executive Officer,in which Mr. Kang agreed that certain stock transactions by him in 2002involving our common stock should have resulted in a liability under Section16(b) of the Securities Exchange Act of 1934, as amended (“Section 16(b)”).  These transactions include Mr. Kang’s privatesale of 285,715 shares of his personal Liquidmetal Technologies common stock toGrowell Metal Co., Ltd. in February 2002, prior to our initial publicoffering.  They also include Mr. Kang’ssubsequent indirect purchase and disposition of Liquidmetal Technologies commonstock in order to satisfy a personal agreement Mr. Kang made to Growell Metalin February 2002 regarding the guaranteed minimum value of the stock purchasedby Growell Metal in February 2002 (the purchases and dispositions incident tothis agreement occurred in August and November 2002, respectively).  Lastly, the transactions include open-marketpurchases of an aggregate of 89,300 shares of our common stock made by Mr. Kangin August 2002.

The Audit Committee of our Board of Directorsconducted an independent inquiry into the above-described transactions with theaid of independent legal counsel and, as a result of such inquiry, the AuditCommittee concluded that the transactions should have resulted in a liabilityto the Company under Section 16(b) in the amount of $302.  Mr. Kang has acknowledged this liability, andin an agreement negotiated between Mr. Kang and the Audit Committee andapproved by the full Board, Mr. Kang will pay this liability through periodicinstallments in 2005 and 2006.  As aresult, the Company accrued for the $302 receivable in other assets and otherincome as of December 31, 2004.  Theabove-described transactions involving Growell Metal was reported ona new Form 4 filed by Mr. Kang on November 15, 2004, and the open-marketpurchases were previously reported on a timely basis in August 2002.  As of December 31, 2005, the outstandingamount of the receivable was $235, which is included in other assets, and hasremained unchanged as of March 31, 2006.

**14. Subsequent Events**

In April 2006, the Company has reached agreements inprinciple to settle the Company’s previously-disclosed consolidated securitiesclass action and shareholder derivative actions (see Note 12).

If approved by thecourts, the agreements would settle the consolidated class action litigation *entitled Primavera Investors v. Liquidmetal Technologies, Inc., et al.*,the consolidated shareholder derivative actions entitled *Brian Clair,Derivatively on Behalf of Liquidmetal Technologies, Inc. v. John Kang, et al*.and *Joseph Durgin, Derivatively on Behalf ofLiquidmetal Technologies, Inc. v. John Kang, et al*., and theshareholder derivative action entitled *Robert Story v. John Kang,et al.,*

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pending in theUnited States District Court for the Middle District of Florida, Tampa Division,the Superior Court of Orange County, California, and the United States DistrictCourt for the Middle District of Florida, Tampa Division, respectively. Theconsolidated class action arose from a number of lawsuits filed in 2004 underthe federal securities laws against Liquidmetal and certain of its former andcurrent directors and officers. The derivative actions also arose from lawsuitsoriginally filed in 2004 and was based upon the same facts and circumstancesunderlying the class action.

As part of theagreements, Liquidmetal’s directors’ and officers’ liability insurance carrierswill contribute a total of $7,500 to settle all of the actions: $7,025 for theconsolidated class action and $475 for the two derivative actions. The fundspaid to settle the consolidated class action will be principally paid into anescrow account within a specified period of time after the federal court grantspreliminary approval of the settlement. The funds will be disbursed to certainpurchasers of Liquidmetal securities according to a distribution plan to bedevised and approved by the federal court. In addition, Liquidmetal will committo maintaining or implementing various corporate governance measures inconnection with the settlement of the derivative actions.

Taking into account theinsurance contribution, the net cost of the settlement to the company should beapproximately $500, which is the insurance deductible the company paid overseveral quarters ending in the third quarter of 2005, and which the Companypreviously recorded as a charge.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

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

*Thismanagement’s discussion and analysis, as well as other sections of this reporton Form 10-Q, may contain “forward-looking statements” that involve risksand uncertainties, including statements regarding our plans, future events,objectives, expectations, forecasts, or assumptions. Any statement that is nota statement of historical fact is a forward-looking statement, and in somecases, words such as “believe,” “estimate,” “ project,” “expect,” “intend,” “may,”“anticipate,” “plans,” “seeks,” and similar expressions identifyforward-looking statements. These statements involve risks and uncertaintiesthat could cause actual outcomes and results to differ materially from theanticipated outcomes or results, and undue reliance should not be placed onthese statements. These risks and uncertainties include, but are not limitedto, the matters discussed under the caption “Factors Affecting Future Results”in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005and other risks and uncertainties discussed in filings made with the Securitiesand Exchange Commission (including risks described in subsequent reports onForm 10-Q, Form 10-K, Form 8-K, and other filings). LiquidmetalTechnologies disclaims any intention or obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents, or otherwise.*

**Overview**

We are a materialstechnology company that develops and commercializes products made fromamorphous alloys.  Our Liquidmetal®family of alloys consists of a variety of coatings, powders, bulk alloys, andcomposites that utilize the advantages offered by amorphous alloy technology.  We develop, manufacture, and sell productsand components from bulk amorphous alloys that are incorporated into thefinished goods of our customers, and we also market and sell amorphous alloyindustrial coatings.  We also partnerwith third-party licensees and distributors to develop and commercialize Liquidmetalalloy products.  We have the exclusiveright to develop, manufacture, and sell what we believe are the onlycommercially viable bulk amorphous alloys.

Amorphous alloys are unique materialsthat are distinguished by their ability to retain a random atomic structurewhen they solidify, in contrast to the crystalline atomic structure that formsin ordinary metals and alloys when they solidify. Liquidmetal alloys possess acombination of performance, processing, and cost advantages that we believe makesthem preferable to other materials in a variety of applications. The amorphousatomic structure of our alloys enables them to overcome certain performancelimitations caused by inherent weaknesses in crystalline atomic structures,thus facilitating performance and processing characteristics superior in manyways to those of their crystalline counterparts. For example, ourzirconium-titanium Liquidmetal alloys are approximately 250% stronger thancommonly used titanium alloys, such as Ti-6Al-4V, but they have processingcharacteristics similar in many respects to plastics. We believe theseadvantages could result in Liquidmetal alloys supplanting other incumbentmaterials in a wide variety of applications. Moreover, we believe theseadvantages will enable the introduction of entirely new products andapplications that are not possible or commercially viable with other materials.

Our revenues are derived from twoprincipal operating segments: Liquidmetal alloy industrial coatings and bulkLiquidmetal alloy products.  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 in coal-burning power plants. The historicaloperating information for fiscal year 2001 is based substantially on sales ofLiquidmetal alloy coatings. In the second half of 2002, we began producing bulkLiquidmetal alloy components and products for incorporation into our customers’finished goods. Bulk Liquidmetal alloy segment revenue includes sales of partsor components 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.  Weexpect that these sources of revenue will continue to significantly change the characterof our revenue mix.

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

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Selling, general, andadministrative expenses currently consist primarily of salaries and relatedbenefits, severance costs, travel, consulting and professional fees,depreciation and amortization, insurance, office and administrative expenses,and other expenses related to our operations.

Research anddevelopment expenses represent salaries, related benefits expense, stock-basedcompensation, depreciation of research equipment, consulting and contractservices, expenses incurred for the design and testing of new processingmethods, expenses for the development of sample and prototype products, andother expenses related to the research and development of Liquidmetal alloys.Costs associated with research and development activities are expensed asincurred. We plan to enhance our competitive position by improving our existingtechnologies and developing advances in amorphous alloy technologies. Webelieve that our research and development efforts will focus on the discoveryof new alloy compositions, the development of improved processing technology,and the identification of new applications for our alloys.

On August 4, 2004,the Company established a plant in the city of Weihai in Shandong province ofChina under Weihai Liquidmetal Company Limited, which is 100% owned byLiquidmetal Korea, to facilitate our bulk alloy manufacturing business.  Weihai Liquidmetal is consolidated intoLiquidmetal Technologies with all intercompany transactions eliminated.

The followingdiscussion and analysis of our financial condition and results of operationsfocuses on the historical results of our continuing operations.

**CriticalAccounting Policies and Estimates**

The preparation ofcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires us to makeestimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates and assumptions are based on historical experience and various otherfactors that are believed to be reasonable under the circumstances.  Actual results could differ materially fromthese estimates under different assumptions or conditions.

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

·     Exchange rate fluctuations

·     Warrantyaccrual

·     Allowance for doubtful accounts

·     Inventories at lower of cost or netrealizable value

·     Deferred tax assets

·     Valuationof derivatives of warrants and embedded conversion features

Our Annual Reporton Form 10-K for the year ended December 31, 2005,contains further discussionson our critical accounting policies and estimates.

The companyadopted Statement of Financial Accounting Standards No. 123,Share-Based Payment (“SFAS 123R”), on January 1, 2006. This new standardrequires companies to expense the fair value of employee stock options andsimilar awards. The company adopted SFAS 123R using the modified prospectivetransition method. Therefore, stock based compensation expense measured in accordancewith SFAS 123R was recorded during the first quarter of 2006, but the prioryear consolidated statement of income was not restated. The adoption of SFAS123R resulted in incremental expense in the first quarter of 2006 of $0.2million. See Note 1 for further information.

**Resultsof Operations**

Comparisonof the three months ended March 31, 2006 and 2005

*Revenue*. Revenue increased $3.8 million to$6.6 million for the three months ended March 31, 2006 from $2.8 millionfor the three months ended March 31, 2005. The increase consisted of an increase of $2.2 million from the sales andprototyping of parts manufactured from bulk Liquidmetal alloys to consumerelectronics customers as a result of increased demand from

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electroniccasings applications, an increase of $0.3 million from our research anddevelopment contracts, and an increase of $1.3 million from sales of ourcoatings products as a result of increase in demand from oil drillingapplications.

*Costof Sales*. Cost of sales increased to $5.3 million, or 81% ofrevenue, for the three months ended March 31, 2006 from $2.8 million, or100% of revenue, for the three months ended March 31, 2005.  The decrease in cost of sales as a percentageof revenue was a result of continued maturing of our manufacturing process,which represents the Company’s efforts to manage costs and focus on our corebusiness, and an increase in revenues generated from our higher margin coatingsproducts. Significant portions of our manufacturing costs continue to remainfixed.  We believe that highermanufacturing volumes and greater mix of higher-margin products in the futurewill cause the gross profit to improve over time.  The cost to manufacture parts from our bulkLiquidmetal alloys is variable and differs based on the unique design of eachproduct.  However, the cost of sales forthe products sold by the coatings business segment is generally consistentbecause the Liquidmetal coatings products are produced by third parties andsold wholesale to various industries.

*Selling,General, and Administrative Expenses*. Selling, general, andadministrative expenses increased to $2.7 million, or 41% of revenue, forthe three months ended March 31, 2006 from $2.6 million, or 91% ofrevenue, for the three months ended March 31, 2005. This increase was primarilya result of increase wages and compensation of $0.7 million primarily fromrecognition of stock based compensation expense during the quarter andincreases in employees, advertising and promotions costs of $0.1 millionprimarily from higher commissions costs, travel expenses of $0.1 million,offset by decreases in professional services by $0.2 million, decrease ininsurance costs of $0.4 million, and decrease in depreciation expenses of $0.1million.

*Researchand Development Expenses*. Research and development expensesdecreased to $0.2 million, or 3% of revenue, for the three months endedMarch 31, 2006 from $0.4 million, or 14% of revenue, for the three monthsended March 31, 2005. The Company continues to perform research and developmentof new Liquidmetal alloys and related processing capabilities, develop newmanufacturing techniques, and contract with consultants to advance thedevelopment of Liquidmetal alloys.  Thedecrease was primarily due to decreases in salaries, wages and related costs of$0.2 million

*Changein Value of Warrants. *Change in value of warrants decreased to anet loss of $1.3 million, or 20% of revenue, for the three months ended March31, 2006 from a net gain of $0.1 million, or 4% of revenue, for the three monthsended March 31, 2005.  The change invalue of warrant consisted of warrants issued from the senior convertible debtfunded in March 2004 and exchanged in August 2004, convertible debt funded inJune 2005, senior convertible debt funded in August 2005, and subordinatedpromissory note funded in March 2006 primarily as a result of fluctuations inour stock price.

*Changein Value of Conversion Feature.*Change in the value of our conversion feature liability from our seniorconvertible debt funded in March 2004 and exchanged in August 2004 and August2005 resulted in a Change in value ofconversion feature net loss of $1.8 million, or 27% of revenue, during thethree months ended March 31, 2006 and a gain of $1.1 million, or 39% ofrevenue, for the three months ended March 31, 2005, primarily due tofluctuations in our stock price.

*OtherIncome.*Other income was $480, or 7% of revenue, for thethree months ended March 31, 2006 from net gain recognized from termination ofa distribution agreement with a Japanese sporting goods distributor originallyentered into in March 1996.  There wereno amounts recognized as other income during the three months ended March 31,2005.

*InterestExpense*. Interest expense was $1.7 million, or 27% ofrevenue, for the three months ended March 31, 2006 and was $1.5 million, or 28%of revenue, for the three months ended March 31, 2005.  Interest expense consists primarily ofinterest accrued on the Kookmin Bank loan funded in February 2003, seniorconvertible debt funded in March 2004 and exchanged in August 2004, seniorconvertible debt funded in August 2005, subordinated promissory note funded inMarch 2006, fees charged from short-term borrowings under the April 2005factoring, loan, and security agreement, as well as amortization of debtissuance costs and discount on the convertible debt.  The increase was primarily due to additionalamortization of debt issuance costs and discount on debt funded in June 2005and August 2005 as well as fees from borrowings made under the April 2005factoring, loan, and security agreement.

*Interest Income.* Interest income was $2 thousand for the threemonths ended March 31, 2006 and was $6 thousand for the three months endedMarch 31, 2005 from interest earned on cash deposits.

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**Liquidityand Capital Resources**

Our cash used for operating activities was$1.2 million for the three months ended March 31, 2006 and$1.1 million for the three months ended March 31, 2005.  Our working deficit increased from $11.0million at December 31, 2005 to $12.0 million at March 31, 2006.  The Company’s working deficit increase of$1.0 million was primarily attributable to increase in accounts payable andaccrued liability of $1.4 million, increase in short term debt of $1.7 million,increase in warrant liabilities of $1.4 million, increase in conversion featureliability of $1.8 million, offset by increase in trade accounts receivable of$1.1 million, decrease in settlement payable of $3.3 million, and decrease indeferred revenue of $0.9 million.

Our cash used in investing activities was $0.2 millionfor the three months ended March 31, 2006 for the acquisition of property andequipment and investments in patents and trademarks.

Our cash provided by financing activities was $1.4million for the three months ended March 31, 2006, which consists of $1.0million in proceeds from borrowings from our subordinated promissory noteexecuted in March 2006 and $3.0 million in proceeds from factoring agreementexecuted in April 2005, offset by $2.6 million on repayment of borrowings.  The proceeds from borrowings have been usedto meet working capital requirements.

Our capital requirements during the nexttwelve months will depend on numerous factors, including the success ofexisting products either in manufacturing or development, the development ofnew applications for Liquidmetal alloys, and the resources we devote to developand support our Liquidmetal alloy products, the success of pursuing strategiclicensing and funded product development relationships with external partners.

We have experienced significant operating losses sinceour inception. Our net loss for the three months ended March 31, 2006 and 2005was $6.0 million and $3.2 million, respectively. In the audit report on ourfinancial statements for our fiscal years ended December 31, 2005 and 2004, ourauditors included a going-concern qualification indicating that our significantoperating losses and working capital deficit cause substantial doubt about ourability to continue as a going concern. By issuing an opinion stating thatthere is substantial doubt about our ability to continue as a going concern,our auditors have indicated that they are uncertain as to whether we have thecapability to continue our operations without additional funding.  Accordingly, we anticipate that we will needadditional funding during the next 12 months, and we plan to seek to raise suchfunds through public or private equity financing, bank debt financing, or fromother sources.  Specifically, weanticipate that we could need $1 to $5 million over the next twelvemonths to pursue our current operating plan, although this amount maybe lower depending on the orders we receive for our products.  The amount of funding that we plan to seekand the timing of such fundraising efforts will depend on the extent to whichwe are able to increase revenues through obtaining additional purchase ordersfor our products, particularly components for cellular phones and flash memorydrive casings, and our ability to continue to improve our manufacturingprocesses.  We evaluate our workingcapital needs and operating plan assumptions on a monthly basis to determinewhether any adjustment to our cash and liquidity outlook is warranted, and wealso review potential sources of financing on an ongoing basis.  However, adequate funds may not be availablewhen needed, and if we raise additional funds by issuing equity securities,existing stockholders may be diluted.  Ifwe don’t receive sufficient funding to operate under our current plan, weintend to reduce operations and expenses and shift our focus to the pursuit oflicensing transactions and other strategic transactions that are less capitalintensive.

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**ContractualObligations**

The following table summarizes the Company’s obligations andcommitments as of March 31, 2006:

**PaymentsDue by Period (in thousands)**
|                                  | ** ** | ** ** | ** ** | **Less Than** | ** ** | ** **    | ** ** | ** **    | ** ** | ** **        | ** ** |
|----------------------------------|------------|------------|------------|---------------|------------|---------------|------------|---------------|------------|-------------------|------------|
| ** **                       | ** ** | **Total**  | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5 Years** | ** ** |
| Contractual Cash Obligations (1) |       |       |       |          |       |          |       |          |       |              |       |
| Long-term debt (2)               |       | 14,756     |       | 1,391         |       | 13,365        |       | —        |       | —            |       |
| Short-term debt (3)              |       | 2,286      |       | 2,286         |       | —        |       | —        |       | —            |       |
| Capital lease obligation (4)     |       | 42         |       | 42            |       | —        |       | —        |       | —            |       |
| Operating leases and rents       |       | 1,009      |       | 492           |       | 516           |       | 1             |       | —            |       |
| Consulting services payable      |       | 86         |       | 86            |       | —        |       | —        |       | —            |       |
| Dongyang                         |       | 11         |       | 11            |       | —        |       | —        |       | —            |       |
| Nichimen                         |       | 350        |       | 350           |       | —        |       | —        |       | —            |       |
|                             |       | 18,540     |       | 4,658         |       | 13,881        |       | 1             |       | —            |       |

 

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(1) Contractual cash obligations include Long-TermDebt comprised of $2,310 of Senior Convertible Notes issued in 2004 and $9,878of Convertible Notes issued in 2005, Short-Term Debt comprised of $1,286advances received under factoring, loan, and security agreement, $1,000 ofunsecured subordinated promissory note issued in 2006, future minimum leasepayments under capital and operating leases, and purchase commitments fromconsultants, payments due from our discontinued equipment manufacturingbusiness (Dongyang), and minimum payments due under a distribution agreement(Nichimen).

(2) Does not include interest payments of $1,342;and un-amortized discounts for conversion feature and warrants of $7,004 of ourconvertible notes.

(3) Does not include minimum interest and feepayments of $30.

(4) Includes imputed interest of $1.

**OffBalance Sheet Arrangements**

An off-balance sheet arrangement is anytransaction, agreement or other contractual arrangement involving an unconsolidatedentity under which a company has (1) made guarantees, (2) a retained or acontingent interest in transferred assets, (3) an obligation under derivativeinstruments classified as equity, or (4) any obligation arising out of amaterial variable interest in an unconsolidated entity that provides financing,liquidity, market risk or credit risk support to the company, or that engagesin leasing, hedging, or research and development arrangements with the company.

We have madeno arrangements of the types described in any of the categories that may have amaterial current or future effect on our financial condition, liquidity orresults of operations.

**Item 3 – Quantitative and Qualitative Disclosures aboutMarket Risk**

We areexposed to various markets risks in conducting the business of the Company, andwe anticipate that this exposure will increase as a result of our plannedgrowth.  In an effort to mitigate lossesassociated with these risks, we may at times enter into derivative financialinstruments, although we have not historically done so.  These may take the form of forward salescontracts, option contracts, foreign currency exchange contracts, and interestrate swaps.  We have not, and do notintend to, engage in the practice of trading derivative securities for profit.

*Interest Rates.*  We are exposed to market risks relating tochanges in interest rates.  Some of theproceeds of our initial public offering are invested in short-term,interest-bearing, investment grade securities. The value of these securities will be subject to interest rate risk andcould fall in value if interest rates rise.

*Commodity Prices. *We are exposed to pricerisk related to anticipated purchases of certain commodities used as rawmaterials 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

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contacts in the future as our business grows and asour purchases of these raw materials increase.

*Foreign Exchange 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 the exchange rates of the South Korean wonto the U.S. dollar will affect our costs of goods sold and operating marginsand could result in exchange losses. Although we do not currently enter into foreign exchange hedge transactions,we may do so in the future as our business grows.

**Item 4 —Controls and Procedures**

Evaluationof disclosure controls and procedures**.**  As directed by Section 404 of theSarbanes-Oxley Act of 2002, or SOX, the SEC has adopted rules requiring publiccompanies to include a report of management on the company’s internal controlsover financial reporting in their annual reports on Form 10-K. In addition, thepublic accounting firm auditing a public company’s financial statements mustattest to and report on management’s assessment of the effectiveness of thecompany’s internal controls over financial reporting. Although theserequirements were first applicable to our annual report on Form 10-K for ourfiscal year ending December 31, 2004, we were unable to comply with theserequirements for such fiscal year. As disclosed in our amended Form 10-K filedwith the SEC on May 10, 2005, the time and resources necessary to complete therestatement of prior periods’ financial statements delayed our ability tocomplete the internal documentation, assessment and evaluation of internalcontrol over financial reporting, all of which are required to be undertaken tocomply with Section 404 of SOX. This delay prevented our independent auditorfrom being able to satisfactorily complete a timely audit of our internalcontrol over financial reporting as of December 31, 2004.

Dueto these delays, we and our independent auditor determined that it would not bepossible to complete the management’s assessment and auditor’s audit of ourinternal controls over financial reporting as of December 31, 2004, andaccordingly our independent auditor has issued a disclaimer of opinion withrespect to our internal control over financial reporting as of December 31,2004, and such disclaimer was filed with our amended Form 10-K filed on May 10,2005. The filing of this disclaimer does not comply with the SEC’s rules andregulations under Section 404, and this noncompliance has resulted in us beingin violation of Section 13(a) under the Securities Exchange Act of 1934.Section 13(a) establishes the general requirement that public companies mustfile with the SEC, in accordance with such rules and regulations as the SEC mayprescribe, such information, documents, and reports as the SEC may from time totime require for the protection of investors, including Form 10-Ks and 10-Qs.

Ingeneral, the SEC has broad authority under the Securities Exchange Act of 1934to institute investigations, to seek injunctions, to seek monetary penalties,and to otherwise pursue enforcement actions for violations of Section 13(a),including a failure to file a Form 10-K or for the omission of necessarystatements in a Form 10-K.  Therefore, aviolation under Section 404 of SOX or Section 13(a) of the Securities ExchangeAct of 1934 could potentially subject an issuer to these same investigationsand penalties. Section 404 of SOX is a relatively new legal requirement, andthere is very little precedent establishing the consequences or appropriateresponse to a public company’s failure to comply with Section 404.  Accordingly, we cannot predict what action,if any, the SEC may take against our company as a result of a failure to becompliant with our obligations under Section 404 of  SOX or Section 13(a) of the SecuritiesExchange Act of 1934.

EffectiveDecember 27, 2005, the SEC announced final rulings on revisions to acceleratedfiler definition and deadlines for periodic reports.  The ruling revised the definition of the term“accelerated filer” to permit an accelerated filer that has voting and non-votingcommon equity held by non-affiliates of less than $50 million to exitaccelerated filer status at the end of the fiscal year in which its equityfalls below $50 million and to file its annual report for that year andsubsequent periodic reports on a non-accelerated basis.  As of the fiscal year ended December 31,2005, we are considered an accelerated filer and are required to comply withSOX 404 requirements for the 2005 fiscal year.

Inaddition to the foregoing, although our common stock was admitted to the OTCBulletin Board for quotation on June 15, 2005, as a result of our noncompliancewith Section 404 for our 2005 fiscal year, it may not have been appropriate forthe OTC Bulletin Board to admit our common stock for quotation on June 15,2005.  Consequently, there is noassurance that our common stock will remain eligible for quotation on the OTCBulletin Board.

OnJanuary 16, 2006, our management completed and concluded its documentation,assessment and evaluation of its internal controls over financial reporting asof December 31, 2005.  During the courseof its assessment, management identified the

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controldeficiencies described in Item 9A of our Form 10-K for the 2005 fiscalyear.  However, our independent auditors,Stonefield Josephson Inc., resigned on December 1, 2005, and on January 20,2006, we engaged Choi, Kim & Park LLP (“CKP”) as our new independentregistered public accounting firm.  Whilewe have advised CKP of the foregoing weaknesses in internal controls, due tothe untimeliness of the foregoing events, CKP was unable to conduct an audit ofour internal control over financial reporting pursuant to Section 404 of SOX,and thus, have issued a disclaimer of an opinion on the company’s internalcontrol over financial reporting as of December 31, 2005.

As of the end of the period covered by this report, anevaluation was carried out under the supervision and with the participation ofthe company’s management, including its Chief Executive Officer and ChiefFinancial Officer, of its disclosure controls and procedures (as defined byRules 13a — 15(e) and 15d-15(e) under the Securities ExchangeAct of 1934). Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the design and operation of these disclosurecontrols and procedures were effective.

Changes ininternal controls.** **There has been no change in theregistrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control overfinancial reporting.

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**PART IIOTHER INFORMATION**

**Item1 – Legal Proceedings**

In April 2006, the Company reached agreements inprinciple to settle the Company’s previously-disclosed consolidated securitiesclass action and shareholder derivative actions.

If approved by thecourts, the agreements would settle the consolidated class action litigation *entitled Primavera Investors v. Liquidmetal Technologies, Inc., et al.*,the consolidated shareholder derivative actions entitled *Brian Clair,Derivatively on Behalf of Liquidmetal Technologies, Inc. v. John Kang, et al*.and *Joseph Durgin, Derivatively on Behalf ofLiquidmetal Technologies, Inc. v. John Kang, et al*., and the shareholderderivative action entitled *Robert Story v. John Kang,et al.,* pending in the United States District Court for the MiddleDistrict of Florida, Tampa Division, the Superior Court of Orange County,California, and the United States District Court for the Middle District ofFlorida, Tampa Division, respectively. The consolidated class action arose froma number of lawsuits filed in 2004 under the federal securities laws againstThe Company and certain of its former and current directors and officers. Thederivative actions also arose from lawsuits originally filed in 2004 and wasbased upon the same facts and circumstances underlying the class action.

As part of theagreements, The Company’s directors’ and officers’ liability insurance carrierswill contribute a total of $7.5 million to settle all of the actions: $7.0million for the consolidated class action and $0.5 million for the twoderivative actions. The funds paid to settle the consolidated class action willbe principally paid into an escrow account within a specified period of timeafter the federal court grants preliminary approval of the settlement. Thefunds will be disbursed to certain purchasers of The Company securitiesaccording to a distribution plan to be devised and approved by the federalcourt. In addition, The Company will commit to maintaining or implementingvarious corporate governance measures in connection with the settlement of thederivative actions.

Taking intoaccount the insurance contribution, the net cost of the settlement to thecompany should be approximately $0.5 million, which is the insurance deductiblethe company paid over several quarters ending in the third quarter of 2005, andwhich the company previously recorded as a charge.

**Item 1A –Risk Factors**

Therehave been no material changes to the risk factors that are included in ourAnnual Report on Form 10-K for the year ended December 31, 2005 that couldaffect our business, results of operations or financial condition.

**Item 2 –Unregistered Sales of Equity Securities and Use of Proceeds**

On March 17, 2006,in exchange for a $1.0 million loan, we issued a $1.0 million 10% subordinatedpromissory note due October 16, 2006 (the “October 2006 Note”) to AtlanticRealty Group, Inc., a company controlled by Jack Chitayat, a former director ofour company.  The October 2006 Note isunsecured and subordinated to all prior indebtedness of the company.  All accrued interest and unpaid principal aredue October 16, 2006.  The proceeds fromthe October 2006 Note were used for working capital purposes.  In connection with the October 2006 Note, weissued warrants to Atlantic Realty to purchase an aggregate amount of up to125,000 shares of common stock exercisable at $2.00 per share.  The warrants will expire on March 17, 2009and include price adjustment provisions for anti-dilution purposes.  There are no registration rights of theshares issuable from the exercise of the warrants.  Further, cashless exercise of the warrants ispermitted.  We claimed exemption fromregistration for this transaction under the Securities Act of 1933, as amended(the “Securities Act”), by virtue of Section 4(2) of the Securities Act. Thegrant of this Note and the accompanying warrant (and the offer ofthe shares issuable upon exercise of the warrant) did not involve anypublic offering, was made without general solicitation or advertising,and Atlantic Realty is an accredited investor with access to allrelevant information necessary to evaluate the investment and represented to usthat the Note, warrant, and underlying shares were being acquired forinvestment.

**Item 3 –Defaults Upon Senior Securities**

None

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

None

**Item 5 –Other Information**

There were no mattersrequired to be disclosed in a current report on Form 8-K during the fiscalquarter covered by this report that were not so disclosed.

**Item 6 –Exhibits**

The followingdocuments are filed as an exhibit to this Report:
| Exhibit Number | ** ** | **Description of Document**                                                                                                                                            |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     | ** ** | ** **                                                                                                                                                             |
| 31.1           |       | Certification of the President and Chief Executive  Officer, Ricardo A. Salas, as required by Section 302 of Sarbanes-Oxley Act  of 2002                               |
|           |       |                                                                                                                                                                   |
| 31.2           |       | Certification of Chief Financial Officer, Young Ham,  as required by Section 302 of Sarbanes-Oxley Act of 2002                                                         |
|           |       |                                                                                                                                                                   |
| 32.1           |       | Certification of Principal Executive Officer,  Ricardo A. Salas, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of Sarbanes-Oxley Act of 2002 |
|           |       |                                                                                                                                                                   |
| 32.2           |       | Certification of Chief Financial Officer, Young Ham,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002            |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.
|                |   | LIQUIDMETAL TECHNOLOGIES                                              |
|---------------------|--------|-----------------------------------------------------------------------|
|                |   | (Registrant)                                                          |
|                |   |                                                                  |
| Date: July 20, 2006 |   | /s/ Ricardo A. Salas                                                  |   |
|                |   | Ricardo A. Salas                                                      |
|                |   | President and  Chief Executive Officer  (Principal Executive Officer) |
|                |   |                                                                  |
| Date: July 20, 2006 |   | /s/ Young Ham                                                         |   |
|                |   | Young Ham                                                             |
|                |   | Chief Financial  Officer                                              |
|                |   | (Principal  Financial and Accounting Officer)                         |

 

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