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MVIS > SEC Filings for MVIS > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for MICROVISION INC


9-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The information set forth in this report in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 3, "Quantitative and Qualitative Disclosure about Market Risk," includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is subject to the safe harbor created by that section. Such statements may include, but are not limited to, projections of revenues, income or loss, capital expenditures, plans for product development and cooperative arrangements, future operations, financing needs or plans of MicroVision , as well as assumptions relating to the foregoing. The words "anticipate," "believe," "estimate," "expect," "goal," "may," "plan," "project," "will," and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Factors that could cause actual results to differ materially from those projected in our forward-looking statements include the following: our ability to obtain financing; market acceptance of our technologies and products; our financial and technical resources relative to those of our competitors; our ability to keep up with rapid technological change; government regulation of our technologies; our ability to enforce our intellectual property rights and protect our proprietary technologies; the ability to obtain additional contract awards and to develop partnership opportunities; the timing of commercial product launches; the ability to achieve key technical milestones in key products; and other risk factors identified in this report under the caption "Item 1A - Risk Factors."


Overview

We are developing our proprietary PicoP® display technology, which can be used by our customers to create high-resolution miniature laser display and imaging engines. Our PicoP display technology utilizes our widely patented expertise in two dimensional Micro- Electrical Mechanical Systems (MEMS), lasers, optics and electronics to create a high quality video or still image from a small form factor device with lower power needs than conventional display technologies. Our strategy is to develop and supply PicoP display technology directly or through licensing arrangements to original equipment manufacturers (OEMs) in market segments including consumer electronics, automotive, and industrial for integration into their products.

During 2012, we aligned our operations to our ingredient brand strategy, simplifying our operations and resulting in an expected significant reduction to our future cash requirements. Our strategy is to focus our efforts on licensing our technology to partners who will produce display engines based on PicoP display technology and incorporate the engine into their products. Our development efforts are focused on supporting our customers in their manufacturing and integration and optimizing PicoP display technology for specific applications.

The primary objective for consumer applications is to provide users of mobile consumer devices such as smartphones, media players, tablet PCs and other consumer electronics products with a large screen viewing experience produced by a small projector either embedded in the device or via an attached accessory. These potential products would allow users to watch movies and videos, play video games, and display images and other data onto a variety of surfaces, freeing users from the limitations of a small, palm-sized screen. PicoP display technology could be further modified to be embedded into a pair of glasses to provide the mobile user with a see-through or occluded personal display to view movies, play games or access other content.

PicoP display technology is currently sold by Pioneer Corporation as part of an aftermarket high-resolution head-up display (HUD) that projects point-by-point navigation, critical operational, safety and other information important to the vehicle operator. With some modification PicoP display technology could also be embedded into a vehicle or integrated into a portable standalone HUD.

Devices enabled by PicoP display technology can be used in field-based professions such as service repair or sales to view and share information such as schematics for equipment repair, sales data, orders or contact information within a CRM application on a larger, more user-friendly display. We also see potential for embedding PicoP display technology in industrial products where our displays could be used for 3D measuring and digital signage, enhancing the overall user experience of these applications. We continue to enter into a limited number of contracts with commercial and U.S. government customers to develop advanced prototypes and demonstration units based on our light scanning technologies.

We develop and procure intellectual property rights relating to our technology as a key aspect of our business strategy. We generate intellectual property from our internal research and development activities and our ongoing performance on development contracts. We also have acquired exclusive rights to various technologies under licensing and acquisition agreements.

In 2012, we reduced our sales and marketing effort for the SHOWWX ™ line of pico projectors and we do not expect to increase our investment in the SHOWWX™ product in the future.

We have incurred substantial losses since inception and expect to incur a substantial loss during the fiscal year ending December 31, 2013.


Results of Operations

Product revenue.

(in thousands)                  2013       2012      $ change     % change

Three months ended June 30   $   917    $   750    $     167         22.3

(in thousands) 2013 2012 $ change % change

Six months ended June 30 $ 2,136 $ 2,279 $ (143) (6.3)

Product revenue during the three and six months ended June 30, 2013 primarily includes sales of components to Pioneer under our "Image by PicoP" ingredient brand business model. Product revenue during the three and six months ended June 30, 2012 included sales of components to Pioneer, sales of our SHOWWX™ line of accessory pico projectors and sales of our PicoP display engines.

Our product sales generally include acceptance provisions. We recognize product revenue upon acceptance of the product by the customer or expiration of the contractual acceptance period, after which there are no rights of return. Provisions are made for warranties at the time revenue is recorded. Warranty expense was not material for any periods presented.

Pioneer has reported a group net loss for the period April to December 2012. The group net loss has been attributed in part due to lower financial performance for its car navigation system business. As a result of this performance, we have reduced our expectations for significant 2013 follow-on orders for their after-market HUD product.

Product revenue was higher during the three months ended June 30, 2013 than the same period in 2012, due to higher sales of components to Pioneer. These increases were partially offset by lower sales of our accessory pico projectors. Product revenue was lower during the six months ended June 30, 2013 than the same period in 2012, due to decreased sales of our PicoP display engines and finished units. These decreases were partially offset by increased component sales. The backlog of product orders at June 30, 2013 was approximately $282,000, compared to $4.4 million at June 30, 2012. The product backlog is scheduled for delivery within one year.

Contract revenue.

                                          % of                  % of
                                        contract              contract
(in thousands)                 2013     revenue      2012     revenue      $ change     % change
Three months ended June 30
Government revenue           $   -           -     $  53          9.7    $     (53)      (100.0)
Commercial revenue              73        100.0      492         90.3         (419)       (85.2)
Total contract revenue       $  73        100.0    $ 545        100.0    $    (472)       (86.6)

                                          % of                  % of
                                        contract              contract
(in thousands)                 2013     revenue      2012     revenue      $ change     % change
Six months ended June 30
Government revenue           $   -           -     $ 156         20.9    $    (156)      (100.0)
Commercial revenue             355        100.0      590         79.1         (235)       (39.8)
Total contract revenue       $ 355        100.0    $ 746        100.0    $    (391)       (52.4)


We earn contract revenue from the sale of prototype units and evaluation kits based on our PicoP display engine and sales of test equipment built specifically for use in PicoP display engine production and from performance on long-term, cost plus fixed fee, and fixed price contracts with commercial customers and the U.S. government. Our contract revenue from sales of prototype units and evaluation kits may vary substantially due to the timing of orders from customers and potential constraints on resources. Our contract revenue from long-term contracts in a particular period is dependent upon when we enter into a contract, the value of the contracts we have entered into, and the availability of technical resources to perform work on the contracts.

We recognize contract revenue on the sale of prototype units and evaluation kits, upon acceptance of the deliverables by the customer or expiration of the contractual acceptance period, after which there are no rights of return. While we anticipate future revenue from these units, quarterly revenue may vary substantially due to the timing of orders from customers and potential constraints on resources.

We recognize contract revenue as work progresses on long-term, cost plus fixed fee, and fixed price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. We have developed processes that allow us to make reasonable estimates of the cost to complete a contract. When we begin work on the contract and at the end of each accounting period, we estimate the costs required to complete the contract and compare these estimates to costs incurred to date. Since our contracts generally require some level of technology development, the actual costs required to complete a contract can vary from our estimates. Recognized revenues are subject to revisions as actual cost becomes certain. Revisions in revenue estimates are reflected in the period in which the facts that give rise to the revision become known. In the future, revisions in these estimates could significantly impact recognized revenue in any one reporting period.

Contract revenue was lower during the three and six months ended June 30, 2013 than the same period in 2012 primarily due to lower sales of test equipment and reduced activity on government contracts in 2013 compared to the prior year.

Our contract backlog at June 30, 2013 was $104,000 compared to $1.0 million at June 30, 2012. The backlog is scheduled for completion during the next twelve months.

Development revenue.

(in thousands)                  2013      2012     $ change     % change

Three months ended June 30   $   880    $   -    $     880           -

(in thousands) 2013 2012 $ change % change

Six months ended June 30 $ 1,180 $ - $ 1,180 -

We earn development revenue from performance on collaborative research and development agreements with commercial customers researching and developing commercial applications for our technology. Our contributions under the collaborative agreements generally include research services, components, and prototype devices and fixtures. Our development revenue from such agreements in a particular period is dependent upon the values and timing of agreements, and the availability of technical resources to perform the work. We evaluate the performance criteria and terms of our collaborative research and development agreements to determine whether revenue should be recognized under a performance-based method or milestone method.

In March 2013, we entered into a $4.6 million collaborative research and development agreement with a prominent electronics company to incorporate our PicoP® display technology into a display engine that could enable a variety of new products. During the three and six months ended June 30, 2013, $880,000 and $1.2 million of revenue was recognized on this agreement.


Based on the terms of this agreement, we recognize development revenue as work progresses on the agreement and as our customer accepts the deliverables using a proportional method based on lesser of the cumulative proportion of total planned costs to be incurred under the agreement versus the cash payments received plus outstanding billings for work accepted by the customer. Since our collaborative agreements generally require some level of technology development, the actual costs required to complete a contract can vary from our estimates. The proportional revenue recognition method we use for collaborative research and development agreements includes adjustments for revisions to estimated total agreement costs. Each period, we evaluate total estimated costs for each agreement and include any significant revisions in the period we become aware of changes in estimated total costs. In the future, revisions in these estimates could significantly impact recognized revenue in any one reporting period.

Our backlog of collaborative research and development agreements at June 30, 2013 was $3.4 million compared to zero at June 30, 2012. The backlog is scheduled for completion during the next twelve months.

Cost of product revenue.

                                          % of                   % of
                                         product                product
(in thousands)                 2013      revenue      2012      revenue     $ change     % change
Three months ended June
30                          $   837        91.3    $  (281)      (37.5)   $   1,118       (397.9)
Six months ended June 30      1,501        70.3      3,894       170.9       (2,393)       (61.5)

Cost of product revenue includes the direct and allocated indirect cost of manufacturing products sold to customers. Direct costs include labor, materials and other costs incurred directly in the manufacture of these products. Indirect costs include labor, manufacturing overhead, and other costs associated with operating our manufacturing capabilities and capacity. Manufacturing overhead includes the costs of procuring, inspecting and storing material, and facility and depreciation costs, and is allocated to cost of product revenue based on the proportion of direct material purchased to support production. In the event that we maintain production capacity in excess of production requirements, cost of product revenue may also include manufacturing overhead associated with the excess capacity.

Cost of product revenue was higher during the three months ended June 30, 2013 than the same period in 2012 because, during the three months ended June 30, 2012, we negotiated a lower price for certain components in inventory that had previously been written down to net realizable value. As a result of this renegotiation, the aggregate purchase price was reduced and we recorded a credit of $1.4 million to cost of product revenue during second quarter of 2012. This change was partially offset by lower costs in 2013 resulting from a change in product mix from sales of lower margin SHOWWX™ products in 2012 to sales of higher margin components to support Pioneer's Cyber Navi production.

Cost of product revenue was lower during the six months ended June 30, 2013 than the same period in 2012 primarily because of the change in product mix from lower margin SHOWWX™ products to sales of higher margin components, decreased inventory write downs and lower manufacturing overhead associated with excess production capacity compared to the prior year. During the six months ended June, 2013 and 2012, cost of product revenue included inventory write downs of $303,000 and $1.1 million, respectively. During the six months ended June 30, 2013, cost of product revenue did not include any manufacturing overhead associated with production capacity in excess of production requirements, compared to $411,000 during the same period in 2012.

The cost of product revenue as a percentage of product revenue can fluctuate significantly from period to period, depending on the product mix and volume, the level of overhead expense and the volume of direct material purchased. It decreased substantially during the six months ended June 30, 2013 than the same period in 2012 due to costs incurred in 2012 associated with aligning our operations to our ingredient brand strategy per above.

Cost of contract revenue.

                                          % of                  % of
                                        contract              contract
(in thousands)                 2013     revenue      2012     revenue      $ change     % change
Three months ended June 30   $  26         35.6    $ 248         45.5    $    (222)       (89.5)
Six months ended June 30       163         45.9      403         54.0         (240)       (59.6)


Cost of contract revenue includes both the direct and allocated indirect costs of producing prototype units and evaluation kits and performing on long-term, cost plus fixed fee, and fixed price contracts. Direct costs include labor, materials and other costs incurred directly in producing prototype units and evaluation kits or performing on a contract. Indirect costs include labor and other costs associated with operating our research and development department and building our technical capabilities and capacity. Cost of contract revenue is determined by the level of direct and indirect costs incurred, which can fluctuate substantially from period to period.

Cost of contract revenue was lower during the three and six months ended June 30, 2013 than the same period in 2012 as a result of the decreased sales of test equipment and reduced activity on government contracts.

The cost of revenue as a percentage of revenue can fluctuate significantly from period to period, depending on the contract cost mix and the levels of direct and indirect costs incurred.

Research and development expense.

(in thousands)                  2013       2012      $ change     % change
Three months ended June 30   $ 2,339    $ 3,227    $    (888)       (27.5)
Six months ended June 30       4,591      7,167       (2,576)       (35.9)

Research and development expense consists of compensation related costs of employees and contractors engaged in internal research and product development activities, direct material to support development programs, laboratory operations, outsourced development and processing work, and other operating expenses. We include costs for work performed under collaborative research and development agreements in research and development costs in the periods incurred. We allocate our research and development resources based on the business opportunity of the available projects, the skill mix of the resources available and the contractual commitments we have made to customers.

We believe that a substantial level of continuing research and development expense will be required to further develop our PicoP technology and to support our customers to integrate our technology into their products under the ingredient brand business model. Accordingly, we anticipate our level of research and development spending will continue to be substantial. We believe that under the ingredient brand business model, we will have lower research and development spending in the future than had we not implemented the strategy.

The decrease in research and development expense during the three and six months ended June 30, 2013, compared to the same period in 2012, is primarily attributable to decreased payroll costs associated with reductions in staffing levels and lower subcontracted services compared to the prior year.

Sales, marketing, general and administrative expense.

(in thousands)                  2013       2012      $ change     % change
Three months ended June 30   $ 2,101    $ 3,064    $    (963)       (31.4)
Six months ended June 30       4,504      6,352       (1,848)       (29.1)

Sales, marketing, general and administrative expense includes compensation and support costs for marketing, sales, management and administrative staff, and for other general and administrative costs, including legal and accounting services, consultants and other operating expenses. We believe that under the ingredient brand business model we will have lower costs in sales, marketing, general and administrative expense in the future than had we not implemented the strategy.

The decrease in sales, marketing, general and administrative expense during the three and six months ended June 30, 2013, compared to the same period in 2012, is primarily due to decreased payroll costs associated with reductions in staffing levels compared to the prior year.


Other income (expense).

(in thousands)                 2013     2012     $ change     % change
Three months ended June 30   $  (3)   $  (9)   $       6        (66.7)
Six months ended June 30        (4)      16          (20)      (125.0)

The change in other income (expense) for the six months ended June 30, 2013 compared to the same period in 2012 resulted primarily from prior year sales of excess inventory.

Liquidity and Capital Resources

We have incurred significant losses since inception. We have funded operations to date primarily through the sale of common stock, convertible preferred stock, warrants, the issuance of convertible debt and, to a lesser extent, from contract revenues, collaborative research and development agreements and product sales. At June 30, 2013, we had $6.0 million in cash and cash equivalents and a working capital deficit of $2.6 million.

Based on our current operating plan, we anticipate that we have sufficient cash and cash equivalents to fund our operations through October of 2013. We will require additional cash to fund our operating plan past that time. We plan to obtain additional cash through the issuance of equity or debt securities. There can be no assurance that additional cash will be available or that, if available, it will be available on terms acceptable to us on a timely basis. If adequate funds are not available on a timely basis, we intend to consider limiting our operations substantially. This limitation of operations could include reducing our planned investment in development projects resulting in reductions in staff, operating costs, capital expenditures and investment in research and development.

We received a report from our independent registered public accounting firm regarding the consolidated financial statements for the year ended December 31, 2012 that includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. These financial statements are prepared assuming we will continue as a going concern.

Cash used in operating activities totaled $6.3 million during the six months ended June 30, 2013, compared to $13.0 million during the same period in 2012. During the six months ended June 30, 2013, the decrease in net cash used in operating activities was primarily driven by lower personnel costs and increased margins on product sales, as well as savings resulting from steps taken to lower our cash use as we aligned our operations with our ingredient brand strategy.

Net cash used in investing activities totaled $83,000 for the six months ended June 30, 2013 compared to net cash used in investing activities of $38,000 during the six months ended June 30, 2012. During the six months ended June 30, 2013, the change in net cash used in investing activities was primarily driven by prior year activity which did not occur in the current year. Prior year activity included a $350,000 decrease of our restricted cash offset by purchases of property and equipment totaling $400,000.

Net cash provided by financing activities totaled $5.5 million for the six months ended June 30, 2013 compared to $14.7 million during the same period in 2012.

In May 2013, we raised $5.85 million before issuance costs of approximately $362,000 from the sale of 2.6 million shares of common stock and warrants to purchase up to an aggregate of 2.0 million shares of our common stock in a registered direct offering. The warrants have an exercise price of $2.886 per share, a five year term, and are exercisable beginning on the date of issuance. Each warrant to purchase a share of common stock may also be exchanged during its term for a number of shares of common stock (but not more than one share of common stock for each warrant so exchanged) with a value determined by a negotiated formula if, among other things, our common stock is then trading at a price at or lower than the warrant exercise price per share. Subject to limitations in the warrants, we may require the warrants be exercised for cash if the closing bid price of our stock is over $3.61 for 20 consecutive trading days and the average daily dollar volume over that period is equal to or exceeds $300,000.

In June 2012, we raised $10.5 million before issuance costs of approximately $823,000 through an underwritten public offering of 4.2 million shares of our common stock and warrants to purchase 2.1 million shares of our common stock. The warrants have an exercise price of $2.65 per share, a five year term, and are exercisable beginning one year from the date of issuance.


In May 2012, we raised $5.0 million before issuance costs of approximately $71,000 from the sale of 3.3 million shares of common stock and warrants to purchase 1.0 million shares of our common stock to a strategic investor. The warrants have an exercise price of $2.12 per share, a three year term, and are exercisable beginning on the date of issuance.

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