MicroVision, Inc. (MVIS) Q3 2014 Earnings Report, Transcript and Summary

Welcome to the Third Quarter 2014 MicroVision, Inc. Conference Call. My name is Ellen, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Dawn Goetter. Ms. Goetter, you may begin.

Thank you. I'd like to welcome everyone to MicroVision's Third Quarter 2014 Financial and Operating Results Conference Call. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer; and Stephen Holt, Chief Financial Officer. The information in today's conference call may include forward-looking statements, including statements regarding: Benefits under existing contracts and the negotiation of future agreements; our competitive advantages; progress with prospective customers; projections of future operations and financial results; product development, applications and benefits; availability and supply of product and key components; market opportunities and growth in demand; plans to manage cash used in operations, as well as statements containing words like believe, goal, path, expects, plan, will, could, would and other similar expressions. These statements are not guarantees of future performance. Actual results could differ materially from the future results implied or expressed in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are included in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission under the heading Risk Factors Relating to the Company's Business and our other reports filed with the commission from time to time. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in circumstances or any other reason. The agenda for today's call will be as follows: Alex will report on the operation results. Steve will then report the financial results. There'll be a question-and-answer session, and then Alex will conclude the call with some final remarks. And now I would like to turn the call over to Alex Tokman.

Thank you, Dawn. Good morning. Thank you for joining us today for an update on MicroVision's business and financial results for the third quarter of 2014. In Q3, we made tangible progress on our 3 primary operating goals for the year. MicroVision's first goal is related to our strategic cooperation with the Fortune Global 100 customer on the development and commercialization of a custom display module incorporated in PicoP display technology intended for use in a variety of products. This goal entails 3 key elements: first, to complete the display module development phase with the Fortune Global 100 customer; second, to support them with their display module commercialization efforts; and third, to supply them with key MicroVision components. I'm pleased to tell you that we have made significant progress on all 3 elements. First, we announced in September that we completed the display module development phase with our partner. Second, we began supporting them with the display module commercialization efforts in the third quarter under the $1.5 million support agreement that we announced in October. And finally, we received purchase orders in September for MicroVision-specific components totaling approximately $1.9 million. And in fact, we commenced shipments of these components this quarter. As we stated in the purchase order release, if you recall, these components are intended as a part of commercialization preparation activities to exercise their supply chain and to support their early production needs. The multiyear commercial agreement negotiations are in progress and we are targeting completion later this year. Moving on to our second operating goal, building pipeline of consumer and automotive opportunities with MicroVision's other go-to-market partners. In June, we announced a collaboration with the second consumer electronic company on the Global Fortune 500 list, to develop a display engine for an innovative smartphone product that is planned to be offered by this company. To remind you, the new Fortune 500 partner has communicated to us that it targets market introduction of this product in the second half of 2015. We successfully completed the initial phase with this partner in Q3 and are now moving into the next development phase of this program. Moving to the automotive segment. We delivered a prototype head-up display system to a vehicle OEM in early October. The OEM is continuing its internal evaluation program. The vehicle OEM is one of the 2 customers, as many of you know, that we have communicated from the automotive segment with whom MicroVision is working on HUD opportunities. Also in the third quarter, we delivered custom PicoP display modules to another customer, a leader in global logistics and package delivery. The modules are part of a new package guidance application aimed at increasing processing efficiency in real-time package sorting and routing. Now what about additional opportunities? As we stated in our past quarterly calls, our business development efforts are focused on 4 main go-to-market coalitions that involve all the necessary stakeholders to enable a new market. In our case, this coalition includes display engine manufacturers, consumer-electronic OEMs and major retailers. In Q3, we made significant strides on several go-to market path in this area involving OEMs and major retailers that are interested in a variety of consumer electronic products that use PicoP display technology. Our third goal for the year is to have MicroVision components available to our partners in the fourth quarter. As I mentioned a few minutes ago, we began shipments of MicroVision components against the orders we received in September for -- to our Fortune Global 100 partner as a part of commercialization readiness to support early production needs. In the third quarter, we began qualification cycle of production processes of MicroVision-specific components and our engineering quality and operations teams have been focused on production readiness activities to establish the baseline production capabilities. These activities are continuing in the fourth quarter as we ship and fulfill in customer orders. Finally, I'm proud to say that during the third quarter, we have managed our cash used in operating activities well, very consistent with what we've done over the past 8 quarters. And we were able to reduce the operating loss by double-digit percentage numbers. With this, I will turn over to Steve for a full recap on Q3 financials in the first 9 months.

Thank you, Alex. The numbers I'm about to share are included in our press release and in the 8-K filed today both are available from the Investor page of our website. In the fourth quarter, we completed our development agreement with our Fortune Global 100 customer and completed the delivery to the global logistics company. Additionally, as a result of our continued financial management, operating expenses and cash used in operations were lower than the same quarter a year ago. Now for some details. Third quarter revenue was $1 million compared to $1 million for the third quarter of 2013. Revenue for the first 9 months of this year was $2.8 million versus $4.6 million for the first 9 months of 2013. Third quarter operating expenses were $4 million compared to $5 million in operating expenses in Q3 of 2013, a decrease of 20%. For the first 9 months of the year, operating expenses were 1.2 -- I'm sorry, $12.1 million, down 14% from $14.1 million for the same period last year. MicroVision's third quarter operating loss was $3.4 million, which is lower than our Q3 2013 operating loss of $4.1 million. The operating loss for the first 9 months was $9.8 million, which is favorable to our operating loss of $11.2 million in the same period last year. Our third quarter net loss was $3.4 million or $0.08 per share compared to $3.7 million or $0.13 per share in the third quarter of 2013. Our year-to-date net loss is $14.8 million or $0.36 per share. Our net loss for the first 9 months of 2013 was $10.8 million or $0.40 per share. As a reminder, this year's first quarter net loss included a $5 million non-cash loss on the exchange of warrants, which was reflected in this year's 9-month net loss number. Cash used in operating activities was $3.2 million for the third quarter. This compares favorably to the $3.7 million used in the third quarter of 2013. For the first 9 months of the year, cash used in operations was $9.9 million, equaling the $9.9 million used in the first 9 months of last year. Cash and cash equivalents on hand on September 30 were $10.9 million. The cash balance includes $1.9 million raised on the sale of equity through our ATM facility in the third quarter. The total net proceeds for the year-to-date from the aftermarket facility were $2.8 million. Finally, backlog at the end of the quarter was $2.1 million. And for clarity, backlog does not include the $1.5 million in support services that we announced in October. That concludes the financial results. We will now open it up to questions.

[Operator Instructions] The first question is from Andrew Uerkwitz with Oppenheimer & Co. Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division: It sounds like you're making a lot of progress with your multiple partners and your different phases and whatnot. How would you kind of characterize how far along you are versus how much more there is to do before we see some commercialization of products?

It's a complex question, Andrew, involved. So basically, let's start from the beginning. Our proposition goes to market and has to go through several channels. The products, obviously, would be sold through retail -- major retail directly to consumer, whether online or direct. These products will be build by OEMs, who make private label, or brand these products to the retail. Then the engine will come from one of our partners to go inside these products. Right now, we have multiple paths in works and they're at different stages. The most important part from our side is to be ready with our MicroVision-specific component and enable the engine manufacturers, one of them who you already know and we announced, to be ready to provide their solutions to the product guys so they can basically start populating the retail channels. At different stages -- at this point in time, unfortunately, I know what everybody wants on the call, want a little more guidance, what is the timing of the product introductions and as you know, we cannot comment on other people's product introductions until they are ready to talk about it. And if you wait a little longer for more information to come up. Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division: Sure. Would you say that the automotive and the packaging company are further along?

You know what? We know what they are trying to do and we know what they're internally trying to do. What we're waiting for them is to give us feedback on what we have provided to them. I'm happy to tell everybody that we provided to both automotive and logistics company everything on time and with the quality expected. So now we're waiting. As they run through their applications, they will come back and communicate to us next steps. Until that, there's really nothing to comment. Even though we know what their internal plans are, we still have to wait for official communications from them in order to determine the next step. Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division: Okay, great. And then the last question, you've been hitting all your milestones, you've been doing well on OpEx and a lot of multiple pieces moving here. As you get closer, as you get deeper into these phases with your partners, should we expect OpEx to stay about where it's at or will we start to see that ramp up a little bit?

The operating expenses are in a place where we expect to be able to ramp the business for a while with them. We're using contract manufacturers so as things ramp up, the investments that we have to make are not that large.

The next question is from Mike Latimore with Northland Capital markets.

This is Jim Fitzgerald sitting in for Mike Latimore. So my first question is surrounding the smartphone opportunity. Can you comment a little bit on what effect do you see that having on revenue in the first half of 2015?

Remember -- recall that what I stated today and what we stated during the release of this information that the customer specifically told us that they are targeting second half of 2015, not the first half of 2015. We anticipate that until then, we're going to be in development phase and so no product revenue should be expected in the first half of 2015.

Okay, perfect. Got you. And is there a contract in place for that opportunity?

That's correct. We have agreement in place. It's a smaller scale agreement than what we've done with Fortune Global 100 customer because we are contributing less. So it's a less investment -- resource investment on our part but yes, we're under agreement. Correct.

Okay, great. And I might have missed this earlier but going back to the Fortune 100 company for a second. Do you see -- foresee a market launch this year with that customer?

It's a great question. I'm pretty sure everybody on the phone call wants to know the answer. All I can tell you is that -- we've been consistent with this. It's really difficult for us. As a policy, we do not comment on specific product introductions by others because in many cases, if these are our partners, we are restricted from what we can say. But our goal, remember, was to be ready with our components to be shipped to them in the fourth quarter and we are on track. And hopefully, more communication will come out. But at this point, we cannot comment on their product introduction time lines.

The next question is from Tom Szulist with No Limits Capital.

Number one, you mentioned that you're going to have different products from your Fortune 100 company and then you've also got another cell phone company dealing with you. Realistically, I mean, are we talking about -- how many different products, potentially, will have retail debuts in 2015?

Great question, Tom. We hope -- we believe it's going to be a number of products. But obviously, the important part for everybody, timing of these products, what specific market they will targeted and what eventual volumes we would expect. I think we have to all -- all of us, including us, we have to see how this market introduction transition will take place in the next 6 to 12 months because remember, the success -- success is -- now lies into how effectively will retailers and OEMs will sell and promote these types of products and that will determine the -- our growth path and the slow [indiscernible] because we are pretty confident. We're going to be ready with what we need to provide to everybody to be successful. Now we have to basically rely certain degrees on the retailers and OEMs to make sure that they do the best, put the best foot forward to promote and -- properly promote and sell these products. And we have some -- we collected and commissioned some direct consumer data that we, in fact, have been using with them to educate them how to more effectively sell these products in these markets.

Right. So the data you show that shows 80% acceptance when you showed to consumers. Let's say that translates and you end up having a product here that gets to be into high demand, my next question is how ramp-able is your end of it? Let's say you got a $5 million order, can you reach that? And how long will it take you?

We have -- and remember, we stated a couple of calls ago that we set up a baseline capacity based on what we see as an initial uptake and we have ability to -- subject to lead times, to get to higher numbers, including the number you just indicated. There's certain lead time to get to the specific rate and -- so we're at the base rate, can we get to this rate? Yes. But we -- if somebody comes into us and says, "Look, can you get to $5 million per year rate?" We would give them a date and say, "Look, we can get to this rate by this date to this rate, but yes, we can eventually get to $5 million. No problem."

Right. So you really don't have any bottlenecks and you're very scalable in your current business model?

We don't see it at this point in time. You can never be absolutely sure. But at this point in time, we feel comfortable about setting up baseline to enable the initial launches and also ramping this capacity to enable higher volumes.

Right. Also on your test kits, are you still actively getting test kits out there in the marketplace?

We have been focused on execution over the past. One of our main priority had been basically to enable Fortune Global 100 and a couple of vital few partners to make them successful so that it would accelerate, hopefully, the introduction time lines for them as well as us. So we did not spend as much time on the universities as we've done in the past. But as soon as we -- as soon as somebody start launching products based on our technology and we start gaining revenue and margin from the component sales and from royalties, we expect to come back and start exploring more because we're going to have more bandwidth and we'll be able to afford to staff it.

All right. Got it. And then another question, if you've got your Fortune 100 company and your cell phone company, does that production conflict at all if you end up getting OEM production going into something like HUD and it starts rolling out on a rapid pace? Are the 2, the same supply line chain or are they separate and independent?

They -- at this point in time, they could be the same supply chain, but it shouldn't be a bottleneck because there's no -- there's a delay between the consumer introduction and the automotive introduction. Plus the automotive volumes typically will be far lower than consumer expectations and volumes. So even if there is some overlap later, it would not be significant enough to impact our ability to deliver.

I guess, my only view is that I'm concerned that if we are successful with what we've been waiting for throughout these years is that we don't have any kind of bottlenecks that'll just let us flow because I've seen the products so I know. My last question is tax loss, carryforward, how much is there?

We're checking right now.

Okay. Got it. I mean, my understanding is it's quite a number. And what's the fully diluted share count now?

We're at 43,858.

43 million.

43,000,858 on the -- the tax loss carryforward, that's in the K, but I don't have that. I don't have that number right in front of me. I don't have the K in front of me, Tom. Sorry.

We will -- listen, we will look up the number for the tax area and we will provide it either through --

I should be able to give it to you in a minute.

Yes, I can check the K also. I just -- I thought it was quite substantial and I just wanted to have an idea what that value is.

Yes, well, he's checking. Do you have any other question while he's checking?

No. It's been -- one last question, green LEDs or green lasers, I mean, your concerns are no longer what they used to be in prior years? Prior months?

We were just talking about this. If we have green laser situation in 2010 than we have today, we all's will be smiling. Everyone will be smiling right now. And yes, we're feeling pretty good about the green laser situation.

Tom, the tax loss carryforward is $326 million.

Great. And most of that would be applicable for years to come? You don't have a lot expiring soon?

I'd believe that's correct.

The next question is from Randall Hough with ProEquities.

Alex, rightfully so, everybody on this call so far has been focused on the details of initial rollouts and relationships and progress and what have you. And it's easy to lose sight at this point in our product life cycle of the big picture and you mentioned the word demand, so I want to focus on that. Did you give us a general view to -- of the demand potential, continuing growth in the novelty of having embedded projectors in consumer electronic products and also the novelty of having heads-up displays in the automobile markets?

Okay, Randy. Let me try to address the demand in a succinct form. Fundamentally, you've all seen, there's a video revolution. The digital content is viewed primarily, especially by 35-year-olds and younger on mobile devices. It's viewed on a cell phone or on a tablet or on a phablet, if you will. And there is much -- a lot of evidence in the market, from YouTube, from Adobe, from a variety of -- Netflix, that the mobile downloads now dominating basically the traffic and imagine all these people who watch sports, television, play games, are doing all of it on a 5-inch screen, if you're lucky, I mean, on a large screen. Now what we are doing we offer -- we could offer all of these users an immersive experience from their mobile device whether it's independent standalone companion that works wirelessly with your cell phone or eventually something that will be embedded. And what is the value proposition of this? I mean, it's the instant -- we're a culture of instant gratification. So instant sharing and viewing and sharing with your friends and colleagues, et cetera. That's kind of -- that's how most people live online. And sometimes you have interesting information, clips, highlights of a sports event. You come in and instead of passing your cell phone to 5 people around the table, you simply shoot the image on the ceiling and everybody can see it and enjoy it at the same time. It changes the experience. It makes it truly interactive. And the ecosystem has grown a lot since 2010 to help with these applications. So not only the video downloads dominate the industry right now and that's where our money is in services. But also, their facilitating technologies had been introduced to market that would enhance the value proposition of pico projection. And specifically, it's a wireless video technology. Until last year, it wasn't available. Now you have most of the cell phones have wireless video, specifically Android and Apple cell phones. What you can do today, you basically just plug your cell phone, turn on the projector that is about the same size as your cell phone and drive this using your cell phone as a control -- remote control. It's just beautiful. So all of these factors are really helping and the consumer behavior really what drives this application and we just believe that what has been available today in the market was not sufficient in terms of basic performance and functionality. And also in some cases, people did not know how to sell it because this is truly not a projection technology that people are selling. This is a media sharing experience and that's how it needs to be positioned and that's where we've been spending a lot of time with retailers and OEMs, educating them based on the consumer data that we have commissioned and collected. And the head-up display race, I mean, head-up display is going to be -- everybody believes that the head-up display not only is a safety feature, but is going to be kind of must-have feature eventually on every car because it would considerably simplify the in-car experience. And we personally believe that the cell phone is going to be the central point of all of this. So basically, think of it, how all of these is related. You have your smartphone with all of the information and when you have pico projector whether embedded or companion, you can share this information with others, with your colleagues at work or your family or your friends. Now you sit in the car, you plug in your smartphone into a cradle and the GPS -- 3D GPS information, for which you're already paying, is displayed on the windshield. Now eyewear is an extension because it's a similar technology. Now it's projected onto your retina instead of projected on the windshield. So we see all of it as tied into 1 application, basically centered around the consumer whether it's automotive application, whether it's consumer projection or consumer eyewear, it's all centered around you and it's all centered around information that you have already on your cell phone. So this is why we're excited because our technology is broad. It doesn't just for -- addresses the pico projection product market needs, but it actually is suitable for the other applications and that's why we're excited about it.

Got it. Great answer. Then let's talk about where our technology, in your mind, stacks up against competition. The whole story has been the laser-based pico projector was superior to DLP or other methods of projection. As the industry begins to come more and more apparent to consumers and more products are being offered with these competing technologies, how do you feel generally about the claim that our technology is superior to those?

You have to look -- you want to be objective for this. We you can't be just -- we don't want to be just blindly optimistic. But what I can tell you if you look objectively at pico projection application, at head-up display application, at eyewear application, there are distinct advantages that we have in each of these areas the simplify how consumer would use the final product. For example, if you -- many of you on the phone have used projectors. How frustrating it is, is to continue to adjust the focus even on a stationary device. Imagine now you hold something in your hand and you want to share it with your friends and every time you move your hand or you change the surface, the image goes out of focus, you have to stop whatever you do, you have to readjust it, make sure it's clear and after, "Okay. Now I'm ready to show it to you." It's -- basically, the ease-of-use of what we provide is unmatched by others. The second piece that is important for mobile devices is that whatever you provide runs on a single battery charge for several hours and we -- our technology balances the brightness versus power requirements better than any other. What this implies is that we can actually have a tiny device that looks like a smartphone that runs on several -- on a single battery charge for several hours at a reasonable brightness. I don't know how many other people can claim this. The third one is we're the only HD solution in this form factor. And the fourth one, probably, very important for every user is you want to get a huge screen when you watch something or you share something and there is no limit on how big our screen can get without getting out of focus. It's not the case with other technologies. So these are kind of 4 different channels that I would start with.

Well, they sound like the big ones to me.

The next question is from Henry James with State of Michigan.

My first question has to do with your cash usage and what you expect for the fourth quarter. Would you expect cash usage to decline further in the fourth quarter relative to the third quarter?

Yes, we had $10.9 million in cash at the end of the quarter and we're comfortable with that cash position. Given the difficulty in predicting the size and the timing of events, it isn't appropriate for us to give forward guidance at this time. We have been running at a consistent -- fairly consistent rate. This year, we're running about $1.1 million a month and earlier, I mentioned that we don't see significant increases in OpEx as we increase. And depending on, of course, orders and so on, we may see working capital investments being made in the quarter as well.

Okay. Alex, I'm wondering if you could update us on sort of the technology progress that you've been making in the company over the last year or so? I know one of the things you've been working on is to try to increase the efficiency of the PicoP display module and I know going back a couple of years you did a partnership with a company called Intersil. And I was wondering if there is anything you could say to us or to update us on the progress of that?

It's a good question, Jim. We have been working. We have been public about some of these developments, but have been working on pushing further the limits of the technology that we have showcased during the past couple of years. And our emphasis is -- has been on reducing power while increasing brightness at the same time, which is something that we can do more effectively than others. We will communicate more about this. And we will provide more details on where we're focusing on innovations, but this call is not the time for it. But I assure you that we will provide updates to you and other shareholders on how we progress in this area not into distant future.

Okay. As far as -- I know Pioneer is a company that you've worked with in the past. Is there anything going on with Pioneer at this time?

Right now, we're working with multiple companies in both consumer and automotive. And we typically don't highlight specific company until we actually close an agreement and announce something specific. So I won't - I cannot comment at this point in time anymore. Basically, just all you need to know is that there is a list of automotive and consumer companies we are working on. They're all well-recognizable names and we'll just stop at this, okay?

All right. One last question, Hewlett-Packard introduced a product about a week ago called HP Sprout. It takes advantage of multiple screens, one of them a projector screen and as well as having some sort of 3D scanning capability, which I'm aware your technologies also possess. So I was just wondering if you could just sort of comment on that. I don't know if you're aware of it, but just comment on that and just the technologies involved and what it might mean for MicroVision.

Good question. Well, if you are under NDA and we had a beer, I could tell you probably a lot more than what you're reading in the announcements. But as a policy, we do not comment on specific products or developments announced by either our partners or competitors until we explicitly mentioned by them are allowed to speak or provide more information. But the good news, the good news is from overall market perspective, we are very pleased to see so much activity in the pico projection in automotive markets because we believe that this high level of activity indicates a very robust market opportunity and signals that there's a healthy outlook for our industry, which is -- should be important to all of us. So we actually, very -- we can't comment but we are very happy with all of these activities you've been seeing in the market whether it's in automotive or in the consumer, it all benefits us. The market is -- we believe the market is very large and it needs a push. And the push comes when you have a lot of different events happening around the same time. It will benefit all of us. And some will be ours, some will be not, but we are very happy that this is happening right now.

The next question is from Jeff Cone with Wall Street Capital.

Given that we're a month or so beyond the end of the quarter, I'm wondering if there's a material amount used on the ATM that finishes it or near finishes it.

Jeff, we can't -- we can only state what happened in the third quarter. We are not -- once we provide Q4 results in the end of the year, we will update on the situation. But at this point, we just can't say what transpired.

If prior to Q4, you complete the ATM, will you announce that?

Yes, we would.

We have no further questions at this time. I will now turn the call back over to Alexander Tokman for the final closing comments.