MicroVision, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. Unless otherwise stated, amounts below are in U.S. dollars; financial statement figures are in millions.
Business context
MicroVision develops laser beam scanning (LBS) technology, including PicoP, for display, sensing and interactive applications. Its strategy centers on LBS engines, technology licensing and development programs for OEMs and ODMs. Revenue in the period was primarily from development-contract work.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2.014 | $1.339 | $4.202 | $1.907 |
| Gross profit | $0.333 | $0.346 | $0.648 | $0.298 |
| Gross margin | 16.5% | 25.8% | 15.4% | 15.6% |
| Operating expenses | $8.784 | $5.997 | $16.219 | $11.895 |
| Operating loss | $(8.451) | $(5.651) | $(15.571) | $(11.597) |
| Net loss | $(8.459) | $(5.656) | $(15.591) | $(11.605) |
| Net loss per share | $(0.10) | $(0.08) | $(0.19) | $(0.17) |
At June 30, cash and cash equivalents were $20.993 million, with $0.435 million of restricted cash. Current assets were $29.391 million and current liabilities $23.939 million, yielding working capital of $5.452 million. Total liabilities were $24.376 million; the balance sheet does not present a separate debt balance. Accumulated deficit was $534.457 million.
For the six months, operating cash outflow was $12.253 million, investing outflow $0.502 million and financing inflow $16.782 million. Cash and restricted cash increased $4.027 million. The financing inflow included net proceeds from common-stock and warrant issuances. The June public offering raised $18.0 million gross through 14.4 million shares, with approximately $1.4 million of issuance costs. Shares outstanding rose from 78.597 million at year-end 2017 to 93.073 million at June 30, 2018.
Material changes versus prior comparable periods
- Q2 revenue increased 50% year over year, and first-half revenue more than doubled, driven by higher contract revenue. Product revenue was zero in both 2018 periods; royalty revenue was zero in Q2 and $11,000 for the first half.
- Contract revenue increased to $2.014 million in Q2 and $4.191 million for the first half, principally from the April 2017 development agreement. Gross profit was nearly flat in Q2 and higher for the first half, but Q2 gross margin fell to 16.5% from 25.8%.
- Research and development expense increased 82% in Q2 and 65% for the first half, reflecting subcontractor costs, higher headcount and personnel costs for LBS engine development. Net losses widened in both comparisons.
- Operating cash use increased substantially from $2.159 million to $12.253 million for the first half, reflecting the higher loss and timing of customer receipts and supplier payments.
- One customer represented 97% of Q2 revenue and 96% of first-half revenue; that customer also accounted for all $2.672 million of accounts receivable at June 30.
Outlook, agreements and key risks
- Management projected that existing cash would fund operations through June 2019, assuming expected development-contract proceeds and receipt of the $5.0 million license payment due in October 2018. The filing states that additional capital will be needed beyond that period and that availability and terms are uncertain.
- The company disclosed substantial doubt about its ability to continue as a going concern. Development-contract receipts depend on milestone completion; failure to meet milestones could reduce expected cash receipts and could require repayment of the $10.0 million upfront payment under the April 2017 agreement.
- A five-year license signed in May 2018 grants a customer exclusivity for display-only applications subject to contract requirements. MicroVision received $5.0 million in June and expects another $5.0 million in October, plus potential engineering, milestone and component-sale payments.
- The April 2017 development contract may provide up to $14.0 million in development fees, contingent on milestones, and was scheduled to conclude in Q1 2019. The company had received $6.5 million in development fees and recognized $8.7 million of development-fee revenue through June 30. Successful completion could result in the separate $10.0 million upfront payment being applied as a discount to future component purchases.
- Management expected significant losses in 2018. The filing also cites uncertain market adoption, reliance on third parties and limited-source suppliers, customer concentration, execution and milestone risks, competition, and need for further financing. Backlog at June 30 was approximately $4.3 million of product orders and $5.7 million of contract backlog; the latter represented the April 2017 development contract.
- Open purchase obligations were $4.5 million. The Asia Optical arbitration claims were settled in Q2 for less than related reserves; management reported no other legal proceedings expected to have a material adverse effect.
- Topic 606 was adopted retrospectively. It changed the timing of certain license and product revenue recognition and restated prior-period results; management stated adoption did not affect cash flows.
Important facts for investors to verify
- Progress against development milestones, remaining contract payments, the potential repayment obligation and whether the program completes on schedule.
- Receipt of the $5.0 million license payment due in October, maintenance of the customer’s exclusivity conditions, and any related engineering or component-sale revenue.
- Cash burn, financing needs and the assumptions behind management’s June 2019 cash-runway estimate, including the timing and amount of contract proceeds.
- Customer concentration, collection of the receivable balance, and conversion of product and contract backlog into recognized revenue and cash.
- Further share issuance and dilution, as well as the effect of Topic 606 revenue timing and contract-cost estimates on reported performance.