MicroVision, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Although the request identifies 2017 Q4, this filing is an annual report; unaudited fourth-quarter results are included below. Dollar amounts are in U.S. dollars.
Business context
MicroVision develops and commercializes PicoP laser-beam-scanning technology for miniature projection, interactive displays and 3D sensing. Its strategy is to sell scanning engines and components and license its technology to OEMs and ODMs. Revenue remains dependent on a small number of customers and development programs.
Financial highlights
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $10.9 million | $14.8 million |
| Gross profit / margin | $1.0 million / 9.3% | $4.4 million / 29.7% |
| Operating loss | $24.2 million | $16.5 million |
| Net loss | $24.2 million | $16.5 million |
| Basic and diluted loss per share | $0.33 | $0.32 |
| Cash used in operating activities | $15.5 million | $14.8 million |
| Cash and cash equivalents at year-end | $17.0 million | $15.1 million |
| Working capital | $3.1 million | $10.1 million |
Revenue fell 26% year over year as product revenue declined to $2.3 million from $12.8 million following completion of Sony component shipments. Development-contract revenue rose to $7.0 million from $0.1 million, largely reflecting a new major-technology-company contract. FY2017 revenue also included $1.6 million of royalties. Research and development expense increased 24% to $15.1 million; sales, marketing, general and administrative expense increased 16% to $10.2 million. The company recorded $1.0 million of inventory write-downs and reported $4.5 million of inventory at year-end.
Q4 2017: Revenue was $2.56 million, gross profit $10,000, net loss $7.86 million and loss per share $0.10. Q4 2016 revenue was $2.91 million, gross profit $505,000, net loss $5.37 million and loss per share $0.09.
Long-term liabilities were $4.8 million in selected financial data; the balance sheet reports total liabilities of $24.8 million. The filing does not provide a clear breakdown indicating conventional funded debt. Financing activities provided $20.3 million in 2017, principally through common-stock issuances and warrant exercises. Shares outstanding increased from 68.1 million at year-end 2016 to 78.6 million at year-end 2017.
Material changes and significant items
- In April 2017, MicroVision entered a development agreement with a major technology company for up to $24.0 million: $14.0 million in milestone-dependent development fees and a $10.0 million upfront payment. The upfront payment was received; $4.0 million in development fees had been received by year-end. The upfront amount may be credited against future component purchases if the customer proceeds to manufacture, and is repayable if termination results from MicroVision’s failure to meet milestones.
- MicroVision received a $6.7 million order for display engines from Ragentek. The customer deferred receipt of the remaining engines—associated with $4.3 million of planned Q4 revenue—until 2018. Year-end product backlog was approximately $4.3 million; contract backlog was approximately $9.3 million, including the major development program.
- In August, the company raised equity capital through public and private offerings, ATM sales and warrant exercises. These financings supported cash levels but increased the share count.
- The company recognized a $64.3 million reduction in deferred tax assets following the Tax Cuts and Jobs Act rate change; the adjustment was offset by a corresponding valuation-allowance decrease, and no income-tax provision was recorded.
- CEO Alexander Tokman resigned in November 2017; Perry Mulligan became CEO. Tokman’s separation arrangement included 18 months of salary continuation and a $196,000 target bonus payment.
- The company signed a 65-month lease amendment for expanded Redmond facilities. Future minimum operating-lease payments totaled $3.49 million.
Outlook, liquidity and risks
Management expected a significant loss in 2018 and stated that, under its operating plan and assuming anticipated development-contract proceeds, existing cash would fund operations into the third quarter of 2018. Additional capital would be required thereafter. Management said the funding need, recurring losses and uncertainty around future revenue raise substantial doubt about the company’s ability to continue as a going concern. The auditor issued an unqualified opinion on the financial statements but included a going-concern uncertainty paragraph.
Key risks include milestone execution and possible repayment of the $10.0 million upfront payment; reliance on concentrated customers, third-party partners and single- or limited-source suppliers; uncertain product adoption and commercialization; competition and rapid technological change; potential financing needs and shareholder dilution; and inventory, manufacturing and delivery risks. A supplier, Asia Optical, seeks $3.6 million plus fees, interest and costs in arbitration; MicroVision contests the claim and says the outcome and possible loss cannot be predicted. Open purchase obligations were $4.8 million. Management reported effective disclosure controls and internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether the major development program met milestones, generated the remaining fees, and avoided any repayment obligation.
- Whether Ragentek accepted the deferred engine shipments and whether the associated revenue and cash were realized in 2018.
- Actual cash runway, subsequent financing, dilution and progress toward funding needs beyond the company’s stated Q3 2018 horizon.
- Customer concentration and the conversion of reported product and contract backlog into accepted deliveries and cash receipts.
- Status and potential financial exposure of the Asia Optical arbitration and any changes in purchase commitments or inventory valuations.
- Effects of adopting the new revenue-recognition standard, including the stated retrospective changes to prior-period revenue and deferred revenue.