MicroVision, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Financial statements are unaudited. MicroVision develops laser beam scanning (LBS) technology, marketed as PicoP, for display and 3D sensing applications.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $0.792 million | $3.701 million |
| Gross profit (margin) | $0.254 million (32.1%) | $1.112 million (30.0%) |
| Operating expenses | $5.898 million | $4.665 million |
| Operating loss | $5.644 million | $3.553 million |
| Net loss; loss per share | $5.647 million; $0.08 | $3.556 million; $0.07 |
| Cash used in operations | $6.729 million | $2.982 million |
| Cash and cash equivalents | $7.655 million | $15.139 million at Dec. 31, 2016 |
| Total assets; shareholders’ equity | $14.823 million; $2.150 million | $20.106 million; $7.474 million at Dec. 31, 2016 |
Revenue comprised $0 product revenue, $0.535 million royalty revenue and $0.257 million contract revenue. Current assets were $10.986 million versus current liabilities of $7.582 million. The balance sheet shows no borrowings or debt line item; total liabilities were $12.673 million, largely including deferred revenue. Cash declined by $7.484 million during the quarter; investing cash use was $0.755 million, primarily for manufacturing and production equipment. The filing reports $0.435 million of restricted cash separately.
Material changes versus Q1 2016
- Revenue fell $2.909 million, or about 79%, principally because product revenue dropped from $3.155 million to zero after MicroVision completed outstanding Sony component deliveries in Q4 2016.
- Royalty revenue was nearly unchanged, down 1.3%; contract revenue increased from $4,000 to $257,000 as contract activity grew.
- Operating expenses rose 26.4%: research and development increased 27.8% and sales, marketing, general and administrative expense increased 24.8%. Management cited higher development subcontractor costs, headcount and personnel costs, and legal fees related to commercial contracts and engine offerings.
- Net loss increased approximately 59%. Operating cash use more than doubled, primarily due to supplier prepayments for production equipment and higher inventory supporting the engine strategy. Capital expenditures were also higher than in the prior-year quarter.
- Weighted-average shares increased to 68.113 million from 47.566 million, reflecting prior equity issuances; the company reported no financing cash inflow in Q1 2017.
Outlook, risks and unusual items
- Liquidity and going concern: Management expected available cash to fund operations through December 2017, relying in part on the April 2017 development agreement. The filing states substantial doubt exists about the company’s ability to continue as a going concern; additional capital will be needed beyond that period, and availability and terms are uncertain. Without timely funding, management may substantially limit operations.
- April developments: A $6.7 million order received in March for small-form-factor display engines was scheduled for delivery over the next 12 months, with shipments expected to begin mid-2017. Separately, an April agreement with a major technology company could provide up to $24 million: $14 million in development fees over an expected 21 months, contingent on milestones, and a $10 million upfront payment for other items. The filing says the upfront amount may be repayable if the customer terminates for failure to meet milestones. No portion of this agreement was included in the reported March backlog.
- Product and contract backlog at March 31 was approximately $6.7 million and $1.7 million, respectively. Backlog is subject to customer and company performance and is not assurance of realized revenue.
- Customer concentration was high: two customers represented 67% and 26% of Q1 revenue. One customer represented 94% of accounts receivable. MicroVision also depends on single- or limited-source suppliers.
- Open purchase obligations were $11.9 million. The company had accrued $0.5 million for materials commitments relating to the SHOWWX pico projector that exceeded estimated future proceeds.
- A supplier arbitration claim seeks $3.6 million plus attorneys’ fees, interest and costs. MicroVision contests the claim; it cannot predict the likelihood or range of loss. An adverse outcome could materially affect its financial condition.
- Management expects continued significant losses and negative cash flow at least through 2017 and likely thereafter. Commercialization, market acceptance, production capacity, customer timing, competition and access to financing remain material uncertainties.
- Adoption of the new revenue standard is expected to materially affect reported results. MicroVision planned full retrospective adoption from January 1, 2018; it expected the $8 million Sony upfront license fee to have been recognized in Q1 2015 under the new standard, reducing reported 2016 revenue by $1.0 million and Q1 2017 revenue by $246,000. Management also anticipated a material balance-sheet impact from the new lease standard, particularly for its office lease.
Important facts for investors to verify
- Whether the April development contract’s upfront payment was received, and whether milestones are met and contingent fees collected on schedule.
- Whether the $6.7 million engine order converts to shipments, customer product launches and recognized revenue, and whether margins are adequate.
- Cash burn, financing plans and actual liquidity runway, including any equity issuance and associated dilution.
- Progress and outcome of the $3.6 million supplier arbitration and exposure under the $11.9 million of purchase obligations.
- Customer concentration, supplier dependence, backlog conversion, and the quantified effects of adopting the new revenue and lease accounting standards.