LIQUIDMETAL TECHNOLOGIES, INC. This management's discussion and analysis should be read in conjunction with the consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q. All amounts described in this section are in thousands, except percentages, periods of time, and share and per share data. This management's discussion and analysis, as well as other sections of this Quarterly Report on Form 10-Q, may contain "forward-looking statements" that involve risks and uncertainties, including statements regarding our plans, future events, objectives, expectations, estimates, forecasts, assumptions, or projections. Any statement that is not a statement of historical fact is a forward-looking statement, and in some cases, words such as "believe," "estimate," "project," "expect," "intend," "may," "anticipate," "plan," "seek," and similar words or expressions identify forward-looking statements. These statements involve risks and uncertainties that could cause actual outcomes and results to differ materially from the anticipated outcomes or results, and undue reliance should not be placed on these statements. These risks and uncertainties include, but are not limited to, the matters discussed in Part II herein, under the heading "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and other risks and uncertainties discussed in other filings made with theSecurities and Exchange Commission (including risks described in subsequent reports on Form 10-Q and Form 8-K and other filings). We disclaim any intention or obligation, other than as required by applicable law, to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Overview We are a materials technology company that develops and commercializes products made from amorphous alloys. Our Liquidmetal® family of alloys consists of a variety of proprietary bulk alloys and composites that utilize the advantages offered by amorphous alloy technology. We design, develop, and sell custom products and parts from bulk amorphous alloys to customers in various industries. We also partner with third-party manufacturers and licensees to develop and commercializeLiquidmetal alloy products. Amorphous alloys are, in general, unique materials that are distinguished by their ability to retain a random atomic structure when they solidify, in contrast to the crystalline atomic structure that forms in other metals and alloys when they solidify.Liquidmetal alloys are proprietary amorphous alloys that possess a combination of performance, processing, and potential cost advantages that we believe will make them preferable to other materials in a variety of applications. The amorphous atomic structure of bulk alloys enables them to overcome certain performance limitations caused by inherent weaknesses in crystalline atomic structures, thus facilitating performance and processing characteristics superior in many ways to those of their crystalline counterparts. We believe the alloys and the molding technologies we employ can result in components for many applications that exhibit exceptional dimensional control and repeatability that rivals precision machining, excellent corrosion resistance, brilliant surface finish, high strength, high hardness, high elastic limit, alloys that are non-magnetic, and the ability to form complex shapes common to the injection molding of plastics. All of these characteristics are achievable from the molding process, so design engineers often do not have to select specific alloys to achieve one or more of the characteristics as is the case with crystalline materials. We believe these advantages could result inLiquidmetal alloys supplanting high-performance alloys, such as titanium and stainless steel, and other incumbent materials in a wide variety of applications. Moreover, we believe these advantages could enable the introduction of entirely new products and applications that are not possible or commercially viable with other materials. Licensing Transactions Eontec License Agreement OnMarch 10, 2016 , we entered into a Parallel License Agreement (the "License Agreement") with DongGuan Eontec Co., Ltd., aHong Kong corporation ("Eontec") pursuant to which the parties agreed to cross-license certain patents, technical information, and trademarks between us and Eontec. In particular, we granted to Eontec a paid-up, royalty-free, perpetual license to our patents and related technical information to make, have made, use, offer to sell, sell, export, and import products in certain geographic areas outside ofNorth America andEurope , and Eontec granted to us a paid-up, royalty-free, perpetual license to Eontec's patents and related technical information to make, have made, use, offer to sell, sell, export, and import products in certain geographic areas outside of specified countries inAsia . The license granted by us to Eontec is exclusive (including to the exclusion of us) in the countries ofBrunei ,Cambodia ,China (P.R.C and R.O.C.),East Timor ,Indonesia ,Japan ,Laos ,Malaysia ,Myanmar ,Philippines ,Singapore ,South Korea ,Thailand , andVietnam . The license granted by Eontec to us is exclusive (including to the exclusion of Eontec) inNorth America andEurope . The cross-licenses are non-exclusive in geographic areas outside of the foregoing exclusive territories. 18
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Beyond the License Agreement, we collaborate with Eontec to accelerate the commercialization of amorphous alloy technology. This includes but is not limited to developing technologies to reduce the cost of amorphous alloys, working on die cast machine technology platforms to pursue broader markets, sharing knowledge to broaden our intellectual property portfolio, and utilizing Eontec's volume production capabilities as a third party contract manufacturer.
Eutectix Business Development Agreement
OnJanuary 31, 2020 , we entered into a Business Development Agreement (the "Agreement") withEutectix, LLC , aDelaware limited liability company ("Eutectix"), which provides for collaboration, joint development efforts, and the manufacturing of products based on our proprietary amorphous metal alloys. Under the Agreement, we have agreed to license to Eutectix specified equipment owned by us, including two injection molding machines, the Machines, and other machines and equipment, all of which will be used to make products for our customers and Eutectix customers. The licensed machines and equipment represent substantially all of the machinery and equipment currently held by us. We have also licensed to Eutectix various patents and technical information related to our proprietary technology. Under the Agreement, Eutectix will pay us a royalty of six percent (6%) of the net sales price of licensed products sold by Eutectix, and Eutectix will also manufacture products for us. The Agreement has a term of five years, subject to renewal provisions and the ability of either party to terminate earlier upon specified circumstances. Apple License Transaction OnAugust 5, 2010 , we entered into a license transaction with Apple pursuant to which (i) we contributed substantially all of our intellectual property assets to a newly organized special-purpose, wholly-owned subsidiary, calledCrucible Intellectual Property, LLC ("CIP"), (ii) CIP granted to Apple a perpetual, worldwide, fully-paid, exclusive license to commercialize such intellectual property in the field of consumer electronic products, as defined in the license agreement, in exchange for a license fee, and (iii) CIP granted back to us a perpetual, worldwide, fully-paid, exclusive license to commercialize such intellectual property in all other fields of use. Under the agreements relating to the license transaction with Apple, we were obligated to contribute, to CIP, all intellectual property developed by us throughFebruary 2016 . We are also obligated to maintain certain limited liability company formalities with respect to CIP at all times after the closing of the license transaction.
Other Material License Transactions
OnJanuary 13, 2022 , our majority owned subsidiary, Liquidmetal Golf ("LMG"), entered into a sublicense agreement ("LMG Sublicense Agreement") withAmorphous Technologies Japan, Inc. ("ATJ"), a newly formed Japanese entity that was established byTwins Corporation , a sporting goods company operating inJapan . Under the agreement, LMG granted to ATJ a nonexclusive worldwide sublicense to our amorphous alloy technology and related trademarks to manufacture and sell golf clubs and golf related products. The LMG Sublicense Agreement has a term of three years and provides for the payment of a running royalty to LMG of 3% of the net sales price of licensed products. InMarch 2009 , we entered into a license agreement withSwatch Group, Ltd. ("Swatch") under which Swatch was granted a non-exclusive license to our technology to produce and market watches and certain other luxury products. InMarch 2011 , this license agreement was amended to grant Swatch exclusive rights as to watches and all third parties (including us), but non-exclusive as to Apple. We will receive royalty payments over the life of the contract on allLiquidmetal products produced and sold by Swatch. The license agreement with Swatch will expire on the expiration date of the last licensed patent.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States requires us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. 19
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We believe that the following accounting policies are the most critical to our consolidated financial statements since these policies require significant judgment or involve complex estimates that are important to the portrayal of our financial condition and operating results: • Revenue recognition • Impairment of long-lived assets and definite-lived intangibles • Deferred tax assets • Share based compensation Our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Annual Report") contains further discussions on our critical accounting policies and estimates. Results of Operations
Comparison of the three and nine months ended
For the three months ended September 30, For the nine months ended September 30,
2022 2021 2022 2021
% of % of % of % of
in 000's Revenue in 000's Revenue in 000's Revenue in 000's Revenue
Revenue:
Products $ 18 $ 406 $ 284 $ 700
Licensing and
royalties - - 22 21
Total revenue 18 406 306 721
Cost of sales 15 83% 319 79% 243 79% 528 73%
Gross profit 3 17% 87 21% 63 21% 193 27%
Selling,
marketing,
general and
administrative 744 4133% 1,643 405% 2,319 758% 3,372 468%
Research and
development 19 106% 14 3% 46 15% 74 10%
Total operating
expense 763 1,657 2,365 3,446
Operating loss (760 ) (1,570 ) (2,302 ) (3,253 )
Lease income 133 132 398 396
Interest and
investment income 56 35 51 138
Net loss $ (571 ) $ (1,403 ) $ (1,853 ) $ (2,719 ) Revenue and operating expenses
Revenue. Total revenue decreased to$18 for the three months endedSeptember 30, 2022 from$406 for the three months endedSeptember 30, 2021 . Total revenue decreased to$306 for the nine months endedSeptember 30, 2022 from$721 for the nine months endedSeptember 30, 2021 . The decrease for both period was attributable to lower general production shipments of products made by our contract manufacturers and decreases in payments under development projects, following the Company's transition to outsourced manufacturing in 2020. Cost of sales. Cost of sales was$15 , or 83% of total revenue, for the three months endedSeptember 30, 2022 , a decrease from$319 , or 79% of total revenue, for the three months endedSeptember 30, 2021 . Cost of sales was$243 , or 79% of total revenue, for the nine months endedSeptember 30, 2022 , an increase from$528 , or 73% of total revenue, for the nine months endedSeptember 30, 2021 . The decrease for the three months endedSeptember 30, 2022 and 2021 was attributable to lower products revenue, increase in licensing and royalties revenue, and lower gross profit percentages. The decrease for the nine months endedSeptember 30, 2022 and 2021 was attributable to lower products revenue, decrease in licensing and royalties revenue, and higher gross profit percentages. If we begin increasing our products revenues with shipments of routine, commercial products and parts through third party contract manufacturers, we expect our cost of sales percentages to decrease, stabilize and be more predictable. Gross profit. Our gross profit decreased to$3 for the three months endedSeptember 30, 2022 from$87 for the three months endedSeptember 30, 2021 . Our gross profit as a percentage of total revenue, decreased to 17% for the three months endedSeptember 30, 2022 from 21% for the three months endedSeptember 30, 2021 . Our gross profit decreased to$63 for the nine months endedSeptember 30, 2022 from$193 for the nine months endedSeptember 30, 2021 . Our gross profit as a percentage of total revenue, decreased to 21% for the nine months endedSeptember 30, 2022 from 27% for the nine months endedSeptember 30, 2021 . Early prototype and pre-production orders generally result in a higher cost mix, relative to revenue, than would otherwise be incurred in an on-site production environment, with higher volumes and more established operating processes, or through contract manufacturers. As such, our gross profit percentages have fluctuated and may continue to fluctuate based on volume and quoted production prices per unit and may not be representative of our future business. If we begin increasing our products revenues with shipments of routine, commercial products and parts through future orders to third party contract manufacturers, we expect our gross profit percentages to stabilize, increase, and be more predictable. 20
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Selling, marketing, general and administrative. Selling, marketing, general, and administrative expenses were$744 and$2,319 for the three and nine months endedSeptember 30, 2022 , respectively, compared to$1,657 and$3,446 for the three and nine months endedSeptember 30, 2021 , respectively. The decrease in expenses was primarily attributable to lower stock-based compensation as well as continued cost reductions. Research and development. Research and development expenses were$19 and$46 for the three and nine months endedSeptember 30, 2022 , respectively, compared to$14 and$74 for the three and nine months endedSeptember 30, 2021 , respectively. We continue to perform research and development of newLiquidmetal alloys and related processing capabilities, albeit on a reduced basis in comparison with prior periods. Operating loss. Operating loss was$760 and$2,302 for the three and nine months endedSeptember 30, 2022 , respectively. This compares to$1,570 and$3,253 for the three and nine months endedSeptember 30, 2021 , respectively. Fluctuations in our operating loss are primarily attributable to variations in operating expenses, as discussed above. We continue to invest in our technology infrastructure to expedite the adoption of our technology, but we have experienced long sales lead times for customer adoption of our technology. Until that time when we can either (i) increase our revenues with shipments of routine, commercial products and parts through third party contract manufacturers or (ii) obtain significant licensing revenues, we expect to continue to have operating losses for the foreseeable future. Other income and expenses Lease income. Lease income relates to straight-line rental income received under the Facility Lease. Such amounts were$133 and$398 for the three and nine months endedSeptember 30, 2022 , respectively. This compares to$132 and$396 for the three and nine months endedSeptember 30, 2021 , respectively. Interest and investment income. Interest and investment income relates to interest earned from our cash deposits and investments in debt securities for the respective periods. Interest and investment was$56 and$51 for the three and nine months endedSeptember 30, 2022 , respectively. This compares to interest and investment income of$35 and$138 during the three and nine months endedSeptember 30, 2021 , respectively. The decrease during 2022 is due continued volatility in corporate debt and bond markets, which is resulting in reduced yields.
Liquidity and Capital Resources
Cash used in operating activities
Cash used in operating activities totaled$1,452 and$1,635 for the nine months endedSeptember 30, 2022 and 2021, respectively. The cash was primarily used to fund operating expenses related to our business and product development efforts.
Cash provided by investing activities
Cash provided by investing activities totaled$2,564 and provided by investing activities totaled$5,354 for the nine months endedSeptember 30, 2022 and 2021, respectively. Investing inflows primarily consist of proceeds from the sale of debt securities. Investing outflows primarily consist of purchases of debt securities.
Cash provided by financing activities
Cash provided by financing activities totaled$212 for the nine months endedSeptember 30, 2022 related to the exercise of our stock options, and$0 for the nine months endedSeptember 30, 2021 .
Financing arrangements and outlook
We have a relatively limited history of selling bulk amorphous alloy products
and components on a mass-production scale. Furthermore, the ability of future
contract manufacturers to produce our products in desired quantities and at
commercially reasonable prices is uncertain and is dependent on a variety of
factors that are outside of our control, including the nature and design of the
component, the customer's specifications, and required delivery timelines. These
factors have previously required that we engage in equity sales under various
stock purchase agreements to support its operations and strategic initiatives.
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However, as ofSeptember 30, 2022 , we had$5,420 in cash and restricted cash, as well as$19,208 in investments in debt securities. We view this total of$24,628 as readily available sources of liquidity in the event needed to advance our existing strategy, and/or pursue an alternative strategy. As such, we anticipate that our current capital resources, when considering expected losses from operations, will be sufficient to fund our operations for the foreseeable future.
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