MICROVISION, INC. The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included in Part II, Item 8 of this Form 10-K. The following discussion focuses on the results of our operations for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . Similar discussion of the results of our operations for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Overview Currently, our development efforts are primarily focused on automotive lidar sensors and perception software for ADAS applications. Our integrated solution will combine our MEMS-based lidar sensor, custom ASICs, and software targeted for sale to automotive OEMs and Tier 1 automotive suppliers. We are forecasting small quantities of sales in 2023, but we do not expect to achieve significant, sustained revenue from our ADAS solution in the near term. Although automotive lidar is our priority now, we have developed solutions for Augmented Reality, Interactive Displays, and Consumer Lidars. For the past few years, our strategy has been to sell AR displays or components, Interactive Displays, or Consumer Lidars to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) for incorporation into their products. Currently, our sole customer is Microsoft Corporation. Our arrangement with this customer generates royalty income; however, the volume of sales and resulting royalties from that arrangement are not significant. In the recent past, we have been unable to secure additional customers to launch one of our products. 17
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We have incurred substantial losses since inception and expect to incur a significant loss during the fiscal year endingDecember 31, 2023 . 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. There can be no assurance that additional capital will be available or that, if available, it will be available on terms acceptable to us on a timely basis. We cannot be certain that we will succeed in commercializing our technology or products.
Continuing Impact of COVID-19 on Our Business
Our business operations continue to be impacted by the ongoing COVID-19 pandemic. Government restrictions in the early days of the pandemic caused us to mostly close our offices in early 2020. To support our hardware development efforts, we reopened our offices inJuly 2021 while maintaining compliance with government mandates and health agency protocols, including masking requirements and encouraging vaccination. Some of our office employees continue to work remotely or on hybrid schedules. We may experience reductions in productivity and disruptions to our business routines while our hybrid work policy remains in place, or if our employees become ill and are unable to work, which could have an adverse effect on the timing of our development and productization activities. We will continue to prioritize the health and safety of our employees as we adapt our workplace policies based on evolving government regulation, health agency advice, and industry best practice. In addition, several of our suppliers have experienced closures or have been operating at reduced capacity, resulting in lower component availability. Continued disruptions to our supply chain could have a material impact on our development and future operations. Moreover, various global travel restrictions and office closures have hampered our business development efforts, making it more difficult to engage with potential customers and partners, which could have a material negative impact on our business prospects.
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 inthe 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.
We believe the following key accounting policies require significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
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.
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).
We identify each performance obligation in our development contracts at contract
inception. The contracts generally include product development and customization
specified by the customer. In contracts with multiple performance obligations,
we identify each performance obligation and evaluate whether the performance
obligations are distinct within the context of the contract. Determining whether
products and services are considered distinct performance obligations that
should be accounted for separately versus together may require significant
judgment. Performance obligations that are not distinct at contract inception
are combined.
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If we identify multiple distinct performance obligations, we evaluate each performance obligation to determine if there is a stand-alone selling price. In instances where stand-alone selling price is not directly observable, such as when we do not sell the product or service separately, we determine the stand-alone selling price using information that may include market conditions and other observable inputs. Judgment is required to determine the stand-alone selling price for each distinct performance obligation. Our development contracts are primarily fixed-fee contracts. If control of deliverables occurs over time, we recognize revenue on fixed fee contracts on the proportion of total cost expended (under Topic 606, the 'input method') to the total cost expected to complete the contract performance obligation. For contracts that require the input method for revenue recognition, the determination of the total cost expected to complete the performance obligations on fixed fee contracts involves significant judgment. We incorporate revisions to hour and cost estimates when the causal facts become known.
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 and non-executive PSUs is determined by the closing price of our common stock on the grant date. For performance-based awards, expense is recognized when it is probable the performance criteria will be achieved. If the likelihood becomes improbable that the performance criteria will be achieved, the expense is reversed. Executive PSUs that have market-based performance criteria 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.
Leases
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.
Income taxes
Significant judgment is required in evaluating our tax position and in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We record a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. Based on our history of losses since inception, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets. Our actual tax exposure may differ from our estimates and any such differences may impact income our tax expense in the period in which such determination is made. The key accounting policies described above are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for us to apply judgment or make estimates. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result to our consolidated financial statements. Additional information about our accounting policies, and other disclosures required by generally accepted accounting principles, are set forth in the notes to our consolidated financial statements.
Results of Operations
YEAR ENDED
License and royalty revenue
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% of % of
total total
2022 revenue 2021 revenue $ change % change
(In thousands)
License and royalty revenue $ 664 100.0 $ 2,500 100.0
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. As described above, inMarch 2020 , our customer took over production of components that we had been producing for them. As a result, beginning inMarch 2020 , we earn a royalty on each component shipped that is approximately equal to the gross profit we would have earned if we had continued to produce and ship the components. The decrease in license and royalty revenue for year endedDecember 31, 2022 compared to the same period in 2021 was due to a lower number of royalty-bearing products being communicated to us as distributed by our customer. As we recognize this revenue, we record a corresponding reduction in the$10.0 million prepayment that we received from this customer in 2017; accordingly, no cash will be received for this royalty revenue unless and until the prepayment is exhausted. Cost of product revenue % of % of product product 2022 revenue 2021 revenue $ change % change (In thousands) Cost of product revenue$ 100 n/a$ 2 n/a$ 98 4,900.0 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. 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 twelve months endedDecember 31, 2022 compared to the same period in 2021 due to inventory write-downs for obsolete materials.
Research and development expense
2022 2021 $ change % change
(In thousands)
Research and development expense $ 30,413 $ 24,111 $ 6,302 26.1
Research and development expense consists of compensation related costs of
employees and contractors engaged in internal research and product development
activities, direct material to support development programs, laboratory
operations, outsourced development and processing work, and other operating
expenses. We assign our research and development resources based on the business
opportunity of the available projects, the skill mix of the resources available
and the contractual commitments we have made to our customers. We believe that a
substantial level of continuing research and development expense will be
required to further develop our scanning technology.
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The increase in research and development expense during the year endedDecember 31, 2022 was primarily due to higher personnel costs as a result of increased headcount of$3.9 million , higher facilities expenses of$1.1 million higher non-cash compensation expense of$808,000 and higher purchased labor of$542,000 compared to the prior year.
Sales, marketing, general and administrative expense
2022 2021 $ change % change
(In thousands)
Sales, marketing, general and
administrative expense $ 24,041 $ 22,256 $ 1,785 8.0
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
year ended December 31, 2022 was primarily attributed to increased salary and
benefits expenses as a result of increased headcount of approximately
$1.5 million , higher professional services of $1.0 million and increased
business insurance of $1.0 million compared to the prior year, offset by lower
consulting expenses of $1.4 million and lower non-cash compensation of $631,000 .
Income taxes
No provision for income taxes has been recorded because we have experienced net losses from inception throughDecember 31, 2022 . AtDecember 31, 2022 , we had net operating loss carryforwards of approximately$440.3 million for federal income tax reporting purposes. In addition, we have research and development tax credits of$9.6 million . During 2022,$22.0 million federal net operating losses expired unused. A majority of the net operating loss carryforwards and research and development credits available to offset future taxable income, if any, will expire in varying amounts from 2023 to 2042, if not previously used. In certain circumstances, as specified in the Internal Revenue Code, a 50% or more ownership change by certain combinations of our shareholders during any three-year period would result in a limitation on our ability to use a portion of our net operating loss carryforwards. We recognize interest accrued and penalties related to unrecognized tax benefits in tax expense. We did not have any unrecognized tax benefits atDecember 31, 2022 or atDecember 31, 2021 .
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. AtDecember 31, 2022 , we had$20.5 million in cash and cash equivalents and$62.2 million in investment securities. Between the effectiveness of the Asset Purchase Agreement,December 1, 2022 , and the closing of the acquisition,January 31, 2023 , we advanced operating funds to Ibeo totaling approximatelyEUR 6.6 million or approximately$7.1 million to support its ongoing operations while in insolvency. These funds included costs incurred by Ibeo to reduce its headcount so that only approximately 250 employees would transfer to MicroVision upon closing of the acquisition. The costs related to the headcount reductions will be reimbursed to MicroVision by way of deduction from the purchase price per the Asset Purchase Agreement. In addition, at closing, MicroVision paidEUR 7.0 million or approximately$7.6 million to Ibeo andEUR 3.0 million or$3.3 million to an escrow account to be available to cover properly established claims by MicroVision. We expect to make the remaining final payment during the second quarter of 2023. As ofJanuary 31, 2023 , we had$18.5 million in cash and cash equivalents and$59.2 million in investment securities after making the payments to Ibeo as described above, but excluding the expected impact of the noted final payment that we expect to make in the second quarter. Based on our current operating plan for 2023 and beyond, we anticipate that we have sufficient cash and cash equivalents to fund our operations for at least the next 12 months. 21
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Operating activities
Cash used in operating activities totaled$38.0 million during 2022, compared to$29.4 million in 2021. Cash used in operating activities resulted primarily from cash used to fund our net loss, after adjusting for non-cash charges such as share-based compensation, depreciation and amortization charges and changes in operating assets and liabilities. The changes in cash used in operating activities were primarily attributed to increased operating expenses to support the development of our lidar sensor and software solution.
Investing activities
Cash used in investing activities totaled$38.1 million in 2022, compared to cash provided by investing activities of$35.3 million in 2021. During the year endedDecember 31, 2022 , we purchased short-term investment securities totaling$90.2 million and sold short-term investment securities totaling$60.6 million . During the year endedDecember 31, 2021 , we purchased short-term investment securities totaling$32.8 million . In 2022, operating funds advances to Ibeo during the pre-closing period totaling$4.1 million were included in cash used in investing activities. Purchases of property and equipment during the twelve months endedDecember 31, 2022 and 2021 were$4.4 million and$2.5 million , respectively. The increase in 2022 was primarily due to one-time$2.2 million investment in tenant improvements for build-out construction for our new HQ office and lab space inRedmond, WA. We expect to recover this investment through the contractual incentive payment agreed to be paid by the new incoming tenant for timely exiting our old headquarters inRedmond, WA.
Financing activities
Cash provided by financing activities totaled$14.3 million in 2022, compared to$131.2 million in 2021. During the year endedDecember 31, 2022 , we made principal payments under long-term debt totaling$392,000 related to the loan under the Paycheck Protection Program of the 2020 CARES Act (PPP) administered by theSmall Business Administration compared to$488,000 in the prior year. Proceeds received from stock option exercises totaled$726,000 during 2022 compared to$2.7 million during 2021. Principal payments under finance leases were$26,000 in 2022 and$28,000 in 2021.
The following is a list of our financing activities during 2022 and 2021.
• In June 2021 , we entered into a $140.0 million ATM equity offering
agreement with Craig-Hallum. Under the agreement we are able, at our
discretion, to offer and sell shares of our common stock having an
aggregate value of up to $140.0 million through Craig-Hallum. As of
December 31, 2021 , we had issued 4.0 million shares of our common stock
for net proceeds of $67.8 million under this ATM agreement. In 2022, we
issued 4.3 million shares of our common stock for net proceeds of
$14.0 million under this ATM agreement. In January 2023 , we issued
5.0 million shares of our common stock for net proceeds of $12.5 million
under the agreement. As of
$43.5 million available under this ATM agreement. • InFebruary 2021 , we entered into a$50.0 million ATM equity offering agreement with Craig-Hallum. Under the agreement we were able, at our discretion, to offer and sell shares of our common stock having an aggregate value of up to$50.0 million through Craig-Hallum. We issued 2.5 million shares of our common stock for net proceeds of$48.8 million
under this ATM agreement. No further shares are available for sales under
this agreement.
• In December 2020 , we entered into a $13.0 million ATM equity offering
agreement with Craig-Hallum. Under the agreement we were able to, fromtime to time, at our discretion offer and sell shares of our common stock
having an aggregate value of up to
of
of
classified as subscriptions receivable on our December 31, 2020 balance
sheet and is not included in the cash balance as of December 31, 2020 . In
January 2021 , we issued 1.1 million shares of our common stock for net
proceeds of $6.6 million under the agreement. In total, we issued
2.1 million shares of our common stock for net proceeds of $12.7 million under this ATM agreement. No further shares are available for sales under
this agreement.
Our capital requirements will depend on many factors, including, but not limited
to, the rate at which OEMs and other potential customers introduce products
incorporating our technology and the market acceptance and competitive position
of such products. Our ability to raise capital will depend on numerous factors,
including the following:
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• Perceptions of our ability to continue as a going concern;
• Market acceptance of products incorporating our technology;
• Changes in evaluations and recommendations by any securities analysts
following our stock or our industry generally;
• Announcements by other companies in our industry;
• Changes in business or regulatory conditions;
• Announcements or implementation by our competitors of technological
innovations or new products;
• The status of particular development programs and the timing of
performance under specific development agreements;
• Economic and stock market conditions;
• The cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
• Our ability to establish cooperative development or licensing
arrangements; or
• Other factors unrelated to our company or industry.
If we are successful in establishing OEM co-development arrangements, we may
receive full or partial funding for certain non-recurring engineering costs for
technology development and/or product development. Nevertheless, we expect our
capital requirements to remain high as we expand our activities and operations
with the objective of commercializing our technology.
Contractual obligations
The following table lists our contractual obligations as ofDecember 31, 2022 (in thousands): Payments Due By Period Contractual Obligations < 1 year 1-3 years 3-5 years > 5 years Total Open purchase obligations *$ 2,068 $ 49 $ - $ -$ 2,117 Minimum payments under finance leases 21 - - - 21 Minimum payments under operating leases+ 1,903 3,843 3,980 9,663 19,389$ 3,992 $ 3,892 $ 3,980 $ 9,663 $ 21,527 * Open purchase obligations represent commitments to purchase materials,
capital equipment, maintenance agreements and other goods used in the normal
operation of our business.
Recent accounting pronouncements
See Note 2, "Summary of significant accounting policies," in the Notes to the consolidated financial statements found in Part II, Item 8 of this Form 10-K.
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