MicroVision, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited; amounts below are in U.S. dollars. Comparisons are to 2017, restated where applicable for adoption of Topic 606.
Business context and financial results
MicroVision develops laser beam scanning (LBS) technology, marketed as PicoP, for display, sensing and interactive applications. Its strategy centers on selling scanning engines and licensing technology to manufacturers and other partners.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $11.57 million | $5.43 million | $15.77 million | $7.33 million |
| Gross profit (loss) | $8.93 million | $(0.28) million | $9.58 million | $0.02 million |
| Operating income (loss) | $0.29 million | $(5.77) million | $(15.28) million | $(17.36) million |
| Net income (loss) | $0.29 million | $(5.76) million | $(15.30) million | $(17.37) million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(19.46) million | $(7.85) million |
- Q3 revenue included $10.0 million of license revenue and $1.57 million of contract revenue; product revenue was zero. For the first nine months, license revenue was $10.01 million, contract revenue $5.76 million and product revenue zero.
- Gross margin was approximately 77% in Q3 and 61% for the first nine months. Q3 diluted earnings per share rounded to $0.00; nine-month diluted loss per share was $0.18.
- Research and development expense was $6.39 million in Q3 and $17.91 million year to date, up 86% and 72%, respectively. Management attributed the increase to subcontractor costs, higher headcount and personnel costs supporting LBS engine development.
Financial position and material changes
- At September 30, cash and cash equivalents were $13.21 million, plus $0.44 million restricted cash. Total current assets were $23.57 million and current liabilities $17.39 million. Total liabilities were $17.92 million; capital lease obligations totaled $40,000. Accumulated deficit was $534.17 million.
- Cash and cash equivalents declined from $16.97 million at December 31, 2017. Nine-month cash used in operations was $19.46 million, investing cash use was $0.97 million, and financing provided $16.68 million.
- In June, the company raised $18.0 million gross through a public offering of 14.4 million shares, incurring approximately $1.4 million in issuance costs. Shares outstanding increased to 93.07 million from 78.60 million at year-end 2017.
- Year-to-date revenue more than doubled, primarily because of the new license agreement. The prior-year period included product revenue, while 2018 product revenue was zero. Contract revenue increased 21% year to date but declined 49% in Q3.
- Q3 included a $1.1 million inventory write-down. Inventory was $3.35 million at quarter-end, mainly finished goods. Accounts receivable was $5.04 million, of which one customer represented 99%.
Outlook, risks and unusual items
- Management estimated cash would fund operations through March 2019, including expected development-contract proceeds and the $5.0 million license payment received in October 2018. The company stated it would need additional capital thereafter and that availability, timing and terms were uncertain. Management disclosed substantial doubt about the company’s ability to continue as a going concern.
- The April 2017 development agreement may provide up to $14.4 million in milestone-based development fees, with work expected to continue into Q2 2019. Proceeds depend on milestone completion. The separate $10.0 million upfront payment is subject to repayment if the customer terminates for MicroVision’s failure to meet milestones; if the product is manufactured using MicroVision components, it would be applied as a discount to future component purchases.
- A May 2018 five-year agreement grants a customer an exclusive license for display-only applications. MicroVision recognized $10.0 million of license revenue after completing the required performance obligations in Q3; it received $5.0 million in June and the remaining $5.0 million in October. Exclusivity depends on contractual requirements. The company also expects potential engineering and component-sale revenue.
- Revenue was highly concentrated: two customers accounted for 99% of nine-month 2018 revenue. The company also relies on single- or limited-source suppliers. Backlog was $7.4 million, including $4.2 million of contract backlog tied to the development agreement; product backlog was $3.2 million. Open purchase obligations were $6.8 million.
- Management expects significant losses in 2018 and ongoing losses and negative cash flow at least through 2018, likely beyond. If financing or expected customer receipts do not materialize, the company may substantially reduce production investment, R&D, staffing, operating costs and capital expenditures.
- The Asia Optical arbitration was settled during Q2 2018 for less than related reserves. Management reported no other legal proceeding it believed reasonably likely to have a material adverse effect. The company also said adoption of the new lease standard, effective in 2019, was expected to materially affect the balance sheet, particularly through recognition of its office lease obligation.
Important facts for investors to verify
- Whether development-contract milestones are achieved and related receipts are collected on schedule, and whether any repayment obligation arises.
- Whether the cash runway estimate through March 2019 remains valid and what financing will be available thereafter, including potential shareholder dilution.
- Whether the exclusive license customer satisfies exclusivity requirements and whether licensing leads to follow-on engineering or component sales.
- Whether MicroVision can convert its development activity and backlog into product shipments and recurring revenue, given zero product revenue in the first nine months and high customer concentration.
- Whether inventory valuation, supplier availability and the $6.8 million of purchase obligations create additional cash or impairment risks.