MVIS

Business Context and Reporting Period

Company: MICROVISION, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Microvision develops high-resolution miniature display and imaging engines based on its proprietary PicoP display engine platform. The company is transitioning from a reliance on government development contracts to commercial product sales, specifically an accessory pico projector and embedded engines for OEM partners.

Key Financial Metrics

Liquidity: As of June 30, 2010, the company held $19.6 million in cash and cash equivalents and $2.6 million in auction rate securities (ARS). Management anticipates sufficient cash to fund operations through January 2011.

Material Changes vs. Prior Period

• Revenue Composition Shift: Total revenue increased 42% for the six months ended June 30, 2010, compared to the prior year. This was driven by a 477% increase in product revenue ($2.385 million vs. $0.413 million), primarily from the new accessory pico projector. Conversely, contract revenue (government and commercial development) declined 76% to $0.371 million.
• Gross Margin Deterioration: The company reported a negative gross margin of $(1.889) million for the six months ended June 30, 2010, compared to a positive margin of $0.244 million in the prior year. This was caused by product costs exceeding revenue, including $1.457 million in inventory write-downs (lower of cost or market adjustments) for the accessory pico projector.
• Operating Expenses: Total operating expenses remained relatively flat at $18.746 million for the six months ended June 30, 2010, compared to $18.807 million in the prior year. Research and development expenses decreased slightly by 2.5%.
• Cash Flow: Net cash used in operating activities increased to $22.268 million for the six months ended June 30, 2010, from $16.308 million in the prior year. This increase was driven by lower contract activity and significant inventory purchases for the new product line.

Guidance, Outlook, and Risks

• Outlook: Management expects to require additional cash to fund operations past January 2011. They plan to raise capital through equity or debt issuance. However, due to a late filing of a Form 8-K, the company is currently ineligible to use Form S-3 for registering new securities until July 1, 2011, or until the next Form 10-K is filed.
• Backlog: Product order backlog was approximately $20.0 million as of June 30, 2010, compared to $0.135 million in the prior year. This includes an $8.5 million purchase order from an OEM customer for embedded engines.
• Key Risks:
  • Liquidity: Significant risk of needing to curtail operations if additional capital is not raised on acceptable terms.
  • Profitability: The cost per unit for PicoP-based accessory projectors currently exceeds the selling price. The company must lower production costs to achieve profitability.
  • Market Acceptance: Success depends on OEM adoption of the PicoP engine and consumer acceptance of the accessory projector.
  • Inventory: Risk of further write-downs if inventory cannot be sold at current carrying values.

Investor Verification Checklist

• Cash Runway: Verify the timeline for the next capital raise given the January 2011 liquidity horizon and current ineligibility for Form S-3.
• Unit Economics: Confirm progress in reducing the cost of goods sold (COGS) for the accessory pico projector to achieve a positive gross margin.
• OEM Fulfillment: Monitor the status of the $8.5 million OEM order and the timeline for delivery to ensure revenue recognition.
• Inventory Valuation: Assess the risk of additional inventory write-downs given the current excess of cost over market value.
• Government Contract Exposure: Note the sharp decline in government contract revenue and the company's reduced reliance on this stream.