Business Context and Reporting Period
Company: Microvision, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: Microvision develops miniature display and imaging engines based on MEMS, lasers, and optics, primarily focusing on the "PicoP" display engine for consumer, automotive, and defense applications. Revenue is derived from government and commercial development contracts and sales of bar code scanners (ROV and Flic).
Key Financial Metrics
| Metric (in thousands) | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Revenue | $2,570 | $2,235 |
| Gross Margin | $1,469 (57.2%) | $941 (42.1%) |
| Operating Loss | $(7,092) | $(5,954) |
| Net Loss | $(5,038) | $(6,892) |
| Net Loss Per Share (Basic/Diluted) | $(0.09) | $(0.16) |
| Cash and Cash Equivalents | $14,593 | $7,305 |
| Total Liquid Assets (Cash + Investments) | $30,093 | $N/A |
| Accumulated Deficit | $(264,459) | $(259,421) |
Liquidity: As of March 31, 2008, the company held $30.1 million in cash, cash equivalents, and investment securities. Management believes this is sufficient to fund operations through at least March 2009.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 15% to $2.57 million, driven by a 369% increase in commercial contract revenue ($1.37 million vs. $0.29 million). Government contract revenue declined 44% to $0.91 million.
- Product Revenue Decline: Product revenue decreased 13% to $0.29 million, primarily due to the cessation of "Nomad" revenue ($0 vs. $0.05 million), partially offset by a slight increase in bar code scanner revenue.
- Improved Gross Margin: Gross margin improved significantly to 57.2% from 42.1%, attributed to better contract terms negotiated in late 2007.
- Operating Expenses: Total operating expenses rose 24% to $8.56 million. Research and Development (R&D) increased 32% to $4.43 million, and Sales, Marketing, G&A increased 17% to $4.14 million, reflecting increased payroll and marketing costs.
- Derivative Gains: A significant non-operating gain of $1.67 million on derivative instruments (warrants) reduced the net loss, compared to a loss of $0.65 million in the prior year. This was driven by changes in the fair value of warrants issued with convertible notes.
- Cash Flow: Net cash used in operating activities was $5.3 million, slightly better than the $5.6 million used in Q1 2007. Investing activities provided $6.5 million due to net sales of investment securities.
Outlook, Risks, and Contingencies
- Capital Needs: The company will require additional cash to fund operations past March 2009. There is no assurance that financing will be available on acceptable terms. Failure to secure funds could force substantial reductions in staff and operations.
- Auction-Rate Securities (ARS): $4.3 million of the investment portfolio is in AAA-rated auction-rate securities. Due to global credit market conditions, auctions for these securities have failed, rendering them temporarily illiquid. While the company does not expect to sell at a loss, it faces liquidity risk if funds are needed immediately.
- Related Party Litigation: The company is suing former CEO Richard Rutkowski and his spouse to collect $1.73 million in unpaid loans. Counterclaims seeking over $15 million have been filed against the company. Management believes the counterclaims are without merit but acknowledges an adverse outcome could be material.
- Backlog: Development contract backlog was $1.5 million at March 31, 2008, down significantly from $6.5 million in the prior year. Product order backlog was approximately $0.34 million.
- Stock Price: The stock traded below $5.00 per share during the quarter, subjecting the company to "penny stock" rules which may limit liquidity.
Investor Verification Checklist
- Liquidity Runway: Verify the company's ability to secure financing before March 2009 to avoid operational curtailment.
- ARS Liquidity: Monitor the status of the $4.3 million in auction-rate securities and the potential for forced sales at a loss if auctions continue to fail.
- Legal Exposure: Track the progress of the litigation with former CEO Richard Rutkowski regarding the $1.73 million loan and the $15 million counterclaim.
- Revenue Concentration: Assess the risk of revenue volatility given the reliance on a limited number of government contracts and the significant drop in contract backlog.
- Derivative Volatility: Note that net income is heavily influenced by non-cash gains/losses on warrant valuations, which may not reflect core operational performance.