Business Context and Reporting Period
Company: MICROVISION, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: Microvision designs and markets information display and image capture products, primarily utilizing scanned beam display technology. Key products include the Nomad wearable computer and the Flic laser bar code scanner. The company also holds a significant equity investment in Lumera Corporation (approx. 30% ownership), which is accounted for using the equity method following Lumera's 2004 IPO.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2005 | Nine Months Ended Sept 30, 2005 | Sept 30, 2005 Balance Sheet |
|---|---|---|---|
| Total Revenue | $3,330 | $12,037 | -- |
| Gross Margin | $(434) | $1,410 | -- |
| Net Loss | $(11,182) | $(22,764) | -- |
| Net Loss Available to Common Shareholders | $(12,571) | $(24,718) | -- |
| Cash and Cash Equivalents | -- | -- | $1,415 |
| Total Current Liabilities | -- | -- | $17,386 |
| Notes Payable (Current + Long-term) | -- | -- | $6,980 |
| Accumulated Deficit | -- | -- | $(210,231) |
Note: Gross margin for the three months ended Sept 30, 2005 was negative due to high cost of product revenue driven by inventory write-downs and excess manufacturing overhead.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 22% year-over-year for the three months ended Sept 30, 2005 ($3.33M vs $2.73M) and 49% for the nine months ($12.04M vs $8.10M). This was driven by a 101% increase in product revenue (Nomad and Flic sales) and a 48% increase in contract revenue (largely due to a $6.2M contract with Ethicon Endosurgery).
- Operating Expenses: Research and Development (R&D) expenses decreased significantly by 58% ($2.0M vs $4.7M) for the quarter and 53% ($5.9M vs $12.6M) for the nine months. This reduction is primarily due to the deconsolidation of Lumera and the reclassification of Nomad manufacturing costs from R&D to Cost of Revenue.
- Non-Operating Items: The company recorded a $3.3M loss on debt extinguishment in July 2005 following an amendment to its convertible notes. Conversely, it recognized a $1.7M gain on derivative features of notes payable and a $1.6M gain on the sale of Lumera securities during the nine-month period.
- Liquidity: Cash and cash equivalents increased slightly to $1.4M from $1.3M at year-end 2004, despite a net cash burn of $17.4M from operating activities over the nine months, offset by $16.5M in financing activities.
Outlook, Risks, and Management Commentary
- Capital Needs: Management explicitly states an immediate need for additional capital to fund operations. The company has engaged an investment banker to raise funds within weeks. Failure to secure capital could force a substantial curtailment of operations, including staff reductions and cuts to R&D.
- Liquidity Strategy: The company plans to raise limited cash by selling Lumera common stock (approx. 190,000 shares available under Rule 144) or through private placements. Unpledged Lumera shares have a market value of approx. $13.2M.
- Debt Structure: The company holds $10M in convertible notes (issued March 2005) with complex derivative features. These notes are secured by 1.75M shares of Lumera stock. Interest payments are due quarterly starting December 2005, with options to pay in stock.
- Risks:
- Going Concern: Significant doubt exists regarding the ability to continue as a going concern without new financing.
- Market Acceptance: Success depends on the commercial adoption of scanned beam technology, which faces competition and long sales cycles.
- Government Contracts: A significant portion of revenue relies on U.S. government contracts, which are subject to termination for convenience.
- Stock Price: Trading below $5.00 subjects the company to "penny stock" rules, potentially limiting liquidity.
Investor Verification Checklist
- Financing Status: Verify if the company has successfully secured the "immediate" capital mentioned in the filing to avoid operational curtailment.
- Debt Conversion: Monitor the conversion of the $10M convertible notes into equity, which could significantly dilute existing shareholders.
- Lumera Stock Sales: Track the volume and price of Lumera stock sales by Microvision, as this is a primary near-term liquidity source but may depress Lumera's stock price.
- Inventory Valuation: Review future inventory write-downs, as the company recorded $1.6M in write-downs during the nine months ended Sept 30, 2005, due to obsolescence.
- Contract Backlog: Confirm the execution of the $4.6M development contract backlog and the $276k product order backlog.