Microvision, Inc. Q4 FY2020 Earnings Call

Good afternoon, and welcome to the MicroVision Fourth Quarter and Full Year 2020 Financial and Operating Results Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Lindsey Stibbard. Please go ahead.

Thank you. Good afternoon, and welcome everyone to MicroVision's fourth quarter and full year 2020 financial and operating results conference call. Joining me on today's call are Sumit Sharma, Chief Executive Officer; and Steve Holt, Chief Financial Officer. The information in today's conference call includes forward-looking statements, including statements regarding exploration of strategic alternatives, sale of our product verticals or technology; sale or merger of the Company; or completing any such strategic transaction; maximizing shareholder value; managing costs; expected customer orders; future royalties; progress under and benefits of existing contracts and license agreements and the negotiation of future agreements; customer product launches; advantages of our technology; litigation; business execution; projections of future operations and financial results; availability of funds; product development applications and benefits; availability and supply of products and key components; commercialization of our technology; market opportunities and future demand; as well as statements containing words like opportunity, potential, possibly, intend, believe, goals, paths, expects, plans, will, could, would, likely, 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. We encourage you to review our various SEC filings, including our Annual Report on Form 10-K filed on March 12, 2020 and Form 10-Q filed on October 30, 2020 as well as various other SEC filings made from time to time in which we discuss risk factors associated with investing in MicroVision. These risk factors could cause results to differ materially from those implied or expressed in our forward-looking statements. All forward-looking statements are made as of the date of this call and except as required by law, we undertake no obligation to update this information. The financial numbers presented on the call today are included in our press release and in the 8-K filed today. Both are available from the Investor Relations section of our website. This conference call will also be available for audio replay in the Investor Relations section of MicroVision's website at www.microvision.com. And now I'd like to turn the call over to Sumit Sharma. Sumit?

Thank you, Lindsey. Good afternoon, everyone. As we look back at 2020, I see it as a defining year for us. A year ago, we faced a very challenging business environment and global outlook. Despite this, we made important progress that allowed us to stabilize the Company for 2021 and position us to advance our technology while pursuing strategic alternatives. I would like to start by thanking our employees for their dedication, creativity, innovation, and execution. The potential value of this work is just starting to come into focus as the market segment in advanced driver safety and autonomous driving sees established multinational technology companies and software companies focused on delivering mobility as a service and traditional automotive OEMs and Tier 1 companies start to invest in and engage in preparation for this emerging market. I would also like to thank our shareholders for their support that allows us to focus on obtaining the right value while exploring strategic alternatives, including a possible sale of the Company. This support has enabled us to have a stronger balance sheet as we continue evaluating our options while we work to complete our long-range LiDAR sample, which we expect to be best-in-class. Stronger balance sheet allows us to add staff that we believe increases the value of our Company for potential strategic partners as well as reduces risk to our 2021 development goals. I expect us to continue adding key staff through 2021 to enhance our ability to demonstrate to the market and potential strategic partners two sustainable strategic advantages of our technology: first, the ability to deliver a high-performance long-range LiDAR sensor that is designed to meet or exceed current OEM requirements; and second, scalability of our sensor to support future price targets. Over the last 12 months, we also welcomed three new members to our Board of Directors with considerable expertise in automotive and augmented reality market segments. I believe adding these new expertise and insights to our current board to augment existing expertise in business, including expertise in mergers and acquisitions, strengthens our ability to create value for our shareholders. Over the past two decades, we have leveraged our strengths to solve some of the toughest technical problems anticipated by multinational OEMs as they looked to new market opportunities using laser beam scanning technology. In our Augmented Reality, Interactive Display, and Consumer LiDAR product verticals, we pioneered scalable solutions that we believe were far ahead of global competitors. The impact and value of what we achieved was hard to measure since there were no competitive solutions for these verticals. Our Automotive LiDAR product addresses an emerging market segment that has the potential to impact millions of lives in mobility and safety, with potentially billions of dollars of sensor and vehicle sales for OEMs and multinational technology companies over coming decades. I believe this market demand represents a great opportunity for MicroVision to showcase our competitive advantage of high performance and scalability. We expect our long-range LiDAR sensor to demonstrate what we believe will be the high performance required for advanced driver assistance systems and autonomous driving. This performance is calibrated to meet current OEM requirements and would include a range of up to 250 meters and beyond, a high-resolution point cloud with up to 10.8 million points per second from a single return, object velocities relative to the ego vehicle from a time-of-flight LiDAR, low latency, intensity, inertial output, and interference immunity from sunlight and other LiDARs. With such capabilities in our first potential product, we believe a future product could then include a LiDAR and the camera module combined in a single sensor. We expect such a product could reduce the number of sensors required per vehicle to achieve features for advanced safety in autonomous driving. This improvement in cost could support faster adoption. We believe our capability to demonstrate scale is important in this segment. We have successfully demonstrated our solid-state technology to achieve scale over more than a decade. Our custom MEMS and ASICs scale from 200 millimeter wafer technology where we have successfully delivered products for OEM programs. Our LiDAR is based on 905 nanometer laser diode technology that is currently available and is the plan of record for anchor technology companies. Additional innovations in injection molded free form plastic optics, multi-axis active alignment automation, automated testing, and closed-loop control algorithms, among others, have prepared us to show scalability from our pilot line. As I mentioned in our call last October regarding our A-sample timing, we expect the hardware for demonstration along with select benchmark data from our development platform will be available to interested parties in the April time frame, followed by continued benchmarking and testing. I also expect that a version of our solid-state, long-range LiDAR sensor could be available for sale in small quantities in Q3 or Q4 this year. Our solid-state, long-range LiDAR sensor could enable any interested party to perform testing with our sensor on their moving platforms, such as cars and long-haul trucks. This is important because we believe scalability as a key strategic advantage of our technology needs to be demonstrated to help realize value for our shareholders. Also, we expect to establish a pilot line with appropriate capacity to demonstrate scalability as we have done over the last decade for multinational technology partners. Let me be specific on this. Our capabilities include delivering process maps, control plans, supply chain partnerships, automation, and product integrity qualification for high-yield designs that can ramp. We have confidence in our ability to scale our sensor from our pilot line. In addition to our automotive LiDAR vertical, we believe we remain well positioned in Augmented Reality, Interactive Display, and Consumer LiDAR product verticals for strategic alternatives. The impact of the global pandemic on consumer devices in these segments is evolving as is clarity about opportunities from OEMs focused in these markets. In conclusion, we remain committed to exploring synergic alternatives, including a potential sale of the Company, in part or whole, to maximize value for our shareholders. I believe with our advanced technology and the continued dedication of our employees, our vision on products and markets, and strength of our balance sheet, we can deliver a scalable, best-in-class, long-range LiDAR sensor. I am profoundly optimistic about our path forward. Finally, today the Company announced that David Westgor will retire from MicroVision. David has been a key contributor for over 15 years. He is stepping down from his current role, but will be available to support the transition to a new General Counsel. As he approaches his 68th birthday he feels it is time to look to his planned retirement and enjoy the time with family with the Company on a solid path forward. On behalf of our employees and shareholders, I would like to thank David for his dedication and service to MicroVision. I will miss our time together and his counsel, and I wish him a wonderful retirement. Now let me turn over the call to Steve to discuss the fourth quarter and full year results. Steve?

Thank you, Sumit. Good afternoon, everyone. Before I move on with my prepared remarks, let me just echo Sumit’s sentiments about David's retirement. I too will miss the daily interaction and wish him the best in retirement. For the fourth quarter, revenue was $395,000. All the fourth quarter's revenue was royalty revenue and was attributable to our April 2017 customer. In comparison, in the third quarter, we recognized $639,000, $539,000 in royalty revenue and about $100,000 in product revenue. Revenue for the full year was $3.1 million, $1.7 million from royalty revenue and $1.3 million in product revenue. The product revenue was mainly from shipments to our April 2017 customer in Q1 before we moved to a royalty model starting on March 1, 2020. As a reminder, I want to point out that royalties that are due to MicroVision related to our April 2017 customer will be credited against the prepayment made by the customer in 2017. When the prepayment is exhausted, the customer will begin making cash payments for royalties due. At the end of Q4, the balance of the prepayment stood at $7.8 million. As I previously reported, the $7.8 million prepayment is not refundable to the customer and the $7.8 million is on the balance sheet as a contract liability. During the year ended December 31, 2020, we applied a total of $2 million against the prepayment. Royalties have no cost of revenue. So fourth quarter cost of revenue was zero, resulting in a gross profit of $395,000. In comparison, gross profit was $639,000 in the prior quarter. Operating expenses were $4 million in the fourth quarter, up from $3.5 million in the prior quarter. The increase is due to additional expenses related to our development work on our first-generation LiDAR sensor and personnel additions we've made to our engineering staff. Let me talk a minute about headcount. A year ago, in February 2020, we reduced our headcount approximately 60% because we were not sure what the future held. While lowering headcount was essential at that time, we've concluded that we need more people to advance our LiDAR product to a point where it would be easy or ready to scale. Additionally, we believe having a more rounded out or complete team makes us more attractive to those who may consider strategic transactions. Fortunately, we've been able to rehire some of the employees that we were forced to lay off in February 2020, and we've added some new personnel. Today, our headcount stands at 53. For the fourth quarter, our net loss was $3.6 million or $0.02 per share, and this compares to a loss of $2.8 million or $0.02 per share in the prior quarter. In the fourth quarter, cash used in operations was $4.2 million, which compares to cash used in the prior quarter of $3.5 million. We expect that our cash used in operations for Q1 2021 will be in the range of $5 million to $5.5 million. The expected increase will be due to continued spending on parts, tooling, and contractors to develop the first-generation long-range LiDAR and the increase in headcount. I'm very pleased to announce that we ended the fourth quarter with total cash and cash equivalents of $16.9 million, up from $5 million in the prior quarter. In addition to the $16.9 million cash balance, we raised net proceeds of $61.4 million from two ATMs we completed in January and February of 2021. This puts our balance sheet in the strongest position it has been in for many years. And based on the December 31st cash balance and the 2021 proceeds from our ATMs, we anticipate the financial statements that we will be releasing shortly will no longer have a going concern opinion. We are very pleased with where the Company is today. We will now open the call for questions.

Our first question will come from Glenn Mattson with Ladenburg Thalmann.

Hi, thank you for taking my questions. I have a few, so just bear with me. So on the interactive display as we're trying to kind of think about what that could be worth as far as to a third party or strategic buyer or something, it was about a year ago, thinking back that this time that large customer that you were potentially working with kind of stepped back from that project. So perhaps could you give us an update on like has there been any further discussions on new products? Has that customer come back? I mean there's a lot of applications where that could be useful, obviously. There's a lot of home speaker companies who would maybe be interested in differentiating themselves. And that product has been available now for a few years, more or less. I know it's been improved over time. But maybe you can give us some color, Sumit, on how much interest there is right now in that part of the business?

Good question. As I mentioned in my remarks, the impacts of the global pandemic and what's that done to consumer device demand, that gets stabilized based on what OEM outlook would be. But at this point, we are well positioned in the three verticals I mentioned on the consumer side. And beyond that, we're not giving any more clarity. But you're right, there's as a consumer myself and yourself, we can recognize in our lives, especially in the last year, there's multiple opportunities to have a technology like that, especially when it's a Class 1, and it could fit in a lot of different places for a lot of different applications.

On the April '17 customer regarding that display piece, which has been available for some time now, could you provide insight into whether they are experiencing an increase in usage? With the growing interest in AR/VR, do you have any information on this, or are you now completely distanced since you have transitioned to more of a licensing partner instead of a solutions provider for them?

Yes, on the April 2017 customer, we are expecting that royalties in 2021 will increase over 2020 and we're rooting for that product to do well and for it to really be successful. So, we do think there will be some increase.

And then moving on to the LiDAR stuff. So, congrats on the progress. Nice to know. I think you said the April timeframe, which I assume being that you think you'll have product for shipment late in the back half is like just plus or minus a few weeks, I guess. So, I guess, it's clearly a big market. And Sumit, you talked a lot about all the ways that your product differentiates from the numerous other LiDAR makers out there. But the biggest one I think I heard about was kind of the ability to reduce the number of sensors on a vehicle. So, I just like some clarity on that, I think, because it is important, I think. And then are you suggesting that there would not be a need for any redundancies or that instead of three or four sensors, you can get down to one or two, or just sensor systems. So, maybe you can just kind of clarify or maybe expand on that. I think that's an interesting point.

It's a great question and one of my favorite topics, so I'll try to keep it concise. When considering these sensors, much of the redundancy will be determined by regulations. The capabilities of a sensor and its performance over time, based on actual miles driven and testing on various vehicles, will be evaluated by regulatory bodies such as NHTSA and Euro NCAP, who will establish the requirements. For instance, a major original equipment manufacturer shipping over ten million vehicles will have different considerations compared to one shipping only half a million. The industry will evolve, but these organizations will ultimately choose which products are most scalable in the long term while meeting regulatory needs. However, everyone aims for a solution that is efficient and provides the best chance to deliver a product at a competitive price. The costs of adoption go down as the number of sensors decreases. It's common knowledge that cars are equipped with radars, ultrasonics, LiDARs, and multiple camera modules. Less frequently discussed is the ECU, where all this data is integrated, making critical decisions related to planning and maneuvering. So, if you think about some of the choices we've made, some of the hard problems that we chose to solve for multiple years before launching our product, obviously, range is important. That's a basic. You have to have a range, so certainly have that. But this high-resolution where something at 250 meters as tall as me, probably even shorter than me, significantly shorter than me, you could identify that is a very compelling thing. So, resolution is a very important one. On top of that, cluster velocity, so you can predict how things are moving in relation to the car you're driving, the ego vehicle, that's very important, again, in the same sensor. This whole point of like 30 hertz, or low latency, this is very important because camera modules that are in the cars right now, they operate there. So, sensor fusion becomes a lot simpler. Unlike if a sensor was at, let's say, 5 hertz, 10 hertz, 15 hertz, some people would say, oh, it's all the way to 120 hertz. Well, we can be there as well. But what we do know is sensor fusion requires a very, very simple computing to merge them; simple, relatively speaking. But then you can start seeing pieces come together that make the entire system, including the computing and substitute required to deliver true L3, L4 features as regulations are written for them. So, in general, having a sensor LiDAR with such high-resolution at the latency, which is about the same as a camera module and a computer system that can actually fuse the sensor and perform all the analysis on the fly, that's the path to a scalable product in general. Now what else stays in there? What are the features out of there? It's regulation, of course, what OEMs want to offer, what their differentiation would be. So this is the data all the way back from my time at Google and other places. This is the problem that everybody has been looking to solve is how do you take the number of sensors required to achieve autonomous driving and advanced safety features, and this is the path. So again, that’s what I believe, is what we believe, and you can see in the market right now, you see different people feeling different moving platform testing. And we're excited about having this product available for them to put it on their moving platform and explore this.

That's great insight. I have two questions regarding the balance sheet. Firstly, now that you have a significant amount of cash, which could last about three to four years at the current burn rate without any incoming revenue, are you considering the possibility of operating independently? Given the cash reserve, there might be less urgency to seek a partnership. I'm interested in whether you're thinking about staying an independent entity with this cash on hand.

So, I think consolidation is actually happening in the market, as you know. There's more than 100 LiDAR companies. So that's part of it. So we have to keep that in mind. And consolidations are horizontal, vertical, depending on the market by itself is settling. The best solution, the best scalable solution, was most likely going to win. So that's a premise that we just have to sort of remember. So, the concept of strategic alternatives is the most pragmatic way I can describe how one would have to approach this as we think about going forward. So this concept of as a stand-alone company, I think for us, we've mentioned on the call, we continued the advanced development and expect to have the best-in-class LiDAR, as we said that. So that positions us for that one key part of the conversation about why is this such a differentiated product. The second piece is also extremely important, which is scalability. So, if you think about all the consolidation, it's going to whittle down to a small group of companies that have the most gravity around their solution. And it's not the one that's got the flash in the pan kind of like what conversation they can have. This has to be the protein and the fiber part of it, where you have actually thought about what problem you want to solve and you're way ahead of everybody. That's the conversation. So that's how I look at it. So, there’s a question about standalone company. I think it's a good one. But I think the way to really think about it, consolidation is a point that is happening. Strategic alternatives are there.

For my last question, regarding the third ATM, I've never seen one announced and completed in such a short timeframe of about six days. The first two took longer to complete, which made sense given the necessity to quickly strengthen the balance sheet for sale negotiations. However, with the stock's recent rise, you weren't under significant pressure this time. I'm curious about your thoughts on this rapid execution. If you believed the stock had considerable potential for growth, you might have chosen a longer timeline since you weren't constrained by urgent balance sheet needs. Could you share your rationale behind the swift execution?

Yes. The trading volume was quite high, which allowed us to be patient, and it didn’t take long to sell the shares. We took advantage of the elevated price and volume. Additionally, we were able to clear previous ATM offerings in a relatively short time due to the strong trading volume and favorable prices at those times, although they weren't as high as for the third offering.

Our next question comes from Kevin Dede with H.C. Wainwright.

Thank you gentlemen for taking my call and hosting the conference call. I realize that there's a lot of background noise, so I apologize. I'm not sure if you can even hear me at this level. So let me know that first before I continue.

We can hear you, Kevin.

So Sumit, you mentioned the compatibility with cameras. So, can you talk about that? And I mean, I get the whole 30 hertz thing, but I'm wondering how much further you're going to go? Are you going to try to continue to work on your module and integrate it with a camera on your own, or do you think you're just going to be able to pass off the LiDAR technology separately and go with that?

If you reviewed the comments I made today, we're focused on our LiDAR product, but what I was trying to draw a future vision of part of the roadmap for anybody reasonable would be to accommodate that and what is the real benefit to that. So, by making this LiDAR to the level we've done, what is the real benefit? That LiDAR by itself is extremely valuable. I mean, I'm always optimistic about the Company. A year ago, where we were, people asked, what do you think MicroVision where it is, I think back even back then, I said it's worth billions. So took a year. So that's what the market valuation is. So, if you think about the value of the LiDAR is where I'm trying to say that what problem has it solved? How is just LiDAR another widget that another company, the source company has with a widget and how do you differentiate? So, I'm trying to draw that bigger picture of how important it is to actually solve these problems in these segments, that's point number one.

Yes. No, understood. I think you did a great job making those points clear. Sumit, I guess, I was just sort of thinking of the next step in terms of convenience for your potential future partners or customers.

I want to be clear about this. We are focused on our LiDAR A-sample, which is exactly as I mentioned. Regarding strategic alternatives, we understand the steps we need to take, but having insight into long-term solutions based on our experience and the support of some excellent board members does not mean we are starting that process just yet. It's important to be clear about our current focus and our commitment to exploring strategic alternatives, as it aligns with where things stand right now.

Fair enough. I apologize if you thought I read too much into it. It just seemed like the logical next step.

Kevin, that's a great question. It's important that people have a clear understanding of what we are working on during these calls. As we mentioned, the concept is to clarify why we are confident about our success.

I appreciate the candor. So, I know, Glenn got a couple of words in on cash burn, but I was on was hoping maybe Steve could go back to that topic. What's your expectations for headcount, Steve? I think you mentioned 53 total now. Where do you think that goes year-end and how does that change your cash burn?

Well, we haven't given a forecast on where it's going to go. We see that we'll be adding some throughout the year. But just to sort of kind of bookend it, I think, it’d be in the realm of 80-ish would be as high as I would think it would be potentially lower, but just it's not ramping tremendously. About a year ago we were in February 2020, I think we were at like 70, 80 people at around that time frame. And you got to remember that cut we made in February was pretty deep. Currently, I project our cash burn for the next quarter to be between $5 million and $5.5 million. There are significant costs associated with materials needed to develop this product, but I expect those expenses to decrease. I don't have a long-term forecast, but I don't anticipate the cash burn increasing significantly.

Last question for me. I know Sumit spent a lot of time on this, too. But can you just kind of go over exactly what will be tangible within the April timeframe?

So, in the April timeframe, we'll have the A-sample hardware that can be demonstrated and shown and also, we would have some benchmark data from the A-sample device as well as from our development platforms that we can share that data as well. So, folks can understand what the A-sample is capturing and seeing.

And then on Q4…

Benchmark testing and additional testing are ongoing, including any requests for custom testing that may arise, so the work continues.

Of course then 3Q, 4Q, is that your B sample?

No, that's A sample. That's where it's up for sale. So as I said, potentially, if somebody wants to work the hardware on a moving platform test because obviously, we're not investing in moving platform testing on cars or long-haul trucking, however, that could be utilized, we would have the capability to build that. But it's a pilot line in the sense that it can be ramped. Obviously, that's always been our wheelhouse. But we're just being reasonable about what the future would be and beyond that, I think we're not giving any more guidance.

The demonstration we're doing would be to potential customers or other interested parties. It's not a public demonstration per se but it's to folks that we're in conversation with.

Understood. Thank you for entertaining questions and hosting the call. Very much appreciated. I think Summit, most everybody that's listening in feels the same way that you do, right? There's a lot of technology, and it has a lot of value.

Yes, yes. I think this is like a fight for the feature. The last time I remember feeling this kind of excitement was what we call the Internet age, right, in the late 90s or the mid-90s, you knew that there was a big revolution that would impact everybody's life. So, I'm excited. All of us are. Thanks, Kevin.

So, we're going to go on to some of the questions. We received over 70 questions from investors. Many of the questions are variations of the same topic, and most of the questions were addressed in our prepared remarks. As we did last quarter, we tried to consolidate the questions on the same topic to address the basic issues. We won't be able to answer every question that was submitted, but we will go through several. The first question is, Sumit, can you provide any more color about your automotive LiDAR A-sample, the outdoor testing and customer validation and also, will there be B- or C-sample?

As I mentioned earlier, the A-sample, which I believe we discussed back in October, is a specific component that everyone can use to assess the impact of the technology on their projects. It is funded by MicroVision and allows us to reach out to all potential interested parties. Our sensor includes advanced features that must undergo proper verification. When we talk about 250 meters and full resolution, we have to prove that. Additionally, there are various custom requests for specific evaluations that may be confidential to certain parties. The A-sample serves as a great platform; that's why we refer to it as both A sample hardware and a development platform, adapting to different situations as they arise. Many retail investors inquire whether this data will be made public, and the answer is no, as it contains confidential information. This benchmark data is only provided to interested third parties. Outdoor testing is essential, especially given our active scan locking feature that enables time-of-flight LiDAR with a 9 to 5-nanometer laser, which is remarkable. In outdoor testing, it's crucial to verify these features, and that's the most fundamental verification step. Today, the weather in the Seattle and Redmond area is quite nice, with brightness up to about 70,000 lux. You need to generate a comprehensive dataset that includes various modifications, which may be requested by different parties. It's important to keep this in mind. Regarding the A sample, we have a timeline for the hardware, but we also need to focus on gathering data to address the questions and interests of relevant parties. As we progress, we will likely be approached by interested parties to explore tailored capabilities, so this information is not covered in the standard data sheets. The ongoing testing is crucial, which is why we are initiating extensive verification testing to meet the demands for data from those working with us under a non-disclosure agreement. This testing will take place with the A sample and the development platform, which is key to our current operations. It’s important to clarify that we are concentrating on the development of the A sample, and there are no B or C samples at this stage. You can think of B and C samples as being connected to the request for quote process with an OEM, which allows for the customization of their base solution. This customization could involve a complete redesign or a partial redesign and qualification to meet their specific standards. These steps lead into the OEM launch cycle, which follows its own timeline.

As you noticed, it's important to be practical about what you need to achieve so you can think things through. You don't want to make unrealistic promises and then fall short; instead, it's better to be sensible about future developments and allocate resources accordingly. I think that's a solid approach. And for me, personally, like the process continues, process is all continuing, but we will not be commenting more on it. I think the question that Steve has created here is like a softer version from the questions, and I appreciate everybody's enthusiasm for the company and trying to understand. But as we've said before, I assure you the process continues, but we will not be commenting on any specifics. Okay. With that, that's the last question. Sumit, do you want to make any final comments?

Yes. In closing, I want to once again thank our employees, business partners, and our shareholders for their continued support. I look forward to reporting on our progress in the future. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.