MVIS

Business Context and Reporting Period

Company: Microvision, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2005
Business Overview: Microvision designs and markets information display and image capture products, including the Nomad wearable computer and Flic laser bar code scanner. The company relies heavily on development contracts with the U.S. government and commercial partners. Following the July 2004 IPO of its former subsidiary, Lumera Corporation, Microvision now accounts for its 33% stake in Lumera using the equity method.

Key Financial Metrics

Liquidity: As of March 31, 2005, the company held $6.3 million in cash, cash equivalents, and investment securities. Management states this is sufficient to fund operations through June 2005.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 34% to $3.98 million, driven primarily by a 47% increase in contract revenue ($3.38 million vs. $2.30 million). Product revenue declined 11% to $600,000.
• Cost Increases: Cost of product revenue surged 73% to $1.15 million, largely due to a $443,000 inventory write-down for obsolete Nomad and Flic components. Cost of contract revenue increased 52% to $1.83 million.
• Expense Reductions: Research and development (R&D) expenses dropped 59% to $1.88 million, primarily due to the deconsolidation of Lumera and a shift of costs to revenue-generating contracts. Non-cash compensation expense fell 81% to $131,000.
• Financing Activity: In March 2005, the company raised $10 million via the issuance of convertible notes and warrants. This resulted in a significant increase in interest expense ($191,000 vs. $8,000) and a $285,000 loss on derivative features of the notes.
• Cash Flow: Net cash used in operating activities improved to $4.76 million (from $7.47 million used in Q1 2004), while financing activities provided $9.66 million.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Management expects to require additional financing to fund operations beyond June 2005. There is no assurance that such financing will be available on acceptable terms.
• If adequate funds are not secured, the company may be forced to limit operations, reduce capital expenditures, and cut staff.
• Product revenue is expected to increase as Nomad and Flic gain market acceptance, though quarterly results may vary significantly.

Key Risks and Contingencies:

• Liquidity Risk: The company has a history of operating losses and an accumulated deficit of $194.4 million. Continued losses are anticipated through at least 2005.
• Convertible Notes: The new debt instrument includes embedded derivatives and warrants that create volatility in earnings and limit the ability to incur additional debt.
• Market Acceptance: Success depends on the adoption of scanned beam display technology, which faces competition and rapid technological change.
• Government Contracts: A significant portion of revenue comes from U.S. government contracts, which are subject to termination for convenience and funding fluctuations.
• Intellectual Property: The company relies on licenses from the University of Washington and faces potential patent infringement litigation.

Investor Verification Checklist

• Runway: Verify the timeline for securing additional financing, as current cash reserves are projected to last only through June 2005.
• Inventory Valuation: Review the $443,000 inventory write-down and assess the risk of future obsolescence for Nomad and Flic components.
• Debt Terms: Analyze the impact of the $10 million convertible notes, specifically the embedded derivative valuation changes and the potential for dilution upon conversion.
• Lumera Investment: Monitor the market value of the 33% stake in Lumera Corporation, which represents a significant portion of the company's assets and potential liquidity source.
• Contract Backlog: Confirm the status of the $4.7 million development contract backlog and the mix of government vs. commercial revenue.