LIQUIDMETAL TECHNOLOGIES INC - 10-Q Quarterly Report

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	June 30,			December 31,
	2004			2003
	(unaudited)

ASSETS

Current Assets:

Cash and cash equivalents	$	6,356		$	3,127
Trade accounts receivables, net of allowance for doubtful accounts of $198 and $127	4,164			3,748
Inventories	5,966			3,731
Prepaid expenses and other current assets	206			395
Assets available for sale, net	—			827
Total current assets	16,692			11,828

Property, plant and equipment, net	16,639			17,743
Other intangibles, net	1,034			984
Other assets	808			297
Total assets	$	35,173		$	30,852

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:

Accounts payable and accrued expenses	$	6,569		$	3,683
Deferred revenue	838			1,435
Long-term debt, current portion, net of discounts of $3,286	6,053			1,032
Other liabilities, current portion	1,019			4,705
Total current liabilities	14,479			10,855

Long-term debt, net of current portion	2,928			3,015
Other long-term liabilities, net of current portion	366			814
Total liabilities	17,773			14,684

Commitments and Contingencies:

Minority interest	—			5

Shareholders’ Equity:

Common stock, $0.001 par value; 100,000,000 shares authorized and 41,609,652 issued and outstanding at June 30, 2004 and December 31, 2003	42			42
Paid in capital	132,124			128,581
Unamortized stock-based compensation	—			(128		)
Accumulated deficit	(115,443		)	(112,587		)
Accumulated comprehensive income	677			255
Total shareholders’ equity	17,400			16,163

Total liabilities and shareholders’ equity	$	35,173		$	30,852

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

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share data)

(unaudited)

	For the Three						For the Six
	Months Ended June 30,						Months Ended June 30,
	2004			2003			2004			2003
				(restated)						(restated)

Revenue	$	4,055		$	4,533		$	10,343		$	7,732
Cost of sales	2,475			4,146			6,032			6,806

Gross profit	1,580			387			4,311			926

Operating Expenses:
Selling, general, and administrative	2,544			4,571			5,609			8,633
Research and development	345			2,736			686			6,774
Total expenses	2,889			7,307			6,295			15,407

Loss from operations	(1,309		)	(6,920		)	(1,984		)	(14,481		)

Other income	694			—			1,280			—
Interest expense	(1,166		)	(114		)	(1,437		)	(175		)
Interest income	22			102			34			228
Gain on sale of marketable securities held-for-sale	—			1,178			—			1,178
Loss from operations before minority interest, income taxes, and discontinued operations	(1,759		)	(5,754		)	(2,107		)	(13,250		)

Income taxes	—			—			—			—
Minority interest in income of consolidated subsidiary	—			10			—			3

Loss from continuing operations	(1,759		)	(5,744		)	(2,107		)	(13,247		)

Loss from discontinued equipment manufacturing operations, net of tax of $8 for the three and six months ended June 30, 2003	(356		)	(317		)	(749		)	(310		)

Net loss	(2,115		)	(6,061		)	(2,856		)	(13,557		)

Other comprehensive loss
Foreign exchange translation gain	43			1,099			422			159
Net unrealized loss on marketable securities held-for-sale (including transfer of realized gain of $1,178)	—			(527		)	—			(1,668		)
Comprehensive loss	$	(2,072	)	$	(5,489	)	$	(2,434	)	$	(15,066	)

Net loss per common share – basic and diluted:
Loss per share – continuing operations	$	(0.04	)	$	(0.14	)	$	(0.05	)	$	(0.32	)
Loss per share – discontinued operations	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.01	)
Loss per share basic and diluted	$	(0.05	)	$	(0.15	)	$	(0.07	)	$	(0.33	)

Number of weighted average shares – basic and diluted	41,610			41,597			41,610			41,494

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

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Six months Ended June 30, 2004

(in thousands, except share data)

(unaudited)

							Unamortized
							Stock-
	Common	Common		Paid in			Based			Accumulated			Comprehensive
	Shares	Stock		Capital			Compensation			Deficit			Income		Total

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 of convertible debt	—	—		3,395			—			—			—		3,395
Foreign exchange translation gain	—	—		—			—			—			422		422
Net loss	—	—		—			—			(2,856		)	—		(2,856		)
Balance, June 30, 2004	41,609,652	$	42	$	132,124		$	—		$	(115,443	)	$	677	$	17,400

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

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share data)

(unaudited)

	For the Six Months
	Ended June 30,
	2004			2003
				Restated
Operating Activities:
Net loss	$	(2,856	)	$	(13,557	)
Adjustments to reconcile loss from continuing operations to net cash provided by (used for) operating activities:
Gain on sale of marketable securities held-for-sale	—			(1,178		)
Depreciation and amortization	1,823			2,274
Amortization of debt discount	1,069			—
Stock-based compensation	276			85
Bad debt expense	105			209
Warranty expense	137			188

Changes in operating assets and liabilities:
Accounts receivable	(521		)	261
Inventories	(2,235		)	(1,422		)
Prepaid expenses and other current assets	189			1,129
Other assets	(575		)	172
Accounts payable and accrued expenses	2,165			(4,199		)
Deferred revenue	(597		)	(130		)
Other liabilities	(4,388		)	291
Net cash used for continuing operations	(5,408		)	(16,295		)

Net cash provided by (used for) discontinued operations	822			(633		)
Net cash used for operating activities	(4,586		)	(16,928		)

Investing Activities:
Purchases of property and equipment	—			(2,023		)
Proceeds from sale of marketable securities held-for-sale	—			2,578
Investment in patents and trademarks	(102		)	(167		)
Net cash provided by (used for) investing activities	(102		)	388

Financing Activities:
Proceeds from borrowings	9,924			5,488
Repayment of borrowings	(1,841		)	—
Repayment of other liabilities	(58		)	(17		)
Stock warrants exercised	—			5
Stock options exercised	—			594
Net cash provided by financing activities	8,025			6,070

Effect of foreign exchange translation	(108		)	(638		)
Net increase (decrease) in cash and cash equivalents	3,229			(11,108		)

Cash and cash equivalents at beginning of period	3,127			25,058
Cash and cash equivalents at end of period	$	6,356		$	13,950

Supplemental cash flow information:
Interest paid	$	208		$	145
Taxes paid	$	—		$	126

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

		For the Three						For the Six
		Months Ended June 30,						Months Ended June 30,
		2004			2003			2004			2003
					Restated						Restated

Net loss as reported		$	(2,115	)	$	(6,061	)	$	(2,856	)	$	(13,557	)

Add:	stock-based employee compensation expense included in reported net loss, net of related tax effects	7			42			277			183

Deduct:	total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(1,100		)	(1,338		)	(2,809		)	(3,355		)

Proforma net loss:		$	(3,208	)	$	(7,357	)	$	(5,388	)	$	(16,729	)

Basic and diluted loss per share:
As reported		$	(0.05	)	$	(0.15	)	$	(0.07	)	$	(0.33	)
Proforma		(0.08		)	(0.18		)	(0.13		)	(0.40		)

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 three and six months ended June 30, 2004 and 2003, respectively: 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 2.9% to 3.9%.

2. Restatement

Growell Restatement

As a part of the accompanying condensed consolidated financial statements and the notes thereto, the Company has restated certain previously issued financial statements due to the fact that previously recognized revenues from equipment sales made to Growell Metal Co., Ltd., a South Korean metals processing company (“Growell”), in 2002 and 2003 should not have been recognized during the period. Revenues previously recognized were deferred until the first quarter of 2004.

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

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

Under terms of a January 10, 2004 settlement of the dispute 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

	For the Three Months Ended
Consolidated Statements of Operations Data:	6/30/03			6/30/03
	Previously Reported			Restated
	(In thousands, except per share data)

Revenue	$	6,409		$	6,409
Cost of sales	6,389			6,124
Gross profit	20			285
Operating expense:
Selling, general, and administrative	4,704			4,704
Research and development	2,809			2,809
Total operating expenses	7,513			7,513

Loss before interest, other income, income taxes, minority interest and discontinued operations	(7,493		)	(7,228		)
Interest income (expense), net	(13		)	(13		)
Gain on sale of marketable securities held-for-sale	1,178			1,178

Loss before income taxes, minority interest and discontinued operations	(6,328		)	(6,063		)

Income taxes	(8		)	(8		)

Minority interest in (loss) income of consolidated subsidiary	10			10

Loss from continuing operations	(6,326		)	(6,061		)

Net loss	$	(6,326	)	$	(6,061	)

Loss per share from continuing operations – basic and diluted	$	(0.15	)	$	(0.15	)

Weighted average common shares used to compute loss per share from continuing operations – basic and diluted	41,587			41,597

3. Basis of Presentation and Recent Accounting Pronouncements

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 Liquidmetal Korea have been translated based upon Korean Won as the functional currency. Liquidmetal Korea’s assets and liabilities were translated using the exchange rate at period end and income and expense items were

translated at the average exchange rate for the reporting period. 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 restatements of previously reported financial statements (see Note 2), 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.

New Accounting Pronouncements

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

4. Liquidity

The Company has experienced losses from continuing operations during the last two fiscal years and has an accumulated deficit of $115,443 as of June 30, 2004. Cash used for continuing operations for the six months ended June 30, 2004 was $5.4 million and cash flow from continuing operations may be negative throughout the fiscal year 2004. 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, 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.

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

We believe that our current cash and cash equivalents, which includes the private placement funding of $9.9 million infusion in March 2004 of which $4.5 million was redeemed as of August 2004 (see Note 7 and Note 13), together with anticipated cash flow from our operations, will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. Our projections of cash flows 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.

5. Discontinued Operations

Dongyang

On June 28, 2002, the Company acquired a 51% interest in Chusik Hoesa Dongyang Yudoro (“Dongyang”). During 2003, Dongyang experienced net 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 Dongyang to the minority shareholder. The loss from operations for the three months ended March 31, 2004 totaled $50 and was included in the loss from discontinued equipment manufacturing operations for that period. The net payable balance of $75 is to be paid in quarterly installments throughout 2004. The outstanding amount of payables to Dongyang is $51 as of June 30, 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.

As Donyang was sold prior to June 30, 2004, there are no assets and liabilities of Dongyang as of June 30, 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:

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

Taesung

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. As of March 31, 2004, management determined that no impairment was anticipated on the divestiture of its Taesung division. However, the sale resulted in a loss of approximately $184 when it was completed. The loss from operations for the three months and six months ended June 30, 2004 totaled $172 and $469 respectively and is included in the loss from discontinued equipment manufacturing operations for the respective periods.

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. Taesung is reported as part of the discontinued business operations as of March 31, 2004 as the Company’s plans for divesture of Taesung was determined during the three months ended March 31, 2004.

As Taesung was sold prior to June 30, 2004, there are no assets and liabilities of Taesung as of June 30, 2004. The following is a listing of the major classes of assets and 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:

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

6. Product Warranty

Due to the lack of historical information for warranty expense related to bulk alloy products, management estimates product warranties as a percentage of bulk alloy product sales earned during the period. During the three and six months ended June 30, 2004, the Company recorded $79 and $137 of warranty expense, respectively. The product warranty accrual balance is included in accounts payable and accrued expenses and the warranty expense is included in selling, general, and administrative expenses.

7. Long-term Debt

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 our 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.

The fair value of the 1.2 million warrants totals $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.

During June 2004, the Company redeemed $1,500 of the outstanding note balance in cash. The redemption resulted in write down of debt issuance costs and debt discount of $664 to interest expense as of June 30, 2004. Further, 0.5 million of unexercised warrants originally issued to certain Placement Agents in March 2004 expired in June 2004. The change in valuation on the 0.5 million warrants immediately prior to the expiration resulted in a reduction of the warrant liability of $279 to other income in June 2004. As of June 30, 2004, our gross outstanding loan balance totaled $8,424, un-amortized discounts for beneficial conversion feature and warrants totaled $3,286, contra liability debt issuance costs totaled $407 and

other asset debt issuance costs totaled $517. Interest expense for the amortization of debt issuance cost and discount on note was $271 and $335 for the three and six months ended June 30, 2004.

The Company was obligated, pursuant to a Registration Rights Agreement between the Company, the Placement Agents and the note holders dated March 1, 2004 to file a registration statement with the Securities and Exchange Commission to register the shares of Common Stock issuable upon conversion of the notes payable and the related warrants on or before the later of March 31, 2004 or, within 25 days following the issuance thereof, and to use our best efforts to cause such registration statement to become effective within 60 days following the SEC’s first written comments on the registration statement. Pursuant to EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the relative fair values of the warrants of $1,302 was originally recorded as other liability during March 2004 as the Company has not yet filed the registration statement. Further, the $8,424 balance of the note and un-amortized discounts for beneficial conversion feature and warrants of $3,286 is presented as short-term liability as of June 30, 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 Registration Rights Agreement. 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. During the period from March 3, 2004 to June 30, 2004, the change of the relative fair value of the warrants is $1,280, which is recorded as other income for the six months ended June 30, 2004. The fair value of warrants outstanding at June 30, 2004 of $22 was computed using the Black-Scholes model under the following assumptions: (1) expected life of 0.27 years; (2) volatility of 95%, (3) risk free interest of 0.97% and dividend rate of 0%. As of December 2004, the Company has not received any demands for payment from the note holders.

Kookmin Note

On February 4, 2003, the Company’s Korean subsidiary 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 paydown 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 will be required to make equal monthly installments of principal and interest to repay the remaining balance of the loan over a 36-month period.

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

8. Stock Compensation Plan

During the quarter ended June 30, 2004, under the Company’s 2002 Equity Incentive Plan which provides for the grant of stock options to officers, employees, consultants and directors, the Company granted options to purchase 54,000 common shares of the Company for an exercise price of $1.93 which equaled the fair market value on the date of grant

During the quarter ended June 30, 2004, under the Company’s 2002 Non-employee Director Stock Option Plan which provides for the grant of stock options to non-employee directors, the Company granted options to purchase 50,000 common shares of the Company for an average exercise price of $1.18. All options granted under this plan had exercise prices that were equal to the fair market value on the date of grant.

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

9. 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. Primarily, the expenses incurred by the bulk Liquidmetal alloy segment are research and development costs and selling expenses associated with identifying and developing market opportunities. Bulk Liquidmetal alloys 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 4 to the consolidated financial statements included in the Company’s Form 10-K filed with the Securities and Exchange Commission on November 10, 2004.

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

	Coatings		Bulk Alloy Products			Segment Totals
Three months ended June 30, 2004:
Revenue from external customers	$	706	$	3,349		$	4,055
Gross profit	327		1,253			1,580
Income before minority interest, interest expense and discontinued operations	192		619			811
Total identifiable assets at end of period	821		24,702			25,523

Three months ended June 30, 2003 (Restated):
Revenue from external customers	$	707	$	3,826		$	4,533
Gross profit	337		50			387
Income (loss) before minority interest, interest expense and discontinued operations	144		(4,075		)	(3,931		)
Total identifiable assets at end of period	912		29,664			30,576

Six months ended June 30, 2004 (Restated):
Revenue from external customers	$	1,722	$	8,621		$	10,343
Gross profit	795		3,516			4,311
Income before minority interest, interest expense and discontinued operations	540		2,100			2,640
Total identifiable assets at end of period	821		24,702			25,523

Six months ended June 30, 2003:
Revenue from external customers	$	1,480	$	6,252		$	7,732
Gross profit	716		210			926
Income (loss) before minority interest, interest expense and discontinued operations	18		(8,285		)	(8,267		)
Total identifiable assets at end of period	912		29,664			30,576

Reconciling information between reportable segments and the Company’s net loss is shown in the following table:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2004			2003			2004			2003

Total operating income (loss) before minority interest, interest expense and discontinued operations	$	811		$	(3,931	)	$	2,640		$	(8,267	)
General and administrative expenses not allocated to segments	(2,120		)	(2,989		)	(4,624		)	(6,214		)
Loss before interest, other income, income taxes, minority interest and discontinued operations	(1,309		)	(6,920		)	(1,984		)	(14,481		)
Other income	694			—			1,280			—
Interest expense	(1,166		)	(114		)	(1,437		)	(175		)
Interest income	22			102			34			228
Gain on sale of marketable securities held-for-sale	—			1,178			—			1,178
Income taxes	—			—			—			—
Minority interest in income of consolidated subsidiary	—			10			—			3
Loss from discontinued operations, net	(356		)	(317		)	(749		)	(310		)
NET LOSS	$	(2,115	)	$	(6,061	)	$	(2,856	)	$	(13,557	)

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.

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

During the three months ended June 30, 2004, the Company had revenue from sales to companies outside of the United States of $2,799 of which $2,006 represented sales to companies located in South Korea. Of the sales in South Korea, $72 was from our discontinued equipment manufacturing business. During the three months ended June 30, 2003, the Company had revenues from companies outside of the United States of $2,426 of which $1,763 represented sales to companies located in South Korea. Of the $2,426 sales, $1,876 was from our discontinued equipment manufacturing business. The revenue related to sales to companies outside of the United States was from bulk alloy products including equipment sales.

Long-lived assets include net property, plant, and equipment, net intangible assets and goodwill. The Company had long-lived assets of $2,290 and $2,547 located in the United States at June 30, 2004 and December 31, 2003, respectively. The Company had long-lived assets of $15,383 and $16,395 located in South Korea at June 30, 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.

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

	June 30, 2004

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

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

10. Income (Loss) Per Common Share

Basic earnings per share (“EPS”) is computed by dividing earnings (loss) attributable to 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. Common stock equivalents consist of 8,308,922 and 6,945,446 equity instruments at June 30, 2004 and 2003, respectively, and have not been included in the EPS calculation at June 30, 2004 and 2003 as the amounts are anti-dilutive.

11. Commitments

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

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. (See Note 13)

12. 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 subsequently 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 $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 six months ended June 30, 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 six months ended June 30, 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 and for the six months ended June 30, 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 $13 during the quarter ended June 30, 2004 and $25 for the six-month period ended June 30, 2004.

13. Subsequent Events

On August 20, 2004, the 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”). In addition, the Company redeemed approximately $4.5 million of the March Notes, in cash, since March 2004, of which approximately $3.5 million was redeemed during the quarter ended September 30, 2004. The Short-Term Notes have a maturity date of July 29, 2005, and a conversion price of $2.00 per share (compared to a conversion 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. Holders of the Long-Term Notes will 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. In addition, holders of both the Long-Term Notes and Short-Term Notes will have the right to call for repayment of the notes if the Company does not, within 180 days of the issuance of the notes, become compliant with its SEC reporting obligations and become listed or quoted on the OTC Bulletin Board, the Nasdaq Stock Market, or a national securities exchange. A total of 562,151 warrants to purchase our common stock at an exercise price of $3.00 per share—all of which were previously issued in connection with the purchase of the Prior Notes—have been amended to provide for an extended expiration date of March 1, 2006

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. The actions were originally brought on behalf of those who purchased Liquidmetal Technologies’ common stock between May 22, 2002, and March 30, 2004, inclusive. The complaints contain varying allegations, but generally allege that the defendants engaged in improper revenue recognition with respect to the Company’s transactions with Growell Metal Co., Ltd. and that the defendants issued false and misleading statements concerning the Company’s business and operations, including unrealistic but favorable information about market demand for Liquidmetal products, with the result of artificially inflating the Company’s share price. The complaints seek unspecified compensatory damages and other relief. 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 Consolidated Amended Class Action Complaint in the Primavera Investors action is due on or before Monday, January 10, 2004. Liquidmetal Technologies and the other defendants will have 45 days from the service date to move to dismiss or otherwise respond to the Consolidated Amended Class Action Complaint. 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 the federal shareholder class action lawsuits. 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. The Demurrer is set for hearing on February 10, 2005. The Plaintiff in the Florida derivative action filed a First Amended Shareholder Derivative Complaint on November 22, 2004. The Company’s response to the amended Florida derivative complaint was due on December 17, 2004. The Company joined other defendants in moving to dismiss the amended Florida derivative complaint. The Company is awaiting a ruling on that 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.

Two separate lawsuits were filed in July and September 2004 by two former employees of our Pyongtaek manufacturing facility in South Korea. The suits are based on a claim of wrongful termination and breach of employment contract. In November 2004, the Company entered into a settlement agreement with the employees whereby the Company would pay $243 to the employees in exchange for all claims being dismissed. The payable amount is included in our September 30, 2004 financial statement.

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 the year 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 in 24 equal monthly installments beginning in January 2005. 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.

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

For the Six Months Ended June 30, 2004 and 2003

(in thousands, except share data)

(unaudited)

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

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

This management’s discussion and analysis, as well as other sections of this report on Form 10-Q, 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and other risks and uncertainties discussed in filings made with 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 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 5 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.

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.

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 5). 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 manfuacturing business were segregated in our accompanying Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Loss, and Consolidated Statements of Cash Flows.

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 2003 financial statements for equipment sales made to Growell Metal Co., Ltd. (“Growell”) as disclosed in Note 2 in the notes to condensed consolidated financial statements section of this document.

Critical Accounting Policies and Estimates

The preparation of condensed 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 condensed 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:

• Exchange rate fluctuations

• Warranty accrual

• Allowance for doubtful accounts

• Inventories at lower of cost or net realizable value

• Deferred tax assets

• Goodwill impairment

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

Results of Operations

Comparison of the three months ended June 30, 2004 and 2003

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

Cost of Sales. Cost of sales decreased to $2.5 million, or 61% of revenue, for the three months ended June 30, 2004 from $4.1 million, or 91% of revenue, for the three months ended June 30, 2003. This decrease was a result of improved manufacturing processes and increases in sales of higher margin products. Cost of sales as a percentage of revenue has decreased from improved manufacturing processes and decreases in research and development activities charged to cost of sales as well as the fact that there was no impairment of inventory during 2004. We believe that anticipated higher manufacturing volumes and an expected greater mix of higher-margin products in the future will cause the gross profit to continue to improve over time. The cost to manufacture parts from our bulk Liquidmetal alloys is variable and differs based on the unique design of each product. However, the cost of sales for the products sold by the coatings business segment is generally consistent 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 $2.5 million, or 63% of revenue, for the three months ended June 30, 2004 from $4.6 million, or 101% of revenue, for the three months ended June 30, 2003. This decrease of $2.0 million was primarily a result of decrease in wages and related expense by $1.4 million, decrease in travel expenses by $0.2 million, and decrease in property rent by $0.3 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 $0.3 million, or 9% of revenue, for the three months ended June 30, 2004 from $2.7 million, or 60% of revenue, for the three months ended June 30, 2003. This decrease was a result of the Company’s 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 of 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. The decrease of $2.4 million was due to decreases in salaries, wages and the related by $0.6 million, decrease in professional fees, consultant fees, and contract services by $0.2 million, decrease in laboratory and prototyping expenses by $1.4 million, decrease in depreciation expense by $0.1 million, and a decrease in travel expenses by $0.1 million.

Other Income. Other income was $0.7 million, or 17% of revenue, during the three months ended June 30, 2004 due to change in valuation of warrant payable issued related to the senior convertible debt funded in March 2004. There was no other income recorded during the three months ended June 30, 2003.

Interest Expense. Interest expense was $1.2 million, or 29% of revenue, for the three months ended June 30, 2004 and was $0.1 million, or 3% of revenue, for the three months ended June 30, 2003. During the three months ended June 30, 2004, the interest expense was primarily due to the interest accrued on the Kookmin Bank loan funded on February 4, 2003 and accrued interest, amortization of debt issuance costs and debt discount on senior convertible debt funded on March 3, 2004. During the three months ended June 30, 2003, the interest expense was primarily due to the interest accrued on the Kookmin Bank loan.

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

Comparison of the six months ended June 30, 2004 and 2003

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

Cost of Sales. Cost of sales decreased to $6.0 million, or 58% of revenue, for the six months ended June 30, 2004 from $6.8 million, or 88% of revenue, for the six months ended June 30, 2003. This decrease was a result of improved manufacturing processes and increases in sales of higher margin products. Cost of sales as a percentage of revenue has decreased from improved manufacturing processes and decreases in research and development activities charged to cost of sales. We believe that anticipated higher manufacturing volumes and an expected greater mix of higher-margin products in the future will cause the gross profit to continue to improve over time. The cost to manufacture parts from our bulk Liquidmetal alloys is variable and differs based on the unique design of each product. However, the cost of sales for the products sold by the coatings business segment is generally consistent 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 $5.6 million, or 54% of revenue, for the six months ended June 30, 2004 from $8.6 million, or 112% of revenue, for the six months ended June 30, 2003. This decrease of $3.0 million was primarily a result of decrease in wages and related expense by $2.3 million, decrease in travel expenses by $0.5 million, and decrease in property rent by $0.5 million offset by an increase in bad debt expense by $0.3 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 $0.7 million, or 7% of revenue, for the six months ended June 30, 2004 from $6.8 million, or 88% of revenue, for the six months ended June 30, 2003. This decrease was a result of the Company’s 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 of 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. The decrease of $6.1 million was due to decreases in salaries, wages and the related by $2.4 million, decrease in professional fees, consultant fees, and contract services by $0.6 million, decrease in research grants to institutions by $0.3 million, decrease in laboratory and prototyping expenses by $2.0 million, decrease in depreciation expense by $0.5 million, and a decrease in travel expenses by $0.1 million

Other Income. Other income was $1.3 million, or 12% of revenue, during the six months ended June 30, 2004 due to change in valuation of warrant payable issued related to the senior convertible debt funded in March 2004. There was no other income recorded during the six months ended June 30, 2003.

Interest Expense. Interest expense was $1.4 million, or 14% of revenue, for the six months ended June 30, 2004 and was $0.2 million, or 2% of revenue, for the six months ended June 30, 2003. During the six months ended June 30, 2004, the interest expense was primarily due to the interest accrued on the Kookmin Bank loan funded on February 4, 2003 and accrued interest, amortization of debt issuance costs and debt discount on senior convertible debt funded on March 3, 2004. During the six months ended June 30, 2003, the interest expense was primarily due to the interest accrued on the Kookmin Bank loan.

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

Liquidity and Capital Resources

Our cash used for operating activities was $4.6 million for the six months ended June 30, 2004, which includes cash provided by our discontinued equipment manufacturing business of $0.8 million, and $16.9 million for the six months ended June 30, 2003, which includes cash used for our discontinued retail golf and equipment manufacturing businesses of $0.6 million. Our working capital increased from $1.0 million at December 31, 2003 to $2.2 million at June 30, 2004. The Company’s working capital increase of $1.2 million was primarily attributable to increase in cash of $3.2 million, increase in accounts receivable of $0.4 million, increase in inventory of $2.2 million, decrease in deferred revenue of $0.6 million, decrease in other current liabilities of $3.7 million offset by a decrease in prepaid and other current assets of $0.2 million, decrease in assets held for sale from our discontinued equipment manufacturing business of $0.8 million, increase in accounts payable of $2.9 million, and increase in current portion of long-term debt of $5.0 million.

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

Our cash provided by financing activities was $8.0 million for the six months ended June 30, 2004, which consists of $9.9 million in proceeds from borrowings from our senior convertible debt offset by $1.8 million on repayment of borrowings and $0.1 million in repayment of other liabilities.

The Company has experienced losses from continuing operations during the last three fiscal years and has an accumulated deficit of $115,443 as of June 30, 2004. Cash used for continuing operations for the six months ended June 30, 2004 was $5.4 million and cash flow from continuing operations may be negative throughout the fiscal year 2004. Such conditions raise substantial doubt about the ability of the Company continuing 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, 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.

Our capital requirements during the next 12 months will depend on numerous factors, including the success of our existing products, the development of new applications for Liquidmetal alloys, and the resources we devote to develop and support our Liquidmetal alloy products. However, we anticipate our capital expenditures will be less than $0.5 million in the next 12 months. We expect 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.

We believe that our current cash and cash equivalents together with anticipated cash flow from our operations, will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. Our projections of cash flows 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 working capital or 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.

Contractual Obligations

The following table summarizes the Company’s obligations and commitments as of June 30, 2004:

	Payments Due by Period (in thousands)
Contractual Cash Obligations	Total		Less Than 1 Year		2-3 Years		4-5 Years		After 5 Years

Long-term debt	$	12,267	$	9,339	$	2,928	$	—	$	—
Capital lease obligation	256		118		138		—		—
Operating leases and rents	2,081		878		1,203		22		149
Purchase obligations	2,500		—		2,500		—		—
	$	17,104	$	10,335	$	6,769	$	22	$	149

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various markets 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. Some of the proceeds of our initial public offering are invested in short-term, interest-bearing, investment grade securities. The value of these securities will be subject to interest rate risk and could fall in value if interest rates rise.

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 increase.

Foreign Exchange Rates. As a result of our operation of a manufacturing facility in South Korea, a substantial portion of our costs will be denominated in the 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.

Item 4 – Controls and Procedures

Within the 90 days prior to the date of this quarterly 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 of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 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 are effective in timely alerting them to material information relating to the Company, including its consolidated

PART II

OTHER INFORMATION

Item 2 – Change in Securities and Use of Proceeds

Pursuant to the our Registration Statement on Form S-1, as amended, initially filed with the Securities and Exchange Commission on November 20, 2001 and declared effective May 21, 2002 (Registration No. 333-73716), 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 overallotment 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 supplies 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.

Item 6 – Exhibits and Reports on Form 8-K.

(a) Exhibits

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

Exhibit Number		Description of Document

31.1		Certification of President & Chief Executive Officer, John Kang, as required by Section 3.02 of Sarbane-Oxley Act of 2002

31.2		Certification of Vice President of Finance, Tony Chung, as required by Section 3.02 of Sarbane-Oxley Act of 2002

32.2		Certification of President & Chief Executive Officer, John Kang, as required by Section 9.06 of Sarbane-Oxley Act of 2002

32.2		Certification of Vice President of Finance, Tony Chung, as required by Section 9.06 of Sarbane-Oxley Act of 2002

(b) Reports on Form 8-K

•Filed January 15, 2004

•Filed January 16, 2004

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

PART I

Item 1 – Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Condensed Consolidated Statements of Shareholders’ Equity (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Item 4 – Controls and Procedures

PART II – Other Information

Item 2 – Changes in Securities and Use of Proceeds

Item 6 – Exhibits and Reports on Form 8-K

Signatures

Certifications

	LIQUIDMETAL TECHNOLOGIES
	(Registrant)

Date: December 20, 2004	/s/ John Kang
	John Kang
	President & Chief Executive Officer
	(Principal Executive Officer)


Date: December 20, 2004	/s/ Tony Chung
	Tony Chung
	Vice President of Finance
	(Principal Financial Officer)

FORM 10-Q

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

TABLE OF CONTENTS

Item 1 – Financial Statements

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Item 4 – Controls and Procedures

PART II – Other Information

Item 2 – Changes in Securities and Use of Proceeds

Item 6 – Exhibits and Reports on Form 8-K

Signatures

Certifications

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

For the Six months Ended June 30, 2004

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS