MicroVision(MVIS) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) The unaudited financial statements for the period ended September 30, 2020, show a continued net loss and a shareholders' deficit. Total revenue decreased significantly in the third quarter compared to 2019, though it increased for the nine-month period. The company holds a small cash position and faces substantial doubt about its ability to continue as a going concern, with cash expected to last only through Q1 2021. A key event was the shift from component production to a royalty-based model with a major technology customer Condensed Balance Sheet Data (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,027 | $5,837 | | Total current assets | $5,775 | $7,837 | | Total assets | $8,961 | $11,836 | | Total current liabilities | $11,615 | $14,456 | | Total liabilities | $13,154 | $15,813 | | Total shareholders' equity (deficit) | $(4,193) | $(3,977) | Condensed Statements of Operations (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $639 | $1,190 | $2,695 | $4,281 | | Gross profit (loss) | $639 | $(882) | $1,297 | $(857) | | Loss from operations | $(2,818) | $(6,145) | $(10,051) | $(23,192) | | Net loss | $(2,826) | $(6,141) | $(10,064) | $(23,199) | | Net loss per share | $(0.02) | $(0.05) | $(0.07) | $(0.21) | Condensed Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(11,847) | $(19,733) | | Net cash provided by (used in) investing activities | $431 | $(671) | | Net cash provided by financing activities | $10,606 | $13,280 | - Management has expressed substantial doubt about the company's ability to continue as a going concern due to significant historical losses and the need for additional capital. Cash on hand is only expected to fund operations through the first quarter of 2021[26][28] Notes to Condensed Financial Statements The notes detail critical accounting policies and events. Key disclosures include the company's strategic shift to explore a sale or merger after an OEM canceled a planned 2020 product launch. The company received a $1.57 million PPP loan, of which it expects about $690,000 to be forgiven. A major technology customer, accounting for 96% of YTD revenue, transitioned from purchasing components to a royalty agreement against an $8.2 million prepayment. The company also continued to raise capital through its stock purchase agreement with Lincoln Park - In February 2020, an OEM informed the company that products using its interactive display module would not launch in 2020, leading to a 60% headcount reduction and a focus on strategic alternatives like a sale or merger[24] - In March 2020, the company transitioned a contract with a major technology company from component production to a royalty-based model. Royalties earned will be applied against the remaining $8.2 million prepayment from the customer[32] - In April 2020, the company received a $1.57 million loan under the Paycheck Protection Program (PPP). It has used all funds for qualified purposes and intends to apply for partial forgiveness of approximately $690,000[33][34] - For the nine months ended September 30, 2020, one customer accounted for $2.6 million in revenue, representing 96% of total revenue[48] - As of September 30, 2020, the company had raised a total of $9.9 million under its Common Stock Purchase Agreement with Lincoln Park. Subsequent to the quarter end, it raised an additional $5.8 million through October 26, 2020[64][69] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strategic pivot towards seeking a sale, merger, or licensing deal while continuing development of its automotive LiDAR module. The analysis of operations highlights a significant shift in revenue composition, with contract and product revenues declining while license and royalty revenues surged due to a new agreement with a major customer. Operating expenses decreased across the board due to cost-cutting measures, including a major headcount reduction. The company's liquidity remains a critical concern, with existing cash and anticipated proceeds from stock sales expected to fund operations only through Q1 2021, reinforcing the 'going concern' doubt Overview MicroVision, a pioneer in laser beam scanning (LBS) technology, is shifting its focus to strategic alternatives, including a potential sale or merger. This decision follows the failure to secure a customer for its module products in 2020. Concurrently, the company will continue developing its 1st Generation Long Range LiDAR (LRL) module for the automotive market to maximize shareholder value. The COVID-19 pandemic has introduced uncertainties, affecting the supply chain and creating potential disruptions to development and strategic transaction timelines - The company's strategy has shifted to focus on strategic alternatives, including a potential sale or merger, after failing to secure a customer to launch one of its module products[74] - While pursuing strategic alternatives, the company plans to complete the development of its 1st Generation Long Range LiDAR (LRL) module for the automotive market[75] - In March 2020, the company transferred component production to a customer and will now earn a royalty, preserving gross profit potential while conserving cash[76] - The COVID-19 pandemic is causing business uncertainty, with potential impacts on the supply chain, employee productivity, and the ability to complete a strategic transaction[78][79][80] Results of Operations For Q3 2020, total revenue fell to $0.6 million from $1.2 million in Q3 2019, driven by a sharp drop in product and contract revenue. However, this was partially offset by a significant increase in license and royalty revenue to $539,000 from a new agreement. For the nine-month period, total revenue decreased to $2.7 million from $4.3 million year-over-year, mainly due to the completion of a major development contract in 2019. Costs and operating expenses were substantially lower in both the three and nine-month periods due to lower product shipments, reduced inventory write-downs, and significant cuts in personnel and R&D spending Revenue by Type (in thousands) | Revenue Type | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Product Revenue | $100 | $999 | $1,347 | $1,198 | | License and Royalty Revenue | $539 | $17 | $1,323 | $17 | | Contract Revenue | $0 | $174 | $25 | $3,066 | - The significant increase in license and royalty revenue is due to a new agreement effective March 2020 where a customer pays a royalty per component shipped, which is applied against a prepayment[89] - The decrease in contract revenue is attributed to the completion of a development contract with a major customer in 2019[91] - Research & Development expense decreased by 44.7% for the quarter and 53.1% for the nine months YoY, due to reduced personnel-related compensation, benefits, and lower direct materials and subcontractor costs[96][97] - Sales, Marketing, General & Administrative expense decreased by 12.5% for the quarter and 33.8% for the nine months YoY, due to reduced personnel-related compensation and purchased services[98][100] Liquidity and Capital Resources The company's liquidity position is precarious, with $5.0 million in cash and cash equivalents at quarter-end. Management anticipates this, along with proceeds from its stock purchase agreement with Lincoln Park, will only be sufficient to fund operations through Q1 2021. This situation raises substantial doubt about the company's ability to continue as a going concern. Financing activities in 2020 included a $1.57 million PPP loan and raising $9.9 million through the Lincoln Park agreement as of September 30, 2020 - The company anticipates that its current cash and proceeds from its stock purchase agreement will only fund operations through the first quarter of 2021, necessitating additional capital[102] - These factors raise substantial doubt about the company's ability to continue as a going concern[103] - Cash used in operating activities decreased to $11.8 million for the first nine months of 2020, compared to $19.7 million in the same period of 2019, primarily due to reduced operating expenses[104] - Financing activities included receiving a $1.57 million PPP loan and raising $9.9 million under the Lincoln Park stock purchase agreement as of September 30, 2020[106][107] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that its exposure to market risk, including interest rate and foreign exchange rate risk, is not material. Cash and cash equivalents of $5.0 million are held in operating accounts and highly rated money market savings accounts. While some purchase agreements may be in foreign currencies, the exposure is considered immaterial, and the company's major contracts are denominated in U.S. dollars - The company believes its exposure to market and interest rate risk is not material as of September 30, 2020[111] - Major contracts are paid in U.S. dollars, and exposure to foreign currency fluctuations from supply agreements is considered immaterial[113] Item 4. Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, evaluated the company's disclosure controls and procedures as of September 30, 2020, and concluded they were effective. There were no material changes in internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[114] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports that it has settled all claims with Ragentek and its distributor, leading to the dismissal of the arbitration filed in Hong Kong in March 2019. As part of the settlement, a final $100,000 payment to the distributor was no longer required. The company is not currently party to any other legal proceedings expected to have a material adverse effect - The company settled all claims with Ragentek and its distributor and dismissed the arbitration it had filed. A final $100,000 payment to the distributor was waived as part of the settlement[116] Item 1A. Risk Factors This section outlines significant risks to the company's business. Key risks include its history of operating losses and the substantial doubt about its ability to continue as a going concern, driven by the need for additional capital which may not be available. The COVID-19 pandemic poses risks to operations, capital raising, and strategic plans. Business risks are heightened by the dependence on a small number of customers, reliance on third-party manufacturers, and the challenge of achieving market acceptance for its technology. Competitive pressures, rapid technological change, and potential intellectual property disputes also present material threats Financial and Operational Risks The company has a history of substantial losses, with an accumulated deficit of $582.7 million as of September 30, 2020. It requires additional capital to fund operations beyond Q1 2021, and there is no assurance it can be obtained. The failure to secure a customer for a 2020 product launch has led to a focus on strategic alternatives, the success of which is uncertain. The COVID-19 pandemic adds further uncertainty, potentially impacting capital raising, development timelines, and the ability to complete a merger or sale - The company has a history of substantial operating losses and expects to incur significant losses in the future[120] - The company will require additional capital to fund operations past Q1 2021. Failure to obtain it may require substantial curtailment of operations[125] - The COVID-19 pandemic could adversely impact the ability to raise capital, enter licensing agreements, meet development timelines, and complete a sale or merger of the company[124][126] Business and Market Risks The company's success is highly dependent on third parties for manufacturing, sales, and marketing, and on a small number of customers for revenue. For the nine months ended September 30, 2020, one customer accounted for 96% of total revenue. The company relies on single or limited-source suppliers, and any disruption could cause significant delays and lost revenue. There is no certainty that its LBS technology will achieve market acceptance, which is crucial for future growth. Furthermore, there is a risk of being delisted from The Nasdaq Global Market if listing standards are not maintained - The company is dependent on third parties to develop, manufacture, sell, and market products, which reduces control and introduces risk[133] - The company relies on single or limited-source suppliers, and the loss of any could result in lost revenues and damaged customer relationships[129][130] - For the nine months ended September 30, 2020, one customer accounted for 96% of total revenue, highlighting significant customer concentration risk[139] - The company's common stock could be delisted from The Nasdaq Global Market if it fails to meet listing maintenance standards, which would reduce liquidity[143] Technology and Intellectual Property Risks The company operates in an industry with rapid technological change and may not be able to keep pace with competitors, many of whom have substantially greater resources. Its success depends on advancing its technology, which relies on components from other companies. There is also a significant risk of intellectual property litigation. Third-party patents could be used to challenge the company's own patents, and defending against infringement claims would be costly and time-consuming, potentially limiting its ability to commercialize its technology - The company faces competition from established manufacturers with substantially greater financial and technical resources[146] - The industry is characterized by rapid technological change, and the company's success depends on its ability to innovate in a timely and cost-effective manner[147] - The company could face costly lawsuits related to patent infringement, which could limit its ability to commercialize its technology or require expensive licensing agreements[149][150] - Failure to obtain and maintain effective intellectual property protection for its technology could subject the company to increased competition[157] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q. The exhibits include the Certificate of Amendment to the company's Certificate of Incorporation, certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act, and the XBRL Interactive Data Files - The list of exhibits includes the Certificate of Amendment, CEO/CFO certifications (Rule 13a-14(a) and Section 1350), and XBRL data files[169] Signatures The report is duly signed and authorized by the company's Chief Executive Officer, Sumit Sharma, and Chief Financial Officer, Stephen P. Holt, on October 29, 2020 - The Form 10-Q was signed on October 29, 2020, by Sumit Sharma (CEO) and Stephen P. Holt (CFO)[172]