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MVIS > SEC Filings for MVIS > Form 10-Q on 1-Aug-2016All Recent SEC Filings

Show all filings for MICROVISION, INC.

Form 10-Q for MICROVISION, INC.


1-Aug-2016

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 those sections. Such statements may include, but are not limited to, projections of revenues, income or loss, capital expenditures, plans for product development and cooperative arrangements, technology development by third parties, future operations, financing needs or plans of MicroVision, Inc. ("we" or "our"), as well as assumptions relating to the foregoing. The words "anticipate," "could," "would," "believe," "estimate," "expect," "goal," "may," "plan," "project," "will," and similar expressions identify forward-looking statements. Factors that could cause actual results to differ materially from those projected in our forward-looking statements include risk factors identified below in Item 1A.

Overview

MicroVision, Inc. is a pioneer in laser beam scanning (LBS) technology that we market under our brand name PicoP®. We have developed our proprietary PicoP® scanning technology that can be adopted by our customers to create high-resolution miniature projection and three-dimensional sensing and image capture solutions that use laser diodes as the light source. Our PicoP® scanning technology incorporates our patented expertise in two-dimensional Micro-Electrical Mechanical Systems (MEMS), lasers, optics, and electronics to create a small form factor scanning engine with lower power needs than many other technologies that projects high-quality video and still image and/or uses depth sensing to capture three-dimensional data.

Our business strategy is to commercialize our PicoP® scanning technology by enabling original design manufacturers (ODMs) and original equipment manufacturers (OEMs) to produce scanning engines by licensing our technology to those ODMs and OEMs, and by selling key scanning engine components to them, as needed.


While we are optimistic about our technology and the potential for future revenues, we have incurred substantial losses since inception and expect to incur a significant loss during the fiscal year ending December 31, 2016. The consolidated financial statements are prepared assuming we will continue as a going concern.

Key accounting policies and estimates - Revenue recognition

We recognize revenue when: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred and there are no uncertainties regarding customer acceptance, (iii) fees are fixed or determinable, and (iv) collection is reasonably assured.

We generate revenue from many sources and activities. We enter into arrangements that can include various combinations of product sales, services, and licensing activities. For multiple-element arrangements, we use a hierarchy to determine the contract consideration to be used for allocating revenue to deliverables:
(i) vendor-specific objective evidence of fair value (VSOE), (ii) third party evidence of selling price (TPE), and (iii) best estimate of selling price. To date, our revenue sources can be classified as: product revenue, royalty revenue, or contract revenue.

Product revenue

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. No estimates are made for product returns because revenue is recognized upon expiration of the contractual acceptance period.

Royalty revenue

Royalty revenue is revenue under license agreements to our PicoP® scanning technology. We recognize revenue on upfront license fees over the expected time frame that we provide services or have ongoing obligations under the agreement. Ongoing per unit royalties are recognized when reported by our customer to us on a quarterly basis. Currently, we recognize revenue for ongoing per unit royalties one quarter in arrears when reported by our customer, representing when such amounts are fixed and determinable, and all other revenue recognition criteria are met.

Contract revenue

We recognize contract revenue on long-term, cost plus fixed fee, and fixed price contracts using the percentage-of-completion method. Under the percentage-of- completion method, revenue is recognized as work progresses on the contract. The percentage-of-completion method relies on estimates of total expected contract revenue and costs. At the end of each period, we estimate the labor, material and other costs required to complete the contract using data provided by our technical team, project managers, vendors, outside consultants and others and compare these to costs incurred to date.

Recognized revenues are subject to amendments for actual costs incurred. Amendments to revenue and costs to complete estimates are recognized in the period in which the facts become known. In the future, amendments to estimates could significantly impact recognized revenue in any one reporting period. If we are unable to estimate costs on a contract, revenue is recognized using the completed-contract method. Under the completed-contract method, revenue and contract costs are deferred and both are recognized when all deliverables are completed.

License agreement

In March 2015, we signed a license agreement as part of a multiple-element arrangement with a customer for our PicoP® scanning technology. The license agreement granted the customer a non-exclusive license to manufacture and sell scanning engines that use our PicoP® scanning technology.

For multiple-element arrangements, we use a hierarchy to determine the contract consideration to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE) and (iii) best estimate of selling price. Because VSOE and TPE do not exist for the March 2015 agreement, we have allocated the contract consideration based on our best estimate.


Under the terms of this multiple-element arrangement, we received an $8.0 million upfront payment in March 2015 and we will receive a per unit royalty for each display module sold by the customer containing our PicoP® scanning technology. We recognize revenue on the initial $8.0 million payment on a straight-line basis within Royalty Revenues, over a period of eight years which is the expected time frame that we will provide services under the agreement. Ongoing per unit royalties are reported by our customer to us on a quarterly basis. Currently, we recognize revenue for ongoing per unit royalties one quarter in arrears when reported by our customer, representing when such amounts are fixed and determinable, and all other revenue recognition criteria are met. Products delivered under multiple-element arrangements will be recognized upon acceptance of the deliverables by the customer or the expiration of the contractual acceptance period, after which there are no rights of return.

During the three and six months ended June 30, 2016, we recognized $360,000 and $653,000, respectively, from ongoing per unit royalties, and $249,000 and $498,000, respectively, from a prorated portion of the $8.0 million upfront payment. During the three and six months ended June 30, 2015, we recognized $75,000 and $123,000, respectively, from ongoing per unit royalties, and $249,000 and $345,000, respectively, from a prorated portion of the $8.0 million upfront payment. At June 30, 2016, remaining unrecognized upfront license fees are included in current and long-term deferred revenues, amounting to $999,000 and $5.7 million, respectively. At December 31, 2015, unrecognized upfront license fees are included in current and long-term deferred revenues, amounting to $1.0 million and $6.1 million, respectively.

Results of operations

Product revenue

(in thousands)                   2016       2015      $ change     % change
Three Months Ended June 30,   $ 3,530    $ 2,182    $   1,348         61.8
Six Months Ended June 30,       6,685      2,923        3,762        128.7

Product revenue is revenue from our sales of our products, which are MEMS and ASICs. Our product sales generally include acceptance provisions. We recognize product revenue upon acceptance of the product by the customer or the expiration of the contractual acceptance period, after which there are no rights of return. Our quarterly product revenue may vary substantially due to the timing of product orders from customers, product shipments, production constraints and availability of components and raw materials.

Product revenue was higher during the three and six months ended June 30, 2016 compared to the same periods in 2015 due to higher product sales to Sony Corporation as part of continued shipments of orders we received during 2015 and 2014 totaling $14.6 million and $3.8 million, respectively, for key components to be integrated into display modules it manufactures and sells. The backlog of product orders at June 30, 2016 was approximately $5.3 million, compared to $15.0 million at June 30, 2015. The product backlog is scheduled for delivery within the next twelve months.

Royalty revenue

(in thousands)                   2016      2015     $ change     % change
Three Months Ended June 30,   $   609    $ 324    $     285         88.0
Six Months Ended June 30,       1,151      468          683        145.9

Royalty revenue is revenue under license agreements to our PicoP® scanning technology. We recognize revenue on upfront license fees over the expected time frame that we provide services or have ongoing obligations under the agreement. Ongoing per unit royalties are reported by the customer and are recognized as revenue in the period in which the data becomes available to us. Royalty revenue was higher during the three and six months ended June 30, 2016 compared to the same periods in 2015 as a result of higher royalty payments we received from Sony Corporation for display modules it sold.

Contract revenue

(in thousands)                  2016      2015      $ change     % change
Three Months Ended June 30,   $  16    $ 1,537    $  (1,521)       (99.0)
Six Months Ended June 30,        20      1,553       (1,533)       (98.7)


Contract revenue includes revenue from the sale of prototype units and evaluation kits based on our PicoP® scanning engine. Our contract revenue 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 long-term, cost plus fixed fee, and fixed price contracts using the percentage-of-completion method. If we are unable to estimate costs on a contract, revenue is recognized using the completed-contract method. Under the completed-contract method, revenue and contract costs are deferred and both are recognized when all deliverables are completed.

Our contract backlog, including orders for prototype units and evaluation kits, at June 30, 2016 was approximately $45,000 compared to $14,000 at June 30, 2015. The contract backlog is scheduled for completion during the next twelve months.

Cost of product revenue

                                         % of                      % of
                                       product                   product
(in thousands)              2016       revenue        2015       revenue      $ change     % change
Three Months Ended
June 30,                $   2,587         73.3    $   2,074         95.1    $     513         24.7
Six Months Ended June
30,                         5,175         77.4        3,111        106.4        2,064         66.3

Cost of product revenue includes the direct and allocated indirect costs of manufacturing products sold to customers. Direct costs include labor, materials and other costs incurred directly, or charged to us by our contract manufacturers, 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, facility and depreciation costs and reserves for estimated warranty expenses, and is allocated to cost of product revenue based on the proportion of indirect labor which supported production activities.

Cost of product revenue can fluctuate significantly from period to period, depending on the volume and product mix and the level of manufacturing overhead expense. Cost of product revenue was higher during the three and six months ended June 30, 2016 compared to the same periods in 2015 driven primarily by higher product sales to Sony Corporation.

During the three and six months ended June 30, 2016, we expensed approximately $183,000 and $411,000 of manufacturing overhead associated with production capacity in excess of production requirements, compared to $142,000 and $363,000 during the same periods in 2015. Additionally, during the three and six months ended June 30, 2016, we recorded a provision for scrap of $49,000 and $171,000, compared to $149,000 and $287,000 during the same periods in 2015.

Cost of contract revenue

                                           % of                  % of
                                         contract              contract
(in thousands)                  2016     revenue      2015     revenue      $ change     % change
Three Months Ended June 30,   $   5         31.3    $ 782         50.9    $    (777)       (99.4)
Six Months Ended June 30,         6         30.0      789         50.8         (783)       (99.2)

Cost of contract revenue includes both the direct and allocated indirect costs of performing on contracts and producing prototype units and evaluation kits. 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.

Research and development expense

(in thousands)                   2016       2015      $ change     % change
Three Months Ended June 30,   $ 2,879    $ 2,011    $     868         43.2
Six Months Ended June 30,       5,476      3,909        1,567         40.1


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 assign 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 our customers. We believe that a substantial level of continuing research and development expense will be required to further develop our scanning technology.

The increase in research and development expense during the three and six months ended June 30, 2016 compared to the same periods in 2015 was attributable to the allocation of resources to internal research and development activities that were previously designated to a commercial contract in prior periods and increased personnel-related compensation and benefits expenses.

Sales, marketing, general and administrative expense

(in thousands)                   2016       2015      $ change     % change
Three Months Ended June 30,   $ 2,171    $ 1,946    $     225         11.6
Six Months Ended June 30,       4,239      3,867          372          9.6

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.

The increase in sales, marketing, general and administrative expense during the three and six months ended June 30, 2016 compared to the same periods in 2015 was primarily due to increased non-cash compensation expense and professional fees and business development costs.

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 development contract revenues, product sales, and licensing activities. At June 30, 2016, we had $7.2 million in cash and cash equivalents. The consolidated financial statements are prepared assuming we will continue as a going concern.

Based on our current operating plan, and assuming some sales of additional equity under our existing ATM facility discussed in Note 8, we anticipate that we have sufficient cash and cash equivalents to fund our operations through December 2016. We will require additional capital to fund our operating plan past that time. We plan to obtain additional capital through the issuance of equity or debt securities and/or product sales and licensing activities. There can be no assurance that additional capital will be available to us or, if available, will be available on terms acceptable to us or on a timely basis. If adequate capital resources are not available on a timely basis, we intend to consider limiting our operations substantially. This limitation of operations could include reducing investments in our production capacities, research and development projects, staff, operating costs, and capital expenditures.

Operating activities

Cash used in operating activities totaled $7.1 million during the six months ended June 30, 2016 compared to cash provided by operating activities of $1.5 million during the same period in 2015. The change in cash flows from operating activities in the 2015 period primarily reflects an $8.0 million upfront payment we received under the terms of the license agreement with Sony Corporation for our PicoP® scanning technology in March 2015.

Investing activities

During the six months ended June 30, 2016 and 2015, net cash used in investing activities was $193,000 and $719,000.


Financing activities

During the six months ended June 30, 2016 and 2015, net cash provided by financing activities was $6.6 million and $6.0 million.

During the six months ended June 30, 2016, we received gross proceeds of $349,000 as part of an ATM agreement we entered into with Meyers Associates, L.P. in May 2015. As of June 30, 2016, we have received aggregate gross proceeds of approximately $2.6 million before issuance costs of approximately $95,000 from the sale of 928,000 shares of common stock.

In March 2016, we raised $6.9 million before issuance costs of approximately $650,000 from the sale of 4.1 million shares of common stock in an underwritten public offering.

During the six months ended June 30, 2015, we received $3.3 million from the exercise of warrants to purchase 1.5 million shares of common stock, which warrants were issued in connection with earlier financing transactions.

During the three months ended March 31, 2015, we received gross proceeds of $1.0 million as part of an ATM agreement we entered into with Meyers Associates, L.P. in June 2014. We have completed sales under this agreement, having received total proceeds of $4.5 million before issuance costs of approximately $206,000 from the sale of 2.0 million shares of common stock.

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