UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 001-34170
MicroVision, Inc.
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6244 185th Avenue NE, Suite 100
Redmond, Washington 98052
(425) 936-6847
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ |
Accelerated filer x |
Non-accelerated filer ¨ |
Smaller reporting company x |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The number of shares of the registrant's common stock outstanding as of April 22, 2019 was 103,522,820.
TABLE OF CONTENTS
Part I: Financial Information |
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Item 1. Financial Statements (unaudited) |
Page |
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 |
2 |
Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 |
3 |
Condensed Consolidated Statements of Shareholders' Equity (Deficit) for the three months ended March 31, 2019 and 2018 |
4 |
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 |
5 |
Notes to Condensed Consolidated Financial Statements |
6 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
14 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
18 |
Item 4. Controls and Procedures |
19 |
Part II: Other Information |
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Item 1. Legal Proceedings |
19 |
Item 1A. Risk Factors |
19 |
Item 6. Exhibits |
26 |
Signatures |
27 |
1
PART I
ITEM 1. FINANCIAL STATEMENTS
MicroVision, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
March 31, | December 31, | |||||
2019 | 2018 | |||||
Assets | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | 6,979 | $ | 13,766 | ||
Accounts receivable, net of allowances of $0 and $0, respectively | 274 | 476 | ||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 1,199 | 987 | ||||
Inventory | 1,062 | 1,109 | ||||
Other current assets | 1,091 | 1,311 | ||||
Total current assets | 10,605 | 17,649 | ||||
Property and equipment, net | 2,675 | 2,993 | ||||
Operating lease right-of-use asset | 1,559 | - | ||||
Restricted cash | 435 | 435 | ||||
Intangible assets, net | 457 | 486 | ||||
Other assets | 1,470 | 1,470 | ||||
Total assets | $ | 17,201 | $ | 23,033 | ||
Liabilities and shareholders' equity (deficit) | ||||||
Current liabilities | ||||||
Accounts payable | $ | 2,003 | $ | 2,411 | ||
Accrued liabilities | 5,092 | 5,602 | ||||
Billings on uncompleted contracts in excess of related costs | 5 | - | ||||
Other current liabilities | 10,095 | 10,154 | ||||
Current portion of operating lease liability | 642 | - | ||||
Current portion of finance lease obligations | 22 | 21 | ||||
Total current liabilities | 17,859 | 18,188 | ||||
Operating lease liability, net of current portion | 1,746 | - | ||||
Finance lease obligations, net of current portion | 28 | 33 | ||||
Deferred rent, net of current portion | - | 695 | ||||
Total liabilities | 19,633 | 18,916 | ||||
Commitments and contingencies (Note 9) | ||||||
Shareholders' equity (deficit) | ||||||
Preferred stock, par value $0.001; 25,000 shares authorized; zero and | ||||||
zero shares issued and outstanding | - | - | ||||
Common stock, par value $0.001; 150,000 shares authorized; | ||||||
102,105 and 100,105 shares issued and outstanding at March 31, | ||||||
2019 and December 31, 2018, respectively | 102 | 100 | ||||
Additional paid-in capital | 551,650 | 550,133 | ||||
Accumulated deficit | (554,184) | (546,116) | ||||
Total shareholders' equity (deficit) | (2,432) | 4,117 | ||||
Total liabilities and shareholders' equity (deficit) | $ | 17,201 | $ | 23,033 |
The accompanying notes are an integral part of these financial statements.
2
MicroVision, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended | ||||||
March 31, | ||||||
2019 | 2018 | |||||
Product revenue | $ | 199 | $ | - | ||
License and royalty revenue | - | 11 | ||||
Contract revenue | 1,652 | 2,177 | ||||
Total revenue | 1,851 | 2,188 | ||||
Cost of product revenue | 288 | 238 | ||||
Cost of contract revenue | 955 | 1,635 | ||||
Total cost of revenue | 1,243 | 1,873 | ||||
Gross profit | 608 | 315 | ||||
Research and development expense | 5,973 | 4,828 | ||||
Sales, marketing, general and administrative expense | 2,699 | 2,607 | ||||
Total operating expenses | 8,672 | 7,435 | ||||
Loss from operations | (8,064) | (7,120) | ||||
Other expenses, net | (4) | (12) | ||||
Net loss | $ | (8,068) | $ | (7,132) | ||
Net loss per share - basic and diluted | $ | (0.08) | $ | (0.09) | ||
Weighted-average shares outstanding - basic and diluted | 101,971 | 78,610 |
The accompanying notes are an integral part of these financial statements.
3
MicroVision, Inc.
Condensed Consolidated Statements of Shareholders' Equity (Deficit)
(In thousands)
(Unaudited)
Common Stock | Additional | Total | ||||||||||||
Par | paid-in | Accumulated | shareholders' | |||||||||||
Shares | value | capital | deficit | equity (deficit) | ||||||||||
Balance at January 1, 2018 | 78,597 | $ | 79 | $ | 528,873 | $ | (524,086) | $ | 4,866 | |||||
Adoption of ASC 606, Revenue from Contracts with Customers | - | - | - | 5,220 | 5,220 | |||||||||
Share-based compensation expense | 16 | - | 332 | - | 332 | |||||||||
Net loss | - | - | - | (7,132) | (7,132) | |||||||||
Balance at March 31, 2018 | 78,613 | $ | 79 | $ | 529,205 | $ | (525,998) | $ | 3,286 | |||||
Balance at January 1, 2019 | 100,105 | $ | 100 | $ | 550,133 | $ | (546,116) | $ | 4,117 | |||||
Share-based compensation expense | - | - | 351 | - | 351 | |||||||||
Sales of common stock | 2,000 | 2 | 1,166 | - | 1,168 | |||||||||
Net loss | - | - | - | (8,068) | (8,068) | |||||||||
Balance at March 31, 2019 | 102,105 | $ | 102 | $ | 551,650 | $ | (554,184) | $ | (2,432) |
The accompanying notes are an integral part of these financial statements.
4
MicroVision, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended | ||||||
March 31, | ||||||
2019 | 2018 | |||||
Cash flows from operating activities | ||||||
Net loss | $ | (8,068) | $ | (7,132) | ||
Adjustments to reconcile net loss to net cash used in operations: | ||||||
Depreciation and amortization | 552 | 448 | ||||
Share-based compensation expense | 351 | 320 | ||||
Inventory write-downs | - | 4 | ||||
Other non-cash adjustments | - | (10) | ||||
Change in: | ||||||
Accounts receivable, net | 202 | (2,487) | ||||
Costs and estimated earnings in excess of billings on uncompleted contracts | (212) | 422 | ||||
Inventory | 47 | 18 | ||||
Other current and non-current assets | 220 | (702) | ||||
Accounts payable | (193) | (1,010) | ||||
Accrued liabilities | (332) | 755 | ||||
Billings on uncompleted contracts in excess of related costs | 5 | (1) | ||||
Other current liabilities | (59) | (39) | ||||
Operating lease liabilities | (160) | - | ||||
Other long-term liabilities | - | (142) | ||||
Net cash used in operating activities | (7,647) | (9,556) | ||||
Cash flows from investing activities | ||||||
Purchases of property and equipment | (313) | (182) | ||||
Net cash used in investing activities | (313) | (182) | ||||
Cash flows from financing activities | ||||||
Principal payments under finance leases | (4) | - | ||||
Net proceeds from issuance of common stock | 1,177 | - | ||||
Net cash provided by financing activities | 1,173 | - | ||||
Change in cash, cash equivalents, and restricted cash | (6,787) | (9,738) | ||||
Cash, cash equivalents, and restricted cash at beginning of period | 14,201 | 17,401 | ||||
Cash, cash equivalents, and restricted cash at end of period | $ | 7,414 | $ | 7,663 | ||
Supplemental schedule of non-cash investing and financing activities | ||||||
Non-cash additions to property and equipment | $ | 221 | $ | 101 | ||
The following table provides a reconciliation of the cash, cash equivalents, and restricted cash balances as of | ||||||
March 31, 2019 and December 31, 2018: | ||||||
March 31, | December 31, | |||||
2019 | 2018 | |||||
Cash and cash equivalents | $ | 6,979 | $ | 13,766 | ||
Restricted cash | 435 | 435 | ||||
Cash, cash equivalents, and restricted cash | $ | 7,414 | $ | 14,201 |
The accompanying notes are an integral part of these financial statements.
5
MicroVision, Inc. 1. MANAGEMENT'S STATEMENT The Condensed Consolidated Balance Sheets as of March 31, 2019, the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Shareholders' Equity (Deficit) for the three months
ended March 31, 2019 and 2018, and Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018, have been prepared by MicroVision, Inc. ("we" or "our") and have
not been audited. In the opinion of management, all adjustments necessary to state fairly the financial position at March 31, 2019 and the results of operations and cash flows for all periods presented have been made
and consist of normal recurring adjustments. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules of the Securities and Exchange Commission (SEC). The year-end condensed balance sheet data was derived from audited
financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. You should read these condensed consolidated
financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The results of
operations for the three months ended March 31, 2019 are not necessarily indicative of the operating results that may be attained for the entire fiscal year. We have incurred significant losses since inception. We have funded our 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 March 31, 2019, we had $7.0 million in cash and cash equivalents. Based on our current operating plan that includes expected proceeds from a development contract signed in April 2017 with a
major technology company, expected proceeds of $2.0 million from the April 2019 registered direct offering,
and without additional proceeds from the sale of shares under our existing Purchase Agreement with Lincoln Park Capital Fund, LLC ("Lincoln Park"), we
anticipate that we have sufficient cash and cash equivalents to fund our operations through July 2019. Our receipt of proceeds under our April 2017 development contract is subject to our
completion of certain milestones, and we can provide no assurance that such milestones will be completed. 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, product sales and/or 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. We are introducing new technology and products into an emerging market which creates significant uncertainty about our ability to accurately project revenue, costs and cash flows. Our
capital requirements will depend on many factors, including, but not limited to, the commercial success of our laser beam scanning (LBS) engines, the rate at which original equipment
manufacturers (OEMs) or original design manufacturers (ODMs) introduce products incorporating our PicoP® scanning technology and the market acceptance and competitive position of such
products. If revenues are less than we anticipate, if we fail to meet milestones for future payments or have to repay amounts already received under our April 2017 development contract, if the mix
of revenues and the associated margins vary from anticipated amounts or if expenses exceed the amounts budgeted, we may require additional capital earlier than expected to fund our
operations. In addition, our operating plan provides for the development of strategic relationships with suppliers of components and systems and equipment manufacturers that may require
additional investments by us. These factors raise substantial doubt regarding our ability to continue as a going concern. Our unaudited consolidated financial statements have been prepared assuming we will continue as
a going concern and do not include any adjustments that might be necessary should we be unable to continue as a going concern. 2. NET LOSS PER SHARE Basic net loss per share is calculated using the weighted-average number of common shares outstanding during the period. Net loss per share, assuming dilution, is calculated using the
weighted-average number of common shares outstanding and the dilutive effect of all potentially dilutive securities, including common stock equivalents and convertible securities. Net loss per
share, assuming dilution, is equal to basic net loss per share because the effect of dilutive securities outstanding during the period, including options and warrants computed using the treasury
stock method, is anti-dilutive. 6
The components of basic and diluted net loss per share were as follows (in thousands, except loss per share data): For the three months ended March 31, 2019 and 2018, we excluded the following securities from net loss per share as the effect of including them would have been anti-dilutive: options
outstanding and warrants exercisable into a total of 4,494,000 and 6,946,000 shares of common stock, respectively, and 1,149,000 and 185,000 nonvested restricted stock units, respectively. 3. LONG-TERM CONTRACTS In May 2018, we signed a five-year license agreement with a customer granting them exclusive license to our LBS technology for display-only applications. As part of the agreement, we
received a first payment of $5.0 million in June 2018 and the second payment of $5.0 million in October 2018. The contract includes requirements that must be met in order to maintain exclusivity.
If this customer acquires a customer, we expect orders for component sales. We may also receive payments for non-recurring engineering expenses associated with process and product transfer
and qualification milestones. During the year ended December 31, 2018 we completed the performance obligations required by the contract. As a result, we recognized $10.0 million in license
and royalty revenue during the year ended December 31, 2018. In April 2017, we signed a contract with a major technology company to develop an LBS display system. Under this agreement, we are working to develop a new generation of MEMS,
ASICs and related firmware for a high resolution, LBS-based product that the technology company is planning to produce. Under the agreement, we received an upfront payment of
$10.0 million in 2017 and may receive up to $15.1 million in fees for development work that is expected to span into the second quarter of 2019. Our receipt of the development fees is
contingent on completion of milestones in 2017, 2018, and into the second quarter of 2019. As of March 31, 2019, we have received $12.3 million in fees for development work and recognized
$13.7 million in revenue. Upon successful completion of the development program, if the major technology company decides to manufacture the product with the MicroVision display components,
the $10.0 million upfront payment would be applied as a discount to future component purchases from us. If the contract is terminated by the technology company for our failure to meet
milestones, the $10.0 million upfront payment is subject to repayment. We are recognizing revenue on the $15.1 million in development fees over time based on the proportion of total cost
expended (under Topic 606, the "input method") to the total cost expected to complete the contract performance obligation. During the quarter ended March 31, 2019, we have
recognized $1.6 million of contract revenue from development fees on this agreement compared to $2.1 million during the quarter ended March 31, 2018. We have an amount equal to the $10.0
million upfront payment classified as an other current liability on the balance sheet. 4. REVENUE RECOGNITION The following is a description of principal activities from which we generate revenue. Revenues are recognized when control of the promised goods or services are transferred to our
customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. We generate all of our revenue from contracts with customers. We evaluate contracts based on the 5-step model as stated in Topic 606 as follows: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv)
allocate the transaction price, and (v) recognize revenue when (or as) performance obligations are satisfied. A contract contains a promise (or promises) to transfer goods or services to a customer. A performance obligation is a promise (or a group of promises) that is distinct, as defined in the
revenue standard. The transaction price is the amount of consideration an entity expects to be entitled to from a customer in exchange for providing the goods or services. A number of factors should be
considered to determine the transaction price, including whether there is variable consideration, a significant financing component, noncash consideration, or amounts payable to the customer.
The determination of variable consideration will require a significant amount of judgment. In estimating the transaction price we will use either the expected value method or the most likely
amount method. The transaction price is allocated to the separate performance obligations in the contract based on relative standalone selling prices. Determining the relative standalone selling price can be
challenging when goods or services are not sold on a standalone basis. The revenue standard sets out several methods that can be used to estimate a standalone selling price when one is not
directly observable. Allocating discounts and variable consideration must also be considered. Allocating the transaction price can require significant judgement on our part. Revenue is recognized when (or as) the customer obtains control of the good or service/performance obligations are satisfied. Topic 606 provides guidance to help determine if a
performance obligation is satisfied at a point in time or over time. Where a performance obligation is satisfied over time, the related revenue is also recognized over time. 7
Disaggregation of revenue The following table provides information about disaggregated revenue by timing of revenue recognition, (in thousands): Contract balances The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers (in thousands): Under Topic 606, our rights to consideration are presented separately depending on whether those rights are conditional or unconditional. We present our unconditional rights to consideration
as "accounts receivable" in our Consolidated Balance Sheet. Contract assets represent rights to consideration that are subject to a condition other than the passage of time and will be comprised primarily of costs and estimated profits in excess of
billings on uncompleted contracts and estimated accrued sales-based royalty revenue. Contract costs in excess of billing are included in the "Costs and estimated earnings in excess of billings on uncompleted contracts" line of our Consolidated Balance Sheet. 8
Significant changes in the contract assets and the contract liabilities balances during the period are as follows (in thousands, except percentages): During the three months ended March 31, 2019, we billed $1.4 million on our development contracts. Of this amount, $987,000 was included in contract assets at December 31, 2018. We also
recognized revenue of $1.6 million during the three months ended March 31, 2019, resulting in a contract asset of $1.2 million. Contract acquisition costs We are required to capitalize certain contract acquisition costs consisting primarily of commissions paid when contracts are signed. We
currently do not pay any commissions upon the signing of a contract; therefore, no commission cost has been incurred as of March 31, 2019. Transaction price allocated to the remaining performance obligations The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the
reporting period. The estimated revenue does not include the $10.0 million upfront payment received from a major technology company to develop an LBS display system due to uncertainty
around the timing of recognition. Additionally, the estimated revenue does not include amounts of variable consideration attributable to royalties or unexercised contract renewals (in thousands): 5. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS AND SUPPLIERS Concentration of credit risk Financial instruments that potentially subject us to a concentration of credit risk are primarily cash equivalents and accounts receivable. We typically do not require collateral from our
customers. As of March 31, 2019, our cash and cash equivalents are comprised of short-term highly rated money market savings accounts. Concentration of major customers and suppliers For the three months ended March 31, 2019, one customer accounted for $1.6 million in revenue, representing 88% of our total revenue. A second customer
accounted for $199,000 in revenue, representing 11% of our total revenue. For the three months ended March 31, 2018, one customer accounted for $2.1 million in revenue, representing
95% of our total revenue. One customer accounted for $267,000, or 98% of our net accounts receivable balance at March 31, 2019. A significant concentration of our components and the products we sell are currently manufactured and obtained from single or limited-source suppliers. The loss of any single or limited-
source supplier, the failure of any of these suppliers to perform as expected, or the disruption in the supply chain of components from these suppliers could subject us to risks and uncertainties
including, but not limited to, increased cost of sales, possible loss of revenues, or significant delays in product deliveries, any of which could adversely affect our financial condition and operating
results. 9
6. INVENTORY Inventory consists of the following: Inventory consists of raw materials and finished goods assemblies. Inventory is computed using the first-in, first-out (FIFO) method and is stated at the lower of cost and net realizable value.
Management periodically assesses the need to account for obsolescence of inventory and adjusts the carrying value of inventory to its net realizable value when required. As of March 31, 2019
and December 31, 2018, $1.4 million of materials that are not expected to be consumed during the next twelve months are classified as "other assets" on the balance sheet. 7. SHARE-BASED COMPENSATION We issue share-based compensation to employees in the form of stock options, restricted stock units (RSUs), and performance stock units (PSUs). We account for the share-based
awards by recognizing the fair value of share-based compensation expense on a straight-line basis over the service period of the award, net of estimated forfeitures. The fair value of stock options
is estimated on the grant date using the Black-Scholes option pricing model. The fair value of RSUs is determined by the closing price of our common stock on the grant date. The PSUs are
valued using a binomial option pricing model using the following inputs: stock price, volatility, and risk-free interest rates. Changes in estimated inputs or using other option valuation methods may
result in materially different option values and share-based compensation expense. The following table summarizes the amount of share-based compensation expense by line item on the statements of operations: Options activity and positions The following table summarizes shares, weighted-average exercise price, weighted-average remaining contractual term and aggregate intrinsic value of options outstanding and options
exercisable as of March 31, 2019: 10
As of March 31, 2019, our unrecognized share-based employee compensation related to stock options was $1.4 million which we plan to amortize over the next 2.1 years, our unrecognized
share-based compensation related to RSUs was $456,000 which we plan to amortize over the next 2.1 years, and our unrecognized share-based compensation related to the PSUs was $15,000,
which we plan to amortize over the next 2.2 years. 8. LEASES In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires lessees to recognize a right-of-use (ROU) asset
and lease liability in the balance sheet for all leases, including operating leases, with terms of more than twelve months. Recognition, measurement and presentation of expenses and cash flows
from a lease by a lessee have not significantly changed from previous guidance. The amendments also require qualitative disclosures along with specific quantitative disclosures. We adopted this
guidance using the cumulative-effect adjustment method on January 1, 2019, meaning we did not restate prior periods. Current year financial information is presented under the guidance in
Topic 842, while prior year information will continue to be presented under Topic 840. Adoption of the standard resulted in the recognition of an operating ROU asset of approximately $1.6 million,
a lease liability of approximately $2.5 million, and a reduction in other short-term and long-term liabilities of $873,000. Adoption of the standard did not have a material impact on our Statement of
Operations or Statement of Cash flows. Accounting for our capital leases remains substantially unchanged. We determine if an arrangement is a lease at inception. On our balance sheet, our office lease is included in Operating lease right-of-use asset, Current portion of operating lease liability and
Operating lease liability, net of current portion. On our balance sheet, finance leases are included in Property and equipment, Current portion of finance lease obligations and Finance lease
obligations, net of current portion. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU
assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. For leases that do not provide an implicit rate, we use our
incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Significant judgment may be required when determining whether a contract contains a lease, the length of the lease term, the allocation of the consideration in a contract between lease and
non-lease components, and the determination of the discount rate included in our office lease. We review the underlying objective of each contract, the terms of the contract, and consider our
current and future business conditions when making these judgments. Our leases have remaining lease terms of two to four years. Our office space lease contains an option to extend the lease for one period of five years. This extension period is not included in
our ROU asset or lease liability amounts. Our office lease agreement includes both lease and non-lease components, which are accounted for separately. Our finance leases contain options to
purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless we are reasonably certain to exercise the purchase option. The components of lease expense were as follows: 11
Supplemental cash flow information related to leases was as follows: Supplemental balance sheet information related to leases was as follows: 12
As of March 31, 2019, maturities of lease liabilities were as follows: 9. COMMITMENTS AND CONTINGENCIES Litigation In March 2019, we filed a Notice of Arbitration in Hong Kong against Ragentek as a result of its failure to perform its obligations under a purchase order with
us. The relief sought is $4.0 million dollars plus interest and arbitration costs. At this time we cannot predict the likelihood of a favorable outcome. We are subject to various claims and pending or threatened lawsuits in the normal course of business. We are not currently party to any legal proceedings that management believes are
reasonably possible to have a material adverse effect on our financial position, results of operations or cash flows. Purchase commitments At March 31, 2019, we had $5.2 million in open purchase obligations that represent commitments to purchase inventory, materials, capital equipment, and other goods used in the normal
operation of our business. 10. COMMON STOCK AND WARRANTS In January 2019, we raised $1.2 million before issuance costs of approximately $26,000 through a registered direct offering of 2.0 million shares of our
common stock to a private investor. In December 2018, we raised $4.2 million before issuance costs of approximately $524,000 through an underwritten public offering of 7.0 million shares of our common stock. In June 2018, we raised $18.0 million before issuance costs of approximately $1.4 million through an underwritten public offering of 14.4 million shares of our common stock. 13
11. SUBSEQUENT EVENTS In April 2019, we entered into an agreement with Lincoln Park. Proceeds from any sales of stock are expected to be used for general corporate purposes. Under the terms of the agreement, Lincoln Park initially purchased $1.0 million in shares of common stock at a purchase price of $0.9821. In addition, for a period of 24 months, we have the
right, at our sole discretion, to sell up to $10.0 million of additional common stock to Lincoln Park, subject to certain limitations, based on the prevailing market prices of our shares at the time of
each sale. Lincoln Park has no right to require any sales and is obligated to purchase the common stock as directed by us, subject to certain limitations set forth in the agreement. Lincoln Park has
agreed not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of our shares of common stock. In consideration for entering into the agreement, we have
issued 250,000 shares of common stock to Lincoln Park as a commitment fee. No warrants, derivatives, or other share classes are associated with this agreement. In April 2019, we raised an additional $2.0 million before issuance costs through a registered direct offering of 2.3 million shares of our common stock to a private investor.
This transaction is expected to close on April 26, 2019. 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
Disclosures 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," "our," or "us"), 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 scanning technology that
can be used in products for interactive projection, consumer light detection and ranging (LiDAR), automotive LiDAR, and augmented and mixed reality. Our PicoP® scanning technology is based on
our patented expertise in systems that include micro-electrical mechanical systems (MEMS), laser diodes, opto-mechanics, and electronics and how those elements are packaged into a small form factor, low power
scanning engine that can display, interact and sense, depending on the needs of the application. These systems utilize edge computing and machine intelligence as part of the solutions. Our strategy includes selling LBS engines to original equipment manufacturers (OEMs) and original design manufacturers (ODMs). We plan to offer scanning engines to support a wide array
of applications: an interactive scanning engine for smart home speakers and other Internet of Things (IoT) products, a LiDAR engine for consumer electronic
applications, and solutions for augmented and mixed reality devices. We also are developing LiDAR for automotive collision avoidance systems. In addition to selling engines, we have licensed our patented PicoP® scanning technology to other companies for incorporation into their scanning engines for projection. We sell our
customers key components needed to produce their laser scanning engines and/or license our technology in exchange for a royalty fee or margin for each scanning engine they sell. Companies
to whom we license our PicoP® scanning technology are typically OEMs or ODMs who are in the business of making components or products ready for sale to end users. To date, we have
primarily focused on the consumer electronics market, however, we believe that our LBS technology could support multiple applications and markets including automotive, medical, and
industrial. 14
While we are optimistic about our technology and the potential for future revenues, we have incurred substantial losses since inception and we expect to incur a significant loss during the fiscal
year ending December 31, 2019. Key accounting policies and estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that materially affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We evaluate our estimates on a continuous basis. We base our estimates on historical data,
terms of existing contracts, our evaluation of trends in the consumer display and 3D sensing industries, information provided by our current and prospective customers and strategic partners,
information available from other outside sources and on various other assumptions we believe to be reasonable under the circumstances. The results form the basis for making judgments
regarding the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Except for policy changes in accounting for leases associated with our adoption of Topic 842 (see Note 8 "Leases" in the Notes to Condensed Consolidated Financial Statements in
Item 1), there have been no significant changes to our critical accounting judgments, policies, and estimates as described in our Annual Report on Form 10-K for the year ended December 31,
2018. Results of operations Product revenue Product revenue is revenue from sales of our products which are LBS engines, MEMS and ASICs. Revenue is recognized when the product is shipped to the customer because control
passes to the customer at the point of shipment. Our product sales generally include acceptance provisions, however, because we generally can objectively determine that we have met agreed-
upon customer specifications prior to shipment, control of the item passes at the time of shipment. 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 backlog at March 31, 2019 and 2018 was zero and $4.3 million, respectively. The change in backlog from March 31, 2018 to March 31, 2019 was primarily due to the
uncertainty of fulfilling the remainder of our March 2017 order from Ragentek. We are pursuing our legal rights to enforce the contract. License and royalty revenue License and royalty revenue is revenue under license agreements to our PicoP® scanning technology. We recognize revenue on upfront license fees at a point in time if the nature of the
license granted is a right-to-use license, representing functional intellectual property with significant standalone functionality. If the nature of the license granted is a right-to-access license,
representing symbolic intellectual property, which excludes significant standalone functionality, we recognize revenue over the period of time we have ongoing obligations under the agreement.
We will recognize revenue from sales-based royalties on the basis of the quarterly reports provided by our customer as to the number of royalty-bearing products sold or otherwise distributed. In
the event that reports are not received, we will estimate the number of royalty-bearing products sold by our customers. 15
Contract revenue Contract revenue includes revenue from performance on development contracts and 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 either at a point in time, or over time, depending upon the characteristics of the individual contract. If control of the deliverable(s) occur over time, the
revenue is recognized in proportion to the transfer of control. If control passes to the customer only upon completion and transfer of the asset, revenue is recognized at the completion of the
contract. In contracts that include significant customer acceptance provisions, we recognize revenue only upon acceptance of the deliverable(s). In April 2017, we signed a contract with a major technology company to develop an LBS display system. Under the terms of this agreement, we may receive $15.1 million in fees for
development contingent on completion of milestones. As of March 31, 2019, we have received $12.3 million in fees for development work. We are recognizing revenue on the $15.1 million in
development fees over time utilizing the input method of total costs expended to total cost expected to complete the performance obligation. The original contract was for $14.0 million in fees for
development, but we and the customer agreed to add $1.1 million in additional work to total $15.1 million. As of March 31, 2019, we have recognized $13.7 million of contract revenue from
development fees on this agreement. The decrease in contract revenue during the three months ended March 31, 2019 compared to the same period in 2018 was attributed to decreased contract activity. Our contract backlog,
including orders for prototype units and evaluation kits, at March 31, 2019 and 2018 was approximately $1.3 million and $7.2 million, respectively. The April 2017 development contract represents
$1.3 million of the contract backlog and is scheduled for completion during the second quarter of 2019. Cost of product revenue Cost of product revenue includes the direct and allocated indirect costs of products sold to customers. Direct costs include labor, materials, reserves for estimated warranty expenses, 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 other costs, and is
allocated to cost of product revenue based on the proportion of indirect labor which supported production activities. 16
Cost of product revenue can fluctuate significantly from period to period, depending on the product mix and volume, the level of manufacturing overhead expense and the volume of direct
material purchased. Cost of product revenue was higher during the three months ended March 31, 2019 compared to the same period in 2018 due to higher product shipments. Cost of contract revenue 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. The decrease in the cost of contract revenue during the three months ended March 31, 2019 was primarily attributed to reduced activity on the April 2017 development contract. Research and development expense 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 months ended March 31, 2019 compared to the same period in 2018 was attributable to higher costs related to direct
materials and increased personnel-related compensation and benefits expenses related to our LBS engine development. Sales, marketing, general and administrative expense 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 months ended March 31, 2019 compared to the same period in 2018 was attributed to increased
personnel-related compensation and benefits expenses as well as professional services, offset by lower legal fees related to commercial contracts. 17
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 March 31, 2019, we had $7.0 million in
cash and cash equivalents. Based on our current operating plan that includes expected proceeds from a development contract signed in April 2017 with a major technology company,
expected proceeds of $2.0 million from the April 2019 registered direct offering,
and without additional proceeds from the sale of shares under our existing Purchase Agreement
with Lincoln Park, we anticipate that we have sufficient cash and cash equivalents to fund our operations through July 2019. Our receipt of proceeds under our April 2017 development contract is
subject to our completion of certain milestones, and we can provide no assurance that such milestones will be completed. 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, product sales and/or 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.
These factors raise substantial doubt regarding our ability to continue as a going concern. Our unaudited consolidated financial statements have been prepared assuming we will continue as a
going concern and do not include any adjustments that might be necessary should we be unable to continue as a going concern. Operating activities Cash used in operating activities totaled $7.6 million during the three months ended March 31, 2019 compared to cash used in operating activities of $9.6 million during the same period in
2018. The change in cash flows from operating activities is primarily attributed to the timing of payments received from customers and payments made to suppliers. Investing activities During the three months ended March 31, 2019 and 2018, net cash used in investing activities was $313,000 and $182,000, respectively, and was attributed to purchases of property and
equipment. Financing activities In January 2019, we raised $1.2 million before issuance costs of approximately $26,000 through a registered direct offering of 2.0 million shares of our common stock to a private
investor. In December 2018, we raised $4.2 million before issuance costs of approximately $524,000 through an underwritten public offering of 7.0 million shares of our common stock. In June 2018, we raised $18.0 million before issuance costs of approximately $1.4 million through an underwritten public offering of 14.4 million shares of our common stock. During the three months ended March 31, 2018, we had no cash provided from financing activities. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate and market liquidity risk As of March 31, 2019, all of our cash and cash equivalents have variable interest rates. Therefore, we believe our exposure to market and interest rate risk is not material. 18
Our investment policy generally directs that the investment manager should select investments to achieve the following goals: principal preservation, adequate liquidity and return. As of March
31, 2019, we had $7.0 million in cash and cash equivalents, which are comprised of operating checking accounts and short-term, highly rated money market savings accounts. Foreign exchange rate risk Our major contract and collaborative research and development agreements, product sales, and licensing activity payments are currently made in U.S. dollars. However, in the future we
may enter into contracts or collaborative research and development agreements in foreign currencies that may subject us to foreign exchange rate risk. We have entered into purchase orders and
supply agreements in foreign currencies in the past and may enter into such arrangements, from time to time, in the future. We believe our exposure to currency fluctuations related to these
arrangements is not material. We may enter into foreign currency hedges to offset material exposure to currency fluctuations when we can adequately determine the timing and amounts of the exposure. ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report and, based on this
evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) that occurred during the quarter ended March 31, 2019 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting. PART II. In March 2019, we filed a Notice of Arbitration in Hong Kong against Ragentek as a result of its failure to perform its obligations under a purchase order with us. The relief sought is
$4.0 million dollars plus interest and arbitration costs. At this time we cannot predict the likelihood of a favorable outcome. We are also subject to various claims and pending or threatened lawsuits in the normal course of business. We are not currently party to any other legal proceedings that management
believes are reasonably possible to have a material adverse effect on our consolidated financial position, results of operations or cash flows. You should carefully consider the risks described below together with the other information set forth in this report, which could materially affect our business, financial condition and
future results. The risks described below are not the only risks facing our company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and operating results. Risk Factors Related to Our Business and Industry We have a history of operating losses and expect to incur significant losses in the future. We have had substantial losses since our inception. We cannot assure you that we will ever become or remain profitable. The likelihood of our success must be considered in light of the expenses, difficulties and delays frequently encountered by companies formed to develop and commercialize new technologies.
In particular, our operations to date have focused primarily on research and development of our PicoP® scanning technology system and development of demonstration units. We are unable
to accurately estimate future revenues and operating expenses based upon historical performance. 19
We cannot be certain that we will succeed in obtaining additional development revenue or commercializing our technology or products. In light of these factors, we expect to continue to incur
significant losses and negative cash flow at least through 2019 and likely thereafter. We cannot be certain that we will achieve positive cash flow at any time in the future. We will require additional capital to fund our operations and to implement our business plan. If we do not obtain additional capital, we may be required to curtail our operations substantially.
Raising additional capital may dilute the value of current shareholders' shares. Based on our current operating plan that includes expected proceeds from a development contract signed in April 2017 with a major technology company,
expected proceeds of $2.0 million from the April 2019 registered direct offering,
and without additional proceeds from
the sale of shares under our existing Purchase Agreement with Lincoln Park, we anticipate that we have sufficient cash and cash equivalents to fund our operations through July 2019. Our
receipt of proceeds under our April 2017 development contract is subject to our completion of certain milestones, and we can provide no assurance that such milestones will be completed. 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, product sales and/or licensing activities.
We are introducing new technology and products into an emerging market which creates significant uncertainty about our ability to accurately project revenue, costs and cash flows. Our
capital requirements will depend on many factors, including, but not limited to, the commercial success of our LBS engines, the rate at which OEMs and ODMs introduce products incorporating our
PicoP® scanning technology and the market acceptance and competitive position of such products. If revenues are less than we anticipate, if we fail to meet milestones for future payments or
have to repay amounts already received under our April 2017 development contract, if the mix of revenues and the associated margins varies from anticipated amounts or if expenses exceed the
amounts budgeted, we may require additional capital earlier than expected to fund our operations. In addition, our operating plan provides for the development of strategic relationships with
suppliers of components, products and systems, and equipment manufacturers that may require additional investments by us. Additional capital may not be available to us or, if available, may not be available on terms acceptable to us or on a timely basis. Raising additional capital may involve issuing securities with
rights and preferences that are senior to our common stock and may dilute the value of our current shareholders' shares. If adequate capital resources are not available on a timely basis, we may
consider limiting our operations substantially and we may be unable to continue as a going concern. This limitation of operations could include reducing investments in our production capacities or
research and development projects, staff, operating costs, and capital expenditures which could jeopardize our ability to achieve our business goals or satisfy our customer requirements. Qualifying a new or alternative contract manufacturer or foundry for our products could cause us to experience delays that result in lost revenues and damaged customer relationships. We rely on single or limited-source suppliers to manufacture our products. Establishing a relationship with a new or alternative contract manufacturer(s) or foundry is a time-consuming
process, as our unique technology may require significant manufacturing process adaptation to achieve full manufacturing capacity. Accordingly, we may be unable to establish a relationship with
new or alternative contract manufacturers in the short-term, or at all, at prices or on other terms that are acceptable to us. Changes in our supply chain may result in increased cost and delay and may subject us to risks and uncertainties regarding, but not limited to, product warranty, product liability and quality
control standards. The loss of any single or limited-source supplier, the failure of any of these suppliers to perform as expected or the disruption in the supply chain of components from these
suppliers could cause significant delays in product deliveries, which may result in lost revenues and damaged customer relationships. To the extent that we are not able to establish a relationship
with a new or alternative contract manufacturer(s) or foundry in a timely manner, we may be unable to meet contract or production milestones, which could have a material adverse effect on our
financial condition, results of operations and cash flows. Our success will depend, in part, on our ability to secure significant third party manufacturing resources. Our success will depend, in part, on our ability to provide our components and future products in commercial quantities at competitive prices and on schedule. Accordingly, we will be required
to obtain access, through business partners or contract manufacturers, to manufacturing capacity and processes for the commercial production of our expected future products. 20
Our foreign contract manufacturers could experience severe financial difficulties or other disruptions in their business, and such continued supply could be significantly reduced or terminated.
In addition, we cannot be certain that we will successfully obtain access to needed manufacturing resources concurrent with a significant increase in our planned production levels. Future
manufacturing limitations of our suppliers could constrain the number of products that we are able to develop and produce. We are dependent on third parties in order to develop, manufacture, sell and market products incorporating our PicoP® scanning technology, scanning engines, and the scanning
engine components. Our business strategy for commercializing our technology in products incorporating PicoP® scanning technology includes entering into development, manufacturing, licensing, sales and
marketing arrangements with OEMs, ODMs and other third parties. These arrangements reduce our level of control over production and distribution and may subject us to risks and uncertainties
regarding, but not limited to, product warranty, product liability and quality control standards. We cannot be certain that we will be able to negotiate arrangements on acceptable terms, if at all, or that these arrangements will be successful in yielding commercially viable products. If we
cannot establish these arrangements, we would require additional capital to undertake such activities on our own and would require extensive manufacturing, sales and marketing expertise that we
do not currently possess and that may be difficult to obtain. In addition, we could encounter significant delays in introducing our PicoP® scanning technology or find that the development, manufacture or sale of products incorporating our technology
would not be feasible. To the extent that we enter into development, manufacturing, licensing, sales and marketing or other arrangements, our revenues will depend upon the performance of third
parties. We cannot be certain that any such arrangements will be successful. We cannot be certain that our technology system or products incorporating our PicoP® scanning technology will achieve market acceptance. If our technology system or products
incorporating our technology do not achieve market acceptance, our revenues may not grow. Our success will depend in part on customer acceptance of our PicoP® scanning technology. Our technology may not be accepted by manufacturers who use display and 3D sensing
technologies in their products, by systems integrators, OEMs, and ODMs who incorporate the scanning engine components into their products or by end users of these products. To be accepted,
our PicoP® scanning technology must meet the expectations of our current and potential customers in the consumer electronics, automotive, and other markets. If our technology system or
products incorporating our PicoP® scanning technology do not achieve market acceptance, we may not be able to continue to develop our technology. Future products incorporating our PicoP® scanning technology and scanning engines are dependent on advances in technology by other companies. Our PicoP® scanning technology will continue to rely on technologies, such as laser diode light sources and other components that are developed and produced by other companies. The
commercial success of certain future products incorporating our PicoP® scanning technology will depend, in part, on advances in these and other technologies by other companies. We may,
from time to time, contract with and support companies developing key technologies in order to accelerate the development of them for our or our customers' specific uses. There are no
guarantees that such activities will result in useful technologies or products that will be profitable. We are dependent on a small number of customers for our revenue. Our quarterly performance may vary substantially and this variance, as well as general market conditions, may cause
our stock price to fluctuate greatly and potentially expose us to litigation. For the three months ended March 31, 2019, one customer accounted for $1.6 million in revenue, representing 88% of our total revenue. A second customer accounted for $199,000 in
revenue, representing 11% of our total revenue. For the three months ended March 31, 2018, one customer accounted for $2.1 million in revenue, representing 95% of our total revenue. Our
customers take time to obtain, and the loss of a significant customer could negatively affect our revenue. Our quarterly operating results may vary significantly based upon: 21
In one or more future quarters, our results of operations may fall below the expectations of securities analysts and investors and the trading price of our common stock may decline as a
consequence. In addition, following periods of volatility in the market price of a company's securities, shareholders often have instituted securities class action litigation against that company. If we become involved in a class action suit, it could divert the attention of management and, if adversely determined, could require us to pay substantial damages. We or our customers may fail to perform under open orders or agreements, which could adversely affect our operating results and cash flows. Our backlog under open orders and agreements totaled $1.3 million as of March 31, 2019. We or our customers may be unable to meet the performance requirements and obligations under
open orders or agreements, including performance specifications, milestones or delivery dates, required by such purchase orders or agreements. Furthermore, our customers may be unable or
unwilling to perform their obligations thereunder on a timely basis, or at all if, among other reasons, our products and technologies do not achieve market acceptance, our customers' products and
technologies do not achieve market acceptance or our customers otherwise fail to achieve their operating goals. To the extent we are unable to perform under such purchase orders or
agreements or to the extent customers are unable or unwilling to perform, our operating results and cash flows could be adversely affected. We may not be able to maintain our listing on The Nasdaq Global Market and it may become more difficult to sell our stock in the public market. Our common stock is listed on The Nasdaq Global Market. To maintain our listing on this market, we must meet Nasdaq's listing maintenance standards. If we are unable to
continue to meet Nasdaq's listing maintenance standards for any reason, our common stock could be delisted from The Nasdaq Global Market. If our common stock were delisted, we likely would
seek to list our common stock on The Nasdaq Capital Market, the American Stock Exchange or on a regional stock exchange. Listing on such other market or exchange could reduce the liquidity
of our common stock. If our common stock were not listed on The Nasdaq Capital Market or another exchange, trading of our common stock would be conducted in the Over-the-Counter (OTC)
market on an electronic bulletin board established for unlisted securities or directly through market makers in our common stock. If our common stock were to trade in the OTC market, an investor
would find it more difficult to dispose of, or to obtain accurate quotations for the price of, the common stock. A delisting from The Nasdaq Global Market and failure to obtain listing on another market or exchange would subject our common stock to so-called penny stock rules that impose additional
sales practice and market-making requirements on broker-dealers who sell or make a market in such securities. Consequently, removal from The Nasdaq Global Market and failure to obtain
listing on another market or exchange could affect the ability or willingness of broker-dealers to sell or make a market in our common stock and the ability of purchasers of our common stock to sell
their securities in the secondary market. On April 22, 2019, the closing price of our common stock was $0.96 per share. Our lack of financial and technical resources relative to our competitors may limit our revenues, potential profits, overall market share or value. Our products and potential products incorporating our PicoP® scanning technology will compete with established manufacturers of existing products and companies developing new
technologies. Many of our competitors have substantially greater financial, technical and other resources than we have. Because of their greater resources, our competitors may develop products
or technologies that may be superior to our own. The introduction of superior competing products or technologies could result in reduced revenues, lower margins or loss of market share, any of
which could reduce the value of our business. 22
We may not be able to keep up with rapid technological change and our financial results may suffer. The consumer display and 3D sensing industries have been characterized by rapidly changing technology, accelerated product obsolescence and continuously evolving industry standards.
Our success will depend upon our ability to further develop our PicoP® scanning technology system and to cost effectively introduce new products and features in a timely manner to meet
evolving customer requirements and compete with competitors' product advances. We may not succeed in these efforts due to: The occurrence of any of the above factors could result in decreased revenues, market share and value of our business. We could face lawsuits related to our use of PicoP® scanning technology or other technologies. Defending these suits would be costly and time-consuming. An adverse outcome, in
any such matter, could limit our ability to commercialize our technology or products incorporating our PicoP® scanning technology, reduce our revenues and increase our operating
expenses. We are aware of several patents held by third parties that relate to certain aspects of light scanning displays and 3D sensing products. These patents could be used as a basis to challenge
the validity, limit the scope or limit our ability to obtain additional or broader patent rights of our patents or patents we have licensed. A successful challenge to the validity of our patents or patents
we have licensed could limit our ability to commercialize our technology or products incorporating our PicoP® scanning technology and, consequently, materially reduce our revenues.
Moreover, we cannot be certain that patent holders or other third parties will not claim infringement by us with respect to current and future technology. Because U.S. patent applications are held
and examined in secrecy, it is also possible that presently pending U.S. applications will eventually be issued with claims that will be infringed by our products or our technology. The defense and prosecution of a patent suit would be costly and time-consuming, even if the outcome were ultimately favorable to us. An adverse outcome in the defense of a patent suit
could subject us to significant costs, require others and us to cease selling products incorporating our technology, require us to cease licensing our technology or require disputed rights to be
licensed from third parties. Such licenses, if available, would increase our operating expenses. Moreover, if claims of infringement are asserted against our future co-development partners or
customers, those partners or customers may seek indemnification from us for any damages or expenses they incur. If we fail to manage expansion effectively, our revenue and expenses could be adversely affected. Our ability to successfully offer products incorporating PicoP® scanning technology and implement our business plan in a rapidly evolving market requires an effective planning and
management process. The growth in business and relationships with customers and other third parties has placed, and will continue to place, a significant strain on our management systems and
resources. We will need to continue to improve our financial and managerial controls, reporting systems and procedures, and will need to continue to train and manage our work force. If we fail to adequately reduce and control our manufacturing, supply chain and operating costs, our business, financial condition, and operating results could be adversely affected. We incur significant costs related to procuring components and increasing our production capabilities to manufacture our products. We may experience delays, cost overruns or other
unexpected costs associated with an increase in production. If we are unsuccessful in our efforts to reduce and control our manufacturing, supply chain and operating costs and keep costs
aligned with the levels of revenues we generate, our business and financial condition could suffer. Our technology and products incorporating our PicoP® scanning technology may be subject to future environmental, health and safety regulations that could increase our development
and production costs. Our technology and products incorporating our PicoP® scanning technology could become subject to future environmental, health and safety regulations or amendments that could
negatively impact our ability to commercialize our technology and products incorporating our PicoP® scanning technology. Compliance with any such new regulations would likely increase the
cost to develop and produce products incorporating our PicoP® scanning technology, and violations may result in fines, penalties or suspension of production. If we become subject to any
environmental, health, or safety laws or regulations that require us to cease or significantly change our operations to comply, our business, financial condition and operating results could be
adversely affected. 23
Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address. In the recent past, general worldwide economic conditions have experienced a downturn due to slower economic activity, concerns about inflation, increased energy costs, decreased
consumer confidence, reduced corporate profits and capital spending, and adverse business conditions. Any continuation or worsening of the current global economic and financial conditions
could materially adversely affect: (i) our ability to raise, or the cost of, needed capital, (ii) demand for our current and future products, and (iii) our ability to commercialize products. We cannot
predict the timing, strength, or duration of any economic slowdown or subsequent economic recovery, worldwide, regionally or in the display industry. Because we plan to continue using foreign contract manufacturers, our operating results could be harmed by economic, political, regulatory and other factors in foreign countries. We currently use foreign contract manufacturers and plan to continue to use foreign contract manufacturers to manufacture current and future products, where appropriate. These international
operations are subject to inherent risks, which may adversely affect us, including, but not limited to: Our contract manufacturers' facilities could be damaged or disrupted by a natural disaster or labor strike, either of which would materially affect our financial position, results of operations
and cash flows. A major catastrophe, such as an earthquake, monsoon, flood or other natural disaster, labor strike, or work stoppage at our contract manufacturers' facilities, our suppliers, or our customers,
could result in a prolonged interruption of our business. A disruption resulting from any one of these events could cause significant delays in product shipments and the loss of sales and
customers, which could have a material adverse effect on our financial condition, results of operations, and cash flows. If we are unable to obtain effective intellectual property protection for our products, processes and technology, we may be unable to compete with other companies. Intellectual property protection for our products, processes and technology is important and uncertain. If we do not obtain effective intellectual property protection for our products, processes
and technology, we may be subject to increased competition. Our commercial success will depend, in part, on our ability to maintain the proprietary nature of our PicoP® scanning technology
and other key technologies by securing valid and enforceable patents and effectively maintaining unpatented technology as trade secrets. We protect our proprietary PicoP® scanning technology by seeking to obtain United States and foreign patents in our name, or licenses to third party patents, related to proprietary
technology, inventions, and improvements that may be important to the development of our business. However, our patent position involves complex legal and factual questions. The standards
that the United States Patent and Trademark Office and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. Additionally, the scope of patents is subject to interpretation by courts and their validity can be subject to challenges and defenses, including challenges and defenses based on the existence
of prior art. Consequently, we cannot be certain as to the extent to which we will be able to obtain patents for our new products and technology or the extent to which the patents that we already
own, protect our products and technology. Reduction in scope of protection or invalidation of our licensed or owned patents, or our inability to obtain new patents, may enable other companies to
develop products that compete directly with ours on the basis of the same or similar technology. 24
We also rely on the law of trade secrets to protect unpatented know-how and technology to maintain our competitive position. We try to protect this know-how and technology by limiting
access to the trade secrets to those of our employees, contractors and partners, with a need-to-know such information and by entering into confidentiality agreements with parties that have access
to it, such as our employees, consultants and business partners. Any of these parties could breach the agreements and disclose our trade secrets or confidential information, or our competitors
might learn of the information in some other way. If any trade secret not protected by a patent were to be disclosed to or independently developed by a competitor, our competitive position could
be negatively affected. We could be subject to significant product liability claims that could be time-consuming and costly, divert management attention and adversely affect our ability to obtain and maintain
insurance coverage. We could be subject to product liability claims if any of the product applications are alleged to be defective or cause harmful effects. For example, because some of the scanning engines
incorporating our PicoP® scanning technology could scan a low power beam of colored light into the user's eye, the testing, manufacture, marketing and sale of these products involve an
inherent risk that product liability claims will be asserted against us. Additionally, any misuse of our technology or products incorporating our PicoP® scanning technology by end users or third parties that obtain access to our technology, could result in
negative publicity and could harm our brand and reputation. Product liability claims or other claims related to our products or our technology, regardless of their outcome, could require us to spend
significant time and money in litigation, divert management time and attention, require us to pay significant damages, harm our reputation or hinder acceptance of our products. Any successful
product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms. An inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our products and our PicoP® scanning
technology. Our contracts and collaborative research and development agreements have long sales cycles, which makes it difficult to plan our expenses and forecast our revenues. Our contracts and collaborative research and development agreements have long sales cycles that involve numerous steps including determining the product application, exploring the
technical feasibility of a proposed product, evaluating the costs of manufacturing a product or qualifying a new or alternative contract manufacturer for production. Our long sales cycle, which can
last several years, makes it difficult to predict the quarter in which revenue recognition will occur. Delays in entering into contracts and collaborative research and development agreements could
cause significant variability in our revenues and operating results for any particular period. Our contracts and collaborative research and development agreements may not lead to any product or any products that will be profitable. Our contracts and collaborative research and development agreements, including without limitation, those discussed in this document, are exploratory in nature and are intended to develop
new types of products for new applications. Our efforts may prove unsuccessful and these relationships may not result in the development of any product or any products that will be
profitable. Our operations could be adversely impacted by information technology system failures, network disruptions, or cyber security breaches. We rely on information technology systems to process, transmit, store, and protect electronic data between our employees, our customers and our suppliers. Our systems are vulnerable to
damage or interruptions due to events beyond our control, including, but are not limited to, natural disasters, power loss, telecommunications failures, computer viruses, hacking, or other cyber
security issues. Our system redundancy may be inadequate and our disaster recovery planning may be ineffective or insufficient to account for all eventualities. Additionally, we maintain
insurance coverage to address certain aspects of cyber risks. Such insurance coverage may be insufficient to cover all losses or all claims that may arise, should such an event occur. Loss of any of our key personnel could have a negative effect on the operation of our business. Our success depends on our executive officers and other key personnel and on the ability to attract and retain qualified new personnel. Achievement of our business objectives will
require substantial additional expertise in the areas of sales and marketing, research and product development and manufacturing. Competition for qualified personnel in these fields is intense,
and the inability to attract and retain additional highly skilled personnel, or the loss of key personnel, could hinder our ability to compete effectively in the LBS markets and adversely affect our
business strategy execution and results of operations. 25
Exhibit Description 10.1 31.1 31.2 32.1 32.2 101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
26
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. MICROVISION, INC. Date: April 25, 2019 By: /s/ Perry M. Mulligan Perry M. Mulligan Chief Executive Officer and Director Date: April 25, 2019 By: /s/ Stephen P. Holt Stephen P. Holt Chief Financial Officer 27
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended
March 31,
2019
2018
Numerator:
Net loss available for common shareholders - basic and diluted
$
(8,068)
$
(7,132)
Denominator:
Weighted-average common shares outstanding - basic and diluted
101,971
78,610
Net loss per share - basic and diluted
$
(0.08)
$
(0.09)
Three Months Ended March 31, 2019
Product
Royalty
Contract
revenue
revenue
revenue
Total
Timing of revenue recognition:
Products transferred at a point in time
$
199
$
-
$
16
$
215
Product and services transferred over time
-
-
1,636
1,636
Total
$
199
$
-
$
1,652
$
1,851
Three Months Ended March 31, 2018
Product
Royalty
Contract
revenue
revenue
revenue
Total
Timing of revenue recognition:
Products transferred at a point in time
$
-
$
11
$
99
$
110
Product and services transferred over time
-
-
2,078
2,078
Total
$
-
$
11
$
2,177
$
2,188
March 31,
December 31,
2019
2018
Accounts receivable, net
$
274
$
476
Costs and estimated earnings in excess of billings on uncompleted contracts
1,199
987
Billings on uncompleted contracts in excess of related costs
5
-
Other current liabilities
10,000
10,000
March 31,
December 31,
2019
2018
$ Change
% Change
Contract assets
$
1,199
$
987
$
212
21.5
Contract liabilities
(5)
-
(5)
-
Net contract assets (liabilities)
$
1,194
$
987
$
207
21.0
Remainder of 2019
2020
Product revenue
$
-
$
-
License and royalty revenue
-
-
Contract revenue
1,301
-
March 31,
December 31,
(in thousands)
2019
2018
Raw materials
$
32
$
32
Finished goods
1,030
1,077
$
1,062
$
1,109
Three Months Ended
March 31,
(in thousands)
2019
2018
Cost of product revenue
$
1
$
-
Research and development expense
123
179
Sales, marketing, general and administrative expense
227
141
$
351
$
320
Weighted-
Weighted-
Average
Average
Remaining
Aggregate
Exercise
Contractual
Intrinsic
Options
Shares
Price
Term (years)
Value
Outstanding as of March 31, 2019
4,494,000
$
2.26
6.9
$
20,000
Exercisable as of March 31, 2019
2,355,000
$
2.94
5.3
$
5,000
Three Months Ended
(in thousands)
March 31, 2019
Operating lease expense
$
116
Finance lease expense:
Amortization of leased assets
4
Interest on lease liabilities
1
Total finance lease expense
5
Total lease expense
$
121
Three Months Ended
(in thousands)
March 31, 2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases
$
160
Operating cash flows from finance leases
1
Financing cash flows from finance leases
4
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases
1,638
Finance leases
$
-
(in thousands)
March 31, 2019
Operating leases
Operating lease right-of-use assets
$
1,559
Current portion of operating lease liability
642
Operating lease liability, net of current portion
1,746
Total operating lease liabilities
$
2,388
Finance leases
Property and equipment, at cost
$
66
Accumulated depreciation
(13)
Property and equipment, net
$
53
Current portion of finance lease obligations
$
22
Finance lease obligations, net of current portion
28
Total finance lease liabilities
$
50
Weighted Average Remaining Lease Term
Operating leases
4 years
Finance leases
2 years
Weighted Average Discount Rate
Operating leases
6.0%
Finance leases
13.8%
Operating
Finance
Years Ended December 31,
leases
leases
2019
$
481
$
21
2020
656
27
2021
676
9
2022
696
-
2023
175
-
Thereafter
-
-
Total minimum lease payments
2,684
57
Less: amount representing interest
(296)
(7)
Present value of capital lease liabilities
$
2,388
$
50
(in thousands)
2019
2018
$ change
% change
Three Months Ended March 31,
$
199
$
-
$
199
-
(in thousands)
2019
2018
$ change
% change
Three Months Ended March 31,
$
-
$
11
$
(11)
(100.0)
(in thousands)
2019
2018
$ change
% change
Three Months Ended March 31,
$
1,652
$
2,177
$
(525)
(24.1)
% of
% of
product
product
(in thousands)
2019
revenue
2018
revenue
$ change
% change
Three Months Ended March 31,
$
288
144.7
$
238
-
$
50
21.0
% of
% of
contract
contract
(in thousands)
2019
revenue
2018
revenue
$ change
% change
Three Months Ended March 31,
$
955
57.8
$
1,635
75.1
$
(680)
(41.6)
(in thousands)
2019
2018
$ change
% change
Three Months Ended March 31,
$
5,973
$
4,828
$
1,145
23.7
(in thousands)
2019
2018
$ change
% change
Three Months Ended March 31,
$
2,699
$
2,607
$
92
3.5
Number
(Principal Executive Officer)
(Principal Financial Officer and Principal Accounting Officer)