SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2004

OR

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

For the transition period from                 to                 

Commission File No.  001-31332

LIQUIDMETAL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

25800 Commercentre Drive, Suite 100

Lake Forest, California 92630

(address of principal executive office, zip code)

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

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

Yes o No ý 

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

Yes ý No o

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

FORM 10-Q

FOR THE QUARTER ENDED

JUNE 30, 2004

FORWARD-LOOKING INFORMATION

Statements in this report concerning the future sales, expenses, profitability, financial resources, product mix, market demand, product development and other statements in this report concerning the future results of operations, financial condition and business of Liquidmetal Technologies, Inc. are “forward-looking” statements as defined in the Securities Act of 1933 and Securities Exchange Act of 1934. Investors are cautioned that the Company’s actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business environment, including competition, need for increased acceptance of products, ability to continue to develop and extend our brand identity, ability to anticipate and adapt to a competitive market, ability to effectively manage rapidly expanding operations, amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure, ability to provide superior customer service, dependence upon key personnel and the like. The Company’s most recent filings with the Securities and Exchange Commission, including Form 10-K, contain additional information concerning many of these risk factors, and copies of these filings are available from the Company upon request and without charge.

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TABLE OF CONTENTS

Explanatory Note

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

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Item 1 – Financial Statements

LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

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

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LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share data)

(unaudited)

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

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LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Six months Ended June 30, 2004

(in thousands, except share data)

(unaudited)

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

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LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share data)

(unaudited)

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

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During the six months ended June 30, 2004, the Company sold it’s 51% ownership interest in Dongyang to the 49% minority shareholder, which resulted in a loss of $46 from disposal of discontinued operations.

During the six months ended June 30, 2004, the Company sold assets and liability of its Taesung equipment manufacturing division in Korea to a third party which resulted in a loss of approximately $184.

During the six months ended 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 foreign exchange between the U.S. Dollar and the South Korean Won resulted in a $39 gain related to the note payable, a $525 gain related to property, plant and equipment and a $5 loss related to minority interest in consolidated subsidiary.

During the six months ended June 30, 2003, an option holder surrendered 93,758 shares of the Company’s common stock in-lieu of cash payment for the option exercise price of $250 and income taxes payable by the option holder of $403.  The Company immediately canceled the common shares received in lieu of cash payment upon receipt of the shares.

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

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LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2004 and 2003

(in thousands, except share data)

(unaudited)

1.                                      Basis of Presentation and Recent Accounting Pronouncements

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

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

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

Stock-based compensation

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

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

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The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants for the three and six months ended June 30, 2004 and 2003, respectively: expected volatility of 100% for all periods; dividend yield of 0.0% for all periods; expected option life of approximately 5 years; and a risk-free interest rate ranging from 2.9% to 3.9%.

2.                                      Restatement

Growell Restatement

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

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

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

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

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Liquidmetal Korea, and supporting equipment purchased from other suppliers.  Also as part of the settlement, Growell satisfied in full a balance of $2,058 owed to Liquidmetal Korea for the die casting machines Growell purchased from Liquidmetal Korea in the first quarter of 2003 as part of a license agreement to manufacture Liquidmetal alloy parts for the South Korean automotive industry.  The remaining settlement payable of $2,837 and trade accounts payable of $14 will be paid to Growell (in cash or stock at the Company’s discretion) by December 31, 2004, and is included in accounts payable and accrued liabilities in the June 30, 2004 Condensed Consolidated Balance Sheet.  The Company recorded a loss on the settlement at December 31, 2003 of $2,765 which is included in “Cost of Sales” in the December 31, 2003 Consolidated Statements of Operations and Comprehensive Loss.  The loss on settlement reflects the write-down of the assets received in the settlement to their fair market value.  The loss is accrued for in the “Accounts payable and accrued expenses” section in the December 31, 2003, Consolidated Balance Sheet. The sale of the die casting machines to Growell is recorded as revenue in the first quarter of 2004.  Under the settlement agreement between the parties, the Company and Growell granted to the other party (and the other party’s affiliates) a release of all known and unknown claims of any nature arising between the parties through the date of settlement, as well as a release against future claims under agreements between the parties that were terminated as a part of the settlement.  The settlement agreement provided that all agreements of any nature between the parties and their respective affiliates were terminated as of the date of settlement, with the exception of certain confidentiality agreements, a Liquidmetal coatings distribution agreement, and future rights under the die casting agreement pursuant to which Growell purchased the die casting machines and obtained a license to make auto parts from Liquidmetal alloys.  The settlement agreement also includes, as an accommodation to Growell, if the Company becomes aware of any prospective customer that desires to purchase a proprietary Company casting machine at a time when Growell desires to sell any of its Liquidmetal die casting machines, then the Company will not sell such die casting machine to the prospective customer unless the Company first directs the prospective customer to Growell and encourages the prospective customer to purchase the machine from Growell.

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

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3.                                      Basis of Presentation and Recent Accounting Pronouncements

Translation of Foreign Currency

Upon consolidation of the Company’s foreign subsidiaries into the Company’s consolidated financial statements, any balances with the subsidiaries denominated in the foreign currency are translated at the exchange rate at year end. The financial statements of Liquidmetal Korea have been translated based upon Korean Won as the functional currency. Liquidmetal Korea’s assets and liabilities were translated using the exchange rate at period end and income and expense items were

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translated at the average exchange rate for the reporting period. The resulting translation adjustment was included in other comprehensive income (loss).

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

New Accounting Pronouncements

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

4.                                      Liquidity

The Company has experienced losses from continuing operations during the last two fiscal years and has an accumulated deficit of $115,443 as of June 30, 2004.  Cash used for continuing operations for the six months ended June 30, 2004 was $5.4 million and cash flow from continuing operations may be negative throughout the fiscal year 2004.  Such conditions raise substantial doubt that the Company will be able to continue as a going concern for a reasonable period of time.  These operating results occurred while the Company was developing and attempting to commercialize and manufacture products from an entirely new and unique technology.  This business plan required significant spending related to start-up costs and capital expenditures.  These factors have placed a significant strain on the financial resources of the Company.  The ultimate success of the Company depends on its ability to continue reducing operating costs, generate higher revenue, achieve positive cash flow from continuing operations and profitability.  The consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty.

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

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

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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 losses as a result of a continuing economic downturn in markets for its machinery products. These events, along with Dongyang’s operating loss, cash flow losses and uncertainty surrounding its future cash flows, led the Company to evaluate its investment for recoverability as of December 31, 2003.  As a result, the Company determined that the carrying value of its investment in Dongyang exceeded its fair value as of December 31, 2003 in the amount of $184.  This impairment loss was recorded in operating expenses for the year ended December 31, 2003.

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

The Company has adopted SFAS 144 and as a result the 2003 balances have been restated in order to conform with the presentation of 2004 financial statements.  Dongyang is reported as part of the assets available for sale on the balance sheet.

As Donyang was sold prior to June 30, 2004, there are no assets and liabilities of Dongyang as of June 30, 2004.  The following is a listing of the major classes of assets and liabilities of Dongyang as of December 31, 2003.

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Summarized operating results of Dongyang’s discontinued operations are as follows:

Taesung

On June 14, 2004, the Company entered into an Asset Purchase Agreement whereby all the assets and liabilities of its Taesung equipment manufacturing division in Korea were sold to a third party for $345 which is payable by the third party in four equal installments with the last installment being due on June 30, 2005.  As of March 31, 2004, management determined that no impairment was anticipated on the divestiture of its Taesung division.  However, the sale resulted in a loss of approximately $184 when it was completed.  The loss from operations for the three months and six months ended June 30, 2004 totaled $172 and $469 respectively and is included in the loss from discontinued equipment manufacturing operations for the respective periods.

The Company has adopted SFAS 144 and as a result the 2003 balances have been restated in order to conform with the presentation of 2004 financial statements.  Taesung is reported as part of the discontinued business operations as of March 31, 2004 as the Company’s plans for divesture of Taesung was determined during the three months ended March 31, 2004.

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

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Summarized operating results of Taesung’s operations are as follows:

6.             Product Warranty

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

7.             Long-term Debt

Senior Convertible Note

On March 3, 2004, the Company issued $9.9 million of 6.0% senior convertible notes due 2007 (the “March Notes”) to investor groups in a transaction led by Michigan Venture Capital Co., Ltd, a South Korea-based institutional investment firm, and IndiGo Ventures LLC, a New York-based investment firm (the “Placement Agents”) that served as a financial advisor to the Company for the transaction.  The notes were collateralized by the patents held by the Company and second priority mortgage interest in plant facilities and certain equipment in South Korea.  The notes were convertible at any time into our common stock at a price of $3.00 per share.  Investors in the private placement and the Placement Agents received warrants to purchase an aggregate amount of up to approximately 1.2 million shares of common stock, exercisable at $3.00 per share for varying periods but no later than 100 days following the effectiveness of a registration statement covering the resale of shares issuable upon exercise of the warrants.  In addition, the investors had the right to call for repayment of the notes prior to maturity at any time after the second anniversary of the closing of the transaction.

The fair value of the 1.2 million warrants totals $1,883 and was computed using the Black-Scholes pricing model under the following assumptions: (1) expected life of 3 years; (2) volatility of 82%, (3) risk free interest of 0.95% and dividend rate of 0%.  In addition, since this debt is convertible into equity at the option of the note holder at beneficial conversion rates, an embedded beneficial conversion feature was recorded as a debt discount and will be amortized using the effective interest rate method over the life of the debt in accordance with Emerging Issues Task Force No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments.”  In March 2004, total cost of beneficial conversion feature of $3,395 and the relative fair value of the 0.6 million warrants issued to investors of $584 were recorded as discounts of the convertible note.  In addition, $718 relating to the fair value of the 0.6 million warrants issued to the Placement Agents and $581 direct costs incurred relating to issuance of the convertible note were recorded as debt issuance cost as a contra liability account in warrant liability and other assets, respectively.

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

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

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

Kookmin Note

On February 4, 2003, the Company’s Korean subsidiary received 6,500,000 in South Korean Won, or approximately $5,488, under a loan from Kookmin Bank of South Korea.  The loan bears interest at an annual rate of 7.1%.  In the event of delayed repayment, the interest increases to a maximum of 21%, depending on the length of time the repayment is delayed.  This loan is collateralized by the plant facilities and certain equipment in South Korea.  During the first eighteen months from the origination date, interest was payable on a monthly basis.  In October 2003, the Company paid $873 of principal at the request of Kookmin Bank due to the sale of machines that had been part of the collateral on the loan.  Subsequent to October 31, 2003, Kookmin Bank requested that the Company pay an additional $866 of principal by February 2004 due to the Company’s current credit rating.  The Company made two payments on the requested additional loan paydown in November and December 2003 of $320 and $205, respectively.  The remaining payment of $341 was subsequently made in February 2004.  Beginning in September 2004, the Company will be required to make equal monthly installments of principal and interest to repay the remaining balance of the loan over a 36-month period.

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

8.             Stock Compensation Plan

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

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

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

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9.             Segment Reporting and Geographic Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires companies to provide certain information about their operating segments.  In April 2002, the Company began classifying operations into two reportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings are used primarily as a protective coating for industrial machinery and equipment, such as drill pipe used by the oil drilling industry and boiler tubes used by coal burning power plants.  Bulk Liquidmetal alloys include market opportunities to manufacture and sell casing components for electronic devices, medical devices, sporting goods, tooling, prototype sampling, defense applications and metal processing equipment.  Primarily, the expenses incurred by the bulk Liquidmetal alloy segment are research and development costs and selling expenses associated with identifying and developing market opportunities.  Bulk Liquidmetal alloys products can be distinguished from Liquidmetal alloy coatings in that the bulk Liquidmetal alloy can have significant thickness, up to approximately one inch, which allows for their use in a wider variety of applications other than a thin protective coating applied to machinery and equipment.   Revenue and expenses associated with research and development services are included in the bulk Liquidmetal alloy segment.  The accounting policies of the reportable segments are the same as those described in Note 4 to the consolidated financial statements included in the Company’s Form 10-K filed with the Securities and Exchange Commission on November 10, 2004.

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

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