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 Li.



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Licensing Transactions



Eontec License Agreement



On March 10, 2016, in connection with the 2016 Purchase Agreement, we entered
into the License Agreement with 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 pursuant to
which (i) we contributed substantially all of our intellectual property assets
to a newly organized special-purpose, wholly-owned subsidiary, called 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 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 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.



On January 31, 2020, we entered into the Agreement with Eutectix, which provides
for collaboration, joint development efforts, and the manufacturing of products
based on the Company's proprietary amorphous metal alloys. Under the Agreement,
the Company has licensed to Eutectix specified equipment owned by the Company,
including two injection molding machines, two diecasting machines, and other
machines and equipment, all of which will be used to make product for Company
customers and Eutectix customers. The licensed machines and equipment represent
substantially all of the machinery and equipment then held by the Company. The
Company has also licensed to Eutectix various patents and technical information
related to the Company's proprietary technology. Under the Agreement, Eutectix
will pay the Company a royalty of six percent (6%) of the net sales price of
licensed products sold by Eutectix, and Eutectix will also manufacture for the
Company product ordered by the Company. The Agreement has a term of five years,
subject to renewal provisions and the ability of either party to terminate
earlier upon specified circumstances.



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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.



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 nine months ended September 30, 2020 and 2019





                                       For the three months ended September 30,                               For the nine months ended September 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                   $      288                           $     373                        $       367                          $     728
Licensing and royalties            39                                  48                                 64                                 48
Total revenue                     327                                 421                                431                                776

Cost of sales                     171              52%                284            67%                 242              56%               566            73%
Gross profit                      156              48%                137            33%                 189              44%               210            27%

Selling, marketing,
general and
administrative                  1,096             335%              1,380            328%              2,953             685%             4,088            527%
Research and development           30              9%                 284            67%                  86              20%             1,179            152%
Impairment of long-lived
assets                              -              0%                   -             0%                   -              0%              1,676            216%
Gain on disposal of
long-lived assets                   -              0%                  (7 )          -2%                 (35 )            -8%                (2 )           0%
Total operating expense         1,126                               1,657                              3,004                              6,941

Operating loss                   (970 )                            (1,520 )                           (2,815 )                           (6,731 )

Lease income                      132                                   -                                352                                  -
Interest and investment
income                             61                                 125                                297                                344

Net loss                   $     (777 )                         $  (1,395 )                      $    (2,166 )                        $  (6,387 )

Revenue and operating expenses





Revenue. Total revenue decreased to $327 for the three months ended September
30, 2020 from $421 for the three months ended September 30, 2019. Total revenue
decreased to $431 for the nine months ended September 30, 2020 from $776 for the
nine months ended September 30, 2019. The decrease was attributable to lower
product sale volumes associated with the Company's continued transition from
internal manufacturing to outsourced manufacturing. During the three months
ended September 30, 2020, the Company began making routine deliveries under
production orders, which will continue through at least the first half of 2021.
In the event the Company can continue to deliver under these orders, through
outsourced manufacturing supply chains, and add additional orders, revenue
streams are expected to increase, stabilize and become more predictable.



Cost of sales. Cost of sales was $171, or 52% of total revenue, for the three
months ended September 30, 2020, a decrease from $284, or 67% of total revenue,
for the three months ended September 30, 2019. Cost of sales was $242, or 56% of
total revenue, for the nine months ended September 30, 2020, a decrease from
$566, or 73% of products revenue, for the nine months ended September 30, 2019.
The decrease in our cost of sales as a percentage of products revenue for the
three and nine months ended September 30, 2020 was primarily attributable to
more predictable costs associated with established volume manufacturers. If we
are able to sustain and increase 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 increased to $156 for the three month period
ended September 30, 2020 from $137 for the three month period ended September
30, 2019. Our gross profit as a percentage of total revenue, increased to 48%
for the three month period ended September 30, 2020 from 33% for the three month
period ended September 30, 2019. Our gross profit decreased to $189 for the nine
month period ended September 30, 2020 from $210 for the nine month period ended
September 30, 2019. Our gross profit as a percentage of total revenue, increased
to 44% for the nine month period ended September 30, 2020 from 27% for the nine
month period ended September 30, 2019. Our gross profit percentages have
fluctuated and may continue to fluctuate based on production volumes and quoted
production prices per unit and may not be representative of our future business.
If we are able to sustain and increase 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.



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Selling, marketing, general and administrative. Selling, marketing, general, and
administrative expenses were $1,096 and $2,953 for the three and nine months
ended September 30, 2020, respectively, compared to $1,380 and $4,088 for the
three and nine months ended September 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. These
decreases were off-set by an increase in bad debt expense.



Research and development. Research and development expenses were $30 and $86 for
the three and nine months ended September 30, 2020, respectively, compared to
$284 and $1,179 for the three and nine months ended September 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 on disposal of fixed assets. During the three and nine months ended
September 30, 2020, the Company recorded gains on the disposal of fixed assets
of $0 and $35, respectively. This compares to gains on disposal of fixed assets
of $7 and $2 during the three and nine months ended September 30, 2019.



Operating loss. Operating loss was $970 and $2,815 for the three and nine months
ended September 30, 2020, respectively. This compares to $1,520 and $6,731 for
the three and nine months ended September 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 $352 for the three and nine months ended September 30, 2020, respectively. No such income was recorded during the three and nine months ended September 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 $61 and $297 for the
three and nine months ended September 30, 2020, respectively. This compares to
interest and investment income of $125 and $344 during the three and nine months
ended September 30, 2019, respectively.

Liquidity and Capital Resources

Cash used in operating activities





Cash used in operating activities totaled $1,785 and $3,666 for the nine months
ended September 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 nine months ended September 30, 2020 are expected to be
reflective of cash usages going forward.

Cash used in investing activities





Cash used in investing activities totaled $12,320 and $358 for the nine months
ended September 30, 2020 and 2019, respectively. Investing inflows primarily
consist of proceeds from the sale of debt securities and proceeds from the sale
of fixed assets. 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 nine months
ended September 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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As of September 30, 2020, the Company had recorded $5,443 in cash and restricted
cash, as well as $23,845 in investments in debt securities. The Company views
the total of this as readily available sources of liquidity in the event needed
to advance the Company's existing strategy, and/or pursue an alternative
strategy.

Off Balance Sheet Arrangements

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

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