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 ended December 31, 2019 and other risks and uncertainties discussed
in other filings made with the Securities 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 commercialize Liquidmetal 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 in
Liquidmetal alloys supplanting high-performance alloys, such as titanium and
stainless steel, and other incumbent materials in a wide variety of
applications. Moreover, we believe these advantages could enable the
introduction of entirely new products and applications that are not possible or
commercially viable with other materials.



Our revenues are derived from i) selling our bulk amorphous alloy custom
products and parts for applications which include, but are not limited to,
non-consumer electronic devices, medical products, automotive components, and
sports and leisure goods? ii) selling tooling and prototype parts such as
demonstration parts and test samples for customers with products in development?
and iii) product licensing and royalty revenue.



Our cost of sales consists primarily of the costs of manufacturing, which
include raw alloy and direct labor costs. Selling, general, and administrative
expenses currently consist primarily of salaries and related benefits, travel,
consulting and professional fees, depreciation and amortization, insurance,
office and administrative expenses, and other expenses related to our
operations.



Research and development expenses represent salaries, related benefits expenses,
consulting and contract services, expenses incurred for the design and testing
of new processing methods, expenses for the development of sample and prototype
products, and other expenses related to the research and development of
Liquidmetal bulk alloys. Costs associated with research and development
activities are expensed as incurred. We plan to enhance our competitive position
by improving our existing technologies and developing advances in amorphous
alloy technologies. We believe that our research and development efforts will
focus on the discovery of new alloy compositions, the development of improved
processing technology, and the identification of new applications for our
alloys.



In July 2019, the Company adopted the 2019 Restructuring Plan pursuant to which
the Company elected to wind down its prior manufacturing operations at the
Company's Lake Forest, CA facility and seek to outsource the manufacture of
parts utilizing the Company's technology through domestic and international
manufacturing partners. In connection with the 2019 Restructuring Plan, the
Company shifted its business strategy from internal manufacture of parts and
products for customers toward the use and reliance of outsourced manufacturers,
which will initially be Yihao, a China-based company that is an affiliate of our
largest beneficial stockholder our CEO and Chairman, Professor Lugee Li.



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Licensing Transactions



Eontec License Agreement



On March 10, 2016, in connection with the 2016 Purchase Agreement, we entered
into a Parallel License Agreement (the "License Agreement") with DongGuan Eontec
Co., Ltd., a Hong Kong corporation ("Eontec") pursuant to which we each entered
into a cross-license of our respective technologies.



The License Agreement provides for the cross-license of 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 of North America
and Europe, 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 in Asia. The license granted by us to Eontec is
exclusive (including to the exclusion of us) in the countries of Brunei,
Cambodia, China (P.R.C and R.O.C.), East Timor, Indonesia, Japan, Laos,
Malaysia, Myanmar, Philippines, Singapore, South Korea, Thailand, and Vietnam.
The license granted by Eontec to us is exclusive (including to the exclusion of
Eontec) in North America and Europe. The cross-licenses are non-exclusive in
geographic areas outside of the foregoing exclusive territories.



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.





Apple License Transaction



On August 5, 2010, we entered into a license transaction with Apple Inc.
("Apple") pursuant to which (i) we contributed substantially all of our
intellectual property assets to a newly organized special-purpose, wholly-owned
subsidiary, called Crucible 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 that we developed
through February 2012. Subsequently, this obligation was extended to apply to
all intellectual property developed through February 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 License Transactions



On January 31, 2012, we entered into a Supply and License Agreement for a five
year term with Engel Austria Gmbh ("Engel") whereby Engel was granted a
non-exclusive license to manufacture and sell injection molding machines to our
licensees. Since that time, we and Engel have agreed on an injection molding
machine configuration that can be commercially supplied and supported by Engel.
On December 6, 2013, the companies entered into an Exclusivity Agreement for a
ten year term whereby we agreed, with certain exceptions and limitations, that
we and our licensees would purchase amorphous alloy injection molding machines
exclusively from Engel in exchange for certain royalties to be paid by Engel to
us based on a percentage of the net sales price of such injection molding
machines.



Our Liquidmetal Golf subsidiary has the exclusive right and license to utilize
our Liquidmetal alloy technology for purposes of golf equipment applications.
This right and license is set forth in an intercompany license agreement between
Liquidmetal Technologies and Liquidmetal Golf. This license agreement provides
that Liquidmetal Golf has a perpetual and exclusive license to use Liquidmetal
alloy technology for the purpose of manufacturing, marketing, and selling golf
club components and other products used in the sport of golf. We own 79% of the
outstanding common stock of Liquidmetal Golf.



In March 2009, we entered into a license agreement with Swatch 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. In
March 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 all
Liquidmetal 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 in the United States requires us to
make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates and assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results could differ materially from
these estimates under different assumptions or conditions.



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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
  •   Investments in debt securities
  •   Impairment of long-lived assets and definite-lived intangibles
  •   Deferred tax assets
  •   Share based compensation
  •   Valuation of inventory
  •   Leases





Our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019
Annual Report") contains further discussions on our critical accounting policies
and estimates.



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Results of Operations


Comparison of the three and six months ended June 30, 2020 and 2019





                                For the three months ended June 30,                                   For the six months ended June 30,
                      2020                                 2019                             2020                                2019
                    in 000's         % of Revenue        in 000's      % of Revenue       in 000's          % of Revenue      in 000's       % of Revenue

Revenue:
Products            $      33                            $     132                       $        79                          $     355
Licensing and
royalties                   -                                    -                                25                                  -
Total revenue              33                                  132                               104                                355

Cost of sales              35              106%                103           78%                  71              68%               282            79%
Gross profit
(loss)                     (2 )            -6%                  29           22%                  33              32%                73            21%

Selling,
marketing,
general and
administrative            870             2636%              1,275           966%              1,857             1786%            2,708            763%
Research and
development                27              82%                 406           308%                 56              54%               895            252%
Impairment of
long-lived assets           -               0%               1,676          1270%                  -               0%             1,676            472%
(Gain) loss on
disposal of
long-lived assets         (15 )            -45%                  5            4%                 (35 )            -34%                5             1%
Total operating
expense                   882                                3,362                             1,878                              5,284

Operating loss           (884 )                             (3,333 )                          (1,845 )                           (5,211 )

Lease income              132                                    -                               220                                  -
Interest and
investment income         109                                  109                               236                                219

Net loss            $    (643 )                          $  (3,224 )                     $    (1,389 )                        $  (4,992 )

Revenue and operating expenses





Revenue. Total revenue decreased to $33 for the three months ended June 30, 2020
from $132 for the three months ended June 30, 2019. Total revenue decreased to
$104 for the six months ended June 30, 2020 from $355 for the six months ended
June 30, 2019. The decrease was attributable to lower volumes associated with
the Company's continued transition from internal manufacturing to outsourced
manufacturing. As a result, product revenues during 2020 are expected to be
volatile and will likely not be indicative of future results.



Cost of sales. Cost of sales was $35, or 106% of total revenue, for the three
months ended June 30, 2020, a decrease from $103, or 78% of products revenue,
for the three months ended June 30, 2019. Cost of sales was $71, or 68% of total
revenue, for the six months ended June 30, 2020, a decrease from $282, or 79% of
products revenue, for the six months ended June 30, 2019. The decrease in our
cost of sales as a percentage of products revenue for the three and six months
ended June 30, 2020 was primarily attributable to lower production volumes
during 2020 and the timing of licensing revenues. 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 (loss). Our gross profit (loss) decreased to $(2) for the three
month period ended June 30, 2020 from $29 for the three month period ended June
30, 2019. Our gross profit as a percentage of total revenue, decreased to (6)%
for the three month period ended June 30, 2020 from 22% for the three month
period ended June 30, 2019. Our gross profit (loss) decreased to $33 for the six
month period ended June 30, 2020 from $73 for the six month period ended June
30, 2019. Our gross profit as a percentage of total revenue, increased to 32%
for the six month period ended June 30, 2020 from 21% for the six month period
ended June 30, 2019. 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.



Selling, marketing, general and administrative. Selling, marketing, general, and
administrative expenses were $870 and $1,857 for the three and six months ended
June 30, 2020, respectively, compared to $1,275 and $2,708 for the three and six
months ended June 30, 2019, respectively. The decrease in expenses was
attributable to overall lower costs for employee compensation due to headcount
reductions associated with the 2019 Restructuring Plan.



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Research and development. Research and development expenses were $27 and $56 for
the three and six months ended June 30, 2020, respectively, compared to $406 and
$895 for the three and six months ended June 30, 2019, respectively. The
decrease in expense was mainly due to reductions in employee compensation, and
associated development initiatives, due to headcount reductions associated with
the 2019 Restructuring Plan. Going forward, we will continue to perform research
and development of new Liquidmetal alloys and related processing capabilities,
albeit on a reduced basis in comparison with prior periods.



(Gain) loss on disposal of fixed assets. During the three and six months ended
June 30, 2020, the Company recorded gains on the disposal of fixed assets of $15
and $35, respectively. This compares to losses on disposal of fixed assets of $5
and $5 during the three and six months ended June 30, 2019.



Operating loss. Operating loss was $884 and $1,845 for the three and six months
ended June 30, 2020, respectively. This compares to $3,333 and $5,211 for the
three and six months ended June 30, 2019, 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 $132 and $220 for the three and six months
ended June 30, 2020, respectively. No such income was recorded during the three
and six months ended June 30, 2019.



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 income was $109 and $236 for the
three and six months ended June 30, 2020, respectively. This compares to
interest and investment income of $109 and $219 during the three and six months
ended June 30, 2019, respectively.



Liquidity and Capital Resources

Cash used in operating activities





Cash used in operating activities totaled $1,204 and $2,456 for the six months
ended June 30, 2020 and 2019, respectively. The cash was primarily used to fund
operating expenses related to our business and product development efforts.
Following the completion of the 2019 Restructuring Plan, cash used in operating
activities for the six months ended June 30, 2020 will be reflective of cash
usages going forward.


Cash provided by (used in) investing activities





Cash provided by (used in) investing activities totaled $2,187 and $(592) for
the six months ended June 30, 2020 and 2019, respectively. Investing inflows
primarily consist of proceeds from the sale of debt securities. Investing
outflows primarily consist of purchases of debt securities and capital
expenditures for additional production equipment and building improvements.



Cash provided by financing activities

Cash provided by financing activities totaled $0 and $14 for the six months ended June 30, 2020 and 2019, respectively. Cash provided by financing activities is comprised of cash received for the issuance of shares following the exercise of stock options.

Financing arrangements and outlook





During 2016, we raised a total of $62,700 through the issuance of 405,000,000
shares of our common stock in multiple closings under the 2016 Purchase
Agreement. The Company has 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 the Company's products
in desired quantities and at commercially reasonable prices is uncertain and is
dependent on a variety of factors that are outside of the Company's control,
including the nature and design of the component, the customer's specifications,
and required delivery timelines. These factors have previously required that the
Company engage in equity sales under various stock purchase agreements to
support its operations and strategic initiatives. As a result of the funding
under the 2016 Purchase Agreement, the Company anticipates that its current
capital resources, when considering expected losses from operations, will be
sufficient to fund the Company's operations for the foreseeable future.



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Off Balance Sheet Arrangements

As of June 30, 2020, we did not have any off-balance sheet arrangements.

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