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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2004
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
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Commission File No.
000-31332
LIQUIDMETAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its
charter)
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Delaware
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33-0264467
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer
Identification No.)
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25800 Commercentre Drive, Suite 100
Lake Forest, California 92630
(address of principal executive
office, zip code)
Registrant’s
telephone number, including area code: (949) 206-8000
Securities registered pursuant to Section 12(b)
of the Act: None
Securities registered pursuant to Section 12(g)
of the Act:
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Title of each Class
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Common
Stock, .001 par value
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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for at least the past
90 days. Yes o
No ý
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K o
Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes ý
No o
The aggregate market value of the registrant’s
Common Stock held by non-affiliates of the registrant as of June 30, 2004 was
approximately $34,793,699. For purposes of this calculation only, (i) shares of
Common Stock are deemed to have a market value of $1.42 per share, the closing
price of the Common Stock as reported on the Nasdaq National Market on June 30,
2004, and (ii) each of the executive officers, directors and persons holding
more than 10% of the outstanding Common Stock as of June 30, 2004 is deemed to
be an affiliate.
PART I
Forward-Looking Statements
This annual report on Form 10-K of Liquidmetal
Technologies, Inc. contains “forward-looking statements” that may state our
management’s current expectations, estimates, forecasts, and projections about
the company and its business. Any statement in this report 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 expressions identify forward-looking statements.
Forward-looking statements involve risks and uncertainties that could cause
actual outcomes and results to differ materially from the anticipated outcomes
or result. These statements are not guarantees of future performance, and undue
reliance should not be placed on these statements. It is important to note that Liquidmetal
Technologies, Inc.’s actual results could differ materially from what is
expressed in our forward-looking statements due to the risk factors described
in the section of this report entitled “Factors Affecting Future Results,” as
well as the following risks and uncertainties:
• Our history of losses and uncertainty
surrounding our ability to achieve profitability;
• Our limited history of manufacturing products
from bulk amorphous alloys;
• Lengthy customer adoption cycles and unpredictable
customer adoption practices;
• Our ability to identify, develop, and
commercialize new product applications;
• Competition from other materials;
• Our ability to consummate strategic
partnerships in the future;
• The potential for manufacturing problems or
delays;
• Potential difficulties associated with
protecting or expanding our intellectual property position; and
• Pending shareholder litigation against our
company
Liquidmetal Technologies, Inc. undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Item 1. Business
Overview
We are a materials technology company that
develops and commercializes products made from amorphous alloys. Our Liquidmetal® family of alloys consists of
a variety of proprietary coatings, powders, bulk alloys, and composites that
utilize the advantages offered by amorphous alloy technology. We develop,
manufacture, and sell products and components from bulk amorphous alloys to
customers in various industries, and we also partner with third-party licensees
and distributors to develop and commercialize bulk Liquidmetal alloy products.
We believe that our proprietary bulk alloys are the only commercially viable
bulk amorphous alloys currently available in the marketplace. In addition to our bulk alloys, we market and
sell a line of proprietary amorphous alloy-based industrial coatings under the
Liquidmetal® ArmacorTM Coatings brand.
Amorphous alloys are unique materials that are
distinguished by their ability to retain a random atomic structure when they
solidify, in contrast to the crystalline atomic structure that forms in other
metals and alloys when they solidify. Liquidmetal alloys possess a combination
of performance, processing, and potential cost advantages that we believe will
make them preferable to other materials in a variety of applications. The
amorphous atomic structure of our alloys enables them to overcome certain
performance limitations caused by inherent weaknesses in crystalline atomic
structures, thus facilitating performance and processing characteristics
superior in many ways to those of their crystalline counterparts. For example,
our zirconium-titanium Liquidmetal alloys are approximately 250% stronger than
commonly used titanium alloys such as Ti-6Al-4V, but they also have some of the
beneficial processing characteristics more commonly associated with plastics.
We believe these advantages could result in Liquidmetal alloys supplanting
high-performance alloys, such as titanium and stainless steel, and other
incumbent materials in a wide variety of applications. Moreover, we believe
these advantages could enable the introduction of entirely new products and
applications that are not possible or commercially viable with other materials.
General Corporate
Information
We were originally incorporated in California in
1987, and we reincorporated in Delaware in May 2003. Our principal executive offices are located
at 25800 Commercentre Dr., Suite 100, Lake Forest, California 92630. Our
telephone number at that address is (949) 206-8000. Previously, our
principal executive offices were located in Tampa, Florida. In December 2003,
we consolidated all corporate functions into our Lake Forest facility, which
had previously served as our principal research and development office. Our
Internet website address is www.liquidmetal.com and all of our filings with the
Securities and Exchange Commission are available free of charge on our website.
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Our Technology
The performance, processing, and potential cost
advantages of Liquidmetal alloys are a function of their unique atomic
structure and their proprietary material composition.
Unique
Atomic Structure
The atomic structure of Liquidmetal alloys is
the fundamental feature that differentiates them from other alloys and metals.
In the molten state, the atomic particles of all alloys and metals have an
amorphous atomic structure, which means that the atomic particles appear in a
completely random structure with no discernible patterns. However, when
non-amorphous alloys and metals are cooled to a solid state, their atoms bond
together in a repeating pattern of regular and predictable shapes, or
crystalline grains. This process is analogous to the way ice forms when water
freezes and crystallizes. In non-amorphous metals and alloys, the individual
crystalline grains contain naturally occurring structural defects that limit
the potential strength and performance characteristics of the material. These
defects, known as dislocations, consist of discontinuities or inconsistencies
in the patterned atomic structure of each grain. Unlike other alloys and
metals, bulk Liquidmetal alloys can retain their amorphous atomic structure
throughout the solidification process and therefore do not develop crystalline
grains and the associated dislocations. Consequently, bulk Liquidmetal alloys
exhibit superior strength and other superior performance characteristics
compared to their crystalline counterparts. Our Liquidmetal alloy coatings, in
contrast to our bulk alloys, have a crystalline atomic structure when initially
applied, but their atomic structure becomes amorphous as the coatings rub
against surfaces under force, thus improving their performance over time.
Prior to 1993, commercially viable amorphous
alloys could be created only in thin forms, such as coatings, films, or
ribbons. However, in 1993, researchers at the California Institute of
Technology (Caltech) developed the first commercially viable amorphous alloy in
a bulk form. Today, bulk Liquidmetal alloys can be formed into objects that are
up to one inch thick, and we are not aware of any other commercially available
amorphous alloys that can achieve this thickness. We have the exclusive right
to commercialize bulk amorphous alloy technology through a license agreement
with Caltech and other patents that we own.
Proprietary
Material Composition
The constituent elements and percentage
composition of Liquidmetal alloys are critical to their ability to solidify
into an amorphous atomic structure. We have several different alloy
compositions that have different constituent elements in varying percentages.
These compositions are protected by various patents that we own or exclusively
license from third parties, including Caltech. The raw materials that we use in
Liquidmetal alloys are readily available and can be purchased from multiple
suppliers.
Advantages of
Liquidmetal Alloys
Liquidmetal alloys possess a unique combination
of performance, processing and cost advantages that we believe makes them
superior in many ways to other commercially available materials for a variety
of existing and potential future product applications.
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Performance
Advantages
Our bulk Liquidmetal alloys provide several
distinct performance advantages over other materials, and we believe that these
advantages make the alloys desirable in applications that require high yield
strength, strength-to-weight ratio, elasticity and hardness.
The high yield strength of bulk Liquidmetal
alloys means that a high amount of stress must be exerted to create permanent
deformation. However, because the yield strength is so high, the yield strength
of many of our bulk Liquidmetal alloy compositions is very near their ultimate
strength, which is the measure of stress at which total breakage occurs.
Therefore, very little additional stress may be required to break an object
made of bulk Liquidmetal alloys once the yield strength is exceeded. Although
we believe that the yield strength of many of our bulk alloys exceeds the
ultimate strength of most other commonly used alloys and metals, our bulk
alloys may not be suitable for certain applications, such as pressurized tanks,
in which the ability of the material to yield significantly before it breaks is
more important than its strength advantage. Additionally, although our bulk
alloys show a high resistance to crack initiation because of their very high
strength and hardness, certain of our bulk alloys are sensitive to crack
propagation under certain long-term, cyclical loading conditions. Crack
propagation is the tendency of a crack to grow after it forms. We are currently developing new alloy compositions
that have improved material properties to overcome these limitations.
Processing
Advantages
The processing of a material generally refers to
how a material is shaped, formed, or combined with other materials to create a
finished product. Bulk Liquidmetal alloys possess processing characteristics
that we believe make them preferable to other materials in a wide variety of
applications. In particular, our alloys are amenable to processing options that
are similar in many respects to those associated with plastics. For example, we
believe that bulk Liquidmetal alloys have superior net-shape casting
capabilities as compared to high-strength crystalline metals and alloys. “Net-shape casting” is a type of casting that
permits the creation of near-to-net shaped products that do not require much costly
post-cast processing or machining. Additionally, unlike most metals and alloys,
our bulk Liquidmetal alloys are capable of being thermoplastically molded in
bulk form. Thermoplastic molding consists of heating a solid piece of material
until it is transformed into a moldable state, although at temperatures much
lower than the melting temperature, and then introducing it into a mold to form
near-to-net shaped products.
Accordingly, thermoplastic molding can be beneficial and economical for
net shape fabrication of high-strength products.
Bulk Liquidmetal alloys also permit the creation
of composite materials that cannot be created with most non-amorphous metals
and alloys. A composite is a material that is made from two or more different
types of materials. In general, the ability to create composites is beneficial
because constituent materials can be combined with one another to optimize the
composite’s performance characteristics for different applications. In other
metals and alloys, the high temperatures required for processing could damage
some of the composite’s constituent materials and therefore limit their
utility. However, the relatively low melting temperatures of bulk Liquidmetal
alloys allow mild processing conditions that eliminate or limit damage to the
constituent materials when creating composites. In addition to composites, we
believe that the processing advantages of Liquidmetal alloys will ultimately
allow for a variety of other finished forms, including a coating or a spray.
Most high-strength metals and alloys cannot be processed into these forms.
Notwithstanding the foregoing advantages, our
bulk Liquidmetal alloys possess certain limitations relative to processing. The
beneficial processing features of our bulk alloys are made possible in part by
the alloys’ relatively low melting temperatures. Although a lower melting
temperature is a beneficial characteristic for processing purposes, it renders
certain bulk alloy compositions unsuitable for certain high-temperature
applications, such as jet engine exhaust components. Additionally, the current
one-inch thickness limitation of our zirconium-titanium bulk alloy renders our
alloys currently unsuitable for use as structural materials in large-scale
applications, such as load-bearing beams in building construction. We are
currently engaged in research and development with the goal of developing
processing technology and new alloy compositions that will enable our bulk
alloys to be formed into thicker objects.
Cost
Advantages
Liquidmetal alloys have the potential to
provide cost advantages over other high-strength metals and alloys in certain
applications. Because bulk Liquidmetal alloy has processing characteristics
similar in some respects to plastics, which
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lends itself to near-to-net shape casting
and molding, Liquidmetal alloys can in many cases be shaped efficiently into
intricate, engineered products. This capability can eliminate or reduce certain
post-casting steps, such as machining and re-forming, and therefore has the
potential to significantly reduce processing costs associated with making parts
in high volume.
Additionally, because the near-to-net shape
processing of Liquidmetal alloys reduces the need for capital-intensive heavy
industrial equipment such as that found in foundry and forging operations,
Liquidmetal alloys can be processed with a smaller machinery footprint, which
allows for more efficient development of facilities and reduced permitting and
regulatory costs. We believe that these advantages may allow our customers an
opportunity to maintain or improve the performance of their products without a
commensurate increase in cost.
Our Strategy
As a result of the experience and knowledge that
we have gained through our activities to date, and recognizing that developing
and commercializing a revolutionary new technology is an evolutionary process,
we are continually modifying our business strategy to enable us to better
capitalize on our evolving core strengths and more effectively pursue revenue
growth and profitability. The key
elements of our strategy include:
• Identifying and Developing New Applications for Our
Liquidmetal Alloy Technology. We intend to continue to identify and
develop new applications that will benefit from the performance, processing,
and cost advantages of Liquidmetal alloys.
• Focusing Our Marketing and Internal Manufacturing
Activities on Select Products with Expected Higher Gross-Margins. We intend to focus our marketing and internal
manufacturing activities on select products with anticipated higher gross
margins. This strategy is designed to
align our product development initiatives with our manufacturing processes and
manufacturing cost structure, and to reduce our exposure to more commodity-type
product applications that are prone to unpredictable demand and fluctuating
pricing. Our focus is primarily on
higher-margin products that possess design features that take optimal advantage
of our existing and developing manufacturing technology and that command a
price commensurate with the performance advantages of our alloys. In addition to our focus on products with
higher gross margins, we will continue to engage in prototype manufacturing,
both for internally manufactured products and for products that will ultimately
be licensed to or manufactured by third parties.
• Further Developing Our Manufacturing Processes,
Capabilities, and Efficiencies for Bulk Liquidmetal Alloys. We
intend to improve and enhance our internal manufacturing processes,
capabilities, and efficiencies in order to maintain quality control over
products made from bulk Liquidmetal alloys, to focus on improvements to the
processing of our alloys, and to protect our intellectual property. As our
alloys become more pervasive, however, we expect to enter into additional
strategic relationships that would involve the licensing of Liquidmetal
technology to third parties for certain market segments.
• Pursuing Strategic Partnerships In Order to More
Rapidly Develop and Commercialize Products.
We intend to actively pursue and support strategic
partnerships that will enable us to leverage the resources, strength, and
technologies of other companies in order to more rapidly develop and
commercialize products. These partnerships
may include licensing transactions in which we license full commercial rights
to our technology in a specific application area, or they may include
transactions of a more limited scope in which, for example, we outsource
manufacturing activities or grant distribution rights. We believe that utilizing such a partnering
strategy will enable us to reduce our working capital burden, better fund
product development efforts, better understand customer adoption practices,
leverage the technical and financial resources of our partners, and more
effectively handle product design and process challenges. As this partnering strategy evolves, a
growing portion of our revenue mix may be comprised of revenue from the
provision of product development services, technical support, and engineering
services, as well as revenues from royalties on the sale of Liquidmetal alloy
products by our partners.
• Advancing the Liquidmetal® Brand. We
believe that building our corporate brand will foster continued adoption of our
technology. Our goal is to position Liquidmetal alloys as a superior substitute
for materials currently used in a variety of products across a range of
industries. Furthermore, we seek to establish Liquidmetal alloys as an enabling
technology that will facilitate the creation of a broad range of commercially
viable new products. To enhance industry awareness of our company and increase
demand for Liquidmetal alloys, we are reviewing various brand development
strategies that could include collaborative advertising and promotional
campaigns with select customers, industry conference and trade show
appearances, public relations, and other means.
6
Initial Applications
We have focused our commercialization efforts for
Liquidmetal alloys on five identified product areas. We believe that these areas are consistent
with our strategy in terms of market size, building brand recognition, and
providing an opportunity to develop and refine our processing capabilities.
Although we believe that strategic partnering transactions could create
valuable opportunities beyond the parameters of these target markets, we
anticipate continuing to pursue these markets both internally and in
conjunction with partners.
Casings
for Electronic Products
We produce casing components for electronic
devices using our bulk Liquidmetal alloys and believe that our alloys offer
enhanced performance and design benefits for these casings in certain
applications. Bulk Liquidmetal alloys
can be used for various structural components of a cellular phone, including
the shield, faceplate, hinge, hinge housings, back plate, side plates,
brackets, and the cover on the phones. We initially targeted the electronic
casings market because of its potential for high product volumes and branding
opportunities; however, unpredictable customer adoption practices, short
product model lives, processing limitations, and intense pricing pressures make
it very challenging to compete in this high-volume market. Accordingly, we are currently limiting our
focus in this market to higher-margin applications that have the potential to
benefit from the unique performance characteristics of bulk Liquidmetal
alloys. We continue to believe that the
high strength-to-weight ratio and elastic limit of bulk Liquidmetal alloys
enable the production of stronger and thinner electronic devices as compared to
plastic, zinc, and magnesium, and we intend to focus on products that require
these design and performance benefits.
Through our shipments to date, we have
demonstrated that bulk Liquidmetal alloys can be used for structural components
of cellular phones and other electronic devices. During 2003 and 2004, we shipped production
quantities of cell phone components to Samsung Electronics Company and Vertu
Limited, the luxury communication products subsidiary of Nokia, for inclusion
in various cellular phone models.
Sporting
Goods and Leisure Products
We are developing a variety of applications for
Liquidmetal alloys in the sporting goods and leisure products area.
In the sporting goods industry, we believe that
the high strength, hardness, and elasticity of our bulk alloys have the
potential to enhance performance in a variety of products, and we further
believe that many sporting goods products are conducive to our internal
manufacturing strategy of focusing on high-margin products that meet our design
criteria. Substantial opportunities also
exist for our amorphous alloy coatings, powders and composites. In 2003,
Rawlings Sporting Goods Company launched a new line of baseball and softball
bats that utilize a Liquidmetal alloy coating, and HEAD NV Sport launched a new
line of HEAD® Liquidmetal® tennis racquets that
incorporates Liquidmetal alloy in composite form in their racquet design. In
2005, we will also be launching goods that utilize Liquidmetal alloy including
skis, lacrosse sticks and other sporting goods.
We are continuing to work with golf companies for the development of
golf club components made from bulk Liquidmetal alloys. Other potential
applications for our alloys in this industry include eyewear, fishing, hunting,
diving, bicycle, skate and winter sport products.
In the leisure products category, we believe
that bulk Liquidmetal alloys can be used to efficiently produce intricately
engineered designs with high-quality finishes, such as premium watchcases, and
we further believe that Liquidmetal alloy technology can be used to make
high-quality, high-strength jewelry from precious metals. We have successfully produced prototype rings
made from an amorphous Liquidmetal platinum alloy that is harder (and hence
more scratch resistant) than conventional platinum jewelry. In 2003, a
special-edition concept chronograph timepiece featuring our titanium-zirconium
Liquidmetal alloy was showcased by luxury watchmaker TAG Heuer at the renowned
Basel Watch and Jewelry Show in Basel, Switzerland. In 2004, we have begun prototyping various
watch pieces with TAG Heuer and we expect to be ready to move into production
in 2005.
In order to accelerate the commercialization of
Liquidmetal alloys in the jewelry and high-end luxury products market, in June
2003 we entered into a strategic licensing transaction with LLPG, Inc., a
corporation headed by a former director of our company with ties to the Swiss
jewelry and luxury goods market. Under
this agreement, LLPG was granted a 10-year exclusive worldwide license to
manufacture and sell a variety of luxury goods, including watchcases and
precious-metal jewelry, utilizing Liquidmetal alloys. Under the agreement, we are entitled to
royalties over the life of the contract on all products produced and sold by
LLPG.
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Medical
Devices
We are engaged in product development efforts
relating to various medical devices that could be made from Liquidmetal alloys.
We believe that the unique properties of bulk Liquidmetal alloys provide a
combination of performance and cost benefits that could make them a desirable
replacement to incumbent materials, such as stainless steel and titanium,
currently used in various medical device applications. Our greatest emphasis in 2003 and ongoing in
2004 has been on surgical instrument applications for Liquidmetal alloys. These
include, but are not limited to, specialized blades, orthopedic instruments
utilized for implant surgery procedures, ultrasonic devices, dental devices,
external fixation devices and general surgery devices. The potential value
offered by our alloys is high performance in some cases and cost reduction in
others, the latter stemming from the ability of Liquidmetal alloys to be net
shape cast into components, thus reducing costs of secondary processing. The
status of most components in the prototyping phase is subject to non-disclosure
agreements with our customers.
We believe that our future success in the
medical device market will be driven largely by strategically aligning
ourselves with well-established companies that are uniquely positioned to
facilitate the introduction of Liquidmetal alloys into this market, especially
as it relates to the unique processing challenges and stringent material
qualification requirements that are prevalent in this industry. We also believe that our prospects for
success in this market will be enhanced through our focus on optimizing
existing alloy compositions and developing new alloy compositions to satisfy
the industry’s rigorous material qualification standards. For example, we have
been working with DePuy Orthopaedics, Inc., a Johnson & Johnson company, to
develop an alloy for orthopedic implants and instruments in the knee
replacement device market. Our agreement
with DePuy gives them the exclusive worldwide right and license to market and
sell knee replacement devices that incorporate Liquidmetal alloys. We are also in the early stages of working
with other orthopedic companies to identify surgical instrument or device
applications that would benefit from utilizing Liquidmetal alloys.
Industrial
Coatings and Powders
We continue to market and sell amorphous alloy
industrial coatings and powders under the Liquidmetal® ArmacorTM
Coatings brand name. Liquidmetal alloy coatings are used primarily as a
protective coating for industrial machinery and equipment. Since the inception
of this business in the late 1980s, our proprietary coatings have demonstrated
a high degree of hardness and low coefficient of friction which, when combined
with their strong adhesion properties, reduce the wear and consequent failure
of the machinery and equipment on which they are used. In contrast to our bulk
alloys, we sell Liquidmetal coatings primarily in the form of a wire or powder
feedstock that is melted and applied to machinery or equipment through welding
or thermal spray processes.
Our Liquidmetal coatings are widely used in the
oil drilling industry as a protective coating on drill pipe and casings, and we
estimate that our coatings represent a dominant share of annual worldwide sales
of hard band coatings for new oil drill pipe. Drilling often places tremendous
stress on pipes and casings, especially whenever the drill changes direction.
Both the drill pipe and casing experience excessive wear, which leads to higher
replacement costs and greater failure rates. Liquidmetal coatings are used to
provide a protective coating, or hard band, around the outside of the drill
pipe and the inside of casings to reduce wear and failure rates and accordingly
reduce operating costs. Our principal coatings customers currently include
Grant Prideco, Inc., and TAFA, Inc. among other distributors and applicators.
Liquidmetal coatings have also been sold into
the power generation industry specifically for the purpose of coating boiler
tubes in coal-burning power plants in order to extend the lives of these
boilers. Boiler tubes are subject to high heat, erosion, and corrosion and
often require costly replacement, both in terms of replacement parts and length
of downtime for installation. Additionally, residue build-up in boiler tubes of
coal burning power plants creates operating inefficiencies. Historic
performance and testing of Liquidmetal coatings have demonstrated that our
coatings extend the life of these boiler tubes meaningfully beyond their
current average life depending on the specific environment. In addition, our
coatings have demonstrated the ability to reduce build-up of residue on boiler
tubes, helping to improve the efficiencies of the boilers. Historically, we
have not concentrated sales efforts on the boiler tube market in a substantial
way. However, given the size of the market and potential opportunities for our
coatings, we have recently dedicated greater effort to this area by, among
other initial steps, establishing a team of independent industrial sales
representatives who are now including our coatings in their product portfolios. In addition to boiler tubes, these sales
representatives are soliciting other OEM product applications for Liquidmetal
coatings.
Defense
Applications
We are working with the U.S. Department of
Defense, as well as a variety of defense-related research and development
agencies and large defense contractors, to develop various defense-related
applications for Liquidmetal alloys. For example, we are currently
developing prototype kinetic energy penetrator rods for use in armor-piercing
ammunition
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systems. Kinetic energy penetrators, or KEPs,
are armor piercing munitions that are currently made primarily from depleted
uranium or tungsten. Initial live-fire ballistic tests under
the Liquidmetal KEP program have demonstrated that tungsten KEPs perform better
whenever Liquidmetal alloy is combined with the tungsten to create a composite
material. In August 2003, we signed a
new $3.0 million research and
development contract with the U.S. Army for the development of KEPs. Our
strategy is to orient the KEP program toward future systems such as the Joint
Strike Fighter program and the Army’s Future Combat System.
In addition to funding the Army KEP program in
2005, the Department of Defense Spending Bill for 2005 contains money to
support the development of an advanced Liquidmetal alloy for use in aerospace
applications. Lockheed Martin has joined
Liquidmetal Technologies for this new program that will be managed by the U.S.
Navy.
Liquidmetal is also working with NASA to conduct
an experiment to use Liquidmetal alloys as the optical surface for spaced-based
telescopes.
We also continue to work with a number of
defense-related research and development agencies and large defense companies
to identify additional military applications that may benefit from using
Liquidmetal alloys. We believe that our alloys are well-positioned to
capitalize on the trend toward lighter but stronger weapon systems in the U.S.
military, and our strategy is to align ourselves with the largest and most
significant players in this industry. Product
development programs for defense applications are currently underway with
several leading defense contractors, including Alliant Techsystems and Lockheed
Martin.
Liquidmetal Golf
From 1997 until September 2001, we engaged in
the retail marketing and sale of golf clubs through a majority owned
subsidiary, Liquidmetal Golf. The retail business of Liquidmetal Golf was
discontinued in September 2001 and is now treated as a discontinued operation
in our consolidated financial statements. Although the retail golf club
business has been discontinued, Liquidmetal Golf will be engaged in the
business of manufacturing and selling golf club components to golf original
equipment manufacturers that will integrate these components into their own
clubs and then sell them under their respective brand names. Liquidmetal
Technologies owns 79% of the outstanding common stock in Liquidmetal Golf.
Our Liquidmetal Golf subsidiary has the
exclusive right and license to utilize our Liquidmetal alloy technology for
purposes of golf equipment applications. This right and license is set forth in
an intercompany license agreement between Liquidmetal Technologies and
Liquidmetal Golf. This license agreement provides that Liquidmetal Golf has a
perpetual and exclusive license to use Liquidmetal alloy technology for the
purpose of manufacturing, marketing, and selling golf club components and other
products used in the sport of golf. In consideration of this license,
Liquidmetal Golf has issued 4,500,000 shares of Liquidmetal Golf common stock
to Liquidmetal Technologies.
Our Intellectual
Property
Our intellectual property consists of patents,
trade secrets, know-how, and trademarks. Protection of our intellectual property
is a strategic priority for our business, and we intend to vigorously protect
our patents and other intellectual property. Our intellectual property
portfolio includes 24 owned or licensed U.S. patents and numerous patent
applications relating to the composition, processing, and application of our
alloys, as well as various foreign counterpart patents and patent applications.
Our initial bulk amorphous alloy technology was
developed by researchers at the California Institute of Technology (“Caltech”).
We have purchased patent rights that provide us with the exclusive right to
commercialize the amorphous alloy and other amorphous alloy technology acquired
from Caltech through a license agreement (“Caltech License Agreement”) with
Caltech. Under the Caltech license agreement, we have the exclusive worldwide
right to make, use, and sell products from all of Caltech’s inventions,
proprietary information, know-how, and other technology relating to amorphous
alloys existing as of September 1, 2001. We also have an exclusive
worldwide license to nine issued patents and four patent applications held by
Caltech relating to amorphous alloy technology, as well as all related foreign
counterpart patents and patent applications. Of the patents currently issued to
Caltech and licensed by us, the earliest expiration date is 2013 and the latest
expiration date is 2021. Furthermore,
the license agreement gives us the exclusive right to make, use, and sell
products from substantially all amorphous alloy technology that is developed in
Professor William Johnson’s Caltech laboratory during the period
September 1, 2001 through August 31, 2005. All fees and other amounts
payable by us for these rights and licenses have been paid in full, and no
further royalties, license fees, or other amounts will be payable in the future
under this license agreement.
Our rights under the license agreement are
perpetual in duration. However, Caltech has the right to convert the license to
a non-exclusive license if we fail to utilize the licensed technology for a
period of 18 or more consecutive months,
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provided that Caltech must give us 180-days
advance written notice of the conversion and we may cure the failure at any
time during the 180-day notice period. If we cure the failure, then the license
will not be converted into a non-exclusive license.
Under the license agreement, we have the right
to sublicense any of the licensed technology or patents. The license agreement
also provides that Caltech reserves the right to use the licensed technology
and patents for noncommercial educational and research purposes. The patents
and patent applications that we license from Caltech relate primarily to the
composition and processing of our alloys. The currently issued U.S. patents
covered by the license agreement will expire between 2013 and 2021.
Under the Caltech license agreement, the parties
are obligated to provide reasonable cooperation to each other in connection
with any threatened or actual infringement of the licensed technology by third
parties. We have the right to commence an action for infringement of any of the
licensed technology, and although Caltech is not obligated to bring suit or
take action against infringers, Caltech is obligated to join in any such
lawsuit upon our request.
In addition to the patents and patent
applications that we license from Caltech, we are building a portfolio of our
own patents to expand and enhance our technology position. These patents and
patent applications primarily relate to various applications of our bulk
amorphous alloys, the composition of our coatings and powders, and the
processing of our alloys. The patents relating to our coatings expire on
various dates between 2005 and 2017, and the patents relating to our bulk
amorphous alloys expire on various dates between 2013 and 2021. Our policy is
to seek patent protection for all technology, inventions, and improvements that
are of commercial importance to the development of our business, except to the
extent that we believe it is advisable to maintain such technology or invention
as a trade secret.
In order to protect the confidentiality of our
technology, including trade secrets, know-how, and other proprietary technical
and business information, we require that all of our employees, consultants,
advisors and collaborators enter into confidentiality agreements that prohibit
the use or disclosure of information that is deemed confidential. The
agreements also obligate our employees, consultants, advisors and collaborators
to assign to us developments, discoveries and inventions made by such persons
in connection with their work with us.
Research and Development
We are engaged in ongoing research and
development programs that are driven by the following key objectives:
• Enhance Material Processing
and Manufacturing Efficiencies. We plan to continue research and development of processes and
compositions that will decrease our cost of making products from Liquidmetal
alloys.
• Optimize Existing Alloys and Develop New Compositions. We believe that the primary technology driver
of our business will continue to be our proprietary alloy compositions. We plan to continue research and development
on new alloy compositions to generate a broader class of amorphous alloys with
a wider range of specialized performance characteristics. During 2003 and
continuing into 2004, we have successfully expanded our portfolio of
bulk amorphous alloys to include additional zirconium-titanium alloys, as well
as alloys based on other metals, such as iron and platinum. Although these various compositions are at
different stages of development and only a few are currently suitable for
commercial use, we believe that a larger alloy portfolio will enable us to
increase the attractiveness of our alloys as an alternative to incumbent
materials and, in certain cases, drive down product costs. We also believe that our ability to optimize
our existing alloy compositions will enable us to better tailor our alloys to
our customers’ specific application requirements.
• Develop New Applications. We will continue research and development of
new applications for Liquidmetal alloys. We believe the range of potential
applications will broaden by expanding the forms, compositions, and methods of
processing of our alloys.
We conduct our research and
development programs internally and also through strategic relationships that
we enter into with third parties. Our internal research and development efforts
are currently focused on product and process development. Our internal research
and development efforts are conducted by a team of 21 scientists, engineers and
researchers whom we either employ directly or engage as consultants. Included
among this team are Professor William Johnson, who discovered our initial bulk
amorphous alloy at Caltech in 1993, and his graduate student at the time,
Atakan Peker, who is employed as our Vice President of Technology. Professor Johnson was an employee of our
company from October 2001 through December 2003 and then became a consultant to
the Company. Professor Johnson continues
to be a member of our board of directors.
In addition to our internal research and
development efforts, we enter into cooperative research and development
relationships with leading academic institutions. Professor Johnson continues
to supervise a laboratory at Caltech, and through our license agreement with
Caltech, we have a continuing relationship with the other researchers in
Professor
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Johnson’s Caltech laboratory. We have also
entered into research relationships with several other academic institutions
for the conduct of research relating to the properties and characteristics of
our alloys.
We have entered into development relationships
with other companies for the purpose of identifying new applications for our
alloys and establishing customer relationships with such companies. Some of our
product development programs are partially funded by our customers. We are also
engaged in negotiations with other potential customers regarding possible
product development relationships. Our research and development expenses for
the years ended December 31, 2004, 2003, and 2002 were $1.5 million,
$8.8 million, and $11.8 million, respectively.
Manufacturing
We currently own and operate a 166,000 square
feet manufacturing facility in Pyongtaek, South Korea, which became operational
in the third quarter of 2002. We opened
a 14,400 square feet facility in Weihai, China in August 2004 to facilitate our
bulk alloy manufacturing business. We
believe that these facilities will meet our anticipated manufacturing needs for
the foreseeable future, although these needs may change depending upon the
actual and forecasted orders we receive for our products. We currently intend
to develop supplemental research and development, prototyping and manufacturing
capabilities elsewhere, including the United States, for purposes of meeting
our long-term manufacturing needs and our customers’ requirements. In December 2003, we entered into a license
agreement with Florida Custom Mold, Inc., a Clearwater, Florida-based company
that specializes in high-quality mold design and injection molding services,
under which Florida Custom Mold is currently acting as a contract manufacturer
to our company for purposes of producing prototypes of certain defense and
medical products in the US.
Raw Materials
Liquidmetal alloy compositions are comprised of
many elements, all of which are available commodity products. We believe that
each of these raw materials is readily available in sufficient quantities from
multiple sources on commercially acceptable terms. However, any substantial
increase in the price or interruption in the supply of these materials could
have an adverse effect on our profitability.
Customers
During 2004, four customers accounted for 10% or
more of our revenue from continuing operations.
Revenues from Charm Tech and Pntel, both of which are direct suppliers
to Samsung, represented 62% of revenue from continuing operations for the year
ended 2004. Also, revenues from defense
related contracts with the Unites States of America represented 10% and Growell
Metal represented 12% of revenue from continuing operations for the year ended
2004. During 2003, three customers
accounted for 10% or more of our revenue from continuing operations. Revenue
from Samsung represented 10% of revenue, revenue from LLPG, Inc. represented
12% and defense-related contracts with three departments of the United States
of America represented 16% of revenue from continuing operations for the year
ended December 31, 2003. During the year ended December 31, 2002, revenue
from Samsung represented 15% of revenue while revenue earned on contracts with
the government represented 16% of revenue from continuing operations. We expect that a significant portion of our
revenue may continue to be concentrated in a limited number of customers, even
as our bulk Liquidmetal alloy business grows.
Competition
We are not aware of any other company or
business that manufactures, markets, distributes, or sells bulk amorphous
alloys or products made from bulk amorphous alloys. We believe it would be
difficult to develop a competitive bulk amorphous alloy without infringing our
patents. However, we expect that our bulk Liquidmetal alloys will face
competition from other materials, including metals, alloys, plastics and
composites, which are currently used in the commercial applications that we
pursue. Our alloys could also face competition from new materials that may be
developed in the future, including new materials that could render our alloys
obsolete.
Our Liquidmetal alloy coatings face competition
from industrial coatings currently manufactured or sold by other companies. At
present, the primary competitors of our coatings business are Varco
International, Inc. and Arnco Technology Trust, Limited. Although we believe,
based on market data gathered by us, that our coatings compete favorably with
these companies’ products and that we continue to maintain the dominant market
share with respect to protective coatings for oil drill pipe and casings, these
competitors are larger well-established businesses that have substantially
greater financial, marketing, and other resources than we do.
11
We will also experience indirect competition
from the competitors of our customers. Because we will rely on our customers to
market and sell finished goods that incorporate our components or products, our
success will depend in part on the ability of our customers to effectively
market and sell their own products and compete in their respective markets.
Backlog
In our bulk alloy segment, because of the
minimal lead-time associated with orders of bulk alloy parts, we generally do
not carry a significant backlog. In our coatings segment, we typically ship our
coating products shortly after receipt of an order, and our coatings backlog is
therefore also insignificant. In both our bulk alloy segment and coatings
segment, the backlog as of any particular date gives no indication of actual
sales for any succeeding period.
Sales and Marketing
We direct our marketing efforts towards
customers that will incorporate our components and products into their finished
goods. To that end, we will continue to hire business development personnel
who, in conjunction with engineers and scientists, will actively identify
potential customers that may be able to benefit from the introduction of
Liquidmetal alloys to their products. In some cases, we will develop
applications in conjunction with existing or potential customers. By adopting
this strategy, we intend to take advantage of the sales and marketing forces
and distribution channels of our customers to facilitate the commercialization of
our alloys. We also direct business
development efforts toward companies who we believe could be viable candidates
for potential partnering transactions, such as licensing relationships,
distribution arrangements, joint ventures, and the like.
Employees
As of December 31, 2004, we had 158 full-time
employees. As of December 31, 2004, 55 of our Korean operation employees were
represented by a labor union. We have
not experienced any work stoppages and we consider our employee relations to be
favorable.
Governmental Regulation
Medical instruments incorporating our
Liquidmetal alloys will be subject to regulation in the United States by the
FDA and corresponding state and foreign regulatory agencies. Any orthopedic
devices that we develop will be regulated in a similar manner. Medical device
manufacturers to whom we intend to sell our products may need to obtain FDA
approval before marketing their medical devices that incorporate our products.
Medical device manufacturers may need to obtain similar approvals before
marketing these medical device products in foreign countries.
Because we intend to sell our medical device
products to medical device manufacturers, we do not believe that we will need
to obtain FDA approval or similar foreign approvals before selling products to
medical device manufacturers. Nonetheless,
as a manufacturer of medical device components, we would be subject to quality
control and record keeping requirements of FDA and other federal and state
statutes and regulations, as well as similar regulations in foreign countries.
The process of obtaining and maintaining
required FDA and foreign regulatory approvals for medical devices that
incorporate our products could be lengthy, expensive, and uncertain for our
customers. Additionally, regulatory agencies can delay or prevent product
introductions. Generally, before a medical device manufacturer can market a
product incorporating one of our products, our customer must obtain for their
finished product marketing clearance through a 510(k) premarket notification or
approval of a pre-market approval application, or PMA. The FDA will typically
grant a 510(k) clearance if the applicant can establish that the device is
substantially equivalent to a predicate device. It generally takes a number of
months from the date of a 510(k) submission to obtain clearance, but it may
take longer, particularly if a clinical trial is required.
The FDA may find that a 510(k) is not
appropriate for a medical device that incorporates our product or that substantial
equivalence has not been shown and as a result will require a PMA. A PMA
application must be submitted if a proposed medical device does not qualify for
a 510(k) pre-market clearance procedure. PMA applications must be
supported by valid scientific evidence to demonstrate the safety and
effectiveness of the device, typically including the results of clinical
trials, bench tests, and laboratory and animal studies. The PMA process can be
expensive, uncertain and lengthy, requires detailed and comprehensive data, and
generally takes significantly longer than the 510(k) process. Additionally, the
FDA may never approve the PMA.
12
Similar regulations in foreign countries vary
significantly from country to country and with respect to the nature of the
particular medical device. The time required to obtain these foreign approvals
to market our products may be longer or shorter than that required in the
United States, and requirements for such approval may differ from FDA
requirements.
Factors Affecting Future
Results
This report contains forward-looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995)
that are based on management’s current expectations, estimates, forecasts, and
projections about the Company and its business. In addition, other written or
oral statements which constitute forward-looking statements may be made from
time to time by or on behalf of Liquidmetal Technologies, Inc. Any statement in
this report 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 expressions
identify forward-looking statements. Forward-looking statements involve risks
and uncertainties that could cause actual outcomes and results to differ
materially from the anticipated outcomes or result. These statements are not
guarantees of future performance, and undue reliance should not be placed on
these statements. Liquidmetal Technologies, Inc. undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Factors that could cause actual results to differ
materially from what is expressed or forecasted in our forward-looking
statements include, but are not limited to, the following:
We have not sustained
profitability and may incur losses in the future.
We had an accumulated deficit of approximately $125.3
million at December 31, 2004. Of this accumulated deficit, $44.5 million
was attributable to losses generated by our discontinued equipment
manufacturing and retail golf businesses through December 31, 2004. We may incur additional operating losses in
the future. Consequently, it is possible that we may not achieve positive
earnings and, if we do achieve positive earnings, we may not be able to achieve
them on a sustainable basis.
We have a limited history of developing,
manufacturing, and selling products made from our bulk amorphous alloys.
We have marketed and sold industrial coatings to
distributors in the coatings industry since 1987. Prior to the third quarter of
2002, our experience selling products made from bulk amorphous alloys has been
limited to our discontinued retail golf business, which had a different
marketing strategy than the one we are currently employing. Therefore, we have
a relatively limited history of producing bulk amorphous alloy components and
products on a mass-production basis. Many of our relationships with potential
customers for bulk alloy products are at an early stage, and there can be no
assurance that these customers will enter into purchase commitments with us.
We rely on assumptions
about the markets for our products and components that, if incorrect, may
adversely affect our profitability.
We have a relatively short history producing
bulk amorphous alloy components on a mass-production basis. We have made
assumptions regarding the market size for, and the manufacturing requirements
of, our products and components based in part on information we received from
third parties and also from our limited history. If these assumptions prove to
be incorrect, we may not achieve anticipated revenue targets or profitability.
If we cannot establish
and maintain relationships with customers that incorporate our components and
products into their finished goods, we will not be able to increase our revenue
and commercialize our products.
To increase our revenue, we must establish and
maintain relationships with customers that will incorporate our components and
products into their finished goods. We expect to rely on the marketing,
distribution, and, in some cases, the manufacturing, research, and development
abilities of our customers to assist us in developing, commercializing, and
marketing our products in different markets. Our future growth and success will
depend in large part on our ability to enter into these relationships and the
subsequent success of these relationships. If our products are selected for use
in a customer’s products, we still may not realize significant revenue from
that customer if that customer’s products are not commercially successful.
13
It may take significant
time and cost for us to develop new customer relationships, which may delay our
ability to generate additional revenue or achieve profitability.
Our ability to generate revenue from new
customers will be affected by the amount of time it takes for us to, among
other things:
• identify a potential customer and introduce
the customer to Liquidmetal alloys;
• work with the customer to select and design
the parts to be fabricated from Liquidmetal alloys;
• make the molds and tooling to be used to
produce the selected part;
• make prototypes and samples for customer
testing;
• work with our customers to test and analyze
prototypes and samples; and
• with respect to some types of products, such
as medical devices, to obtain regulatory approval.
We currently do not have a sufficient history of
selling products made from our bulk amorphous alloys to predict accurately the
length of our average sales cycle. We believe that our average sales cycle from
the time we deliver an active proposal to a customer until the time our
customer fully integrates our bulk amorphous alloys into its product could be a
significant period of time. Our history to date has demonstrated that the sales
cycle could extend significantly longer than we anticipate. The time it takes
to transition a customer from limited production to full-scale production runs
will depend upon the nature of the processes and products into which our alloys
are integrated. Moreover, we have found
that customers often proceed very cautiously and slowly before incorporating a
fundamentally new and unique type of material into their products.
After we develop a
customer relationship, it may take a significant amount of time for that
customer to develop, manufacture, and sell finished goods that incorporate our
components and products.
Our experience has shown that our customers will
perform numerous tests and extensively evaluate our components and products
before incorporating them into their finished products. The time required for
testing, evaluating, and designing our components and products into a customer’s
products, and in some cases, obtaining regulatory approval, can take a
significant amount of time, with an additional period of time before a customer
commences volume production of products incorporating our components and
products, if ever. Moreover, because of this lengthy development cycle, we may
experience a delay between the time we accrue expenses for research and
development and sales and marketing efforts and the time when we generate
revenue, if any. We may incur substantial costs in an attempt to transition a
customer from initial testing to prototype and from prototype to final product.
If we are unable to minimize these transition costs, or to recover the costs of
these transitions from our customers, our operating results will be adversely
affected.
A limited number of our
customers generate a significant portion of our revenue.
For the near future, we expect that a
significant portion of our revenue will be concentrated in a limited number of
customers. For example, for the year ended December 31, 2004, revenue from two
customers represented approximately 62% of total revenue from continuing
operations and for the year ended December 31, 2003, revenue from two
customers represented approximately 26% of total revenue from continuing
operations. A reduction, delay, or cancellation of orders from one or more of
these customers or the loss of one or more customer relationships could
significantly reduce our revenue. Unless we establish long-term sales
arrangements with these customers, they will have the ability to reduce or
discontinue their purchases of our products on short notice.
We expect to rely on our
customers to market and sell finished goods that incorporate our products and
components, a process over which we will have little control.
Our future revenue growth and ultimate
profitability will depend in part on the ability of our customers to
successfully market and sell their finished goods that incorporate our
products. We will have little control over our customers’ marketing and sales
efforts. These marketing and sales efforts may be unsuccessful for various
reasons, any of which could hinder our ability to increase revenue or achieve
profitability. For example, our customers may not have or devote sufficient
resources to develop, market, and sell their finished goods that incorporate
our products. Because we
14
typically will not have exclusive sales
arrangements with our customers, they will not be precluded from exploring and
adopting competing technologies. Also, products incorporating competing
technologies may be more successful for reasons unrelated to the performance of
our customers’ products or the marketing efforts of our customers.
Our growth depends on
our ability to identify, develop, and commercialize new applications for our
technology.
Our future growth and success will depend in
part on our ability to identify, develop, and commercialize, either alone or in
conjunction with our customers, new applications and uses for Liquidmetal
alloys. If we are unable to identify and develop new applications, we may be
unable to develop new products or generate additional revenue. Successful
development of new applications for our products may require additional
investment, including costs associated with research and development and the
identification of new customers. In addition, difficulties in developing and
achieving market acceptance of new products would harm our business.
We may not be able to
effectively compete with current suppliers of incumbent materials or producers
of competing products.
The future growth and success of our bulk
amorphous alloy business will depend in part on our ability to establish and
retain a technological advantage over other materials for our targeted
applications. For many of our targeted applications, we will compete with
manufacturers of similar products that use different materials. For example, we
have targeted the cellular phone casing market as an application for bulk
Liquidmetal alloys. In this market, we believe we will compete with other
manufacturers of cellular phone casings who use plastics or metal to construct
their casings. In other markets, we will compete directly with suppliers of the
incumbent material. In addition, in each of our targeted markets,
our success will depend in part on the ability of our customers to compete
successfully in their respective markets. Thus, even if we are successful in replacing
an incumbent material in a finished product, we will remain subject to the risk
that our customer will not compete successfully in its own market.
Future advances in
materials science could render Liquidmetal alloys obsolete.
Academic institutions and business enterprises
frequently engage in the research and testing of new materials, including
alloys and plastics. Advances in materials science could lead to new materials
that have a more favorable combination of performance, processing, and cost
characteristics than our alloys. The future development of any such new
materials could render our alloys obsolete and unmarketable or may impair our
ability to compete effectively.
Our growth depends upon
our ability to retain and attract a sufficient number of qualified employees.
Our future growth and success will depend in
part on our ability to retain key members of our management and scientific
staff, particularly John Kang, our Chairman of the board of directors,
Professor William Johnson, a member of our board of directors and a professor
at Caltech, and Dr. Atakan Peker, our Vice President of Technology. We do not
have “key man” or similar insurance on any of these individuals. If we lose
their services or the services of other key personnel, our financial results or
business prospects may be harmed. Additionally, our future growth and success
will depend in part on our ability to attract, train, and retain scientific
engineering, manufacturing, sales, marketing, and management personnel. We
cannot be certain that we will be able to attract and retain the personnel
necessary to manage our operations effectively. Competition for experienced
executives and scientists from numerous companies and academic and other
research institutions may limit our ability to hire or retain personnel on
acceptable terms. In addition, many of the companies with which we compete for
experienced personnel have greater financial and other resources than we do.
Moreover, the employment of non-citizens may be restricted by applicable immigration
laws.
We may not be able to
successfully identify, consummate, or integrate strategic partnerships.
As a part of our business strategy, we intend to
pursue strategic partnering transactions that provide access to new
technologies, products, markets, and manufacturing capabilities. These
transactions could include licensing agreements, joint ventures, or even
business combinations. For example, we may pursue transactions that will give
us access to new technologies that are useful in connection with the
composition, processing, or application of Liquidmetal alloys. We may not be
able to successfully identify any potential strategic partnerships. Even if we
do identify one or more potentially beneficial strategic partnering, we may not
be able to consummate these transactions on favorable terms or obtain the
benefits we anticipate from such a transaction.
15
We may encounter
manufacturing problems or delays or may be unable to produce high-quality products
at acceptable costs.
We have relatively limited experience in
manufacturing our products and may be required to manufacture a range of
products in high volumes while ensuring high quality and consistency. Although
we currently own and operate a 166,000 square feet and a 14,400 square feet
manufacturing facilities in South Korea and China, respectively, we cannot
guarantee that these facilities will be able to produce the intended products
with production yields, quality controls, and production costs that provide us
with acceptable margins or profitability or satisfy the requirements of our
customers.
We expect to derive a
substantial portion of our revenue from sales outside the United States, and
problems associated with international business operations could affect our
ability to manufacture and sell our products.
We expect that we will continue to manufacture a
substantial portion of our initial bulk Liquidmetal alloy products in our South
Korean facility. As a result, our manufacturing operations are subject to risks
of political instability, including the risk of conflict between North Korea
and South Korea and tensions between the United States and North Korea. In
addition, we anticipate that sales to customers located outside of the United States
will account for a significant portion of our revenue in future periods and
that the trend of foreign customers accounting for an increasing portion of our
total sales may continue. Specifically, we expect to continue to derive a
significant amount of revenue from sales to customers located in Asia. A
downturn in the economies of Asian countries where our products will be sold,
particularly South Korea’s economy, could materially harm our business.
Consequently, our operations and revenue likely
will be subject to a number of risks associated with foreign commerce,
including:
• staffing and managing our manufacturing
facility located in South Korea and post-processing facility located in China;
• product or material transportation delays or
disruption, including the availability and costs of air and other
transportation between our South Korean and Chinese facilities and the United
States;
• political and economic instability, including
instability involving North Korea;
• potentially adverse tax consequences;
• burden of complying with complex foreign laws
and treaties; and
• trade
protection laws, policies, and measures and other regulatory requirements
affecting trade and investment, including loss or modification of exemptions
for taxes and tariffs. Moreover,
customers may sell finished goods that incorporate our components and products
outside of the United States, which exposes us indirectly to additional foreign
commerce risks.
Our business is subject
to the potential adverse consequences of exchange rate fluctuations.
We expect to conduct business in various foreign
currencies and will be exposed to market risk from changes in foreign currency
exchange rates and interest rates. Fluctuations in exchange rates between the
U.S. dollar and such foreign currencies may have a material adverse effect on
our business, results of operations, and financial condition and could
specifically result in foreign exchange gains and losses. The impact of future
exchange rate fluctuations on our operations cannot be accurately predicted. To
the extent that the percentage of our non-U.S. dollar revenue derived from
international sales increases in the future, our exposure to risks associated
with fluctuations in foreign exchange rates will increase further. Moreover, as
a result of operating a manufacturing facility in South Korea, a substantial
portion of our costs are and will continue to be denominated in the South
Korean won. Adverse changes in the exchange rates of the South Korean won to
the U.S. dollar will affect our costs of goods sold and operating margins and
could result in exchange losses.
16
Our inability to protect
our licenses, patents, and proprietary rights in the United States and foreign
countries could harm our business because third parties may take advantage of
our research and development efforts.
We have an exclusive license from Caltech to
several patents and patent applications relating to amorphous alloy technology,
and we have obtained several of our own patents. We also have the exclusive
right to Caltech’s inventions, proprietary information, know-how, and other
technology relating to bulk amorphous alloys existing as of September 1,
2001. Our success depends in part on our ability to obtain and maintain patent
and other proprietary right protection for our technologies and products in the
United States and other countries. If we are unable to obtain or maintain these
protections, we may not be able to prevent third parties from using our
proprietary rights. Specifically, we must:
• protect and enforce our license agreement
with Caltech and our own patents and intellectual property;
• exploit our license of the patented
technology under our license agreement with Caltech as well as our own patents;
and
• operate our business without infringing on
the intellectual property rights of third parties.
Caltech owns several issued United States
patents covering the composition and method of manufacturing of the family of
Liquidmetal alloys. We also hold several United States and corresponding
foreign patents covering the manufacturing processes of Liquidmetal alloys and
their use. The patents relating to our coatings expire on various dates between
2005 and 2017, and those relating to our bulk amorphous alloys between 2013 and
2021. If we are unable to protect our proprietary rights prior to the
expiration of these patents, we may lose the advantage we have established as
being the first to market bulk amorphous alloy products. In addition, the laws
of some foreign countries do not protect proprietary rights to the same extent
as the laws of the United States, and we may encounter significant problems and
costs in protecting our proprietary rights in these foreign countries.
Patent law is still evolving relative to the
scope and enforceability of claims in the fields in which we operate. Our
patent protection involves complex legal and technical questions. Our patents
and those patents for which we have license rights may be challenged, narrowed,
invalidated, or circumvented. We may be able to protect our proprietary rights
from infringement by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. Furthermore, others may independently develop
similar or alternative technologies or design around our patented technologies.
Litigation or other proceedings to defend or enforce our intellectual property
rights could require us to spend significant time and money and could otherwise
adversely affect our business.
Other companies may
claim that we infringe their intellectual property rights, which could cause us
to incur significant expenses or prevent us from selling our products.
Our success depends, in part, on our ability to
operate without infringing on valid, enforceable patents or proprietary rights
of third parties and not breaching any licenses that may relate to our
technology and products. Future patents issued to third parties may contain
claims that conflict with our patents and that compete with our products and
technologies, and third parties could assert infringement claims against us.
Any litigation or interference proceedings, regardless of their outcome, may be
costly and may require significant time and attention of our management and
technical personnel. Litigation or interference proceedings could also force us
to:
• stop or delay using our technology;
• stop or delay our customers from selling,
manufacturing or using products that incorporate the challenged intellectual
property;
• pay damages; or
• enter into licensing or royalty agreements
that may be unavailable on acceptable terms.
The time and cost
associated with complying with government regulations to which we could become
subject could have a material adverse effect on our business.
Some of the applications that we have identified
or may identify in the future may be subject to government regulations. For
example, any medical devices such as precision ophthalmic instruments and
orthopedic devices made from our alloys likely will be subject to extensive
government regulation in the United States by the Food and Drug
17
Administration, or FDA. Any medical device manufacturers
to whom we sell Liquidmetal alloy products may need to comply with FDA
requirements, including premarket approval or clearance under
Section 510(k) of the Food Drug and Cosmetic Act before marketing in the
United States Liquidmetal alloy medical device products. These medical device
manufacturers may be required to obtain similar approvals before marketing
these medical devices in foreign countries. Any medical device manufacturers
with which we jointly develop and sell medical device products may not provide
significant assistance to us in obtaining required regulatory approvals. The
process of obtaining and maintaining required FDA and foreign regulatory
approvals could be lengthy, expensive, and uncertain. Additionally, regulatory
agencies can delay or prevent product introductions. The failure to comply with
applicable regulatory requirements can result in substantial fines, civil and
criminal penalties, stop sale orders, loss or denial of approvals, recalls of
products, and product seizures.
In addition, the processing of beryllium, a
minor constituent element of some of our alloys, can result in the release of
beryllium into the workplace and the environment and in the creation of
beryllium oxide as a by-product. Beryllium is classified as a hazardous air
pollutant, a toxic substance, a hazardous substance, and a probable human
carcinogen under environmental, safety, and health laws, and various acute and
chronic health effects may result from exposure to beryllium. We are required
to comply with certain regulatory requirements and to obtain a permit from the
U.S. Environmental Protection Agency or other government agencies to process
beryllium. Our failure to comply with present or future governmental
regulations related to the processing of beryllium could result in suspension
of manufacturing operations and substantial fines or criminal penalties.
To the extent that our products have the
potential for dual use, such as military and non-military applications, they
may be subject to import and export restrictions of the U.S. government, as
well as other countries. The process of obtaining any required U.S. or foreign
licenses or approvals could be time-consuming, costly, and uncertain. Failure
to comply with import and export regulatory requirements can lead to
substantial fines, civil and criminal penalties, and the loss of government
contracting and export privileges.
We may require
additional funding, which may not be available on favorable terms or at all.
Our future capital requirements will depend on
the amount of cash generated by our operations. Our projections of cash flows
from operations and, consequently, future cash needs are subject to substantial
uncertainty. If our available funds and cash generated from operations are
insufficient to satisfy our liquidity requirements, we may need additional
funds in the future to support our working capital requirements and for other
purposes, and we may seek to raise additional funds through public or private
equity financing, bank debt financing, or from other sources. Adequate funds
may not be available when needed or may not be available on favorable terms. If
we raise additional funds by issuing equity securities, existing shareholders
may be diluted. If funding is insufficient at any time in the future, we may
not be able to develop or enhance our products or services, take advantage of
business opportunities, or respond to competitive pressures, any of which could
harm our business.
Antitakeover provisions
of our certificate of incorporation and bylaws and provisions of applicable
corporate law could delay or prevent a change of control that you may favor.
Provisions in our certificate of incorporation,
our bylaws, and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our shareholders. These
provisions could discourage potential takeover attempts and could adversely
affect the market price of our shares. Because of these provisions, you might
not be able to receive a premium on your investment. These provisions:
• authorize
our board of directors, without shareholder approval, to issue up to 10,000,000
shares of “blank check” preferred stock that could be issued by our board of
directors to increase the number of outstanding shares and prevent a takeover
attempt;
• limit shareholders’ ability to call a special
meeting of our shareholders;
• provide for a classified board of directors;
and
• establish advance notice requirements to
nominate directors for election to our board of directors or to propose matters
that can be acted on by shareholders at shareholder meetings.
The provisions described above could delay or
make more difficult transactions involving a change in control of us or our
management.
18
Our bulk amorphous alloy technology is still
at an early stage of commercialization relative to many other materials.
Our bulk amorphous alloy technology is a relatively new
technology as compared to many other material technologies, such as plastics
and widely-used high-performance crystalline alloys. Historically, the successful
commercialization of a new materials technology has required the persistent
improvement and refining of the technology over a sometimes lengthy period of
time. Accordingly, we believe that our
Company’s future success will be dependent on our ability to continue expanding
and improving our technology platform by, among other things, constantly
refining and improving our manufacturing processes, optimizing our existing
amorphous alloy compositions for various applications, and developing and
improving new bulk amorphous alloy compositions. Our failure to further expand our technology
base could limit our growth opportunities and hamper our commercialization
efforts.
Our stock price may experience volatility.
The trading price of our common stock could fluctuate widely due to:
• quarter-to-quarter variations in
results of operations;
• loss of a major customer;
• announcements of technological innovations
by us or our potential competitors;
• changes in, or our failure to
meet, the expectations of securities analysts;
• new products offered by us or our
competitors;
• announcements of strategic
relationships or strategic partnerships; or
• other events or factors that may
be beyond our control.
In addition, the securities markets in general have
experienced extreme price and trading volume volatility in the past. The
trading prices of securities of many companies at our stage of growth have fluctuated
broadly, often for reasons unrelated to the operating performance of the
specific companies. These general market and industry factors may adversely
affect the trading price of our common stock, regardless of our actual
operating performance. If our stock
price is volatile, we could face securities class action litigation, which
could result in substantial costs and a diversion of management’s attention and
resources and could cause our stock price to fall.
Item 2. Properties
Our principal executive offices and principal
research and development offices are located in Lake Forest, California and
consist of approximately 30,000 square feet. This facility is occupied pursuant
to a lease agreement that expires in June 2007. Prior to December 31, 2003, our
principal executive offices were located in Tampa, Florida; however, as an
outgrowth of various cost reduction measures in the fourth quarter of 2003,
activities of the Tampa office were transferred to and consolidated with the
Lake Forest office. In Conroe, Texas, we
lease an office and warehouse for our coatings business segment. This facility,
which is approximately 10,000 square feet, is leased through September 2006.
Our principal prototyping and manufacturing
facility is in Pyongtaek, South Korea, and consists of approximately 166,000
square feet. We lease the land on which this facility is located, although we
own the buildings, fixtures, and all personal property located on the land. The
parcel of land consists of approximately four acres and is leased through 2022.
We currently expect that this facility will meet our anticipated internal
manufacturing needs for the foreseeable future.
Until June 2004 we also leased a facility in Incheon, South Korea, where
an equipment manufacturing division of the Company assembled die casting
equipment. This facility is approximately 22,430 square feet, and its lease
expired in February 2005; however, that die casting equipment division was
divested as of June 14, 2004 and the lease was terminated. On August 2004, we entered into a 3 year
lease for a post-processing facility located in Wehai, China, which consists of
approximately 14,400 square feet, to facilitate our bulk alloy manufacturing.
Item 3. Legal Proceedings
Liquidmetal Technologies and certain of its present
and former officers and directors were named as defendants in nine purported
class action complaints filed in the United States District Courts for the
Middle District of Florida, Tampa
19
Division, and the Central District of California,
Southern Division, alleging violations of Sections 11 and 15 of the Securities
Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder. In August 2004, four complaints were
consolidated in the United States District Court for the Middle District of
Florida under the caption Primavera Investors v.
Liquidmetal Technologies, Inc., et al., Case No.
8:04-CV-919-T-23EAJ. John Lee, Chris
Cowley, Dwight Mamanteo, Scott Purcell and Mark Rabold, were appointed co-lead
plaintiffs (the “Lead Plaintiffs”). In
September 2004, the other five complaints filed in the Central District of
California were transferred to the Middle District of Florida for consolidation
with the Primavera Investors action. The Lead Plaintiffs served their Consolidated
Amended Class Action Complaint on January 12, 2005. The
Amended Complaint alleges that the Prospectus issued in connection with the
Company’s initial public offering in May 2002 contained material
misrepresentations and omissions regarding the Company’s historical financial
condition and regarding a personal stock transaction by the Company’s chief
executive officer. The Lead Plaintiffs
further generally allege that during the proposed Class Period of May 21, 2002,
through May 13, 2004, the defendants engaged in improper revenue recognition
with respect to certain of the Company’s business transactions, failed to
maintain adequate internal controls, and knowingly disclosed unrealistic but
favorable information about market demand for and commercial viability of the
Company’s products to artificially inflate the value of the Company’s
stock. The Amended Complaint seeks unspecified compensatory damages and other
relief. Defendants’ motion to dismiss will be due on March 28, 2005. We intend to vigorously defend against the class action. We cannot currently predict the impact or
resolution of this litigation or reasonably estimate a range of possible loss,
which could be material. The resolution of this lawsuit may harm our business
and have a material adverse impact on our financial condition.
In addition to the above, certain present and former officers and
directors of Liquidmetal Technologies, as well as Liquidmetal Technologies as a
nominal defendant, have been named in three shareholder derivative
actions. Two shareholder derivative
complaints were filed in California state court styled Brian Clair,
Derivatively on Behalf of Liquidmetal Technologies, Inc. v. John Kang, et al.,
Case No. 04CC00551, and Joseph Durgin Derivatively
on Behalf of Liquidmetal Technologies, Inc.
v. John Kang, et al.,
Case No. 04CC00553, both commenced in the Superior Court of Orange County,
California. A third shareholder
derivative complaint was filed in 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, Tampa
Division. These shareholder derivative
lawsuits allege that the defendants breached various fiduciary duties and
otherwise violated state law based primarily upon the same underlying facts and
circumstances as alleged in the federal shareholder class action. The
plaintiffs seek unspecified compensatory damages, restitution and disgorgement
of profits, equitable and/or injunctive relief as permitted by law and other
relief. The two shareholder derivative
complaints in California state court have been consolidated. Plaintiffs served a Consolidated Shareholder
Derivative Complaint on October 12, 2004.
The defendants served a Demurrer to the Consolidated Shareholder
Derivative Complaint on November 22, 2004, seeking dismissal of that
complaint. At a hearing on February 10, 2005,
the court sustained the demurrer, dismissing the Consolidated Shareholder
Derivative Complaint but giving the plaintiffs 45 days within which to amend
the complaint. The amended complaint is
due on March 28, 2005. In the Florida
derivative action, the Plaintiff filed a First Amended Shareholder Derivative
Complaint on November 22, 2004. The
Company’s Motion to Dismiss was filed on December 20, 2004. Plaintiff’s Response and Objection to the
Motion to Dismiss was filed on February 4, 2005. We cannot anticipate when the Court will rule
on the Motion to Dismiss. We intend to
vigorously defend against the derivative actions. We cannot currently predict the impact or
resolution of this litigation or reasonably estimate a range of possible loss,
which could be material. The resolution of these lawsuits may harm our business
and have a material adverse impact on our financial condition.
Item 4. Submission of
Matters to a Vote of Security Holders
No matters were submitted to a vote of our
security holders during the fourth quarter of 2004.
20
PART II
Item 5. Market For
Registrant’s Common Equity and Related Stockholder Matters
Prior to July
16, 2004, our common stock was quoted on the Nasdaq National Market under the
symbol “LQMT.” On July 14, 2004, the
Company was notified by the Nasdaq Listing Qualifications Panel that the
Company’s common stock would be delisted from the Nasdaq National Market
effective with the open of business on Friday, July 16, 2004. The Company was delisted for its failure to
comply with Marketplace Rule 4310(c)(14) due to the Company’s inability to file
its Form 10-K for the fiscal year 2003 and Form 10-Q for the first quarter of
2004. As of July 19, 2004, the shares of
Liquidmetal Technologies, Inc. common stock commenced trading in the Over the
Counter (OTC) Pink Sheets Market under the symbol “LQMT.PK”. On January 13, 2005, the Company filed
its Form 10-Q for the third quarter of 2004 and thus, became current on its
filings. Subsequently, the Company filed
the necessary forms with Nasdaq and is currently working with them to be listed
on the Nasdaq (OTC) bulletin boards.
The following table sets forth, for the periods indicated, the high and
low sale prices for our common stock as reported by The Nasdaq National Market:
|
|
|
Fiscal 2004
|
|
|
|
|
High
|
|
Low
|
|
|
Fourth Quarter
|
|
$
|
4.00
|
|
$
|
1.75
|
|
|
Third Quarter
|
|
$
|
2.33
|
|
$
|
0.71
|
|
|
Second Quarter
|
|
$
|
3.68
|
|
$
|
0.55
|
|
|
First Quarter
|
|
$
|
4.52
|
|
$
|
2.50
|
|
The closing price of our common stock as
reported on The OTC Pink Sheets Market on February 1, 2005 was $1.55 per share.
As of February 1, 2005, there were 238 holders of record of our common stock.
We have never paid a cash dividend on our common
stock. We do not anticipate paying any cash dividends on our common stock in
the foreseeable future, and we plan to retain our earnings to finance future
growth.
Item 6. Selected
Consolidated Financial Data
We derived the selected consolidated financial data below as of and for
each of the three years in the period ended December 31, 2004 from our audited
consolidated financial statements and related notes thereto included elsewhere
in this annual report on Form 10-K.
The following selected consolidated financial data should be read in
conjunction with Liquidmetal Technologies, Inc.’s consolidated financial
statements and the related notes thereto, and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere
in this annual report on Form 10-K
In addition, readers should note the following information regarding the
selected historical consolidated financial data presented below.
We have restated our previously reported consolidated financial
statements for the fiscal years ended December 31, 2002 and 2001. The restatement adjustments resulted in a
cumulative net reduction to shareholders’ equity of $2.0 million as of December
31, 2002 and an increase in previously reported net loss of $1.1 million and
$0.9 million for the years ended December 31, 2002 and 2001, respectively. Further, the 2003, 2002, and 2001 balances
from our 10-K filed on November 10, 2004 have been restated in order to conform
with the presentation of 2004 financial statements as a result of application
of SFAS 144 over discontinued operations of our equipment manufacturing
business (see Note 17). The selected
consolidated financial data presented below includes all such
restatements. See Note 2 in the notes to
consolidated financial statements in the fiscal 2003 annual report on Form 10-K
filed on November 10, 2004, which reflects the restatements of prior year
transactions.
21
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
(restated)
|
|
(restated)
|
|
(unaudited)
|
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
17,429
|
|
$
|
13,658
|
|
$
|
9,138
|
|
$
|
3,882
|
|
$
|
4,200
|
|
|
Cost of sales
|
|
12,168
|
|
18,162
|
|
5,656
|
|
1,924
|
|
1,983
|
|
|
Gross Profit
|
|
5,261
|
|
(4,504
|
)
|
3,482
|
|
1,958
|
|
2,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
11,591
|
|
17,729
|
|
13,099
|
|
5,239
|
|
1,449
|
|
|
Research and development
|
|
1,467
|
|
8,780
|
|
11,825
|
|
1,726
|
|
455
|
|
|
Impairment of goodwill
|
|
—
|
|
184
|
|
—
|
|
—
|
|
—
|
|
|
Impairment of long lived assets
|
|
—
|
|
2,684
|
|
—
|
|
—
|
|
—
|
|
|
Total operating expenses
|
|
13,058
|
|
29,377
|
|
24,924
|
|
6,965
|
|
1,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before interest, other
income, income taxes, minority interest and discontinued operations
|
|
(7,797
|
)
|
(33,881
|
)
|
(21,442
|
)
|
(5,007
|
)
|
313
|
|
|
Loss from extinguishments of debt
|
|
(1,663
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Change in value of warrants, net
|
|
747
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Other income
|
|
302
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Interest expense, net
|
|
(3,566
|
)
|
(86
|
)
|
(603
|
)
|
(1,095
|
)
|
(188
|
)
|
|
Gain on sale of marketable securities
held-for-sale
|
|
—
|
|
1,178
|
|
832
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, minority
interest and discontinued operations
|
|
(11,977
|
)
|
(32,789
|
)
|
(21,213
|
)
|
(6,102
|
)
|
125
|
|
|
Income taxes
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Minority interest in loss of consolidated
subsidiary
|
|
—
|
|
21
|
|
118
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
(11,977
|
)
|
(32,768
|
)
|
(21,095
|
)
|
(6,102
|
)
|
125
|
|
|
Income (loss) from operations of
discontinued operations, net
|
|
(749
|
)
|
(964
|
)
|
83
|
|
(5,973
|
)
|
(8,938
|
)
|
|
Gain (loss) from disposal of discontinued operations,
net
|
|
—
|
|
127
|
|
1,556
|
|
(11,949
|
)
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,726
|
)
|
$
|
(33,605
|
)
|
$
|
(19,456
|
)
|
$
|
(24,024
|
)
|
$
|
(8,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share from continuing operations
– basic and diluted
|
|
$
|
(0.29
|
)
|
$
|
(0.79
|
)
|
$
|
(0.54
|
)
|
$
|
(0.18
|
)
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to compute
income (loss) per share from continuing operations – basic and diluted
|
|
41,610
|
|
41,505
|
|
38,714
|
|
33,323
|
|
30,884
|
|
22
|
|
|
As of December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
(restated)
|
|
(restated)
|
|
(unaudited)
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
742
|
|
$
|
3,127
|
|
$
|
25,058
|
|
$
|
2,230
|
|
$
|
124
|
|
|
Restricted cash
|
|
754
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Marketable securities held-for-sale
|
|
—
|
|
—
|
|
3,068
|
|
—
|
|
—
|
|
|
Working capital (deficiency)
|
|
(9,691
|
)
|
(698
|
)
|
24,845
|
|
(9,573
|
)
|
(1,960
|
)
|
|
Total assets
|
|
28,508
|
|
30,852
|
|
27,772
|
|
6,680
|
|
1,945
|
|
|
Long-term debt and capital leases,
including current portion
|
|
9,672
|
|
4,360
|
|
93
|
|
2,988
|
|
2,506
|
|
|
Shareholders’ equity (deficiency)
|
|
8,860
|
|
16,163
|
|
(50,599
|
)
|
(7,504
|
)
|
(3,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
This management’s discussion and analysis should be read in
the conjunction with the condensed consolidated financial statements and notes
included elsewhere in this report on Form 10-K.
This management’s discussion and analysis, as well as other
sections of this report on Form 10-K, may contain “forward-looking
statements” that involve risks and uncertainties, including statements
regarding our plans, future events, objectives, expectations, forecasts, or
assumptions. Any statement that is not a statement of 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 expressions identify forward-looking statements. These statements
involve risks and uncertainties that could cause actual outcomes and results to
differ materially from the anticipated outcomes or results, and undue reliance should
not be placed on these statements. These risks and uncertainties include, but
are not limited to, the matters discussed under the caption “Factors Affecting
Future Results” in Item 1 of this report and other risks and uncertainties
discussed in filings made with the Securities and Exchange Commission
(including risks described in subsequent reports on Form 10-Q,
Form 10-K, Form 8-K, and other filings). Liquidmetal Technologies,
Inc. disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise.
OVERVIEW
We
are a materials technology company that develops and commercializes products
made from amorphous alloys. Our
Liquidmetal® family of alloys consists of a variety of coatings, powders, bulk
alloys, and composites that utilize the advantages offered by amorphous alloy
technology. We develop, manufacture, and
sell products and components from bulk amorphous alloys that are incorporated
into the finished goods of our customers, and we also market and sell amorphous
alloy industrial coatings. We also
partner with third-party licensees and distributors to develop and
commercialize Liquidmetal alloy products.
We have the exclusive right to develop, manufacture, and sell what we
believe are the only commercially viable bulk amorphous alloys.
Amorphous alloys are unique materials that are
distinguished by their ability to retain a random atomic structure when they
solidify, in contrast to the crystalline atomic structure that forms in
ordinary metals and alloys when they solidify. Liquidmetal alloys possess a
combination of performance, processing, and cost advantages that we believe
makes them preferable to other materials in a variety of applications. The amorphous
atomic structure of our alloys enables them to overcome certain performance
limitations caused by inherent weaknesses in crystalline atomic structures,
thus facilitating performance and processing characteristics superior in many
ways to those of their crystalline counterparts. For example, our
zirconium-titanium Liquidmetal alloys are approximately 250% stronger than
commonly used titanium alloys, such as Ti-6Al-4V, but they have processing
characteristics similar in many respects to plastics. We believe these
advantages could result in Liquidmetal alloys supplanting other incumbent
materials in a wide variety of applications. Moreover, we believe these
advantages will enable the introduction of entirely new products and
applications that are not possible or commercially viable with other materials.
Our revenues are derived from two principal operating
segments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloy
products. Liquidmetal alloy industrial
coatings are used primarily as a protective coating for industrial machinery
and equipment, such as drill pipe used by the oil drilling industry and boiler
tubes used in coal-burning power plants. The historical operating information
for fiscal year 2001 is based substantially on sales of Liquidmetal alloy
coatings. In the second half of 2002, we began producing bulk Liquidmetal alloy
components and products for incorporation into our customers’ finished goods.
Bulk Liquidmetal alloy segment revenue includes sales of parts or components of
electronic devices, medical products, and sports and leisure goods; tooling and
prototype parts (including demonstration parts and test samples) for customers
with products in development; metal processing equipment (see Note 17 for
disclosure regarding the disposal of our equipment manufacturing business); and
research and development revenue relating primarily to defense and medical
applications. We expect that these
sources of revenue will continue to significantly change the character of our
revenue mix.
The
cost of sales for our Liquidmetal coatings segment consists primarily of the
costs of outsourcing our manufacturing to third parties. Consistent with our
expectations, our cost of sales has been increasing over historical results as
we further build our bulk Liquidmetal alloy business. Although we plan to
continue outsourcing the manufacturing of our coatings, we will internally
manufacture many products derived from our bulk Liquidmetal alloys.
Selling, general, and administrative expenses currently
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 to our
operations.
24
Research
and development expenses represent salaries, related benefits expense,
stock-based compensation, depreciation of research equipment, consulting and
contract services, expenses incurred for the design and testing of new
processing methods, expenses for the development of sample and prototype
products, and other expenses related to the research and development of
Liquidmetal alloys. Costs associated with research and development activities
are expensed as incurred. We plan to enhance our competitive position by
improving our existing technologies and developing advances in amorphous alloy
technologies. We believe that our research and development efforts will focus
on the discovery of new alloy compositions, the development of improved
processing technology, and the identification of new applications for our
alloys.
Impairment
of goodwill represents the write-down of the goodwill balance of Dongyang
Yudoro (“Dongyang”), our 51% owned subsidiary in South Korea. During 2003, Dongyang experienced net
losses as a result of a continuing economic downturn in markets for its
machinery products. These events, along with Dongyang’s operating cash flow
losses and uncertainty surrounding its future cash flows, led us to evaluate
our investment for recoverability as of December 31, 2003. As a result, we determined that the carrying
value of our investment in Dongyang exceeded its fair value as of December 31,
2003 in the amount of $184. In March 2004, we sold our 51% investment in
Dongyang to the 49% minority shareholder.
Impairment
of Long-Lived Assets consists of a write-down of the building of our
manufacturing facility in South Korea on the basis that the fair value of this
building was determined to be less than the book value as of December 31,
2003. Our significant operational
difficulties in 2003 along with our history of operating or cash flow losses
and uncertainty surrounding our future cash flows, led us to evaluate our
long-lived assets for recoverability as of December 31, 2003. As a result, we determined that the carrying
value of our manufacturing plant in Pyongtaek, South Korea exceeded its fair
value as of December 31, 2003 in the amount of $2,684. The fair value of the building was based on
the average of two independent appraisals of the building obtained in the first
quarter of 2004.
In
conjunction with the divestiture of our Dongyang and Taesung subsidiaries in
March and June 2004, respectively, the Company decided to discontinue our
equipment manufacturing business in order to conform our operations to our
broader corporate business strategy (see Note 17). Pursuant to Accounting Principles Board
Opinion No. 30, Reporting the Results
of Operations — Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
we reclassified our consolidated financial statements to reflect the
discontinuation of our equipment manufacturing operations. The revenue, costs
and expenses, assets and liabilities, and cash flows of the equipment
manufacturing business were segregated in our accompanying Consolidated Balance
Sheets, Consolidated Statements of Operations and Comprehensive Loss, and
Consolidated Statements of Cash Flows.
On
May 21, 2003, we completed a reincorporation by transitioning from a
California corporation to a Delaware corporation. The reincorporation was
effected through the merger of the former California entity into a newly
created wholly owned Delaware subsidiary. The reincorporation changed the legal
domicile of our company but did not result in any change to our business,
management, employees, fiscal year, assets or liabilities, or location of
facilities. As part of the reincorporation, each share of the California corporation
was automatically converted into one share of the Delaware corporation. In addition, total authorized shares decreased from 200,000,000 shares
to 100,000,000 shares.
On
August 4, 2004, the Company established a sub-assembly plant in the city of Weihai
in Shandong province of China under Weihai Liquidmetal Company Limited, which
is 100 percent owned by Liquidmetal Korea, to facilitate our bulk alloy
manufacturing business. Weihai
Liquidmetal is consolidated into Liquidmetal Technologies with all intercompany
transactions eliminated.
The
following discussion and analysis of our financial condition and results of
operations focuses on the historical results of our continuing operations and
reflects the effect of restating our 2002 and 2003 (2003 quarterly filings)
financial statements for proper revenue recognition as disclosed in Note 2 in
the notes to the consolidated financial statements in the fiscal 2003
annual report on Form 10-K filed on November 10, 2004.
Results of Operations
Comparison of the years ended
December 31, 2004 and 2003
Revenue. Revenue increased to $17.4 million in the twelve months ended
December 31, 2004 from $13.7 million in the twelve months ended
December 31, 2003. The increase was due to increases in revenue earned by our bulk
Liquidmetal alloy and coatings segments in the twelve months ended
December 31, 2004. This increase in revenue consisted of $3.8 million
from the sale and prototyping of parts manufactured from bulk Liquidmetal
alloys, offset by a decrease of $1.9 million from research and development
services related primarily from reduced activity from defense and medical
applications. Our coatings business
contributed $1.0 million to the increase in revenues as compared to the twelve
months ended December 31, 2003 from increased demand for drill pipe
coatings.
25
Cost of Sales. Cost of sales decreased to $12.2 million, or 70% of revenue,
during the twelve months ended December 31, 2004 from $18.2 million,
or 133% of revenue, in the twelve months ended December 31, 2003. This
decrease was a result of the continued maturing of our manufacturing process
and represents the Company’s efforts to manage costs and focus on our core
business while continuing to build production pipeline and manufacturing
infrastructure required to prepare for and support the anticipated growth of
our bulk Liquidmetal alloy business. The
cost of sales for the products sold by the coatings business segment is
generally consistent from year to year because the Liquidmetal coatings
products are produced by third parties and sold wholesale to various
industries.
Selling, General, and Administrative Expenses. Selling, general, and administrative
expenses decreased to $11.6 million, or 66% of revenue, in the twelve
months ended December 31, 2004 from $17.7 million, or 130% of
revenue, in the twelve months ended December 31, 2003. This decrease was primarily a result
of decrease in wages and related expense by $5.0 million, decreases in
travel and communication expenses by $0.8 million, decreases in rent by $0.8
million, decrease in relocation expenses by $0.7 million, offset by an increase
in professional fees, consultant fees, and contract services by
$0.8 million, and an increase in insurance costs by $0.4 million. These and other decreases in selling, general
and administrative expenses represent the Company’s efforts to manage costs and
focus on our core business while continuing to build our corporate
infrastructure required to prepare for and support the anticipated growth of
our bulk Liquidmetal alloy business.
Research and Development Expenses. Research and development expenses decreased
to $1.5 million, or 8% of revenue, in the twelve months ended
December 31, 2004 from $8.8 million, or 64% of revenue, in the twelve
months ended December 31, 2003. The
decrease was primarily a result of decreases in salaries, wages and the related
expenses by $3.0 million, decrease in laboratory and prototyping expenses
by $2.0 million, decrease in depreciation expense by $0.7 million,
decrease in professional fees, consultant fees, and contract services by $0.6,
decrease in research grants by $0.3 million, and decrease in travel related
expenses by $0.2 million. The decreases
were a result of the Company focusing primarily on our core business associated
with our bulk Liquidmetal alloy business while managing our costs. The Company continues to perform research and
development efforts on new Liquidmetal alloys and related processing
capabilities, develop new manufacturing techniques, and contract with
consultants and provide research grants to various institutions to advance the
development of Liquidmetal alloys.
Impairment of Goodwill.
Impairment of goodwill was $184, or 1% of revenue, in the twelve months ended December 31,
2003. Impairment of goodwill represents the write-down of the goodwill balance
of Dongyang Yudoro (“Dongyang”), our 51% owned subsidiary in South Korea. During 2003, Dongyang experienced net
losses as a result of a continuing economic downturn in the market for its
machinery products. These events along with Dongyang’s operating, and cash flow
losses, and uncertainty surrounding its future cash flows, led us to evaluate
our investment for recoverability as of December 31, 2003. As a result, we determined that the carrying
value of our investment in Dongyang exceeded its fair value as of December 31,
2003 in the amount of $184. In March
2004, we sold our 51% investment in Dongyang to the 49% minority shareholder
(see Note 17). There was no impairment
charge to goodwill in the twelve months
ended December 31, 2004.
Impairment of Long Lived Assets.
Impairment of long lived assets was $2.7 million, or 20% of revenue, in
the twelve months ended December 31, 2003.
Impairment expense represents a write-down of the building of our
manufacturing facility in South Korea.
Due to the decreased production and usage of our Pyongtaek manufacturing
operation, we decided to obtain independent appraisals as to the fair value of
this building. Accordingly, the fair
value of the building as determined by the average of the two independent
appraisals was less than the carrying value of the building as of December 31,
2003. There was no impairment charge to
long lived assets in the twelve months ended December 31, 2004.
Loss from Extinguishment of Debt. Loss
from extinguishment of debt was $1.7 million, or 10% of revenue, during the
twelve months ended December 31, 2004 due to the extinguishment of our March
Notes as it relates to the exchange in August 2004. There was no such loss recorded during twelve
months ended December 31, 2003.
Change in value of warrants, net. Change
in value of warrants was a net gain of $0.7 million, or 4% of revenue, during
the twelve months ended December 31, 2004
from the change in valuation of warrant payable issued related to the
senior convertible debt funded in March 2004, which was exchanged in August
2004 (see note 14). There were no such
amounts recorded for the twelve months ended December 31, 2003.
Other Income. Other
income was $0.3 million, or 2% of revenue, during the twelve months ended
December 31, 2004 from certain stock transactions with John Kang, our Chairman,
President, and Chief Executive Officer during 2002 (see Note 23). There were no amounts recorded as other
income for the twelve months ended December 31, 2003.
Interest Expense. Interest expense was $3.6 million, or 21% of revenue, in the
twelve months ended December 31, 2004 and was $0.4 million, or 3% of
revenue, in the twelve months ended December 31, 2003. During the twelve months ended December 31,
2004, the interest expense was primarily due to the interest accrued,
amortization of debt discount and deferred issuance costs on new senior
convertible debt originally sold on March 3, 2004 and exchanged in August 2004,
and interest accrued on Kookmin Bank loan funded on February 4, 2003. During
the twelve months ended December 31, 2003, interest expense was primarily
due to interest accrued on the Kookmin Bank loan to our South Korean subsidiary
made on February 4, 2003.
26
Interest Income. Interest income was $37 for the twelve months ended December 31,
2004 for interest earned on certificate of deposits. Interest income was $0.3 million or 2% of
revenue for the twelve months ended December 31, 2003 for interest earned on
short-term, investment grade, interest-bearing securities.
Gain from Sale of
Investment. In April 2003
we sold our remaining shares of Growell Metal Co., Ltd. that were purchased in
July 2002. We recognized a $1.2 million gain on the sale of these shares
during the twelve months ended December 31, 2003. There were no such gains in the twelve months
ended December 31, 2004.
Comparison of the years ended
December 31, 2003 and 2002
Revenue. Revenue increased to $13.7 million in the twelve months ended
December 31, 2003 from $9.1 million in the twelve months ended
December 31, 2002. The increase was due to increases in revenue earned by our
bulk Liquidmetal alloy segment in the twelve months ended December 31,
2003. This increase in our bulk Liquidmetal alloy segment revenue consisted of
a revenue increase of $1.8 million from the sale of metal processing
equipment in the US, an increase of $0.1 million from the sale and prototyping
of parts manufactured from bulk Liquidmetal alloys, and an increase of $2.2
million from research and development services related primarily to defense and
medical applications. The increase in revenue earned by our bulk Liquidmetal
alloy segment was offset by a decrease of $1.6 million in the revenue
earned by our coatings business as compared to the twelve months ended
December 31, 2002 due to a slowdown in demand for drill pipe coatings.
Cost of Sales. Cost of sales increased to $18.2 million, or 133% of revenue,
during the twelve months ended December 31, 2003 from $5.7 million,
or 62% of revenue, in the twelve months ended December 31, 2002. The cost
of sales as a percentage of revenue increased due to three primary factors:
first, a higher percentage of plant operating costs allocated to manufacturing
in the current period, as opposed to the same twelve month period in 2002 when
our manufacturing facility was in the final stages of construction and
significant in-plant spending was directed to research and development to
support the ramp-up of manufacturing operations; second, the impact of
unprofitable electronic casing components and prototypes moving through our
manufacturing mix; and third, the impact of the write-down of excess raw
material in the amount of $1.0 million and the write-down of raw material and
equipment inventory in the amount of $2.8 million in connection with a
settlement of a dispute with Growell which was finalized in January 2004.
Although the cost to manufacture parts from our bulk
Liquidmetal alloys is variable and differs based on the unique design of each
product, we expect gross margin to improve as we limit production and
prototyping to select products that require the high-performance qualities of
Liquidmetal alloys and can be priced accordingly. Furthermore, we believe that
strategic licensing agreements and other relationships to advance the
development of our technology and processes that we will pursue could also
contribute to improved gross margins. The cost of sales for the products sold
by the coatings business is expected to remain generally consistent because
Liquidmetal coatings products are produced by third parties and sold wholesale
to various industries.
Selling, General, and Administrative Expenses. Selling, general, and administrative
expenses increased to $17.7 million, or 130% of revenue, in the twelve
months ended December 31, 2003 from $13.1 million, or 143% of
revenue, in the twelve months ended December 31, 2002. This increase was
primarily a result of costs incurred for closing our Tampa, Florida offices,
which included: an increase in severance costs of $2.2 million for releasing a
substantial number of these employees as well as our expense and accrual of
$0.8 million for terminating our office lease, due to the determination that we
will be unable to sublease this space over the remaining term; an increase in
professional fees, consultant fees, and contract services of $0.8 million;
an increase in insurance expense of $0.5 million; an increase in data
communications expense of $0.2 million; an increase in depreciation
expense of $0.3 million; an increase of warranty expense of $0.5 million;
and a $0.3 million increase in expenses associated with the disposition of
certain assets in the twelve months ended December 31, 2003. The increase
in selling, general and administrative expenses are associated with the
aforementioned cost reduction measures, including the consolidation of offices,
the staff reductions, and a corresponding shift in strategy for the continued
development of our bulk Liquidmetal alloy business. This was partially offset by a decrease in
advertising expense of $0.1 million; a decrease in bad debt expense of $0.9
million; and a $0.7 million decrease in stock compensation expense.
Research and Development Expenses. Research and development expenses decreased
to $8.8 million, or 64% of revenue, in the twelve months ended
December 31, 2003 from $11.8 million, or 129% of revenue, in the
twelve months ended December 31, 2002. This decrease was partially a
result of the maturing of our manufacturing process and related processing
capabilities, the consolidation of our facilities into our California
Technology Center, and the discontinuation of certain prototyping and
developmental activities that occurred extensively while the Company was
identifying our current technology capabilities and limitations. These decreases were partially offset by
increases in providing research grants to various institutions to advance the
development of Liquidmetal alloys. In the category of research and development
expenses: travel decreased by $0.2 million; professional fees, consultant
fees, and contract services decreased by $1.6 million; laboratory and
prototyping expenses decreased by $0.9 million; and stock compensation
expense decreased by $1.4 million. These
expenses were partially offset by increases in depreciation of research
equipment of $0.4 million, increased research grants to educational
institutions of $0.1 million, and increase to salaries, wages and
severance net of $0.5 million.
27
Impairment of Goodwill.
Impairment of goodwill represents
the write-down of the goodwill balance of Dongyang Yudoro (“Dongyang”), our 51%
owned subsidiary in South Korea. During
2003, Dongyang experienced net losses as a result of a continuing economic
downturn in the market for its machinery products. These events along with
Dongyang’s operating, and cash flow losses, and uncertainty surrounding its
future cash flows, led us to evaluate our investment for recoverability as of
December 31, 2003. As a result, we
determined that the carrying value of our investment in Dongyang exceeded its
fair value as of December 31, 2003 in the amount of $184. In March 2004, we sold our 51% investment in
Dongyang to the 49% minority shareholder.
Impairment of Long Lived Assets.
Impairment expense represents a write-down of the building of our
manufacturing facility in South Korea.
Due to the decreased production and usage of our Pyongtaek manufacturing
operation, we decided to obtain independent appraisals as to the fair value of
this building. Accordingly, the fair
value of the building as determined by the average of the two independent
appraisal was less than the carrying value of the building as of December 31,
2003.
Interest Expense. Interest expense was $0.4 million, or 3% of revenue, in the
twelve months ended December 31, 2003 and was $1.1 million, or 12% of
revenue, in the twelve months ended December 31, 2002. During the twelve
months ended December 31, 2003, interest expense was primarily due to
interest accrued on the Kookmin Bank loan to our South Korean subsidiary made
on February 4, 2003. During the twelve months ended December 31, 2002,
interest expense was primarily due to the amortization of the fair value of
warrants granted in connection with subordinated promissory notes we issued in
February 2001.
Interest Income. Interest income was $0.3 million, or 2% of revenue, in the twelve
months ended December 31, 2003 due to interest earned on short-term,
investment grade, interest-bearing securities. During the twelve months ended
December 31, 2002, interest income was $0.5 million, or 6% of
revenue, which was interest earned from the proceeds of our May 22, 2002
initial public offering.
Gain from Sale of Investment. In April 2003 we sold our remaining shares of
Growell Metal Co., Ltd. that were purchased in July 2002. We recognized a
$1.2 million gain on the sale of these shares.
28
QUARTERLY
RESULTS
The following information presents our unaudited quarterly
operating results for 2004 and 2003. The data has been prepared by Liquidmetal
Technologies, Inc. on a basis consistent with the Consolidated Financial Statements
included elsewhere in this Form 10-K, and includes all adjustments,
consisting of normal recurring accruals, that we consider necessary for a fair
presentation thereof. Included in our
2003 fourth quarter results are costs charged to our cost of sales for the
write-down of raw materials of $1.0 million and a $2.8 million write-down of
inventory and equipment recorded in connection with a dispute settlement with
Growell. In addition, as a result of the
Company’s cost reduction measures taken in the fourth quarter, our selling,
general, and administrative expenses include severance costs of $2.4 million
and office relocation costs of $0.8 million.
These operating results are not necessarily indicative of our future
performance.
During
the fourth quart of 2004, although our revenues were comparable to prior year,
we had a decrease in revenue of $2.1 million compared to the third quarter due
to an unanticipated and temporary decrease in orders from one of our customers,
Samsung. In addition, included in our
fourth quarter cost of sales is a $0.4 million charge related to certain hinge
finished goods used in Samsung’s cell phone models which were nearing its end
of life. The Company experienced a gross
loss of $0.4 million for the fourth quarter due to the one time charge of cost
of sales and also due to the fact that our cost of sales from our Liquidmetal
bulk alloy segment includes primarily fixed costs from our labor and equipment
expenses.
These statements should be read in conjunction with restatement
footnote 2 in the notes to consolidated financial
statements in the fiscal 2003 annual report on Form 10-K filed on November 10,
2004, which reflects the restatements of prior year transactions.
Pursuant
to Accounting Principles Board Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, we reclassified our
consolidated financial statements to reflect the discontinuation of our
equipment manufacturing operations and retail golf business. The revenue, costs
and expenses, assets and liabilities, and cash flows of the equipment
manufacturing and our retail golf businesses were segregated in our
accompanying Consolidated Balance Sheets, Consolidated Statements of Operations
and Comprehensive Loss, and Consolidated Statements of Cash Flows. The net operating results, net assets, and
net cash flows of the equipment manufacturing and retail golf businesses were
reported as discontinued operations in our annual consolidated financial
statements and in the condensed consolidated financial statements included in
this report on Form 10-K. (see Note 17)
29
|
|
|
For the Three Months Ended
|
|
|
|
|
12/31/04
|
|
9/30/04
|
|
6/30/04
|
|
3/31/04
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
Revenue
|
|
$
|
2,471
|
|
$
|
4,615
|
|
$
|
4,055
|
|
$
|
6,288
|
|
|
Cost of sales
|
|
2,895
|
|
3,241
|
|
2,475
|
|
3,557
|
|
|
Gross profit (loss)
|
|
(424
|
)
|
1,374
|
|
1,580
|
|
2,731
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
2,413
|
|
3,569
|
|
2,544
|
|
3,065
|
|
|
Research and development
|
|
407
|
|
374
|
|
345
|
|
341
|
|
|
Total operating expenses
|
|
2,820
|
|
3,943
|
|
2,889
|
|
3,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(3,244
|
)
|
(2,569
|
)
|
(1,309
|
)
|
(675
|
)
|
|
Loss on extinguishments of debt
|
|
—
|
|
(1,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in value of warrants, net
|
|
(99
|
)
|
(434
|
)
|
694
|
|
586
|
|
|
Other income (expense), net
|
|
—
|
|
302
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
(358
|
)
|
(1,805
|
)
|
(1,144
|
)
|
(259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operation before income taxes and
discontinued operations
|
|
(3,701
|
)
|
(6,169
|
)
|
(1,759
|
)
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(3,701
|
)
|
(6,169
|
)
|
(1,759
|
)
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of
tax
|
|
—
|
|
—
|
|
(356
|
)
|
(393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,701
|
)
|
$
|
(6,169
|
)
|
$
|
(2,115
|
)
|
$
|
(741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations –
basic and diluted
|
|
$
|
(0.09
|
)
|
$
|
(0.15
|
)
|
$
|
(0.04
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to
compute loss per share from continuing operations – basic and diluted
|
|
41,610
|
|
41,610
|
|
41,610
|
|
41,610
|
|
30
|
|
|
For the Three Months Ended
|
|
|
|
|
12/31/03
|
|
9/30/03
|
|
6/30/03
|
|
3/31/03
|
|
|
|
|
|
|
|
|
(restated)
|
|
(restated)
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,645
|
|
$
|
3,281
|
|
$
|
4,533
|
|
$
|
3,199
|
|
|
Cost of sales
|
|
6,761
|
|
4,595
|
|
4,146
|
|
2,660
|
|
|
Gross profit (loss)
|
|
(4,116
|
)
|
(1,314
|
)
|
387
|
|
539
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
5,435
|
|
3,661
|
|
4,571
|
|
4,062
|
|
|
Research and development
|
|
1,025
|
|
981
|
|
2,736
|
|
4,038
|
|
|
Impairment of goodwill
|
|
184
|
|
—
|
|
—
|
|
—
|
|
|
Impairment of long-lived assets
|
|
2,684
|
|
—
|
|
—
|
|
—
|
|
|
Total operating expenses
|
|
9,328
|
|
4,642
|
|
7,307
|
|
8,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(13,444
|
)
|
(5,956
|
)
|
(6,920
|
)
|
(7,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
(86
|
)
|
(53
|
)
|
(12
|
)
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of marketable securities
held-for-sale
|
|
—
|
|
—
|
|
1,178
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes,
minority interest and discontinued operations
|
|
(13,530
|
)
|
(6,009
|
)
|
(5,754
|
)
|
(7,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in loss (income) of
consolidated subsidiary
|
|
(5
|
)
|
23
|
|
10
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(13,535
|
)
|
(5,986
|
)
|
(5,744
|
)
|
(7,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
(412
|
)
|
(115
|
)
|
(317
|
)
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,947
|
)
|
$
|
(6,101
|
)
|
$
|
(6,061
|
)
|
$
|
(7,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations –
basic and diluted
|
|
$
|
(0.33
|
)
|
$
|
(0.14
|
)
|
$
|
(0.14
|
)
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to
compute loss per share from continuing operations – basic and diluted
|
|
41,610
|
|
41,610
|
|
41,597
|
|
41,390
|
|
31
LIQUIDITY
AND CAPITAL RESOURCES
Our
operating activities, including our discontinued equipment manufacturing
operations, used cash of $6.3 million for the year ended December 31,
2004. Our operating activities,
including our discontinued equipment manufacturing and retail golf operations,
used cash of $26.5 million for the year ended December 31, 2003. Cash used
in operating activities for the year ended December 31, 2004 resulted from
net cash used by continuing operations of $6.4 million offset by net cash
provided by discontinued operations of $0.1 million. Cash used in operating
activities for the year ended December 31, 2003 resulted from net cash
used by discontinued operations of $2.4 million and net cash used by
continuing operations of $24.1 million. Our working capital (deficit) was
$(9.7) million as of December 31, 2004.
Our
investing activities used cash of $0.3 million for the year ended
December 31, 2004 for the acquisition of property and equipment of $0.1
million and investment in patents and trademarks of $0.3 million. These expenditures were offset by proceeds
from sale of property and equipment of $0.1 million.
Our cash provided by financing activities was $3.9 million
for the year ended December 31, 2004, which consists of $9.9 million in
proceeds from borrowings from our senior convertible debt offset by $5.2
million on repayment of borrowings, $0.1 million of repayment of other
liabilities, and increase in restricted cash of $0.8 million.
We
anticipate that our capital expenditures will be approximately less than $0.5
million for the full year 2005 for the acquisition of furniture, fixtures, and
other business equipment. This amount is subject to change, however, depending
upon the nature and the amount of the product orders that we actually receive
from customers.
Our
capital requirements during the next twelve months will depend on numerous
factors, including the success of existing products either in manufacturing or
development, the development of new applications for Liquidmetal alloys, the
resources we devote to develop and support our Liquidmetal alloy products, and
the success of pursuing strategic licensing and funded product development
relationships with external partners. During the next twelve months, based
on our current business plan, we expect to have sufficient resources to
continue to devote limited capital to our research and development activities,
to further develop and strengthen our manufacturing technology, and to provide
for working capital and other general corporate purposes. However, based on our historical operating
results and the continued development of our manufacturing capabilities and
alloy compositions, there exists the possibility that these resources will not
be adequate to operate at the proposed business plan levels. These expenses and capital expenditures could
consume a material amount of our cash resources, but the amount of these
requirements will depend on the nature and amount of orders we receive for the
purchase of our bulk Liquidmetal alloy products.
Our
business is based on commercializing an entirely new and unique technology, and
our current business plan contains a variety of assumptions and expectations
that are subject to uncertainty, including assumptions and expectations about
order flow, unit volumes, manufacturing efficiencies, product cost and pricing,
continuing technology improvements, customer adoption practices, strategic
licensing relationships and other relevant matters. These assumptions take into
account recent significant cost reductions, as well as recent improvements to
our manufacturing processes. We have experienced losses from continuing
operations during the last two fiscal years and have an accumulated deficit of
$125.3 million as of December 31, 2004. Cash used in continuing operations
for the years ended December 31, 2004 and December 31, 2003 was $6.4
million and $24.1 million, respectively.
At December 31, 2004, our principal source of liquidity was $0.7
million of cash and cash equivalents and trade accounts receivables of $1.7 million. Such
conditions raise substantial doubt that our Company will be able to continue as
a going concern for a reasonable period of time without receiving additional
funding. These operating results occurred while we were developing and attempting
to commercialize and manufacture products from an entirely new and unique
technology. This business plan required significant spending related to
start-up costs and capital expenditures. These factors have placed a
significant strain on our financial resources. The ultimate success of the Company depends on our ability to continue
to reduce operating costs, generate higher revenue, achieve positive cash flow
from continuing operations and achieve profitability.
On
March 3, 2004, we sold $9.9 million of 6.0% senior convertible notes due 2007
(the “March Notes”) to investor groups in a transaction led by Michigan Venture
Capital Co., Ltd, a South Korea-based institutional investment firm, and IndiGo
Ventures LLC, a New York-based investment firm that served as a financial
advisor to the Company for the transaction.
The notes were convertible at any time into our common stock at a price
of $3.00 per share. Investors in the
private placement received warrants to purchase an aggregate 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 days following the
effectiveness of a registration statement covering the resale of shares
issuable upon exercise of the warrants.
In addition, the investors had the right to call for repayment of the
notes prior to maturity at any time after the second anniversary of the closing
of the transaction. (see Note 14 to the Consolidated Financial Statements)
On August 19, 2004, the Company completed a
private exchange offer for its March Notes. Under terms of the exchange offer,
approximately $5.5 million in aggregate principal amount of the March 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 of 10% Senior
Secured Notes Due 2005 (the “Short-Term Notes”), collectively referred to as “Exchange
Notes”. In addition, the Company
32
redeemed
approximately $4.5 million of the March Notes in cash. The Exchange
Notes are collateralized by certain patents owned by the Company and second
priority mortgage interest in plant facilities and certain equipment at our
plant in South Korea. 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 price of $3.00 per share under the March
Notes). The Long-Term Notes have a
maturity date of July 29, 2007, and a conversion price of $1.00 per share. Further, the exchange notes are convertible
into Common Stock, at the option of the Company, if at any time after the
issuance of the notes, the closing per share price of the Common Stock exceeds
$4.00 (as adjusted for stock splits, reverse splits, stock dividends, and
recapitalizations) for 30 consecutive trading days, and further provided that
there has been effective registration during such period. Holders of the Long-Term Notes also have the
right to call for repayment of the Long-Term Notes prior to maturity at any
time after the second anniversary of the completion of the exchange offer. A total of 563,151 warrants to purchase our
common stock at an exercise price of $3.00 per share—all of which were
previously issued in connection with the purchase of the March Notes—have been
amended to provide for an extended expiration date of March 1, 2006. As of December 31, 2004, we were in breach of
a covenant in the Note Exchange Agreement requiring us to become
current in our SEC filings, as well as file a registration statement with
the SEC for the shares into which the notes are convertible, within 90
days of the issue date of the new notes. If written notice of default is
delivered to us for breach of this covenant, then we will have a period of
30 days to cure the breach before it becomes an event of default under the
notes, and if the breach is not cured during such time period, the holders
of the notes will become entitled to accelerate the remaining balance
of their respective notes and declare them immediately due and
payable. As of the date of the filing of this Form
10-K, we have not received a notice for demand for payment as a
result of not meeting the registration and listing requirements.
Our
future success depends on our ability to continue reducing operating costs and
ultimately to generate higher revenue and attain profitability. We cannot be
certain that additional capital, whether through selling additional debt or
equity securities or obtaining a line of credit or other loan, will be available
to us or, if available, will be on terms acceptable to us. If we issue
additional securities to raise funds, these securities may have rights,
preferences, or privileges senior to those of our common stock, and our current
stockholders may experience dilution.
In March 1996, we entered into a distribution agreement
whereby we granted to a third party exclusive rights to market and sell golf
products incorporating Liquidmetal technology to certain Japanese sporting
equipment companies. The third party paid us a $1.0 million distribution
fee as part of this agreement, of which a portion was refundable according to a
formula based on the gross profit earned by the third party. The remaining
unearned distribution fee of $0.8 million has not been refunded as of
December 31, 2004, and we do not believe the third party is entitled to a
refund. On March 28, 2003, the distribution agreement was terminated and
we entered into a new agreement to pay to the same third party a commission on
the net sales price of all Liquidmetal golf equipment that is shipped by our
Company or its affiliates to Japanese golf companies for sale into the Japanese
end-market. This commission will apply to golf equipment shipped by our Company
or its affiliates during the period beginning on March 28, 2003 and ending
on March 28, 2006. If, by March 28, 2006, we have not paid
$0.4 million in commission payments, the balance between commissions paid
and $0.4 million will be paid by April 30, 2006, thereby guaranteeing
the third party a $0.4 million minimum payment during the term of the
agreement. We will recognize the unearned distribution fee of $0.8 million
as revenue proportionately with the payment of commissions under the letter
agreement.
USE
OF PROCEEDS
Pursuant to our Registration Statement on Form S-1
(Registration No. 333-73716), as amended, initially filed with the Securities
and Exchange Commission on November 20, 2001 and declared effective
May 21, 2002, we closed an initial public offering of 5,000,000 shares of
common stock on May 28, 2002, plus an additional 229,000 shares on
June 10, 2002 pursuant to an over allotment option, at a price of $15.00
per share (which sale is referred to herein as the “Offering”). The Offering
generated aggregate cash proceeds during the second quarter 2002 of
$78.4 million. The net proceeds were $70.7 million after deducting
underwriting commissions of $5.5 million and other transaction fees of
$2.2 million. The managing underwriters for the Offering were Merrill
Lynch & Co., UBS Warburg, and Robert W. Baird & Co.
As of December 31, 2003, we have used the
$70.7 million of net proceeds from the Offering. In 2002, we used
approximately $7.8 million of the net proceeds from the Offering to repay
all outstanding promissory notes and accrued interest, $11.1 million to
fund the construction of our manufacturing facility in South Korea,
$14.3 million to purchase equipment used to manufacture Liquidmetal parts,
$0.4 million to purchase assets related to production and sale of
equipment used in the production process of Liquidmetal alloy products, and
$0.3 million to purchase the 51% interest in our majority owned Dongyang
subsidiary. During the third quarter of 2002, we used $2.0 million to
invest in the common stock of Growell Metal, which supplied a portion of the
Liquidmetal alloy ingots used in our manufacturing operations in Korea. We have
since sold such stock, realizing a gain on the sale. We used the remaining
proceeds of $32.7 million for working capital in 2002 and 2003, excluding
$2.1 million paid to Paul Azinger in 2002 and 2003 for amounts due under
the terms of his terminated endorsement agreement with our discontinued retail
golf operations.
33
On March 3, 2004, the Company issued $9.9 million of 6.0% senior
convertible notes due 2007, which was exchanged in August 2004, to investor
groups in a transaction led by Michigan Venture Capital Co., Ltd, a South
Korea-based institutional investment firm, and IndiGo Ventures LLC, a New
York-based investment firm (the “Placement Agents”) that served as a financial
advisor to the Company for the transaction (see Note 14). The Company used $0.6 million of the proceeds
to pay various agents as issuance costs of the notes in March 2004. From June through August 2004, the Company
redeemed $4.5 million of the outstanding note balance in cash. We used the remaining proceeds of $3.3
million for working capital needs and used $0.8 million as collateral held in
certificate of deposit to finance a
certain insurance policy. As of
December 31, 2004, $0.7 million of the proceeds are held as cash and cash
equivalents. The remaining proceeds of
$0.7 million will be used for working capital needs.
OFF-BALANCE SHEET ARRANGEMENTS
An off-balance sheet arrangement is any transaction,
agreement or other contractual arrangement involving an unconsolidated entity
under which a company has (1) made guarantees, (2) a retained or a contingent
interest in transferred assets, (3) an obligation under derivative instruments
classified as equity, or (4) any obligation arising out of a material variable
interest in an unconsolidated entity that provides financing, liquidity, market
risk or credit risk support to the company, or that engages in leasing,
hedging, or research and development arrangements with the company.
We have made no arrangements of the types described in any of the
categories that may have a material current or future effect on our financial
condition, liquidity or results of operations. See Note 12 to the Consolidated
Financial Statements contained in this Annual Report on Form 10-K.
CONTRACTUAL
OBLIGATIONS
The following table of material debt and lease commitments at December
31, 2004, summarizes the effect these obligations are expected to have on our
cash flow in the future periods set forth below (in thousands):
|
|
|
Payments due by period
|
|
|
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
|
|
|
(in thousands, except per share data)
|
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
9,460
|
|
$
|
6,842
|
|
$
|
2,618
|
|
$
|
—
|
|
$
|
—
|
|
|
Capital lease obligation
|
|
212
|
|
134
|
|
78
|
|
—
|
|
—
|
|
|
Operating leases and rents
|
|
2,240
|
|
1,215
|
|
952
|
|
73
|
|
—
|
|
|
Growell settlement payable
|
|
3,246
|
|
3,246
|
|
—
|
|
—
|
|
—
|
|
|
Consulting services payable
|
|
172
|
|
172
|
|
|
|
|
|
|
|
|
Dongyang payable
|
|
28
|
|
28
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,358
|
|
$
|
11,637
|
|
$
|
3,648
|
|
$
|
73
|
|
$
|
—
|
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates and assumptions are based
on historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results could differ materially from
these estimates under different assumptions or conditions.
We believe that the following accounting policies are the
most critical to our consolidated financial statements since these policies
require significant judgment or involve complex estimates that are important to
the portrayal of our financial condition and operating results:
• Our earnings and cash flows are subject to
fluctuations due to changes in non-U.S. currency exchange rates. We are exposed
to non-U.S. exchange rate fluctuations as the financial results of non-U.S.
subsidiaries are translated into U.S. dollars. As exchange rates vary, those
results, when translated, may vary from expectations and adversely impact
overall expected profitability. The cumulative translation effects for
subsidiaries using functional currencies other than the U.S. dollar are
included in accumulated foreign exchange translation in shareholders’ equity.
Movements in non-U.S. currency exchange rates may affect our competitive
position, as exchange rate changes may affect business practices and/or pricing
strategies of non-U.S. based competitors.
34
• We record an accrual for potential product
warranty costs. Due to the lack of historical information for warranty expense
related to bulk alloy products, management estimates product warranties as a
percentage of bulk alloy product sales earned during the period. In the event
in future periods the actual product warranty costs consistently exceed the
estimate for product warranty costs, an adjustment would be made and income
would decrease in the period of such determination. Likewise, in the event we
determine that actual product warranty costs are consistently lower than the
estimate for product warranty costs, an adjustment would be made and income
would increase in the period of such determination.
• We record an allowance for doubtful accounts
as a contra-asset to our trade receivables for estimated uncollectible
accounts. Management estimates the amount of potentially uncollectible accounts
by reviewing significantly past due customer balances relative to historical
information available for those customers. In the event, in future periods,
actual uncollectible accounts exceed the estimate for uncollectible accounts,
an adjustment would be made and income would decrease in the period of such
determination. Likewise, in the event, in future periods, actual uncollectible
accounts are lower than the estimate for uncollectible accounts, an adjustment
would be made and income would increase in the period of such determination.
• We value inventories at lower of cost or net
realizable value. Management has determined net realizable value to be equal to
the selling price of the products to be produced and sold less the cost of
disposal. In the event, in future periods, the actual selling prices exceed the
estimate for selling prices less cost to sell, an adjustment would be made and
income would increase in the period of such determination. Likewise, in the
event, in future periods, actual selling prices are lower than the estimate for
selling prices, an adjustment would be made and income would decrease in the
period of such determination.
During 2003 we reduced the carrying value of raw materials held by our
subsidiary, Liquidmetal Korea, by the amounts considered to be obsolete. During 2003 we reduced the carrying value of
our inventories by $1.0 million as we determined that certain raw material and
inventories exceeded their net realizable value as of December 31, 2003. Additionally, we recorded a write-down of
$2.8 million of raw material and machine inventory associated with the
settlement of a dispute with a customer, Growell, in December 2003. Such write-down adjustments are included
within Cost of Sales. (see Note 6)
• We record valuation allowances to reduce the
deferred tax assets to the amounts estimated to be realized. While we consider
taxable income in assessing the need for a valuation allowance, in the event we
determine we would be able to realize our deferred tax assets in the future in
excess of the net recorded amount, an adjustment would be made and income
increased in the period of such determination. Likewise, in the event we
determine we would not be able to realize all or part of our deferred tax
assets in the future, an adjustment would be made and charged to income in the
period of such determination.
RECENT
ACCOUNTING PRONOUNCEMENTS
In December 2003, the Securities and Exchange
Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition.” SAB 104 supersedes SAB 101, “Revenue Recognition in Financial
Statements.” SAB 104’s primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue
Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the
SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions
and Answers (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic
13, Revenue Recognition. Selected portions of the FAQ have been incorporated
into SAB 104. While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged
by the issuance of SAB 104, which was effective upon issuance. The adoption of
SAB 104 did not impact the consolidated financial statements.
In March 2004, the FASB approved the
consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.” The objective of this Issue is to provide guidance for
identifying impaired investments. EITF 03-1 also provides new disclosure
requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that
delays the effective date of the measurement and recognition guidance in EITF
03-1 until after further deliberations by the FASB. The disclosure requirements
are effective only for annual periods ending after June 15, 2004. The Company
has evaluated the impact of the adoption of the disclosure requirements of EITF
03-1 and does not believe the impact will be significant to the Company’s
overall results of operations or financial position. Once the FASB reaches a
final decision on the measurement and recognition provisions, the company will
evaluate the impact of the adoption of EITF 03-1.
In November 2004, the FASB issued SFAS No. 151 “Inventory
Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement
151 clarify that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and require the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. The guidance is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Earlier application is permitted for inventory costs incurred during
fiscal years beginning after November 23, 2004. The Company has evaluated the
impact of the adoption of SFAS 151, and does not believe the impact will be
significant to the Company’s overall results of operations or financial
position.
35
In December 2004, the FASB issued SFAS No.153, “Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions.” The amendments made by Statement 153 are based on
the principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar productive assets and
replace it with a broader exception for exchanges of nonmonetary assets that do
not have commercial substance. Previously, Opinion 29 required that the
accounting for an exchange of a productive asset for a similar productive asset
or an equivalent interest in the same or similar productive asset should be
based on the recorded amount of the asset relinquished. Opinion 29 provided an
exception to its basic measurement principle (fair value) for exchanges of
similar productive assets. The Board believes that exception required that some
nonmonetary exchanges, although commercially substantive, be recorded on a
carryover basis. By focusing the exception on exchanges that lack commercial
substance, the Board believes this Statement produces financial reporting that
more faithfully represents the economics of the transactions. The Statement is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. Earlier application is permitted for nonmonetary asset
exchanges occurring in fiscal periods beginning after the date of issuance. The
provisions of this Statement shall be applied prospectively. The
Company has evaluated the impact of the adoption of SFAS 153, and does not
believe the impact will be significant to the Company’s overall results of
operations or financial position.
In December 2004, the FASB issued SFAS No.123
(revised 2004), “Share-Based Payment”. Statement 123(R) will provide investors
and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating to
share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. Statement 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share
purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting
for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. Statement 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25, as long as the footnotes to financial statements disclosed what net income
would have been had the preferable fair-value-based method been used. Public
entities (other than those filing as small business issuers) will be required
to apply Statement 123(R) as of the first interim or annual reporting period
that begins after June 15, 2005. The Company has evaluated the impact of the
adoption of SFAS 123(R), and does not believe the impact will be significant to
the Company’s overall results of operations or financial position.
In December 2004 the Financial Accounting Standards Board issued two
FASB Staff Positions—FSP FAS 109-1, Application
of FASB Statement 109 “Accounting for Income Taxes” to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004, and FSP FAS 109-2 Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation
Act of 2004. Neither of these affected the Company as it does not
participate in the related activities.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risks
We are exposed to various market risks in
conducting the business of the company, and we anticipate 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 times enter into derivative
financial instruments, although we have not historically done so. These may
take the form of forward sales contracts, option contracts, foreign currency
exchange contracts, and interest rate swaps. We have not, and do not intend to,
engage in the practice of trading derivative securities for profit.
Interest Rates. We
are exposed to market risks relating to changes in interest rates. Although we do not currently have any
borrowings with variable interest rates, fluctuations in interest rates may
have a negative impact to any future borrowings.
Commodity Prices. We
are exposed to price risk related to anticipated purchases of certain
commodities used as raw materials by our businesses, including titanium and
zirconium. Although we do not currently enter into commodity future, forward,
and option contracts to manage the fluctuations in prices of anticipated
purchases, we may enter into such contacts in the future as our business grows
and as our purchases of these raw materials increases.
Foreign Exchange Rates.
As a result of our manufacturing presence
in South Korea, a substantial portion of our costs will be denominated in South
Korean won. Consequently, fluctuations in the exchange rates of the South
Korean won to the U.S. dollar will affect our costs of goods sold and operating
margins and could result in exchange losses. Although we do not currently enter
into foreign exchange hedge transactions, we may do so in the future as our
business grows.
36
Item 8. Financial Statements
and Supplementary Data
The financial statements required by this item
are located beginning on page 59 of this report. The supplementary financial
information required by this item is located under the caption “QUARTERLY
RESULTS” in Item 7 of this report.
Item 9. Changes in and
Disagreements with Accountants on Accounting and financial Disclosures
Information required by this Item may be found in our Form
8-K filed May 6, 2004 in connection with the resignation of Deloitte &
Touche LLP as our independent auditors and our Form 8-K filed on May 21, 2004,
in connection with our appointment of Stonefield Josephson Inc. as our
independent auditors. Following is Item 4 of the respective Form 8-Ks:
May
6, 2004
On
May 6, 2004, Deloitte & Touche LLP (“Deloitte”), the Registrant’s
independent auditors, notified the Registrant that they were resigning from the
client-auditor relationship with the Registrant effective as of that date.
Deloitte
was engaged by Registrant to serve as the Registrant’s independent auditors for
the fiscal year ended December 31, 2003, although Deloitte has not issued a
report on the financial statements of the Registrant and its subsidiaries for
the 2003 fiscal year. The reports of Deloitte with respect to the Registrant’s
financial statements for the fiscal years ended December 31, 2002 and 2001
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. During the
fiscal years ended December 31, 2003 and 2002 and the period from December 31,
2003 through the date of Deloitte’s resignation, there were no disagreements
between the Registrant and Deloitte on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Deloitte, would
have caused Deloitte to make reference to the subject matter of the
disagreements in connection with its report on the Registrant’s financial
statements for such year.
The
Registrant previously announced that it expects to restate revenues and results
of operations for the third and fourth quarters of 2002 and the first quarter
of 2003 in connection with the Registrant’s sales of alloy melting and casting equipment
during such quarters to Growell Metal Co., Ltd., a South Korea metals
processing company (“Growell”). The Registrant’s Audit Committee conducted an
internal inquiry at the request of Deloitte into the Registrant’s transactions
with Growell and found that the original revenue recognition on the Growell
equipment sales did not take into account all relevant documentation relating
to the transactions. The Registrant announced in January 2004 that it entered
into a dispute settlement agreement with Growell to resolve various outstanding
claims between the parties relating to the Registrant’s transactions with
Growell.
In
connection with the Audit Committee’s inquiry into the Growell equipment sales
and dispute settlement, the Audit Committee also reviewed the facts and
circumstances relating to a personal stock transaction between the Registrant’s
CEO and Growell. In this transaction, as reported by the CEO, the CEO undertook
a private sale of personal shares of Registrant common stock to Growell in February
2002, prior to the Registrant’s initial public offering. As part of the
inquiry, the CEO reported that this sale included a previously undisclosed
personal agreement to ensure that the purchase price of the stock purchased by
Growell would be at a thirty percent discount to the Registrant’s initial
public offering price, and he also provided information regarding his
fulfillment of this personal agreement.
As
of May 6, 2004, certain details of the foregoing transactions had not been
resolved to Deloitte’s satisfaction, and the audit for the 2003 fiscal year has
therefore not been completed. As a result of the expected restatements and
these unresolved issues, the Registrant’s previously issued financial
statements for the year ended December 31, 2002 and Deloitte’s audit report
thereon, as well as the Registrant’s quarterly financial statements for the
third quarter of 2002 and the first, second, and third quarters of 2003 (and
Deloitte’s related review reports thereon), should no longer be relied upon.
Deloitte
has communicated to the Registrant that it is unwilling to continue to rely on
the representations of the Registrant’s CEO. Deloitte has also previously
communicated to the Registrant that, in light of the facts and circumstances
surrounding the expected restatement, there were material weaknesses in the
Registrant’s internal accounting controls relating to the execution,
administration, and accounting for contracts, particularly in the Registrant’s
South Korean operations. The Registrant has taken and is continuing to take
steps to improve these internal controls.
Other
than the foregoing, none of the reportable events described under Item
304(a)(1)(v) of Regulation S-K occurred within the two most recent fiscal years
of the Registrant ended December 31, 2003 and 2002 or within the subsequent
interim period through the date of Deloitte’s resignation.
37
The
Registrant’s Audit Committee has discussed with Deloitte the matters disclosed
above. The Registrant has authorized Deloitte to respond fully to the inquiries
of the Registrant’s successor accountant concerning the matters
disclosed above.
The
Registrant has provided Deloitte with a copy of the foregoing disclosure and
has requested that Deloitte furnish it with a letter addressed to the SEC
stating whether or not it agrees with the above statements. A copy of that
letter will be filed with the SEC promptly upon receipt. The Registrant’s Audit Committee has begun
the process of selecting new independent certified public accountants and will
file a Form 8-K upon the engagement of a new auditing firm.
May
21, 2004
On
May 21, 2004, the Audit Committee of Liquidmetal Technologies, Inc. (the “Registrant”)
appointed Stonefield Josephson, Inc. (“Stonefield Josephson”) as the Registrant’s
independent auditors. A copy of the press release announcing the engagement of
Stonefield Josephson is filed as Exhibit 99.1 to this Current Report on Form
8-K.
During
the two most recent fiscal years and through the date of this Current Report on
Form 8-K, the Registrant did not consult Stonefield Josephson regarding (i) the
application of accounting principles to a specific transaction, either
completed or proposed, or the type of audit opinion that may be rendered on the
Registrant’s financial statements, and neither a written report nor oral advice
was provided to the Registrant that Stonefield Josephson concluded was an
important factor considered by the Registrant in reaching a decision as to any
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a “disagreement” (as defined in Item 304(a)(1)(iv) of
Regulation S-K and the related instructions thereto) or a “reportable event”
(as defined in Item 304(a)(1)(v) of Regulation S-K).
Item 9A. Controls and
Procedures
Evaluation of
disclosure controls and procedures. During the course of the audit of our
financial statements for the fiscal years ended December 31, 2001, 2002, and
2003, it was determined that revenues from certain equipment sales made by the
Company to Growell Metal Co., Ltd. in the third and fourth quarters of 2002 and
the first quarter of 2003 should not have been recognized in those
periods. It was also determined that
certain amounts relating to sales made to Samsung in December 2002, to JS
Technologies in September 2002, and AM Corporation in December 2002 should not
have been recognized. It also was determined that compensation expense
related to certain stock options granted in 2001 and 2002 were not calculated
in accordance with generally accepted accounting principles under APB Opinion
No. 25, SFAS No. 123, and EITF 00-23.
These determinations and the associated restatement of previously issued
financial statements, as described more fully elsewhere in the Form 10-K for
the year ended December 31, 2003, filed on November 10, 2004, suggest that, at
the time of the subject transactions and the preparation of our financial
statements for the relevant periods, the Company’s disclosure controls and procedures
(as defined in Rule 13a-15 under the Securities Exchange Act of 1934) were
ineffective as of the period covered by the Form 10-K filed on November 10,
2004 for purposes of ensuring that all information required to be disclosed by
the Company was adequately accumulated and communicated to the Company’s
management at such time.
Within the 90 days prior to the
date of this annual report, Liquidmetal Technologies (the “Company”) carried
out an evaluation, under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and Chief
Financial Officer, of the effectiveness as of December 31, 2004 of the design
and operation of the Company’s disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive
Officer and Vice President Finance have concluded that these disclosure
controls and procedures were ineffective by reason of the material weaknesses
mentioned in more detail below in timely alerting them to material information
relating to the Company, including its consolidated subsidiaries, required to
be included in this annual report on
Form 10-K.
Update on
Management’s Assessment of Internal Control Over Financial Reporting.
The time and resources committed to the restatement of prior periods’ financial
statements as aforementioned delayed our internal timetable with respect to our
documentation, assessment and evaluation of internal control over financial
reporting, which are required to be undertaken
to comply with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX
404"). Due in part to the issues described in the foregoing paragraph,
management’s assessment of the effectiveness of our internal control over
financial reporting has been substantially delayed, which in turn has delayed
the Company’s independent registered public accounting firm, Stonefield
Josephson, in performing its audit of
management’s assessment of the effectiveness of internal control over financial
reporting pursuant to SOX 404.
Based on the foregoing, this
initial filing of our Annual Report on Form 10-K does not include management’s
assessment of internal controls over financial reporting nor Stonefield
Josephson’s report relating to our assessment of the effectiveness of internal
control over financial reporting.
Additionally, Stonefield Josephson has notified us that it may not
have sufficient time to complete its
work relating to our internal controls by the 45-day extension deadline to file
management’s report on internal controls in an amended Form 10-K, which is April 30, 2005.
In making our assessment of
internal control over financial reporting, management will use the criteria
established in “Internal Control - Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). To
date, management has identified several control deficiencies, some of which
have been determined to be material weaknesses on internal control over
financial reporting. As a result of the
material weaknesses identified below, management has determined that when it
finishes its assessment, it will conclude that it did not maintain effective
internal control over financial reporting as of December 31, 2004, based on the
criteria established in COSO. In
addition, we
38
expect that the material
weaknesses will result in an adverse opinion by our independent registered
public accounting firm on the effectiveness of our internal controls.
While management has not
completed its evaluation of our internal controls, and may identify additional
material weaknesses, management has identified the following material
weaknesses as of March 20, 2005:
1. Lack of adequate segregation
of duties in accounts payable and accounts receivable involving cash receipts
and deposits, bank reconciliations, cash disbursements, purchasing, and
accounts receivable reconciliations;
2. Lack of adequate controls and
monitoring of payroll and payroll processing, currently outsourced to a third
party provider; and
3. Lack of documentation to
evidence reviews of certain reconciliations; lack of documentation of
authorization of transactions; manual performance of numerous procedures that
could be automated using current reporting systems.
Management believes that it has
taken appropriate steps to address these material deficiencies subsequent to
December 31, 2004, including hiring an independent consulting firm to identify
and propose remedial actions to address and mitigate the deficiencies. However, management is not able to conclude
that our internal control over financial reporting are effective as of December
31, 2004 because the deficiencies were not identified and remedial actions were
not implemented until after December 31,
2004. In addition, our auditors may not
have sufficient time to test our assertions over internal control and,
therefore, expect to provide an adverse opinion on the effectiveness of our
internal control over financial reporting.
In addition, we cannot assure you that we will not discover and
subsequently report additional material internal control weaknesses and
deficiencies.
Changes in internal controls.
There were no changes in the Company’s internal controls over financial
reporting that occurred during the quarter ended December 31, 2004. The Company is currently in the process of
re-evaluating its internal controls pursuant to SOX 404 (see Item 9A Controls
and Procedures, Evaluations of disclosure controls and procedures).
39
PART III
Item 10. Directors and
Executive Officers of the Registrant
Set forth below is a table identifying our current directors and
executive officers:
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
John Kang
|
|
42
|
|
Chairman of the Board
|
|
|
|
|
|
|
|
John Thorne
|
|
64
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
James Kang
|
|
44
|
|
Director and Founder
|
|
|
|
|
|
|
|
William Johnson, Ph.D.
|
|
56
|
|
Director
|
|
|
|
|
|
|
|
Dean Tanella
|
|
44
|
|
Director
|
|
|
|
|
|
|
|
Vincent Addonisio
|
|
49
|
|
Director (Audit Committee Chairman)
|
|
|
|
|
|
|
|
Robert Biehl
|
|
61
|
|
Director
|
|
|
|
|
|
|
|
CK Cho
|
|
49
|
|
Director
|
|
|
|
|
|
|
|
David Binnie
|
|
55
|
|
Senior Vice President of
Administration and Secretary
|
|
|
|
|
|
|
|
Tony Chung
|
|
35
|
|
Vice President of Finance
|
John Kang was re-elected as Chairman of our
Board of Directors in August 2003. He
has been a director of our Company since 1994.
From December 1994 to December 2000, he served as Chairman of our Board
of Directors in a non-employee capacity, and from December 2000 to June 2001 he
served as Chairman of our Board of Directors in an employee capacity. From June 2001 to December 2004, he served as
our Chief Executive Officer and President. From July 1996 to September 2000, Mr.
Kang served variously as Chief Executive Officer, President, and a director of
Medical Manager Corporation, a public company traded on the Nasdaq National
Market until its sale in September 2000 to WebMD Corporation. From 1988 to
1995, he was Chairman of the board of directors of Clayton Group, Inc., a
private company engaged in the distribution of waterworks equipment. Mr. Kang received a B.A. degree in Economics
from Harvard College in 1985. Mr. Kang
is the brother of James Kang, the former Chairman of our board of directors.
John
Thorne joined Liquidmetal in November 2004 and began serving as our
President and Chief Executive Officer in January 2005. Mr. Thorne has more than 35 years of
leadership and management experience in fabrication, casting, product
development, technical management and P&L responsibility with
high-performance alloy and specialty metals companies, including Ruger
Investment Casting Division of Sturm, Ruger & Co., Inc., IMI Titanium,
Inc., Precision Castparts Corporation and Howmet Corporation. Currently, he is
President and CEO of Thorne Technologies, LLC, an Arizona-based metallurgical
engineering and management consulting firm serving high technology metals
industries. He holds a bachelor degree in Metallurgical Engineering and an MBA
in Business Administration from Cornell University, and an MSE and Ph.D. in
Metallurgical Engineering from the University of Michigan.
James Kang has
served as a director since December 1994 and as executive Founder of our
company since August 2003. From December
1994 to June 2001, he served variously as our Chief Executive Officer,
President, and Chairman. Mr. Kang
received a B.A. degree in Marketing from the University of Illinois in 1983,
and an M.B.A. degree from the Kellogg School of Management at Northwestern
University in 1985. Mr. Kang is the
brother of John Kang, our Chairman of the Board of Directors, who was also our
Chief Executive Officer and President during 2004.
William Johnson, Ph.D., has served as a director since June 2000. From October 2001 to September 2003, he was
employed as our executive Vice Chairman of Technology. Since 1997, Professor Johnson has been the
Mettler Professor of Engineering and Applied Physics at Caltech. He held a Visiting Professor appointment at
the Metal Physics Institute in Gottingen, Germany (1983) and received a Von
Humbolt Distinguished Scientist Fellowship in Gottingen (1988). He is the 1995 recipient of the TMS/AIME Hume
Rothery Award for his experimental work.
He received a B.A. degree in Physics from Hamilton College and a Ph.D.
degree in Applied Physics from Caltech.
He spent two years at IBM’s Research Center (1975-1977). At Caltech, Professor Johnson directed the
research that led to the discovery of our bulk Liquidmetal alloy. Professor Johnson is currently a consultant to
the Company.
40
Dean G. Tanella
was elected as a director in February 2004.
Mr. Tanella is a 20-year veteran of the institutional investment
business and has worked for such leading firms as Raymond James &
Associates, CS First Boston Corp., Adams Harkness & Hill, Drexel Burnham
Lanbert, Inc., Kidder Peabody & Co. and the Vanguard Group. Since 1999, Mr. Tanella has served as
President of Safe Harbor Capital, LLC and HarborLight Capital, LLC, both of which
are private investment firms. Mr.
Tanella received his bachelors degree from Princeton University and his MBA
from the Harvard Graduate School of Business Administration.
Vincent Addonisio was elected as a director in May 2004.
Mr. Addonisio is President and CEO of Regency Strategic Advisors,
Inc., a firm he founded to advise select corporate clients on strategy,
business development, and mergers and acquisitions. Previously, he served as a
director, executive vice president and chief administrative officer for
IMRglobal Corp., a public company that was subsequently acquired in 2001. Prior to joining IMRglobal, he was a
director, executive vice president and chief financial officer for ABR
Information Services, Inc., a public company which he also helped lead through
initial and secondary public offerings and strategic acquisitions. A CPA,
Addonisio began his career with an international accounting firm and
subsequently joined W.R. Grace, where he held positions of progressive
management responsibility. He holds a BS
degree in accounting from Binghamton University and earned an MSM from Georgia
Institute of Technology in Atlanta.
Robert Biehl has
served as a director since January 2005.
Mr. Biehl founded the Masterplanning Group International and as
President, personally consulted over 400 clients and mentored over 2,500
executives and world leaders. Prior to
starting Masterplanning Group, Mr. Biehl was an executive staff of World Vision
International where he designed and developed the Love Loaf Program, which has
raised millions of dollars worldwide. He
has also published many books in the area of personal and organizational
development. Mr. Biehl received his B.A.
degree in psychology and a Masters Degree in Counseling from Michigan State
University.
CK Cho was elected
as a director in January 2005. Mr. Cho
has over 18 years of experience with Samsung Electronics and managed over $700
million annual procurement budget responsible for semi-conductor and
telecommunication equipment and other electronic components. He is also the CEO of Winvest Venture
Partners Inc. Mr. Cho received his
bachelors degree majoring in Business Administration and Material Sciences from
the Korea University of Seoul.
David
Binnie has
been Senior Vice President-Administration and Corporate Secretary since
December 2003. Previously, he served as Senior Vice President for Human
Resources, a position he had held since October 2001. Prior to joining Liquidmetal Technologies,
Binnie was a senior official with the School District of Hillsborough County,
Florida, where he served as the Assistant Superintendent for Human Resources.
Hillsborough County is currently the 10th largest school system in the United
States with over 191,000 students and over 32,000 employees. Mr. Binnie earned degrees at the Bachelors
(Education 1971), Masters (Education, 1973) and Doctorate (Education
Leadership, 1985) levels at the University of South Florida.
Tony Chung has been our Vice President of Finance since
October 2004, prior to which he served as our Director of Finance upon joining
the Company in May 2004. From September 1992 to May 2004, Mr. Chung
served in a variety of senior finance capacities at various companies including
Everdream Corporation, a startup venture specializing in IT outsourcing, and
MAI Systems Corporation, a publicly traded company that develops
and licenses hotel management software. Mr. Chung is a Certified Public
Accountant and served eight years at KPMG as an Audit and Consulting Manager
for several large multinational companies. He received his B.S. degree
specializing in accounting and finance from the University of
California at Berkeley in 1992 at The Haas School of Business. Mr. Chung is
currently pursuing a Juris Doctorate Degree with Pacific Coast University
School of Law and expects to receive his degree in June 2006.
Change in Principal Financial
Officer
On November 3, 2004, David Nail resigned as our Vice
President of Finance and ceased to be our principal financial officer. On the same day, our board elected Tony Chung
to serve as our Vice President of Finance and become our company’s principal
financial officer. Additional
information regarding Mr. Chung is set forth above in this Item 10.
BOARD OF DIRECTORS
Terms of Directors
Our board of
directors is divided into three classes (designated “CLASS I,” “CLASS II,” and “CLASS
III”), as nearly equal in number as possible, with each class serving
three-year terms expiring at the third annual meeting of stockholders after
their elections or until their respective successors have been elected and
qualified. CLASS I currently consist of
the following directors whose term is scheduled to expire at the 2005 annual
meeting of stockholders: John Kang, William Johnson, and Robert Biehl. CLASS II currently consists of the following
directors whose term is scheduled to expire at the 2006 annual meeting of
stockholders: Dean Tanella and CK
Cho. CLASS III currently consists of the
following directors whose term will expire at the 2007 annual meeting of
stockholders: James Kang and Vincent
Addonisio.
41
Audit Committee
Our board of directors has an Audit Committee that
is currently comprised of Mr. Addonisio and Mr. Tanella. The Audit Committee is responsible for
reviewing the independence, qualifications, and activities of our independent
certified accountants and our financial policies, control procedures, and
accounting staff. The Audit Committee is
also responsible for the review of transactions between us and any officer,
director, or entity in which an officer or director of Liquidmetal has a
material interest. Our board of
directors has determined that Mr. Addonisio and Mr. Tanella each qualify as “audit
committee financial experts” as defined by the regulations of the Securities
and Exchange Commission. The Audit
Committee is governed by a written charter approved by the board of directors.
Compensation
Committee
The Compensation Committee is comprised of Mr. Cho and Mr.
Biehl. All of the members of the Compensation Committee are “independent
directors,” as defined by the rules applicable to members of the Compensation
Committee. The Compensation Committee is responsible for establishing the
compensation of our senior management, including salaries, bonuses, termination
arrangements, and other executive officer benefits. The Compensation Committee
also administers our equity incentive plans.
Corporate Governance and Nominating Committee
A Corporate
Governance and Nominating Committee (“the Committee”) was formed on
February 18, 2003, and is comprised of Mr. Tanella and Mr. Biehl. All members of the Committee are “independent
directors,” as defined by the rules applicable to members of the Committee. The
Committee is generally responsible for adopting policies, procedures, and
practices designed to help ensure that our corporate governance policies,
procedures, and practices continue to assist the board and our management in
effectively and efficiently promoting the best interests of our shareholders. The Committee is also responsible for selecting
and recommending for approval by the Board and the Company’s
shareholders a slate of director nominees for
election at each of the Company’s annual meetings of shareholders, and
otherwise for determining the Board committee members and chairmen, subject to
Board ratification, as well as recommending to the Board director nominees to
fill vacancies or new positions on the Board or its committees that may occur
or be created from time to time, all in accordance with the Company’s Bylaws
and applicable law.
The Corporate Governance Committee’s principal functions include:
• developing
and maintaining our corporate governance policy guidelines;
• developing
and maintaining our codes of conduct and ethics;
• overseeing
the interpretation and enforcement of our Code of Conduct and our Code of
Ethics for Chief Executive Officer and Senior Financial and Accounting
Officers; and
• evaluating
the performance of our board, its committees, and committee chairmen and our
directors.
• selecting
and recommending a slate of director nominees for election at each of the
Company’s annual meeting of the shareholders and recommending to the Board
director nominees to fill vacancies or new positions on the Board or its
committees that may occur from time to time.
Code of Ethics
Our board of directors has adopted a Code of
Ethics that is applicable to its principal executive officer, principal
financial officer, principal accounting officer or controller, and persons
performing similar functions. The Code of Ethics is attached as Exhibit 14 to
the Annual Report on Form 10-K filed on November 10, 2004.
BENEFICIAL OWNERSHIP
REPORTING REQUIREMENTS
During the year ended December 31, 2004, our executive
officers and directors filed with the Securities and Exchange Commission on a
timely basis all required reports relating to transactions involving shares of
our common stock beneficially owned by them, except that John Kang, Chairman,
disposed of 188,700 shares during various dates in 2004 as gifts to various
individuals and organizations and James Kang, Director and Founder, disposed of
67,320 shares on January 5, 2004 as gifts to various individuals and
organization. These disposals were reported
in John Kang’s Form 5 filed on February 17, 2005 and James Kang’s Form 4 filed
on January 28, 2005.
42
Item 11. Executive
Compensation
The following table sets forth certain information
regarding compensation paid by us for each of our last three years to our Chief
Executive Officer and each of our other executive officers during 2004
(collectively, the “named executive officers”).
|
|
|
|
|
|
|
Long-Term
Compensation
|
|
|
|
|
Name and Positions
|
|
Year
|
|
Annual Compensation
|
|
Shares
Underlying
Options
Granted
|
|
All Other
Compensation
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Annual
|
|
Salary
|
|
Bonus
|
|
Compensation
|
|
John Kang (1)
|
|
2004
|
|
$
|
208,586
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Chairman of the Board
|
|
2003
|
|
$
|
300,007
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
2002
|
|
$
|
116,671
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Thorne (2)
|
|
2004
|
|
$
|
37,500
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Chief Executive Officer
|
|
2003
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
and President
|
|
2002
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Kang (3)
|
|
2004
|
|
$
|
300,004
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Founder and Director
|
|
2003
|
|
$
|
280,011
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
2002
|
|
$
|
373,334
|
|
—
|
|
—
|
|
2,877,420
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Binnie (4)
|
|
2004
|
|
$
|
142,506
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Senior VP of Administration
|
|
2003
|
|
$
|
140,005
|
|
—
|
|
—
|
|
150,000
|
|
—
|
|
|
and Secretary
|
|
2002
|
|
$
|
150,005
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tony Chung (5)
|
|
2004
|
|
$
|
73,544
|
|
—
|
|
—
|
|
80,000
|
|
—
|
|
|
VP of Finance
|
|
2003
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
2002
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1) As of August 22, 2003, John
Kang was named Chairman of our board of directors, in addition to already
serving as Chief Executive Officer and President. Mr.
Kang ceased to be our Chief Executive Officer as of January 14, 2005
(2) As of January 14, 2005, John
Thorne was named Chief Executive Officer and President of the Company. Previously during 2004, Mr. Thorne served as
a consultant.
(3) As of August 22, 2003, James
Kang became the executive Founder of the Company and ceased to be the Chairman
of our board of directors.
(4) Mr. Binnie joined Liquidmetal
in October 2001 as Vice President of Human Resources and assumed the position
of Senior Vice President of Administration and Secretary effective December
2003.
(5) Mr. Chung joined Liquidmetal
in May 2004 as Director of Finance and assumed the position of Vice President of
Finance effective November 2004.
43
The following table sets forth information with respect to
the aggregate stock option exercises by the executive officers named in the
Summary Compensation Table during 2004 and the year-end value of unexercised
options held by such executive officers.
Aggregate Option Exercises in
Last Year and Year-End Values
|
|
|
Shares
Acquired
on
|
|
Value
|
|
Number of Unexercised
Options at Year End
|
|
|
|
|
Exercise
|
|
Realized (1)
|
|
Exercisable
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Kang
|
|
—
|
|
—
|
|
1,612,904
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Thorne
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Kang
|
|
—
|
|
—
|
|
2,845,162
|
|
32,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Binnie
|
|
—
|
|
—
|
|
69,355
|
|
112,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tony Chung
|
|
—
|
|
—
|
|
—
|
|
80,000
|
|
(1) Represents the difference
between the fair market value of the underlying shares at the time of exercise
and the exercise price of the options exercised.
EMPLOYMENT
AGREEMENTS
We have entered into employment agreements with the executive officers
identified in Item 11 above, as follows:
John Kang. On
December 31, 2000, we entered into an employment agreement with John Kang that,
as amended, provides for his employment as our Chief Executive Officer and
President, and on August 22, 2003, Mr. Kang was named Chairman of our Board of
Directors. Mr. Kang’s employment
agreement expires on December 31, 2005.
Mr. Kang receives an annual base salary equal to $200,000 per year, and
his employment will terminate upon the earlier of his death, resignation,
disability, or termination by the board of directors for any reason. If we terminate Mr. Kang’s employment without
cause, or if Mr. Kang terminates his own employment upon a change of control of
our company or for other good reason, as defined in the agreement, we are
responsible for paying Mr. Kang a lump-sum cash payment equal to 200% of Mr.
Kang’s annual base salary plus the average cash bonus during the two full
fiscal years immediately preceding the termination. Pursuant to the agreement, Mr. Kang was
issued options to purchase 1,612,904 shares of our common stock at an exercise
price of $4.65 per share. The options
expire on December 31, 2010 and vested immediately upon grant. In addition, Mr. Kang is prohibited, during
his employment with us and for one year after he is no longer employed by us,
from soliciting any of our employees or competing with us in any manner. Starting in May 2003, Mr. Kang and other
members of senior management took a 10% voluntary decrease in their base salary
and returned to full salary in June 2004.
Mr. Kang ceased to be our President and Chief Executive Officer as of
January 14, 2005.
John Thorne.
On January 14, 2005, we entered into an employment agreement with John
Thorne, which provides for his employment as the named Chief Executive Officer
and President of our company. Mr. Thorne’s
employment expires April 30, 2005, and his
term may continue subsequent to the expiration date on a month-to-month basis
at the same salary if mutually agreed in writing at least 2 weeks prior to each
extension. His monthly salary is
$20,834, and will receive 10,000 stock options on April 30, 2005, contingent on
remaining as an employee until that time.
James Kang. On
May 1, 2001, we entered into an employment agreement with James Kang that, as
amended, provides for his employment as the named executive Founder of our
company. Mr. Kang’s employment agreement
expires on May 1, 2006. Mr. Kang
receives an annual base salary equal to $300,000 per year, and his employment
will terminate upon the earlier of his death, resignation, disability, or
termination by the board of directors for any reason. If we terminate Mr. Kang’s employment without
cause, or if Mr. Kang terminates his own employment upon a change of control of
our company or for other good reason, as defined in the agreement, we are
responsible for paying Mr. Kang a severance benefit equal to a lump-sum cash
payment equal to 200% of Mr. Kang’s annual base salary plus the average cash
bonus during the two full fiscal years immediately preceding the
termination. Pursuant to the agreement,
Mr. Kang was issued options to purchase 2,580,646 shares of our common stock at
an exercise price of $6.20 per share.
The options expire on April 30, 2011 and vest at a rate of 33% per year
for three years, with the first 33% vesting on May 21, 2002 and an additional
33% on May 21,
44
2003 and 2004. In addition, Mr.
Kang is prohibited, during his employment with us and for two years after he is
no longer employed by us, from soliciting any of our employees or
customers. Starting in May 2003, Mr.
Kang and other members of senior management took a 10% voluntary decrease in
their base salary and returned to full salary in June 2004.
David Binnie. On October 1, 2001, we entered into an
employment agreement with David Binnie, which provides for his employment as
the named Senior Vice President for Human Resources. Mr. Binnie’s employment expires September 30,
2006, and his term may continue
subsequent to the expiration date on a month-to-month basis at the same
salary. His annual salary is $150,000,
and he received 100,000 stock options as part of the employment agreement. In December 2003, Mr. Binnie was named as our
Senior Vice President of Administration and Secretary.
Tony Chung. On November 3, 2004, we entered into an
employment agreement with Tony Chung, which provides for his employment as the
named Vice President of Finance. Mr.
Chung’s employment expires November 2, 2007, and his term may continue subsequent to the expiration date on a
month-to-month basis at the same salary.
His annual salary is $125,000, and he received 20,000 stock options as
part of the employment agreement.
REPORT ON EXECUTIVE
COMPENSATION
General
The Compensation Committee of our Board of Directors was
established in 2002 and currently consists of CK Cho and Robert Biehl. The Compensation Committee is comprised
entirely of non-employee directors and is responsible for establishing the
compensation of our senior management, including salaries, bonuses, termination
arrangements, and other executive officer benefits. The Compensation Committee also administers
our equity incentive plans. The
Compensation Committee also annually reviews and approves the compensation of
John Thorne, our Chief Executive Officer and President.
Compensation Philosophy
The
Compensation Committee’s goal is to establish and maintain compensation
policies that will enable us to attract, motivate, and retain high-quality
executives and to ensure that their individual interests are aligned with our
long-term interests and our stockholders.
The committee places heavy emphasis on paying for performance and
believes that a significant portion of an executive’s total compensation opportunity
should be at risk and tied to company performance. Our compensation package consists of three
principal components:
• Base salaries, subject to minimums set forth
in individual employment agreements;
• Annual incentive bonus eligibility; and
• Stock option grants and other forms of
equity-based compensation.
Base Salary. Base salary is the
largest portion of the cash compensation package received by each of our
executive officers. The base salary of
each of our executive officers is governed by employment agreements that were
entered into during 2000 through 2005. Subject to the minimum amounts set forth
in their respective employment agreements, we generally establish the base
salary of each executive officer based, among other factors, on the
Compensation Committee’s assessment of that executive officer’s position,
responsibilities, experience, and performance.
Our philosophy is to pay base salaries sufficient to attract and retain
highly qualified executives. An
executive officer’s level of responsibility is the primary factor used in
determining base salary. Individual
performance also is considered in determining any salary adjustment.
The Compensation Committee reviews and approves all
executive officer salary adjustments as recommended by the Chief Executive
Officer and determines whether to increase the base salary above the amount set
forth in their employment agreements.
The Compensation Committee reviews annually the performance of the Chief
Executive Officer and establishes his base salary, subject to the minimum
$250,000 annual base salary set forth in his employment agreement. In 2004 and 2003, the Compensation Committee
did not increase the base salary of any of the executive officers.
Annual
Bonus. Our executive officers are
eligible for an annual cash bonus under our Performance Bonus Plan.
The plan is designed to:
• put a
significant portion of an executive officer’s total cash compensation
opportunity at risk based on the performance of the Company;
• be aligned with
our mission, values and culture;
45
• be cost-effective and
appropriately budgeted to allow for growth of our revenue as well as growth of
individual compensation plans;
• be externally competitive by
matching or leading competitors; and
• be internally equitable
through alignment with level of contribution, performance-based rewards, and
administrative capabilities.
Awards of incentive bonuses generally are based on
achieving corporate goals and a subjective evaluation of the contributions of
individual executives toward the achievement of our business goals. Eligibility for the bonus will be contingent
upon the Company meeting or exceeding company-wide financial goals and
successful attainment of individual goals for the position. Both elements must be successfully met in
order to be eligible for the bonus. None
of our executive officers received bonuses for 2003 and 2004 because the
company-wide financial goals were not satisfied.
Equity-Based Compensation.
Our
equity-based awards to our executive officers consist principally of stock
options granted from time to time under our 2002 Equity Incentive Plan and our
1996 Stock Option Plan. Stock option
grants are based on various factors, including the executive officer’s
position, responsibility and tenure, each executive officer’s ability to
contribute to our future success, and the other elements of such executive
officer’s compensation. Generally, we use equity-based compensation to better
align the interests of our executive officers with those of our
stockholders. For 2004, the Compensation
Committee approved awards of options to executive officers and certain members
of senior management, with the sizes of the awards determined with reference to
the scope of the position and the employees’ relative contributions to the
Company. In addition, three of our
executive officers, John Kang, our Chief Executive Officer, James Kang, our
executive Founder, and William Johnson, our Vice Chairman, own a significant
amount of our common stock.
CEO Compensation
John Kang’s base salary for 2003, as our President and Chief Executive
Officer, was originally set at $200,000, although Mr. Kang and other members of
senior management took a 10% voluntary decrease in their base salary starting
in May 2003, at which time Mr. Kang’s base salary was reduced to $180,000 per
year. This represents a decrease over
Mr. Kang’s 2002 salary of $200,000. Mr.
Kang’s compensation reflects his status as a significant stockholder of the
Company. Accordingly, his base salary is
lower than the base salary of CEOs of comparable companies. Mr. Kang voluntarily waived his base salary
from January 2004 through May 2004 in support of the Company’s strategic cash
objectives. In June 2004, Mr. Kang
returned to his base salary of $200,000 and received his differential retroactive
pay in equal installments over the remaining months of 2004. As a significant stockholder in the Company,
his overall compensation is tied directly to sustained increases in the Company’s
value.
No bonus payments were made to Mr. Kang for 2003 and 2004
because the Compensation Committee determined not to pay any bonuses to any of
our executive officers due to the Company missing its financial goals. In addition, no options were granted to Mr.
Kang in 2003 and 2004. As of December
31, 2004, Mr. Kang held options and warrants to purchase 1,935,485 shares of
our common stock, all of which were fully vested.
John Thorne’s base salary, as our President and Chief Executive Officer, effective January 14,
2005, is $250,008. As of December 31, 2004, Mr. Thorne did not
hold any options to purchase our common stock.
The Internal
Revenue Code imposes a limitation on the deduction under Section 162(m) for
certain executive officers’ compensation unless certain requirements are met.
Our policy is to have all compensation fully deductible; however, we reserve
the right to pay compensation that is not deductible if it is in our best
interests.
Compensation Committee of the Board of Directors
CK Cho
Robert Biehl
December 31, 2004
The report of
the Compensation Committee shall not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act of 1933 or under the Securities
Exchange Act of 1934, except to the extent that we specifically incorporate
this information by reference, and shall not otherwise be deemed filed under
such acts.
46
DIRECTOR
COMPENSATION
Our
non-employee directors receive an annual fee of $10,000 for their service to
our board and are reimbursed for expenses incurred in attending board and
committee meetings. Non-employee
directors are also entitled to receive a $10,000 annual cash stipend for each
standing board committee (excluding the Audit Committee) on which the director
serves. For Audit Committee service, the
Audit Committee chairman is entitled to a $35,000 annual stipend, and the other
members of the Audit Committee are entitled to a $27,500 annual stipend. In addition to the annual stipends, each
non-employee director is entitled to receive a per-meeting fee of $1,000 for
each meeting of the board of directors or any board committee attended in
person. Effective May 2004, Vincent
Addonisio was elected as the lead independent director of the Company. The lead independent director is entitled to
a $30,000 annual stipend.
We also have a 2002 Non-employee Director Stock Option Plan pursuant to
which our non-employee directors are entitled to receive stock options. Under this plan, when a director is first
elected or appointed to our board of directors, the non-employee director is
entitled to receive an initial stock option grant to purchase 50,000 shares of
our common stock. Thereafter, on the
first business day of January of each year in which the director continues to
serve as a member of our board, the director is entitled to an annual stock
option grant to purchase 10,000 shares of our common stock. All options granted under the plan have an
exercise price equal to the fair market value of our common stock on the date
of the grant. These stock options have a
10-year term, vest, and are exercisable pursuant to an equal 5-year vesting
schedule, and remain exercisable for certain periods of time after a person is
no longer a director.
No director
who is an employee will receive separate compensation for services rendered as
a director. However, our employee
directors are eligible to participate in our 2002 Equity Incentive Plan
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following
table sets forth certain information regarding the beneficial ownership of our
common stock as of December 31, 2004 by:
• each of our directors and the executive
officers identified in Item 10 above;
• all directors and executive officers as a
group, and
• each person known by us to own beneficially
more than 5% of the common stock.
Beneficial
ownership is determined under the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Unless otherwise indicated,
each of the stockholders has sole voting and investment power with respect to
the shares beneficially owned, subject to applicable community property
laws. As of December 31, 2004, there
were 238 holders of record of our common stock.
For purposes of calculating amounts beneficially owned by a stockholder,
the number of shares deemed outstanding includes 41,609,652 shares of common
stock outstanding as of December 31, 2004.
In addition, shares of common stock subject to options or warrants that
are currently exercisable or exercisable within 60 days of December 31, 2004
are deemed to be outstanding and to be beneficially owned by the person holding
the options or warrants for the purpose of computing the beneficial ownership
of that person but are not treated as outstanding for the purpose of computing
the beneficial ownership of any other person.
47
|
|
|
Beneficially Owned
|
|
|
Name
|
|
Shares
|
|
Percent
|
|
|
|
|
|
|
|
|
|
John Kang (1)
|
|
5,600,474
|
|
13
|
%
|
|
|
|
|
|
|
|
|
James Kang (2)
|
|
7,003,904
|
|
17
|
%
|
|
|
|
|
|
|
|
|
William Johnson
|
|
1,195,650
|
|
3
|
%
|
|
|
|
|
|
|
|
|
David Binnie (3)
|
|
75,115
|
|
|
*
|
|
|
|
|
|
|
|
|
Dean Tanella (4)
|
|
26,120
|
|
|
*
|
|
|
|
|
|
|
|
|
Vincent Addonisio (5)
|
|
—
|
|
|
*
|
|
|
|
|
|
|
|
|
Robert Biehl
|
|
25,000
|
|
|
*
|
|
|
|
|
|
|
|
|
CK Cho (6)
|
|
185,102
|
|
|
*
|
|
|
|
|
|
|
|
|
John Thorne
|
|
—
|
|
|
*
|
|
|
|
|
|
|
|
|
Tony Chung (7)
|
|
47,250
|
|
|
*
|
|
|
|
|
|
|
|
|
All directors and executive officers as a
group – 10 persons
|
|
|
|
34
|
%
|
* Less than one percent.
(1) As of August 22, 2003,
John Kang was named Chairman of our board of directors, in addition to already
serving as Chief Executive Officer and President. As of January 14, 2005, John Kang ceased to
be our Chief Executive Officer and President.
The beneficial shares include:
(a) 1,612,904 shares that are issuable
pursuant to outstanding stock options that are exercisable currently or within
60 days of December 31, 2004.
(b) 322,581 shares issuable pursuant to a
warrant held jointly by John Kang and Ricardo Salas (a former director of the
company) that is currently exercisable; and
(c) 127,800 shares held by Mr. Kang’s minor children.
(2) Includes 2,845,162
shares issuable pursuant to outstanding stock options that are exercisable
currently or within 60 days of December 31, 2004. Also includes 969 shares held by James Kang’s
minor children. Does not include 32,258 shares issuable pursuant to outstanding
stock options that are not exercisable currently or within 60 days of December
31, 2004.
(3) Includes 69,355 shares
issuable pursuant to outstanding stock options that are exercisable currently
or within 60 days of December 31, 2004.
Also includes 760 shares held by Mr. Binnie’s family. Does not include
112,904 shares issuable pursuant to outstanding stock options that are not
exercisable currently or within 60 days of December 31, 2004.
(4) Includes 16,130 shares
held by Mr. Tanella’s investment firm, HarborLight Diversified Fund, LP. Also, includes 1,390 shares held by Mr.
Tanella’s family. Does not include
50,000 shares that are issuable pursuant to outstanding stock options that are
not exercisable within 60 days.
(5) Does not include 70,000
shares that are issuable pursuant to outstanding stock options that are not
exercisable within 60 days.
(6) Includes 109,678 shares
held by Mr. Cho’s Investment firm, Winvest.
(7) Does not include 80,000
shares that are issuable pursuant to outstanding stock options that are not
exercisable within 60 days.
48
Equity Compensation Plan Information
The following table sets forth certain information
regarding the securities authorized for issuance under our equity compensation
plans as of December 31, 2004.
|
Plan Category
|
|
Number of Securities To be
Issued upon Exercise of
Outstanding Options,
Warrants, and Rights
|
|
Weighted Average Exercise
Price of Outstanding
Options,
Warrants, and Rights
|
|
Number of Securities
Remaining Available for
Future Issuance
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by
security holders:
|
|
6,899,164
|
|
$
|
4.95
|
|
10,232,001
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by
security holders:
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
6,899,164
|
|
$
|
4.95
|
|
10,232,001
|
|
Item 13. Certain
Relationships and Related Transactions
In June 2003,
the Company entered into an exclusive, ten-year license agreement with LLPG,
Inc. (“LLPG”), a corporation headed by a former director of the Company. Under the terms of the agreement, LLPG has
the right to commercialize Liquidmetal alloys, particularly precious-metal
based compositions, in jewelry and high-end luxury product markets. The Company, in turn, will receive royalty
payments over the life of the contract on all Liquidmetal products produced and
sold by LLPG. In conjunction with its
technology licensing contract, LLPG purchased two proprietary Liquidmetal alloy
melting machines and three proprietary Liquidmetal alloy casting machines for a
total purchase price of $2,000,000. At
December 31, 2003, the Company had a remaining receivable balance of approximately
$500,000 due from LLPG, which was paid in full in March 2004.
The Company is a party
to a license agreement with California Institute of Technology (“Caltech”)
under which the Company exclusively licenses from Caltech certain inventions
and technology relating to amorphous alloys.
Professor William Johnson, a member of the Company’s Board of Directors,
is a professor at Caltech, and substantially all of the amorphous alloy
technology licensed to the Company under the Caltech license agreement was
developed in Professor Johnson’s Caltech laboratory. During 2003, the Company paid approximately
$50,000 to Caltech representing the second and final installments on the
approximately $150,000 aggregate fees related to this agreement. Additionally, the Company reimburses Caltech
for laboratory expenses incurred by Professor Johnson’s Caltech laboratory,
which during the years ended December 31, 2004 and 2003, amounted to $0 and
approximately $22,000, respectively.
A company managed and
partially owned by one of the Company’s former directors provides technical
support services and computer equipment to the Company. During the year ended December 31, 2003, the
Company incurred approximately $20,000 of expenses and equipment purchases related
to this arrangement. There were no
expenses and payables to this Company as of December 31, 2004.
We are a
party to a consulting agreement with Chitnis Consulting, Inc., which is owned
100% by Shekhar Chitnis, a former director and executive officer of our company. Under this agreement, we have engaged Chitnis
Consulting to provide consulting services on an as-needed basis through
December 31, 2005. During 2003, we
incurred approximately $50,000 in consulting fees from Chitnis Consulting and
incurred approximately $54,000 as of December 31, 2004.
Soo Buchanan,
the sister of John Kang and James Kang, was employed by our company and was
paid aggregate compensation of approximately $76,000 and $43,000 as of December
31, 2003 and 2004. Additionally, Otis
Buchanan, the husband of Ms. Buchanan, was employed by the Company and was paid
aggregate compensation of approximately $90,000 and $54,000 as of December 31,
2003 and 2004, respectively.
In November 2004, we entered into an agreement with John
Kang, our Chairman, President, and Chief Executive Officer, in which Mr. Kang
agreed that certain stock transactions by him in 2002 involving our common
stock should have resulted in a liability under Section 16(b) of the Securities
Exchange Act of 1934, as amended (“Section 16(b)”). These transactions include Mr. Kang’s private
sale of 285,715 shares of his personal Liquidmetal Technologies common stock to
Growell Metal Co., Ltd. in February 2002, prior to our initial public
offering. They also include Mr. Kang’s
subsequent indirect purchase and disposition of Liquidmetal Technologies common
stock in order to satisfy a personal agreement Mr. Kang made to Growell Metal
in February 2002 regarding the guaranteed minimum value of the stock purchased
by Growell Metal
49
in February 2002 (the purchases and dispositions incident
to this agreement occurred in August and November 2002, respectively). Lastly, the transactions include open-market
purchases of an aggregate 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 independent
inquiry into the above-described transactions with the aid of independent legal
counsel and, as a result of such inquiry, the Audit Committee concluded that
the transactions should have resulted in a liability to the Company under
Section 16(b) in the amount of approximately $302,000. Mr. Kang has acknowledged this liability, and
in an agreement negotiated between Mr. Kang and the Audit Committee and
approved by the full Board, Mr. Kang will pay this liability through periodic
installments in 2005 and 2006. . As a result, the Company accrued the $302,000
receivable in other assets and other income as of December 31, 2004. The above-described transactions involving
Growell Metal were reported on a new Form 4 filed by Mr. Kang on
November 15, 2004, and the open-market purchases were previously reported on a
timely basis in August 2002.
Item 14. Principal Accounting
Fees and Services
Prior to May 2004, Deloitte & Touche LLP was our
independent public accountant; however, effective May 2004, Deloitte &
Touche LLP resigned as our independent accountant. Liquidmetal Technologies subsequently engaged
Stonefield Josephson, Inc. Item 14
includes the principal accounting fees and services for both Deloitte &
Touche LLP and Stonefield Josephson, Inc.
Stonefield Josephson, Inc.
Stonefield Josephson, Inc. was engaged in May 2004 and has
served as our independent public accountants during the year ended December 31,
2003 and 2004.
The
following table summarizes the aggregate fees billed to the Company by
Stonefield for professional services:
|
Fees
|
|
2003, 2002, and 2001
|
|
2004
|
|
|
Audit Fees (1)
|
|
$
|
760,000
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
(1) Audit Fees.
Fees for audit services billed in 2004 consisted of:
• Audit of the
Company’s annual financial statements for 2003, 2002, and 2001;
• Review and audit
of the Company’s quarterly and annual financial statements for 2004,
respectively.
Deloitte & Touche LLP
The
following table summarizes the aggregate fees billed to the Company by Deloitte
& Touche LLP for professional services performed in 2003:
|
Fees
|
|
2003
|
|
|
Audit Fees (1)
|
|
$
|
296,021
|
|
|
Tax Fees (2)
|
|
68,435
|
|
|
|
|
|
|
|
Total
|
|
$
|
364,456
|
|
(1) Audit Fees. Fees for
audit services billed in 2003 consisted of:
• Audit of the
Company’s annual financial statements;
• Reviews of the
Company’s quarterly financial statements;
• Comfort letters,
statutory and regulatory audits, consents and other services related to
Securities and Exchange Commission matters;
• Consultations
about accounting for settlement and fund raising; and
• Reviews of
Securities and Exchange Commission documents associated with financing and
restructuring.
(2) Tax Fees.
Fees for tax services billed in 2003 and 2002 consisted of tax compliance and
tax planning/advice
50
The Audit Committee pre-approves all audit and permissible non-audit
services provided by the independent directors on a case-by-case basis. The Audit Committee approved 100% of the
services performed by Deloitte & Touche LLP and Stonefield Josephson, Inc.
in 2004, 2003, and 2002 as identified above.
PART IV
Item 15. Exhibits,
Financial Statement Schedules and Reports on Form 8-K
(a)
The following documents are filed as a part of this report:
1.
Financial Statements. The Index
to our Consolidated Financial Statements is set forth on page 68 of this
report.
2.
Financial Statement Schedules.
See the last page of Consolidated Financial Statements.
3.
Exhibits. See Item 15(c)
below.
(b) Reports on
Form 8-K. The following reports on Form 8-K were filed during the
quarter ended December 31, 2004:
|
Date Filed
|
|
Date of Report
|
|
Item
|
|
|
|
|
|
|
|
October
19, 2004
|
|
October
18, 2004
|
|
The
Company filed a news release under Item 7.01 of Form 8-K announcing the
status of the company’s external audit and Form 10-K filing.
|
|
|
|
|
|
|
|
November
10, 2004
|
|
November
10, 2004
|
|
The
Company filed a news release under Item 7.01 of Form 8-K announcing the status
of the company’s external audit and Form 10-K filing.
|
|
|
|
|
|
|
|
November
23, 2004
|
|
November
22, 2004
|
|
The Company announced under Item 8.01 of Form 8-K that in a letter
and decision dated November 18, 2004, the Listing Council notified the
Company that it affirms the Panel’s decision to delist the Company’s
securities from The Nasdaq National Market.
|
|
|
|
|
|
|
|
December
17, 2004
|
|
December
17, 2004
|
|
The
Company filed a news release under Item 5.02 of Form 8-K announcing
the appointment of John K. Thorne as Interim President and Chief Executive
Officer. Also included in the press release is the stepping down of
Thian-Song Tjoa as a member of our Board of Directors, and the elections of
Robert J. Biehl and C.K. Cho to the Board. The appointment and elections
will become effective on January 1, 2005.
|
|
|
|
|
|
|
|
December
23, 2004
|
|
December
23, 2004
|
|
The
Company filed a news release under Item 2.02 of Form 8-K announcing
the results of operations for the quarter ended March 31, 2004.
|
(c) Exhibits. The exhibits listed on the
Exhibit Index, which appears at the end of this Item 15, are filed as
part of, or incorporated by reference into, this report.
(d) Financial
Statement Schedules. See Item 15(a)(2) above.
51
EXHIBIT INDEX
|
Exhibit
Number
|
|
|
|
Description of Document
|
|
2.1
|
|
—
|
|
Agreement
and Plan of Merger, dated May 21, 2003, between Liquidmetal Technologies,
Inc. and Liquidmetal Technologies (incorporated by reference to Exhibit 2.1
to the Form 10-Q filed on August 14, 2003).
|
|
3.1
|
|
—
|
|
Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Form 10-Q filed on August 14, 2003)
|
|
3.2
|
|
—
|
|
Bylaws (incorporated by reference to Exhibit 3.2 to the Form
10-Q filed on August 14, 2003)
|
|
4.1
|
|
—
|
|
Reference
is made to Exhibits 3.1 and 3.2.
|
|
4.2
|
|
—
|
|
Form
of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the
Form 10-Q filed on August 14, 2003)
|
|
10.1
|
|
—
|
|
Amended
and Restated License Agreement, dated September 1, 2001, between
Liquidmetal Technologies, Inc. and California Institute of Technology
(incorporated by reference to Exhibit 10.1 to the Registration Statement
on Form S-1 filed on November 20, 2001 (Registration
No. 333-73716)).
|
|
10.2
|
|
—
|
|
Improved
Property Commercial Lease, dated September 11, 2002, between Liquidmetal
Technologies, Inc. and P & S Properties (incorporated by reference to
Exhibit 10.2 of Form 10-K filed on March 31, 2003).
|
|
10.3
|
|
—
|
|
Lease,
dated October 4, 2001, between Plaza IV Associates, Ltd. and Liquidmetal
Technologies, Inc. (incorporated by reference to Exhibit 10.1 to the
Registration Statement on Form S-1 filed on November 20, 2001
(Registration No. 333-73716)).
|
|
10.4
|
|
—
|
|
Second
Amendment of Lease, dated October 3, 2003, between Liquidmetal Technologies,
Inc. and Plaza Associates IV, Ltd. (incorporated by reference to Exhibit 10.1
of Form 10-Q filed on November 14, 2003).
|
|
10.5
|
|
—
|
|
Standard
Lease, dated May 27, 2001, between Investors Equity Fund, Inc. and
Amorphous Technologies International (now known as Liquidmetal Technologies,
Inc.) (incorporated by reference to Exhibit 10.1 to the Registration
Statement on Form S-1 on November 20, 2001 (Registration
No. 333-73716)).
|
|
10.6*
|
|
—
|
|
1996
Stock Option Plan, as amended, together with form of Stock Option Agreement
(incorporated by reference to Exhibit 10.7 to the Registration Statement
on Form S-1 filed on November 20, 2001 (Registration
No. 333-73716)).
|
|
10.7*
|
|
—
|
|
2002
Equity Incentive Plan (incorporated by reference to Exhibit 10.23 to the
Registration Statement on Form S-1 (Amendment No. 2) filed on
April 5, 2002 (Registration No. 333-73716)).
|
|
10.8*
|
|
—
|
|
2002
Non-Employee Director Stock Option Plan (incorporated by reference to
Exhibit 10.24 to the Registration Statement on Form S-1 (Amendment
No. 2) filed on April 5, 2002 (Registration No. 333-73716)).
|
|
10.9*
|
|
—
|
|
Employment
Agreement, dated December 31, 2000, between Liquidmetal Technologies,
Inc. and John Kang, as amended by Amendment No. 1 to Employment
Agreement, dated June 28, 2001 (incorporated by reference to Exhibit
10.8 to the Registration Statement on Form S-1 filed on
November 20, 2001 (Registration No. 333-73716)).
|
|
10.10*
|
|
—
|
|
Employment
Agreement, dated May 1, 2001, between Liquidmetal Technologies, Inc. and
James Kang, as amended by Amendment No. 1 to Employment Agreement, dated
June 28, 2001 (incorporated by reference to Exhibit 10.9 to the
Registration Statement on Form S-1 (Amendment No. 2) filed on
April 5, 2002 (Registration No. 333-73716)).
|
|
10.11*
|
|
—
|
|
Amendment
No. 2 to Employment Agreement, dated September 1, 2003, between James Kang
and Liquidmetal Technologies, Inc. (incorporated by reference to Exhibit 10.2
of Form 10-Q filed on November 14, 2003).
|
|
10.12*
|
|
—
|
|
Employment
Agreement, dated October 1, 2001, between Liquidmetal Technologies, Inc.
and William Johnson, Ph.D. (incorporated by reference to Exhibit 10.10
to the Registration Statement on Form S-1 filed on November 20,
2001 (Registration No. 333-73716))
|
|
10.13*
|
|
—
|
|
Employment Agreement, dated October 1, 2001, between Liquidmetal
Technologies, Inc., and David Binnie. (incorporated by reference to Exhibit
10.13 to the Form 10-K filed on November 10, 2004)
|
|
10.14*
|
|
—
|
|
Employment Agreement, dated November 3, 2004, between Liquidmetal
Technologies, Inc. and Tony Chung. (incorporated by reference to Exhibit
10.14 to the Form 10-K filed on November 10, 2004)
|
|
10.15*
|
|
—
|
|
Employment
Agreement, dated December 31, 2000, between Liquidmetal Technologies,
Inc. and T. Scott Wiggins (incorporated by reference to Exhibit 10.11 to
the Registration Statement on Form S-1 filed on November 20, 2001
(Registration No. 333-73716)).
|
52
|
10.16*
|
|
—
|
|
Employment
Agreement, dated May 21, 2001, between Liquidmetal Technologies, Inc.
and Brian McDougall (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 filed on November 20, 2001
(Registration No. 333-73716)).
|
|
10.17*
|
|
—
|
|
Employment
Separation Agreement, dated December 31, 2003, between Liquidmetal
Technologies, Inc. and Brian McDougall. (incorporated by reference to Exhibit
10.17 to the Form 10-K filed on November 10, 2004)
|
|
10.18*
|
|
—
|
|
Letter Agreement, dated February 26, 2004, between Brian McDougall
and Liquidmetal Technologies, Inc. (incorporated by reference to Exhibit
10.18 to the Form 10-K filed on November 10, 2004)
|
|
10.19*
|
|
—
|
|
Employment
Agreement, December 1, 2002, between Liquidmetal Technologies, Inc. and
Thomas Trotter. (incorporated by reference to Exhibit 10.19 to the Form 10-K
filed on November 10, 2004)
|
|
10.20*
|
|
—
|
|
Employment
Separation Agreement, dated November 6, 2003, between Liquidmetal
Technologies, Inc. and Thomas Trotter. (incorporated by reference to Exhibit
10.20 to the Form 10-K filed on November 10, 2004)
|
|
10.21*
|
|
—
|
|
Separation
and Consulting Agreement, dated November 15, 2001, between Liquidmetal
Technologies, Inc. and Shekhar Chitnis, together with Consulting Agreement
attached as Exhibit A (incorporated by reference to Exhibit 10.14
to the Registration Statement on Form S-1 (Amendment No. 2) filed on
April 5, 2002 (Registration No. 333-73716)).
|
|
10.22
|
|
—
|
|
Warrant
for Purchase of Shares of Common Stock, dated February 21, 2001, granted
by Liquidmetal Technologies, Inc. to John Kang and Ricardo Salas
(incorporated by reference to Exhibit 10.18 to the Registration Statement on
Form S-1 filed on November 20, 2001 (Registration No. 333-73716)).
|
|
10.23
|
|
—
|
|
Warrant
for Purchase of Shares of Common Stock, dated February 21, 2001, granted
by Liquidmetal Technologies, Inc. to Tjoa Thian Song (incorporated by
reference to Exhibit 10.19 to the Registration Statement on
Form S-1 filed on November 20, 2001 (Registration No. 333-73716)).
|
|
10.24
|
|
—
|
|
Non-Qualified
Stock Option Agreement, dated January 1, 2001, between Liquidmetal
Technologies, Inc. and Paul Azinger (incorporated by reference to
Exhibit 10.19 to the Registration Statement on Form S-1 filed on
November 20, 2001 (Registration No. 333-73716)).
|
|
10.25
|
|
—
|
|
Foreign
Corporation Lease Zone Occupancy (Lease) Agreement, dated March 5, 2002,
between Kyonggi Local Corporation and Liquidmetal Korea Co., Ltd.
(incorporated by reference to Exhibit 10.22 to the Registration
Statement on Form S-1 (Amendment No. 2) filed by Liquidmetal
Technologies on April 5, 2002 (Registration No. 333-73716)).
|
|
10.26
|
|
—
|
|
Credit
Service Agreement, dated February 2003, between Liquidmetal Korea Co., Ltd.
and Kookmin Bank (incorporated by reference to Exhibit 10.20 to the Form 10-K
filed on March 31, 2003).
|
|
10.27
|
|
—
|
|
Agreement
for Rent dated February, 2003, between Liquidmetal Korea Co., Ltd. and Dong
Myung Seo Bank (incorporated by reference to Exhibit 10.21 to the Form 10-K
filed on March 31, 2003).
|
|
10.28
|
|
—
|
|
Share
Transfer Agreement, dated February 28, 2004, among Liquidmetal Korea Co.
Ltd., Sun Joo Ho, and Dongyang Induction Co. Ltd. (incorporated by reference
to Exhibit 10.28 to the Form 10-K filed on November 10, 2004)
|
|
10.29
|
|
—
|
|
Settlement
Agreement, dated January 10, 2004, between Liquidmetal Korea Co., Ltd. and
Growell Metal Co., Ltd. (incorporated by reference to Exhibit 10.29 to the
Form 10-K filed on November 10, 2004)
|
|
10.30
|
|
—
|
|
Amended
and Restated Securities Purchase Agreement, dated March 1, 2004, among
Liquidmetal Technologies, Inc., Michigan Venture Capital Co., Ltd., and the
investors identified as “Purchasers” therein (incorporated by reference to
Exhibit 10.1 to the Form 8-K filed on July 2, 2004).
|
|
10.31
|
|
—
|
|
Form
of 6% Senior Convertible Note issued under Amended and Restated Securities
Purchase Agreement (incorporated by reference to Exhibit 10.2 to the Form 8-K
filed on July 2, 2004).
|
|
10.32
|
|
—
|
|
Registration
Rights Agreement, dated March 1, 2004, among Liquidmetal Technologies, Inc.
and the purchasers under Amended and Restated Securities Purchase Agreement
(incorporated by reference to Exhibit 10.3 to the Form 8-K filed on July 2,
2004).
|
|
10.33
|
|
—
|
|
Common
Stock Purchase Warrant, dated March 1, 2004, granted by Liquidmetal
Technologies, Inc. to Michigan Venture Capital Co., Ltd. (incorporated by
reference to Exhibit 10.4 to the Form 8-K filed on July 2, 2004).
|
|
10.34
|
|
—
|
|
Factory
Mortgage Agreement, dated March 1, 2004, among Liquidmetal Korea Co., Ltd.,
Michigan Venture Capital Co., Ltd., and the other parties identified therein
(incorporated by reference to Exhibit 10.5 to the Form 8-K filed on July 2,
2004).
|
|
10.35
|
|
—
|
|
Securities
Purchase Agreement, dated March 1, 2004, among Liquidmetal Technologies, Inc.
and the investors identified as “Purchasers” therein (incorporated by
reference to Exhibit 10.6 to the Form 8-K filed on July 2, 2004).
|
|
10.36
|
|
—
|
|
Form
of 6% Senior Convertible Note issued under Securities Purchase Agreement
(incorporated by reference to Exhibit 10.7 to the Form 8-K filed on July 2,
2004).
|
|
10.37
|
|
—
|
|
Registration
Rights Agreement, dated March 1, 2004, among Liquidmetal Technologies, Inc.
and the purchasers under Securities Purchase Agreement (incorporated by
reference to
|
53
|
|
|
|
|
Exhibit
10.8 to the Form 8-K filed on July 2, 2004).
|
|
10.38
|
|
—
|
|
Form
of Common Stock Purchase Warrant granted to purchasers under Securities
Purchase Agreement (incorporated by reference to Exhibit 10.9 to the Form 8-K
filed on July 2, 2004).
|
|
10.39
|
|
—
|
|
Form
of Placement Agent Common Stock Purchase Warrant, dated March 1, 2004
(incorporated by reference to Exhibit 10.10 to the Form 8-K filed on July 2, 2004).
|
|
10.40
|
|
—
|
|
Security
Agreement, dated March 1, 2004, between Liquidmetal Technologies, Inc. and
Middlebury Capital LLC, as agent (incorporated by reference to Exhibit 10.11
to the Form 8-K filed on July 2, 2004).
|
|
10.41
|
|
—
|
|
Note
Exchange Agreement, dated July 29, 2004, among Liquidmetal Technologies, Inc.
and certain individuals identified as “Noteholders” therein (incorporated by reference to Exhibit 10.1
to the Form 8-K filed on August 20, 2004).
|
|
10.42
|
|
—
|
|
Form
of 10% Senior Secured Notes Due 2005 of Liquidmetal Technologies, Inc. issued
pursuant to Note Exchange Agreement filed as Exhibit 10.2 hereto (incorporated by reference to Exhibit 10.2
to the Form 8-K filed on August 20, 2004).
|
|
10.43
|
|
—
|
|
Form
of 6% Senior Security Note Due 2007 of Liquidmetal Technologies, Inc. issued
pursuant to Note Exchange Agreement filed as Exhibit 10.3 hereto (incorporated by reference to Exhibit 10.3
to the Form 8-K filed on August 20, 2004).
|
|
10.44
|
|
—
|
|
Note
Exchange Agreement, dated July 29, 2004, among Liquidmetal Technologies, Inc
and Winvest Venture Partners Inc. (incorporated by reference to Exhibit 10.4 to the Form 8-K filed on
August 20, 2004).
|
|
10.45
|
|
—
|
|
10%
Senior Secured Notes Due 2005 of Liquidmetal Technologies, Inc. issued to
Winvest Venture Partners Inc. (incorporated by reference to Exhibit 10.5 to the Form 8-K filed on
August 20, 2004).
|
|
10.46
|
|
—
|
|
Form
of 6% Senior Security Note Due 2007 of Liquidmetal Technologies, Inc. issued
to Winvest Venture Partners Inc. (incorporated by reference to Exhibit 10.6 to the Form 8-K filed on
August 20, 2004).
|
|
10.47
|
|
—
|
|
Employment
Agreement, dated January 14, 2005, between Liquidmetal Technologies, Inc. and
John Thorne.
|
|
14
|
|
—
|
|
Code
of Ethics for Chief Executive Officer and Senior Financial and Accounting
Officers (incorporated by reference to Exhibit 14 to the Form 10-K filed on
November 10, 2004)
|
|
21
|
|
—
|
|
Subsidiaries
of the Registrant. (incorporated by reference to Exhibit 21 to the Form 10-K filed
on November 10, 2004)
|
|
23.1
|
|
—
|
|
Consent
of Stonefield Josephson
|
|
24.1
|
|
—
|
|
Power
of Attorney relating to subsequent amendments (included on the signature
page(s) of this report).
|
|
31.1
|
|
—
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended.
|
|
31.2
|
|
—
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended.
|
|
32.1
|
|
—
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. 1350.
|
|
32.2
|
|
—
|
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. 1350.
|
* Denotes a management contract or compensatory plan or arrangement
required to be filed as an exhibit this Form 10-K.
54
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
Liquidmetal Technologies, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
John Thorne
|
|
|
|
|
|
John
Thorne
|
|
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
Date:
March 21, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Tony Chung
|
|
|
|
|
|
Tony
Chung
|
|
|
|
|
|
Vice
President of Finance
|
|
|
Date:
March 21, 2005
|
|
|
|
|
55
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that
each person whose signature appears below constitutes and appoints John Thorne
and Tony Chung and each of them, jointly and severally, his attorneys-in-fact,
each with full power of substitution, for him in any and all capacities, to
sign any and all amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that each said attorneys-in-fact or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
John Kang
|
|
Chairman
of the Board and
Director
|
|
March 21, 2005
|
|
John
Kang
|
|
|
|
|
|
|
|
|
|
|
|
/s/
John Thorne
|
|
Chief
Executive Officer and President (Principal Executive Officer)
|
|
March 21, 2005
|
|
John
Thorne
|
|
|
|
|
|
|
|
|
|
|
|
/s/
James Kang
|
|
Founder
and Director
|
|
March 21, 2005
|
|
James
Kang
|
|
|
|
|
|
|
|
|
|
|
|
/s/
William Johnson
|
|
Director
|
|
March 21, 2005
|
|
William
Johnson
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Robert Biehl
|
|
Director
|
|
March 21, 2005
|
|
Robert
Biehl
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Vincent Addonisio
|
|
Director
|
|
March 21, 2005
|
|
Vincent Addonisio
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Dean Tanella
|
|
Director
|
|
March 21, 2005
|
|
Dean Tanella
|
|
|
|
|
|
|
|
|
|
|
|
/s/ CK Cho
|
|
Director
|
|
March 21, 2005
|
|
CK Cho
|
|
|
|
|
Certifications
provided as Exhibits.
56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Liquidmetal Technologies, Inc.
We have audited the accompanying consolidated balance sheets of
Liquidmetal Technologies, Inc. and subsidiaries (the “Company”) as of December
31, 2004 and 2003, and the related consolidated statements of operations and
comprehensive loss, shareholders’ equity (deficiency), and cash flows for each
of the three years in the period ended December 31, 2004. Our audit also included the financial
statement schedule listed at index in Item 15(a) as of and for the years ended
December 31, 2004. Our responsibility is
to express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Liquidmetal Technologies,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company’s significant operating
losses and working capital deficit raise substantial doubt about its ability to
continue as a going concern. Management’s plans regarding those matters also
are described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Irvine, California
Certified Public Accountants
March 3, 2005
58
LIQUIDMETAL TECHNOLOGIES, INC. AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share data)
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
742
|
|
$
|
3,127
|
|
|
Restricted cash
|
|
754
|
|
—
|
|
|
Trade accounts receivable, net of allowance for
doubtful accounts of $108 and $127
|
|
1,668
|
|
3,748
|
|
|
Inventories
|
|
2,353
|
|
2,060
|
|
|
Prepaid expenses and other current assets
|
|
930
|
|
395
|
|
|
Assets available for sale, net
|
|
—
|
|
827
|
|
|
Total current
assets
|
|
6,447
|
|
10,157
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
|
16,434
|
|
17,743
|
|
|
IDLE EQUIPMENT
|
|
1,906
|
|
1,671
|
|
|
LONG-TERM INVENTORY
|
|
1,810
|
|
—
|
|
|
OTHER INTANGIBLE ASSETS, NET
|
|
1,143
|
|
984
|
|
|
OTHER ASSETS
|
|
768
|
|
297
|
|
|
Total assets
|
|
$
|
28,508
|
|
$
|
30,852
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
4,969
|
|
$
|
3,683
|
|
|
Settlement payable
|
|
3,246
|
|
2,765
|
|
|
Deferred revenue
|
|
900
|
|
1,435
|
|
|
Long-term debt, current portion
|
|
5,991
|
|
1,032
|
|
|
Other current liabilities
|
|
1,032
|
|
1,940
|
|
|
Total current liabilities
|
|
16,138
|
|
10,855
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT, NET OF CURRENT PORTION
|
|
2,618
|
|
3,015
|
|
|
OTHER LIABILITIES
|
|
892
|
|
814
|
|
|
Total liabilities
|
|
19,648
|
|
14,684
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST
|
|
—
|
|
5
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value per share,
100,000,000 shares authorized; 41,609,652 shares issued and outstanding at
December 31, 2004 and December 31, 2003
|
|
42
|
|
42
|
|
|
Additional paid in capital
|
|
132,160
|
|
128,581
|
|
|
Unamortized stock-based compensation
|
|
—
|
|
(128
|
)
|
|
Accumulated deficit
|
|
(125,313
|
)
|
(112,587
|
)
|
|
Accumulated other comprehensive income
|
|
1,971
|
|
255
|
|
|
Total shareholders’ equity
|
|
8,860
|
|
16,163
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
28,508
|
|
$
|
30,852
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
59
LIQUIDMETAL TECHNOLOGIES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(in
thousands, except per share data)
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE, Net
|
|
$
|
17,429
|
|
$
|
13,658
|
|
$
|
9,138
|
|
|
COST OF SALES
|
|
12,168
|
|
18,162
|
|
5,656
|
|
|
Gross (loss) profit
|
|
5,261
|
|
(4,504
|
)
|
3,482
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
11,591
|
|
17,729
|
|
13,099
|
|
|
Research and development
|
|
1,467
|
|
8,780
|
|
11,825
|
|
|
Impairment of goodwill
|
|
—
|
|
184
|
|
—
|
|
|
Impairment of long lived assets
|
|
—
|
|
2,684
|
|
—
|
|
|
Total operating expenses
|
|
13,058
|
|
29,377
|
|
24,924
|
|
|
LOSS BEFORE INTEREST, OTHER INCOME,
INCOME TAXES MINORITY INTEREST AND DISCONTINUED OPERATIONS
|
|
(7,797
|
)
|
(33,881
|
)
|
(21,442
|
)
|
|
Loss from extinguishments of debt
|
|
(1,663
|
)
|
—
|
|
—
|
|
|
Change in value of warrants, net
|
|
747
|
|
—
|
|
—
|
|
|
Other income
|
|
302
|
|
—
|
|
—
|
|
|
Other expense
|
|
—
|
|
—
|
|
—
|
|
|
Interest expense
|
|
(3,603
|
)
|
(390
|
)
|
(1,109
|
)
|
|
Interest income
|
|
37
|
|
304
|
|
506
|
|
|
Gain on sale of marketable securities held-for-sale
|
|
—
|
|
1,178
|
|
832
|
|
|
LOSS BEFORE INCOME TAXES, MINORITY INTEREST
AND DISCONTINUED OPERATIONS
|
|
(11,977
|
)
|
(32,789
|
)
|
(21,213
|
)
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATIONS
|
|
(11,977
|
)
|
(32,789
|
)
|
(21,213
|
)
|
|
|
|
|
|
|
|
|
|
|
Minority interest in loss of consolidated
subsidiary
|
|
—
|
|
21
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS
|
|
(11,977
|
)
|
(32,768
|
)
|
(21,095
|
)
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued
operations, net
|
|
(749
|
)
|
(964
|
)
|
83
|
|
|
Gain (loss) from disposal of discontinued
operations, net
|
|
—
|
|
127
|
|
1,556
|
|
|
NET LOSS
|
|
(12,726
|
)
|
(33,605
|
)
|
(19,456
|
)
|
|
OTHER COMPREHENSIVE GAIN (LOSS):
|
|
|
|
|
|
|
|
|
Foreign exchange translation gain (loss) during the
period
|
|
1,716
|
|
211
|
|
(28
|
)
|
|
Net unrealized gain (loss) on marketable securities
available-for-sale
|
|
—
|
|
(1,668
|
)
|
1,668
|
|
|
COMPREHENSIVE LOSS
|
|
$
|
(11,010
|
)
|
$
|
(35,062
|
)
|
$
|
(17,816
|
)
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE BASIC and DILUTED:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.29
|
)
|
$
|
(0.79
|
)
|
$
|
(0.54
|
)
|
|
Gain (Loss) from discontinued operations
|
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
0.04
|
|
|
Net loss
|
|
$
|
(0.31
|
)
|
$
|
(0.81
|
)
|
$
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of weighted average shares – basic
and diluted
|
|
41,610
|
|
41,505
|
|
38,714
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
60
LIQUIDMETAL TECHNOLOGIES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY (DEFICIENCY)
(in
thousands, except share data)
|
|
|
Preferred
Shares
|
|
Preferred
Stock
|
|
Common
Shares
|
|
Common
Stock
|
|
Additional
Paid in
Capital
|
|
Unamortized
Stock-based
Compen-
sation
|
|
Accumu-
lated
Deficit
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(restated)
|
|
(restated)
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2001 (as restated)
|
|
456,857
|
|
$
|
5,577
|
|
35,023,515
|
|
$
|
29,752
|
|
$
|
23,915
|
|
$
|
(7,294
|
)
|
$
|
(59,526
|
)
|
$
|
72
|
|
$
|
(7,504
|
)
|
|
Common stock
issued
|
|
—
|
|
—
|
|
5,229,000
|
|
78,435
|
|
—
|
|
—
|
|
—
|
|
—
|
|
78,435
|
|
|
Transaction expenses
of initial public offering including commissions
|
|
—
|
|
—
|
|
—
|
|
(7,714
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(7,714
|
)
|
|
Stock options
exercised
|
|
—
|
|
—
|
|
299,873
|
|
504
|
|
—
|
|
—
|
|
—
|
|
—
|
|
504
|
|
|
Conversion of
preferred stock to common stock
|
|
(456,857
|
)
|
(5,577
|
)
|
456,857
|
|
5,577
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Stock-based
compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
4,694
|
|
—
|
|
—
|
|
4,694
|
|
|
Unamortized stock
option based compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,340
|
)
|
2,340
|
|
—
|
|
—
|
|
—
|
|
|
Foreign exchange
translation loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(28
|
)
|
(28
|
)
|
|
Net unrealized
gain on marketable securities
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,668
|
|
1,668
|
|
|
Net loss (as
restated)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(19,456
|
)
|
—
|
|
(19,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2002 (as restated)
|
|
—
|
|
$
|
—
|
|
41,009,245
|
|
$
|
106,554
|
|
$
|
21,575
|
|
$
|
(260
|
)
|
$
|
(78,982
|
)
|
$
|
1,712
|
|
$
|
50,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
exercised
|
|
—
|
|
—
|
|
684,165
|
|
1,149
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,149
|
|
|
Repurchase of
shares
|
|
—
|
|
—
|
|
(93,758
|
)
|
(653
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(653
|
)
|
|
Change in par value
due to Reincorporation
|
|
—
|
|
—
|
|
—
|
|
(107,008
|
)
|
107,008
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Stock-based compensation
|
|
—
|
|
—
|
|
10,000
|
|
—
|
|
100
|
|
25
|
|
—
|
|
—
|
|
125
|
|
|
Unamortized stock
option based compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(107
|
)
|
107
|
|
—
|
|
—
|
|
—
|
|
|
Purchase of common
stock of subsidiaries
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5
|
|
—
|
|
—
|
|
—
|
|
5
|
|
|
Foreign exchange
translation gain
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
211
|
|
211
|
|
|
Reclassification
for net realized gain
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,668
|
)
|
(1,668
|
)
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(33,605
|
)
|
—
|
|
(33,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
—
|
|
—
|
|
—
|
|
|
Beneficial
conversion feature
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,424
|
|
—
|
|
—
|
|
—
|
|
3,424
|
|
|
Warrants
cancelled
|
|
—
|
|
—
|
|
—
|
|
—
|
|
7
|
|
—
|
|
—
|
|
—
|
|
7
|
|
|
Foreign exchange
translation gain
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,716
|
|
1,716
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(12,726
|
)
|
—
|
|
(12,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2004
|
|
—
|
|
$
|
—
|
|
41,609,652
|
|
$
|
42
|
|
$
|
132,160
|
|
$
|
—
|
|
$
|
(125,313
|
)
|
$
|
1,971
|
|
$
|
8,860
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
61
LIQUIDMETAL TECHNOLOGIES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands,
except share data)
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
(restated)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,726
|
)
|
$
|
(33,605
|
)
|
$
|
(19,456
|
)
|
|
Add (gain) loss from operations and loss on
disposition of discontinued operations
|
|
749
|
|
837
|
|
(1,639
|
)
|
|
Loss from continuing operations
|
|
(11,977
|
)
|
(32,768
|
)
|
(21,095
|
)
|
|
Adjustments to reconcile net loss to net cash used
by operating activities:
|
|
|
|
|
|
|
|
|
Impairment of long lived assets
|
|
—
|
|
2,684
|
|
—
|
|
|
Impairment of goodwill
|
|
—
|
|
184
|
|
—
|
|
|
Loss from Growell settlement
|
|
—
|
|
2,765
|
|
—
|
|
|
Gain on sale of marketable securities
held-for-sale
|
|
—
|
|
(1,178
|
)
|
(832
|
)
|
|
Gain on disposal of property and equipment
|
|
4
|
|
—
|
|
—
|
|
|
Minority interest
|
|
—
|
|
(21
|
)
|
(118
|
)
|
|
Bad debt expense
|
|
84
|
|
(28
|
)
|
921
|
|
|
Warranty expense
|
|
288
|
|
(297
|
)
|
237
|
|
|
Depreciation and amortization
|
|
3,444
|
|
4,354
|
|
1,513
|
|
|
Loss on extinguishments of debt
|
|
1,663
|
|
—
|
|
—
|
|
|
Amortization of debt discount
|
|
2,860
|
|
—
|
|
912
|
|
|
Stock-based compensation
|
|
276
|
|
123
|
|
2,203
|
|
|
Gain from change in value of warrants
|
|
747
|
|
—
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
1,996
|
|
1,660
|
|
(5,319
|
)
|
|
Inventories
|
|
(2,103
|
)
|
(100
|
)
|
(1,432
|
)
|
|
Prepaid expenses and other current assets
|
|
(535
|
)
|
1,689
|
|
(990
|
)
|
|
Other assets
|
|
(869
|
)
|
83
|
|
(189
|
)
|
|
Accounts payable and accrued expenses
|
|
414
|
|
(5,969
|
)
|
5,990
|
|
|
Deferred revenue
|
|
(535
|
)
|
38
|
|
567
|
|
|
Other liabilities
|
|
(2,154
|
)
|
2,661
|
|
—
|
|
|
Net cash used by continuing operations
|
|
(6,397
|
)
|
(24,120
|
)
|
(17,632
|
)
|
|
Net cash provided (used) by discontinued
operations
|
|
73
|
|
(2,429
|
)
|
(2,756
|
)
|
|
Net cash used by operating activities
|
|
(6,324
|
)
|
(26,549
|
)
|
(20,388
|
)
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(73
|
)
|
(2,329
|
)
|
(23,527
|
)
|
|
Proceeds from sale of property and equipment
|
|
38
|
|
—
|
|
—
|
|
|
Purchase of marketable securities held-for-sale
|
|
—
|
|
—
|
|
(2,000
|
)
|
|
Proceeds from sale of marketable securities
held-for-sale
|
|
—
|
|
2,578
|
|
1,432
|
|
|
Acquisition of subsidiary, net of cash received
|
|
—
|
|
—
|
|
74
|
|
|
Investment in patents and trademarks
|
|
(273
|
)
|
(298
|
)
|
(144
|
)
|
|
Net cash used by investing activities
|
|
(308
|
)
|
(49
|
)
|
(24,165
|
)
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
9,924
|
|
5,488
|
|
3,500
|
|
|
Repayment of borrowings
|
|
(5,184
|
)
|
(1,441
|
)
|
(7,400
|
)
|
|
Repayment of other liabilities
|
|
(135
|
)
|
(72
|
)
|
(14
|
)
|
|
Restricted cash
|
|
(754
|
)
|
—
|
|
—
|
|
|
Proceeds from issuance of common stock, net of
offering costs
|
|
—
|
|
—
|
|
70,721
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
—
|
|
899
|
|
504
|
|
|
Proceeds from issuance (repurchase) of common stock
by subsidiaries, net
|
|
—
|
|
5
|
|
—
|
|
|
Net cash provided by financing activities
|
|
3,851
|
|
4,879
|
|
67,311
|
|
|
EFFECT OF FOREIGN EXCHANGE TRANSLATION
|
|
396
|
|
(212
|
)
|
70
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
|
|
(2,385
|
)
|
(21,931
|
)
|
22,828
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD
|
|
3,127
|
|
25,058
|
|
2,230
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
742
|
|
$
|
3,127
|
|
$
|
25,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
640
|
|
$
|
443
|
|
$
|
52
|
|
|
Taxes paid
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
62
In 2004, the
Company sold its 51% ownership interest in Dongyang to the 49% minority
shareholder, which resulted in a loss of $46 from disposal of discontinued
operations.
In 2004, the Company sold assets and liability of its Taesung equipment
manufacturing division in Korea to a third party which resulted in a loss of
approximately $184.
In 2003, an option holder surrendered 93,758
shares of the Company’s common stock in lieu of cash payment for the option
exercise price of $250 and income taxes payable by the option holder of
$403. The Company immediately canceled
the common shares received in lieu of cash payment upon receipt of the shares.
In 2003 the Company reclassified $1,477 of
machines from property, plant and equipment to machines held by customer.
In 2003, the Company entered into a lease
agreement for $291 of laboratory equipment that was recorded as a capital lease
obligation.
In 2002,
$2,570 in notes payable and accrued interest were converted to the Company’s
common stock.
In 2002, the Company recorded a net addition to
shareholders’ equity of $2,492 comprised of stock compensation and discounts on
convertible notes payable in the discontinued retail golf operations. In 2002,
there was a $98 foreign exchange loss effect in the discontinued retail golf
operations.
In 2002, the Company entered into a lease
agreement for $107 of office furniture that was recorded as a capital lease
obligation.
The
accompanying notes are an integral part of the consolidated financial
statements.
63
LIQUIDMETAL TECHNOLOGIES, INC AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004, 2003,
and 2002
(in thousands, except share data)
1. Description of
Business
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 Technologies markets and sells Liquidmetal® alloy
industrial coatings and also manufactures, markets and sells products and
components from bulk Liquidmetal alloys that can be incorporated into the
finished goods of its customers across a variety of industries. The Company also partners with third-party
licensees and distributors to develop and commercialize Liquidmetal alloy
products.
The Company classifies operations into two
reportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetal
alloys. Liquidmetal alloy industrial coatings are used primarily as a
protective coating for industrial machinery and equipment, such as drill pipe
used by the oil drilling industry and boiler tubes used by coal-burning power
plants. Bulk Liquidmetal alloys include potential market opportunities to
manufacture and sell products and components for electronic devices, medical
devices, defense applications, and sporting goods. In addition, the bulk Liquidmetal alloys
segment includes tooling and prototype sampling, and the manufacture and sale
of die casting and VIM equipment (see Note 3 for disclosure regarding the
disposal of this segment). In addition, such alloys are used to generate
research and development services revenue for developing uses related primarily
to defense and medical applications as well as potential license fees,
royalties, and other compensation from strategic partnering transactions.
On August 4, 2004, the Company established a
post-processing plant in the city of Weihai in Shandong province of China under
Weihai Liquidmetal Company Limited, which is 100 percent owned by Liquidmetal
Korea, to facilitate our bulk alloy manufacturing business. Weihai Liquidmetal is consolidated into
Liquidmetal Technologies with all intercompany transactions eliminated.
2. Going Concern /
Liquidity
The Company has experienced losses from
continuing operations during the last two fiscal years and has an accumulated
deficit of $125,313 as of December 31, 2004.
Cash used for continuing operations for the year ended December 31, 2004
was $6397 and cash flow from continuing operations may be negative throughout
fiscal year 2005. At December 31, 2004,
the Company’s principal source of liquidity is $742 of cash and cash
equivalents and trade accounts receivable of $1,668. Such conditions raise substantial doubt that
the Company will be able to continue as a going concern for a reasonable period
of time. These operating results
occurred while the Company was developing and attempting to commercialize and
manufacture products from an entirely new and unique technology. This business plan required significant
spending related to start-up costs and capital expenditures. These factors have placed a significant
strain on the financial resources of the Company. The ultimate success of the Company depends
on its ability to continue reducing operating costs, generate higher revenue,
and achieve positive cash flow from continuing operations and
profitability. The consolidated
financial statements do not include any adjustments that might result from the
outcome of the uncertainty.
Capital requirements during the next 12 months will
depend on numerous factors, including the success of existing products, the
development of new applications for Liquidmetal alloys, and the resources
devoted to develop and support Liquidmetal alloy products. However, the Company anticipates capital
expenditures in the next 12 months will be less than $0.5 million. The Company
expects to continue to devote limited capital to our research and development
activities, to further develop and strengthen our manufacturing capabilities,
and for working capital and other general corporate purposes.
Our cash flow projections from operations
and, consequently, future cash needs are subject to uncertainty. If our available funds and cash generated
from operations are insufficient to satisfy our liquidity requirements, we may
need to raise additional capital to fund our operations and capital expenditure
requirements. We cannot be certain that
additional capital, whether through selling additional debt or equity
securities or obtaining a line of credit or other loan, will be available to us
or, if available, will be on terms acceptable to us. If we issue additional securities to raise
funds, these securities may have rights, preferences, or privileges senior to
those of the rights of our common stock and our stockholders may experience additional
dilution.
3. Summary of Significant
Accounting Policies
Principles of
Consolidation. The
consolidated financial statements include the accounts of Liquidmetal
Technologies, Inc. and its wholly-owned subsidiaries, Liquidmetal Korea Co.,
Ltd. (“LMT Korea”), located in South Korea, Chusik Hoesa Dongyang Yudoro (“Dongyang”),
now accounted for as a discontinued operations, and Liquidmetal Golf and its
subsidiaries, which included the retail golf segment, now accounted for as a
discontinued operations. The Company acquired its 51% interest in Dongyang in
2002. The aggregate purchase price was
$333 in cash. As of March 2004, the
Company divested of its 51% ownership in Dongyang to the minority shareholder. In June 2004, the Company sold assets and
liability of its Taesung equipment manufacturing division in Korea to a third
party. Accordingly, the results of Dongyang and
Taesung’s operations have been reclassified in the consolidated financial
64
statements as discontinued operations (see Note
17). Previously, the results of Donyang
and Taesung’s operations have been included in the consolidated financial
statements from the acquisition date.
All intercompany balances and transactions have been eliminated. A
minority interest in Liquidmetal Golf is included in the consolidated financial
statements as a component of the loss from operations of the discontinued
retail golf segment (see Note 17).
Effective in 2003, management closed the Japan operations and the Seoul office,
which did not result in a significant impact on the financial position or
results of operations for any of the periods presented. Also, effective in December 2003, management
closed the Tampa office (see Note 12). In
August 2004, the Company established a post-processing plant in the city of
Weihai in Shandong province of China under Weihai Liquidmetal Company Limited,
which is 100 percent owned by Liquidmetal Korea, to facilitate our bulk alloy
manufacturing business.
Sales of Stock by
Subsidiaries. Gains on sales
of stock by Liquidmetal Golf are recognized as components of the Company’s
shareholders’ equity (deficiency).
Revenue Recognition. Revenue
is recognized pursuant to applicable accounting standards including Securities
and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101 (SAB
101), “Revenue Recognition in Financial
Statements”, and SAB 104, Revenue
Recognition. SAB 101 as amended and SAB 104 summarize certain points
of the SEC staff’s views in applying generally accepted accounting principles
to revenue recognition in financial statements and provides guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry.
The Company’s revenue recognition policy complies with the requirements
of SAB 101 and SAB 104. Revenue is recognized at the time the Company ships its
products, as this is when title passes to the customer and all other incidences
of a sale have occurred. Revenue is deferred and included in liabilities when
the Company receives cash in advance for services not yet performed or goods
not yet delivered. Revenue from research and development contracts is
recognized under the percentage of completion method.
Cash and Cash
Equivalents. The Company
considers all highly liquid investments with maturity dates of three months or
less when purchased to be cash equivalents. The Company limits the amount of
credit exposure to each individual financial institution and places its
temporary cash into investments of high credit quality. There are no
significant concentrations of credit risk to the Company associated with cash
and cash equivalents.
Restricted Cash. The Company
considers all cash and cash equivalents held under restrictive accounts as
restricted cash.
Marketable Securities. The
Company follows Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and classifies all of its investment securities as
available -for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Shareholders’ Equity
(Deficiency) under the caption “Accumulated Other Comprehensive Income.”
Trade Accounts
Receivables. The Company
grants credit to its customers generally in the form of short-term trade
accounts receivable. The creditworthiness of customers is evaluated prior to
the sale of inventory. As of December
31, 2004, two customers represented 30%, or $497, of the total outstanding
trade accounts receivable. Two customers
represent 95%, or $3,540, of total outstanding trade accounts receivable as of
December 31, 2003.
The allowance for doubtful accounts reflects
management’s best estimate of probable losses inherent in the trade accounts
receivable. Management primarily determines the allowance based on the
aging of accounts receivable balances, historical write-off experience,
customer concentrations, customer creditworthiness and current industry and
economic trends. The Company’s provisions for uncollectible receivables
are included in selling, general and administrative expense in the accompanying
consolidated statements of operations and comprehensive loss.
Inventories. Inventories
are accounted for using the moving average basis and reported at the lower of
cost or market. Inventories consist of raw materials, work in process, and
finished goods. The Company records write-offs for inventory obsolescence when
it is deemed that there is impairment of the value of the inventories on hand.
Property, Plant and
Equipment. Property, plant
and equipment are stated at cost less accumulated depreciation and
amortization. Additions and major renewals are capitalized. Repairs and
maintenance are charged to expense as incurred. Upon disposal, the related cost
and accumulated depreciation are removed from the accounts, with the resulting
gain or loss included in operating income. Depreciation is provided principally
on the straight-line method over the estimated useful lives of the assets,
which range from two to twenty years.
Leased property meeting certain criteria is
capitalized and the present value of the related lease payments is recorded as
a liability. Amortization of capitalized leased assets is provided on the
straight-line method over the estimated useful lives of the assets, which is
five years.
65
Intangible Assets. Intangible
assets consist of the costs incurred to purchase patent rights and costs
incurred to internally develop patents and trademarks. Intangible assets are
reported net of accumulated amortization. Patents and trademarks are amortized
using the straight-line method over a period based on their contractual lives
ranging from eleven to seventeen years.
Goodwill. Beginning January 1, 2002, the Company
adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (See “New
Accounting Pronouncements”). According to this statement, goodwill and other
intangible assets are no longer subject to amortization, but instead must be
reviewed annually for impairment by applying a fair value-based test.
Impairment of
Long-lived Assets. The Company
reviews long-lived assets to be held and used in operations for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may be impaired. An impairment loss is recognized when the estimated
fair value of the assets is less than the carrying value of the assets. During 2003, the Company recognized an
impairment of long-lived assets in the amount of $2,684 (see Note 7). There were no such impairment losses in 2004.
Fair Value of Financial
Instruments. The estimated
fair value of amounts reported in the consolidated financial statements have
been determined using available market information and valuation methodologies,
as applicable. The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable, and all other current assets and liabilities
approximate their fair value because of their short term maturities at
December 31, 2004 and 2003, unless otherwise stated. The fair value of
non-current assets and liabilities approximate their carrying value unless
otherwise stated. The fair value of the
Company’s long-term debt is based on interest rates that would be available to
the Company for the issuance of debt with similar terms.
Research and
Development Expenses. Research and
development expenses represent salaries, related benefits expense, expenses
incurred for the design and testing of new processing methods and other
expenses related to the research and development of Liquidmetal alloys.
Development costs incurred in research and development activities are expensed
as incurred.
Advertising
and Promotion Expenses. Advertising and promotion expenses are
expensed when incurred. Advertising and promotion expenses were $239, $136, and
$127 for the years ended December 31, 2004, 2003 and 2002, respectively.
Debt Discount
Amortization. Debt discounts
for notes payable are amortized to interest expense, using a method that
approximates the interest method over the term of the related debt instruments.
Stock-Based
Compensation. The Company
applies Accounting Principles Board (“APB”) Opinion No. 25 for options when the
exercise price of options granted to employees is less than the fair value of
the underlying stock on the date of grant.
The Company applies Statement of Financial Accounting Standards (“SFAS”)
No. 123 for options granted to non-employees who perform services for the
Company.
Had the Company determined employee stock-based
compensation cost based on the fair value at the grant date for stock options
consistent with the method of SFAS No. 123, the Company’s net loss and basic
and diluted net loss per share would have been as follows:
|
|
|
For the years ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from Continuing Operations:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(11,977
|
)
|
$
|
(32,768
|
)
|
(21,095
|
)
|
|
Add: stock-based employee compensation
expense included in reported net loss, net of related tax effects
|
|
276
|
|
123
|
|
2,203
|
|
|
Deduct: total stock-based employee
compensation expense determined under the fair value based method for all
awards
|
|
(4,201
|
)
|
(5,427
|
)
|
(7,664
|
)
|
|
Proforma net loss from continuing operations
|
|
$
|
(15,902
|
)
|
$
|
(38,072
|
)
|
$
|
(26,556
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.29
|
)
|
(0.79
|
)
|
(0.54
|
)
|
|
Proforma
|
|
(0.38
|
)
|
(0.92
|
)
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
Income Taxes. Income
taxes are provided under the asset and liability method as required by SFAS
No. 109, Accounting for Income Taxes.
Under this method, deferred income taxes are recognized for the tax
consequences of “temporary differences” by applying enacted statutory tax rates
applicable to future years to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. The effect of a
tax rate change on deferred taxes is recognized in operations in the period
that the change in the rate is enacted. Valuation allowances are established
when necessary to reduce net deferred tax assets to the amount expected to be
realized.
Translation of Foreign
Currency. Upon
consolidation of the Company’s foreign subsidiaries into the Company’s
consolidated financial statements, any balances with the subsidiaries
denominated in the foreign currency are translated at the exchange rate at year
end. The financial statements of LMT Korea have been translated based upon
Korean Won as the functional currency.
LMT Singapore’s and LMT Korea’s assets and liabilities were translated
using the exchange rate at year end and income and expense items were
translated at the average exchange rate for the year. The resulting translation
adjustment was included in other comprehensive income (loss).
The Company applies FASB No. 52, Foreign Currency Translation,
for translating foreign currency into US dollars in our
consolidation of the financial statements. Due to our restatement of 2002
financial statements, certain footnote disclosures and previously reported
financial statements were adjusted to conform to retroactive applications of
FASB No. 52. These adjustments did not have a material impact in the
financial statements. See Note 2
in the notes to consolidated financial statements in the fiscal 2003 annual
report on Form 10-K filed on November 10, 2004, which reflects the restatements
of prior year transactions.
Earnings Per Share. Basic
earnings per share (“EPS”) is computed by dividing earnings
(losses) attributable to common shareholders by the weighted average
number of common shares outstanding for the periods. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
Use of Estimates. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reported periods. Actual results could differ from those estimates.
These management estimates are primarily related to impairment of long-lived
assets, inventory valuation, product warranty, and the allowance for bad debt
account balances.
Reclassifications. Certain
amounts from prior years have been reclassified to conform to the current year’s
presentation.
New Accounting
Pronouncements.
In December 2003, the Securities and Exchange
Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition.” SAB 104 supersedes SAB 101, “Revenue Recognition in Financial
Statements.” SAB 104’s primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue
Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the
SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions
and Answers (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic
13, Revenue Recognition. Selected portions of the FAQ have been incorporated
into SAB 104. While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104, which was effective upon issuance. The
adoption of SAB 104 did not impact the consolidated financial statements.
In March 2004, the FASB approved the
consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.” The objective of this Issue is to provide guidance for
identifying impaired investments. EITF 03-1 also provides new disclosure
requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that
delays the effective date of the measurement and recognition guidance in EITF
03-1 until after further deliberations by the FASB. The disclosure requirements
are effective only for annual periods ending after June 15, 2004. The Company
has evaluated the impact of the adoption of the disclosure requirements of EITF
03-1 and does not believe the impact will be significant to the Company’s
overall results of operations or financial position. Once the FASB reaches a
final decision on the measurement and recognition provisions, the company will
evaluate the impact of the adoption of EITF 03-1.
In November 2004, the FASB issued SFAS No. 151 “Inventory
Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement
151 clarify that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and require the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. The guidance is
effective for inventory costs incurred during fiscal years
67
beginning after June 15,
2005. Earlier application is permitted for inventory costs incurred during
fiscal years beginning after November 23, 2004. The Company has evaluated
the impact of the adoption of SFAS 151, and does not believe the impact will be
significant to the Company’s overall results of operations or financial
position.
In December 2004,
the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an amendment of
APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The
amendments made by Statement 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for
an exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the
recorded amount of the asset relinquished. Opinion 29 provided an exception to
its basic measurement principle (fair value) for exchanges of similar
productive assets. The Board believes that exception required that some
nonmonetary exchanges, although commercially substantive, be recorded on a
carryover basis. By focusing the exception on exchanges that lack commercial
substance, the Board believes this Statement produces financial reporting that
more faithfully represents the economics of the transactions. The Statement is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. Earlier application is permitted for nonmonetary
asset exchanges occurring in fiscal periods beginning after the date of
issuance. The provisions of this Statement shall be applied prospectively. The
Company has evaluated the impact of the adoption of SFAS 153, and does not
believe the impact will be significant to the Company’s overall results of
operations or financial position.
In December 2004,
the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment”. Statement
123(R) will provide investors and other users of financial statements with more
complete and neutral financial information by requiring that the compensation
cost relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. Statement 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued
in 1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25, as long as the footnotes to financial statements disclosed what net income
would have been had the preferable fair-value-based method been used. Public
entities (other than those filing as small business issuers) will be required
to apply Statement 123(R) as of the first interim or annual reporting period
that begins after June 15, 2005. The Company has evaluated the impact of
the adoption of SFAS 123(R), and does not believe the impact will be
significant to the Company’s overall results of operations or financial
position.
In December 2004
the Financial Accounting Standards Board issued two FASB Staff Positions—FSP
FAS 109-1, Application of FASB
Statement 109 “Accounting for Income Taxes” to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004,
and FSP FAS 109-2 Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. Neither
of these affected the Company as it does not participate in the related
activities.
4.
Marketable Securities
On July 29, 2002,
the Company invested $2,000 in Growell Metal, Inc. (“Growell”), a metals
processing company located in South Korea and publicly traded on South Korea’s
KOSDAQ stock market. The Company acquired 891,100 shares (or approximately
5%) of Growell’s outstanding common stock in this transaction. During the fourth
quarter of 2002, Growell’s spin-off of its electronics division resulted in the
creation of a new company named Growell Electronics, Inc. (“Growell
Electronics”). As a result of the spin-off, 30% of the Company’s 891,100 common
shares of Growell were exchanged for an equal number of shares in the common
stock of Growell Electronics. During the year ended December 31, 2002, the
Company sold its shares in Growell Electronics for approximately $1,432, which
was based on the market price of the stock on the KOSDAQ stock market on the
date of sale. This sale resulted in a realized gain of $832. At December 31,
2002, the change in fair value of the remaining investment in Growell resulted
in an unrealized gain of $1,668, which is reported as other comprehensive
income in the accompanying consolidated financial statements. In April 2003, the Company sold the
stock owned in Growell, which resulted in a realized gain of $1,178. A reclassification adjustment of ($1,668) for
net realized gains included in net loss is included in “Other comprehensive
loss” on the accompanying Statement of Operations and Comprehensive Loss for
the year ended December 31, 2003.
68
5.
Trade accounts receivable
Trade accounts receivables
from continuing operations were comprised of the following:
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
$
|
1,776
|
|
$
|
3,875
|
|
|
Less:
Allowance for doubtful accounts
|
|
(108
|
)
|
(127
|
)
|
|
Trade
accounts receivable, net
|
|
$
|
1,668
|
|
$
|
3,748
|
|
6.
Inventories
Inventories were
comprised of the following:
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,688
|
|
$
|
643
|
|
|
Work in
process
|
|
352
|
|
284
|
|
|
Finished
goods
|
|
313
|
|
442
|
|
|
Machines
held by customer
|
|
—
|
|
691
|
|
|
Total
current inventories
|
|
2,353
|
|
2,060
|
|
|
Long-term
inventories
|
|
1,810
|
|
—
|
|
|
Total
inventories
|
|
$
|
4,163
|
|
$
|
2,060
|
|
During 2003, the Company experienced significant operational
difficulties as a result of problems and delays encountered in manufacturing
bulk amorphous parts. These issues led
the Company to begin assessing its long-term strategy. As a result of changes made to the Company’s
manufacturing objectives, the Company determined that it held excessive volumes
of certain raw materials at December 31, 2003. Accordingly, the Company reduced the carrying
value of raw materials held by its subsidiary, Liquidmetal Korea, by the
amounts considered to be obsolete. The
write-downs amounted to $1,004 and are included in “Cost of Sales” in the
accompanying Statement of Operations and Comprehensive Loss for the year ended December 31,
2003. As of December 31, 2004, the
write-downs included in “Cost of Sales” in the accompanying Statement of
Operations and Comprehensive Loss amounted to $605, which includes a $406 charge
incurred during the fourth quarter of 2004 related to certain hinge
finished goods used in our customer’s cell phone models which were nearing its
end of life.
Machines held by customer represent machines conditionally sold to
Growell in 2002 and 2003. These machines
are subject to put options whereby Growell has the right to require the Company
to buy back the machines if certain conditions are not met. The Company recorded a write-down of $2,765
of raw material and machine inventory associated with the settlement of a
dispute with Growell in December 2003 (see Note 11). These amounts are included in “Cost of
Sales” in the accompanying Statement of Operations and Comprehensive Loss for
the years ended December 31, 2003 and 2002 respectively.
The Company maintains
certain of its raw material inventory in amounts excess of our operating cycle
of one year due to the nature of our manufacturing process, production lead
time, and the recyclability of our raw material. Therefore, the Company has determined and
allocated $1,810 of raw material as long term inventory in 2004. Long term inventory was $0 in 2003 as our
business strategy of selling Liquidmetal ingots that were included in raw
material inventory were within our one year operating cycle.
7. Property,
Plant and Equipment
Property, plant and
equipment consists of the following:
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
12,600
|
|
$
|
11,122
|
|
|
Computer
equipment
|
|
1,357
|
|
1,355
|
|
|
Office
equipment, furnishings and improvements
|
|
1,910
|
|
1,838
|
|
|
Buildings
|
|
9,719
|
|
8,503
|
|
|
Total
|
|
25,586
|
|
22,818
|
|
|
Accumulated
depreciation
|
|
(9,152
|
)
|
(5,075
|
)
|
|
Total
property, plant and equipment, net
|
|
$
|
16,434
|
|
$
|
17,743
|
|
69
Depreciation expense
is classified as follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
sales
|
|
$
|
2,623
|
|
$
|
2,908
|
|
$
|
403
|
|
|
Selling,
general and administrative
|
|
700
|
|
627
|
|
229
|
|
|
Research and
development
|
|
8
|
|
730
|
|
799
|
|
|
Total
depreciation expense
|
|
$
|
3,331
|
|
$
|
4,265
|
|
$
|
1,431
|
|
During 2003,
the Company experienced significant operational difficulties as a result of
problems and delays encountered in manufacturing bulk amorphous parts. These
events, along with the Company’s history of operating or cash flow losses and
uncertainty surrounding its future cash flows, led the Company to evaluate its
long-lived assets for recoverability as of December 31, 2003. As a result, the Company determined that the
carrying value of its manufacturing plant in Pyongtaek, South Korea exceeded
its fair value as of December 31, 2003 in the amount of $2,684. The fair value of the building was based on
the average of two independent appraisals of the building. This impairment loss is recorded in operating
expenses as “Impairment of long lived assets” in the accompanying Consolidated
Statement of Operations and Comprehensive Loss for the year ended December 31,
2003.
8.
Idle Equipment
Idle equipment
consists of certain equipment held by the Company for use in expansion of bulk
alloy parts manufacturing in 2005. The
equipment was presented as machines held by a customer in 2003 as inventory, which
represented machines conditionally sold to Growell in 2002 and 2003 (see Note
6). The
equipment was included in inventory as of December 31, 2003 as the Company
was anticipating the sale of the equipment to a customer in 2004. However, the anticipated sale did not take
place during 2004. While the Company is
actively marketing the equipment for ultimate sale, the equipment may be used
internally to meet future capacity requirements for expansion of our
business. As of December 31, 2004,
the idled equipment includes a foreign currency translation gain of $235.
9.
Other Intangible Assets
Intangible assets consist of the following:
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Purchased
and licensed patent rights
|
|
$
|
555
|
|
$
|
517
|
|
|
Internally
developed patents
|
|
1,056
|
|
824
|
|
|
Trademarks
|
|
85
|
|
83
|
|
|
Total
|
|
1,696
|
|
1,424
|
|
|
Accumulated
amortization
|
|
(553
|
)
|
(440
|
)
|
|
Total intangible assets, net
|
|
$
|
1,143
|
|
$
|
984
|
|
Amortization expense
was $113, $100, and $82, for the years ended December 31, 2004, 2003, and
2002, respectively. The estimated
aggregate amortization expense for each of the five succeeding years is as
follows:
|
December 31,
|
|
Aggregate Amortization Expense
|
|
|
2005
|
|
$
|
107
|
|
|
2006
|
|
104
|
|
|
2007
|
|
102
|
|
|
2008
|
|
100
|
|
|
2009
|
|
98
|
|
|
|
|
|
|
70
Accumulated
Amortization for the years ended December 31, 2004 and 2003 is as follows:
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Purchased
and licensed patent rights
|
|
$
|
(181
|
)
|
$
|
(126
|
)
|
|
Internally
developed patents
|
|
(352
|
)
|
(302
|
)
|
|
Trademarks
|
|
(20
|
)
|
(12
|
)
|
|
Total
|
|
$
|
(553
|
)
|
$
|
(440
|
)
|
The
weighted average amortization periods for each of the years ended December 31,
2004, 2003, and 2002 is as follows:
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
and licensed patent right
|
|
17.0
|
|
17.0
|
|
17.0
|
|
|
Internally
developed patents
|
|
17.0
|
|
17.0
|
|
17.0
|
|
|
Trademarks
|
|
10.0
|
|
10.0
|
|
10.0
|
|
|
Total
weighted
|
|
13.5
|
|
13.5
|
|
13.5
|
|
Purchased patent
rights represent the exclusive right to commercialize the bulk amorphous alloy
and other amorphous alloy technology acquired from California Institute of
Technology (“Caltech”), a shareholder, through a license agreement with Caltech
(“License Agreement”). Under the License Agreement, the Company has the
exclusive right to make, use, and sell products from all of Caltech’s
inventions, proprietary information, know-how, and other technology relating to
amorphous alloys in existence as of September 1, 2001. The Company also
has an exclusive license to nine issued patents and four patent applications
held by Caltech relating to amorphous alloy technology, as well as all related
foreign counterpart patents and patent applications. Of the patents currently
issued to Caltech and licensed by the Company, the earliest expiration date is
2013 and the latest expiration date is 2021. Furthermore, the license agreement
gives the Company the exclusive right to make, use, and sell products from
substantially all amorphous alloy technology that is developed in Professor
William Johnson’s Caltech laboratory during the period September 1, 2001
through August 31, 2005. All fees and other amounts payable by the Company
for these rights and licenses have been paid or accrued in full, and no further
royalties, license fees or other amounts will be payable in the future under
the License Agreements.
In addition to the
patents and patent applications under the License Agreement with Caltech, the
Company has internally developed patents. Internally developed patents include
legal and registration costs incurred to obtain the respective patents. The
Company currently holds various patents and numerous pending patent applications
in the United States, as well as numerous foreign counterparts to these patents
outside of the United States.
10.
Goodwill
During
2002, the Company completed an impairment review and did not recognize any
impairment of goodwill. Accordingly, for
2002, the Company has forgone all related goodwill amortization expense. During 2003, Dongyang experienced net
losses as a result of a continuing economic downturn in markets for its
machinery products. These events, along with Dongyang’s operating loss, cash
flow losses and uncertainty surrounding its future cash flows, led the Company
to evaluate its investment for recoverability as of December 31,
2003. As a result, the Company
determined that the carrying value of its investment in Dongyang exceeded its
fair value as of December 31, 2003 in the amount of $184. This impairment loss is recorded in operating
expenses as “Impairment of Goodwill” in the accompanying Statement of
Operations and Comprehensive Loss for the year ended December 31, 2003.
In
March 2004, the Company sold its 51% investment in Dongyang to the 49%
minority shareholder (see Note 17).
11.
Settlement Payable
The
settlement payable balance consists of payables to Growell Metal Co.,
Ltd., a South Korean metals processing company (“Growell”), as a result of a settlement agreement
executed in January 2004. Under
terms of the January 2004 settlement of the dispute over certain sales
transactions from 2003 and 2002 between Liquidmetal Korea and Growell,
Liquidmetal Korea agreed to pay Growell $4,895 to purchase Growell’s investment
in alloy inventories, proprietary alloying equipment purchased from Liquidmetal
Korea, and supporting equipment purchased from other suppliers. Also as part of the settlement, Growell
satisfied in full a balance of $2,058 owed to Liquidmetal Korea for the die
casting machines Growell purchased from Liquidmetal Korea in the first quarter
of 2003 as part of a license agreement to manufacture Liquidmetal alloy parts
for the South Korean automotive industry.
71
The remaining settlement payable of $2,837 and trade
accounts payable of $14 were to be paid to Growell (in cash or stock at the
Company’s discretion) by December 31, 2004. As of December 31, 2004, the settlement
payable was not paid to Growell due to Growell’s breach of warranty on
equipment repurchased by Liquidmetal Korea.
The outstanding balance of payables to Growell from the settlement as of
December 31, 2004 was $3,246, net of foreign exchange translation
loss. In January 2005, Growell was
acquired by a third party and the Company is currently in negotiations to
settle this balance with the third party.
The Company
recorded a loss on the settlement at December 31, 2003 of $2,765 which is
included in “Cost of Sales” in the December 31, 2003 Consolidated
Statements of Operations and Comprehensive Loss. The loss on settlement reflects the
write-down of the assets received in the settlement to their fair market value. The sale of the die casting machines to
Growell was reflected in the first quarter of 2004. Under the settlement agreement between the
parties, the Company and Growell granted to the other party (and the other
party’s affiliates) a release of all known and unknown claims of any nature arising
between the parties through the date of settlement, as well as a release
against future claims under agreements between the parties that were terminated
as a part of the settlement. The
settlement agreement provided that all agreements of any nature between the
parties and their respective affiliates were terminated as of the date of
settlement, with the exception of certain confidentiality agreements, a
Liquidmetal coatings distribution agreement, and future rights under the die
casting agreement pursuant to which Growell purchased the die casting machines
and obtained a license to make auto parts from Liquidmetal alloys. The settlement agreement also includes, as an accommodation to Growell, if the Company becomes aware of
any prospective customer that desires to purchase a proprietary Company casting
machine at a time when Growell desires to sell any of its Liquidmetal die
casting machines, then the Company will not sell such die casting machine to
the prospective customer unless the Company first directs the prospective
customer to Growell and encourages the prospective customer to purchase the
machine from Growell.
12.
Other Liabilities
The other liabilities
balance consists of accrued severance and operating lease costs associated with
the Company’s cost reduction measures for the Tampa, Florida executive offices,
the accrued loss on the settlement with a customer (see Note 11), a capital
lease obligation for office furniture and furnishings and capital lease
obligations for a SEM Microscope and a JSM Electron Microscope used in the
laboratory in Lake Forest, California, and warrant payable from the convertible
debt issued during 2004 (see note 14).
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Accrued
severance
|
|
$
|
579
|
|
$
|
1,683
|
|
|
Accrued
operating lease costs
|
|
596
|
|
758
|
|
|
Accrued
capital lease costs
|
|
213
|
|
348
|
|
|
Warrant
payable
|
|
550
|
|
—
|
|
|
Total
|
|
1,938
|
|
2,789
|
|
|
|
|
|
|
|
|
|
Imputed
interest
|
|
(14
|
)
|
(35
|
)
|
|
Total
|
|
1,924
|
|
2,754
|
|
|
Less current
portion
|
|
(1,032
|
)
|
(1,940
|
)
|
|
Other long
term liabilities, less current portion
|
|
$
|
892
|
|
$
|
814
|
|
During
2003, the Company initiated activities to substantially reduce the number of
employees and consolidate manufacturing and administrative facilities to
improve operational effectiveness and efficiency and reduce expenses. During the year ended December 31, 2003,
there was a total of 225 employees terminated.
The total amount of severance granted to the terminated employees is
$2,718 which is included in Cost of Sales in the amount of $199, Selling,
general and administrative in the amount of $2,253, and Research and
Development in the amount of $266 in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2003. The amount of severance paid was $1,104, and
$1,035 as of December 31, 2004 and 2003, respectively. The remaining severance owed to the
terminated employees is $579 and $1,683 as of December 31, 2004 and 2003,
respectively. The total severance
granted to terminated employees of $2,718 is separated into the following
reportable segments as of December 31, 2003: Coatings at $75 and Bulk
alloy at $2,643. The categories of
employees that were eliminated include the following: Product management positions at various
levels, including Vice President; entry level technicians; accounting and
finance positions from entry level through executive; marketing mid to senior
level positions; engineering mid to senior levels positions; information
technology support; administrative, legal and executive support; senior
internal legal counsel; human resources and senior executives. Also, there are other relocation expenses
associated with relocating the Tampa, Florida office to Lake Forest, California
totaling $759, which includes the accrual of all remaining facility and
telecommunication lease payments for the Tampa, Florida office. Total liability accrued from the relocation
and terminations in 2003, including the severance and lease accruals, were
$1,175 and $2,441 as
72
of December 31, 2004 and 2003, respectively. The Company has substantially concluded all
cost reduction and restructuring activities as of March 31, 2004. The
current portion of the 2003 termination and relocation liability is $909 and
the long-term portion of the liability is
$266 at December 31, 2004.
At December 31, 2003, the current portion of the 2003 termination
and relocation liability was $1,826 and the long-term portion of the liability
was $615.
All leases with an
initial term greater than one year are accounted for under SFAS No. 13 Accounting for Leases. These leases are
classified as either capital leases or operating leases, as appropriate. Assets under capital leases are capitalized
using interest rates appropriate at the inception of each lease. At December 31,
2004, the cost recorded for the office furniture and furnishings, the SEM
Microscope and the JSM 6360 Electron Microscope under the capital lease was
$107, $47 and $289, respectively, and the accumulated amortization was $57, $22
and $89, respectively. At December 31,
2003, the cost recorded for the office furniture and furnishings, the SEM
Microscope and the JSM 6360 Electron Microscope under the capital lease was
$107, $47 and $289, respectively and the accumulated amortization was $36, $17
and $31, respectively. Future minimum
lease payments for the above assets under capital leases during subsequent
years are as follows.
|
December 31,
|
|
Minimum
Payments
|
|
|
2005
|
|
$
|
134
|
|
|
2006
|
|
71
|
|
|
2007
|
|
7
|
|
|
Total
|
|
212
|
|
|
Imputed
interest
|
|
(14
|
)
|
|
Total
|
|
198
|
|
|
Less current
portion
|
|
(123
|
)
|
|
Capital
lease obligation, net of current portion
|
|
$
|
75
|
|
13.
Product Warranty
Management estimates
product warranties as a percentage of bulk alloy product revenues. During the
years ended December 31, 2003 and 2004, the Company’s product warranty
accrual balance had the following activity:
|
Balance, December 31,
2002
|
|
$
|
237
|
|
|
Expense
accrual
|
|
(297
|
)
|
|
Warranty
charges
|
|
363
|
|
|
Balance, December 31,
2003
|
|
$
|
303
|
|
|
Expense
accrual
|
|
288
|
|
|
Warranty
charges
|
|
(72
|
)
|
|
Balance, December 31,
2004
|
|
$
|
519
|
|
The product warranty
accrual balance was included in accounts payable and accrued expenses at December 31,
2004 and December 31, 2003.
14.
Notes Payable
Senior Convertible Note
On March 3,
2004, the Company issued $9.9 million of 6.0% senior convertible notes due 2007
(the “March Notes”) to investor groups in a transaction led by Michigan
Venture Capital Co., Ltd, a South Korea-based institutional investment firm,
and IndiGo Ventures LLC, a New York-based investment firm (the “Placement
Agents”) that served as a financial advisor to the Company for the
transaction. The notes were
collateralized by the patents held by the Company and second priority mortgage
interest in plant facilities and certain equipment in South Korea. The notes were convertible at any time into
common stock at a price of $3.00 per share.
Investors in the private placement and the Placement Agents received
warrants to purchase an aggregate 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 days following the effectiveness of a registration statement
covering the resale of shares issuable upon exercise of the warrants. In addition, the investors had the right to
call for repayment of the notes prior to maturity at any time after the second
anniversary of the closing of the transaction.
73
The fair
value of the 1.2 million warrants totaled $1,883 and was computed using the
Black-Scholes pricing model under the following assumptions: (1) expected
life of 3 years; (2) volatility of 82%, (3) risk free interest of
0.95% and dividend rate of 0%. In
addition, since this debt is convertible into equity at the option of the note
holder at beneficial conversion rates, an embedded beneficial conversion
feature was recorded as a debt discount and will be amortized using the
effective interest rate method over the life of the debt in accordance with
Emerging Issues Task Force No. 00-27, “Application of Issue No. 98-5
to Certain Convertible Instruments.” In March 2004,
total cost of beneficial conversion feature of $3,395 and the relative fair
value of the 0.6 million warrants issued to investors of $584 were recorded as
discounts of the convertible note. In
addition, $718 relating to the fair value of the 0.6 million warrants issued to
the Placement Agents and $581 direct costs incurred relating to issuance of the
convertible note were recorded as debt issuance cost as a contra liability
account in warrant liability and other assets, respectively.
From June through
August 2004, the Company redeemed $4,465 of the outstanding note balance
in cash. The redemption resulted in a
write down of debt issuance costs and debt discount of $2,071 to interest
expense during the year ended December 31, 2004. Further, 500,000 of warrants originally
issued to a financial advisor for the transaction expired during June 2004
and 163,748 of unexercised warrants originally issued to investors were cancelled
as a result of the Company’s redemption of the note balances during the year
ended December 31, 2004. The
663,748 total expired and canceled warrants immediately prior to the expiration
and cancellation resulted in a reduction of warrant liability of $7 and $279 to
paid in capital and change in value of warrants, respectively, during the year
ended December 31, 2004.
On August 19,
2004, the Company completed a private exchange offer for its March Notes
with the remaining holders after the redemption. Under terms of the exchange offer,
approximately $5.5 million in aggregate principal amount of the March 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 of 10%
Senior Secured Notes Due 2005 (the “Short-Term Notes”), collectively referred
to as “Exchange Notes”. The Exchange
Notes are collateralized by certain patents owned by the Company and second
priority mortgage interest in plant facilities and certain equipment at our
South Korea plant. 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 price of $3.00 per share under the March Notes). The Long-Term Notes have a maturity date of July 29,
2007, and a conversion price of $1.00 per share. Further, the exchange notes are convertible
into Common Stock, at the option of the Company, if at any time after the
issuance of the notes, the closing per share price of the Common Stock exceeds
$4.00 (as adjusted for stock splits, reverse splits, stock dividends, and
recapitalizations) for 30 consecutive trading days, and further provided that
there has been effective registration during such period. Holders of the Long-Term Notes also have the
right to call for repayment of the Long-Term Notes prior to maturity at any
time after the second anniversary of the closing of the exchange offer.
A total
of 563,151 warrants to purchase our common stock at an exercise price of $3.00
per share—all of which were previously issued in connection with the purchase
of the March Notes—have been amended to provide for an extended expiration
date of March 1, 2006.
The
exchange offer was treated as an extinguishment of the March Notes in
accordance with Emerging Issues Task Force No. 96-19, “Debtors Accounting
for a Modification or Exchange of Debt Instruments.” The exchange resulted in a $1,663 loss from
extinguishment of the March Notes, write down of $352 of deferred issue
costs in other assets, $189 of contra liability deferred issuance costs, and
$1,122 of debt discount as a result of the change in carrying value of
exchanged notes.
In
connection with the private exchange offer, the Company issued $250 of private
placement notes to certain Placement Agents as issuance costs. Of the $250 notes issued, $125 was paid in
the form of long-term notes which is due in 2007 with interest rate of 6% per
annum (Long-Term Notes) and $125 was paid in the form of short-term notes which
is due in 2005 with interest rate of 10% per annum (Short-Term Notes). The Short-Term and Long-Term Notes are
convertible into Common Stock at $2.00 and $1.00, respectively, and have the
same terms as the Exchange Notes issued to the investors. Further, a beneficial conversion feature was
recorded from the $125 Long-Term Notes issued to Placement Agents of $29 during
August 2004.
As of December 31,
2004, our gross outstanding loan balance totaled $5,709, un-amortized discounts
for beneficial conversion feature and warrants totaled $851 and other asset
debt issuance costs totaled $183.
Interest expense for the amortization of debt issuance cost and discount
on note was $789 for the year ended December 31, 2004. As of December 31, 2004, the effective
interest rates for the Short-Term and the Long-Term Notes were 22% and 32%,
respectively.
The
Company was obligated, pursuant to a Registration Rights Agreement, as amended
by the Exchange Notes, between the Company, the Placement Agents and the note
holders to file a registration statement with the Securities and Exchange
Commission (“SEC”) to register the shares of Common Stock issuable upon
conversion of the notes payable and the related warrants within 90
74
days
following the effective closing date of the exchange notes (July 29,
2004), and to use best efforts to cause such registration statement to become
effective within 60 days following the SEC’s first written comments on the
registration statement. Further, if the
Company is not in compliance with the registration or listing requirements, the
holders have rights to late registration payments equal to 2 percent of the
purchase price paid for the unconverted notes for the first 30 business days of
late registration, and 1 percent for each 30 business days thereafter, but no
more than 10 percent of the purchase price of the unconverted note
balance. The $5,709 balance of the note
and un-amortized discounts for beneficial conversion feature and warrants of $851
is presented as short-term liability as of December 31, 2004 as the note
holders have the right to call for payment on demand as the registration
statement has not been filed in accordance with the amended Registration Rights
Agreement. As of the filing of this
report, the Company has not received any demands for payment from the note
holders.
Pursuant
to EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock”, the original relative fair
values of the warrants of $1,302 have been recorded as other liability as the
Company has not yet filed the registration statement. In addition, the Company is required to
report a value of the warrant as a fair value and record the fluctuation to the
fair value of the warrant liability to current operations. The change in the relative fair value of the
warrants resulted in a net gain of $747 for the year ended December 31,
2004. The fair value of warrants
outstanding at December 31, 2004 of $550 was computed using the Black-Scholes
model under the following assumptions: (1) expected life of 1.17 years; (2) volatility
of 124%, (3) risk free interest of 3.08% and dividend rate of 0%.
The following is a repayment schedule of
the Short-Term and Long-Term Notes based on maturity date of the notes:
|
Senior Convertible Notes
Repayment Schedule
December 31,
|
|
Minimum
Payments
|
|
|
|
|
|
|
|
2005
|
|
$
|
2,854
|
|
|
2006
|
|
—
|
|
|
2007
|
|
2,855
|
|
|
Total
|
|
$
|
5,709
|
|
Kookmin Note
On February 4,
2003, our Korean subsidiary received 6,500,000 in South Korean Won, or
approximately $5,488, under a loan from Kookmin Bank of South Korea. The loan bears interest at an annual rate of
7.1%. In the event of delayed repayment,
the interest increases to a maximum of 21%, depending on the length of time the
repayment is delayed. This loan is
collateralized by the plant facilities and certain equipment in South
Korea. During the first eighteen months
from the origination date, interest was payable on a monthly basis. In October 2003, the Company paid $873
of principal at the request of Kookmin Bank due to the sale of machines that
had been part of the collateral on the loan.
Subsequent to October 31, 2003, Kookmin Bank requested that the
Company pay an additional $866 of principal by February 2004 due to the
Company’s current credit rating. The
Company made two payments on the requested additional loan pay down in November and
December 2003 of $320 and $205, respectively. The remaining payment of $341 was
subsequently made in February 2004.
Beginning in September 2004, the Company is required to make equal
monthly installments of principal and interest to repay the remaining balance
of the loan over a 36-month period. For
the year ended December 31, 2004, principal payments made to Kookmin Bank
totaled $296, which includes $422 of foreign exchange translation loss.
75
The notes payable from
Kookmin Loan as of December 31, 2004 and 2003 and the activity for the
year ended December 31, 2004 is shown in the following table:
|
|
|
December 31,
2003
|
|
Borrowings
|
|
Repayments
|
|
December 31,
2004
|
|
|
Kookmin Loan
7.1%, principal $5,488
|
|
$
|
4,047
|
|
$
|
—
|
|
$
|
(296
|
)
|
$
|
3,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kookmin Repayment Schedule
December 31,
|
|
Minimum
Payments
|
|
|
|
|
|
|
|
2005
|
|
$
|
1,208
|
|
|
2006
|
|
1,208
|
|
|
2007
|
|
1,208
|
|
|
2008
|
|
127
|
|
|
Total
|
|
$
|
3,751
|
|
Shinhan
Credit Agreement
On August 23,
2003, the Company entered into a short-term credit agreement with Shinhan Bank
of South Korea in the amount of $1,000, which expired on May 30,
2004. The credit agreement is solely for
the issuance of a letter of credit to vendors when the Company’s Korean
subsidiary imports raw materials and other goods into South Korea. The facility is secured by any raw material
or goods financed through the credit facility.
As of December 31, 2003, there were no borrowings outstanding under
this agreement, and the Company has not renewed the agreement as of December 31,
2004.
15.
Shareholders’ Equity (Deficiency)
Initial
Public Offering. Pursuant to the
Company’s Registration Statement (Registration No. 333-73716) on Form S-1,
as amended, initially filed with the Securities and Exchange Commission on November 20,
2001 and declared effective May 21, 2002, the Company closed an initial
public offering of 5,000,000 registered shares of common stock on May 28,
2002, plus an additional 229,000 shares on June 10, 2002 pursuant to an
over allotment option, at a price of $15.00 per share (which sale is referred
to herein as the “Offering”). The Offering generated net cash proceeds for the
Company during the second quarter 2002 of approximately $70,721, net of
underwriting commissions of $5,490 and other transaction fees of approximately
$2,224.
Stock
Split. On June 29, 2001 the Company
declared a ten-for-one stock split to its common shareholders of record on June 29,
2001. This stock split was effected in the form of a stock dividend. On April 4,
2002, the Company declared a one-for-3.1 reverse stock split to its common
shareholders of record on April 4, 2002. The consolidated financial
statements and accompanying notes have been retroactively adjusted to reflect
the effects of the split and reverse split.
Reincorporation. On May 21, 2003, the Company completed a
reincorporation by transitioning from a California corporation to a Delaware
corporation. The reincorporation was effected though the merger of the former
California entity into its newly created wholly owned Delaware subsidiary. In
connection with the reincorporation, the number of authorized common shares was
reduced from 200,000,000 to 100,000,000. Additionally, the par value of the
common stock was changed from no par value common stock to common stock with a
par value of $0.001 per share. For purposes of these notes, the term “Company”
refers to the former California entity with respect to periods prior to May 21,
2003.
Preferred
Stock. As of December 31, 2001, the Company
received net proceeds of $5,577 from the sale of the preferred stock at a per
share price of $12.40, as adjusted for the revised stock split. Upon the
completion of the Offering, each share of preferred stock was converted
automatically into one share of Class A common stock pursuant to the terms
of the preferred stock issued.
Warrants
As of December 31,
2004, outstanding warrants to acquire shares of the Company’s common stock are
as follows:
|
Number of
Shares
|
|
Exercise
Price
|
|
Expiration Date
|
|
|
645,162
|
|
4.65
|
|
December 31, 2005
|
|
|
563,151
|
|
3.00
|
|
March 1, 2006
|
|
|
1,208,313
|
|
|
|
|
|
76
16.
Stock Compensation Plan
Under the Company’s
1996 Stock Option Plan (“1996 Company Plan”) the Company could grant to
employees, directors or consultants options to purchase up to 12,903,226 shares
of common stock as adjusted for the reverse stock split. The stock options are
exercisable over a period determined by the Board of Directors or the
Compensation Committee, but no longer than 10 years.
On April 4, 2002,
our shareholders and board of directors adopted the 2002 Equity Incentive Plan
(“2002 Equity Plan”). The 2002 Equity Plan provides for the grant of stock
options to officers, employees, consultants and directors of the Company and
its subsidiaries. In addition, the plan permits the granting of stock
appreciation rights with, or independently of, options, as well as stock
bonuses and rights to purchase restricted stock. A total of 10,000,000 shares
of our common stock may be granted under the 2002 Equity Plan. As of December 31, 2004, there are
1,505,379 options outstanding under the 2002 Equity Plan.
Prior to the approval
of the 2002 Equity Plan, options were primarily granted under the Company’s
1996 Stock Option Plan (“1996 Company Plan”). On April 4, 2002, our board
of directors terminated the 1996 Company Plan. The termination will not affect
any outstanding options under the 1996 Company Plan and all such options will
continue to remain outstanding and be governed by the Plan. No additional
options may be granted under the 1996 Company Plan. As of December 31,
2004, there were 3,426,622 options outstanding under the 1996 Company Plan.
On April 4, 2002,
our shareholders and board of directors adopted the 2002 Non-employee Director
Stock Option Plan (“2002 Director Plan”). Only non-employee directors are
eligible for grants under the 2002 Director Plan. A total of 1,000,000 shares
of the Company’s Common Stock may be granted under the 2002 Director Plan.
There are 122,000 options outstanding under the 2002 Director Plan as of December 31,
2004.
Additionally, the
Company has 1,845,163 options outstanding at December 31, 2004 which were
granted outside the 1996 Company Plan, 2002 Equity Plan and 2002 Director Plan.
The Company applies
APB Opinion No. 25 for options when the exercise price of options granted
to employees is less than the fair value of the underlying stock on the date of
grant. The Company applies SFAS No. 123 for options granted to
non-employees who perform services for the Company. Stock-based compensation
expense was recognized as follows for the year ended December 31, 2004:
|
|
|
In accordance with
|
|
|
|
|
APB Opinion
No. 25
|
|
SFAS
No. 123
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
|
$
|
—
|
|
$
|
240
|
|
$
|
240
|
|
|
Research and
development
|
|
—
|
|
36
|
|
36
|
|
|
Total
|
|
$
|
—
|
|
$
|
276
|
|
$
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense was recognized as follows for the year ended December 31,
2003:
|
|
|
In accordance with
|
|
|
|
|
APB Opinion
No. 25
|
|
SFAS
No. 123
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
|
$
|
50
|
|
$
|
5
|
|
$
|
55
|
|
|
Research and
development
|
|
6
|
|
62
|
|
68
|
|
|
Total
|
|
$
|
56
|
|
$
|
67
|
|
$
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense was recognized as follows for the year ended December 31,
2002 (as restated):
|
|
|
In accordance with
|
|
|
|
|
APB Opinion
No. 25
|
|
SFAS
No. 123
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
|
$
|
50
|
|
$
|
655
|
|
$
|
705
|
|
|
Research and
development
|
|
—
|
|
1,498
|
|
1,498
|
|
|
Total
|
|
$
|
50
|
|
$
|
2,153
|
|
$
|
2,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
The fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants for the years ended December 31, 2004, 2003, and 2002,
respectively: expected volatility of 100% for all periods; dividend yield of
0.0% for all periods; expected option life of approximately 5 years; and
risk-free interest rate ranging from 2.57% and 6.38%, as appropriate.
The following table
summarizes the Company’s stock option transactions for the three years ended December 31,
2004:
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2001
|
|
8,053,155
|
|
$
|
4.55
|
|
|
Granted
|
|
643,202
|
|
13.71
|
|
|
Exercised
|
|
(299,873
|
)
|
1.68
|
|
|
Forfeited
|
|
(79,297
|
)
|
8.39
|
|
|
Options
outstanding at December 31, 2002
|
|
8,317,187
|
|
5.33
|
|
|
Granted
|
|
1,810,920
|
|
3.07
|
|
|
Exercised
|
|
(684,165
|
)
|
1.68
|
|
|
Forfeited
|
|
(1,272,481
|
)
|
5.43
|
|
|
Options outstanding
at December 31, 2003
|
|
8,171,461
|
|
5.11
|
|
|
Granted
|
|
695,843
|
|
1.82
|
|
|
Exercised
|
|
—
|
|
—
|
|
|
Forfeited
|
|
(1,968,140
|
)
|
4.54
|
|
|
Options
outstanding at December 31, 2004
|
|
6,899,164
|
|
$
|
4.95
|
|
The weighted average
fair value of options granted during the years ended December 31, 2004,
2003, and 2002 was $1.29, $2.41, and $10.42 respectively. There were 5,752,412
options with a weighted average exercise price of $5.22 exercisable at December 31,
2004, 5,080,557 options with a weighted average exercise price of $5.12
exercisable at December 31, 2003 and 4,353,030 options with a weighted
average exercise price of $4.36 exercisable at December 31, 2002.
Included
in the above tables are certain options granted where their exercise prices
were below the fair market value of the common stock at the grant date
(measurement date). Such options totaled
358,582 with a weighted average fair value of $11.22 were outstanding at December 31,
2004; 1,327,314 with a weighted average fair value of $4.96 were outstanding at
December 31, 2003; and 1,343,444 with a weighted average fair value of
$5.01 were outstanding at December 31, 2002.
The following table summarizes the
Company’s stock options outstanding and exercisable by ranges of option prices
as of December 31, 2004:
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Range of
Exercise Prices
|
|
Number of options
Outstanding
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
Weighted
Average
Exercise Price
|
|
Number of
Options
Exercisable
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00 -
|
1.55
|
|
380,359
|
|
9.5
|
|
$
|
1.34
|
|
0
|
|
$
|
—
|
|
|
1.56 -
|
3.10
|
|
1,713,024
|
|
6.9
|
|
2.52
|
|
1,202,026
|
|
2.54
|
|
|
3.11 -
|
4.65
|
|
1,853,357
|
|
6.2
|
|
4.61
|
|
1,766,485
|
|
4.65
|
|
|
4.66 -
|
6.20
|
|
2,592,810
|
|
6.4
|
|
6.20
|
|
2,559,853
|
|
6.20
|
|
|
7.76 -
|
9.30
|
|
11,507
|
|
7.9
|
|
8.80
|
|
4,602
|
|
8.80
|
|
|
9.31 -
|
10.85
|
|
12,613
|
|
6.4
|
|
9.83
|
|
4,613
|
|
9.87
|
|
|
10.86 -
|
12.40
|
|
222,585
|
|
6.6
|
|
12.40
|
|
165,803
|
|
12.40
|
|
|
13.95 -
|
15.50
|
|
112,909
|
|
6.9
|
|
15.00
|
|
49,030
|
|
15.00
|
|
|
Total
|
|
6,899,164
|
|
|
|
|
|
5,752,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
17.
Discontinued Operations
Dongyang
On June 28,
2002, the Company acquired a 51% interest in Chusik Hoesa Dongyang Yudoro (“Dongyang”). During 2003, Dongyang experienced net losses
as a result of a continuing economic downturn in markets for its machinery
products. These events, along with Dongyang’s operating loss, cash flow losses
and uncertainty surrounding its future cash flows, led the Company to evaluate
its investment for recoverability as of December 31, 2003. As a result, the Company determined that the
carrying value of its investment in Dongyang exceeded its fair value as of December 31,
2003 in the amount of $184. This
impairment loss was recorded in operating expenses for the year ended December 31,
2003.
In March 2004,
the Company sold its 51% investment in Dongyang to the 49% minority
shareholder. The selling price of the
Company’s 51% interest in Dongyang was $80, which was equal 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
receivable balance from Growell. The
transaction resulted in net payable to Dongyang of $75 and a loss of $46 from
transfer of the Company’s interest in Donyang to the minority shareholder. The net payable balance of $75 is to be paid
in quarterly installments throughout 2004, with
$25 to be paid subsequent to 2004.
The outstanding amount payable to Dongyang is $25 as of December 31,
2004 and is included in accounts payable and accrued liabilities.
The Company has
adopted SFAS 144 and as a result the 2003 balances have been restated in order
to conform with the presentation of 2004 financial statements. Dongyang is reported as part of the assets
available for sale on the balance sheet for 2003.
As Donyang was sold
prior to December 31, 2004, and there are no assets and liabilities of
Dongyang as of December 31, 2004.
The following is a listing of the major classes of assets and
liabilities of Dongyang as of December 31, 2003.
|
|
|
December 31,
|
|
|
|
|
2003
|
|
|
Current
Assets:
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
1
|
|
|
Accounts
receivable, net
|
|
181
|
|
|
Inventories
|
|
1,572
|
|
|
Prepaid
expenses and other current assets
|
|
56
|
|
|
Total
current assets
|
|
1,810
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
58
|
|
|
Other Assets
|
|
29
|
|
|
Total assets
|
|
$
|
1,897
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
233
|
|
|
Deferred
revenue
|
|
1,583
|
|
|
Total
current liabilities
|
|
$
|
1,816
|
|
Summarized operating
results of Dongyang’s discontinued operations are as follows.
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
22
|
|
$
|
1,019
|
|
|
Loss from
discontinued equipment manufacturing operations, net of tax
|
|
(96
|
)
|
(268
|
)
|
|
|
|
|
|
|
|
|
Taesung
On June 14,
2004, the Company entered into an Asset Purchase Agreement whereby all the
assets and liabilities of its Taesung equipment manufacturing division in Korea
were sold to a third party for $345 which is payable by the third party in four
equal installments with the last installment being due on June 30,
2005. The sale resulted in a loss of
$184 and is included in the loss from discontinued equipment manufacturing
operations as of December 31, 2004.
The loss from operations for the year ended December 31, 2004
totaled $653 and is included in the loss from discontinued equipment
manufacturing operations for the period.
79
The Company has
adopted SFAS 144 and as a result the 2003 balances have been restated in order
to conform with the presentation of 2004 financial statements.
As Taesung was sold
during the period ended June 30, 2004, there are no assets and liabilities
of Taesung as of December 31, 2004.
The following is a listing of the major classes of assets and
liabilities of Taesung as of December 31, 2003.
|
|
|
December 31,
|
|
|
|
|
2003
|
|
|
Current Assets:
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
1
|
|
|
Accounts
receivable, net
|
|
256
|
|
|
Inventories
|
|
477
|
|
|
Prepaid
expenses and other current assets
|
|
113
|
|
|
Total
current assets
|
|
847
|
|
|
Property,
plant and equipment, net
|
|
$
|
157
|
|
|
Other Assets
|
|
100
|
|
|
Total assets
|
|
$
|
1,104
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
358
|
|
Summarized operating
results of Taesung’s operations are as follows.
|
|
|
Year Ended Ended December,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
172
|
|
$
|
2,177
|
|
|
Loss from
discontinued equipment manufacturing operations, net of tax
|
|
(653
|
)
|
(696
|
)
|
|
|
|
|
|
|
|
|
Liquidmetal
Golf
On April 30,
2002, management terminated the operations of the retail golf segment by means
of liquidating substantially all of the retail golf assets and liabilities. The
disposition of the retail golf operations represents the disposal of a business
segment. Accordingly, the accompanying consolidated financial statements
reflect the retail golf segment as a discontinued operation for all periods
presented.
For the year ended December 31,
2003, there was a net gain of $127 in the estimate of expenses associated with
the disposal of the discontinued retail golf operations. The change resulted from reducing the net
liabilities of the discontinued operations to $0 as there are no additional
expenditures associated with the discontinued retail golf operations. There were no assets associated with
discontinued retail golf operations at December 31, 2003 and 2004.
For the year ended December 31,
2002, the Company had a net gain change in estimate of $1,556 on the disposal
of the discontinued retail golf segment that was primarily due to a change in
estimated value of stock-based compensation. The change in estimated value of
the stock-based compensation was a result of the cumulative decrease in the
fair market value of the common shares underlying the options granted to Paul
Azinger of $2,129 and a decrease of $250 in the estimate of fees related to the
termination of the endorsement agreement. Additionally, there was a $98 gain
due to the reversal of the accumulated foreign exchange gains after the
liquidation of Liquidmetal Golf Europe Inc, and a decrease in the estimated
warranty cost of $128. These gains were partially offset by other changes in
the estimated loss on disposal that included $530 of additional operating
expenses, a $57 increase in the allowance for doubtful accounts and $462
primarily for the reduction of the estimated disposal value of work-in-process
inventory and equipment.
80
The results of
operations for all periods presented have been restated for discontinued
operations. The operating results of the discontinued operations are as
follows:
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Net gain
(loss) on disposal
|
|
—
|
|
127
|
|
1,556
|
|
|
Foreign
exchange translation gain (loss) during the period
|
|
—
|
|
—
|
|
(98
|
)
|
|
Comprehensive
gain (loss)
|
|
$
|
—
|
|
$
|
127
|
|
$
|
1,458
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Compensation Plan. Historically,
Liquidmetal Golf granted its own options to employees, directors and
consultants under a stock option plan (“1997 Golf Plan”) approved by
Liquidmetal Golf’s Board of Directors pursuant to which Liquidmetal Golf could
have granted stock options exercisable over a period determined by the Board of
Directors to purchase up to 500,000 shares of common stock of Liquidmetal Golf.
In connection with the Company’s plan to discontinue the retail golf
operations, the Company does not intend to issue additional options under the
1997 Golf Plan.
Liquidmetal Golf
applies APB Opinion No. 25 and related interpretations in accounting for
its plans. Accordingly, Liquidmetal Golf recognized compensation when the
exercise price of the options was less than the fair value of the underlying
stock on the date of grant. There was no
compensation expense recorded during the years ended December 31, 2004,
2003, and 2002.
Had compensation cost
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS No. 123, Liquidmetal Golf’s
net loss would have been as follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
—
|
|
$
|
127
|
|
$
|
1,556
|
|
|
Pro forma
|
|
$
|
—
|
|
$
|
15
|
|
$
|
1,405
|
|
The fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants for the fiscal years ended December 31, 2004, 2003, and 2002:
expected volatility of 100% for all periods; dividend yield of 0.0% for all
periods; expected option life of approximately 5 years; and a risk-free
interest rate ranging from 5.2% to 6.2%, as appropriate.
The following table
summarizes Liquidmetal Golf’s stock option transactions for the three years
ended December 31, 2004:
|
|
|
Number of
Shares
|
|
Weighted
Average
Price
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2001
|
|
253,000
|
|
5.71
|
|
|
Granted
|
|
—
|
|
—
|
|
|
Exercised
|
|
—
|
|
—
|
|
|
Forfeited
|
|
(137,500
|
)
|
3.53
|
|
|
Options
outstanding at December 31, 2002
|
|
115,500
|
|
8.31
|
|
|
Granted
|
|
—
|
|
—
|
|
|
Exercised
|
|
(300
|
)
|
16.00
|
|
|
Forfeited
|
|
(16,500
|
)
|
5.73
|
|
|
Options
outstanding at December 31, 2003
|
|
98,700
|
|
8.72
|
|
|
Granted
|
|
—
|
|
—
|
|
|
Exercised
|
|
—
|
|
—
|
|
|
Forfeited
|
|
(10,000
|
)
|
8.00
|
|
|
Options
outstanding at December 31, 2004
|
|
88,700
|
|
$
|
8.80
|
|
|
|
|
|
|
|
|
There were 88,700
options with a weighted average exercise price of $8.80 exercisable at December 31,
2004. There were 98,700 options with a
weighted average exercise price of $8.72 exercisable at December 31, 2003
and 115,500 options with a weighted average exercise price of $8.31 exercisable
at December 31, 2002.
81
Included in the above
tables are certain options granted where their exercise prices were below the
fair market value of the common stock at the grant date. Such options totaled
10,000, 131,250 and 131,250 with weighted average fair values of $5.74, $5.74
and $5.74 were outstanding at December 31, 2004, 2003 and 2002,
respectively.
The following summarizes
Liquidmetal Golf’s stock options outstanding and exercisable by the different
exercise prices at December 31, 2004:
|
Exercise Price
|
|
Number of Options
Outstanding at
December 31, 2003
|
|
Weighted Average
Remaining Contract
Life (Years)
|
|
Number of Options
Exercisable at
December 31, 2004
|
|
|
$
|
0.50
|
|
10,000
|
|
2.33
|
|
10,000
|
|
|
$
|
8.00
|
|
63,000
|
|
4.81
|
|
63,000
|
|
|
$
|
16.00
|
|
13,200
|
|
3.33
|
|
13,200
|
|
|
$
|
24.00
|
|
2,500
|
|
3.58
|
|
2,500
|
|
|
|
|
88,700
|
|
|
|
88,700
|
|
18.
Income Taxes
For all financial
statement periods presented, there was no provision for domestic income
taxes. However, there was approximately
$8 and $123 of tax expense during the twelve months ended December 31,
2003 and 2002, respectively, related to foreign taxes incurred by Dongyang, a
51% owned subsidiary, which is included as part of loss from discontinued
operations on the consolidated statements of operations and comprehensive loss
(see Note 17).
The significant
components of deferred tax assets were as follows:
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee
stock compensation
|
|
$
|
109
|
|
$
|
51
|
|
$
|
103
|
|
|
Allowance
for bad debt
|
|
37
|
|
44
|
|
52
|
|
|
Loss from
discontinued operations
|
|
—
|
|
—
|
|
—
|
|
|
Loss carry
forwards
|
|
31,403
|
|
27,202
|
|
24,175
|
|
|
Other
|
|
1,244
|
|
1,569
|
|
1,071
|
|
|
Total
deferred tax asset
|
|
32,793
|
|
28,866
|
|
25,401
|
|
|
Valuation
allowance
|
|
(32,793
|
)
|
(28,866
|
)
|
(25,401
|
)
|
|
Total
deferred tax asset, net
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
The following table
accounts for the differences between the actual tax provision and the amounts
obtained by applying the statutory U.S. Federal income tax rate of 34% to
income (loss) before income taxes:
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax
expense
|
|
(34.00
|
)%
|
(34.00
|
)%
|
(34.00
|
)%
|
|
|
|
|
|
|
|
|
|
|
State tax
expense, net
|
|
(4.79
|
)%
|
(1.62
|
)%
|
(3.40
|
)%
|
|
Foreign
income not subject to income tax
|
|
4.96
|
%
|
24.16
|
%
|
13.36
|
%
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
0.79
|
%
|
0.36
|
%
|
1.26
|
%
|
|
Increase in
valuation allowance
|
|
33.04
|
%
|
11.13
|
%
|
22.82
|
%
|
|
|
|
|
|
|
|
|
|
|
Total tax
provision
|
|
0.0
|
%
|
0.03
|
%
|
0.04
|
%
|
82
As of December 31,
2004, the Company had approximately $86,000 of net operating loss (“NOL”) carry
forwards for U.S. federal income tax purposes expiring in 2005 through 2024. In
addition, the Company has state NOL carryforwards of approximately $39,000
expiring in 2005 through 2009. The Company and Liquidmetal Golf filed on a
separate company basis for federal income tax purposes. Accordingly, the
federal NOL carryforwards of one legal entity are not available to offset federal
taxable income of the other. As of December 31, 2004, Liquidmetal
Technologies, Inc. had approximately $48,000 in federal NOL carryforwards,
expiring in 2005 through 2024 and approximately $16,000 in state NOL
carryforwards, expiring in 2005 through 2009. Liquidmetal Golf, Inc. had
approximately $38,000 of federal NOL carryforwards, expiring in 2012 through
2023 and approximately $23,000 in state NOL carryforwards expiring in 2004
through 2008.
As of December 31,
2004, the Company had approximately $317 of Research & Development (“R&D”)
credit carryforwards for U.S. federal income tax purposes expiring in 2016
through 2018. In addition, the Company
has California R&D credit carryforwards of approximately $279, which do not
expire under current California law.
Section 382 of
the Internal Revenue Code (“IRC”) imposes limitations on the use of NOL’s and
credits following changes in ownership as defined in the IRC. The limitation
could reduce the amount of benefits that would be available to offset future
taxable income each year, starting with the year of an ownership change. The
Company has not completed the complex analysis required by the IRC to determine
if an ownership change has occurred.
The ability to realize
the tax benefits associated with deferred tax assets, which includes benefits
related to NOL’s, is principally dependent upon the Company’s ability to
generate future taxable income from operations.
The Company has provided a full valuation allowance for its net deferred
tax assets due to the Company’s net operating losses.
19.
Segment Reporting and Geographic Information
SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, requires companies to provide certain
information about their operating segments.
In April 2002, the Company began classifying operations into two
reportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetal
alloys. The Liquidmetal alloy industrial
coatings are used primarily as a protective coating for industrial machinery
and equipment, such as drill pipe used by the oil drilling industry and boiler
tubes used by coal burning power plants.
Bulk Liquidmetal alloys include market opportunities to manufacture and
sell casing components for electronic devices, medical devices, sporting goods,
tooling, prototype sampling, defense applications and metal processing
equipment. The expenses incurred by the
bulk Liquidmetal alloy segment are manufacturing, research and development
costs, and selling expenses associated with identifying and developing market
opportunities. Bulk Liquidmetal alloy
products can be distinguished from Liquidmetal alloy coatings in that the bulk
Liquidmetal alloy can have significant thickness, up to approximately one inch,
which allows for their use in a wider variety of applications other than a thin
protective coating applied to machinery and equipment. Revenue and expenses associated with
research and development services are included in the bulk Liquidmetal alloy
segment. The accounting policies of the
reportable segments are the same as those described in Note 3 above.
Summarized financial
information concerning the Company’s reportable segments is shown in the
following tables:
|
|
|
Coatings
|
|
Bulk Alloy
|
|
Segment
Totals
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2004:
|
|
|
|
|
|
|
|
|
Revenue to
external customers
|
|
$
|
3,956
|
|
$
|
13,473
|
|
$
|
17,429
|
|
|
Gross profit
|
|
1,807
|
|
3,454
|
|
5,261
|
|
|
Total
segment income
|
|
1,227
|
|
2,330
|
|
3,557
|
|
|
Total
identifiable assets at end of period
|
|
842
|
|
22,635
|
|
23,477
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2003:
|
|
|
|
|
|
|
|
|
Revenue to
external customers
|
|
$
|
2,997
|
|
$
|
10,661
|
|
$
|
13,658
|
|
|
Gross profit
(loss)
|
|
1,466
|
|
(5,970
|
)
|
(4,504
|
)
|
|
Total
segment income (loss)
|
|
369
|
|
(21,140
|
)
|
(20,771
|
)
|
|
Total
identifiable assets at end of period
|
|
959
|
|
23,832
|
|
24,791
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2002 (restated):
|
|
|
|
|
|
|
|
|
Revenue to
external customers
|
|
$
|
4,587
|
|
$
|
4,551
|
|
$
|
9,138
|
|
|
Gross profit
|
|
2,171
|
|
1,311
|
|
3,482
|
|
|
Income
(loss) before minority interest, interest expense and discontinued operations
|
|
1,425
|
|
(13,179
|
)
|
(11,754
|
)
|
|
Total
identifiable assets at end of period
|
|
1,969
|
|
29,441
|
|
31,410
|
|
83
Reconciling
information for the statements of operations between reportable segments and the
Company’s consolidated totals is shown in the following table:
|
|
|
For the Years ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
(restated)
|
|
|
Total
segment income (loss) before minority interest, interest expense and
discontinued operations
|
|
$
|
3,557
|
|
$
|
(20,771
|
)
|
$
|
(11,754
|
)
|
|
General and
administrative expenses, excluded
|
|
(11,354
|
)
|
(13,110
|
)
|
(9,688
|
)
|
|
Consolidated
loss before interest, other income, income taxes, minority interest and
discontinued operations
|
|
(7,797
|
)
|
(33,881
|
)
|
(21,442
|
)
|
|
Loss from
extinguishments of debt
|
|
(1,663
|
)
|
—
|
|
—
|
|
|
Change in
value of warrants, net
|
|
747
|
|
—
|
|
—
|
|
|
Other income
|
|
302
|
|
—
|
|
—
|
|
|
Interest
expense
|
|
(3,603
|
)
|
(390
|
)
|
(1,109
|
)
|
|
Interest
income
|
|
37
|
|
304
|
|
506
|
|
|
Gain on sale
of marketable securities held-for-sale
|
|
—
|
|
1,178
|
|
832
|
|
|
Income taxes
|
|
—
|
|
—
|
|
—
|
|
|
Minority
interest in loss of consolidated subsidiary
|
|
—
|
|
21
|
|
118
|
|
|
Gain (loss)
from discontinued operations, net
|
|
(749
|
)
|
(837
|
)
|
1,639
|
|
|
Consolidated
net loss
|
|
$
|
(12,726
|
)
|
$
|
(33,605
|
)
|
$
|
(19,456
|
)
|
Excluded
general and administrative expenses are attributable to the Company’s corporate
headquarters. These expenses primarily
include corporate salaries, consulting, professional fees and facility
costs. Research and development expenses
are included in the operating costs of the segment that performed the research
and development.
Included in our bulk
alloy revenue to external customers are equipment sales from our Dongyang
subsidiary and Taesung equipment division in Korea, both of which were divested
in March and June 2004 respectively.
External revenue from our discontinued equipment manufacturing
operations includes $3.2 million and $0.2 million for the years ended December 31,
2003 and 2004, respectively.
Reconciling
information for the balance sheets between reportable segments and the Company’s
consolidated totals is shown in the following table:
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Total
segment assets
|
|
$
|
23,477
|
|
$
|
24,791
|
|
|
Cash and
cash equivalents
|
|
742
|
|
3,127
|
|
|
Restricted
cash
|
|
754
|
|
—
|
|
|
Prepaid expenses
and other current assets
|
|
801
|
|
322
|
|
|
Other
property, plant and equipment
|
|
975
|
|
1,563
|
|
|
Intangibles,
net
|
|
1,143
|
|
984
|
|
|
Other assets
|
|
616
|
|
65
|
|
|
Total
Consolidated Assets
|
|
$
|
28,508
|
|
$
|
30,852
|
|
Assets excluded from
segments include assets attributable to the Company’s corporate headquarters.
The largest asset represents the Company’s intangible assets, consisting
primarily of the Company’s patents and trademarks.
84
Certain customers
accounted for more than 10% of revenues from continuing operations as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
(restated)
|
|
|
Samsung
|
|
5
|
%
|
10
|
%
|
15
|
%
|
|
Charm Tech
|
|
32
|
%
|
—
|
|
—
|
|
|
Pntel
|
|
30
|
%
|
2
|
%
|
—
|
|
|
United
States Government
|
|
10
|
%
|
16
|
%
|
16
|
%
|
|
Growell
Metal
|
|
12
|
%
|
—
|
|
—
|
|
|
LLPG
|
|
—
|
|
12
|
%
|
—
|
|
The revenue related to
the United States Government was earned under three defense-related research
and development contracts.
Revenues from sales to
companies in the United States of America were $5,546 and $6,050 during the
years ended December 31, 2004 and 2003, respectively. The revenue related to the United States of
America was earned under three defense-related research and development
contracts and sales of coatings products.
During the year ended December 31,
2004, the Company had revenue on sales to companies outside of the United
States of $11,883 of which $9,545 represented sales to companies located in
South Korea. During the year ended December 31,
2003, the Company had revenue on sales to companies outside of the United
States of $7,608, of which $4,559 represented sales to companies located in
South Korea. During the year ended December 31,
2002, the Company did not generate
significant sales to companies located outside of the United States.
Long-lived assets
include net property, plant, and equipment and net intangible assets. The
Company had long-lived assets of $1,594 and $2,547 located in the United States
at December 31, 2004 and 2003, respectively. The Company had long-lived
assets of $15,422 and $16,395 located in South Korea at December 31, 2004
and December 31, 2003, respectively.
Of the assets located in South Korea at December 31,
2003, $215 was from long-lived assets of our discontinued equipment
manufacturing business. Further, the
Company has long lived assets of $47 at December 31, 2004 located in China
as a result of a new plant opened during August 2004 (see Note 1).
20.
Income (Loss) Per Common Share
Basic EPS is computed
by dividing earnings (loss) attributable to common shareholders by the
weighted average number of common shares outstanding for the periods. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings. A reconciliation of the number of common shares used in calculation of
basic and diluted EPS is presented below:
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares
|
|
41,609,652
|
|
41,505,218
|
|
38,713,878
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
Stock
options
|
|
—
|
|
—
|
|
—
|
|
|
Conversion
of notes payable
|
|
—
|
|
—
|
|
—
|
|
|
Weighted
average diluted shares
|
|
41,609,652
|
|
41,505,218
|
|
38,713,878
|
|
Options to purchase
approximately 6,899,164 shares of common stock at prices ranging from $1.18 to
$15.00 per share were outstanding at December 31, 2004, but were not
included in the computation of diluted EPS for the same period because the
inclusion would have been antidilutive.
Options to purchase approximately 8,171,461 shares of common stock at
prices ranging from $1.16 to $15.50 per share were outstanding at December 31,
2003, but were not included in the computation of diluted EPS for the same
period because the inclusion would have been antidilutive. Options to purchase
approximately 8,317,187 shares of common stock at prices ranging from $0.78 to
$15.50 per share were outstanding at December 31, 2002, but were not
included in the computation of diluted EPS for the same period because the
inclusion would have been antidilutive.
85
Warrants to purchase
1,208,313 shares of common stock between $3.00 and $4.65 per share were
outstanding at December 31, 2004 but were not included in the computation
of diluted EPS for the same period because the inclusion would have been
antidilutive. Warrants to purchase
645,162 shares of common stock at $4.65 per share were outstanding at December 31,
2003 and December 31, 2002.
21.
Commitments and Contingencies
During September 2004, as part of a
security agreement to finance a certain insurance policy, the Company used
certificates of deposits with maturities of less than one year as
collateral. The $754 held in
certificates of deposits is presented as restricted cash at December 31,
2004.
The Company is from time to time a party to
certain legal proceedings arising in the ordinary course of business. Although
outcomes cannot be predicted with certainty, the Company does not believe that
any legal proceeding to which it is a party will have a material adverse effect
on the Company’s financial position, results of operations, and cash flows.
Liquidmetal Technologies and certain of its present
and former officers and directors were named as defendants in nine purported
class action complaints filed in the United States District Courts for the
Middle District of Florida, Tampa Division, and the Central District of
California, Southern Division, alleging violations of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In August 2004,
four complaints were consolidated in the United States District Court for the
Middle District of Florida under the caption Primavera
Investors v. Liquidmetal Technologies, Inc., et al., Case No. 8:04-CV-919-T-23EAJ. John Lee, Chris Cowley, Dwight Mamanteo,
Scott Purcell and Mark Rabold, were appointed co-lead plaintiffs (the “Lead
Plaintiffs”). In September 2004,
the other five complaints filed in the Central District of California were
transferred to the Middle District of Florida for consolidation with the Primavera Investors action.
The Lead Plaintiffs served their Consolidated Amended Class Action
Complaint on January 12, 2005. The Amended Complaint alleges that the
Prospectus issued in connection with the Company’s initial public offering in May 2002
contained material misrepresentations and omissions regarding the Company’s
historical financial condition and regarding a personal stock transaction by
the Company’s chief executive officer.
The Lead Plaintiffs further generally allege that during the proposed Class Period
of May 21, 2002, through May 13, 2004, the defendants engaged in
improper revenue recognition with respect to certain of the Company’s business
transactions, failed to maintain adequate internal controls, and knowingly
disclosed unrealistic but favorable information about market demand for and
commercial viability of the Company’s products to artificially inflate the
value of the Company’s stock. The Amended Complaint seeks unspecified
compensatory damages and other relief. Defendants’ motion to dismiss will be due on March 28,
2005. The Company intends to vigorously defend against the class action. The Company cannot currently predict the
impact or resolution of this litigation or reasonably estimate a range of
possible loss, which could be material.
In addition to the above, certain present and former officers and
directors of Liquidmetal Technologies, as well as Liquidmetal Technologies as a
nominal defendant, have been named in three shareholder derivative actions. Two shareholder derivative complaints were
filed in California state court styled Brian Clair, Derivatively
on Behalf of Liquidmetal Technologies, Inc. v. John Kang, et al.,
Case No. 04CC00551, and Joseph Durgin Derivatively
on Behalf of Liquidmetal Technologies, Inc. v. John Kang, et al., Case No. 04CC00553, both
commenced in the Superior Court of Orange County, California. A third shareholder derivative complaint was
filed in 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, Tampa Division.
These shareholder derivative lawsuits allege that the defendants
breached various fiduciary duties and otherwise violated state law based
primarily upon the same underlying facts and circumstances as alleged in the
federal shareholder class action. The plaintiffs seek unspecified compensatory
damages, restitution and disgorgement of profits, equitable and/or injunctive
relief as permitted by law and other relief.
The two shareholder derivative complaints in California state court have
been consolidated. Plaintiffs served a
Consolidated Shareholder Derivative Complaint on October 12, 2004. The defendants served a Demurrer to the
Consolidated Shareholder Derivative Complaint on November 22, 2004,
seeking dismissal of that complaint. At
a hearing on February 10, 2005, the court sustained the demurrer,
dismissing the Consolidated Shareholder Derivative Complaint but giving the
plaintiffs 45 days within which to amend the complaint. The amended complaint is due on March 28,
2005. In the Florida derivative action,
the Plaintiff filed a First Amended Shareholder Derivative Complaint on November 22,
2004. The Company’s Motion to Dismiss
was filed on December 20, 2004.
Plaintiff’s Response and Objection to the Motion to Dismiss was filed on
February 4, 2005. The Company
cannot anticipate when the Court will rule on the Motion to Dismiss. The Company intends to vigorously defend
against the derivative actions. We
cannot currently predict the impact or resolution of this litigation or
reasonably estimate a range of possible loss, which could be material.
In March 1996,
the Company entered into a distribution agreement whereby it granted to a third
party exclusive rights to market and sell golf products incorporating
Liquidmetal Technology to certain Japanese sporting equipment companies. The third party paid the Company a $1.0
million distribution fee as part of this agreement, of which a portion was
refundable according to a formula based on the gross profit earned by the third
party. The remaining unearned
distribution fee of $830 has not been refunded as of December 31, 2004.
86
On March 28,
2003, the distribution agreement was terminated and the Company entered into a
new agreement to pay to the same third party a commission on the net sales
price of all Liquidmetal golf equipment that is shipped by the Company or its
affiliates to Japanese golf companies for sale into the Japanese
end-market. This commission will apply
to golf equipment shipped by the Company or its affiliates during the period
beginning on March 28, 2003 and ending on March 28, 2006. If, by March 28, 2006, the Company has
not paid $350 in commission payments, the balance between commission paid and
$350 will be paid by April 30, 2006, thereby guaranteeing the third party
a $350 minimum payment during the term of the agreement. The Company will recognize the unearned
distribution fee of $830 as revenue proportionately with the payment of
commissions under the new agreement. As
of December 31, 2004, the unearned distribution fee remained unchanged at
$830.
In August 2004,
the Company entered into a consulting agreement whereby the Company was to
receive services from a third party to improve the Company’s bulk alloy
manufacturing process. The service is to
be provided from 2004 through February 2006. The total amount of service fees is $172, of
which $15 was included in trade accounts payable as of December 31, 2004.
Operating Leases
The Company leases its
offices and warehouse facilities under various lease agreements, certain of
which are subject to escalations based upon increases in specified operating
expenses or increases in the Consumer Price Index. Future minimum lease
payments under non-cancelable operating leases during subsequent years are as
follows:
|
December 31,
|
|
Minimum
Payments
|
|
|
|
|
|
|
|
2005
|
|
$
|
1,215
|
|
|
2006
|
|
530
|
|
|
2007
|
|
317
|
|
|
2008
|
|
105
|
|
|
2009
|
|
73
|
|
|
Total
|
|
$
|
2,240
|
|
Rent expense was $479,
$1,419, and $955 for the years ended December 31, 2004, 2003, and 2002,
respectively.
22. 401(k)
Savings Plan
The Company has a
tax-qualified employee savings and retirement plan, or 401(k) plan, which
covers all of its United States- based employees. Our Korean employees are
covered under a government sponsored pension program and do not participate in
the U.S. based 401(k) program.
Under the U.S. based
401 (k) plan, participants may elect to reduce their current compensation, on a
pre-tax basis, by up to 15% of their taxable compensation or of the statutorily
prescribed annual limit, whichever is lower, and have the amount of the
reduction contributed to the 401(k) plan. The 401(k) plan permits the Company,
in its sole discretion, to make additional employer contributions to the 401(k)
plan. However, the Company did not make employer contributions to the 401(k)
plan during any of the periods presented in the accompanying consolidated
financial statements.
23.
Related Party Transactions
In June 2003,
the Company entered into an exclusive, ten-year license agreement with LLPG, Inc.
(“LLPG”), a corporation headed by a former director of the Company. Under the terms of the agreement, LLPG has
the right to commercialize Liquidmetal alloys, particularly precious-metal
based compositions, in jewelry and high-end luxury product markets. The Company, in turn, will receive royalty
payments over the life of the contract on all Liquidmetal products produced and
sold by LLPG. In conjunction with its
technology licensing contract, LLPG purchased two proprietary Liquidmetal alloy
melting machines and three proprietary 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 paid in full in March 2004.
The Company is a party to a license agreement with California Institute
of Technology (“Caltech”) under which the Company exclusively licenses from
Caltech certain inventions and technology relating to amorphous alloys. Professor William Johnson, a member of the
Company’s Board of Directors, is a professor at Caltech, and substantially all
of the amorphous alloy technology licensed to the
87
Company under the Caltech license agreement was developed in Professor
Johnson’s Caltech laboratory. During
2003, the Company paid $50 to Caltech representing the second and final
installments on the $150 aggregate fees related to this agreement. Additionally, the Company reimburses Caltech
for laboratory expenses incurred by Professor Johnson’s Caltech laboratory,
which during the years ended December 31, 2004 and 2003, amounted to $0
and $22 in reimbursements, respectively.
A company managed and partially owned by one of the Company’s former
directors provides technical support services and computer equipment to the
Company. During the year ended December 31,
2003, the Company incurred $20 of expenses and equipment purchases related to
this arrangement. There were no expenses
and payables to this Company as of December 31, 2004.
We are a party to a consulting agreement with
Chitnis Consulting, Inc., which is owned 100% by Shekhar Chitnis, a former
director and executive officer of our company.
Under this agreement, we have engaged Chitnis Consulting to provide
consulting services on an as-needed basis through December 31, 2005. During 2003, we incurred $50 in consulting
fees from Chitnis Consulting and incurred $54 as of December 31, 2004.
Soo Buchanan,
the sister of John Kang and James Kang, was employed by our company and was
paid aggregate compensation of $76 and
$43 as of December 31, 2003 and 2004. Additionally, Otis Buchanan, the husband of Ms. Buchanan,
was employed by the Company and was paid aggregate compensation of $90 and $54
as of December 31, 2003 and 2004, respectively.
In November 2004,
we entered into an agreement with John Kang, our Chairman, President, and Chief
Executive Officer, in which Mr. Kang agreed that certain stock transactions
by him in 2002 involving our common stock should have resulted in a liability
under Section 16(b) of the Securities Exchange Act of 1934, as
amended (“Section 16(b)”). These
transactions include Mr. Kang’s private sale of 285,715 shares of his
personal Liquidmetal Technologies common stock to Growell Metal Co., Ltd. in February 2002,
prior to our initial public offering.
They also include Mr. Kang’s subsequent indirect purchase and
disposition of Liquidmetal Technologies common stock in order to satisfy a
personal agreement Mr. Kang made to Growell Metal in February 2002
regarding the guaranteed minimum value of the stock purchased by Growell Metal
in February 2002 (the purchases and dispositions incident to this
agreement occurred in August and November 2002, respectively). Lastly, the transactions include open-market
purchases of an aggregate 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 independent inquiry into the above-described
transactions with the aid of independent legal counsel and, as a result of such
inquiry, the Audit Committee concluded that the transactions should have
resulted in a liability to the Company under Section 16(b) in the
amount of $302. Mr. Kang has
acknowledged this liability, and in an agreement negotiated between Mr. Kang
and the Audit Committee and approved by the full Board, Mr. Kang will pay
this liability through periodic installments in 2005 and 2006. As a result, the Company accrued for the $302
receivable in other assets and other income as of December 31, 2004. The above-described transactions involving
Growell Metal was reported on a new Form 4 filed by Mr. Kang on
November 15, 2004, and the open-market purchases were previously reported
on a timely basis in August 2002.
24.
Fourth Quarter Adjustments and Transactions
During the fourth quarter of 2004, the Company recognized $406
write-downs of inventory included in “Cost of Sales” in the accompanying
Statement of Operations and Comprehensive Loss related to certain hinge
finished goods used in our customer’s cell phone models which were nearing its
end of life (see Note 6).
88
Schedule II – Valuation and Qualifying Accounts
|
|
|
Balance at
Beginning
of Period
|
|
Additions
Charged to
Expenses
|
|
Write-offs
and
Payments
|
|
Balance at
End of
Period
|
|
|
Allowance
for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2004
|
|
$
|
127
|
|
$
|
84
|
|
$
|
(103
|
)
|
$
|
108
|
|
|
Year ended December 31,
2003
|
|
450
|
|
(28
|
)
|
(295
|
)
|
127
|
|
|
Year ended December 31,
2002
|
|
30
|
|
921
|
|
(501
|
)
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
warranty accrual
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2004
|
|
$
|
303
|
|
$
|
288
|
|
$
|
(72
|
)
|
$
|
519
|
|
|
Year ended December 31,
2003
|
|
237
|
|
(297
|
)
|
363
|
|
303
|
|
|
Year ended December 31,
2002
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
asset valuation allowance *
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2004
|
|
$
|
28,866
|
|
$
|
3,927
|
|
$
|
—
|
|
$
|
32,793
|
|
|
Year ended December 31,
2003
|
|
25,401
|
|
3,465
|
|
—
|
|
28,866
|
|
|
Year ended December 31,
2002
|
|
23,796
|
|
1,605
|
|
—
|
|
25,401
|
|
* The
deferred tax asset valuation allowance represents a 100% reserve against the
deferred tax asset accounts at December 31, 2004, 2003 and 2002,
respectively.
89