What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-09 compared with 2020-03-10 · 48 added, 106 removed, 109 unchanged (59% of the section changed)

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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 our 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.

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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.

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 in which our largest beneficial stockholder our CEO and Chairman, Professor Li, holds a material, indirect equity interest.

SIGNIFICANT TRANSACTIONS

Manufacturing Facility Purchase

On February 16, 2017, we purchased a 41,000 square foot manufacturing facility located in Lake Forest, CA, where operations commenced during July 2017.

The purchase price for the property was $7,818.

As a result of the 2019 Restructuring Plan, we will discontinue manufacturing operations in this facility and, during January 2020, we executed a lease agreement with a commercial tenant of approximately 80% of the facility.

2016 Purchase Agreement

On March 10, 2016, we entered into a Securities Purchase Agreement (the “2016 Purchase Agreement”) with Liquidmetal Technology Limited, a Hong Kong company (the “Investor”), which is controlled by our Chairman and CEO, Professor Lugee Li (“Professor Li”).

The 2016 Purchase Agreement provided for the purchase by the Investor of a total of 405,000,000 shares of our common stock for an aggregate purchase price of $63,400.

The transaction occurred in multiple closings, with the Investor having purchased 105,000,000 shares at a purchase price of $8,400 (or $0.08 per share) at the initial closing on March 10, 2016 and the remaining 200,000,000 shares at $0.15 per share and 100,000,000 shares at $0.25 per share for an aggregate purchase price of $55,000 on October 26, 2016.

In addition to the shares issuable under the 2016 Purchase Agreement, we issued to the Investor a warrant to acquire 10,066,809 shares of common stock (of which the right to exercise 2,609,913 of the warrant shares vested on March 10, 2016 and the right to exercise the remaining 7,456,896 warrant shares vested on October 26, 2016, all at an exercise price of $0.07 per share).

The warrant will expire on the tenth anniversary of its issuance date.

Further, the 2016 Purchase Agreement provided that the Investor would have the right to designate three members of our board of directors, with one such member serving as Chairman.

The 2016 Purchase Agreement also provided that, with certain limited exceptions, if we issue any shares of common stock at any time through the fifth anniversary of the 2016 Purchase Agreement, the Investor will have a preemptive right to subscribe for and to purchase at the same price per share (or at market price, in the case of issuance of shares pursuant to stock options) the number of shares necessary to maintain its ownership percentage of our issued shares of common stock.

Eontec License Agreement

On March 10, 2016, in connection with the 2016 Purchase Agreement, we and DongGuan Eontec Co., Ltd., a Hong Kong corporation (“Eontec”), entered into a Parallel License Agreement (the “License Agreement”) pursuant to which we and Eontec agreed to cross-license their respective technologies.

Our Chairman and CEO, Professor Li, is also a major shareholder and Chairman of Eontec.

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.

In turn, 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.

In March 2017, we signed contracts with Eontec to purchase two hot-crucible amorphous metal molding machines (“Machines”) at a total purchase price of $780.

The Machines were delivered to our new manufacturing facility located in Lake Forest, CA in April 2017 and were operational during the fourth quarter of 2017.

Eutectix Business Development Agreement

On January 31, 2020, we entered into a Business Development Agreement (the “Agreement”) with Eutectix, LLC, a Delaware 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

On August 5, 2010, we entered into a license transaction with Apple Inc.

(“Apple”) pursuant to which (i) we contributed substantially all of its 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 the 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 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.

On December 6, 2013, we and Engel 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.

Our majority-owned 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 parts 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, 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 February 16, 2017, we purchased a 41,000 square foot manufacturing facility (the “Facility”) located in Lake Forest, CA, where operations commenced during July 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

On January 23, 2020, 20321 Valencia, LLC, a Delaware limited liability company and our wholly owned subsidiary, entered into a lease agreement (the “Facility Lease”) pursuant to which we leased to MatterHackers, Inc., a Delaware 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 on April 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.

RESULTS OF OPERATIONS

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Revenue and operating expenses

Total revenue increased by $841 to $1,373 for the year ended December 31, 2019 from $532 for the year ended December 31, 2018.

The increase was attributable to the completion of higher volume orders to provide current customers with buffer inventories while manufacturing capabilities are transitioned to outsourced manufacturing.

As a result, product revenues during 2019 will likely not be indicative of short-term, prospective volumes.

Total revenue decreased by $384 to $989 for the year ended December 31, 2020 from $1,373 for the year ended December 31, 2019.

The decrease was attributable to lower product sale volumes associated with the Company’s continued transition from internal manufacturing to outsourced manufacturing.

Cost of sales .

Cost of sales was $621, or 63% of total revenue, for the year ended December 31, 2020, a decrease from $832, or 61% of total revenue, for the year ended December 31, 2019.

The decrease in our cost of sales for the year ended December 31, 2019 was primarily attributable to lower raw material costs as a result of $642 in market write-downs taken during 2018, higher volume production during 2019, and improvements in production throughput during 2019.

The cost to manufacture products and components from our bulk amorphous alloys is variable and differs based on the unique design of each product.

Following the transition of manufacturing operations, if we begin increasing our products revenues with shipments of routine, commercial products and components through our third party contract manufacturers, we expect to lower raw material and consumable costs through volume purchases, reduced labor and fixed overhead burdens on end products, and have more stable and predictable cost of sales percentages on product sales.

Gross profit ( loss ) .

Our gross profit (loss) increased by $1,173 from $(632) as of December 31, 2018 to $541 as of December 31, 2019.

Our gross margin percentage increased from (119)% as of December 31, 2018 to 39% as of December 31, 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 our third party contract manufacturers, we expect our gross profit percentages to stabilize, increase, and be more predictable.

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 of December 31, 2019 to $368 as of December 31, 2020.

Our gross margin percentage decreased from 39% as of December 31, 2019 to 37% as of December 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, g eneral, and a dministrative expenses .

Selling, marketing, general, and administrative expenses decreased by $1,626 to $3,798, or 384% of revenue, for the year ended December 31, 2020 from $5,424, or 395% of revenue, for the year ended December 31, 2019.

The decrease in expenses was due to overall lower costs associated with employee compensation as a result of headcount reductions.

This decrease was partially offset by $273 in additional severance expense during the year ended December 31, 2019, as a result of the 2019 Restructuring Plan.

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 d evelopment e xpenses .

Research and development expenses decreased by $1,232 to $110, or 11% of revenue, for the year ended December 31, 2020, from $1,342, or 98% of revenue, for the year ended December 31, 2019.

The decrease in expense was mainly due to reduction in mold, tooling, and alloy development initiatives.

Through the year ended December 31, 2019, research and development activities have been focused on (i) research and development of new Liquidmetal alloys and related processing capabilities, (ii) the development of new manufacturing techniques, and (iii) contracting with consultants to advance the development of Liquidmetal alloys and related production processes.

Such research and development activities will be significantly reduced following completion of the 2019 Restructuring Plan.

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.

Impairment of long-lived assets.

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Gain on disposal of fixed assets.

During the year ended December 31, 2019, the Company recorded gains on the disposal of fixed assets of $11, in connection with the 2019 Restructuring Plan.

Similar charges were not recorded during the year ended December 31, 2018.

During the year ended December 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 ended December 31, 2019.

Operating loss.

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Interest and investment income was $378 and $459 for the years ended December 31, 2020 and 2019, respectively.

The increase during 2019 is due to a higher invested base and overall change in investment strategy to provide increased yields, while preserving liquidity.

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 ended December 31, 2020 and 2019, respectively.

Our annual net losses of $2,643 as of December 31, 2020 and $7,431 as of December 31, 2019 are primarily reflective of operating expenses associated with our on-going business as well as non-operational income, discussed above.

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Cash used in investing activities totaled $15,799 for the year ended December 31, 2020 and $11,835 for the year ended December 31, 2019.

Cash used in investing activities during 2019 primarily consist of purchases of debt securities in line with our investment strategy.

Cash used in investing activities during 2018 primarily consist of capital expenditures to support our previous manufacturing efforts, including the purchase of our facility and additional production equipment.

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 $0 for the year ended December 31, 2020 and $21 for the year ended December 31, 2019.

Annual amounts primarily consist of proceeds received from the exercise of stock options and warrants.

Annual amounts primarily consist of proceeds received from the exercise of stock options.

Financing arrangements and outlook

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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.

As of December 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

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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.

Our revenue recognition policy complies with the requirements of ASC 606.

As a majority of our sales revenue continues to be recognized when products are shipped, and there was no change in the recognition model historically applied to active license and royalty contracts under the new revenue standard, there was no adjustment to the opening balance of retained earnings.

The impact to our results of operations is not material, on an on-going basis, because the analysis of our contracts under the new revenue standard supports a recognition model consistent with our previous revenue recognition model.

Revenue on the majority of our contracts will continue to be recognized over time because of the continuous transfer of control to the customer.

Products- Product revenues are primarily generated from the sale and prototyping of molds and bulk alloy products.

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We do not disclose the value of unsatisfied performance 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.

Our investments in debt securities are carried at fair value and consist primarily of investments in obligations of the United States Treasury, various U.S.

and foreign corporations, and certificates of deposits.

We classify investments in debt securities as available-for-sale with all unrealized gains or losses included as part of other comprehensive income.

We evaluate investments in debt securities with unrealized losses on a quarterly basis for potential other-than-temporary impairments in value.

As a result of this assessment, we did not recognize any other-than-temporary impairment losses considered to be credit related for the years ended December 31, 2019 and 2018.

We value our long-lived assets at the lower of cost or fair market value.

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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 concludes 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.

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 $1,676 for the year ended December 31, 2019, primarily related to the carrying value of our manufacturing assets that will not be utilized prospectively as a result of the July 2019 Restructuring Plan.

No such charges were recorded for the years ended December 31, 2018 or December 31, 2017.

Based on the results of this analysis, we recorded non-cash impairment charges of $1,676 for the year ended December 31, 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 December 31, 2020.

We record valuation allowances to reduce our deferred tax assets to the amounts deemed more likely than not of being realized.

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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.

Our inventory is stated at the lower of cost or estimated net realizable value.

The cost of inventories is determined on the basis of weighted-average cost.

We perform an analysis of our inventory balances at least quarterly to determine if the carrying amount of inventories exceeds their net realizable value.

The analysis of estimated net realizable value is based on customer orders, market trends and historical pricing.

If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value.

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 U.S.

and foreign corporations, and 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

Liability Classified Warrants

In July 2017, the FASB issued an accounting standards update which modifies the requirements for the classification of certain financial instruments with down round features as equity versus liabilities.

The guidance will allow for financial instruments previously required to be presented as liabilities due to the presence of down round features to be presented as equity upon meeting other criteria.

We adopted the requirements of this update effective as of January 1, 2019, utilizing the full retrospective transition option.

Accordingly, we reclassified the warrant liability to additional paid in capital on our December 31, 2018 consolidated balance sheets, which increased additional paid-in capital by $6,970, increased accumulated deficit by $4,778, and decreased warrant liability by $2,192.

In addition, because of the retrospective adoption, we credited change in fair value of warrant liability on our consolidated statements of operations by $1,267 for year ended December 31, 2018.

The adoption of this guidance had no impact on the Company’s consolidated statement of cash flows in the current or previous annual reporting periods.

Financial Instruments- Credit Losses

In June 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 on January 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 Emerging Issues Task Force), the AICPA and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Quantitative and Qualitative Disclosures about Market Risk

Financial Statements

The financial statements required by this item can be found beginning on page 50 of this Annual Report on Form 10-K.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis