**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

### **FORM10-Q**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly periodended June 30, 2004**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom                to                 **

 

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

 

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**LIQUIDMETALTECHNOLOGIES, INC.**

(Exact name of Registrant as specified in its charter)

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

 

**25800 Commercentre Drive, Suite 100**

**LakeForest, California 92630**

(address of principal executive office, zip code)

 

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

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 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 suchreports), and (2) has been subject to such filing requirements for at least thepast 90 days.

 

Yes o No ý  

 

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

 

Yes ýNo o

 

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

 

 

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**FORM 10-QFOR THE QUARTER ENDED****JUNE 30,2004****FORWARD-LOOKINGINFORMATION**

 

Statements in this report concerning the futuresales, expenses, profitability, financial resources, product mix, marketdemand, product development and other statements in this report concerning thefuture results of operations, financial condition and business of LiquidmetalTechnologies, Inc. are “forward-looking” statements as defined in theSecurities Act of 1933 and Securities Exchange Act of 1934. Investors arecautioned that the Company’s actual results in the future may differ materiallyfrom those projected in the forward-looking statements due to risks anduncertainties that exist in the Company’s operations and business environment,including competition, need for increased acceptance of products, ability tocontinue to develop and extend our brand identity, ability to anticipate andadapt to a competitive market, ability to effectively manage rapidly expandingoperations, amount and timing of operating costs and capital expendituresrelating to expansion of our business, operations and infrastructure, abilityto provide superior customer service, dependence upon key personnel and thelike. The Company’s most recent filings with the Securities and ExchangeCommission, including Form 10-K, contain additional information concerning manyof these risk factors, and copies of these filings are available from theCompany upon request and without charge.

 

2

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#### **TABLE OF CONTENTS**

#### ** **

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

 

 

**ExplanatoryNote**

 

We have restated our financial statements for the quarter ended June 30,2003 and related disclosures in this report to correct our prematurerecognition of revenues from one transaction with a single customer that weoriginally recorded in March 2003. We have also restated our financial statements for the fiscal year endedDecember 31, 2002 and related disclosures in our annual report on Form10-K to correct two similar premature revenue recognition events with the samecustomer that were originally recorded in September and December 2002.  Upon analysis of the transaction terms andcertain related agreements undertaken by the Company to resolve a dispute withthe customer, we concluded that the transactions were contingent upon continuedperformance by a subsidiary of the Company, which would have precluded revenuerecognition until the contingency ended. Under the terms of a SettlementAgreement reached with the customer on January 10, 2004, the Companyreacquired the equipment associated with the two fiscal 2002 transactions andrecognized the revenue associated with the March 2003 transaction in January 2004.  The restatement of our December 31, 2002financial statements resulted in a $1.9 million reduction of revenue and a $1.0million increase in net loss.  Therestatement of our 2003 financial statements resulted in a $0.3 millionreduction of cost of sales and an increase in inventory held during the quarterended June 30, 2003 period covered by this report.

 

3

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**Item 1 –Financial Statements**

 

**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands, 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 accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

4

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

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

**(Inthousands, 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 accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

5

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

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

**(inthousands, 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 accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

6

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

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

**(inthousands, 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 accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

7

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

 

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

 

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

 

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

 

During the six monthsended June 30, 2003, an option holder surrendered 93,758 shares of theCompany’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 commonshares received in lieu of cash payment upon receipt of the shares.

 

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

 

8

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

**(inthousands, except share data)**

**(unaudited)**

 

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

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America (“generally accepted accounting principles”)for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of theinformation and notes required by generally accepted accounting principles forcomplete financial statements.  In theopinion of management, all adjustments (consisting only of normal recurringaccruals) considered necessary for a fair presentation have been included.  In addition, certain reclassifications havebeen made for consistent presentation. Operating results for the six months ended June 30, 2004 are notnecessarily indicative of the results that may be expected for any futureperiods or the year ending December 31, 2004.  The accompanying unaudited condensedconsolidated financial statements should be read in conjunction with theCompany’s Form 10-K filed with the Securities and Exchange Commission on November 10,2004.

 

LiquidmetalTechnologies, Inc. (“Liquidmetal Technologies”) and its subsidiaries(collectively “the Company”) are in the business of developing, manufacturing,and marketing products made from amorphous alloys. Liquidmetal Technologiesmarkets and sells Liquidmetal® alloy industrial coatings and also manufactures,markets and sells products and components from bulk Liquidmetal alloys that canbe incorporated into the finished goods of its customers across a variety ofindustries.  The Company also partnerswith third-party licensees and distributors to develop and commercializeLiquidmetal alloy products.

 

The Company classifies operations into two reportable segments:Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys. Liquidmetalalloy industrial coatings are used primarily as a protective coating forindustrial machinery and equipment, such as drill pipe used by the oil drillingindustry and boiler tubes used by coal-burning power plants. Bulk Liquidmetalalloys include potential market opportunities to manufacture and sell productsand components for electronic devices, medical devices, defense applications,and sporting goods.  In addition, thebulk Liquidmetal alloys segment includes tooling and prototype sampling, andthe manufacture and sale of die casting equipment (see Note 5 for disclosureregarding the disposal of this segment). In addition, such alloys are used togenerate research and development services revenue for developing uses relatedprimarily to defense and medical applications as well as potential licensefees, royalties, and other compensation from strategic partnering transactions.

 

Stock-based compensation

 

TheCompany applies Accounting Principles Board (“APB”) Opinion No. 25 foroptions when the exercise price of options granted to employees is less thenthe fair value of the underlying stock on the date of grant.  The Company applies Statement of FinancialAccounting Standards (“SFAS”) No. 123 for options granted to non-employeeswho perform services for the Company.

 

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

 

9

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

 

**2.****                                     ****Restatement**

 

*Growell Restatement*

 

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

 

The die casting equipment was the subject of a previously reported disputebetween the Company’s South Korean subsidiary, Liquidmetal Korea Co., Ltd. (“LiquidmetalKorea”), and Growell, which was a former supplier of alloy ingots toLiquidmetal Korea’s Pyongtaek, South Korea manufacturing plant and also a diecasting licensee of the Company. The restatement of revenues from the equipmentsales is a result of an analysis initiated by the Company based upon thesettlement of this dispute in January 2004 and a determination that theoriginal revenue recognition decision did not include consideration of allagreements relating to the subject matter of the transactions.  The Company concluded that the equipmentsales were contingent upon Liquidmetal Korea’s continued performance under itsagreements with Growell, and consequently revenue recognition is deferred untilthe 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, whichare included in inventories.  The effectof the restatement during the three ended June 30, 2003 is to reduce costof sales and to increase inventory held by $265.  The effect of the restatement during the sixmonths ended June 30, 2004 is a decrease in revenues by $2,953 and anincrease in net loss by $1,423.

 

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

 

10

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Liquidmetal Korea, and supporting equipment purchased from othersuppliers.  Also as part of thesettlement, Growell satisfied in full a balance of $2,058 owed to LiquidmetalKorea for the die casting machines Growell purchased from Liquidmetal Korea inthe first quarter of 2003 as part of a license agreement to manufactureLiquidmetal alloy parts for the South Korean automotive industry.  The remaining settlement payable of $2,837and trade accounts payable of $14 will be paid to Growell (in cash or stock atthe Company’s discretion) by December 31, 2004, and is included inaccounts payable and accrued liabilities in the June 30, 2004 CondensedConsolidated Balance Sheet.  The Companyrecorded a loss on the settlement at December 31, 2003 of $2,765 which isincluded in “Cost of Sales” in the December 31, 2003 ConsolidatedStatements of Operations and Comprehensive Loss.  The loss on settlement reflects thewrite-down of the assets received in the settlement to their fair marketvalue.  The loss is accrued for in the “Accountspayable and accrued expenses” section in the December 31, 2003,Consolidated Balance Sheet. The sale of the die casting machines to Growell isrecorded as revenue in the first quarter of 2004.  Under the settlement agreement between theparties, the Company and Growell granted to the other party (and the otherparty’s affiliates) a release of all known and unknown claims of any naturearising between the parties through the date of settlement, as well as arelease against future claims under agreements between the parties that wereterminated as a part of the settlement. The settlement agreement provided that all agreements of any naturebetween the parties and their respective affiliates were terminated as of thedate of settlement, with the exception of certain confidentiality agreements, aLiquidmetal coatings distribution agreement, and future rights under the diecasting agreement pursuant to which Growell purchased the die casting machinesand obtained a license to make auto parts from Liquidmetal alloys.  The settlement agreement also includes,as an accommodation to Growell, if theCompany becomes aware of any prospective customer that desires to purchase aproprietary Company casting machine at a time when Growell desires to sell anyof its Liquidmetal die casting machines, then the Company will not sell suchdie casting machine to the prospective customer unless the Company firstdirects the prospective customer to Growell and encourages the prospectivecustomer to purchase the machine from Growell.

 

The results of discontinued operations of the Company’s equipmentmanufacturing business (see note 5) for the three months ended June 30,2003 has been combined with continuing operations for comparativepurposes.  A summary of the significanteffects of the restatement is as follows:

 

11

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

 

**3.****                                     ****Basis of Presentationand Recent Accounting Pronouncements**

 

Translation of ForeignCurrency

 

Upon consolidation of theCompany’s foreign subsidiaries into the Company’s consolidated financialstatements, any balances with the subsidiaries denominated in the foreigncurrency are translated at the exchange rate at year end. The financialstatements of Liquidmetal Korea have been translated based upon Korean Won asthe functional currency. Liquidmetal Korea’s assets and liabilities weretranslated using the exchange rate at period end and income and expense itemswere

 

12

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translated at the averageexchange rate for the reporting period. The resulting translation adjustmentwas included in other comprehensive income (loss).

 

The Company applies **FASB No.52, Foreign Currency Translation**, for translating foreigncurrency into US dollars in our consolidation of the financialstatements.  Due to our restatements of previously reported financialstatements (see Note 2), certain footnote disclosures and previously reportedfinancial statements were adjusted to conform to retroactive applications ofFASB No. 52.  These adjustments did not have a material impact in thefinancial statements.

 

NewAccounting Pronouncements

 

In October 2004,the Emerging Issues Task Force of the Financial Accounting Standards Boardissued its consensus opinion on EITF Issue No. 04-8, The Effect ofContingently Convertible Debt on Diluted Earnings Per Share (EITFNo. 04-8). The Task Force reached a consensus that contingentlyconvertible debt instruments with embedded conversion features that arecontingent upon market price triggers should be included in diluted earningsper share computations, if dilutive, regardless of whether the contingency hasbeen met. The Company currently does not have any contingently convertible debtunder the scope of EITF Issue No. 04-8.

 

**4.****                                     ****Liquidity**

 

TheCompany has experienced losses from continuing operations during the last twofiscal years and has an accumulated deficit of $115,443 as of June 30,2004.  Cash used for continuingoperations for the six months ended June 30, 2004 was $5.4 million andcash flow from continuing operations may be negative throughout the fiscal year2004.  Such conditions raise substantialdoubt that the Company will be able to continue as a going concern for areasonable period of time.  Theseoperating results occurred while the Company was developing and attempting tocommercialize and manufacture products from an entirely new and unique technology.  This business plan required significantspending related to start-up costs and capital expenditures.  These factors have placed a significantstrain on the financial resources of the Company.  The ultimate success of the Company dependson its ability to continue reducing operating costs, generate higher revenue,achieve positive cash flow from continuing operations and profitability.  The consolidated financial statements do notinclude any adjustments that might result from the outcome of the uncertainty.

 

Our capital requirementsduring the next 12 months will depend on numerous factors, including thesuccess of our existing products, the development of new applications forLiquidmetal alloys, and the resources we devote to develop and support ourLiquidmetal alloy products.  However, weanticipate our capital expenditures in the next 12 months will be less than$0.5 million.  We expect to continue todevote limited capital to our research and development activities, to furtherdevelop and strengthen our manufacturing capabilities, and for working capitaland other general corporate purposes.

 

We believe that ourcurrent cash and cash equivalents, which includes the private placement fundingof $9.9 million infusion in March 2004 of which $4.5 million was redeemedas of August 2004 (see Note 7 and Note 13), together with anticipated cashflow from our operations, will be sufficient to fund our working capital andcapital expenditure requirements for at least the next 12 months.  Our projections of cash flows from operationsand, consequently, future cash needs are subject to uncertainty.  If our available funds and cash generatedfrom operations are insufficient to satisfy our liquidity requirements, we mayneed to raise additional capital to fund our operations and capital expenditurerequirements.  We cannot be certain thatadditional capital, whether through selling additional debt or equitysecurities or obtaining a line of credit or other loan, will be available to usor, if available, will be on terms acceptable to us.  If we issue additional securities to raisefunds, these securities may have rights, preferences, or privileges senior tothose of the rights of our common stock and our stockholders may experienceadditional dilution.

 

13

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**5.****                                     ****Discontinued Operations**

 

*Dongyang*

 

On June 28, 2002, the Company acquired a 51%interest in Chusik Hoesa Dongyang Yudoro (“Dongyang”).  During 2003, Dongyang experienced net lossesas a result of a continuing economic downturn in markets for its machineryproducts. These events, along with Dongyang’s operating loss, cash flow lossesand uncertainty surrounding its future cash flows, led the Company to evaluateits investment for recoverability as of December 31, 2003.  As a result, the Company determined that thecarrying value of its investment in Dongyang exceeded its fair value as of December 31,2003 in the amount of $184.  Thisimpairment 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% minorityshareholder.  The selling price of theCompany’s 51% interest in Dongyang was $80, which was equal to the Company’snet carrying value for the 51% ownership held. Further, the Company agreed to pay Dongyang $155 for the purchase of areceivable balance from Growell.  Thetransaction resulted in net payable to Dongyang of $75 and a loss of $46 fromtransfer of the Company’s interest in Dongyang to the minority shareholder.  The loss from operations for the three monthsended March 31, 2004 totaled $50 and was included in the loss fromdiscontinued equipment manufacturing operations for that period.  The net payable balance of $75 is to be paidin 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.

 

TheCompany has adopted SFAS 144 and as a result the 2003 balances have beenrestated in order to conform with the presentation of 2004 financialstatements.  Dongyang is reported as partof the assets available for sale on the balance sheet.

 

AsDonyang was sold prior to June 30, 2004, there are no assets andliabilities of Dongyang as of June 30, 2004.  The following is a listing of the majorclasses of assets and liabilities of Dongyang as of December 31, 2003.

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

 

14

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Summarizedoperating 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 anAsset Purchase Agreement whereby all the assets and liabilities of its Taesungequipment manufacturing division in Korea were sold to a third party for $345which is payable by the third party in four equal installments with the lastinstallment being due on June 30, 2005. As of March 31, 2004, management determined that no impairment wasanticipated on the divestiture of its Taesung division.  However, the sale resulted in a loss ofapproximately $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 fromdiscontinued equipment manufacturing operations for the respective periods.

 

TheCompany has adopted SFAS 144 and as a result the 2003 balances have beenrestated in order to conform with the presentation of 2004 financialstatements.  Taesung is reported as partof the discontinued business operations as of March 31, 2004 as theCompany’s plans for divesture of Taesung was determined during the three monthsended March 31, 2004.

 

AsTaesung was sold prior to June 30, 2004, there are no assets andliabilities of Taesung as of June 30, 2004.  The following is a listing of the majorclasses 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        |   |

 

15

----

 

 

Summarizedoperating 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 ofhistorical information for warranty expense related to bulk alloy products,management estimates product warranties as a percentage of bulk alloy productsales earned during the period.  Duringthe three 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 andaccrued expenses and the warranty expense is included in selling, general, andadministrative expenses.

 

**7.****             Long-termDebt**

 

Senior ConvertibleNote

 

On March 3,2004, the Company issued $9.9 million of 6.0% senior convertible notes due 2007(the “March Notes”) to investor groups in a transaction led by MichiganVenture Capital Co., Ltd, a South Korea-based institutional investment firm,and IndiGo Ventures LLC, a New York-based investment firm (the “PlacementAgents”) that served as a financial advisor to the Company for thetransaction.  The notes werecollateralized by the patents held by the Company and second priority mortgageinterest in plant facilities and certain equipment in South Korea.  The notes were convertible at any time intoour common stock at a price of $3.00 per share. Investors in the private placement and the Placement Agents receivedwarrants to purchase an aggregate amount of up to approximately 1.2 millionshares of common stock, exercisable at $3.00 per share for varying periods butno later than 100 days following the effectiveness of a registration statementcovering the resale of shares issuable upon exercise of the warrants.  In addition, the investors had the right tocall for repayment of the notes prior to maturity at any time after the secondanniversary of the closing of the transaction.

 

Thefair value of the 1.2 million warrants totals $1,883 and was computed using theBlack-Scholes pricing model under the following assumptions: (1) expected lifeof 3 years; (2) volatility of 82%, (3) risk free interest of 0.95% and dividendrate of 0%.  In addition, since this debtis convertible into equity at the option of the note holder at beneficialconversion rates, an embedded beneficial conversion feature was recorded as adebt discount and will be amortized using the effective interest rate methodover 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 beneficialconversion feature of $3,395 and the relative fair value of the 0.6 millionwarrants issued to investors of $584 were recorded as discounts of theconvertible note.  In addition, $718relating to the fair value of the 0.6 million warrants issued to the PlacementAgents and $581 direct costs incurred relating to issuance of the convertiblenote were recorded as debt issuance cost as a contra liability account inwarrant liability and other assets, respectively.

 

DuringJune 2004, the Company redeemed $1,500 of the outstanding note balance incash.  The redemption resulted in writedown of debt issuance costs and debt discount of $664 to interest expense as ofJune 30, 2004.  Further, 0.5 millionof unexercised warrants originally issued to certain Placement Agents in March 2004expired in June 2004. The change in valuation on the 0.5 million warrantsimmediately prior to the expiration resulted in a reduction of the warrantliability of $279 to other income in June 2004.  As of June 30, 2004, our grossoutstanding loan balance totaled $8,424, un-amortized discounts for beneficialconversion feature and warrants totaled $3,286, contra liability debt issuancecosts totaled $407 and

 

16

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

 

TheCompany was obligated, pursuant to a Registration Rights Agreement between theCompany, the Placement Agents and the note holders dated March 1, 2004 tofile a registration statement with the Securities and Exchange Commission toregister the shares of Common Stock issuable upon conversion of the notespayable and the related warrants on or before the later of  March 31, 2004 or, within 25 daysfollowing the issuance thereof, and to use our best efforts to cause suchregistration statement to become effective within 60 days following the SEC’sfirst written comments on the registration statement.  Pursuant to EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the relative fair values of the warrants of $1,302 wasoriginally recorded as other liability during March 2004 as the Companyhas not yet filed the registration statement. Further, the $8,424 balance of the note and un-amortized discounts forbeneficial conversion feature and warrants of $3,286 is presented as short-termliability as of June 30, 2004 as the note holders have the right to callfor payment on demand as the registration statement has not been filed inaccordance with the Registration Rights Agreement.  In addition, the Company is required toreport a value of the warrant as a fair value and record the fluctuation to thefair value of the warrant liability to current operations. During the periodfrom March 3, 2004 to June 30, 2004, the change of the relative fairvalue of the warrants is $1,280, which is recorded as other income for the sixmonths ended June 30, 2004.  Thefair value of warrants outstanding at June 30, 2004 of $22 was computedusing the Black-Scholes model under the following assumptions: (1) expectedlife of 0.27 years; (2) volatility of 95%, (3) risk free interest of 0.97% anddividend rate of 0%. As of December 2004, the Company has not received anydemands for payment from the note holders.

 

Kookmin Note

 

On February 4, 2003, the Company’s Korean subsidiary received6,500,000 in South Korean Won, or approximately $5,488, under a loan fromKookmin Bank of South Korea.  The loanbears interest at an annual rate of 7.1%. In the event of delayed repayment, the interest increases to a maximumof 21%, depending on the length of time the repayment is delayed.  This loan is collateralized by the plantfacilities and certain equipment in South Korea.  During the first eighteen months from theorigination date, interest was payable on a monthly basis.  In October 2003, the Company paid $873of principal at the request of Kookmin Bank due to the sale of machines thathad been part of the collateral on the loan. Subsequent to October 31, 2003, Kookmin Bank requested that theCompany pay an additional $866 of principal by February 2004 due to theCompany’s current credit rating.  TheCompany made two payments on the requested additional loan paydown in November andDecember 2003 of $320 and $205, respectively.  The remaining payment of $341 wassubsequently made in February 2004. Beginning in September 2004, the Company will be required to makeequal monthly installments of principal and interest to repay the remainingbalance of the loan over a 36-month period.

 

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

 

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

 

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

 

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

 

The Company canceled1,491 options during the quarter ended June 30, 2004 for terminatedemployees and directors.

 

17

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**9.****             Segment Reporting and GeographicInformation**

 

SFAS No. 131,*Disclosures aboutSegments of an Enterprise and Related Information,*requirescompanies to provide certain information about their operating segments.  In April 2002, the Company beganclassifying operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used bycoal burning power plants.  BulkLiquidmetal alloys include market opportunities to manufacture and sell casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment.  Primarily, the expenses incurred by the bulkLiquidmetal alloy segment are research and development costs and sellingexpenses associated with identifying and developing market opportunities.  Bulk Liquidmetal alloys products can bedistinguished from Liquidmetal alloy coatings in that the bulk Liquidmetalalloy can have significant thickness, up to approximately one inch, whichallows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.   Revenue and expenses associated withresearch and development services are included in the bulk Liquidmetal alloysegment.  The accounting policies of thereportable segments are the same as those described in Note 4 to theconsolidated financial statements included in the Company’s Form 10-K filedwith the Securities and Exchange Commission on November 10, 2004.

 

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

 
| ** **                                                                            | ** ** | **Coatings** | ** ** | **Bulk Alloy  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              |       |

 

18

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Reconciling information between reportable segments and the Company’s netloss 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 andadministrative expenses are attributable to the Company’s corporateheadquarters.  These expenses primarilyinclude corporate salaries, consulting, professional fees and facilitycosts.  Research and development expensesare included in the operating costs of the segment that performed the researchand development.

 

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

 

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

 

Long-lived assets includenet property, plant, and equipment, net intangible assets and goodwill. TheCompany had long-lived assets of $2,290 and $2,547 located in the United Statesat June 30, 2004 and December 31, 2003, respectively. The Company hadlong-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 wasfrom long-lived assets of our discontinued equipment manufacturing business.

 

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

 

19

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| ** **                                 | ** ** | **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 theCompany’s corporate headquarters.  Thelargest asset represents the Company’s cash balances, primarily generated fromthe Company’s proceeds from the senior convertible note and the Kookmin loan(See note 7).

 

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

 

Basicearnings per share (“EPS”) is computed by dividing earnings (loss) attributableto common shareholders by the weighted average number of common shares outstandingfor the periods. Diluted EPS reflects the potential dilution of securities thatcould share in the earnings.  Commonstock 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 EPScalculation 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 hascontingent obligations of $0 and $132 respectively for notes receivables soldwith recourse.

 

The Company is from time to time a party to certain legal proceedingsarising in the ordinary course of business. Although outcomes cannot bepredicted with certainty, the Company does not believe that any legalproceeding to which it is a party will have a material adverse effect on theCompany’s financial position, results of operations, and cash flows. (See Note13)

 

**12.****          Related Party Transactions**

 

In June 2003, the Company entered into an exclusive, ten-year licenseagreement with LLPG, Inc. (“LLPG”), a corporation headed by a former directorof the Company.  Under the terms of theagreement, LLPG has the right to commercialize Liquidmetal alloys, particularlyprecious-metal based compositions, in jewelry and high-end luxury productmarkets.  The Company, in turn, willreceive royalty payments over the life of the contract on all Liquidmetalproducts produced and sold by LLPG.  Inconjunction with its technology licensing contract, LLPG purchased two proprietaryLiquidmetal alloy melting machines and three proprietary Liquidmetal alloycasting machines for a total purchase price of $2,000.  At December 31, 2003, the Company had aremaining receivable balance of $500 due from LLPG, which was subsequently paidin full in March 2004.

 

TheCompany is a party to a license agreement with California Institute ofTechnology (“Caltech”) under which the Company exclusively licenses fromCaltech certain inventions and technology relating to amorphous alloys.  Professor William Johnson, a member of theCompany’s Board of Directors, is a professor at Caltech, and substantially allof the amorphous alloy technology licensed to the Company under the Caltechlicense agreement was developed in Professor Johnson’s Caltech laboratory.   During 2003, the Company paid $50 to Caltechrepresenting the second and final installments on the $150 aggregate feesrelated to this agreement.  Additionally,the Company reimburses Caltech for laboratory expenses incurred by ProfessorJohnson’s Caltech laboratory, which during the six months ended June 30,2004 and 2003, amounted to $0 and $22 in reimbursements, respectively.

 

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A company managedand partially owned by one of the Company’s former directors provides technicalsupport 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 tothis arrangement.  There were no expensesand payables to this Company as of and for the six months ended June 30,2004.

 

We are a party toa consulting agreement with Chitnis Consulting, Inc., which is owned 100% byShekhar Chitnis, a former director and executive officer of our company.  Under this agreement, we have engaged ChitnisConsulting to provide consulting services on an as-needed basis through December 31,2005.  During 2003, we incurred $50 inconsulting fees from Chitnis Consulting and incurred $13 during the quarterended 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 Noteshave been exchanged for an aggregate of (i) $2.75 million of 6% Senior SecuredNotes Due 2007 (the “Long-Term Notes”) and (ii) $2.75 million of 10% SeniorSecured Notes Due 2005 (the “Short-Term Notes”). In addition, the Companyredeemed approximately $4.5 million of the March Notes, in cash, since March 2004,of which approximately $3.5 million was redeemed during the quarter ended September 30,2004.   The Short-Term Notes have amaturity 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 alsohave the right to call for repayment of the Long-Term Notes prior to maturityat 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 havethe right to call for repayment of the notes if the Company does not, within180 days of the issuance of the notes, become compliant with its SEC reportingobligations and become listed or quoted on the OTC Bulletin Board, the NasdaqStock Market, or a national securities exchange.  A total of 562,151 warrants to purchase ourcommon stock at an exercise price of $3.00 per share—all of which werepreviously issued in connection with the purchase of the Prior Notes—have beenamended to provide for an extended expiration date of March 1, 2006

 

Liquidmetal Technologiesand certain of its present and former officers and directors were named asdefendants in nine purported class action complaints filed in the United StatesDistrict Courts for the Middle District of Florida, Tampa Division, and theCentral District of California, Southern Division, alleging violations ofSections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.The actions were originally brought on behalf of those who purchased LiquidmetalTechnologies’ common stock between May 22, 2002, and March 30, 2004,inclusive. The complaints contain varying allegations, but generally allegethat the defendants engaged in improper revenue recognition with respect to theCompany’s transactions with Growell Metal Co., Ltd. and that the defendantsissued false and misleading statements concerning the Company’s business andoperations, including unrealistic but favorable information about market demandfor Liquidmetal products, with the result of artificially inflating the Company’sshare price. The complaints seek unspecified compensatory damages and otherrelief.  In August 2004, fourcomplaints were consolidated in the United States District Court for the MiddleDistrict of Florida under the caption *Primavera Investors v.Liquidmetal Technologies, Inc., et al.*, Case No.8:04-CV-919-T-23EAJ.  John Lee, ChrisCowley, Dwight Mamanteo, Scott Purcell and Mark Rabold, were appointed co-leadplaintiffs (the “Lead Plaintiffs”).  In September 2004,the other five complaints filed in the Central District of California weretransferred to the Middle District of Florida for consolidation with the *Primavera Investors* action. The Consolidated Amended Class Action Complaint in the **PrimaveraInvestors** action is due on or before Monday, January 10,2004.  Liquidmetal Technologies and theother defendants will have 45 days from the service date to move to dismiss orotherwise respond to the Consolidated Amended Class Action Complaint. We intendto vigorously defend against the class action. We cannot currently predict the impact or resolution of this litigationor reasonably estimate a range of possible loss, which could be material. Theresolution of this lawsuit may harm our business and have a material adverse impacton our financial condition.

 

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In addition to the above,certain present and former officers and directors of Liquidmetal Technologies,as well as Liquidmetal Technologies as a nominal defendant, have been named inthree shareholder derivative actions. Two shareholder derivative complaints were filed in California statecourt styled *Brian Clair, Derivatively on Behalf ofLiquidmetal Technologies, Inc. v. John Kang, et al.*, Case No.04CC00551, and *Joseph Durgin Derivatively on Behalf ofLiquidmetal Technologies, Inc.  v. JohnKang, et al.,* CaseNo. 04CC00553, both commenced in the Superior Court of Orange County,California.  A third shareholderderivative complaint was filed in Florida federal court styled *Robert Story v. John Kang, et al.*, Case No.8:04-CV-1587-T23TBM, commenced in the Middle District of Florida, TampaDivision.  These shareholder derivativelawsuits allege that the defendants breached various fiduciary duties andotherwise violated state law based primarily upon the same underlying facts andcircumstances as the federal shareholder class action lawsuits. The plaintiffsseek unspecified compensatory damages, restitution and disgorgement of profits,equitable and/or injunctive relief as permitted by law and other relief.  The two shareholder derivative complaints inCalifornia state court have been consolidated. Plaintiffs served a ConsolidatedShareholder Derivative Complaint on October 12, 2004.  The defendants served a Demurrer to the ConsolidatedShareholder Derivative Complaint on November 22, 2004, seeking dismissalof that complaint. The Demurrer is set for hearing on February 10, 2005.The Plaintiff in the Florida derivative action filed a First AmendedShareholder Derivative Complaint on November 22, 2004. The Company’sresponse to the amended Florida derivative complaint was due on December 17,2004. The Company joined other defendants in moving to dismiss the amendedFlorida derivative complaint. The Company is awaiting a ruling on that Motionto Dismiss.  We intend to vigorouslydefend against the derivative actions. We cannot currently predict the impact or resolution of this litigationor reasonably estimate a range of possible loss, which could be material. Theresolution of these lawsuits may harm our business and have a material adverseimpact on our financial condition.

 

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

 

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

 

**The AuditCommittee of our Board of Directors conducted an independent inquiry into theabove-described transactions with the aid of independent legal counsel and, asa result of such inquiry, the Audit Committee concluded that the transactionsshould have resulted in a liability to the Company under Section 16(b) inthe amount of $302.  Mr. Kang hasacknowledged this liability, and in an agreement negotiated between Mr. Kangand the Audit Committee and approved by the full Board, Mr. Kang will pay thisliability in 24 equal monthly installments beginning in January 2005.  The above-described transactions involvingGrowell Metal was reported on a new Form 4 filed by Mr. Kang on November 15,2004, and the open-market purchases were previously reported on a timely basisin August 2002.**

 

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**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 ofFinancial Condition and Results of Operations**

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

 

*Thismanagement’s discussion and analysis, as well as other sections of this reporton Form 10-Q, may contain “forward-looking statements” that involve risksand uncertainties, including statements regarding our plans, future events,objectives, expectations, forecasts, or assumptions. Any statement that is nota statement of historical fact is a forward-looking statement, and in somecases, words such as “believe,” “estimate,” “ project,” “expect,” “intend,” “may,”“anticipate,” “plans,” “seeks,” and similar expressions identifyforward-looking statements. These statements involve risks and uncertaintiesthat could cause actual outcomes and results to differ materially from theanticipated outcomes or results, and undue reliance should not be placed onthese statements. These risks and uncertainties include, but are not limitedto, the matters discussed under the caption “Factors Affecting Future Results”in our Annual Report on Form 10-K for the fiscal year ended December 31,2003 and other risks and uncertainties discussed in filings made with theSecurities and Exchange Commission (including risks described in subsequentreports on Form 10-Q, Form 10-K, Form 8-K, and other filings).Liquidmetal Technologies disclaims any intention or obligation to update orrevise any forward-looking statements, whether as a result of new information,future events, or otherwise.*

 

**Overview**

 

We are a materialstechnology company that develops and commercializes products made fromamorphous alloys.  Our Liquidmetal®family of alloys consists of a variety of coatings, powders, bulk alloys, andcomposites that utilize the advantages offered by amorphous alloytechnology.  We develop, manufacture, andsell products and components from bulk amorphous alloys that are incorporatedinto the finished goods of our customers, and we also market and sell amorphousalloy industrial coatings.  We alsopartner with third-party licensees and distributors to develop andcommercialize Liquidmetal alloy products. We have the exclusive right to develop, manufacture, and sell what webelieve are the only commercially viable bulk amorphous alloys.

 

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

 

Our revenues are derivedfrom two principal operating segments: Liquidmetal alloy industrial coatingsand bulk Liquidmetal alloy products. Liquidmetal alloy industrial coatings are used primarily as a protectivecoating for industrial machinery and equipment, such as drill pipe used by theoil drilling industry and boiler tubes used in coal-burning power plants. Thehistorical operating information for fiscal year 2001 is based substantially onsales of Liquidmetal alloy coatings. In the second half of 2002, we beganproducing bulk Liquidmetal alloy components and products for incorporation intoour customers’ finished goods. Bulk Liquidmetal alloy segment revenue includessales of parts or components of electronic devices, medical products, andsports and leisure goods; tooling and prototype parts (including demonstrationparts and test samples) for customers with products in development; metalprocessing equipment (see Note 5 for disclosure regarding the disposal of ourequipment manufacturing business); and research and development revenuerelating primarily to defense and medical applications.  We expect that these sources of revenue willcontinue to significantly change the character of our revenue mix.

 

23

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

 

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

 

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

 

 In conjunction with the divestiture of ourDongyang and Taesung subsidiaries in March and June 2004,respectively, the Company decided to discontinue our equipment manufacturingbusiness in order to conform our operations to our broader corporate businessstrategy (see note 5).  Pursuant toAccounting Principles Board Opinion No. 30,*Reporting the Results of Operations — Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,* we reclassified ourconsolidated financial statements to reflect the discontinuation of ourequipment manufacturing operations. The revenue, costs and expenses, assets andliabilities, and cash flows of the equipment manfuacturing business weresegregated in our accompanying Consolidated Balance Sheets, ConsolidatedStatements of Operations and Comprehensive Loss, and Consolidated Statements ofCash Flows.

 

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

 

**Critical Accounting Policies and Estimates**

** **

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

 

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

 

•      Exchangerate fluctuations

•      Warranty accrual

•      Allowance fordoubtful accounts

•      Inventories atlower of cost or net realizable value

•      Deferred taxassets

•      Goodwillimpairment

 

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

 

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**Resultsof Operations**

 

Comparison of thethree months ended 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 thedecrease in our bulk Liquidmetal alloys business which consisted of bulkLiquidmetal alloy products.  Revenuesfrom our coatings and research and development business remained comparable.

 

*Cost ofSales*. 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 ofimproved manufacturing processes and increases in sales of higher marginproducts.   Cost of sales as a percentageof revenue has decreased from improved manufacturing processes and decreases inresearch and development activities charged to cost of sales as well as thefact that there was no impairment of inventory during 2004.  We believe that anticipated highermanufacturing volumes and an expected greater mix of higher-margin products inthe future will cause the gross profit to continue to improve over time. Thecost to manufacture parts from our bulk Liquidmetal alloys is variable anddiffers based on the unique design of each product.  However, the cost of sales for the productssold by the coatings business segment is generally consistent because theLiquidmetal coatings products are produced by third parties and sold wholesaleto various industries.

 

*Selling,General, and Administrative Expenses*. Selling, general, andadministrative expenses decreased to $2.5 million, or 63% of revenue, for thethree months ended June 30, 2004 from $4.6 million, or 101% ofrevenue, for the three months ended June 30, 2003.  This decrease of $2.0 million was primarily aresult of decrease in wages and related expense by $1.4 million, decreasein travel expenses by $0.2 million, and decrease in property rent by$0.3 million.  These and otherdecreases in selling, general and administrative expenses represent the Company’sefforts to manage costs and focus on our core business while continuing tobuild our corporate infrastructure required to prepare for and support theanticipated growth of our bulk Liquidmetal alloy business.

 

*Researchand Development Expenses*. Research and development expensesdecreased 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 theCompany’s focusing primarily on our core business associated with our bulkLiquidmetal alloy business while managing our costs.  The Company continues to perform research anddevelopment of new Liquidmetal alloys and related processing capabilities,develop new manufacturing techniques, and contract with consultants and provideresearch grants to various institutions to advance the development ofLiquidmetal alloys.  The decrease of $2.4million was due to decreases in salaries, wages and the related by$0.6 million, decrease in professional fees, consultant fees, and contractservices by $0.2 million, decrease in laboratory and prototyping expensesby $1.4 million, decrease in depreciation expense by $0.1 million,and a decrease in travel expenses by $0.1 million.

 

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

 

*InterestExpense*. 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 theKookmin Bank loan funded on February 4, 2003 and accrued interest,amortization of debt issuance costs and debt discount on senior convertibledebt funded on March 3, 2004. During the three months ended June 30, 2003, the interest expensewas primarily due to the interest accrued on the Kookmin Bank loan.

 

*InterestIncome.* Interestincome was $22 for the three months ended June 30, 2004 for interestearned on certificate of deposits. Interest income was $102 for the three months ended June 30, 2003for interest earned on short-term, investment grade, interest-bearingsecurities.

 

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Comparison of thesix 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 theincrease in our bulk Liquidmetal alloys business which consisted of an increaseof $2.4 million from bulk alloy products sales and increase of $0.2 million inour coatings business.

 

*Cost ofSales*. 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 improvedmanufacturing processes and increases in sales of higher margin products.   Cost of sales as a percentage of revenue hasdecreased from improved manufacturing processes and decreases in research anddevelopment activities charged to cost of sales.  We believe that anticipated highermanufacturing volumes and an expected greater mix of higher-margin products inthe future will cause the gross profit to continue to improve over time. Thecost to manufacture parts from our bulk Liquidmetal alloys is variable anddiffers based on the unique design of each product.  However, the cost of sales for the productssold by the coatings business segment is generally consistent because theLiquidmetal coatings products are produced by third parties and sold wholesaleto various industries.

 

*Selling,General, and Administrative Expenses*. Selling, general, andadministrative expenses decreased to $5.6 million, or 54% of revenue, forthe six months ended June 30, 2004 from $8.6 million, or 112% ofrevenue, for the six months ended June 30, 2003.  This decrease of $3.0 million was primarily aresult of decrease in wages and related expense by $2.3 million, decreasein 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 otherdecreases in selling, general and administrative expenses represent the Company’sefforts to manage costs and focus on our core business while continuing tobuild our corporate infrastructure required to prepare for and support theanticipated growth of our bulk Liquidmetal alloy business.

 

*Researchand Development Expenses*. Research and development expensesdecreased 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 theCompany’s focusing primarily on our core business associated with our bulkLiquidmetal alloy business while managing our costs.  The Company continues to perform research anddevelopment of new Liquidmetal alloys and related processing capabilities,develop new manufacturing techniques, and contract with consultants and provideresearch grants to various institutions to advance the development ofLiquidmetal alloys.  The decrease of $6.1million was due to decreases in salaries, wages and the related by$2.4 million, decrease in professional fees, consultant fees, and contractservices 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 adecrease in travel expenses by $0.1 million

 

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

 

*InterestExpense*. 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 theKookmin Bank loan funded on February 4, 2003 and accrued interest,amortization of debt issuance costs and debt discount on senior convertibledebt funded on March 3, 2004. During the six months ended June 30, 2003, the interest expense wasprimarily due to the interest accrued on the Kookmin Bank loan.

 

*InterestIncome.* Interestincome 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-bearingsecurities.  Interest income in the sixmonths ended June 30, 2004 was $34.

 

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**Liquidity and Capital Resources**

** **

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

 

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

 

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

 

TheCompany has experienced losses from continuing operations during the last threefiscal years and has an accumulated deficit of $115,443 as of June 30,2004.  Cash used for continuingoperations for the six months ended June 30, 2004 was $5.4 million andcash flow from continuing operations may be negative throughout the fiscal year2004.  Such conditions raise substantialdoubt about the ability of the Company continuing as a going concern for areasonable period of time.  Theseoperating results occurred while the Company was developing and attempting tocommercialize and manufacture products from an entirely new and uniquetechnology.  This business plan requiredsignificant spending related to start-up costs and capital expenditures.  These factors have placed a significantstrain on the financial resources of the Company.  The ultimate success of the Company dependson its ability to continue reducing operating costs, generate higher revenue,achieve positive cash flow from continuing operations and profitability.  The consolidated financial statements do notinclude any adjustments that might result from the outcome of the uncertainty.

 

Our capital requirementsduring the next 12 months will depend on numerous factors, including thesuccess of our existing products, the development of new applications forLiquidmetal alloys, and the resources we devote to develop and support ourLiquidmetal alloy products.  However, weanticipate our capital expenditures will be less than $0.5 million in the next12 months.  We expect to continue todevote limited capital to our research and development activities, to furtherdevelop and strengthen our manufacturing capabilities, and for working capitaland other general corporate purposes.

 

We believe that ourcurrent cash and cash equivalents together with anticipated cash flow from our operations,will be sufficient to fund our working capital and capital expenditurerequirements for at least the next 12 months. Our projections of cash flows from operations and, consequently, futurecash needs are subject to uncertainty. If our available funds and cash generated from operations areinsufficient to satisfy our liquidity requirements, we may need to raiseadditional capital to fund our working capital or capital expenditurerequirements.  We cannot be certain thatadditional capital, whether through selling additional debt or equitysecurities or obtaining a line of credit or other loan, will be available to usor, if available, will be on terms acceptable to us.  If we issue additional securities to raisefunds, these securities may have rights, preferences, or privileges senior tothose of the rights of our common stock and our stockholders may experienceadditional dilution.

 

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**Contractual Obligations**

** **

The following table summarizes the Company’sobligations 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 QualitativeDisclosures about Market Risk**

 

We are exposed to various markets risks in conducting the business of theCompany, and we anticipate that this exposure will increase as a result of ourplanned growth.  In an effort to mitigatelosses associated with these risks, we may at times enter into derivativefinancial instruments, although we have not historically done so.  These may take the form of forward salescontracts, option contracts, foreign currency exchange contracts, and interestrate swaps.  We have not, and do notintend to, engage in the practice of trading derivative securities for profit.

 

*InterestRates.*  We are exposedto market risks relating to changes in interest rates.  Some of the proceeds of our initial publicoffering are invested in short-term, interest-bearing, investment gradesecurities.  The value of thesesecurities will be subject to interest rate risk and could fall in value ifinterest rates rise.

 

*CommodityPrices. *We are exposedto price risk related to anticipated purchases of certain commodities used asraw materials by our businesses, including titanium and zirconium.  Although we do not currently enter intocommodity future, forward, and option contracts to manage the fluctuations inprices of anticipated purchases, we may enter into such contacts in the futureas our business grows and as our purchases of these raw materials increase.

 

*ForeignExchange Rates.*  As aresult of our operation of a manufacturing facility in South Korea, asubstantial portion of our costs will be denominated in the South Koreanwon.  Consequently, fluctuations in theexchange rates of the South Korean won to the U.S. dollar will affect our costsof goods sold and operating margins and could result in exchange losses.  Although we do not currently enter intoforeign exchange hedge transactions, we may do so in the future as our businessgrows.

 

**Item 4 – Controls andProcedures**

** **

Within the 90 days priorto the date of this quarterly report, Liquidmetal Technologies (the “Company”)carried out an evaluation, under the supervision and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures pursuant to Rule 13a-14 underthe Securities Exchange Act of 1934, as amended.  Based on that evaluation, the Chief ExecutiveOfficer and Vice President Finance have concluded that these disclosure controlsand procedures are effective in timely alerting them to material informationrelating to the Company, including its consolidated

 

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subsidiaries, required tobe included in this quarterly report on Form 10-Q.  There were no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of our evaluation.

 

(a)    Evaluation of disclosure controls and procedures.  During the course of the audit of ourfinancial statements for the fiscal years ended December 31, 2001, 2002,and 2003, it was determined that revenues from certain equipment salesmade by the Company to Growell Metal Co., Ltd. in the third andfourth quarters of 2002 and the first quarter of 2003 should not have beenrecognized in those periods****.  It was also****** **determined that certain amountsrelating to sales made to Samsung in December 2002, to JS Technologies in September 2002,and AM Corporation in December 2002 should not have beenrecognized.   ****And lastly, it was determined that certain stockoptions granted in 2001 and 2002 were not calculated in accordance withguidelines under APB Opinion No. 25, SFAS No. 123, and EITF 00-23.** **These determinations and the associated restatement of previouslyissued financial statements, are described more fully in the Form 10-K, suggestthat, at the time of the subject transactions and the preparation of ourfinancial statements for the relevant periods, the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15 under the SecuritiesExchange Act of 1934) did not ensure that all information required to bedisclosed by the Company was adequately accumulated and communicatedto the Company’s management.  Since that time, the Companyhas made various improvements to enhance the reliabilityof its disclosure controls and procedures.  Except for theforegoing, the Company’s principal executive officer and principalfinancial officer have concluded that the Company’s disclosure controlsand procedures were effective as of the end of the period covered bythe Form 10-K based on their evaluation of the controls and procedurespursuant to Rule 13a-15 under the Securities and Exchange Act of 1934

 

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**PART II**

**OTHERINFORMATION**

 

**Item 2 – Change in Securities and Useof 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), weclosed an initial public offering of 5,000,000 shares of common stock on May28, 2002, plus an additional 229,000 shares on June 10, 2002 pursuant toan overallotment option, at a price of $15.00 per share (which sale is referredto herein as the “Offering”).  TheOffering generated aggregate cash proceeds during the second quarter 2002 of$78.4 million.  The net proceeds were$70.7 million after deducting underwriting commissions of $5.5 million andother 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 theOffering.  In 2002, we used approximately$7.8 million of the net proceeds from the Offering to repay alloutstanding promissory notes and accrued interest, $11.1 million to fundthe construction of our manufacturing facility in South Korea,$14.3 million to purchase equipment used to manufacture Liquidmetal parts,$0.4 million to purchase assets related to production and sale ofequipment used in the production process of Liquidmetal alloy products, and$0.3 million to purchase the 51% interest in our majority owned Dongyangsubsidiary.  During the third quarter of2002, 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 ourmanufacturing operations in Korea.  Wehave 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 underthe terms of his terminated endorsement agreement with our discontinued retailgolf operations.

 

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

 

(a)           Exhibits

 

The following documentsare filed as an exhibit to this Report:

 
| **Exhibit  Number** | ** ** | **Description  of Document**                                                                                                         |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                 |
| 31.1                |       | Certification of  President & Chief Executive Officer, John Kang, as required by Section 3.02  of Sarbane-Oxley Act of 2002 |
|                |       |                                                                                                                                 |
| 31.2                |       | Certification of Vice  President of Finance, Tony Chung, as required by Section 3.02 of  Sarbane-Oxley Act of 2002              |
|                |       |                                                                                                                                 |
| 32.2                |       | 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)           Reportson Form 8-K

 

•FiledJanuary 15, 2004

•FiledJanuary 16, 2004

 

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•FiledMarch 3 2004

•FiledMarch 4, 2004

•FiledMarch 30, 2004

•FiledApril 30, 2004

•FiledMay 13, 2004

•FiledMay 18, 2004

•FiledMay 24, 2004

•FiledJune 28, 2004

•FiledJuly 2, 2004

•FiledJuly 15, 2004

•FiledJuly 16, 2004

•FiledAugust 20, 2004

•FiledSeptember 27, 2004

•FiledNovember 10, 2004

•FiledNovember 23, 2004

•FiledDecember 23, 2004

 

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                          | 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)           |   |

 

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