MicroVision, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited results; amounts below are in millions of dollars unless stated otherwise. MicroVision develops and licenses PicoP laser display and imaging technology for consumer electronics, automotive and other applications.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $0.611 | $1.870 | $1.830 | $3.671 |
| Gross margin | $0.443 | $1.007 | $1.663 | $2.007 |
| Loss from operations | $(3.406) | $(3.432) | $(6.461) | $(7.080) |
| Net loss | $(3.401) | $(3.436) | $(11.419) | $(7.090) |
| Net loss per share | $(0.08) | $(0.13) | $(0.29) | $(0.27) |
Q2 gross margin was approximately 72% of revenue, versus 54% in the prior-year quarter; the six-month comparison was approximately 91% versus 55%. These percentages reflect the reported revenue and cost of revenue. Six-month 2014 net loss included a $4.967 million loss on the February warrant exchange; excluding that unusual item is not a company-reported adjusted measure.
- Revenue mix: Q2 development revenue was $0.268 million (down 69.5%); product revenue was $0.019 million (down 97.9%); contract revenue was $0.324 million (up 343.8%). For the six months, development revenue rose 23.8% to $1.461 million, while product revenue fell 98.7% to $0.028 million and contract revenue was $0.341 million, down 3.9%.
- Costs and expenses: Six-month R&D expense increased 4.1% to $4.779 million. Sales, marketing, general and administrative expense declined 15.0% to $3.828 million. A $0.455 million six-month gain from selling previously reserved inventory partly offset expenses.
- Cash flow: Six-month operating cash use was $6.666 million, compared with $6.296 million in 2013; investing cash use was $0.081 million. Financing provided $13.836 million, primarily through equity offerings. Cash increased $7.089 million to $12.464 million.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $12.464 million, restricted cash $0.435 million, current assets $13.096 million, and current liabilities $3.953 million. Total liabilities were $4.510 million and shareholders’ equity was $11.011 million, versus a $1.696 million deficit at year-end 2013. The balance sheet reports no current capital lease obligation at June 30; the filing does not identify material conventional debt outstanding.
Material changes and financing
- Revenue fell 67% in Q2 and 50% for the first half, primarily reflecting sharply lower product sales and lower Q2 development revenue. 2013 product revenue included component sales to a former customer.
- In March 2014, the company raised $13.9 million before issuance costs through an underwritten share-and-warrant offering. In June, it raised about $1.0 million before costs through an at-the-market offering; that program permits sales of up to $4.5 million in aggregate.
- In February, MicroVision issued 3.713 million common shares under warrant exchange provisions and recorded a $4.967 million loss because the shares’ fair value exceeded the recorded obligation. The share count rose from 32.069 million at December 31, 2013 to 43.507 million at June 30, 2014.
Outlook, risks and contingencies
- Management estimated that existing cash would fund operations through Q4 2014 and said further capital would be required thereafter. The company planned to seek equity or debt financing, but gave no assurance that funding would be available on acceptable terms or in time. If not, it might substantially reduce operations, staffing and development spending.
- Management expected a substantial fiscal 2014 loss and continued substantial R&D spending. It noted that results depend on customer adoption and product launches incorporating PicoP technology, and that actual results may vary with contract timing, revenue mix and costs. The filing provides no quantified revenue or earnings guidance.
- The 2013 auditor’s report included an explanatory paragraph expressing substantial doubt about the company’s ability to continue as a going concern. The 10-Q financial statements assume continued operation.
- Two commercial customers generated 90% of Q2 revenue and 95% of first-half revenue; three customers represented 92% of accounts receivable at June 30. Backlog totaled approximately $1.1 million: $0.230 million development, $0.147 million product and $0.722 million contract orders.
- A supplier, Asia Optical, sought $3.6 million plus attorneys’ fees, interest and arbitration costs in a proceeding alleging MicroVision failed to accept and pay for ordered products. The company was defending the claim and could not estimate the likelihood or range of loss. It also reported $0.5 million accrued for adverse purchase commitments.
- Other stated risks include recurring losses and cash use, dependence on external financing and a small customer base, reliance on third parties and suppliers, commercialization and market-acceptance uncertainty, competition, intellectual-property disputes, and potential Nasdaq listing and share-price volatility.
Important facts for investors to verify
- Whether financing was secured after the company’s stated Q4 2014 cash runway, and on what dilution or debt terms.
- Subsequent cash burn, revenue performance and customer or product developments, particularly given the high customer concentration and modest backlog.
- The status and potential financial impact of the Asia Optical arbitration and the accrued purchase commitments.
- How the warrant exchange, later share issuance and remaining ATM capacity affect fully diluted share count and per-share value.
- The timing and commercial prospects of customer products using PicoP technology; the filing does not establish that development programs will lead to profitable product sales.