**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-Q**

 

| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                  |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                    |
| ** ** | ** ** | **For the quarterly  period ended March 31, 2004**                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                          |
| **OR**     |
|       |       |                                                                                                                                                                                                                          |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                 |
|       |       |                                                                                                                                                                                                                          |
| ** ** | ** ** | **For the transition  period from                  to                ** |

 

**Commission File No**.  **001-31332**

 

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**LIQUIDMETAL TECHNOLOGIES, INC.**

(Exact name of Registrantas specified in its charter)

 
| **Delaware**                                                     | ** ** | **20-0121262**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

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

(address of principalexecutive office, zip code)

 

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

 

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Indicate by check mark whether the registrant (1) has filed all 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 o No ý

 

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

 

Yes ý No o

 

As of December 10, 2004, there were 41,609,652 shares of the registrant’scommon stock, $.001 par value, outstanding.

 

 

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**LIQUIDMETALTECHNOLOGIES, INC.**

**FORM10-Q**

**FOR THEQUARTER ENDED****MARCH 31,2004**

 

 

**FORWARD-LOOKINGINFORMATION**

 

Statements in this report concerning the future sales, expenses,profitability, financial resources, product mix, market demand, productdevelopment and other statements in this report concerning the future resultsof operations, financial condition and business of Liquidmetal Technologies,Inc. are “forward-looking” statements as defined in the Securities Act of 1933and Securities Exchange Act of 1934. Investors are cautioned that the Company’sactual results in the future may differ materially from those projected in theforward-looking statements due to risks and uncertainties that exist in theCompany’s operations and business environment, including competition, need forincreased acceptance of products, ability to continue to develop and extend ourbrand identity, ability to anticipate and adapt to a competitive market,ability to effectively manage rapidly expanding operations, amount and timingof operating costs and capital expenditures relating to expansion of ourbusiness, operations and infrastructure, ability to provide superior customerservice, dependence upon key personnel and the like. The Company’s most recentfilings with 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.

 

2

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**TABLE OF CONTENTS**

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

 

 

### **Explanatory Note**

 

We have restated our financial statements for the quarter ended March31,2003 and related disclosures in this report to correct our prematurerecognition of revenues from one transaction with a single customer that weoriginally recorded in March 2003.  Wehave also restated our financial statements for the fiscal year ended December31, 2002 and related disclosures in our annual report on Form 10-K to correcttwo similar premature revenue recognition events with the same customer thatwere originally recorded in September and December 2002.  Upon analysis of the transaction terms andcertain related agreements undertaken by the Company to resolve a dispute withthe customer, we concluded that the transactions were contingent upon continuedperformance by a subsidiary of the Company, which would have precluded revenuerecognition until the contingency ended. Under the terms of a SettlementAgreement reached with the customer on January 10, 2004, the Company reacquiredthe equipment associated with the two fiscal 2002 transactions and recognizedthe revenue associated with the March 2003 transaction in January 2004.  The restatement of our December 31, 2002financial statements resulted in a $1.9 million reduction of revenue and a $1.0million increase in net loss.  Therestatement of our 2003 financial statements resulted in a $3.0 millionreduction of revenue and a $1.7 million increase in net loss for the quarterending March 31, 2003 covered by this report.

 

3

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### **PART I**

### **FINANCIAL INFORMATION**

 

**Item 1****– Financial Statements**

 

**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEET****S**

**(inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                         | ** ** | **March 31,****2004** | ** ** | **December 31,****2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| **ASSETS**                                                                                                                                         | ** ** | ** **            | ** ** | ** **               | ** ** |
| Current Assets:                                                                                                                                    |       |                  |       |                     |       |
| Cash and cash  equivalents                                                                                                                         |       | $                     | 10,749     |                     | $          | 3,127 |   |
| Trade accounts  receivables, net of allowance for doubtful accounts of $163 and $127                                                               |       | 2,950                 |       | 3,748                    |       |
| Inventories                                                                                                                                        |       | 5,653                 |       | 3,731                    |       |
| Prepaid expenses  and other current assets                                                                                                         |       | 454                   |       | 395                      |       |
| Assets available  for sale, net                                                                                                                    |       | 556                   |       | 827                      |       |
| Total current assets                                                                                                                               |       | 20,362                |       | 11,828                   |       |
|                                                                                                                                               |       |                  |       |                     |       |
| Property, Plant  and Equipment, net                                                                                                                |       | 17,450                |       | 17,743                   |       |
| Other  intangibles, net                                                                                                                            |       | 980                   |       | 984                      |       |
| Other assets                                                                                                                                       |       | 862                   |       | 297                      |       |
| Total assets                                                                                                                                       |       | $                     | 39,654     |                     | $          | 30,852 |   |
|                                                                                                                                               |       |                  |       |                     |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                     |       |                  |       |                     |       |
| Current  Liabilities:                                                                                                                              |       |                  |       |                     |       |
| Accounts payable  and accrued expenses                                                                                                             |       | $                     | 7,306      |                     | $          | 3,683 |   |
| Deferred revenue                                                                                                                                   |       | 837                   |       | 1,435                    |       |
| Long-term debt,  current portion, net of discounts of $3,879                                                                                       |       | 6,685                 |       | 1,032                    |       |
| Other  liabilities, current portion                                                                                                                |       | 1,302                 |       | 4,705                    |       |
| Total current  liabilities                                                                                                                         |       | 16,130                |       | 10,855                   |       |
|                                                                                                                                               |       |                  |       |                     |       |
| Long-term debt,  net of current portion                                                                                                            |       | 3,195                 |       | 3,015                    |       |
| Other long-term  liabilities, net of current portion                                                                                               |       | 864                   |       | 814                      |       |
| Total  liabilities                                                                                                                                 |       | 20,189                |       | 14,684                   |       |
| Commitments and  Contingencies:                                                                                                                    |       |                  |       |                     |       |
| Minority  interest                                                                                                                                 |       | —                |       | 5                        |       |
| Shareholders’  Equity:                                                                                                                        |       |                  |       |                     |       |
| Common stock, $0.001  par value; 100,000,000 shares authorized and 41,609,652 issued and  outstanding at March 31, 2004 and December 31, 2003 |       | 42                    |       | 42                       |       |
| Additional paid  in capital                                                                                                                        |       | 132,124               |       | 128,581                  |       |
| Unamortized  stock-based compensation                                                                                                              |       | (7                    | )          | (128                     | )          |
| Accumulated  deficit                                                                                                                               |       | (113,328              | )          | (112,587                 | )          |
| Accumulated  other comprehensive income                                                                                                            |       | 634                   |       | 255                      |       |
| Total  shareholders’ equity                                                                                                                   |       | 19,465                |       | 16,163                   |       |
|                                                                                                                                               |       |                  |       |                     |       |
| Total  liabilities and shareholders’ equity                                                                                                   |       | $                     | 39,654     |                     | $          | 30,852 |   |

 

The accompanying notesare an integral part of the condensed consolidated financial statements.

 

4

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

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

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

**(unaudited)**

 
| ** **                                                                            | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                                                            | ** ** | ** **                                | ** ** | **Restated** | ** ** |
|                                                                                  |       |                                      |       |   |   |
| Revenue                                                                               |       | $                                         | 6,288      |   | $ | 3,199 |   |
| Cost of sales                                                                         |       | 3,557                                     |       | 2,660 |   |
| Gross profit                                                                          |       | 2,731                                     |       | 539 |   |
|                                                                                  |       |                                      |       |   |   |
| Operating  Expenses:                                                                  |       |                                      |       |   |   |
| Selling,  general, and administrative                                                 |       | 3,065                                     |       | 4,062 |   |
| Research and  development                                                             |       | 341                                       |       | 4,038 |   |
| Total operating  expenses                                                             |       | 3,406                                     |       | 8,100 |   |
| Loss from  operations                                                                 |       | (675                                      | )          | (7,561 | ) |
|                                                                                  |       |                                      |       |   |   |
| Other income                                                                          |       | 586                                       |       | — |   |
| Interest expense                                                                      |       | (271                                      | )          | (61 | ) |
| Interest income                                                                       |       | 12                                        |       | 126 |   |
| Loss from  operations before minority interest and income taxes                       |       | (348                                      | )          | (7,496 | ) |
|                                                                                  |       |                                      |       |   |   |
| Income taxes                                                                          |       | —                                    |       | — |   |
| Minority  interest in loss of consolidated subsidiary                                 |       | —                                    |       | (7 | ) |
|                                                                                  |       |                                      |       |   |   |
| Loss from  continuing operations.                                                     |       | (348                                      | )          | (7,503 | ) |
|                                                                                  |       |                                      |       |   |   |
| Income (loss)  from discontinued equipment manufacturing operations, net of tax of $0 |       | (393                                      | )          | 7 |   |
|                                                                                  |       |                                      |       |   |   |
| Net Loss                                                                              |       | (741                                      | )          | (7,496 | ) |
|                                                                                  |       |                                      |       |   |   |
| Other  comprehensive loss:                                                            |       |                                      |       |   |   |
| Foreign exchange  translation gain (loss)                                             |       | 379                                       |       | (940 | ) |
| Unrealized loss  on marketable securities held-for-sale                               |       | —                                    |       | (1,141 | ) |
| Comprehensive  loss                                                                   |       | $                                         | (362       | ) | $ | (9,577 | ) |
|                                                                                  |       |                                      |       |   |   |
| Net loss per  common share – basic and diluted:                                  |       |                                      |       |   |   |
| Loss per share –  continuing operations                                          |       | $                                         | (0.01      | ) | $ | (0.18 | ) |
| Loss per share –  discontinued operations                                        |       | $                                         | (0.01      | ) | $ | (0.00 | ) |
| Loss per share –  basic and diluted                                              |       | $                                         | (0.02      | ) | $ | (0.18 | ) |
|                                                                                  |       |                                      |       |   |   |
| Number of weighted  average shares – basic and diluted                           |       | 41,610                                    |       | 41,390 |   |

 

The accompanying notesare an integral part of the condensed consolidated financial statements.

 

5

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

###### **For the Three Months Ended March 31, 2004**

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

**(unaudited)**

 
| ** **                                         | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid in  Capital** | ** ** | **Unamortized  Stock-option  Based  Compen-  sation** | ** ** | **Accumu-  lated  Deficit** | ** ** | **Accumu-  lated Other  Compre -  hensive  Income** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------|------------|-----------|------------|
|                                               |       |               |       |              |       |                             |       |                                                  |       |                        |       |                                                |       |      |       |
| **Balance,  December 31, 2003**               |       | 41,609,652         |       | $                 | 42         |                             | $          | 128,581                                               |       | $                           | (128       | )                                                   | $          | (112,587  | )          | $ | 255 |   | $ | 16,163 |   |
| Stock-based  compensation                          |       | —             |       | —            |       | 261                              |       | 8                                                     |       | —                      |       | —                                              |       | 269       |       |
| Unamortized  stock-based compensation              |       |               |       | —            |       | (113                             | )          | 113                                                   |       | —                      |       | —                                              |       | —    |       |
| Beneficial  conversion feature of convertible debt |       | —             |       | —            |       | 3,395                            |       | —                                                |       | —                      |       | —                                              |       | 3,395     |       |
| Foreign exchange  translation gain                 |       | —             |       | —            |       | —                           |       | —                                                |       | —                      |       | 379                                                 |       | 379       |       |
| Net loss                                           |       | —             |       | —            |       | —                           |       | —                                                |       | (741                        | )          | —                                              |       | (741      | )          |
| **Balance,  March 31, 2004**                       |       | 41,609,652         |       | $                 | 42         |                             | $          | 132,124                                               |       | $                           | (7         | )                                                   | $          | (113,328  | )          | $ | 634 |   | $ | 19,465 |   |

 

The accompanying notesare an integral part of the condensed consolidated financial statements.

 

6

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**LIQUIDMETALTECHNOLOGIES, INC.  AND SUBSIDIARIES**

 

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

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

**(unaudited)**

 
| ** **                                                                                               | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                                                                               | ** ** | ** **                                | ** ** | **Restated** | ** ** |
|                                                                                                     |       |                                      |       |   |   |
| **Operating  activities:**                                                                               |       |                                      |       |   |   |
| Net loss                                                                                                 |       | $                                         | (741       | ) | $ | (7,496 | ) |
|                                                                                                     |       |                                      |       |   |   |
| Adjustments to  reconcile loss from operations to net cash provided by (used for) operating  activities: |       |                                      |       |   |   |
| Depreciation and  amortization                                                                           |       | 894                                       |       | 1,368 |   |
| Amortization of  debt discount                                                                           |       | 134                                       |       | — |   |
| Stock-based  compensation                                                                                |       | 269                                       |       | 43 |   |
| Bad debt expense                                                                                         |       | 72                                        |       | (243 | ) |
| Warranty expense                                                                                         |       | 57                                        |       | 64 |   |
|                                                                                                     |       |                                      |       |   |   |
| Changes in  operating assets and liabilities:                                                            |       |                                      |       |   |   |
| Accounts  receivable                                                                                     |       | 726                                       |       | 1,086 |   |
| Inventories                                                                                              |       | (1,922                                    | )          | (498 | ) |
| Prepaid expenses  and other current assets                                                               |       | (778                                      | )          | 1,093 |   |
| Other assets                                                                                             |       | (579                                      | )          | 33 |   |
| Accounts payable  and accrued expenses                                                                   |       | 2,983                                     |       | (3,975 | ) |
| Deferred revenue                                                                                         |       | (598                                      | )          | (413 | ) |
| Other  liabilities                                                                                       |       | (2,627                                    | )          | (2 | ) |
| Net cash used  for continuing operations                                                                 |       | (2,110                                    | )          | (8,940 | ) |
|                                                                                                     |       |                                      |       |   |   |
| Net cash  provided by (used for) discontinued operations                                                 |       | 266                                       |       | (1,569 | ) |
| Net cash used  for operating activities                                                                  |       | (1,844                                    | )          | (10,509 | ) |
|                                                                                                     |       |                                      |       |   |   |
| **Investing  Activities:**                                                                               |       |                                      |       |   |   |
| Purchases of  property and equipment                                                                     |       | —                                    |       | (1,858 | ) |
| Investment in  patents and trademarks                                                                    |       | (20                                       | )          | (90 | ) |
| Investment in  marketable securities                                                                     |       | —                                    |       | (1,668 | ) |
| Net cash used  for investing activities                                                                  |       | (20                                       | )          | (3,616 | ) |
|                                                                                                     |       |                                      |       |   |   |
| **Financing  Activities:**                                                                               |       |                                      |       |   |   |
| Proceeds from  borrowings                                                                                |       | 9,924                                     |       | 5,488 |   |
| Repayment of  borrowings                                                                                 |       | (369                                      | )          | (2 | ) |
| Stock options  exercised                                                                                 |       | —                                    |       | 498 |   |
| Net cash  provided by financing activities                                                               |       | 9,555                                     |       | 5,984 |   |
|                                                                                                     |       |                                      |       |   |   |
| Effect of  foreign exchange translation                                                                  |       | (69                                       | )          | 1,327 |   |
| Net increase  (decrease) in cash and cash equivalents                                                    |       | 7,622                                     |       | (6,814 | ) |
|                                                                                                     |       |                                      |       |   |   |
| Cash and cash  equivalents at beginning of period                                                        |       | 3,127                                     |       | 25,058 |   |
| Cash and cash  equivalents at end of period                                                              |       | $                                         | 10,749     |   | $ | 18,244 |   |
|                                                                                                     |       |                                      |       |   |   |
| Supplemental  cash flow information:                                                                     |       |                                      |       |   |   |
| Interest paid                                                                                            |       | $                                         | 86         |   | $ | 34 |   |
| Taxes paid                                                                                               |       | $                                         | —     |   | $ | 57 |   |

 

The accompanying notesare an integral part of the condensed consolidated financial statements.

 

7

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During the three months ended March 31, 2004, the Company sold it’s 51%ownership interest in Dongyang to the 49% minority shareholder, which resultedin a loss of $46 from disposal of discontinued operations as of March 31, 2004.

 

During the three months ended March 31, 2004, the change in the foreignexchange between the U.S. Dollar and the South Korean Won resulted in a $577gain related to property, plant and equipment, net and loss of $129 from notespayable.

 

During the three months ended March 31, 2003, thechange in the foreign exchange between the U.S. Dollar and the South Korean Wonresulted in a $313 gain related to the note payable and $906 loss related toproperty, plant and equipment, net.

 

During the three months ended March 31, 2003, an option holdersurrendered 93,758 shares of the Company’s common stock in-lieu of cash paymentfor the option exercise price of $250 and income taxes payable by the optionholder of $403.  The common sharesreceived in lieu of cash payment were immediately canceled upon receipt of theshares by the Company.

 

The accompanying notesare an integral part of the condensed consolidated financial statements.

 

8

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**LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For theThree Months Ended March 31, 2004 and 2003**

**(inthousands, except share data)**

**(unaudited)**

 

**1.             Basis of Presentation / Descriptionof Business**

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“generallyaccepted accounting principles”) for interim financial information and with theinstructions to Form 10-Q.  Accordingly,they do not include all of the information and notes required by generallyaccepted accounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting only of normal recurring accruals) considered necessary for a fairpresentation have been included.  Inaddition, certain reclassifications have been made for consistent presentation.  Operating results for the three months endedMarch 31, 2004 are not necessarily indicative of the results that may beexpected for any future periods or the year ending December 31, 2004.  The accompanying unaudited condensedconsolidated financial statements should be read in conjunction with theCompany’s Form 10-K filed with the Securities and Exchange Commission onNovember 10, 2004.

 

Liquidmetal Technologies,Inc. (“Liquidmetal Technologies”) and its subsidiaries (collectively “theCompany”) are in the business of developing, manufacturing, and marketingproducts made from amorphous alloys. Liquidmetal Technologies markets and sellsLiquidmetal® alloy industrial coatings and also manufactures, markets and sellsproducts and components from bulk Liquidmetal alloys that can be incorporatedinto the finished 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 Company classifies operations into two reportablesegments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys.Liquidmetal alloy industrial coatings are used primarily as a protectivecoating for industrial machinery and equipment, such as drill pipe used by theoil drilling industry and boiler tubes used by coal-burning power plants. BulkLiquidmetal alloys include potential market opportunities to manufacture andsell products and components for electronic devices, medical devices, defenseapplications, and sporting goods.  Inaddition, the bulk Liquidmetal alloys segment includes tooling and prototypesampling, and the manufacture and sale of die casting equipment (see note5).  In addition, such alloys are used togenerate research and development services revenue for developing uses relatedprimarily to defense and medical applications as well as potential licensefees, royalties, and other compensation from strategic partnering transactions.

 

Stock-basedcompensation

 

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

 

Had the Companydetermined compensation cost based on the fair value at the grant date forstock options consistent with the method of SFAS No. 123, the Company’sloss from continuing operations and basic and diluted loss per sharefrom continuing operations would have been as follows:

 

9

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| ** **                         | ** **                                                                                                                                | **For the Three Months  Ended March 31,** | ** ** |
|------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------|------------|
| ** **                         | ** **                                                                                                                                | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                         | ** **                                                                                                                                | ** **                                | ** ** | **Restated** | ** ** |
| ** **                         | ** **                                                                                                                                | ** **                                | ** ** | ** ** | ** ** |
| Net loss as  reported              |                                                                                                                                      | $                                         | (741       | ) | $ | (7,496 | ) |
|                               |                                                                                                                                      |                                      |       |   |   |
| *Add:*                             | Stock-based employee  compensation expense included in reported net income, net of related tax  effects                                   |                                      | 270        |   | 141 |   |
|                               |                                                                                                                                      |                                      |       |   |   |
| *Deduct:*                          | Total stock-based  employee compensation expense determined under the fair value based method  for all awards, net of related tax effects |                                      | (1,709     | ) | (2,017 | ) |
|                               |                                                                                                                                      |                                      |       |   |   |
| Proforma net  loss                 |                                                                                                                                      | $                                         | (2,180     | ) | $ | (9,372 | ) |
|                               |                                                                                                                                      |                                      |       |   |   |
| Basic and  diluted loss per share: |                                                                                                                                      |                                      |       |   |   |
| As reported                        |                                                                                                                                      | $                                         | (0.01      | ) | $ | (0.18 | ) |
| Pro forma                          |                                                                                                                                      | (0.05                                     | )          | (0.23 | ) |

 

The fair value of eachoption grant is estimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants for the three months ended March 31, 2004 and 2003, respectively:expected volatility of 100% for all periods; dividend yield of 0.0% for allperiods; expected option life of approximately 5 years; and a risk-freeinterest rate ranging from 2.9% to 3.4%.

 

**2.             Restatement**

 

See note 3 related totranslation of foreign currency.

 

*GrowellRestatement*

 

As a part of the accompanying condensed consolidatedfinancial statements and the notes thereto, the Company has restated certainpreviously issued financial statements due to the fact that revenues fromequipment sales made to Growell Metal Co., Ltd., a South Korean metals processingcompany (“Growell”), should not have been recognized during the first quarterof 2003. Revenues of $2,543 from the sale of die casting machines to Growellwas previously recorded in the quarter ended March 31, 2003.  The 2003 Growell sale of $2,543 had anassociated cost of sales of $840 resulting in profit of $1,703.  The effect of the restatement is to defer therecognition of revenue on the die casting equipment in 2003 until the quarterending March 31, 2004.

 

The die casting equipment was the subject of apreviously reported dispute between the Company’s South Korean subsidiary,Liquidmetal Korea Co., Ltd. (“Liquidmetal Korea”), and Growell, which was aformer supplier of alloy ingots to Liquidmetal Korea’s Pyongtaek, South Koreamanufacturing plant and also a die casting licensee of the Company. Therestatement of revenues from the equipment sales is a result of an analysisinitiated by the Company based upon the settlement of this dispute in January2004 and a determination that the original revenue recognition decision did notinclude consideration of all agreements relating to the subject matter of thetransactions.  The Company concluded thatthe equipment sales were contingent upon Liquidmetal Korea’s continuedperformance under its agreements with Growell, and consequently revenuerecognition is deferred until the contingency was ended.

 

The Company has reclassified the die castingequipment at March 31, 2003 and for subsequent quarterly periods as equipment

 

10

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held by customer, which areincluded in inventories.

 

Under terms of a January 10, 2004 settlement of thedispute between Liquidmetal Korea and Growell, Liquidmetal Korea agreed to payGrowell $4,895 to purchase Growell’s investment in alloy inventories,proprietary alloying equipment purchased from Liquidmetal Korea, and supportingequipment purchased from other suppliers. Also as part of the settlement, Growell satisfied in full a balance of$2,058 owed to Liquidmetal Korea for the die casting machines Growell purchasedfrom Liquidmetal Korea in the first quarter of 2003 as part of a licenseagreement to manufacture Liquidmetal alloy parts for the South Koreanautomotive industry.  The remaining settlementpayable of $2,837 and trade accounts payable of $14 will be paid to Growell (incash or stock at the Company’s discretion) by December 31, 2004, and isincluded in accounts payable and accrued liabilities in the March 31, 2004Condensed Consolidated Balance Sheet. The Company recorded a loss on the settlement at December 31, 2003 of$2,765 which is included in “Cost of Sales” in the December 31, 2003Consolidated Statements of Operations and Comprehensive Loss.  The loss on settlement reflects thewrite-down of the assets received in the settlement to their fair marketvalue.  The loss is accrued for in the “Accountspayable and accrued expenses” section in the December 31, 2003, ConsolidatedBalance Sheet. The sale of the die casting machines to Growell is recorded asrevenue in the first quarter of 2004. Under the settlement agreement between the parties, the Company andGrowell granted to the other party (and the other party’s affiliates) a releaseof all known and unknown claims of any nature arising between the partiesthrough the date of settlement, as well as a release against future claimsunder agreements between the parties that were terminated as a part of thesettlement.  The settlement agreementprovided that all agreements of any nature between the parties and theirrespective affiliates were terminated as of the date of settlement, with theexception of certain confidentiality agreements, a Liquidmetal coatingsdistribution agreement, and future rights under the die casting agreementpursuant to which Growell purchased the die casting machines and obtained alicense to make auto parts from Liquidmetal alloys.  The settlement agreement also includes,as an accommodation to Growell, if theCompany becomes aware of any prospective customer that desires to purchase aproprietary Company casting machine at a time when Growell desires to sell anyof its Liquidmetal die casting machines, then the Company will not sell suchdie casting machine to the prospective customer unless the Company firstdirects the prospective customer to Growell and encourages the prospectivecustomer to purchase the machine from Growell.

 

*StockCompensation Restatement*

 

As a part of the accompanying condensed consolidatedfinancial statements and the notes thereto, the Company has restated certainpreviously issued financial statements due to the fact that stock option grantswere not calculated in accordance with guidelines under APB Opinion No. 25,SFAS No. 123, and EITF 00-23.  As such,unamortized stock compensation expense of $24 was reversed during the periodended March 31, 2003.

 

The Company issued shares of common stock to anindividual during the quarter that was previously not recorded.  Therefore, additional paid in capital wasdecreased by $99 and stock compensation expense increased by $99 in selling,general, and administrative expense during the three months ended March 31,2003.  Due to an additional 10,000 sharesbeing issued related to this transaction, the weighted average shares haveincreased as of March 31, 2003.

 

*****Samsung Restatement*****

 

In 2002, the Company wasengaged by Samsung to provide Liquidmetal alloy parts for cell phones. The Company recognized approximately $315 of mold revenue in December2002, which was subsequently written off in March 2003 as bad debt expense. It was determined that the revenue of $315 recognized in 2002 did notmeet the requirement of revenue recognition under SAB 101 and accordingly theCompany has restated its revenue and accounts receivable for 2002 by $315.Further, the Company reversed the previously recorded write off of accountsreceivables from Samsung by decreasing selling, general, and administrativeexpenses by $309 for the bad debt expense recognized during the three monthsended March 31, 2003.

 

*****JS Technologies Restatement*****

 

In September 2002, theCompany was engaged by JS Technologies to provide molds and MP3 player compactdisc cases and recognized approximately $782 of revenue.  JS Technologiesdid not pay the remaining balance due of $172 because the MP3

 

11

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player compact disc cases never launched into fullproduction, for which the Company recorded a bad debt expense inJanuary 2003.   Consequently, theCompany restated its selling, general and administrative expenses and theallowance for doubtful accounts as of and for the year ended 2002 byrecognizing bad debt expense of $169 in 2002. Further, the Company reversed the previously recorded write off ofaccounts receivables from JS Technologies by decreasing selling, general, andadministrative expenses by $166 for the bad debt expense recognized during thethree months ended March 31, 2003. 

 

*****AM Corporation Restatement*****

 

The Company was engaged by AM Corporation to develop knife prototypesfor distribution of knives in Europe and recognized $250 in the first quarterof 2003.  However, AM Corporationdetermined it would not continue with development and consequently did not paythe receivable of $250 and the Company recorded the amount as bad debt expensein the fourth quarter of 2003.   It wasdetermined that the $250 recorded as revenue in the first quarter of 2003 didnot meet the requirement of revenue recognition per SAB 101 and, accordingly,the sale and bad debt expense were reversed in the first and fourth quarters of2003, respectively.

 

The results of discontinued operations of theCompany’s equipment manufacturing business (see note 5) for the three monthsended March 31, 2003 has been combined with continuing operations forcomparative purposes.  A summary of thesignificant effects of the restatement is as follows:

 
| ** **                                                                                                          | ** ** | **For the Three Months Ended**            | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Consolidated Statements of  Operations Data:**                                                                    | ** ** | **3/31/03  Previously  Reported**         | ** ** | **3/31/03  Restated** | ** ** |
| ** **                                                                                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| Revenue                                                                                                             |       | $                                         | 6,559      |   | $ |  3,606 |   |
| Cost of sales                                                                                                       |       | 3,883                                     |       | 3,020 |   |
| Gross profit                                                                                                        |       | 2,676                                     |       | 586 |   |
| Operating  expense:                                                                                                 |       |                                      |       |   |   |
| Selling,  general, and administrative                                                                               |       | 4,507                                     |       | 4,105 |   |
| Research and  development                                                                                           |       | 4,038                                     |       | 4,038 |   |
| Total operating  expenses                                                                                           |       | 8,545                                     |       | 8,143 |   |
|                                                                                                                |       |                                      |       |   |   |
| Loss before  interest, other income, income taxes, minority interest and discontinued  operations                   |       | (5,869                                    | )          | (7,557 | ) |
| Interest income  (expense), net                                                                                     |       | 68                                        |       | 68 |   |
|                                                                                                                |       |                                      |       |   |   |
| Gain on sale of  marketable securities held-for-sale                                                                |       | —                                    |       | — |   |
|                                                                                                                |       |                                      |       |   |   |
| Loss before  income taxes, minority interest and discontinued operations                                            |       | (5,801                                    | )          | (7,489 | ) |
|                                                                                                                |       |                                      |       |   |   |
| Income taxes                                                                                                        |       | —                                    |       | — |   |
|                                                                                                                |       |                                      |       |   |   |
| Minority  interest in (loss) income of consolidated subsidiary                                                 |       | (7                                        | )          | (7 | ) |
|                                                                                                                |       |                                      |       |   |   |
| Loss from  continuing operations                                                                               |       | (5,808                                    | )          | (7,496 | ) |
|                                                                                                                |       |                                      |       |   |   |
| Net loss                                                                                                            |       | $                                         | (5,808     | ) | $ | (7,496 | ) |
|                                                                                                                |       |                                      |       |   |   |
| Loss per share  from continuing operations – basic and diluted                                                 |       | $                                         | (0.14      | ) | $ | (0.18 | ) |
|                                                                                                                |       |                                      |       |   |   |
| Weighted average  common shares used to compute loss per share from continuing operations –  basic and diluted |       | 41,229                                    |       | 41,390 |   |

 

12

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

 

Translation of Foreign Currency

 

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

 

The Company applies **FASB No. 52, Foreign Currency Translation**,for translating foreign currency into US dollars in ourconsolidation of the financial statements.  Due to our restatements ofpreviously reported financial statements (see Note 2), certain footnotedisclosures and previously reported financial statements were adjusted toconform to retroactive applications of FASB No. 52.  These adjustments didnot have a material impact in the financial statements.

 

New AccountingPronouncements

 

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

 

**4.             Liquidity**

 

The Company hasexperienced losses from continuing operations during the last two fiscal yearsand has an accumulated deficit of $113,328 as of March 31, 2004.  Cash used in continuing operations for thethree months ended March 31, 2004 was $2.1 million and cash flow fromcontinuing operations was negative for the quarter ended June 30, 2004 and cashflow from continuing operations may be negative throughout the remaining fiscalyear 2004.  Such conditions raisesubstantial doubt that the Company will be able to continue as a going concernfor a reasonable period of time.  Theseoperating results occurred while the Company was developing and attempting tocommercialize and manufacture products from an entirely new and uniquetechnology.  This business plan requiredsignificant spending related to start-up costs and capital expenditures.  These factors have placed a significantstrain on the financial resources of the Company.  The ultimate success of the Company dependson its ability to continue reducing operating costs, generate higher revenue,achieve positive cash flow from continuing operations and profitability.  The condensed consolidated financial statementsdo not include any adjustments that might result from the outcome of theuncertainty.

 

Our capital requirements during the next 12 months will depend onnumerous factors, including the success of our existing

 

13

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products, the developmentof new applications for Liquidmetal alloys, and the resources we devote todevelop and support our Liquidmetal alloy products.  However, we anticipate our capitalexpenditures in the next 12 months will be less than $0.5 million.  We expect to continue to devote limitedcapital to our research and development activities, to further develop andstrengthen our manufacturing capabilities, and for working capital and othergeneral corporate purposes.

 

We believe that our current cash and cash equivalents, which includesthe private equity funding of $9.4 million net cash infusion in March 2004, ofwhich $4.5 million was redeemed in August 2004 (see Note 7 and Note 13),together with anticipated cash flow from our operations, will be sufficient tofund our and capital expenditure requirements for at least the next 12months.  Our projections of cash flowsfrom operations and, consequently, future cash needs are subject touncertainty.  If our available funds andcash generated from operations are insufficient to satisfy our liquidityrequirements, we may need to raise additional capital to fund operations andcapital expenditure requirements.  Wecannot be certain that additional capital, whether through selling additionaldebt or equity securities or obtaining a line of credit or other loan, will beavailable to us or, if available, will be on terms acceptable to us.  If we issue additional securities to raisefunds, these securities may have rights, preferences, or privileges senior tothose of the rights of our common stock and our stockholders may experienceadditional dilution.

 

**5.             Discontinued Operations**

 

*Dongyang*

 

On June 28, 2002,the Company acquired a 51% interest in Chusik Hoesa Dongyang Yudoro (“Dongyang”).   During 2003, Dongyang experienced net lossesas a result of a continuing economic downturn in markets for its machineryproducts. These events, along with Dongyang’s operating loss, cash flow lossesand uncertainty surrounding its future cash flows, led the Company to evaluateits investment for recoverability as of December 31, 2003.  As a result, the Company determined that thecarrying value of its investment in Dongyang exceeded its fair value as ofDecember 31, 2003 in the amount of $184. This impairment loss was recorded in operating expenses for the yearended December 31, 2003.

 

In March 2004, theCompany sold its 51% investment in Dongyang to the 49% minorityshareholder.  The selling price of theCompany’s 51% interest in Dongyang was $80, which was equal to the Company’snet carrying value for the 51% ownership held. Further, the Company agreed to pay Dongyang $155 for the purchase of areceivable balance from Growell.  Thetransaction resulted in net payable to Dongyang of $75 and a loss of $46 fromtransfer of the Company’s interest in Donyang to the minority shareholder.  The loss from operations for the three monthsended March 31, 2004 totaled $50 and is included in the loss from discontinuedequipment manufacturing operations for the period.  The net payable balance of $75 is to be paidin quarterly installments throughout 2004, and is included in accounts payableand accrued liabilities as of March 31, 2004.

 

The Company has adoptedSFAS 144 and as a result the 2003 balances have been restated in order toconform with the presentation of 2004 financial statements.  Dongyang is reported as part of the assetsavailable for sale on the balance sheet.

 

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

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

 

14

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

 
| ** **                                                             | ** ** | **For the Three months  Ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                                             | ** ** | ** **                                | ** ** | **(restated)** | ** ** |
| ** **                                                             | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Revenue                                                                |       | $                                         | 22         |   | $ | 182 |   |
| Loss from  discontinued equipment manufacturing operations, net of tax |       | (96                                       | )          | (10 | ) |
|                                                                        |            |                                           |            |  |  |  |  |

 

*Taesung*

 

On June 14, 2004, theCompany entered into an Asset Purchase Agreement whereby all the assets andliabilities of its Taesung equipment manufacturing division in Korea were soldto a third party for $345 which is payable by the third party in four equalinstallments with the last installment being due on June 30, 2005.  As of March 31, 2004, management determinedthat no impairment was anticipated on the divestiture of its Taesungdivision.  Ultimately, the sale resultedin a loss of approximately $184.  Theloss from operations for the three months ended March 31, 2004 totaled $297 andis included in the loss from discontinued equipment manufacturing operationsfor the period.

 

The Company has adoptedSFAS 144 and as a result the 2003 balances have been restated in order toconform with the presentation of 2004 financial statements.  Taesung is reported as part of thediscontinued business operations as of March 31, 2004 as the Company’s plansfor divesture of Taesung was determined during the three months ended March 31, 2004.

 

The following is alisting of the major classes of assets and liabilities of Taesung as of March31, 2004 and December 31, 2003 (combined with Dongyang as assets available forsale on the condensed consolidated balance sheet).

 
| ** **                                 | ** ** | **March 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Current Assets:                            |       |                |       |                   |       |
| Cash and cash  equivalents                 |       | $                   | 2          |                   | $          | 1 |   |
| Accounts receivable,  net                  |       | 148                 |       | 256                    |       |
| Inventories                                |       | 510                 |       | 477                    |       |
| Prepaid expenses  and other current assets |       | 12                  |       | 113                    |       |
| Total current  assets                      |       | 672                 |       | 847                    |       |
|                                       |       |                |       |                   |       |
| Property, plant  and equipment, net        |       | $                   | 153        |                   | $          | 157 |   |
| Other Assets                               |       | 104                 |       | 100                    |       |
| Total assets                               |       | $                   | 929        |                   | $          | 1,104 |   |
|                                       |       |                |       |                   |       |
| Current  Liabilities:                      |       |                |       |                   |       |
| Accounts payable  and accrued expenses     |       | $                   | 373        |                   | $          | 358 |   |

 

Summarized operatingresults of Taesung’s operations are as follows:

 

15

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| ** **                                                                      | ** ** | **For the Three months   Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                                        | ** ** | **2003** | ** ** |
| ** **                                                                      | ** ** | ** **                                      | ** ** | **(restated)** | ** ** |
|                                                                            |       |                                            |       |   |   |
| Revenue                                                                         |       | $                                               | 100        |   | $ | 225 |   |
| Income  (loss) from discontinued equipment manufacturing operations, net of tax |       | (297                                            | )          | 17 |   |
|                                                                                 |            |                                                 |            |  |  |  |  |

 

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

 

Due to the lack ofhistorical information for warranty expense related to bulk alloy products,management estimates product warranties as a percentage of bulk alloy productsales earned during the period.  Duringthe three months ended March 31, 2004 and 2003, the Company recorded $57 and$64, respectively, of warranty expense. The product warranty accrual balance is included in accounts payable andaccrued expenses.

 

**7.****                                     ****Notes Payable**

 

Senior ConvertibleNote

 

On March 3, 2004,the Company issued $9.9 million of 6.0% senior convertible notes due 2007 (the “March Notes”)to investor groups in a transaction led by Michigan Venture Capital Co., Ltd, aSouth Korea-based institutional investment firm, and IndiGo Ventures LLC, a NewYork-based investment firm (the “Placement Agents”) that served as a financialadvisor to the Company for the transaction. The notes were collateralized by the patents held by the Company andsecond priority mortgage interest in plant facilities and certain equipment inSouth Korea.  The notes are convertibleat any time into our 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 per sharefor varying periods but no later than 100 days following the effectiveness of aregistration statement covering the resale of shares issuable upon exercise ofthe warrants.  In addition, the investorshad the right to call for repayment of the notes prior to maturity at any timeafter the second anniversary of the closing of the transaction.

 

The fair value of the 1.2million warrants totals $1,302 and was computed using the Black-Scholes pricingmodel under the following assumptions: (1) expected life of 0.27 years; (2)volatility of 82%, (3) risk free interest of 0.95% and dividend rate of 0% onthe date of issuance.  Since this debt isconvertible into equity at the option of the note holder at beneficial conversionrates, an embedded beneficial conversion feature was recorded as a debtdiscount and will be amortized using the effective interest rate method overthe life of the debt in accordance with Emerging Issues Task Force No. 00-27, “Applicationof Issue No. 98-5 to Certain Convertible Instruments.”  During the quarter ended March 31, 2004,total cost of beneficial conversion feature of $3,395 and the relative fairvalue of the 0.6 million warrants issued to investors of $584 were recorded asdiscounts of the convertible note.  Inaddition, $718 relating to the fair value of the 0.6 million warrants issued tothe Placement Agents and $581 direct costs incurred relating to issuance of theconvertible note were recorded as debt issuance cost as a contra liabilityaccount in warrant liability and other assets, respectively.  As of March 31, 2004, outstanding loanbalance approximated $9,924, un-amortized discounts for beneficial conversionfeature and warrants totaled $3,879 and debt issuance costs totaled $699 incontra liability account and $566 in other assets.  Interest expense of $133 was recorded for theamortization of debt issuance cost and discount on note for the quarter ended March 31,2004.

 

The Company is obligated, pursuant to a Registration Rights Agreementbetween the Company, the Placement Agents and the note holders dated March 1,2004 to file a registration statement with the Securities and ExchangeCommission to register the shares of Common Stock issuable upon conversion ofthe notes payable and the related warrants on or before the later of March 31,2004 or, within 25 days following the issuance thereof, and to use our bestefforts to cause such registration statement to become effective within 60 daysfollowing the SEC’s first written comments on the registration statement.  Pursuant to EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the relative fair values of the warrants of $1,302 havebeen recorded as a short-term liability during March 2004

 

16

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asthe Company has not yet filed the registration statement.  Further, the $9,924 balance of the note andun-amortized discounts for beneficial conversion feature and warrants of $3,879is presented as short-term liability as of March 31, 2004 as the noteholders have the right to call for payment on demand as the registrationstatement has not been filed in accordance with the Registration RightsAgreement. In addition, the Company is required to report a value of thewarrant as a fair value and record the fluctuation to the fair value of thewarrant liability to current operations. During the period from March 3,2004 to March 31, 2004, the change of the relative fair value of thewarrants is $586, which is recorded as other income.  The fair value of warrants outstanding at March 31,2004 of $717 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 0.27~0.19 years; (2) volatility of 95%, (3)risk free interest of 0.95% and dividend rate of 0%. As of December 2004,the Company has not received any demands for payment from the note holders.

 

Kookmin Note

 

On February 4, 2003, the Company’s 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.  This loan is collateralized by the plantfacilities and certain equipment in South Korea.  During the first eighteen months from theorigination date, interest is payable on a monthly basis.  Beginning in September 2004, the Companywill be required to make equal monthly installments of principal and interestto repay the remaining balance of the loan over a 36-month period.

 

Because this note payableis denominated in South Korea Won, the balance will fluctuate with the exchangerate between the U.S. Dollar and the South Korean Won, resulting in therecognition of foreign exchange gains or losses that are included in othercomprehensive loss.  At March 31,2004, the balance of the note was $3,835 resulting in the recognition of acumulative foreign exchange loss of $127 which is included in othercomprehensive loss during the three months ended March 31, 2004.

 

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

 

During the quarter ended March 31,2004, under the Company’s 2002 Equity Incentive Plan which provides for thegrant of stock options to officers, employees, consultants and directors, theCompany granted options to purchase 484 common shares of the Company for anexercise price of $3.81 which equaled the fair market value on the date ofgrant

 

During the quarter ended March 31,2004, under the Company’s 2002 Non-employee Director Stock Option Plan whichprovides for the grant of stock options to non-employee directors, the Companygranted options to purchase 90,000 common shares of the Company for an averageexercise price of $3.22.  All optionsgranted under this plan had exercise prices that were equal to the fair marketvalue on the date of grant.

 

The Company canceled781,431 options during the quarter ended March 31, 2004 for terminatedemployees and directors.

 

**9.****                                      SegmentReporting and Geographic Information**

 

SFAS No. 131,*Disclosures aboutSegments of an Enterprise and Related Information,*requirescompanies to provide certain information about their operating segments.  In April 2002, the Company beganclassifying operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used bycoal burning power plants.  BulkLiquidmetal alloys include market opportunities to manufacture and sell casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment.  Primarily, the expenses incurred by the bulkLiquidmetal alloy segment are research and development costs and sellingexpenses associated with identifying and developing market opportunities.  Bulk Liquidmetal alloys products can bedistinguished from Liquidmetal alloy coatings in that the bulk Liquidmetalalloy can have significant thickness, up to approximately one inch, whichallows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.  Revenue and expenses associated with researchand development services are included in the bulk Liquidmetal alloysegment.  The accounting policies of thereportable segments are the same as those

 

17

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described in Note 4 to the consolidated financial statements included in theCompany’s Form 10-K filed with the Securities and Exchange Commission on November 10,2004.

 

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

 
| ** **                                                                     | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment  Totals** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|---------------------|------------|
| Three  months ended March 31, 2004:                                       |       |         |       |           |       |                |       |
| Revenue  to external customers                                                 |       | $            | 1,016      |           | $          | 5,272               |       | $ | 6,288 |   |
| Gross  profit                                                                  |       | 467          |       | 2,264          |       | 2,731               |       |
| Income  before minority interest, interest expense and discontinued operations |       | 349          |       | 1,480          |       | 1,829               |       |
| Total  identifiable assets at end of period                                    |       | 985          |       | 23,698         |       | 24,683              |       |
|                                                                           |       |         |       |           |       |                |       |
| Three  months ended March 31, 2003(restated):                             |       |         |       |           |       |                |       |
| Revenue  to external customers                                                 |       | $            | 772        |           | $          | 2,427               |       | $ | 3,199 |   |
| Gross  profit                                                                  |       | 379          |       | 160            |       | 539                 |       |
| Loss  before minority interest, interest expense and discontinued operations   |       | (126         | )          | (4,210         | )          | (4,336              | )          |
| Total  identifiable assets at end of period                                    |       | 616          |       | 27,719         |       | 28,335              |       |

 

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

 
| ** **                                                                                                   | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2004**                                       | ** ** | **2003** | ** ** |
| ** **                                                                                                   | ** ** | ** **                                     | ** ** | **Restated** | ** ** |
| Total  operating income (loss) before minority interest, interest expense and  discontinued operations       |       | $                                              | 1,829      |   | $ | (4,336 | ) |
| General  and administrative expenses                                                                         |       | (2,504                                         | )          | (3,225 | ) |
|                                                                                                         |       |                                           |       |   |   |
| Consolidated  loss before interest expense, minority interest, Interest expense and  discontinued operations |       | (675                                           | )          | (7,561 | ) |
| Other  income                                                                                                |       | 586                                            |       | — |   |
| Interest  expense                                                                                            |       | (271                                           | )          | (61 | ) |
| Interest  income                                                                                             |       | 12                                             |       | 126 |   |
| Minority  interest in income of consolidated subsidiary                                                      |       | —                                         |       | (7 | ) |
| Income  (loss) from discontinued operations, net                                                             |       | (347                                           | )          | 7 |   |
| Loss  from disposal of discontinued operations, net                                                          |       | (46                                            | )          | — |   |
| Consolidated  net loss                                                                                       |       | $                                              | (741       | ) | $ | (7,496 | ) |

 

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

 

Revenuesfrom sales to companies in the United States were $1,725 and $1,488 during thethree months ended March 31, 2004 and 2003, respectively.  The revenue related to the United States ofAmerica was earned under three defense-relatedresearch and development contracts and sales of coatings products.

 

Duringthe three months ended March 31, 2004, the Company had revenue from salesto companies outside of the United States of $4,685 of which $4,158 representedsales to companies located in South Korea. Of the $4,158 sales in South Korea, $122 was from our discontinuedequipment manufacturing business.  Duringthe three months ended March 31, 2003, the Company had revenues fromcompanies outside of the United States of $2,118 of which $1,719 representedsales to

 

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companies located in South Korea.  Of the $1,719 sales in South Korea, $407 wasfrom our discontinued equipment manufacturing business.  The revenue related to sales to companiesoutside of the United States was from bulk alloy products including equipmentsales.

 

Long-lived assets includenet property, plant, and equipment, net intangible assets and goodwill. TheCompany had long-lived assets of $2,379 and $2,547 located in the United Statesat March 31, 2004 and December 31, 2003, respectively. The Companyhad long-lived assets of $16,204 and $16,395 located in South Korea at March 31,2004 and December 31, 2003, respectively. Of the assets located in South Korea, $153 and $215 was from long-livedassets of our discontinued equipment manufacturing business at March 31,2004, and December 31, 2003.

 

Reconciling informationbetween reportable segments and the Company’s consolidated totals is shown inthe following table:

 
| ** **                                 | ** ** | **March 31,  2004** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|
|                                       |       |                     |       |
| Total  segment assets                      |       | $                        | 24,683     |   |
| Cash  and cash equivalents                 |       | 10,749                   |       |
| Prepaid  expenses and other current assets |       | 454                      |       |
| Other  property, plant and equipment       |       | 1,370                    |       |
| Intangibles,  net                          |       | 980                      |       |
| Other  assets                              |       | 862                      |       |
| Assets  of discontinued operations         |       | 556                      |       |
| Total  consolidated assets                 |       | $                        | 39,654     |   |

 

Assets excluded from segment assets include assets attributable to theCompany’s corporate headquarters.  Thelargest asset represents the Company’s cash balances, primarily generated fromthe Company’s proceeds from the senior convertible note and the Kookmin loan(See note 7).

 

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

 

Basic earnings per share(“EPS”) is computed by dividing earnings (loss) attributable to commonshareholders by the weighted average number of common shares outstanding forthe periods. Diluted EPS reflects the potential dilution of securities thatcould share in the earnings.  Commonstock equivalents consist of 8,706,413 and 7,058,499 equity instruments at March 31,2004 and 2003, respectively, and have not been included in the EPS calculationat March 31, 2004 and 2003 as the amounts are anti-dilutive.

 

**11.****                               Commitments**

 

As of March 31, 2004 and December 31, 2003, the Company hascontingent obligations of $132 each period for notes receivables sold withrecourse.

 

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

 

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

 

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

 

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machinesand three proprietary Liquidmetal alloy casting machines for a total purchaseprice of $2,000.  At December 31,2003, the Company had a remaining receivable balance of $500 due from LLPG,which was subsequently paid in full in March, 2004.

 

The Company is a party toa license agreement with California Institute of Technology (“Caltech”) underwhich the Company exclusively licenses from Caltech certain inventions andtechnology relating to amorphous alloys. Professor William Johnson, a member of the Company’s Board of Directors,is a professor at Caltech, and substantially all of the amorphous alloytechnology licensed to the Company under the Caltech license agreement wasdeveloped in Professor Johnson’s Caltech laboratory.  During 2003, the Company paid $50 to Caltechrepresenting the second and final installments on the $150 aggregate feesrelated to this agreement.  Additionally,the Company reimburses Caltech for laboratory expenses incurred by ProfessorJohnson’s Caltech laboratory, which during the three months ended March 31,2004 and 2003, amounted to $0 and $22 in reimbursements, respectively.

 

A company managed andpartially owned by one of the Company’s former directors provides technicalsupport services and computer equipment to the Company.  During the three months ended March 31,2003, the Company incurred $12 of expenses and equipment purchases related tothis arrangement.  There were no expensesand payables to this Company as of and for the three months ended March 31,2004.

 

We are a party to aconsulting agreement with Chitnis Consulting, Inc., which is owned 100% byShekhar Chitnis, a former director and executive officer of our company.  Under this agreement, we have engaged ChitnisConsulting to provide consulting services on an as-needed basis through December 31,2005.  During the quarter ended March 31,2004, we incurred $12,500 in consulting fees from Chitnis Consulting.

 

The Company has restatedcertain previously issued financial statements due to certain revenues fromequipment sales made to Growell in the first quarter of 2003 should not havebeen recognized in those periods (see Note 2). Growell owned 285,715 shares of the Company’s common stock as of December 31,2003.  In addition, the Company purchased891,100 shares of Growell’s outstanding common stock in July 2002.  The Company ultimately sold these shares in April 2003and recognized a gain of $1,178 on the transaction.

 

**13.****                               SubsequentEvents**

 

On August 20, 2004,the Company completed a private exchange offer for its March Notes.  Under terms of the exchange offer,approximately $5.5 million in aggregate principal amount of the March Noteshave been exchanged for an aggregate of (i) $2.75 million of 6% Senior SecuredNotes Due 2007 (the “Long-Term Notes”) and (ii) $2.75 million of 10% SeniorSecured Notes Due 2005 (the “Short-Term Notes”). In addition, the Companyredeemed approximately $4.5 million of the March Notes, in cash.  The Short-Term Notes have a maturity date of July 29,2005, and a conversion price of $2.00 per share (compared to a conversion priceof $3.00 per share under the March Notes). The Long-Term Notes have a maturity date of July 29, 2007, and aconversion price of $1.00 per share. Holders of the Long-Term Notes will also have the right to call forrepayment of the Long-Term Notes prior to maturity at any time after the secondanniversary of the closing of the exchange offer. In addition, holders of boththe Long-Term Notes and Short-Term Notes will have the right to call forrepayment of the notes if the Company does not, within 180 days of the issuanceof the notes, become compliant with its SEC reporting obligations and becomelisted or quoted on the OTC Bulletin Board, the Nasdaq Stock Market, or anational securities exchange.  A total of562,151 warrants to purchase our common stock at an exercise price of $3.00 pershare—all of which were previously issued in connection with the purchase ofthe Prior Notes—have been amended to provide for an extended expiration date ofMarch 1, 2006

 

Liquidmetal Technologiesand certain of its present and former officers and directors were named asdefendants in nine purported class action complaints filed in the United StatesDistrict Courts 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 promulgated thereunder.The actions were originally brought on behalf of those who purchasedLiquidmetal Technologies’ common stock between May 22, 2002, and March 30,2004, inclusive. The complaints contain varying allegations, but generallyallege that the defendants

 

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engaged in improperrevenue recognition with respect to the Company’s transactions with GrowellMetal Co., Ltd. and that the defendants issued false and misleading statementsconcerning the Company’s business and operations, including unrealistic butfavorable information about market demand for Liquidmetal products, with the resultof artificially inflating the Company’s share price. The complaints seekunspecified compensatory damages and other relief.  In August 2004, four complaints wereconsolidated in the United States District Court for the Middle District ofFlorida under the caption *Primavera Investors v.Liquidmetal Technologies, Inc., et al.*, Case No.8:04-CV-919-T-23EAJ.  John Lee, ChrisCowley, Dwight Mamanteo, Scott Purcell and Mark Rabold, were appointed co-leadplaintiffs (the “Lead Plaintiffs”).  In September 2004,the other five complaints filed in the Central District of California weretransferred to the Middle District of Florida for consolidation with the *Primavera Investors* action. The Consolidated Amended Class Action Complaint in the **PrimaveraInvestors** action is due on or before Monday, January 10,2004.  Liquidmetal Technologies and theother defendants will have 45 days from the service date to move to dismiss orotherwise respond to the Consolidated Amended Class Action Complaint.  We intend to vigorously defend against theclass action.  We cannot currentlypredict the impact or resolution of this litigation or reasonably estimate arange of possible loss, which could be material. The resolution of this lawsuitmay harm our business and have a material adverse impact on our financialcondition.

 

In addition to the above,certain present and former officers and directors of Liquidmetal Technologies,as well as Liquidmetal Technologies as a nominal defendant, have been named inthree shareholder derivative actions. Two shareholder derivative complaints were filed in California statecourt styled *Brian Clair, Derivatively on Behalf ofLiquidmetal Technologies, Inc. v. John Kang, et al.*, Case No.04CC00551, and *Joseph Durgin Derivatively on Behalf ofLiquidmetal Technologies, Inc.  v. John Kang, et al.,* Case No. 04CC00553, both commenced in the Superior Courtof Orange County, California.  A thirdshareholder derivative complaint was filed in Florida federal court styled *Robert Story v. John Kang, et al.*, Case No.8:04-CV-1587-T23TBM, commenced in the Middle District of Florida, TampaDivision.  These shareholder derivativelawsuits allege that the defendants breached various fiduciary duties andotherwise violated state law based primarily upon the same underlying facts andcircumstances as the federal shareholder class action lawsuits. The plaintiffsseek unspecified compensatory damages, restitution and disgorgement of profits,equitable and/or injunctive relief as permitted by law and other relief.  The two shareholder derivative complaints inCalifornia state court have been consolidated. Plaintiffs served a ConsolidatedShareholder Derivative Complaint on October 12, 2004.  The defendants served a Demurrer to theConsolidated Shareholder Derivative Complaint on November 22, 2004,seeking dismissal of that complaint. The Demurrer is set for hearing on February 10,2005. The Plaintiff in the Florida derivative action filed a First AmendedShareholder Derivative Complaint on November 22, 2004. The Company’s responseto the amended Florida derivative complaint was due on December 17, 2004.The Company joined other defendants in moving to dismiss the amended Floridaderivative complaint. The Company is awaiting a ruling on that Motion toDismiss.  We intend to vigorously defendagainst the derivative actions.  Wecannot currently predict the impact or resolution of this litigation orreasonably estimate a range of possible loss, which could be material. Theresolution of these lawsuits may harm our business and have a material adverseimpact on our financial condition.

 

Two separate lawsuitswere filed in July and September 2004 by two former employees of ourPyongtaek manufacturing facility in South Korea.  The suits are based on a claim of wrongfultermination and breach of employment contract. In November 2004, the Company entered into a settlement agreementwith the employees whereby the Company would pay $243 to the employees inexchange for all claims being dismissed. The payable amount is included in our September 30, 2004 financialstatement.

 

In November 2004, weentered into an agreement with John Kang, our Chairman, President, and ChiefExecutive Officer, in which Mr. Kang agreed that certain stock transactions byhim in the year 2002 involving our common stock should have resulted in aliability under Section 16(b) of the Securities Exchange Act of 1934, asamended (“Section 16(b)”).  Thesetransactions include Mr. Kang’s private sale of 285,715 shares of his personalLiquidmetal Technologies common stock to Growell Metal Co., Ltd. in February 2002,prior to our initial public offering. They also include Mr. Kang’s subsequent indirect purchase anddisposition of Liquidmetal Technologies common stock in order to satisfy apersonal agreement Mr. Kang made to Growell Metal in February 2002regarding the guaranteed minimum value of the stock purchased by Growell Metalin February 2002 (the purchases and dispositions incident to thisagreement occurred in August and November 2002, respectively).  Lastly, the transactions include open-marketpurchases of an aggregate of 89,300 shares of our common stock made by Mr. Kangin August 2002.

 

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The Audit Committee ofour Board of Directors conducted an independent inquiry into theabove-described transactions with the aid of independent legal counsel and, asa result of such inquiry, the Audit Committeeconcluded that the transactions should have resulted in a liability to theCompany 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 in 24 equalmonthly installments beginning in January 2005.  The above-described transactions involvingGrowell Metal was reported on a new Form 4 filed by Mr. Kang on November 15,2004, and the open-market purchases were previously reported on a timely basisin August 2002.

 

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**Item2.** Management’s Discussion and Analysis of 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 31,2003 and other risks and uncertainties discussed in filings made with theSecurities and Exchange Commission (including risks described in subsequentreports on Form 10-Q, Form 10-K, Form 8-K, and other filings). Liquidmetal Technologies disclaims any intention or obligation toupdate or revise any forward-looking statements, whether as a result of newinformation, future events, 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 alloytechnology.  We develop, manufacture, andsell products and components from bulk amorphous alloys that are incorporatedinto the finished goods of our customers, and we also market and sell amorphousalloy industrial coatings.  We alsopartner with third-party licensees and distributors to develop and commercializeLiquidmetal alloy products.  We have theexclusive right to develop, manufacture, and sell what we believe are the onlycommercially viable bulk amorphous alloys.

 

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

 

Our revenues are derivedfrom two principal operating segments: Liquidmetal alloy industrial coatingsand bulk Liquidmetal alloy products. Liquidmetal alloy industrial coatings are used primarily as a protectivecoating for industrial machinery and equipment, such as drill pipe used by theoil drilling industry and boiler tubes used in coal-burning power plants. Thehistorical operating information for fiscal year 2001 is based substantially onsales of Liquidmetal alloy coatings. In the second half of 2002, we beganproducing bulk Liquidmetal alloy components and products for incorporation intoour customers’ finished goods. Bulk Liquidmetal alloy segment revenue includessales of parts or components of electronic devices, medical products, andsports and leisure goods; tooling and prototype parts (including demonstrationparts and test samples) for customers with products in development; metalprocessing equipment; and research and development revenue relating primarilyto defense and medical applications.  Weexpect that these sources of revenue will continue to significantly change thecharacter of our revenue mix.

 

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The cost of sales for ourLiquidmetal coatings segment consists primarily of the costs of outsourcing ourmanufacturing to third parties. Consistent with our expectations, our cost ofsales has been increasing over historical results as we further build our bulkLiquidmetal alloy business. Although we plan to continue outsourcing themanufacturing of our coatings, we will internally manufacture many productsderived from our bulk Liquidmetal alloys.

 

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 and developmentexpenses 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, andthe identification of new applications for our alloys.

 

In conjunction with thedivestiture of our Dongyang subsidiary in March 2004, the Company decidedto discontinue our equipment manufacturing business in order to conform ouroperations to our broader corporate business strategy (see note 5).  Pursuant to Accounting Principles BoardOpinion No. 30,*Reporting the Resultsof Operations — Reporting the Effects of Disposal of a Segment of a Business,and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,*we reclassified our consolidated financial statements to reflect thediscontinuation of our equipment manufacturing operations. The revenue, costsand expenses, assets and liabilities, and cash flows of the equipmentmanfuacturing business were segregated in our accompanying Consolidated BalanceSheets, Consolidated Statements of Operations and Comprehensive Loss, andConsolidated Statements of Cash Flows.

 

The following discussionand analysis of our financial condition and results of operations focuses onthe historical results of our continuing operations and reflects the effect ofrestating our 2003 financial statements for equipment sales made to GrowellMetal Co., Ltd. (“Growell”) as disclosed in Note 2 in the notes to condensed consolidatedfinancial statements section of this document.

 

**Critical Accounting 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 believe that the following accounting policies are the most critical toour condensed consolidated financial statements since these policies requiresignificant judgment or involve complex estimates that are important to theportrayal of our financial condition and operating results:

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

 

Our 10-K Report as of December 31,2003 contains further discussions on our critical accounting policies andestimates.

 

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**Resultsof Operations**

 

Comparison of thethree months ended March 31, 2004 and 2003 

 

*Revenue*.Revenue increased $3.1 million to $6.3 million for the three months ended March 31,2004 from $3.2 million for the three months ended March 31,2003.  The increase was primarily due tothe increase in our bulk Liquidmetal alloys business which consisted of anincrease of $2.4 million from the sale of metal processing equipment primarilyfor use in the processing of bulk Liquidmetal alloy products, an increase of$0.3 million from the sales and prototyping of parts manufactured from bulkLiquidmetal alloys offset by a decrease of $0.6 million from research anddevelopment services related primarily to defense and medical applications andan increase in our coatings business of $0.3 million.

 

*Costof Sales*. Cost of sales increased to$3.5 million, or 56% of revenue, for the three months ended March 31,2004 from $3.0 million, or 83% of revenue, for the three months ended March 31,2003.  This increase was a result of thebulk Liquidmetal alloy business contributing a larger percentage of ourrevenue, primarily in the metal processing equipment sale, than the coatingbusiness for the three months ended March 31, 2003.  Cost of sales as a percentage of revenue hasdecreased from improved manufacturing processes and decreases in research anddevelopment activities charged to cost of sales.  We believe that anticipated highermanufacturing volumes and an expected greater mix of higher-margin products inthe future will cause the gross profit to continue to improve over time. Thecost to manufacture parts from our bulk Liquidmetal alloys is variable anddiffers based on the unique design of each product.  However, the cost of sales for the productssold by the coatings business segment is generally consistent because theLiquidmetal coatings products are produced by third parties and sold wholesaleto various industries.

 

*Selling,General, and Administrative Expenses*. Selling,general, and administrative expenses decreased to $3.1 million, or 49% ofrevenue, for the three months ended March 31, 2004 from $4.1 million,or 127% of revenue, for the three months ended March 31, 2003. Thisdecrease was primarily a result of decrease in wages and related expense by$0.8 million, decrease in travel expenses by $0.3 million, decrease inproperty rent by $0.3 million, and a decrease in professional fees,consultant fees, and contract services by  $0.1 million.  These and other decreases in selling, generaland administrative expenses represent the Company’s efforts to manage costs andfocus on our core business while continuing to build our corporateinfrastructure required to prepare for and support the anticipated growth ofour bulk Liquidmetal alloy business.

 

*Researchand Development Expenses*. Research and developmentexpenses decreased to $0.3 million, or 5% of revenue, for the three monthsended March 31, 2004 from $4.0 million, or 126% of revenue, for thethree months ended March 31, 2003. This decrease was a result of theCompany’s focusing primarily on our core business associated with our bulkLiquidmetal alloy business while managing our costs.  The Company continues to perform research anddevelopment of new Liquidmetal alloys and related processing capabilities,develop new manufacturing techniques, and contract with consultants and provideresearch grants to various institutions to advance the development ofLiquidmetal alloys.  The decrease wasprimarily due to decreases in salaries, wages and the related by$1.8 million, decrease in professional fees, consultant fees, and contractservices by $0.4 million, decrease in research grants to institutions by$0.3 million, decrease in laboratory and prototyping expenses by$0.6 million, decrease in depreciation expense by $0.4 million, and adecrease in travel expenses by $0.1 million.

 

*OtherIncome*. Other income was  $0.6 million, or 9% of revenue, forthe three months ended March 31, 2004 due to change in value of warrantrelated liabilities since the original measurement date (date ofissuance).  There was no other incomeduring the three months ended March 31, 2003.

 

*InterestExpense*. Interest expense was  $0.3 million, or 4% of revenue, forthe three months ended March 31, 2004 and was $0.1 million, or 2% ofrevenue, for the three months ended March 31, 2003.  During the three months ended March 31,2004, the interest expense was primarily due to the interest accrued on theKookmin Bank loan funded on February 4, 2003 and senior convertible debtfunded on March 3, 2004, as well as amortization of debt issuance costsand discount on the senior convertible debt. During the three months ended March 31, 2003, interest expense wasprimarily due to the interest accrued on the Kookmin Bank loan.

 

*InterestIncome.*** Interest income was $12 for the three monthsended March 31, 2004 for interest earned on certificate of

 

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deposits.  Interest income was $126 for the three monthsended March 31, 2003 for interest earned on short-term, investment grade, interest-bearing securities.

 

**Liquidity and Capital Resources**

 

Ourcash used in operating activities was $1.8 million, which includes cashprovided by our discontinued equipment manufacturing business of $0.3 million,for the three months ended March 31, 2004 and $10.5 million, whichincludes cash used in our discontinued equipment manufacturing and retail golfbusinesses of $1.6 million, for the three months ended March 31,2003.  Our working capital increased from$1.0 million at December 31, 2003 to $4.2 million at March 31,2004.  The Company’s working capitalincrease of $3.2 million was primarily attributable to increase in cash of $7.6million, increase in inventory of $1.9 million, decrease in deferred revenue of$0.6 million, decrease in other current liabilities of $3.4, decrease in amountsreceivable of $0.8 million, decrease in current assets of our discontinuedequipment manufacturing business of $0.3 million, increase in accounts payableof $3.6 million and current portion of notes payable of $5.6 million.

 

Ourcash used in investing activities was $20 for the three months ended March 31,2004 for the acquisition of property and equipment.

 

Ourcash provided by financing activities was $9.6 million for the three monthsended March 31, 2004, which consists of $9.9 million in proceeds fromborrowings from our senior convertible debt offset by $0.4 million on repaymentof borrowings.

 

TheCompany has experienced losses from continuing operations during the last twofiscal years and has an accumulated deficit of $113,328 as of March 31,2004.  Cash used in continuing operationsfor the three months ended March 31, 2004 was $2.1 million and cash flowfrom continuing operations may be negative throughout the fiscal year2004.  Such conditions raise substantialdoubt about the ability of the Company continuing as a going concern for areasonable period of time.  Theseoperating results occurred while the Company was developing and attempting tocommercialize and manufacture products from an entirely new and uniquetechnology.  This business plan requiredsignificant spending related to start-up costs and capital expenditures.  These factors have placed a significantstrain on the financial resources of the Company.  The ultimate success of the Company dependson its ability to continue reducing operating costs, generate higher revenue, achieve positive cash flow from continuing operations andprofitability.  The condensedconsolidated financial statements do not include any adjustments that mightresult from the outcome of the uncertainty.

 

Ourcapital requirements during the next 12 months will depend on numerousfactors, including the success of our existing products, the development of newapplications for Liquidmetal alloys, and the resources we devote to develop andsupport our Liquidmetal alloy products. However, we anticipate our capital expenditures will be less than $0.5million in the next 12 months.  We expectto continue to devote limited capital to our research and developmentactivities, to further develop and strengthen our manufacturing capabilities,and for working capital and other general corporate purposes.

 

Webelieve that our current cash and cash equivalents together with anticipatedcash flow from our operations, will be sufficient tofund our working capital and capital expenditure requirements for at least thenext 12 months.  Our projectionsof cash flows from operations and, consequently, future cash needs aresubject to uncertainty.  If our availablefunds and cash generated from operations are insufficient to satisfy ourliquidity requirements, we may need to raise additional capital to fund ourworking capital or capital expenditure requirements.  We cannot be certain that additional capital,whether through selling additional debt or equity securities or obtaining aline of credit or other loan, will be available to us or, if available, will beon terms acceptable to us.  If we issueadditional securities to raise funds, these securities may have rights,preferences, or privileges senior to those of the rights of our common stockand our stockholders may experience additional dilution.

 

**Contractual Obligations**

 

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

 

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| ** **                        | ** ** | **Payments Due by Period (in thousands)** |
|-----------------------------------|------------|-------------------------------------------|
| **Contractual  Cash Obligations** | ** ** | **Total**                                 | ** ** | **Less Than 1  Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
|                              |       |                                      |   |   |   |   |   |   |   |   |   |
| Long-term  debt                   |       | $                                         | 13,759 |   | $ | 10,563 |   | $ | 3,196 |   | $ | — |   | $ | — |   |
| Capital  lease obligation         |       | 285                                       |   | 116 |   | 169 |   | — |   | — |   |
| Operating  leases and rents       |       | 2,255                                     |   | 874 |   | 1,132 |   | 97 |   | 152 |   |
| Purchase  obligations             |       | 2,500                                     |   | — |   | 2,500 |   | — |   | — |   |
|                              |       | $                                         | 18,799 |   | $ | 11,553 |   | $ | 6,997 |   | $ | 97 |   | $ | 152 |   |

 

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

 

We are exposed to various markets risks in conducting the business of theCompany, and we anticipate that this exposure will increase as a result of ourplanned growth.  In an effort to mitigatelosses associated with these risks, we may at times enter into derivativefinancial instruments, 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.** *Weare exposed to price risk related to anticipated purchases of certaincommodities used as raw materials by our businesses, including titanium andzirconium.  Although we do not currentlyenter into commodity future, forward, and option contracts to manage thefluctuations in prices of anticipated purchases, we may enter into suchcontacts in the future as our business grows and as our purchases of these rawmaterials 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 hedgetransactions, we may do so in the future as our business grows.

 

**Item 4 — Controls and Procedures**

 

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

 

(a)                                  Evaluation of disclosure controls andprocedures.  During the course of the audit of ourfinancial statements for the fiscal years ended December 31, 2001, 2002,and 2003, it was determined that revenues from certain equipment salesmade by the Company to Growell Metal Co., Ltd. in the third and fourthquarters of 2002 and the first quarter of 2003 should not have beenrecognized in those periods****.  It was also****** **determined that certain amountsrelating to sales made to Samsung in December 2002, to JS Technologies in September 2002,and AM Corporation in December 2002 should not have been recognized. ****And lastly, it wasdetermined that certain stock options granted in 2001 and 2002 were notcalculated in****

**** ****

****27****

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**** ****

****accordance********withguidelines under APB Opinion No. 25, SFAS No. 123, and EITF 00-23.******** ****These determinations and the associatedrestatement of previously issued financial statements, as described more fullyelsewhere in this Form 10-K, suggest that, at the time of the subjecttransactions and the preparation of our financial statements for the relevantperiods, the Company’s disclosure controls and procedures (as definedin Rule 13a-15 under the Securities Exchange Act of 1934) did not ensurethat all information required to be disclosed by the Company was adequatelyaccumulated and communicated to the Company’s management.  Sincethat time, the Company has made various improvements to enhance thereliability of its disclosure controls and procedures.  Exceptfor the foregoing, the Company’s principal executive officer and principalfinancial officer have concluded that the Company’s disclosure controlsand procedures were effective as of the end of the period covered bythis Form 10-K based on their evaluation of the controls and procedurespursuant to Rule 13a-15 under the Securities and Exchange Act of 1934.

 

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**PART II**

**OTHERINFORMATION**

 

**Item 2 – Change in Securities and Useof Proceeds**

 

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

 

As of December 31, 2003,we have used the $70.7 million of net proceeds from the Offering.  In 2002, we used approximately$7.8 million of the net proceeds from the Offering to repay alloutstanding promissory notes and accrued interest, $11.1 million to fundthe construction of our manufacturing facility in South Korea,$14.3 million to purchase equipment used to manufacture Liquidmetal parts,$0.4 million to purchase assets related to production and sale ofequipment used in the production process of Liquidmetal alloy products, and$0.3 million to purchase the 51% interest in our majority owned Dongyangsubsidiary. During the third quarter of 2002, we used $2.0 million toinvest in the common stock of Growell Metal, which supplies a portion of theLiquidmetal alloy ingots used in our manufacturing operations in Korea. We havesince sold such stock, realizing a gain on the sale. We used the remainingproceeds of $32.7 million for working capital in 2002 and 2003, excluding$2.1 million paid to Paul Azinger in 2002 and 2003 for amounts due underthe terms of his terminated endorsement agreement with our discontinued retailgolf operations.

 

**Item 6 – Exhibits and Reports on Form8-K.**

 

(a)                                  Exhibits

 

The following documentsare filed as an exhibit to this Report:

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                          |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                 |
| 31.1                |       | Certification of President & Chief Executive  Officer, John Kang, as required by Section 3.02 of Sarbane-Oxley Act of  2002 |
|                |       |                                                                                                                                 |
| 31.2                |       | Certification of Vice President of Finance, Tony  Chung, as required by Section 3.02 of Sarbane-Oxley Act of 2002               |
|                |       |                                                                                                                                 |
| 32.1                |       | Certification of President & Chief Executive  Officer, John Kang, as required by Section 9.06 of Sarbane-Oxley Act of  2002 |
|                |       |                                                                                                                                 |
| 32.2                |       | Certification  of Vice President of Finance, Tony Chung, as required by Section 9.06 of  Sarbane-Oxley Act of 2002              |

 
| (b)    |   | Reports on Form 8-K                |
|--------|--------|------------------------------------|
|   |   |                               |
|   |   | •Filed  January 15, 2004 |
|   |   | •Filed  January 16, 2004 |
|   |   | •Filed  March 3 2004     |
|   |   | •Filed  March 4, 2004    |
|   |   | •Filed  March 30, 2004   |

 

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|   |   | •Filed  April 30, 2004     |
|--------|--------|--------------------------------------|
|   |   | •Filed  May 13, 2004            |
|   |   | •Filed  May 18, 2004            |
|   |   | •Filed  May 24, 2004            |
|   |   | •Filed  June 28, 2004      |
|   |   | •Filed  July 2, 2004       |
|   |   | •Filed  July 15, 2004      |
|   |   | •Filed  July 16, 2004      |
|   |   | •Filed  August 20, 2004    |
|   |   | •Filed  September 27, 2004 |
|   |   | •Filed  November 10, 2004  |
|   |   | •Filed  November 23, 2004  |

 

**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: December 17,  2004 | /s/  John Kang                           |   |
|   |                          | John Kang                                     |   |
|   |                          | President & Chief  Executive Officer      |   |
|   |                          | (Principal Executive  Officer)                |   |
|   |                          |                                          |   |
|   |                          |                                          |   |
|   | Date: December 17,  2004 | /s/  Tony Chung                          |   |
|   |                          | Tony  Chung                                   |   |
|   |                          | Vice President of  Finance                    |   |
|   |                          | (Principal Financial  and Accounting Officer) |   |

 

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