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 report on Form 10-K. 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 report on Form 10-K, 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 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 under the caption "Risk Factors" in Item 1A of this report and other risks and uncertainties discussed in filings made with theSecurities and Exchange Commission (including risks described in subsequent reports on Form 10-Q, Form 10-K, Form 8-K, and other filings).Liquidmetal Technologies, Inc. disclaims any intention or obligation 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. 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 ofLiquidmetal 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. InJuly 2019 , the Company adopted the 2019 Restructuring Plan pursuant to which the Company elected to wind down its prior manufacturing operations at the Company'sLake 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, aChina -based company in which our largest beneficial stockholder our CEO and Chairman,Professor Li , holds a material, indirect equity interest. SIGNIFICANT TRANSACTIONS
Manufacturing Facility Purchase
OnFebruary 16, 2017 , we purchased a 41,000 square foot manufacturing facility (the "Facility") located inLake Forest, CA , where operations commenced duringJuly 2017 . The purchase price for the Facility was$7,818 . As a result of the 2019 Restructuring Plan, we have discontinued manufacturing operations in the Facility. Facility Lease OnJanuary 23, 2020 , 20321Valencia, LLC , aDelaware limited liability company and our wholly owned subsidiary, entered into a lease agreement (the "Facility Lease") pursuant to which we leased toMatterHackers, Inc. , aDelaware corporation ("Tenant"), an approximately 32,534 square foot portion of the Facility. The lease term is for 5 years and 2 months and is scheduled to expire onApril 30, 2025 . The base rent payable under the Facility Lease is$33 per month initially and is subject to periodic increases up to a maximum of approximately$54 per month. Tenant will pay approximately 79% of common operating expresses. The Facility Lease has other customary provisions, including provisions relating to default and usage restrictions. The Facility Lease grants to Tenant a right to extend the lease for one additional 60-month period at market rental value. 21
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RESULTS OF OPERATIONS
For the years ended December 31,
2020 2019
in 000's % of Revenue in 000's % of Revenue
Revenue:
Products $ 925 $ 1,325
Licensing and royalties 64 48
Total revenue 989 1,373
Cost of sales 621 63 % 832 61 %
Gross profit (loss) 368 37 % 541 39 %
Selling, marketing, general and
administrative 3,798 384 % 5,424 395 %
Research and development 110 11 % 1,342 98 %
Impairment of long-lived assets - 0 % 1,676 122 %
Gain on disposal of long-lived assets (35 ) -4 % (11 ) -1 %
Total operating expense 3,873 8,431
Operating loss (3,505 ) (7,890 )
Interest and investment income 378 459
Lease income 484 -
Net loss $ (2,643 ) $ (7,431 ) (a) Year Ended
Revenue and operating expenses
Revenue. Total revenue decreased by
Cost of sales. Cost of sales was$621 , or 63% of total revenue, for the year endedDecember 31, 2020 , a decrease from$832 , or 61% of total revenue, for the year endedDecember 31, 2019 . The decrease in our cost of sales was primarily driven by lower product revenues with similar gross profit percentages. 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 decreased by$173 from$541 as ofDecember 31, 2019 to$368 as ofDecember 31, 2020 . Our gross margin percentage decreased from 39% as ofDecember 31, 2019 to 37% as ofDecember 31, 2020 . 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. Selling, marketing, general, and administrative expenses. Selling, marketing, general, and administrative expenses decreased by$1,626 to$3,798 , or 384% of revenue, for the year endedDecember 31, 2020 from$5,424 , or 395% of revenue, for the year endedDecember 31, 2019 . 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 a$226 increase in bad debt expense. Research and development expenses. Research and development expenses decreased by$1,232 to$110 , or 11% of revenue, for the year endedDecember 31, 2020 , from$1,342 , or 98% of revenue, for the year endedDecember 31, 2019 . 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 newLiquidmetal alloys and related processing capabilities, albeit on a reduced basis in comparison with prior periods. 22
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Impairment of long-lived assets. In connection with the 2019 Restructuring Plan, non-cash impairment charges of$1,676 were recorded during the year endedDecember 31, 2019 , as a result of changed assumptions regarding the asset grouping and future use of the Company's manufacturing assets. Similar charges were not recorded during the year endedDecember 31, 2020 . Gain on disposal of fixed assets. During the year endedDecember 31, 2020 , the Company recorded gains on the disposal of fixed assets of$35 . This compares to gains on disposal of fixed assets of$11 for the year endedDecember 31, 2019 .
Operating loss. Operating loss decreased by
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.
Non-operational income and expenses
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$378 and$459 for the years endedDecember 31, 2020 and 2019, respectively. The decrease during 2020 is due to lower overall yields on debt securities as a result of the global COVID-19 pandemic. Lease income. Lease income relates to straight-line rental income received under the Facility Lease. Such amounts were$484 and$0 for the years endedDecember 31, 2020 and 2019, respectively. Net loss. Our annual net losses of$2,643 as ofDecember 31, 2020 and$7,431 as ofDecember 31, 2019 are primarily reflective of operating expenses associated with our on-going business as well as non-operational income, discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities
Cash used in operating activities totaled$2,230 for the year endedDecember 31, 2020 and$3,872 for the year endedDecember 31, 2019 . The cash was primarily used to fund operating expenses related to our business and product development efforts.
Cash used in investing activities
Cash used in investing activities totaled$15,799 for the year endedDecember 31, 2020 and$11,835 for the year endedDecember 31, 2019 . Cash used in investing activities primarily consist of purchases of debt securities in line with our investment strategy.
Cash provided by financing activities
Cash provided by financing activities totaled
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. 23
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As ofDecember 31, 2020 , the Company had recorded$1,519 in cash and cash equivalents and restricted cash, as well as$27,488 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
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to our company, or that engages in leasing, hedging, or research and development arrangements with our company. As ofDecember 31, 2020 , the Company did not have any off-balance sheet arrangements.
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. 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:
• We recognize revenue pursuant to applicable accounting standards including
FASB ASC Topic 606 ("ASC 606"), Revenue from Contracts with Customers. ASC 606
summarizes certain points in applying generally accepted accounting principles
to revenue recognition in financial statements and provides guidance on
revenue recognition issues in the absence of authoritative literature
addressing a specific arrangement or a specific industry.
Products- Product revenues are primarily generated from the sale andprototyping of molds and bulk alloy products. Revenue is recognized when i)
persuasive evidence of an arrangement exists, ii) delivery has occurred, iii)
the sales price is fixed or determinable, iv) collection is probable and v)
all obligations have been substantially performed pursuant to the terms of the
arrangement. When we receive consideration, or such consideration is
unconditionally due, from a customer prior to transferring goods or services
to the customer under the terms of a sales contract, we record deferred
revenue, which represents a contract liability. We will recognize deferred
revenue as products revenue after it has transferred control of the goods or
services to the customer and all revenue recognition criteria are met. Such
amounts are not expected to be material on an ongoing basis.
Licensing and royalties- License revenue arrangements in general provide for
the grant of an exclusive or non-exclusive right to manufacture and/or sell
products covered by patented technologies owned or controlled by us. The
intellectual property rights granted may be perpetual in nature, extending
until the expiration of the related patents, or can be granted for a defined
period of time. Licensing revenues that are one-time fees upon the granting of
the license are recognized when i) the license term begins in a manner
consistent with the nature of the transaction and the earnings process is
complete, ii) when collectability is reasonably assured or upon receipt of an
upfront fee, and iii) when all other revenue recognition criteria have been
met. Pursuant to the terms of these agreements, we have no further obligation
with respect to the grant of the license. Licensing revenues that are related
to royalties are recognized as the royalties are earned over the related
period.
Practical Expedients and Exemptions- We generally expense sales commissions
when incurred because the amortization period would have been one year or
less. These costs are recorded within selling, marketing, general and
administrative expenses. We do not disclose the value of unsatisfiedperformance obligations for (i) contracts with an original expected length of
one year or less and (ii) contracts for which we recognize revenue at the
amount for which it has the right to invoice for services performed.
• We value our long-lived assets at the lower of cost or fair market value. We
review long-lived assets to be held and used in operations for impairment
whenever events or changes in circumstances indicate that the carrying value
of an asset may be impaired. These evaluations may result from significant
decreases in the overall market outlook for our technology or the market price
of an asset, a significant adverse change in the extent or manner in which an
asset is being used in its physical condition, a significant adverse change in
legal factors or in the business climate that could affect the value of an
asset, as well as economic or operational analyses. If we conclude that the
carrying value of certain assets will not be recovered based on expected
undiscounted future cash flows, an impairment write-down is recorded to reduce
the assets to their estimated fair value. Fair value is determined via market,
cost and income based valuation techniques, as appropriate. The fair value is
measured on a nonrecurring basis using a combination of quoted prices for
similar assets in active markets and other unobservable adjustments to
historical cost (Level 3) inputs. Based on the results of this analysis, we
recorded non-cash impairment charges of
2019, primarily related to the carrying value of our manufacturing assets that
would not be utilized prospectively as a result of the 2019 Restructuring
Plan. No such charges were recorded for the year ended
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• We record valuation allowances to reduce our deferred tax assets to the
amounts deemed more likely than not of being realized. While we consider
taxable income in assessing the need for a valuation allowance, in the event
we determine we would be able to realize our deferred tax assets in the future
in excess of the net recorded amount, an adjustment would be made and income
increased in the period of such determination. Likewise, in the event we
determine we would not be able to realize all or part of our deferred tax
assets in the future, an adjustment would be made and charged to income in the
period of such determination.
• We account for share-based compensation in accordance with the fair value
recognition provisions of FASB ASC Topic 718, Share-based Payment, which
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the consolidated financial statements based
on their fair values. The fair value of stock options is calculated by using
the Black-Scholes option pricing formula that requires estimates for expected
volatility, expected dividends, the risk-free interest rate and the term of
the option. If any of the assumptions used in the Black-Scholes model change
significantly, share-based compensation expense may differ materially in the
future from that recorded in the current period.
• We invest excess funds in debt securities to maximize investment yield, while
maintaining liquidity and minimizing credit risk. Debt securities are carried
at fair value and consist primarily of investments in obligations of the
United States Treasury, various
certificates of deposits. We classify our investments in debt securities as
available-for-sale with all unrealized gains or losses included as part of
other comprehensive income. We evaluate our debt securities with unrealized
losses on a quarterly basis for potential other-than-temporary impairments in
value. As a result of these assessments, we did not recognize any
other-than-temporary impairment losses considered to be credit related for the
years ended December 31, 2020 and 2019.
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Instruments- Credit Losses
InJune 2016 , the FASB issued an accounting standards update that changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This update replaces the existing incurred loss impairment model with an expected loss model (referred to as the Current Expected Credit Loss model, or "CECL"). The standard update, and its related amendments, will become effective for the fiscal year beginning onJanuary 1, 2023 . The Company is in the process of assessing the impact of this standard update, and its related amendments, on the Company's consolidated financial statements, but is not expecting that it will have a material impact on the Company's consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its
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