Business Context and Reporting Period
Company: Microvision, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Microvision develops compact, low-power, high-resolution displays and imaging systems based on silicon micro-mirror technology (PicoP). The company generates revenue through development contracts with U.S. government and commercial customers, as well as product sales (primarily the ROV hand-held bar code scanner). The company is in a pre-commercialization phase for its core PicoP display engine, expecting commercial availability in the first half of 2009.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Balance Sheet (Sep 30, 2008) |
|---|---|---|---|
| Total Revenue | $894 | $5,086 | - |
| Gross Margin | $285 (31.9%) | $2,473 (48.6%) | - |
| Net Loss | $(8,443) | $(22,747) | - |
| Net Loss Per Share (Basic/Diluted) | $(0.13) | $(0.38) | - |
| Cash and Cash Equivalents | - | - | $30,991 |
| Investment Securities | - | - | $6,222 |
| Total Current Assets | - | - | $40,193 |
| Total Current Liabilities | - | - | $6,556 |
| Accumulated Deficit | - | - | $(282,168) |
Liquidity: As of September 30, 2008, the company held $37.2 million in cash, cash equivalents, and available-for-sale investment securities. Management believes this is sufficient to fund operations until late 2009.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue for the nine months ended September 30, 2008, decreased to $5.09 million from $7.50 million in the prior year period. Contract revenue dropped significantly ($3.77M vs $6.42M) due to a lower beginning backlog and completion of prior contracts. Product revenue increased slightly ($1.32M vs $1.07M) driven by ROV bar code scanner sales.
- Increased Operating Loss: Net loss for the nine months widened to $22.75 million from $13.77 million in the prior year. This was driven by a $5.86 million increase in Research and Development (R&D) expenses ($16.11M vs $10.25M) as the company accelerated PicoP product development.
- Investment Impairment: The company recorded a $300,000 impairment charge on Student Loan Auction-Rate Securities (SLARS) due to failed auctions and liquidity issues in the market.
- Derivative Gains: A significant non-operating gain of $2.0 million was recognized on derivative instruments (warrants) for the nine months ended September 30, 2008, compared to a loss of $1.7 million in the prior year period. This gain partially offset the operating loss.
- Capital Raise: In July 2008, the company raised approximately $26.0 million through the sale of common stock and warrants, significantly bolstering cash reserves.
Outlook, Risks, and Management Commentary
- Guidance and Outlook: Management expects to continue incurring substantial losses and negative cash flow at least through 2009. The company anticipates the commercial launch of an accessory projector based on the PicoP engine in the first half of 2009. Additional capital will be required to fund operations past late 2009.
- Liquidity Risk: While current cash reserves are sufficient until late 2009, there is no assurance that additional financing will be available on acceptable terms. Failure to secure funding could force substantial reductions in staff and operations.
- Investment Risk: The company holds $3.0 million in SLARS which have been subject to failed auctions. While rated AAA and insured by AMBAC (50%), the securities are currently illiquid, and the company has already recognized an impairment.
- Legal Contingencies: The company is involved in litigation with a former CEO and President to collect $1.73 million in outstanding loans. The former officers have filed counterclaims seeking damages in excess of $15 million. Management believes these claims are without merit but notes an adverse outcome could materially affect financial condition.
- Market Acceptance: Success depends heavily on the market acceptance of the PicoP display engine by OEMs and end-users in consumer, automotive, and military sectors.
Key Facts for Investor Verification
- Cash Runway: Verify the sufficiency of the $37.2 million cash balance to fund operations through late 2009 given the high burn rate (approx. $22.3 million cash used in operations for the nine months ended Sep 30, 2008).
- SLARS Liquidity: Monitor the status of the $3.0 million in Student Loan Auction-Rate Securities and potential for further impairment or liquidity constraints.
- Product Launch Timeline: Confirm the commercial availability of the PicoP-based accessory projector in the first half of 2009 as projected.
- Legal Exposure: Track the status of the litigation with the former CEO regarding the $1.73 million loan and the $15 million counterclaim.
- Revenue Mix: Assess the transition from contract-based revenue (which is declining) to product-based revenue, noting that product gross margins are currently low (approx. 7.2% for the nine months) compared to contract margins.