MicroVision, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited; amounts below are in millions of dollars except per-share data.
Business context and financial performance
MicroVision develops laser beam scanning (LBS) technology and sells engines, licenses technology, and performs development contracts. Its 2017 strategy emphasized selling LBS engines to original design and equipment manufacturers, alongside licensing.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $6.086 | $4.000 | $8.331 | $11.856 |
| Gross profit | $0.243 | $1.207 | $1.005 | $3.882 |
| Gross margin | 4.0% | 30.2% | 12.1% | 32.8% |
| Operating expenses | $5.489 | $5.284 | $17.384 | $14.999 |
| Operating loss | $(5.246) | $(4.077) | $(16.379) | $(11.117) |
| Net loss | $(5.241) | $(4.070) | $(16.382) | $(11.102) |
| Net loss per share | $(0.07) | $(0.08) | $(0.23) | $(0.22) |
- Q3 revenue rose 52% year over year, primarily because contract revenue increased to $3.429 million from $0.052 million. Product revenue fell 36% to $2.298 million; royalty revenue increased 9% to $0.359 million.
- Nine-month revenue declined 30%, as product revenue fell to $2.298 million from $10.302 million, partly offset by contract revenue of $4.793 million versus $0.072 million. Royalty revenue decreased to $1.240 million from $1.482 million.
- Q3 gross margin contracted sharply. Product costs exceeded product revenue, which management attributed in part to low yields during LBS engine production and a finished-goods inventory valuation adjustment. Nine-month product costs also included $0.202 million of scrap provision and $0.434 million of excess-capacity overhead.
Cash, balance sheet, and financing
- At September 30, cash and cash equivalents were $25.303 million, versus $15.139 million at December 31, 2016. Current assets were $32.988 million and current liabilities $20.339 million; the current ratio was approximately 1.62.
- For the first nine months, operating cash use was $7.847 million, investing cash use was $2.448 million, and financing provided $20.459 million. Financing included public and private share offerings, warrant exercises, and other stock sales.
- Total liabilities were $24.827 million, including $10.034 million of other current liabilities, which included the $10 million technology-company advance. The filing does not report interest-bearing debt on the balance sheet.
- Shares outstanding increased from 68.093 million at year-end 2016 to 78.594 million at September 30, 2017; the filing reports 78.594 million outstanding on October 27.
Outlook, developments, and risks
- Management expected available cash, including anticipated proceeds under the April 2017 development contract, to fund operations into at least Q3 2018. The company said it would need additional capital beyond that point and cautioned that financing might not be available on acceptable terms or in time. Management stated these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- The April 2017 agreement with a major technology company may provide up to $24 million: a $10 million upfront payment already received and up to $14 million in milestone-contingent development fees through Q1 2019. MicroVision recognized $2.6 million of development-fee revenue in the first nine months. The advance is subject to repayment if the customer terminates for missed milestones; if the customer proceeds to manufacture, it is applied as a discount to future component purchases.
- Product backlog was approximately $4.3 million and contract backlog approximately $11.5 million at September 30, for total backlog of $15.8 million. The April development contract represented $11.4 million of contract backlog. Backlog is subject to performance, delivery, and customer-demand risks.
- Customer concentration remained significant: three customers represented 44%, 28%, and 15% of nine-month revenue. The company also relies on single- or limited-source suppliers.
- A supplier arbitration claim seeks $3.6 million plus fees, interest, and costs. MicroVision contests the claim; it could not predict the likelihood or range of loss. Open purchase commitments were $7.4 million. The company also disclosed a $0.5 million accrual for discontinued SHOWWX product commitments.
- Management expected a significant loss for full-year 2017 and cited ongoing losses, uncertain market adoption, execution and production risks, and potential need to reduce operations if capital is unavailable.
- MicroVision expected adoption of the new revenue-recognition standard in 2018 to materially affect its statements. It anticipated recognizing the full $8 million Sony upfront license payment in Q1 2015 under the new standard, increasing 2015 revenue by $7.2 million and reducing 2016 and year-to-date 2017 revenue by $1.0 million and $0.747 million, respectively. The impact on the 2017 development contract was still being evaluated.
Important facts for investors to verify
- Whether the company achieves the development contract milestones needed for future payments and avoids repayment of the $10 million advance.
- Whether cash burn, production costs, and gross margins improve sufficiently to meet the stated cash runway and reduce the need for additional financing.
- Whether the $15.8 million backlog converts to revenue on schedule, and whether customer concentration or supplier constraints affect deliveries.
- The status and potential financial exposure of the Asia Optical arbitration, and the expected effect of revenue-recognition changes on reported periods.
- Whether the company can obtain capital beyond its stated runway without materially diluting shareholders or curtailing operations.