** **

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

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

### ** **

**Amendment No. 1**

 
| **x**                                             | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                        | ** **                                                                                    |
| **For the quarterly  period ended June 30, 2004** |
| ** **                                        | ** **                                                                                    |
| **OR**                                            |
|                                              |                                                                                          |
| **o**                                             | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transitionperiod from                             to                            **

** **

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

 

----

 

**LIQUIDMETALTECHNOLOGIES, INC.**

(Exact name of Registrantas specified in its charter)

 

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

** **

**25800 Commercentre Drive, Suite 100**

**LakeForest, California 92630**

(addressof principal executive office, zip code)

 

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

 

----

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for at least the past 90 days.

 

Yes o No x

 

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

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes o No x

 

#### **As of December 17, 2004, there were 41,609,652 sharesof the registrant’s common stock, $.001 par value, outstanding.**

 

 

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**LIQUIDMETAL TECHNOLOGIES, INC.**

**AMENDMENT NO. 1 TO FORM 10-QFOR THE QUARTER ENDED****JUNE 30,2004**

 

**EXPLANATORY****NOTE**

 

We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2004, as filed with the U.S. Securities andExchange Commission (SEC) on January 3, 2005, to restate our financialstatements to properly account for the conversion feature of the seniorconvertible notes issued in March 2004 (see Note 7 to the condensed consolidated financial statements).Additionally, reclassifications to our financial statements have been made forconsistent presentation of our warrant liabilities, settlement payable, andchange in value of warrant liabilities. Thisamendment does not reflect events occurring after the filing of the originallyfiled Form 10-Q.

 

 

2

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**FORWARD-LOOKING INFORMATION**

 

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

 

3

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#### **TABLE OF CONTENTS**

#### ** **

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

 

4

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**Item 1 – Financial Statements**

 

**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

 
| ** **                                                                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                              | ** ** | **2004**          | ** ** | **2003**              | ** ** |
| ** **                                                                                                                                              | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| ** **                                                                                                                                              | ** ** | **(Restated)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                                         |       |              |       |                  |       |
|                                                                                                                                                    |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                              |       | $                 | 6,356      |                  | $          | 3,127 |   |
| Trade accounts  receivables, net of allowance for doubtful accounts of $198 and $127                                                                    |       | 4,164             |       | 3,748                 |       |
| Inventories                                                                                                                                             |       | 5,966             |       | 3,731                 |       |
| Prepaid expenses  and other current assets                                                                                                              |       | 206               |       | 395                   |       |
| Assets available  for sale, net                                                                                                                         |       | —            |       | 827                   |       |
| Total current assets                                                                                                                                    |       | 16,692            |       | 11,828                |       |
|                                                                                                                                                    |       |              |       |                  |       |
| Property, plant  and equipment, net                                                                                                                     |       | 16,639            |       | 17,743                |       |
| Other  intangibles, net                                                                                                                                 |       | 1,034             |       | 984                   |       |
| Other assets                                                                                                                                            |       | 808               |       | 297                   |       |
| Total assets                                                                                                                                            |       | $                 | 35,173     |                  | $          | 30,852 |   |
|                                                                                                                                                    |       |              |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                          |       |              |       |                  |       |
|                                                                                                                                                    |       |              |       |                  |       |
| Current  Liabilities:                                                                                                                                   |       |              |       |                  |       |
|                                                                                                                                                    |       |              |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                                  |       | $                 | 3,619      |                  | $          | 3,683 |   |
| Settlement  payable                                                                                                                                     |       | 2,950             |       | 2,765                 |       |
| Deferred revenue                                                                                                                                        |       | 838               |       | 1,435                 |       |
| Long-term debt,  current portion, net of debt discounts of $6,678 and $0                                                                                |       | 2,661             |       | 1,032                 |       |
| Warrant  liabilities                                                                                                                                    |       | 22                |       | —                |       |
| Conversion  feature liabilities                                                                                                                         |       | 1,703             |       | —                |       |
| Other  liabilities, current portion                                                                                                                     |       | 1,019             |       | 1,940                 |       |
| Total current  liabilities                                                                                                                              |       | 12,812            |       | 10,855                |       |
|                                                                                                                                                    |       |              |       |                  |       |
| Long-term debt,  net of current portion                                                                                                                 |       | 2,928             |       | 3,015                 |       |
| Other long-term  liabilities, net of current portion                                                                                                    |       | 750               |       | 814                   |       |
| Total  liabilities                                                                                                                                      |       | 16,490            |       | 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 June 30, 2004 and  December 31, 2003 |       | 42                |       | 42                    |       |
| Additional  paid-in capital                                                                                                                             |       | 129,007           |       | 128,581               |       |
| Unamortized  stock-based compensation                                                                                                                   |       | —            |       | (128                  | )          |
| Accumulated  deficit                                                                                                                                    |       | (111,043          | )          | (112,587              | )          |
| Accumulated  other comprehensive income                                                                                                                 |       | 677               |       | 255                   |       |
| Total  shareholders’ equity                                                                                                                        |       | 18,683            |       | 16,163                |       |
|                                                                                                                                                    |       |              |       |                  |       |
| Total  liabilities and shareholders’ equity                                                                                                        |       | $                 | 35,173     |                  | $          | 30,852 |   |

 

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

 

5

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

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

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

**(unaudited)**

 
| ** **                                                                                                                     | ** ** | **For the Three**        | ** ** | **For the Six**                | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **Months EndedJune 30,** | ** ** | **Months Ended June 30,** | ** ** |
| ** **                                                                                                                     | ** ** | **2004**                           | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                     | ** ** | **(Restated)**                     | ** ** | **(Restated)**                           | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Revenue                                                                                                                        |       | $                                  | 4,055      |                                     | $          | 4,533 |   | $ | 10,343 |   | $ | 7,732 |   |
| Cost of sales                                                                                                                  |       | 2,475                              |       | 4,146                                    |       | 6,032 |   | 6,806 |   |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Gross profit                                                                                                                   |       | 1,580                              |       | 387                                      |       | 4,311 |   | 926 |   |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Operating  Expenses:                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Selling,  general, and administrative                                                                                          |       | 2,544                              |       | 4,571                                    |       | 5,609 |   | 8,633 |   |
| Research and  development                                                                                                      |       | 345                                |       | 2,736                                    |       | 686 |   | 6,774 |   |
| Total expenses                                                                                                                 |       | 2,889                              |       | 7,307                                    |       | 6,295 |   | 15,407 |   |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Loss from  operations                                                                                                          |       | (1,309                             | )          | (6,920                                   | )          | (1,984 | ) | (14,481 | ) |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Change in value  of warrants, gain                                                                                             |       | 694                                |       | —                                   |       | 1,280 |   | — |   |
| Change in value  of conversion feature, gain                                                                                   |       | 3,904                              |       | —                                   |       | 5,614 |   | — |   |
| Interest expense                                                                                                               |       | (2,255                             | )          | (114                                     | )          | (2,651 | ) | (175 | ) |
| Interest income                                                                                                                |       | 22                                 |       | 102                                      |       | 34 |   | 228 |   |
| Gain on sale of  marketable securities held-for-sale                                                                           |       | —                             |       | 1,178                                    |       | — |   | 1,178 |   |
| Income (loss)  from operations before minority interest, income taxes, and discontinued  operations                            |       | 1,056                              |       | (5,754                                   | )          | 2,293 |   | (13,250 | ) |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Income taxes                                                                                                                   |       | —                             |       | —                                   |       | — |   | — |   |
| Minority interest  in income of consolidated subsidiary                                                                        |       | —                             |       | 10                                       |       | — |   | 3 |   |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Income (loss)  from continuing operations                                                                                      |       | 1,056                              |       | (5,744                                   | )          | 2,293 |   | (13,247 | ) |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Loss from  discontinued equipment manufacturing operations, net of tax of $8 for the  three and six months ended June 30, 2003 |       | (356                               | )          | (317                                     | )          | (749 | ) | (310 | ) |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Net Income  (Loss)                                                                                                             |       | 700                                |       | (6,061                                   | )          | 1,544 |   | (13,557 | ) |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Other  comprehensive loss                                                                                                      |       |                               |       |                                     |       |   |   |   |   |
| Foreign exchange  translation gain                                                                                             |       | 43                                 |       | 1,099                                    |       | 422 |   | 159 |   |
| Net unrealized  loss on marketable securities held-for-sale  (including transfer of realized gain of  $1,178)             |       | —                             |       | (527                                     | )          | — |   | (1,668 | ) |
| Comprehensive  income (loss)                                                                                                   |       | $                                  | 743        |                                     | $          | (5,489 | ) | $ | 1,966 |   | $ | (15,066 | ) |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Net loss per  share basic and diluted:                                                                                         |       |                               |       |                                     |       |   |   |   |   |
| Income (loss)  per share – continuing operations                                                                          |       | $                                  | 0.03       |                                     | $          | (0.14 | ) | $ | 0.06 |   | $ | (0.32 | ) |
| Loss per share –  discontinued operations                                                                                 |       | $                                  | (0.01      | )                                        | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) |
| Income (loss)  per share basic and diluted                                                                                     |       | $                                  | 0.02       |                                     | $          | (0.15 | ) | $ | 0.04 |   | $ | (0.33 | ) |
|                                                                                                                           |       |                               |       |                                     |       |   |   |   |   |
| Number of  weighted average shares – basic and diluted                                                                    |       | 41,610                             |       | 41,597                                   |       | 41,610 |   | 41,494 |   |

 

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

 

6

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**

###### **Forthe Six months Ended June 30, 2004**

**(inthousands, except share data)**

 
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **      | ** ** | ** **        | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------------|------------|------------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **      | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | **Unamortized**  | ** ** | ** **      | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid in** | ** ** | **Stock-Based**  | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**      | ** ** | **Compensation** | ** ** | **Deficit**     | ** ** | **Income**        | ** ** | **Total**  | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)**   | ** ** | ** **       | ** ** | **(Restated)**  | ** ** | ** **        | ** ** | ** ** | ** ** |
| Balance,  December 31, 2003                  |       | 41,609,652 |       | $          | 42         |             | $          | 128,581          |       | $               | (128       | )                 | $          | (112,587   | )          | $ | 255 |   | $ | 16,163 |   |
| Stock-based  compensation                         |       | —     |       | —     |       | 261              |       | 15               |       | —          |       | —            |       | 276        |       |
| Unamortized  stock-based  compensation       |       | —     |       | —     |       | (113             | )          | 113              |       | —          |       | —            |       | —     |       |
| Redemption of  convertible notes  payable    |       | —     |       | —     |       | 278              |       | —           |       | —          |       | —            |       | 278        |       |
| Foreign exchange  translation  gain          |       | —     |       | —     |       | —           |       | —           |       | —          |       | 422               |       | 422        |       |
| Net income                                        |       | —     |       | —     |       | —           |       | —           |       | 1,544           |       | —            |       | 1,544      |       |
| Balance, June  30, 2004 (Unaudited) (As Restated) |       | 41,609,652 |       | $          | 42         |             | $          | 129,007          |       | $               | —     |              | $          | (111,043   | )          | $ | 677 |   | $ | 18,,683 |   |

 

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

 

7

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

 

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

**(inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                               | ** ** | **For the Six Months** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                               | ** ** | **Ended June 30,**          | ** ** |
| ** **                                                                                                               | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                                                                                               | ** ** | **(Restated)**                        | ** ** | **(Restated)** | ** ** |
| **Operating  Activities:**                                                                                               |       |                                  |       |   |   |
| Net income  (loss)                                                                                                       |       | $                                     | 1,544      |   | $ | (13,557 | ) |
|                                                                                                                     |       |                                  |       |   |   |
| Adjustments to  reconcile loss from continuing operations to net cash provided by  (used for) operating activities: |       |                                  |       |   |   |
| Gain on sale of  marketable securities held-for-sale                                                                     |       | —                                |       | (1,178 | ) |
| Depreciation and  amortization                                                                                           |       | 1,823                                 |       | 2,274 |   |
| Amortization of  debt discount                                                                                           |       | 2,283                                 |       | — |   |
| Gain from change  in value of warrants                                                                                   |       | (1,280                                | )          | — |   |
| Gain from change  in value of conversion feature                                                                         |       | (5,614                                | )          | — |   |
| Stock-based  compensation                                                                                                |       | 276                                   |       | 85 |   |
| Bad debt expense                                                                                                         |       | 105                                   |       | 209 |   |
| Warranty expense                                                                                                         |       | 137                                   |       | 188 |   |
|                                                                                                                     |       |                                  |       |   |   |
| Changes in  operating assets and liabilities:                                                                            |       |                                  |       |   |   |
| Accounts  receivable                                                                                                     |       | (521                                  | )          | 261 |   |
| Inventories                                                                                                              |       | (2,235                                | )          | (1,422 | ) |
| Prepaid expenses  and other current assets                                                                               |       | 189                                   |       | 1,129 |   |
| Other assets                                                                                                             |       | (575                                  | )          | 172 |   |
| Accounts payable  and accrued expenses                                                                                   |       | (201                                  | )          | (4,199 | ) |
| Deferred revenue                                                                                                         |       | (597                                  | )          | (130 | ) |
| Other  liabilities                                                                                                       |       | (927                                  | )          | 291 |   |
| Net cash used  for continuing operations                                                                                 |       | (5,593                                | )          | (16,295 | ) |
|                                                                                                                     |       |                                  |       |   |   |
| Net cash  provided by (used for) discontinued operations                                                                 |       | 822                                   |       | (633 | ) |
| Net cash used  for operating activities                                                                                  |       | (4,771                                | )          | (16,928 | ) |
|                                                                                                                     |       |                                  |       |   |   |
| **Investing  Activities:**                                                                                               |       |                                  |       |   |   |
| Purchases of  property and equipment                                                                                     |       | —                                |       | (2,023 | ) |
| Proceeds from  sale of marketable securities held-for-sale                                                               |       | —                                |       | 2,578 |   |
| Investment in  patents and trademarks                                                                                    |       | (102                                  | )          | (167 | ) |
| Net cash  provided by (used for) investing activities                                                                    |       | (102                                  | )          | 388 |   |
|                                                                                                                     |       |                                  |       |   |   |
| **Financing  Activities:**                                                                                               |       |                                  |       |   |   |
| Proceeds from  borrowings                                                                                                |       | 9,924                                 |       | 5,488 |   |
| Repayment of borrowings                                                                                                  |       | (1,841                                | )          | — |   |
| Repayment of  other liabilities                                                                                          |       | (58                                   | )          | (17 | ) |
| Stock warrants  exercised                                                                                                |       | —                                |       | 5 |   |
| Stock options  exercised                                                                                                 |       | —                                |       | 594 |   |
| Net cash  provided by financing activities                                                                               |       | 8,025                                 |       | 6,070 |   |
|                                                                                                                     |       |                                  |       |   |   |
| Effect of  foreign exchange translation                                                                                  |       | 77                                    |       | (638 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                                    |       | 3,229                                 |       | (11,108 | ) |
|                                                                                                                     |       |                                  |       |   |   |
| Cash and cash  equivalents at beginning of period                                                                        |       | 3,127                                 |       | 25,058 |   |
| Cash and cash  equivalents at end of period                                                                              |       | $                                     | 6,356      |   | $ | 13,950 |   |
|                                                                                                                     |       |                                  |       |   |   |
| **Supplemental  cash flow information:**                                                                                 |       |                                  |       |   |   |
| Interest paid                                                                                                            |       | $                                     | 208        |   | $ | 145 |   |
| Taxes paid                                                                                                               |       | $                                     | —     |   | $ | 126 |   |

 

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

 

8

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

 

During the six monthsended June 30, 2004, the Company sold assets and liability of its Taesungequipment manufacturing division in Korea to a third party which resulted in aloss of approximately $184.

 

During the six monthsended June 30, 2004, the change in the foreign exchange between the U.S. Dollarand the South Korean Won resulted in a $672 gain related to property, plant andequipment, net and loss of $137 from notes payable.

 

During the six months ended June 30, 2003, the change in the foreignexchange between the U.S. Dollar and the South Korean Won resulted in a $39gain related to the note payable, a $525 gain related to property, plant andequipment and a $5 loss related to minority interest in consolidatedsubsidiary.

 

During the six monthsended June 30, 2003, an option holder surrendered 93,758 shares of the Company’scommon stock in-lieu of cash payment for the option exercise price of $250 andincome taxes payable by the option holder of $403. The Company immediatelycanceled the common shares received in lieu of cash payment upon receipt of theshares.

 

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

 

9

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**For theSix Months Ended June 30, 2004 and 2003**

**(inthousands, except share data)**

**(unaudited)**

 

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

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America (“generally accepted accounting principles”)for interim financial information and with the instructions to Form 10-Q. Accordingly,they do not include all of the information and notes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments (consisting only of normal recurringaccruals) considered necessary for a fair presentation have been included. Inaddition, certain reclassifications have been made for consistent presentation.Operating results for the six months ended June 30, 2004 are not necessarilyindicative of the results that may be expected for any future periods or theyear 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 “the Company”) are in the business of developing, manufacturing,and marketing products made from amorphous alloys. Liquidmetal Technologiesmarkets and sells Liquidmetal® alloy industrial coatings and also manufactures,markets and sells products and components from bulk Liquidmetal alloys that canbe incorporated into the finished goods of its customers across a variety ofindustries. The Company also partners with third-party licensees anddistributors to develop and commercialize Liquidmetal alloy products.

 

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

 

Stock-based compensation

 

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 ofFinancial Accounting Standards (“SFAS”) No. 123 for options granted tonon-employees who perform services for the Company.

 

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:

 

10

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| ** **                                                                                                                                                             | ** ** | **For the Three**              | ** ** | **For the Six**                | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **Months Ended June 30,** | ** ** | **Months Ended June 30,** | ** ** |
| ** **                                                                                                                                                             | ** ** | **2004**                                 | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                             | ** ** | **(Restated)**                           | ** ** | **(Restated)**                           | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
|                                                                                                                                                                   |       |                                     |       |                                     |       |   |   |   |   |
| Net income  (loss) from continuing operations as reported                                                                                                              |       | $                                        | 1,056      |                                     | $          | (5,774 | ) | $ | 2,293 |   | $ | (13,247 | ) |
|                                                                                                                                                                   |       |                                     |       |                                     |       |   |   |   |   |
| *Add:      *stock-based employee  compensation expense included  in  reported net loss, net of related tax effects                  |       | 7                                        |       | 42                                       |       | 277 |   | 183 |   |
|                                                                                                                                                                   |       |                                     |       |                                     |       |   |   |   |   |
| *Deduct:*  total stock-based employee compensation  expense  determined under the fair  value based method for all  awards, net  of related tax effects |       | (1,100                                   | )          | (1,338                                   | )          | (2,809 | ) | (3,355 | ) |
|                                                                                                                                                                   |       |                                     |       |                                     |       |   |   |   |   |
| Proforma net  loss from continuing operations:                                                                                                                         |       | $                                        | (37        | )                                        | $          | (7,070 | ) | $ | (239 | ) | $ | (16,419 | ) |
|                                                                                                                                                                   |       |                                     |       |                                     |       |   |   |   |   |
| Basic and diluted  loss per share:                                                                                                                                     |       |                                     |       |                                     |       |   |   |   |   |
| As reported                                                                                                                                                            |       | $                                        | 0.03       |                                     | $          | (0.14 | ) | $ | 0.06 |   | $ | (0.32 | ) |
| Proforma                                                                                                                                                               |       | (0.00                                    | )          | (0.17                                    | )          | (0.01 | ) | (0.40 | ) |

 

The fair value of each option grant is estimated on the date of the grantusing the Black-Scholes option-pricing model with the followingweighted-average assumptions used for grants for the three and six months endedJune 30, 2004 and 2003, respectively: expected volatility of 100% for allperiods; dividend yield of 0.0% for all periods; expected option life ofapproximately 5 years; and a risk-free interest rate ranging from 2.9% to3.9%.

 

**2.             Restatement**

 

*GrowellRestatement*

 

As a part of the accompanying condensed consolidated financial statementsand the notes thereto, the Company has restated certain previously issuedfinancial statements due to the fact that previously recognized revenues fromequipment sales made to Growell Metal Co., Ltd., a South Korean metalsprocessing company (“Growell”), in 2002 and 2003 should not have beenrecognized during the period. Revenues previously recognized were deferreduntil the first quarter of 2004.

 

The die casting equipment was the subject of a previously reported disputebetween the Company’s South Korean subsidiary, Liquidmetal Korea Co., Ltd. (“LiquidmetalKorea”), and Growell, which was a former supplier of alloy ingots toLiquidmetal Korea’s Pyongtaek, South Korea manufacturing plant and also a diecasting licensee of the Company. The restatement of revenues from the equipmentsales is a result of an analysis initiated by the Company based upon thesettlement of this dispute in January 2004 and a determination that theoriginal revenue recognition decision did not include consideration of allagreements relating to the subject matter of the transactions. The Companyconcluded that the equipment sales were contingent upon Liquidmetal Korea’scontinued performance under its agreements with Growell, and consequentlyrevenue recognition is deferred until the contingency was ended.

 

The Company has reclassified the die casting equipment at June 30, 2004and for subsequent quarterly periods as equipment held by customer, which areincluded in inventories. The effect of the restatement during the three endedJune 30, 2003 is to reduce cost of sales and to increase inventory held by $265.The effect of the restatement during the six months ended June 30, 2004 is adecrease in revenues by $2,953 and an increase in net loss by $1,423.

 

Under terms of a January 10, 2004 settlement of the dispute betweenLiquidmetal Korea and Growell, Liquidmetal Korea agreed to pay Growell $4,895to purchase Growell’s investment in alloy inventories, proprietary alloyingequipment purchased from

 

11

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Liquidmetal Korea, and supporting equipment purchased from other suppliers.Also as part of the settlement, Growell satisfied in full a balance of $2,058owed to Liquidmetal Korea for the die casting machines Growell purchased fromLiquidmetal Korea in the first quarter of 2003 as part of a license agreementto manufacture Liquidmetal alloy parts for the South Korean automotive industry.The remaining settlement payable of $2,837 and trade accounts payable of $14will be paid to Growell (in cash or stock at the Company’s discretion) byDecember 31, 2004, and is included in settlement payable and accounts payableand accrued liabilities in the June 30, 2004 Condensed Consolidated BalanceSheet, respectively. The Company recorded a loss on the settlement at December31, 2003 of $2,765 which is included in “Cost of Sales” in the December 31,2003 Consolidated Statements of Operations and Comprehensive Loss. The loss onsettlement reflects the write-down of the assets received in the settlement totheir fair market value. The loss is accrued for in the “Accounts payable andaccrued expenses” section in the December 31, 2003, Consolidated Balance Sheet.The sale of the die casting machines to Growell is recorded as revenue in thefirst quarter of 2004. Under the settlement agreement between the parties, theCompany and Growell granted to the other party (and the other party’saffiliates) a release of all known and unknown claims of any nature arisingbetween the parties through the date of settlement, as well as a releaseagainst future claims under agreements between the parties that were terminatedas a part of the settlement. The settlement agreement provided that allagreements of any nature between the parties and their respective affiliateswere terminated as of the date of settlement, with the exception of certainconfidentiality agreements, a Liquidmetal coatings distribution agreement, andfuture rights under the die casting agreement pursuant to which Growellpurchased the die casting machines and obtained a license to make auto partsfrom Liquidmetal alloys. The 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.

 

The results of discontinued operations of the Company’s equipmentmanufacturing business (see note 5) for the three months ended June 30, 2003has been combined with continuing operations for comparative purposes. Asummary of the significant effects of the restatement is as follows:

 

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| ** **                                                                                                          | ** ** | **For the Three Months Ended**                 | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Consolidated Statements of Operations Data:**                                                 | ** ** | **6/30/03**                                                        | ** ** | **6/30/03** | ** ** |
| ** **                                                                                                          | ** ** | **Previously  Reported**                                           | ** ** | **(Restated)** | ** ** |
| ** **                                                                                                          | ** ** | **(In thousands, except per share data)** | ** ** |
|                                                                                                                |       |                                                               |       |   |   |
| Revenue                                                                                                             |       | $                                                                  | 6,409      |   | $ | 6,409 |   |
| Cost of sales                                                                                                       |       | 6,389                                                              |       | 6,124 |   |
| Gross profit                                                                                                        |       | 20                                                                 |       | 285 |   |
| Operating  expense:                                                                                                 |       |                                                               |       |   |   |
| Selling,  general, and administrative                                                                               |       | 4,704                                                              |       | 4,704 |   |
| Research and  development                                                                                           |       | 2,809                                                              |       | 2,809 |   |
| Total operating  expenses                                                                                           |       | 7,513                                                              |       | 7,513 |   |
|                                                                                                                |       |                                                               |       |   |   |
| Loss before  interest, other income, income taxes, minority interest and discontinued  operations                   |       | (7,493                                                             | )          | (7,228 | ) |
| Interest income  (expense), net                                                                                     |       | (13                                                                | )          | (13 | ) |
|                                                                                                                |       |                                                               |       |   |   |
| Gain on sale of  marketable securities held-for-sale                                                                |       | 1,178                                                              |       | 1,178 |   |
|                                                                                                                |       |                                                               |       |   |   |
| Loss before income  taxes, minority interest and discontinued operations                                            |       | (6,328                                                             | )          | (6,063 | ) |
|                                                                                                                |       |                                                               |       |   |   |
| Income taxes                                                                                                        |       | (8                                                                 | )          | (8 | ) |
|                                                                                                                |       |                                                               |       |   |   |
| Minority  interest in (loss) income of consolidated subsidiary                                                 |       | 10                                                                 |       | 10 |   |
|                                                                                                                |       |                                                               |       |   |   |
| Loss from  continuing operations                                                                               |       | (6,326                                                             | )          | (6,061 | ) |
|                                                                                                                |       |                                                               |       |   |   |
| Net loss                                                                                                            |       | $                                                                  | (6,326     | ) | $ | (6,061 | ) |
|                                                                                                                |       |                                                               |       |   |   |
| Loss per share  from continuing operations – basic and diluted                                                 |       | $                                                                  | (0.15      | ) | $ | (0.15 | ) |
|                                                                                                                |       |                                                               |       |   |   |
| Weighted average  common shares used to compute loss per share from continuing operations –  basic and diluted |       | 41,587                                                             |       | 41,597 |   |

 

*SFAS 133 – Accounting for Derivative Instruments and HedgingActivities*

 

As a part of the accompanying consolidatedfinancial and the notes thereto, the Company has restated certain previouslyissued financial statements due to an error related to the Company’s accountingfor embedded convertible feature of senior convertible notes issued in March2004 in accordance with Statement of Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments and Hedging Activities”, (SFAS 133). For furtherdiscussions on the impact of this restatement, please refer to Note 7.

 

13

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**3.             Basis of Presentation and RecentAccounting 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 yearend. 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 the reportingperiod. 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, theEmerging Issues Task Force of the Financial Accounting Standards Board issuedits consensus opinion on EITF Issue No. 04-8, The Effect of ContingentlyConvertible Debt on Diluted Earnings Per Share (EITF No. 04-8). The TaskForce reached a consensus that contingently convertible debt instruments withembedded conversion features that are contingent upon market price triggersshould be included in diluted earnings per share computations, if dilutive,regardless of whether the contingency has been met. The Company currently doesnot have any contingently convertible debt under the scope of EITF Issue No.04-8.

 

**4.             Liquidity**

 

The Company hasexperienced losses from continuing operations during the last two fiscal yearsand has an accumulated deficit of $111,043 as of June 30, 2004. Cash used forcontinuing operations for the six months ended June 30, 2004 was $5.6 millionand cash flow from continuing operations may be negative throughout the fiscalyear 2004. Such conditions raise substantial doubt that the Company will beable to continue as a going concern for 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 required significant spending related tostart-up costs and capital expenditures. These factors have placed asignificant strain on the financial resources of the Company. The ultimatesuccess of the Company depends on its ability to continue reducing operatingcosts, generate higher revenue, achieve positive cash flow from continuingoperations and profitability. The consolidated financial statements do notinclude any adjustments that might result from the outcome of the uncertainty.

 

Our capital requirements during the next 12 months will depend onnumerous factors, including the success of our existing products, thedevelopment of new applications for Liquidmetal alloys, and the resources wedevote to develop and support our Liquidmetal alloy products. However, weanticipate our capital expenditures in the next 12 months will be less than$0.5 million. We expect to continue to devote limited capital to our researchand development activities, to further develop and strengthen our manufacturingcapabilities, and for working capital and other general corporate purposes.

 

We believe that our current cash and cash equivalents, which includesthe private placement funding of $9.9 million infusion in March 2004 of which$4.5 million was redeemed as of August 2004 (see Note 7 and Note 13), togetherwith anticipated cash flow from our operations, will be sufficient to fund ourworking capital and capital expenditure requirements for at least the next 12months. Our projections of cash flows from operations and, consequently, futurecash needs are subject to uncertainty. If our available funds and cashgenerated from operations are insufficient to satisfy our liquidityrequirements, we may need to raise additional capital to fund our operationsand capital expenditure requirements. We cannot be certain 

 

14

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that additional capital, whether through selling additional debt orequity securities or obtaining a line of credit or other loan, will beavailable to us or, if available, will be on terms acceptable to us. If weissue additional securities to raise funds, these securities may have rights,preferences, or privileges senior to those of the rights of our common stockand our stockholders may experience additional dilution.

 

**5.             DiscontinuedOperations**

 

*Dongyang*

 

OnJune 28, 2002, the Company acquired a 51% interest in Chusik HoesaDongyang Yudoro (“Dongyang”). During 2003, Dongyang experienced net losses as aresult of a continuing economic downturn in markets for its machinery products.These events, along with Dongyang’s operating loss, cash flow losses anduncertainty surrounding its future cash flows, led the Company to evaluate itsinvestment for recoverability as of December 31, 2003. As a result, the Companydetermined that the carrying value of its investment in Dongyang exceeded itsfair value as of December 31, 2003 in the amount of $184. This impairment losswas recorded in operating expenses for the year ended December 31, 2003.

 

In March 2004, theCompany sold its 51% investment in Dongyang to the 49% minority shareholder. Theselling price of the Company’s 51% interest in Dongyang was $80, which wasequal to the Company’s net carrying value for the 51% ownership held. Further,the Company agreed to pay Dongyang $155 for the purchase of a receivablebalance from Growell. The transaction resulted in net payable to Dongyang of$75 and a loss of $46 from transfer of the Company’s interest in Dongyang tothe minority shareholder. The loss from operations for the three months endedMarch 31, 2004 totaled $50 and was included in the loss from discontinuedequipment manufacturing operations for that period. The net payable balance of$75 is to be paid in quarterly installments throughout 2004. The outstandingamount of payables to Dongyang is $51 as of June 30, 2004 and is included inaccounts payable and accrued liabilities.

 

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 isreported as part of the assets available for sale on the balance sheet.

 

As Donyang was sold priorto June 30, 2004, there are no assets and liabilities of Dongyang as of June30, 2004. The following is a listing of the major classes of assets andliabilities 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      |   |

 

15

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

 
| ** **                                                             | ** ** | **For the Three months  Ended June ­30,** | ** ** | **For the Six months  Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                                                                | ** ** | **2003**                                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                             | ** ** | ** **                                                              | ** ** | **(Restated)**                                                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Revenue                                                                |       | $                                                                       | —     |                                                            | $          | 465 |   | $ | 22 |   | $ | 647 |   |
| Loss from  discontinued equipment manufacturing operations, net of tax |       | —                                                                  |       | (182                                                            | )          | (96 | ) | (192 | ) |
|                                                                        |            |                                                                         |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

*Taesung*

 

OnJune 14, 2004, the Company entered into an Asset Purchase Agreement whereby allthe assets and liabilities of its Taesung equipment manufacturing division inKorea were sold to a third party for $345 which is payable by the third partyin four equal installments with the last installment being due on June 30, 2005.As of March 31, 2004, management determined that no impairment was anticipatedon the divestiture of its Taesung division. Ultimately, the sale resulted in aloss of approximately $184. The loss from operations for the three months andsix months ended June 30, 2004 totaled $172 and $469 respectively and isincluded in the loss from discontinued equipment manufacturing operations forthe respective periods.

 

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 reportedas part of the discontinued business operations as of March 31, 2004 as theCompany’s plans for divesture of Taesung was determined during the three monthsended March 31, 2004.

 

As Taesung was sold priorto June 30, 2004, there are no assets and liabilities of Taesung as of June 30,2004. The following is a listing of the major classes of assets and liabilitiesof Taesung as of December 31, 2003.

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

 

16

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Summarized operating results of Taesung’soperations are as follows:

 
| ** **                                                            | ** ** | **For the Three months  Ended June 30,** | ** ** | **For the Six months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                                                          | ** ** | **2003**                                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                            | ** ** | ** **                                                        | ** ** | **(Restated)**                                                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Revenue                                                               |       | $                                                                 | 72         |                                                            | $          | 1,411 |   | $ | 172 |   | $ | 1,636 |   |
| Loss from discontinued equipment manufacturing operations, net of tax |       | (356                                                              | )          | (135                                                            | )          | (653 | ) | (118 | ) |
|                                                                       |            |                                                                   |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

**6.             Product Warranty**

 

Due to the lack of historical information for warranty expense relatedto bulk alloy products, management estimates product warranties as a percentageof bulk alloy product sales earned during the period. During the three and sixmonths ended June 30, 2004, the Company recorded $79 and $137 of warrantyexpense, respectively. The product warranty accrual balance is included inaccounts payable and accrued expenses and the warranty expense is included inselling, general, and administrative expenses.

 

**7.             Long-term Debt**

 

Senior Convertible Note

 

On March 3, 2004, the Company issued $9.9million of 6.0% senior convertible notes due 2007 (the “March Notes”) toinvestor 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 bythe patents held by the Company and second priority mortgage interest in plantfacilities and certain equipment in South Korea. The notes were convertible atany time into our common stock at a price of $3.00 per share. Investors in theprivate placement and the Placement Agents received warrants to purchase anaggregate amount of up to approximately 1.2 million shares of common stock,exercisable at $3.00 per share for varying periods but no later than 100 daysfollowing the effectiveness of a registration statement covering the resale ofshares issuable upon exercise of the warrants. In addition, the investors hadthe right to call for repayment of the notes prior to maturity at any time afterthe second anniversary of the closing of the transaction.

 

Pursuant to Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” EITF 00-19, “Accounting for Derivative Financial Instruments Indexedto, and Potentially Settled in, a Company’s Own Stock,” EITF 00-27,“Application of Issue No. 98-5 to Certain Convertible Instruments,” and EITF05-2 “The Meaning of ‘Conventional Convertible Debt Instrument’ in EITF IssueNo. 00-19,” the original fair value of the embedded conversion feature of$7,595 have been recorded as conversion feature liabilities as the debt isconsidered non-conventional convertible debt. The original fair value wascomputed using the Black-Scholes model under the following assumptions: (1)expected life of 3 years; (2) volatility of 82%; (3) risk free interest of2.15% and dividend rate of 0%. The fair value of the conversion feature on thedate of issuance has been recorded as debt discount to be amortized over thelife the debt.

 

Pursuant to EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the original fair value of the 1.2 million warrants of$1,302 has been recorded as warrant liabilities as the shares issuable underthe warrants have not been registered. The original fair value was computedusing the Black-Scholes pricing model under the following assumptions: (1)expected life of 3 years; (2) volatility of 82%, (3) risk free interest of0.95% and dividend rate of 0%.

 

In March 2004, the original fair value of theembedded conversion feature of $7,595 and the original fair value of the 0.6million warrants issued to investors of $584, and the original fair value of0.6 million warrants issued to Placement Agents of 

 

17

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$718 were recorded as discounts of theconvertible note. In addition, $581 direct costs incurred relating to issuanceof the convertible note were recorded as debt issuance cost in other assets.

 

During June 2004, theCompany redeemed $1,500 of the outstanding note balance in cash. The redemptionresulted in write down of debt issuance costs and debt discount of $1,294 tointerest expense and a reduction in conversion feature liabilities of $278 fromcancellation of the embedded conversion feature of the redeemed notes toadditional paid in capital during the three and six months ended June 30, 2004.Further, 0.5 million of unexercised warrants originally issued to certainPlacement Agents in March 2004 expired in June 2004. The change in valuation onthe 0.5 million warrants immediately prior to the expiration resulted in areduction of the warrant liability of $279 to change in value of warrantsduring the three months ended June 30, 2004.

 

As of June 30, 2004, our gross outstanding loanbalance totaled $8,424, un-amortized discounts for conversion feature andwarrants totaled $6,678 and other asset debt issuance costs totaled $517.Interest expense for the amortization of debt issuance cost and discount onnote was $1,360 and $1,549 for the three and six months ended June 30, 2004. Asof June 30, 2004, the effective interest rates were 38%.

 

Pursuant to Statementof Financial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities,” the Company is required to report a value of theconversion liabilityas a fair value and record the fluctuation to the fair value of the conversionfeature liability to current operations. The change in the fair value of the conversion featureliability resulted in a gain of $3,904 and $5,614 for the three and six monthsended June 30, 2004, respectively. The fair value of conversion featureliability outstanding at June 30, 2004 was $1,703. The fair value of conversionfeatures outstanding at June 30, 2004 was computed using the Black-Scholesmodel under the following assumptions: (1) 2.67 years; (2) volatility of 97%,(3) risk free interest of 3.16%and dividend rate of 0%.

 

The Company was obligated, pursuant to a RegistrationRights Agreement between the Company, the Placement Agents and the note holdersdated March 1, 2004 to file a registration statement with the Securities andExchange Commission to register the shares of Common Stock issuable uponconversion of the notes payable and the related warrants on or before the laterof March 31, 2004 or, within 25 days following the issuance thereof, and to useour best efforts to cause such registration statement to become effectivewithin 60 days following the SEC’s first written comments on the registrationstatement. Pursuant to EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, therelative fair values of the warrants of $1,302 was originally recorded as otherliability during March 2004 as the Company has not yet filed the registrationstatement. Further, the $8,424 balance of the note and un-amortized discountsfor conversion feature and warrants of $6,678 is presented as short-termliability as of June 30, 2004 as the note holders have the right to call forpayment on demand as the registration statement has not been filed inaccordance with the Registration Rights Agreement. In addition, the Company isrequired to report a value of the warrant as a fair value and record thefluctuation to the fair value of the warrant liability to current operations.The change in the fair value of the warrants resulted in a gain of $694 and$1,280 for the three and six months ended June 30, 2004, respectively. The fairvalue of warrants outstanding at June 30, 2004 was $22. which was computedusing the Black-Scholes model under the following assumptions: (1) expectedlife of 0.27 years; (2) volatility of 95%, (3) risk free interest of 0.97% anddividend rate of 0%. As of December 2004, the Company has not received anydemands for payment from the note holders.

 

Kookmin Note

 

OnFebruary 4, 2003, the Company’s Korean subsidiary received 6,500,000 in SouthKorean Won, or approximately $5,488, under a loan from Kookmin Bank of SouthKorea. The loan bears interest at an annual rate of 7.1%. In the event ofdelayed repayment, the interest increases to a maximum of 21%, depending on thelength of time the repayment is delayed. This loan is collateralized by theplant facilities and certain equipment in South Korea. During the firsteighteen months from the origination date, interest was payable on a monthlybasis. In October 2003, the Company paid $873 of principal at the request ofKookmin Bank due to the sale of machines that had been part of the collateralon the loan. Subsequent to October 31, 2003, Kookmin Bank requested that theCompany pay an additional $866 of principal by February 2004 due to theCompany’s current credit rating. The Company made two payments on the requestedadditional loan paydown in November and December 2003 of $320 and $205,respectively. The remaining payment of $341 was subsequently made in February 

 

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2004.Beginning in September 2004, the Company will be required to make equal monthlyinstallments of principal and interest to repay the remaining balance of theloan over a 36-month period.

 

Because this note payable is denominated in South Korea Won, thebalance will fluctuate with the exchange rate between the U.S. Dollar and theSouth Korean Won, resulting in the recognition of foreign exchange gains orlosses that are included in other comprehensive loss. At June 30, 2004, thebalance of the note was $3,843 resulting in the recognition of a cumulativeforeign exchange loss of $139, which is included in other comprehensive gainduring the six months ended June 30, 2004.

 

**8.             Stock Compensation Plan**

 

During the quarter ended June30, 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 54,000 common shares of the Company for anexercise price of $1.93 which equaled the fair market value on the date ofgrant

 

During the quarter ended June30, 2004, under the Company’s 2002 Non-employee Director Stock Option Planwhich provides for the grant of stock options to non-employee directors, theCompany granted options to purchase 50,000 common shares of the Company for anaverage exercise price of $1.18. All options granted under this plan hadexercise prices that were equal to the fair market value on the date of grant.

 

The Company canceled 1,491options during the quarter ended June 30, 2004 for terminated employees anddirectors.

 

**9.             SegmentReporting and Geographic Information**

 

SFAS No. 131,*Disclosures about Segments of an Enterprise andRelated Information,*requires companies to provide certaininformation about their operating segments. In April 2002, the Company beganclassifying operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys. The Liquidmetal alloyindustrial coatings are used primarily as a protective coating for industrialmachinery and equipment, such as drill pipe used by the oil drilling industryand boiler tubes used by coal burning power plants. Bulk Liquidmetal alloysinclude market opportunities to manufacture and sell casing components forelectronic devices, medical devices, sporting goods, tooling, prototypesampling, defense applications and metal processing equipment. Primarily, theexpenses incurred by the bulk Liquidmetal alloy segment are research anddevelopment costs and selling expenses associated with identifying anddeveloping market opportunities. Bulk Liquidmetal alloys products can bedistinguished from Liquidmetal alloy coatings in that the bulk Liquidmetalalloy can have significant thickness, up to approximately one inch, whichallows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment. Revenue and expensesassociated with research and development services are included in the bulkLiquidmetal alloy segment. The accounting policies of the reportable segmentsare the same as those described in Note 4 to the consolidated financialstatements included in the Company’s Form 10-K filed with the Securities andExchange Commission on November 10, 2004.

 

Summarized financialinformation concerning the Company’s reportable segments is shown in thefollowing tables:

 

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| ** **                                                                            | ** ** | ** **   | ** ** | **Bulk Alloy** | ** ** | **Segment** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|-------------|------------|
| ** **                                                                            | ** ** | **Coatings** | ** ** | **Products**        | ** ** | **Totals**  | ** ** |
| Three months ended June 30, 2004:                                                     |       |         |       |                |       |        |       |
| Revenue from external customers                                                       |       | $            | 706        |                | $          | 3,349       |       | $ | 4,055 |   |
| Gross profit                                                                          |       | 327          |       | 1,253               |       | 1,580       |       |
| Income before minority interest, interest expense and discontinued  operations        |       | 192          |       | 619                 |       | 811         |       |
| Total identifiable assets at end of period                                            |       | 821          |       | 24,702              |       | 25,523      |       |
|                                                                                  |       |         |       |                |       |        |       |
| Three months ended June 30, 2003:                                                     |       |         |       |                |       |        |       |
| Revenue from external customers                                                       |       | $            | 707        |                | $          | 3,826       |       | $ | 4,533 |   |
| Gross profit                                                                          |       | 337          |       | 50                  |       | 387         |       |
| Income (loss) before minority interest, interest expense and  discontinued operations |       | 144          |       | (4,075              | )          | (3,931      | )          |
| Total identifiable assets at end of period                                            |       | 912          |       | 29,664              |       | 30,576      |       |
|                                                                                  |       |         |       |                |       |        |       |
| Six months ended June 30, 2004:                                                       |       |         |       |                |       |        |       |
| Revenue from external customers                                                       |       | $            | 1,722      |                | $          | 8,621       |       | $ | 10,343 |   |
| Gross profit                                                                          |       | 795          |       | 3,516               |       | 4,311       |       |
| Income before minority interest, interest expense and discontinued  operations        |       | 540          |       | 2,100               |       | 2,640       |       |
| Total identifiable assets at end of period                                            |       | 821          |       | 24,702              |       | 25,523      |       |
|                                                                                  |       |         |       |                |       |        |       |
| Six months ended June 30, 2003:                                                       |       |         |       |                |       |        |       |
| Revenue from external customers                                                       |       | $            | 1,480      |                | $          | 6,252       |       | $ | 7,732 |   |
| Gross profit                                                                          |       | 716          |       | 210                 |       | 926         |       |
| Income (loss) before minority interest, interest expense and  discontinued operations |       | 18           |       | (8,285              | )          | (8,267      | )          |
| Total identifiable assets at end of period                                            |       | 912          |       | 29,664              |       | 30,576      |       |
|                                                                                       |            |              |            |                     |            |             |            |  |  |  |  |  |  |

 

Reconciling informationbetween reportable segments and the Company’s net loss is shown in thefollowing table:

 
| ** **                                                                                                    | ** ** | **For the Three**              | ** ** | **For the Six**                | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **Months Ended June 30,** | ** ** | **Months Ended June 30,** | ** ** |
| ** **                                                                                                    | ** ** | **2004**                                 | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                    | ** ** | **(Restated)**                           | ** ** | **(Restated)**                           | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Total operating income (loss) before minority interest, interest expense  and discontinued operations         |       | $                                        | 811        |                                     | $          | (3,931 | ) | $ | 2,640 |   | $ | (8,267 | ) |
| General and administrative expenses not allocated to segments                                                 |       | (2,120                                   | )          | (2,989                                   | )          | (4,624 | ) | (6,214 | ) |
| Consolidated loss before interest, other income, income taxes,  minority interest and discontinued operations |       | (1,309                                   | )          | (6,920                                   | )          | (1,984 | ) | (14,481 | ) |
| Change in value of warrants, gain                                                                             |       | 694                                      |       | —                                   |       | 1,280 |   | — |   |
| Change in value of conversion feature, gain                                                                   |       | 3,904                                    |       | —                                   |       | 5,614 |   | — |   |
| Interest expense                                                                                              |       | (2,255                                   | )          | (114                                     | )          | (2,651 | ) | (175 | ) |
| Interest income                                                                                               |       | 22                                       |       | 102                                      |       | 34 |   | 228 |   |
| Gain on sale of marketable securities held-for-sale                                                           |       | —                                   |       | 1,178                                    |       | — |   | 1,178 |   |
| Income taxes                                                                                                  |       | —                                   |       | —                                   |       | — |   | — |   |
| Minority interest in income of consolidated subsidiary                                                        |       | —                                   |       | 10                                       |       | — |   | 3 |   |
| Loss from discontinued operations, net                                                                        |       | (356                                     | )          | (317                                     | )          | (749 | ) | (310 | ) |
| Consolidated net income (loss)                                                                                |       | $                                        | 700        |                                     | $          | (6,061 | ) | $ | 1,544 |   | $ | (13,557 | ) |

 

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

 

Revenues from sales to companies in the UnitedStates of America were $1,328 and $3,983 during the three months ended June 30,2004 and 2003, respectively. The revenue related to the United States ofAmerica was earned under three defense-related research and developmentcontracts and sales of coatings products.

 

During the three months ended June 30, 2004, theCompany had revenue from sales to companies outside of the United States of$2,799 of which $2,006 represented sales to companies located in South Korea.Of the sales in South Korea, $72 was from our discontinued equipment manufacturingbusiness. During the three months ended June 30, 2003, the Company hadrevenues from companies outside of the United States of $2,426 of which $1,763represented sales to companies located in 

 

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South Korea. Of the $2,426 sales, $1,876 wasfrom our discontinued equipment manufacturing business. The revenue related tosales to companies outside of the United States was from bulk alloy productsincluding equipment sales.

 

Long-lived assets include net property, plant, and equipment, netintangible assets and goodwill. The Company had long-lived assets of $2,290 and$2,547 located in the United States at June 30, 2004 and December 31, 2003,respectively. The Company had long-lived assets of $15,383 and $16,395 locatedin South Korea at June 30, 2004 and December 31, 2003, respectively. Ofthe assets located in South Korea at December 31, 2003, $215 was fromlong-lived assets of our discontinued equipment manufacturing business.

 

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

 
| ** **                                | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2004**          | ** ** |
| ** **                                | ** ** | ** **        | ** ** |
| Total segment assets                      |       | $                 | 25,523     |   |
| Cash and cash equivalents                 |       | 6,356             |       |
| Prepaid expenses and other current assets |       | 206               |       |
| Other property, plant and equipment       |       | 1,246             |       |
| Other intangible assets, net              |       | 1,034             |       |
| Other assets                              |       | 808               |       |
| Total consolidated assets                 |       | $                 | 35,173     |   |

 

Assets excluded fromsegment assets include assets attributable to the Company’s corporateheadquarters. The largest asset represents the Company’s cash balances,primarily generated from the Company’s proceeds from the senior convertiblenote 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. Common stock equivalents consist of 8,308,922 and6,945,446 equity instruments at June 30, 2004 and 2003, respectively, and havenot been included in the EPS calculation at June 30, 2004 and 2003 as theamounts are anti-dilutive.

 

**11.          Commitments**

 

As of June 30, 2004 andDecember 31, 2003, the Company has contingent obligations of $0 and $132respectively for notes receivables sold with recourse.

 

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 theterms of the agreement, LLPG has the right to commercialize Liquidmetal alloys,particularly precious-metal based compositions, in jewelry and high-end luxuryproduct markets. The Company, in turn, will receive royalty payments over thelife of the contract on all Liquidmetal products produced and sold by LLPG. Inconjunction with its technology licensing contract, LLPG purchased twoproprietary Liquidmetal alloy melting 

 

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

 

The Company is a party to a license agreementwith California Institute of Technology (“Caltech”) under which the Companyexclusively licenses from Caltech certain inventions and technology relating toamorphous alloys. Professor William Johnson, a member of the Company’s Board ofDirectors, is a professor at Caltech, and substantially all of the amorphousalloy technology licensed to the Company under the Caltech license agreementwas developed in Professor Johnson’s Caltech laboratory. During 2003, theCompany paid $50 to Caltech representing the second and final installments onthe $150 aggregate fees related to this agreement. Additionally, the Companyreimburses Caltech for laboratory expenses incurred by Professor Johnson’sCaltech laboratory, which during the six months ended June 30, 2004 and 2003,amounted to $0 and $22 in reimbursements, respectively.

 

A company managed and partially owned by one ofthe Company’s former directors provides technical support services and computerequipment to the Company. During the six months ended June 30, 2003, theCompany incurred $20 of expenses and equipment purchases related to thisarrangement. There were no expenses and payables to this Company as of and forthe six months ended June 30, 2004.

 

We are a party to a consulting agreement withChitnis Consulting, Inc., which is owned 100% by Shekhar Chitnis, a formerdirector and executive officer of our company. Under this agreement, we haveengaged Chitnis Consulting to provide consulting services on an as-needed basisthrough December 31, 2005. During 2003, we incurred $50 in consulting fees fromChitnis Consulting and incurred $13 during the quarter ended June 30, 2004 and$25 for the six-month period ended June 30, 2004.

 

**13.          Subsequent Events**

 

On August 20, 2004, the Companycompleted a private exchange offer for its March Notes. Under terms of theexchange offer, approximately $5.5 million in aggregate principal amount of theMarch Notes have been exchanged for an aggregate of (i) $2.75 million of 6%Senior Secured Notes Due 2007 (the “Long-Term Notes”) and (ii) $2.75 million of10% Senior Secured Notes Due 2005 (the “Short-Term Notes”). In addition, theCompany redeemed approximately $4.5 million of the March Notes, in cash, sinceMarch 2004, of which approximately $3.5 million was redeemed during the quarterended September 30, 2004. 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 maturitydate of July 29, 2007, and a conversion price of $1.00 per share. Holders of theLong-Term Notes will also have the right to call for repayment of the Long-TermNotes prior to maturity at any time after the second anniversary of the closingof the exchange offer. In addition, holders of both the Long-Term Notes andShort-Term Notes will have the right to call for repayment of the notes if theCompany does not, within 180 days of the issuance of the notes, becomecompliant with its SEC reporting obligations and become listed or quoted on theOTC Bulletin Board, the Nasdaq Stock Market, or a national securities exchange.A total of 562,151 warrants to purchase our common stock at an exercise priceof $3.00 per share—all of which were previously issued in connection with thepurchase of the Prior Notes—have been amended to provide for an extendedexpiration date of March 1, 2006

 

Liquidmetal Technologies and certain of itspresent and former officers and directors were named as defendants in ninepurported class action complaints filed in the United States District Courtsfor the Middle District of Florida, Tampa Division, and the Central District ofCalifornia, Southern Division, alleging violations of Sections 11 and 15 of theSecurities Act of 1933 and Sections 10(b) and 20(a) of the Securities ExchangeAct of 1934 and Rule 10b-5 promulgated thereunder. The actions were originallybrought on behalf of those who purchased Liquidmetal Technologies’ common stockbetween May 22, 2002, and March 30, 2004, inclusive. The complaints containvarying allegations, but generally allege that the defendants engaged inimproper revenue recognition with respect to the Company’s transactions withGrowell Metal Co., Ltd. and that the defendants issued false and misleadingstatements concerning the Company’s business and operations, includingunrealistic but favorable information about market demand for Liquidmetalproducts, with the result of artificially inflating the Company’s share price.The complaints seek unspecified compensatory damages and other relief. InAugust 2004, four 

 

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complaints were consolidated inthe United States District Court for the Middle District of Florida under thecaption *Primavera Investors v. Liquidmetal Technologies,Inc., et al*., Case No. 8:04-CV-919-T-23EAJ. John Lee, Chris Cowley,Dwight Mamanteo, Scott Purcell and Mark Rabold, were appointed co-leadplaintiffs (the “Lead Plaintiffs”). In September 2004, the other fivecomplaints filed in the Central District of California were transferred to theMiddle District of Florida for consolidation with the *PrimaveraInvestors* action. The Consolidated Amended Class Action Complaint inthe *Primavera Investors* action is due on orbefore Monday, January 10, 2004. Liquidmetal Technologies and the otherdefendants will have 45 days from the service date to move to dismiss orotherwise respond to the Consolidated Amended Class Action Complaint. We intendto vigorously defend against the class action. We cannot currently predict theimpact or resolution of this litigation or reasonably estimate a range ofpossible loss, which could be material. The resolution of this lawsuit may harmour business and have a material adverse impact on our financial condition.

 

In addition to the above, certain present andformer officers and directors of Liquidmetal Technologies, as well asLiquidmetal Technologies as a nominal defendant, have been named in threeshareholder derivative actions. Two shareholder derivative complaints werefiled in California state court styled *Brian Clair, Derivativelyon Behalf of Liquidmetal Technologies, Inc. v. John Kang, et al.*,Case No. 04CC00551, and *Joseph Durgin Derivativelyon Behalf of Liquidmetal Technologies, Inc. v. John Kang, et al.,* Case No. 04CC00553, bothcommenced in the Superior Court of 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 derivative lawsuits allege that the defendantsbreached various fiduciary duties and otherwise violated state law basedprimarily upon the same underlying facts and circumstances as the federalshareholder class action lawsuits. The plaintiffs seek unspecified compensatorydamages, restitution and disgorgement of profits, equitable and/or injunctiverelief as permitted by law and other relief. The two shareholder derivativecomplaints in California state court have been consolidated. Plaintiffs serveda Consolidated Shareholder Derivative Complaint on October 12, 2004. Thedefendants served a Demurrer to the Consolidated Shareholder DerivativeComplaint on November 22, 2004, seeking dismissal of that complaint. TheDemurrer is set for hearing on February 10, 2005. The Plaintiff in the Floridaderivative action filed a First Amended Shareholder Derivative Complaint onNovember 22, 2004. The Company’s response to the amended Florida derivativecomplaint was due on December 17, 2004. The Company joined other defendants inmoving to dismiss the amended Florida derivative complaint. The Company isawaiting a ruling on that Motion to Dismiss. We intend to vigorously defendagainst the derivative actions. We cannot currently predict the impact orresolution of this litigation or reasonably estimate a range of possible loss,which could be material. The resolution of these lawsuits may harm our businessand have a material adverse impact on our financial condition.

 

Two separate lawsuits werefiled in July and September 2004 by two former employees of our Pyongtaekmanufacturing facility in South Korea. The suits are based on a claim ofwrongful termination and breach of employment contract. In November 2004, theCompany entered into a settlement agreement with the employees whereby theCompany would pay $243 to the employees in exchange for all claims beingdismissed. The payable amount is included in our September 30, 2004 financialstatement.

 

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

 

The Audit Committee of our Board of Directors conducted an independentinquiry into the above-described transactions with 

 

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the aid of independent legal counsel and, as a result of such inquiry,the Audit Committee concluded that the transactions should have resulted in aliability to the Company under Section 16(b) in the amount of $302. Mr. Kanghas acknowledged this liability, and in an agreement negotiated between Mr.Kang and the Audit Committee and approved by the full Board, Mr. Kang will paythis liability in 24 equal monthly installments beginning in January 2005. Theabove-described transactions involving Growell Metal was reported ona new Form 4 filed by Mr. Kang on November 15, 2004, and the open-marketpurchases were previously reported on a timely basis in August 2002.

 

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

** **

*This management’s discussion and analysis should be read in conjunctionwith the condensed consolidated financial statements and notes includedelsewhere in this report on Form 10-Q.*

 

*This management’s discussion and analysis, as well as other sections ofthis report on Form 10-Q, may contain “forward-looking statements” thatinvolve risks and uncertainties, including statements regarding our plans,future events, objectives, expectations, forecasts, or assumptions. Anystatement that is not a statement of historical fact is a forward-looking statement,and in some cases, words such as “believe,” “estimate,” “ project,” “expect,”“intend,” “may,” “anticipate,” “plans,” “seeks,” and similar expressionsidentify forward-looking statements. These statements involve risks anduncertainties that could cause actual outcomes and results to differ materiallyfrom the anticipated outcomes or results, and undue reliance should not beplaced on these statements. These risks and uncertainties include, but are notlimited to, the matters discussed under the caption “Factors Affecting FutureResults” in our Annual Report on Form 10-K for the fiscal year ended December31, 2003 and other risks and uncertainties discussed in filings made with theSecurities and Exchange Commission (including risks described in subsequentreports on Form 10-Q, Form 10-K, Form 8-K, and other filings).Liquidmetal Technologies disclaims any intention or obligation to update orrevise any forward-looking statements, whether as a result of new information,future events, or otherwise.*

 

**Overview**

 

We are a materials technology company thatdevelops and commercializes products made from amorphous alloys. OurLiquidmetal® family of alloys consists of a variety of coatings, powders, bulkalloys, and composites that utilize the advantages offered by amorphous alloytechnology. We develop, manufacture, and sell products and components from bulkamorphous alloys that are incorporated into the finished goods of ourcustomers, and we also market and sell amorphous alloy industrial coatings. Wealso partner with third-party licensees and distributors to develop andcommercialize Liquidmetal alloy products. We have the exclusive right todevelop, manufacture, and sell what we believe are the only commercially viablebulk amorphous alloys.

 

Amorphous alloys are unique materials that aredistinguished by their ability to retain a random atomic structure when theysolidify, in contrast to the crystalline atomic structure that forms inordinary metals and alloys when they solidify. Liquidmetal alloys possess acombination of performance, processing, and cost advantages that we believemakes them preferable to other materials in a variety of applications. Theamorphous atomic structure of our alloys enables them to overcome certainperformance limitations caused by inherent weaknesses in crystalline atomicstructures, thus facilitating performance and processing characteristicssuperior in many ways to those of their crystalline counterparts. For example,our zirconium-titanium Liquidmetal alloys are approximately 250% stronger thancommonly used titanium alloys, such as Ti-6Al-4V, but they have processingcharacteristics similar in many respects to plastics. We believe theseadvantages could result in Liquidmetal alloys supplanting other incumbentmaterials in a wide variety of applications. Moreover, we believe theseadvantages will enable the introduction of entirely new products andapplications that are not possible or commercially viable with other materials.

 

Our revenues are derived from two principaloperating segments: Liquidmetal alloy industrial coatings and bulk Liquidmetalalloy products. Liquidmetal alloy industrial coatings are used primarily as aprotective coating for industrial machinery and equipment, such as drill pipeused by the oil drilling industry and boiler tubes used in coal-burning powerplants. The historical operating information for fiscal year 2001 is basedsubstantially on sales of Liquidmetal alloy coatings. In the second half of2002, we began producing bulk Liquidmetal alloy components and products forincorporation into our customers’ finished goods. Bulk Liquidmetal alloysegment revenue includes sales of parts or components of electronic devices,medical products, and sports and leisure goods; tooling and prototype parts (includingdemonstration parts and test samples) for customers with products indevelopment; metal processing equipment (see Note 5 for disclosure regardingthe disposal of our equipment manufacturing business); and research anddevelopment revenue relating primarily to defense and medical applications. Weexpect that these sources of revenue will continue to significantly change thecharacter of our revenue mix.

 

The cost of sales for our Liquidmetal coatingssegment consists primarily of the costs of outsourcing our manufacturing tothird parties. Consistent with our expectations, our cost of sales has beenincreasing over historical results as we further build our bulk Liquidmetalalloy business. Although we plan to continue outsourcing the manufacturing of ourcoatings, we will 

 

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internally manufacture many products derivedfrom our bulk Liquidmetal alloys.

 

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

 

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

 

 Inconjunction with the divestiture of our Dongyang and Taesung subsidiaries inMarch and June 2004, respectively, the Company decided to discontinue ourequipment manufacturing business in order to conform our operations to ourbroader corporate business strategy (see note 5). Pursuant to AccountingPrinciples Board Opinion No. 30,*Reporting the Results of Operations — Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions,* we reclassified our consolidated financialstatements to reflect the discontinuation of our equipment manufacturingoperations. The revenue, costs and expenses, assets and liabilities, and cashflows of the equipment manufacturing business were segregated in ouraccompanying Consolidated Balance Sheets, Consolidated Statements of Operationsand Comprehensive Loss, and Consolidated Statements of Cash Flows.

 

The following discussion and analysis of ourfinancial condition and results of operations focuses on the historical resultsof our continuing operations and reflects the effect of restating our 2003financial statements for equipment sales made to Growell Metal Co., Ltd.(“Growell”) as disclosed in Note 2 in the notes to condensed consolidated financialstatements section of this document.

 

**CriticalAccounting Policies and Estimates**

** **

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

 

Webelieve that the following accounting policies are the most critical to ourcondensed 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 realizablevalue

•                  Deferred tax assets

•                  Goodwill impairment

•                  Valuation of derivatives of warrants and embeddedconversion features 

 

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

 

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**Resultsof Operations**

 

Comparison of the threemonths ended June 30, 2004 and 2003

 

*Revenue*. Revenue decreased $0.5 million to$4.0 million for the three months ended June 30, 2004 from$4.5 million for the three months ended June 30, 2003. The decrease wasprimarily due to the decrease in our bulk Liquidmetal alloys business whichconsisted of bulk Liquidmetal alloy products. Revenues from our coatings andresearch and development business remained comparable.

 

*Cost of Sales*. Cost of sales decreased to$2.5 million, or 61% of revenue, for the three months ended June 30, 2004from $4.1 million, or 91% of revenue, for the three months ended June 30,2003. This decrease was a result of improved manufacturing processes andincreases in sales of higher margin products. Cost of sales as a percentage ofrevenue has decreased from improved manufacturing processes and decreases inresearch and development activities charged to cost of sales as well as thefact that there was no impairment of inventory during 2004. We believe thatanticipated higher manufacturing volumes and an expected greater mix ofhigher-margin products in the future will cause the gross profit to continue toimprove over time. The cost to manufacture parts from our bulk Liquidmetalalloys is variable and differs based on the unique design of each product.However, the cost of sales for the products sold by the coatings businesssegment is generally consistent because the Liquidmetal coatings products areproduced by third parties and sold wholesale to various industries.

 

*Selling, General, and Administrative Expenses*.Selling, general, and administrative expenses decreased to $2.5 million, or 63%of revenue, for the three months ended June 30, 2004 from $4.6 million, or101% of revenue, for the three months ended June 30, 2003. This decrease of$2.0 million was primarily a result of decrease in wages and related expense by$1.4 million, decrease in travel expenses by $0.2 million, and decrease inproperty rent by $0.3 million. These and other decreases in selling,general and administrative expenses represent the Company’s efforts to managecosts and focus on our core business while continuing to build our corporateinfrastructure required to prepare for and support the anticipated growth ofour bulk Liquidmetal alloy business.

 

*Research and Development Expenses*. Researchand development expenses decreased to $0.3 million, or 9% of revenue, forthe three months ended June 30, 2004 from $2.7 million, or 60% of revenue,for the three months ended June 30, 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 toperform research and development of new Liquidmetal alloys and relatedprocessing capabilities, develop new manufacturing techniques, and contractwith consultants and provide research grants to various institutions to advancethe development of Liquidmetal alloys. The decrease of $2.4 million was due todecreases in salaries, wages and the related by $0.6 million, decrease inprofessional fees, consultant fees, and contract services by $0.2 million,decrease in laboratory and prototyping expenses by $1.4 million, decreasein depreciation expense by $0.1 million, and a decrease in travel expensesby $0.1 million.

 

*Change in Value of Warrants.*Change in valueof warrants increased to a net gain of $0.7 million, or 17% of revenue, duringthe three months ended June 30, 2004 due to change in valuation of warrantpayable issued related to the senior convertible debt funded in March 2004.There was no change in value of warrants recorded during the three months endedJune 30, 2003.

 

*Change inValue of Conversion Feature*. Change in value ofconversion feature liability from our senior convertible debt funded in March2004 resulted in a change in value of conversion feature gain of $3.9 million,or 96% of revenue, during the three months ended June 30, 2004 primarily due tofluctuations in our stock price. There was no such amounts recorded for thethree months ended June 30, 2003.

 

*Interest Expense*. Interest expense was $2.3million, or 56% of revenue, for the three months ended June 30, 2004 and was$0.1 million, or 3% of revenue, for the three months ended June 30, 2003.During the three months ended June 30, 2004, the interest expense was primarilydue to the interest accrued on the Kookmin Bank loan funded on February 4, 2003and accrued interest, amortization of debt issuance costs and debt discount onsenior convertible debt funded on March 3, 2004. During the three months endedJune 30, 2003, the interest expense was primarily due to the interest accruedon the Kookmin Bank loan.

 

*Interest Income.*Interest income was $22thousand for the three months ended June 30, 2004 for interest earned oncertificate of deposits. Interest income was $102 thousand for the three monthsended June 30, 2003 for interest earned on short-term, investment grade,interest-bearing securities.

 

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Comparison of the sixmonths ended June 30, 2004 and 2003

 

*Revenue*. Revenue increased $2.6 million to$10.3 million for the six months ended June 30, 2004 from$7.7 million for the six months ended June 30, 2003. The increase wasprimarily due to the increase in our bulk Liquidmetal alloys business whichconsisted of an increase of $2.4 million from bulk alloy products sales andincrease of $0.2 million in our coatings business.

 

*Cost of Sales*. Cost of sales decreased to$6.0 million, or 58% of revenue, for the six months ended June 30, 2004from $6.8 million, or 88% of revenue, for the six months ended June 30,2003. This decrease was a result of improved manufacturing processes andincreases in sales of higher margin products. Cost of sales as a percentage ofrevenue has decreased from improved manufacturing processes and decreases inresearch and development activities charged to cost of sales. We believe thatanticipated higher manufacturing volumes and an expected greater mix ofhigher-margin products in the future will cause the gross profit to continue toimprove over time. The cost to manufacture parts from our bulk Liquidmetalalloys is variable and differs based on the unique design of each product.However, the cost of sales for the products sold by the coatings businesssegment is generally consistent because the Liquidmetal coatings products areproduced by third parties and sold wholesale to various industries.

 

*Selling, General, and Administrative Expenses*.Selling, general, and administrative expenses decreased to $5.6 million,or 54% of revenue, for the six months ended June 30, 2004 from$8.6 million, or 112% of revenue, for the six months ended June 30, 2003.This decrease of $3.0 million was primarily a result of decrease in wages andrelated expense by $2.3 million, decrease in travel expenses by $0.5million, and decrease in property rent by $0.5 million offset by anincrease in bad debt expense by $0.3 million. These and other decreases inselling, general and administrative expenses represent the Company’s efforts tomanage costs and focus on our core business while continuing to build ourcorporate infrastructure required to prepare for and support the anticipatedgrowth of our bulk Liquidmetal alloy business.

 

*Research and Development Expenses*. Researchand development expenses decreased to $0.7 million, or 7% of revenue, forthe six months ended June 30, 2004 from $6.8 million, or 88% of revenue,for the six months ended June 30, 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 toperform research and development of new Liquidmetal alloys and relatedprocessing capabilities, develop new manufacturing techniques, and contractwith consultants and provide research grants to various institutions to advancethe development of Liquidmetal alloys. The decrease of $6.1 million was due todecreases in salaries, wages and the related by $2.4 million, decrease inprofessional fees, consultant fees, and contract services by $0.6 million,decrease in research grants to institutions by $0.3 million, decrease inlaboratory and prototyping expenses by $2.0 million, decrease indepreciation expense by $0.5 million, and a decrease in travel expenses by$0.1 million

 

*Change in Value of Warrants.*Change in valueof warrants increased to a net gain of $1.3 million, or 12% of revenue, duringthe six months ended June 30, 2004 due to change in valuation of warrantpayable issued related to the senior convertible debt funded in March 2004.There was no change in value f warrants recorded during the six months endedJune 30, 2003.

 

*Change inValue of Conversion Feature*. Change in value ofconversion feature liability from our senior convertible debt funded in March2004 resulted in a change in value of conversion feature gain of $5.6 million,or 54% of revenue, during the six months ended June 30, 2004 primarily due tofluctuations in our stock price. There were no such amounts recorded for thesix months ended June 30, 2003.

 

*Interest Expense*. Interest expense was $2.7million, or 26% of revenue, for the six months ended June 30, 2004 and was $0.2million, or 2% of revenue, for the six months ended June 30, 2003. During thesix months ended June 30, 2004, the interest expense was primarily due to theinterest accrued on the Kookmin Bank loan funded on February 4, 2003 andaccrued interest, amortization of debt issuance costs and debt discount onsenior convertible debt funded on March 3, 2004. During the six months endedJune 30, 2003, the interest expense was primarily due to the interest accruedon the Kookmin Bank loan.

 

*Interest Income.*Interest income was $0.2million, or 3% of revenue, in the six months ended June 30, 2003 due tointerest earned on short-term, investment grade, interest-bearing securities.Interest income in the six months ended June 30, 2004 was $34 thousand.

 

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**Liquidityand Capital Resources**

** **

Our cash used for operatingactivities was $4.8 million for the six months ended June 30, 2004, whichincludes cash provided by our discontinued equipment manufacturing business of$0.8 million, and $16.9 million for the six months ended June 30, 2003,which includes cash used for our discontinued retail golf and equipmentmanufacturing businesses of $0.6 million. Our working capital increased from$1.0 million at December 31, 2003 to $3.9 million at June 30, 2004. TheCompany’s working capital increase of $2.9 million was primarily attributableto increase in cash of $3.2 million, increase in accounts receivable of $0.4million, increase in inventory of $2.2 million, decrease in accounts payableand accrued liabilities of $0.1 million, decrease in deferred revenue of $0.6million, decrease in other current liabilities of $0.9 million, offset by adecrease in prepaid and other current assets of $0.2 million, decrease inassets held for sale from our discontinued equipment manufacturing business of$0.8 million, increase in settlement payable of $0.1 million, increase in currentportion of long-term debt of $1.6 million, and increase in conversion featureliabilities of $1.7 million.

 

Our cash used in investingactivities was $0.1 million for the six months ended June 30, 2004 forinvestments made in patents.

 

Our cash provided by financingactivities was $8.0 million for the six months ended June 30, 2004, whichconsists of $9.9 million in proceeds from borrowings from our seniorconvertible debt offset by $1.8 million on repayment of borrowings and $0.1million in repayment of other liabilities.

 

The Company has experienced losses fromcontinuing operations during the last three fiscal years and has an accumulateddeficit of $111,043 as of June 30, 2004. Cash used for continuing operationsfor the six months ended June 30, 2004 was $5.6 million and cash flow fromcontinuing operations may be negative throughout the fiscal year 2004. Suchconditions raise substantial doubt about the ability of the Company continuingas a going concern for a reasonable period of time. These operating resultsoccurred while the Company was developing and attempting to commercialize andmanufacture products from an entirely new and unique technology. This businessplan required significant spending related to start-up costs and capitalexpenditures. These factors have placed a significant strain on the financialresources of the Company. The ultimate success of the Company depends on itsability to continue reducing operating costs, generate higher revenue, achievepositive cash flow from continuing operations and profitability. Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of the uncertainty.

 

Our capital requirements duringthe next 12 months will depend on numerous factors, including the successof our existing products, the development of new applications for Liquidmetalalloys, and the resources we devote to develop and support our Liquidmetalalloy products. However, we anticipate our capital expenditures will be lessthan $0.5 million in the next 12 months. We expect to continue to devotelimited capital to our research and development activities, to further developand strengthen our manufacturing capabilities, and for working capital andother general corporate purposes.

 

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

 

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**ContractualObligations**

** **

Thefollowing table summarizes the Company’s obligations and commitments as of June30, 2004:

 
| ** **                                 | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | **Total**                                                          | ** ** | **Less Than 1  Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
|                                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Long-term debt                             |       | $                                                                  | 12,267     |   | $ | 9,339 |   | $ | 2,928 |   | $ | — |   | $ | — |   |
| Capital lease obligation                   |       | 256                                                                |       | 118 |   | 138 |   | — |   | — |   |
| Operating leases and rents                 |       | 2,081                                                              |       | 878 |   | 1,203 |   | 22 |   | 149 |   |
| Purchase obligations                       |       | 2,500                                                              |       | — |   | 2,500 |   | — |   | — |   |
|                                       |       | $                                                                  | 17,104     |   | $ | 10,335 |   | $ | 6,769 |   | $ | 22 |   | $ | 149 |   |

 

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

 

We are exposed tovarious markets risks in conducting the business of the Company, and weanticipate that this exposure will increase as a result of our planned growth.In an effort to mitigate losses associated with these risks, we may at timesenter into derivative financial instruments, although we have not historicallydone so. These may take the form of forward sales contracts, option contracts,foreign currency exchange contracts, and interest rate swaps. We have not, anddo not intend to, engage in the practice of trading derivative securities forprofit.

 

*Interest Rates.*Weare exposed to market risks relating to changes 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 securitieswill be subject to interest rate risk and could fall in value if interest ratesrise.

 

*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 currently enter into commodity future, forward,and option contracts to manage the fluctuations in prices of anticipatedpurchases, we may enter into such contacts in the future as our business growsand as our purchases of these raw materials increase.

 

*Foreign Exchange Rates.*Asa result of our operation of a manufacturing facility in South Korea, asubstantial portion of our costs will be denominated in the South Korean won.Consequently, fluctuations in the exchange rates of the South Korean won to theU.S. dollar will affect our costs of goods sold and operating margins and couldresult in exchange losses. Although we do not currently enter into foreignexchange hedge transactions, we may do so in the future as our business grows.

 

**Item 4– Controls and Procedures**

** **

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

 

(a)   Evaluation of disclosure controls andprocedures. During the course of the audit of our financial statements forthe fiscal years ended December 31, 2001, 2002, and 2003, it was determinedthat revenues from certain equipment sales 

 

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made by theCompany to Growell Metal Co., Ltd. in the third and fourth quarters of2002 and the first quarter of 2003 should not have been recognized inthose periods****. It was also****** **determinedthat certain amounts relating to sales made to Samsung in December 2002, to JSTechnologies in September 2002, and AM Corporation in December 2002 should nothave been recognized.   ****And lastly, it was determined that certain stockoptions granted in 2001 and 2002 were not calculated in accordance withguidelines under APB Opinion No. 25, SFAS No. 123, and EITF 00-23.** **These determinations and the associated restatement of previouslyissued financial statements, are described more fully in the Form 10-K, suggestthat, at the time of the subject transactions and the preparation of ourfinancial statements for the relevant periods, the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15 under the SecuritiesExchange Act of 1934) did not ensure that all information required to bedisclosed by the Company was adequately accumulated and communicated to theCompany’s management.  Since that time, the Companyhas made various improvements to enhance the reliabilityof its disclosure controls and procedures.  Except for theforegoing, 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 bythe Form 10-K based on their evaluation of the controls and procedurespursuant to Rule 13a-15 under the Securities and Exchange Act of 1934

 

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**PART II**

**OTHER INFORMATION**

 

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

 

Pursuant to the ourRegistration Statement on Form S-1, as amended, initially filed with theSecurities and Exchange Commission on November 20, 2001 and declared effectiveMay 21, 2002 (Registration No. 333-73716), we closed an initial public offeringof 5,000,000 shares of common stock on May 28, 2002, plus an additional 229,000shares on June 10, 2002 pursuant to an overallotment option, at a price of$15.00 per share (which sale is referred to herein as the “Offering”). TheOffering generated aggregate cash proceeds during the second quarter 2002 of$78.4 million. The net proceeds were $70.7 million after deducting underwritingcommissions of $5.5 million and other transaction fees of $2.2 million. Themanaging underwriters for the Offering were Merrill Lynch & Co., UBSWarburg 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 Offeringto repay all outstanding promissory notes and accrued interest,$11.1 million to fund the construction of our manufacturing facility inSouth Korea, $14.3 million to purchase equipment used to manufactureLiquidmetal parts, $0.4 million to purchase assets related to productionand sale of equipment used in the production process of Liquidmetal alloyproducts, and $0.3 million to purchase the 51% interest in our majorityowned Dongyang subsidiary. During the third quarter of 2002, we used$2.0 million to invest in the common stock of Growell Metal, whichsupplies a portion of the Liquidmetal alloy ingots used in our manufacturingoperations in Korea. We have since sold such stock, realizing a gain on thesale. We used the remaining proceeds of $32.7 million for working capitalin 2002 and 2003, excluding $2.1 million paid to Paul Azinger in 2002 and2003 for amounts due under the terms of his terminated endorsement agreementwith our discontinued retail golf operations.

 

**Item 6 – Exhibits**

 

The following documents arefiled as an exhibit to this Report:

 
| **Exhibit** | ** ** | ** **                                                                                                                                                            |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                 |
|        |       |                                                                                                                                                                  |
| 31.1        |       | Certification  of President and Chief Executive Officer, Ricardo A. Salas, as required by  Section 3.02 of Sarbanes-Oxley Act of 2002                                 |
|        |       |                                                                                                                                                                  |
| 31.2        |       | Certification  of Chief Financial Officer, Young Ham, as required by Section 3.02 of  Sarbanes-Oxley Act of 2002                                                      |
|        |       |                                                                                                                                                                  |
| 32.1        |       | Certification of Principal Executive Officer,  Ricardo A. Salas, pursuant to 18 U.S.C Section 1350, as adopted pursuant to  Section 906 of Sarbanes-Oxley Act of 2002 |
|        |       |                                                                                                                                                                  |
| 32.2        |       | Certification of Chief Financial Officer,  Young Ham, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section  906 of Sarbanes-Oxley Act of 2002            |

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

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

 

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