MicroVision, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Financial statement amounts below are in millions of dollars unless noted. MicroVision develops and commercializes PicoP laser-beam-scanning technology through licensing and sales of components to original equipment and design manufacturers.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Product revenue | $3.155 | $0.741 |
| Royalty revenue | $0.542 | $0.144 |
| Contract revenue | $0.004 | $0.016 |
| Total revenue | $3.701 | $0.901 |
| Gross profit (loss) | $1.112 | $(0.143) |
| Gross margin | 30.0% | (15.9%) |
| Operating expenses | $4.665 | $3.819 |
| Operating loss | $(3.553) | $(3.962) |
| Net loss | $(3.556) | $(3.962) |
| Net loss per share, basic and diluted | $(0.07) | $(0.09) |
Revenue increased 311%, mainly from higher component sales to Sony and increased royalties. Sony accounted for 90% of Q1 2016 revenue, versus approximately 97% in Q1 2015. Product revenue included shipments against orders received in 2014 and 2015; royalty growth reflected Sony module sales and recognition over time of part of an $8.0 million upfront license fee received in March 2015. Product backlog was approximately $9.1 million at quarter-end, versus $17.2 million a year earlier; contract backlog was approximately $45,000, versus $1.5 million.
Cash, liquidity and capital
- Cash and cash equivalents were $11.209 million at March 31, 2016, up from $7.888 million at December 31, 2015. Restricted cash was $0.435 million.
- Operating cash flow was a use of $2.982 million, compared with $5.050 million provided in Q1 2015. The prior-year inflow principally reflected Sony’s $8.0 million upfront license payment.
- Investing cash outflow was $0.082 million; financing cash inflow was $6.385 million. The company raised $6.9 million gross in a March public offering of 4.1 million shares, with approximately $0.650 million of issuance costs.
- Current assets were $13.701 million and current liabilities $7.439 million, implying working capital of $6.262 million. Total liabilities were $13.646 million; the balance sheet reports no debt balance.
- Common shares outstanding were 51.494 million at March 31, versus 47.423 million at year-end. The March offering restricted additional equity sales until June 20, 2016 without underwriter permission. The company also had an ATM facility, but reported no Q1 proceeds from it.
Material changes and management outlook
- Research and development expense rose 36.8% to $2.597 million, due to higher compensation and resources shifted to internal development. Management expects R&D spending to remain substantial.
- Product cost was 82.0% of product revenue, compared with 139.9% a year earlier. Q1 included $0.228 million of excess-capacity overhead and a $0.122 million inventory scrap provision.
- Management expects a significant loss for 2016 and says losses and negative cash flow are likely to continue at least through 2016. Assuming no additional ATM proceeds, it expects current cash to fund operations through December 2016; additional funding will be needed beyond then.
- Management may seek capital through equity or debt, product sales, or licensing. It cautions that funding may not be available on acceptable terms or in time; if not, it may substantially reduce spending, staffing, R&D, production investment, or capital expenditures.
- The 2015 auditor’s report included an explanatory paragraph expressing substantial doubt about the company’s ability to continue as a going concern. Q1 statements are prepared on a going-concern basis.
Risks, contingencies and unusual items
- Customer concentration is substantial: one customer represented 90% of Q1 revenue and all net accounts receivable at March 31. The company also relies on single- or limited-source suppliers, many overseas.
- A supplier, Asia Optical, is pursuing arbitration seeking $3.6 million plus fees, interest and costs. MicroVision contests the claim and says the outcome and potential loss cannot be predicted.
- The company accrued $0.500 million for adverse purchase commitments associated with SHOWWX materials. Inventory included aggregate obsolescence/scrap write-downs of $7.1 million at March 31.
- Key risks include recurring losses, the need for financing, uncertain market acceptance and revenue forecasting, order and backlog execution, manufacturing and supply-chain dependence, competition, intellectual-property and product-liability claims, and potential NASDAQ listing issues.
- Management concluded disclosure controls were effective; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company secures funding beyond its stated December 2016 cash runway, and the dilution or terms of any financing.
- Whether Sony-related sales and royalties continue, and how revenue concentration and the declining product backlog evolve.
- Whether reported backlog converts to shipments and cash on schedule, given customer acceptance terms and supply constraints.
- The outcome and potential financial impact of the Asia Optical arbitration and other contingencies.
- Whether spending, gross margins and operating cash use improve sufficiently to reduce ongoing financing needs.