MICROVISION, INC. 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 ofMicroVision, 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. OverviewMicroVision, Inc. is developing a lidar sensor to be used in automotive safety and autonomous driving applications. Our lidar sensor uses our pioneering laser beam scanning (LBS) technology. Our LBS technology is based on our patented expertise in systems that include micro-electrical mechanical systems (MEMS), laser diodes, opto-mechanics, electronics, algorithms and software and how those elements are packaged into a small form factor. Our lidar sensor also utilizes edge computing and machine intelligence as part of the solution. Though automotive lidar is our current priority, we have also developed solutions for Augmented Reality (AR), Interactive Displays, and Consumer Lidars. We are developing our 1st generation lidar sensor, which we call Long Range Lidar (LRL), for OEMs and Tier 1 automotive suppliers to be incorporated into automotive active collision avoidance systems and autonomous driving vehicles. This product may also be targeted for sales to technology companies focused on Mobility as a Service (MaaS), which are currently major users of automotive lidar sensors. We believe our technology and designs for automotive lidar can be successful in the market and expect our solutions to have features and performance that exceed market expectations and competitive products and that will provide us several sustainable strategic advantages in the market. InApril 2021 we completed our A-Sample LRL module. During the third quarter of 2021, we tested our A-Sample hardware on an outdoor track, and we demonstrated the module at a significant trade show inMunich, Germany . We are continuing to develop the LRL module to improve and refine its features. In addition to our automotive lidar sensor, in prior years we developed micro-display concepts and designs for use in head-mounted AR headsets and developed a 1440i MEMS module that can support AR headsets. We also developed a display solution targeted at the smart speakers market, which we call an Interactive Display module. This display is designed to project onto a countertop, tabletop or a wall from inside a smart speaker. The user can then touch the projected image on any surface on which the display is visible and it will behave like a touchscreen, as on a tablet or smartphone. Lastly, we developed a small lidar sensor, which we call Consumer Lidar, for use indoors with smart home systems. This allows for a smart home system to understand what is happening in the home and then enable the smart home to respond in an appropriate way. For the past few years, our strategy has been to sell AR displays or components, Interactive Displays, or Consumer Lidars to OEMs and 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. As a result, inFebruary 2020 , we began seeking strategic alternatives while continuing to develop our 1st Generation Long Range Lidar module. We currently have no agreements or commitments to engage in any specific strategic transactions.
We have incurred substantial losses since inception, and we expect to incur a
significant loss during the fiscal year ending
14
Impact of COVID-19 on Our Business
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to be spread throughoutthe United States and the world. The impact from the COVID-19 outbreak is uncertain and may impact our business and results of operations and could impact our financial condition in the future. We are unable to accurately predict the full impact that COVID-19 may have due to numerous uncertainties, including the severity, duration and spread of the outbreak, and actions that may be taken by governmental authorities.
Several of the suppliers of components in our LBS modules have experienced closures or have been operating at reduced capacity, resulting in lower component availability. Continued disruptions to the supply chain could have a material impact on our future operating results.
As a result of the COVID-19 pandemic, including related governmental guidance or directives, some of our office-based employees continue to work remotely. 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. This could have an adverse effect on the timing of
our development activities. InApril 2020 , we received funds in the amount of approximately$1.6 million pursuant to a loan under the Paycheck Protection Program of the 2020 CARES Act (PPP) administered by theSmall Business Administration . The loan has an interest rate of 0.98% and a term of 24 months. Due to an extension of the program, no payments were due untilAugust 2021 , although interest accrued during that period. Thereafter, the loan was repayable in monthly installments over the next 9 months to retire the loan plus accrued interest. Funds from the loan could only be used for certain purposes, including payroll, benefits, rent and utilities, and a portion of the loan used to pay certain costs was forgivable, all as provided by the terms of the PPP. The CARES Act provided that the forgivable portion of the PPP loan could be reduced if the borrower reduced full-time equivalent employees during the covered period as compared to a base period. As ofDecember 31, 2020 , all of the funds received under the PPP had been used for qualified purposes. We applied for and received partial forgiveness of the loan of approximately$690,000 in accordance with PPP guidelines. The forgiveness was recorded in our financial statements in the third quarter of 2021. The loan is evidenced by a promissory note, which contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. We may prepay the loan at any time prior to maturity with no prepayment penalties.
Key accounting policies and estimates
Our discussion and analysis of our financial condition and results of operations are based upon our 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. 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, 2020 . Results of operations Product revenue (in thousands) 2021 2020 $ change % change Three Months Ended September 30, $ - $ 100 $ (100) (100.0) Nine Months ended September 30, - 1,347
(1,347) (100.0)
Product revenue is revenue from sales of our products which are LBS modules and their components. Revenue is recognized when control of the goods passes to the customer. 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. 15 The decrease in product revenue for the three and nine months endedSeptember 30, 2021 compared to the same periods in 2020 was due to ceasing product shipments inMarch 2020 in connection with our transfer of production to our customer. From the third quarter of 2019 through the end ofFebruary 2020 , we produced and sold to the customer components to a high definition display system that we developed for the customer pursuant to a development agreement. The volume and resulting revenue and gross profit from this arrangement was fairly low. Therefore, inMarch 2020 we transferred production of the components to the customer. Starting inMarch 2020 , instead of recognizing product revenue and the related cost, we earn a royalty from the customer for each unit shipped. Product revenue backlog atSeptember 30, 2021 and 2020 was zero.
License and royalty revenue
(in thousands) 2021 2020 $ change % change Three Months Ended September 30, $ 718 $ 539 $ 179 33.2 Nine Months ended September 30, 1,943 1,323 620 46.9 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 increase in license and royalty revenue for the three and nine months endedSeptember 30, 2021 compared to the same periods in 2020 was primarily due to this change, resulting in revenue from this arrangement being recognized as royalty revenue rather than as product revenue with a related cost of product revenue. 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. Contract revenue (in thousands) 2021 2020 $ change % change
Three Months Ended September 30, $ - $ - $ - - Nine Months ended September 30, - 25
(25) (100.0)
Contract revenue includes revenue from performance on development contracts and the sale of prototype units and evaluation kits based on our PicoP® scanning module. 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). The decrease in contract revenue during the nine months endedSeptember 30, 2021 compared to the same period in 2020 was attributed to decreased support contract activity with our customer and no prototype shipments. Our contract backlog, including orders for prototype units and evaluation kits, atSeptember 30 ,
2021
and 2020 was zero.
16
Cost of product revenue
% of % of
product product
(in thousands) 2021 revenue 2020 revenue $ change % changeThree Months Ended September 30, $ (10) - $ - - $ (10) - Nine Months ended September 30, (46) -
1,394 103.5 (1,440) (103.3)
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. As described above, cost of product revenue was lower during the three and nine months endedSeptember 30, 2021 compared to the same periods in 2020 due to ceasing product shipments to our customer after we transferred production to the customer inMarch 2020 . The credits of$10,000 and$46,000 for the three and nine months endingSeptember 30, 2021 , respectively, are related to the reversal of accrued warranty liabilities since warranty claims were less than expected. Inventory write-downs of$168,000 were recorded in the nine months endedSeptember 30, 2020 . Cost of contract revenue % of % of contract contract (in thousands) 2021 revenue 2020 revenue $ change % change
Three Months Ended September 30, $ - - $ - - $ - - Nine Months ended September 30, - -
4 16.0 (4) (100.0)
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 nine months ended
Research and development expense
(in thousands) 2021 2020 $ change % change Three Months Ended September 30, $ 5,791$ 1,972 $ 3,819 193.7 Nine Months ended September 30, 17,629 7,262 10,367 142.8 Research and development expense consists of compensation related costs of employees and contractors engaged in internal research and product development activities, direct material to support development programs, laboratory operations, outsourced development and processing work, and other operating expenses. We assign our research and development resources based on the business opportunity of the available projects, the skill mix of the resources available and the contractual commitments we have made to our customers. We believe that a substantial level of continuing research and development expense will be required to further develop our scanning technology. The increase in research and development expense during the three and nine months endedSeptember 30, 2021 compared to the same periods in 2020 was primarily due to higher non-cash compensation expense and increased headcount and direct material and equipment expenses related to the development of our lidar sensor. Due to changes in our incentive compensation and retention programs, we expect higher non-cash compensation expenses in future periods. 17
Sales, marketing, general and administrative expense
(in thousands) 2021 2020 $ change % change Three Months Ended September 30, $ 5,006$ 1,485 $ 3,521 237.1 Nine Months ended September 30, 15,608 4,536
11,072 244.1
Sales, marketing, general and administrative expense includes compensation and support costs for marketing, sales, management and administrative staff, and for other general and administrative costs, including legal and accounting services, consultants and other operating expenses. The increase in sales, marketing, general and administrative expense during the three and nine months endedSeptember 30, 2021 compared to the same period in 2020 was primarily attributed to higher non-cash compensation expense and professional services.
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. AtSeptember 30, 2021 , we had$125.1 million in cash and cash equivalents.
Based on our current operating plan, we anticipate that we have sufficient cash and cash equivalents to fund our operations for at least the next 12 months.
Operating activities
Cash used in operating activities totaled$21.2 million during the nine months endedSeptember 30, 2021 compared to cash used in operating activities of$11.8 million during the same period in 2020. The change in cash flows from operating activities is primarily attributed to increased operating expenses to support development activities during the nine months endedSeptember 30, 2021 compared to the same period in 2020.
Investing activities
During the nine months endedSeptember 30, 2021 , net cash used in investing activities was$2.0 million compared to net cash provided by investing activities of$431,000 during the nine months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2020 , we sold fixed assets to our customer for$525,000 as part of our transfer of production of components that we had previously been producing. Purchases of property and equipment during the nine months endedSeptember 30, 2021 and 2020 were$2.0 million and$94,000 , respectively.
Financing activities
InJune 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 ofSeptember 30, 2021 , we had issued 4.0 million shares of our common stock for net proceeds of$67.8 million under this ATM agreement. There were no transactions under this agreement in the third quarter of 2021. 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. 18 InDecember 2020 , we entered into a$13.0 million ATM equity offering agreement with Craig-Hallum. Under the agreement we were able to, from time to time, at our discretion offer and sell shares of our common stock having an aggregate value of up to$13.0 million through Craig-Hallum. As ofDecember 31, 2020 , we had issued 1.0 million shares for net proceeds of$6.1 million that was received inJanuary 2021 . The$6.1 million was classified as subscriptions receivable on ourDecember 31, 2020 balance sheet and is not included in the cash balance as ofDecember 31, 2020 . InJanuary 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. InDecember 2019 , we entered into a Common Stock Purchase Agreement withLincoln Park granting us the right to sell shares of our common stock having an aggregate value of up to$16.0 million . Under the terms of the agreement,Lincoln Park made an initial purchase of 1.5 million shares of common stock for$1.0 million at a purchase price of$0.6531 per share. Subject to various limitations and conditions set forth in the agreement, we may sell up to an additional$15.0 million in shares of common stock, from time to time, at our sole discretion toLincoln Park over a 24-month period beginningDecember 2019 . In consideration for entering into the agreement, we issued 375,000 shares of our common stock, having a value of$277,000 , based on the closing stock price at the date of grant, toLincoln Park as a commitment fee. We incurred an additional$90,000 in issuance costs. As ofDecember 31, 2020 , we had completed sales under such sales agreement, having sold 22.2 million shares for net proceeds of$15.6 million .
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