TMCnet News
MICROVISION INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements The information set forth in this report in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 3, "Quantitative and Qualitative Disclosure about Market Risk," includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is subject to the safe harbor created by that section. Such statements may include, but are not limited to, projections of revenues, income or loss, capital expenditures, plans for product development and cooperative arrangements, future operations, financing needs or plans of MicroVision , as well as assumptions relating to the foregoing. The words "anticipate," "believe," "estimate," "expect," "goal," "may," "plan," "project," "will," and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Factors that could cause actual results to differ materially from those projected in our forward-looking statements include the following: our ability to obtain financing; market acceptance of our technologies and products; our financial and technical resources relative to those of our competitors; our ability to keep up with rapid technological change; government regulation of our technologies; our ability to enforce our intellectual property rights and protect our proprietary technologies; the ability to obtain additional contract awards and to develop partnership opportunities; the timing of commercial product launches; the ability to achieve key technical milestones in key products; and other risk factors identified in this report under the caption "Item 1A - Risk Factors." Overview We are developing high-resolution miniature laser display and imaging engines based upon our proprietary PicoP® display engine technology. Our PicoP technology utilizes our widely patented expertise in two dimensional Micro-Electrical Mechanical Systems (MEMS), lasers, optics and electronics to create a high quality video or still image from a small form factor device with lower power needs than conventional display technologies. Our strategy is to develop and supply PicoP display engines directly or through licensing of our patents and sale of key components to original equipment manufacturers (OEMs) that would embed them into a variety of consumer, automotive, enterprise and industrial products. In markets requiring high volume production of the PicoP display engine components or subsystems that are to be integrated with other components, we plan to provide designs for components, subsystems and systems to OEMs under licensing arrangements. 10 -------------------------------------------------------------------------------- The primary objective for consumer applications is to provide users of mobile consumer devices such as smartphones, media players, tablet PCs, and other consumer electronic products with a large screen viewing experience produced by a small embedded projector. These potential products would allow users to watch movies and videos, play video games, display images and other data onto a variety surfaces, freeing users from the limitations of a small, palm-sized screen. The current PicoP technology could be modified to be embedded into a pair of glasses to provide the mobile user with a see-through or occluded personal display to view movies, play games or access other content. The PicoP technology could be embedded into a vehicle or integrated into a portable aftermarket device to create a high-resolution head-up display (HUD) that could project point-by-point navigation, critical operational, safety and other information important to the vehicle operator. The enterprise products employing our technology would allow users in field-based professions such as service repair or sales to view and share information such as schematics for equipment repair and sales data and orders within CRM applications on a larger, more user-friendly interface. We also see potential for embedding the PicoP laser display engine in industrial products where our displays could be used for 3D measuring and digital signage, enhancing the overall user experience of these applications. We currently market and sell our SHOWWX™ line of accessory pico projectors that use our Pico display engine through a network of global distributors. We continue to enter into a limited number of development agreements with commercial and U.S. government customers to develop advanced prototypes and demonstration units based on our light scanning technologies. In February 2012, we announced our plan to transition to an "Image by PicoP" ingredient brand business model under which we will pursue commercialization of our PicoP display engine technology by licensing our technology and selling key components to OEMs who would design and build products using the PicoP technology. We expect to make our next-generation HD PicoP display engine technology based on direct green lasers (PicoP Gen2) available to OEMs this year. Results of Operations Product revenue. (in thousands) 2012 2011 $ change % change Three months ended March 31 $ 1,529 $ 886 $ 643 72.6 Our product sales generally include acceptance provisions. We recognize product revenue upon acceptance of the product by the customer or expiration of the contractual acceptance period, after which there are no rights of return. We have entered into agreements with resellers and distributors. Sales made to resellers and distributors are recognized using either the sell-through method or upon expiration of the contractually agreed-upon acceptance period, depending on our ability to reasonably estimate returns. Some of the agreements with resellers and distributors contain price-protection clauses, and revenue is recognized net of these amounts. Provisions are made for warranties at the time revenue is recorded. Warranty expense was not material for any periods presented. Our quarterly revenue may vary substantially due to the timing of product orders from customers, production constraints and availability of components and raw materials. We plan to continue to sell our existing inventory of SHOWWX products through the second quarter of 2012. Product revenue was higher during the three months ended March 31, 2012 than the same period in 2011, due to increased sales of our PicoP display engines compared to the prior period. The backlog of product orders at March 31, 2012 was approximately $305,000, compared to $591,000 at March 31, 2011. The product backlog is scheduled for delivery within one year. 11 -------------------------------------------------------------------------------- Contract revenue. (in thousands) 2012 2011 $ change % change Three months ended March 31 $ 201 $ 233 $ (32) (13.7) We earn contract revenue from performance on development contracts with the U.S. government and commercial customers and from the sale of prototype units and evaluation kits based on our PicoP display engine. Our contract revenue from development contracts in a particular period is dependent upon when we enter into a contract, the value of the contracts we have entered into, and the availability of technical resources to perform work on the contracts. Our contract revenue from sales of prototype units and evaluation kits may vary substantially due to the timing of orders from customers and potential constraints on resources. We recognize contract revenue as work progresses on long-term, cost plus fixed fee, and fixed price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. We have developed processes that allow us to make reasonable estimates of the cost to complete a contract. When we begin work on the contract and at the end of each accounting period, we estimate the costs required to complete the contract and compare these estimates to costs incurred to date. Since our contracts generally require some level of technology development, the actual costs required to complete a contract can vary from our estimates. Recognized revenues are subject to revisions as actual cost becomes certain. Revisions in revenue estimates are reflected in the period in which the facts that give rise to the revision become known. In the future, revisions in these estimates could significantly impact recognized revenue in any one reporting period. We recognize contract revenue on the sale of prototype units and evaluation kits, upon acceptance of the deliverables by the customer or expiration of the contractual acceptance period, after which there are no rights of return. While we anticipate future revenue from these units, quarterly revenue may vary substantially due to the timing of orders from customers and potential constraints on resources. Contract revenue was lower during the three months ended March 31, 2012 than the same periods in 2011, due to the sale of fewer prototype units and evaluation kits in 2012, compared to the prior year. Our backlog of development contracts, including orders for prototype units and evaluation kits, at March 31, 2012 was $1.2 million compared to $895,000 at March 31, 2011, all of which is scheduled for completion during the next twelve months. Cost of product revenue. % of % of product product (in thousands) 2012 revenue 2011 revenue $ change % change Three months ended March 31 $ 4,175 273.1 $ 2,240 252.8 $ 1,935 86.4 Our costs to produce pico projectors during the three months ended March 31, 2012 were substantially higher than product revenue. Cost of product revenue includes the direct and allocated indirect cost of manufacturing products sold to customers. Direct costs include labor, materials and other costs incurred directly in the manufacture of these products. Indirect costs include labor and other costs associated with operating our manufacturing capabilities and capacity. Our overhead, which includes the costs of procuring, inspecting and storing material, and facility and depreciation costs, is allocated to cost of product revenue based on the proportion of direct material purchased to support production. In the event that we maintain capacity in excess of production requirements, cost of product revenue may also include manufacturing overhead associated with the excess capacity. During the three months ended March 31, 2012 we expensed approximately $244,000 of manufacturing overhead associated with production capacity in excess of production requirements, compared to $340,000 during the three months ended March 31, 2011. 12 -------------------------------------------------------------------------------- During the three months ended March 31, 2012, cost of product revenue included a net write down of $1.1 million for inventory in stock at the end of the quarter. The write down included adjustments to our inventory value to reflect our lowered sales forecast of pico projectors as a result of our decision to reduce marketing activities for our first-generation PicoP technology products as availability of our next-generation PicoP technology approaches. The increase in cost of product revenue for the three months ended March 31, 2012, compared to the same period in 2011, was primarily a result of increased sales of pico projectors and higher inventory write downs compared to the same period a year ago. During the three months ended March 31, 2012, we sold inventory which had been previously written down to the lower of cost or market. Accordingly, cost of product revenue for the three months ended March 31, 2012 did not include approximately $1.1 million of previously recognized write downs associated with this inventory. The cost of product revenue as a percentage of product revenue can fluctuate significantly from period to period, depending on the product mix and volume, the level of overhead expense and the volume of direct material purchased. The increase in the cost of product revenue as a percentage of product revenue in 2012, compared to the same period in 2011, was primarily attributed to lower of cost or market adjustments comprising a larger proportion of total cost of product revenue. Cost of contract revenue. % of % of contract contract (in thousands) 2012 revenue 2011 revenue $ change % change Three months ended March 31 $ 155 77.1 $ 299 128.3 $ (144) (48.2) Cost of contract revenue includes both the direct and allocated indirect costs of performing on development contracts and producing prototype units and evaluation kits. Direct costs include labor, materials and other costs incurred directly in performing on a contract or producing prototype units and evaluation kits. Indirect costs include labor and other costs associated with operating our research and development department and building our technical capabilities and capacity. Cost of contract revenue is determined by the level of direct and indirect costs incurred, which can fluctuate substantially from period to period. Cost of contract revenue for the three months ended March 31, 2011 included a provision for estimated losses on uncompleted contracts of $85,000. The losses resulted from excess material cost associated with minimum order quantities for materials required to complete the statement of work. Cost of contract revenue was lower during the three months ended March 31, 2012 than the same period in 2011 as a result of lower contract activity and no provision for estimated losses compared to the prior period. The cost of contract revenue as a percentage of contract revenue was lower in the three months ended March 31, 2012, than in the comparable periods in 2012 primarily as a result of the provision for estimated losses recognized in the prior period. The cost of revenue as a percentage of revenue can fluctuate significantly from period to period, depending on the contract cost mix and the levels of direct and indirect costs incurred. Research and development expense. (in thousands) 2012 2011 $ change % change Three months ended March 31 $ 3,940 $ 4,327 $ (387) (8.9) Research and development expense consists of compensation related costs of employees and contractors engaged in internal research and product development activities, direct material to support development programs, laboratory operations, outsourced development and processing work, and other operating expenses. We allocate our research and development resources based on the business opportunity of the available projects, the skill mix of the resources available and the contractual commitments we have made to customers. 13 -------------------------------------------------------------------------------- The decrease in research and development expense during the three months ended March 31, 2012, compared to the same period in 2011, is primarily attributable to decreased payroll costs associated with reductions in staffing levels compared to the prior year. We believe that under the ingredient brand business model we will lower our research and development spending substantially in the future. We expect that continuing research and development expense will be required to advance the PicoP technology and support our customers to integrate our technology into their products under the ingredient brand business model. Sales, marketing, general and administrative expense. (in thousands) 2012 2011 $ change % change Three months ended March 31 $ 3,288 $ 3,299 $ (11) (0.3) Sales, marketing, general and administrative expense includes compensation and support costs for marketing, sales, management and administrative staff, and for other general and administrative costs, including legal and accounting services, consultants and other operating expenses. We believe that under the ingredient brand business model we will lower our sales, marketing, general and administrative spending in the future. Interest income. (in thousands) 2012 2011 $ change % change Three months ended March 31 $ 10 $ 15 $ (5) (33.3) The decrease in interest income for the three ended March 31, 2012 compared to the same period in 2011 resulted primarily from lower average cash, investment securities balances, and interest rates. Interest expense. (in thousands) 2012 2011 $ change % change Three months ended March 31 $ 9 $ 13 $ (4) (30.8) The decrease in interest expense for the three months ended March 31, 2012 compared to the same period in 2011 resulted primarily from lower average balances on our capital leases and our outstanding loan for leasehold improvements. Liquidity and Capital Resources We have incurred significant losses since inception. We have funded our operations to date primarily through the sale of equity and debt securities and, to a lesser extent, from development contract revenues and product sales. At March 31, 2012, we had $6.8 million in cash, cash equivalents and investment securities, available-for-sale and a working capital deficit of $2.9 million. In May 2012, we signed a definitive agreement with private investors to raise approximately $5.0 million from the sale of our common stock and warrants to purchase our common stock. The investment is subject to customary closing conditions and is expected to be completed by May 29, 2012. See Item 5 of this report for more information. 14 -------------------------------------------------------------------------------- Based on our current operating plan, we anticipate that we have sufficient cash and cash equivalents to fund our operations through June 2012. With the additional $5.0 million we expect to raise in May 2012, we anticipate that we would have sufficient cash and cash equivalents to fund our operations through October 2012. We will require additional cash to fund our operating plan past that time. We are introducing new technology into an emerging market which creates significant uncertainty about our ability to accurately project revenue, costs and cash flows. If the level of sales anticipated by our financial plan is not achieved or our working capital requirements are higher than planned, we will need to raise additional cash sooner or take actions to reduce operating expenses. We plan to obtain additional cash through the issuance of equity or debt securities and through the monetization of select patents that we believe are not core to our business. There can be no assurance that additional cash will be available or that, if available, it will be available on terms acceptable to us on a timely basis. If adequate funds are not available on a timely basis, we intend to consider limiting our operations substantially to extend our funds as we pursue other financing opportunities and business relationships. This limitation of operations would include significant reductions in staff and operating costs. We received a report from our independent public accounting firm regarding the consolidated financial statements for the year ended December 31, 2011 that includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our consolidated financial statements have been prepared on a going concern basis. In April 2012, we implemented measures designed to significantly reduce our cash used in operations in the second half of 2012 compared to the levels expected for the first half of 2012 to align with our ingredient brand business model. Cash used in operating activities totaled $6.2 million during the three months ended March 31, 2012, compared to $8.1 million during the same period in 2011. During the three months ended March 31, 2012, the decrease in net cash used in operating activities was primarily driven by lower inventory purchases for commercialization of PicoP-based products. Net cash used in investing activities totaled $43,000 for the three months ended March 31, 2012 compared to net cash provided by investing activities of $113,000 during the three months ended March 31, 2011. During the three months ended March 31, 2012, the change in net cash used in investing activities was primarily driven by the expiration of a letter of credit that was outstanding under a supplier agreement resulting in a decrease of our restricted investments offset by purchases of production equipment. During the three months ended March 31, 2012, we used cash of $393,000 for capital expenditures, compared to $64,000 during the same period in 2011. Net cash used in financing activities totaled $33,000 for the three months ended March 31, 2012 compared to net cash provided by financing activities of $3.1 million during the same period in 2011. In March 2011, we raised $3.1 million, before placement agent and other issuance costs, from the sale of approximately 313,000 shares of our common stock. |