MicroVision, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results. MicroVision develops laser beam scanning (LBS) technology and engines marketed as PicoP, for display and 3D sensing applications.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.453 million | $4.155 million | $2.245 million | $7.856 million |
| Gross profit / margin | $0.508 million / 35.0% | $1.563 million / 37.6% | $0.762 million / 33.9% | $2.675 million / 34.1% |
| Operating loss | $5.489 million | $3.487 million | $11.133 million | $7.040 million |
| Net loss | $5.494 million | $3.476 million | $11.141 million | $7.032 million |
| Basic and diluted loss per share | $0.08 | $0.07 | $0.16 | $0.14 |
- Product revenue was zero in both 2017 periods, versus $3.530 million in Q2 2016 and $6.685 million in the first half of 2016. MicroVision said it had completed delivery of prior Sony component orders in Q4 2016; initial shipments under its new Ragentek order began at the end of June 2017.
- Royalty revenue declined 43% in Q2 and 24% in the first half, primarily due to lower licensee sales. Contract revenue rose to $1.107 million in Q2 and $1.364 million for the half, largely reflecting development work under a new agreement.
- Research and development expense increased 28% year over year in both the quarter and first half, attributed to subcontractor costs, headcount and personnel costs for LBS engine development. SG&A increased 7% in Q2 and 16% in the first half.
- Cash and cash equivalents were $17.744 million at June 30, 2017, versus $15.139 million at December 31, 2016. Current assets were $25.459 million and current liabilities $21.294 million; working capital was approximately $4.165 million. Total liabilities were $26.086 million, with no borrowings identified in the presented balance sheet.
- For the six months, operating cash use was $2.159 million (versus $7.098 million in 2016), investing cash use was $2.000 million (versus $0.193 million), and financing provided $6.764 million. Financing included equity sales and warrant exercises. Cash flow benefited from the $10 million contract advance, partly offset by operating losses and inventory growth.
Business developments and outlook
- In April 2017, MicroVision signed a development agreement with a major technology company for an LBS display system. It received a $10 million upfront payment and may earn up to $14 million in milestone-based development fees over an expected 21 months; the contract could total $24 million. The company recognized $0.761 million in development-fee revenue through June 30. The advance is subject to repayment if the customer terminates for missed milestones; if the program succeeds and the customer manufactures using MicroVision components, the advance is to be credited against future purchases.
- MicroVision reported a $6.7 million Ragentek order for small-form-factor display engines, with shipments beginning at quarter-end and the smartphone product expected to launch in China in Q3 2017. Product backlog was approximately $6.7 million, scheduled for delivery within 12 months. Contract backlog was approximately $14.8 million, including $13.2 million under the major technology-company agreement; total backlog under open orders and agreements was $21.5 million.
- Management expected available cash, including anticipated proceeds from the development agreement, to fund operations through December 2017. It stated additional capital would be needed thereafter and might be raised through securities, product sales or licensing. Management warned that funds may not be available on acceptable terms or in time and said substantial operating cuts could be considered if financing is inadequate. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. MicroVision expected significant losses in 2017 and negative cash flow at least through 2017 and likely beyond; no profitability or revenue guidance was provided.
Risks, contingencies and notable items
- Customer concentration remained high: two customers contributed 77% of first-half 2017 revenue. Three customers represented 97% of accounts receivable at June 30. The company also relies on single- or limited-source suppliers.
- An ongoing supplier arbitration seeks $3.6 million plus attorneys’ fees, interest and costs. MicroVision contests the claim; it could not predict the likelihood or range of loss.
- Open purchase obligations were $11.3 million. The company had also accrued $0.5 million for adverse purchase commitments relating to SHOWWX pico-projector materials.
- MicroVision identified uncertainty around meeting development-contract milestones, the possibility of repayment of the $10 million advance, commercialization and market acceptance, competition, manufacturing capacity, and its need for further financing. It reported $3.1 million in advances to its contract manufacturer within other current assets and $6.6 million of cumulative inventory write-downs.
- The company expected adoption of the new revenue-recognition standard in 2018 to materially affect its statements. It anticipated that the Sony $8 million upfront license fee would be recognized in Q1 2015 under the new standard, shifting reported revenue between periods; the treatment of the 2017 development contract was still being evaluated.
- Disclosure controls were judged effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether MicroVision met the major customer’s milestones and received the remaining development fees, and whether any repayment obligation arose for the $10 million advance.
- Whether Ragentek shipments converted into recognized product revenue and customer sell-through, given zero product revenue in the reported quarter.
- Whether the December 2017 cash-runway estimate remained achievable, and what financing or spending actions were needed thereafter.
- Updates on the $3.6 million arbitration claim, the $11.3 million purchase obligations, and customer and supplier concentration.
- The timing and financial-statement effects of the new revenue-recognition standard, including the major development contract and Sony license fees.