Business Context and Reporting Period
Company: Microvision, Inc. (including consolidated subsidiary Lumera Corporation)
Reporting Period: Fiscal year ended December 31, 2003
Business Overview: The Company operates in two segments: Microvision, which develops scanned beam technology for information displays (e.g., Nomad head-worn displays, Flic barcode scanners) and image capture; and Lumera, which develops organic non-linear optical materials for telecommunications and networking components. The Company relies heavily on development contracts with the U.S. government and commercial partners, alongside limited commercial product sales.
Key Financial Metrics
| Metric | 2003 | 2002 |
|---|---|---|
| Revenue | $14.7 million | $15.9 million |
| Net Loss | $(26.2) million | $(27.2) million |
| Net Loss Per Share (Basic/Diluted) | $(1.46) | $(1.93) |
| Gross Margin | 52% | 56% |
| Research & Development Expense | $23.3 million | $25.5 million |
| Cash, Cash Equivalents & Investments | $21.8 million | $15.2 million |
| Working Capital | $19.8 million | $14.5 million |
| Accumulated Deficit | $(154.3) million | $(128.1) million |
| Backlog | $3.8 million | $2.6 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 8% to $14.7 million, primarily due to a lower level of development contract business compared to 2002. The mix shifted, with U.S. government contracts dropping from 83% of revenue in 2002 to 49% in 2003, while commercial development contracts increased from 14% to 44%.
- Product Sales: Microvision recorded $855,000 in revenue from 133 Nomad units and $280,000 from Flic barcode scanners in 2003. A significant order for over 5,000 Flic units from NCR was placed in Q4 2003.
- Cost of Revenue: Increased slightly by 1% to $7.0 million, but as a percentage of revenue, it rose from 44% to 48% due to contract mix changes. A $450,000 inventory write-down for Nomad units was recorded.
- R&D Expenses: Decreased 9% to $23.3 million. This reduction was driven by the expiration of a research agreement with Cree Inc. (saving $1.4 million) and amendments to the Lumera sponsored research agreement with the University of Washington.
- Liquidity: Cash and investments increased to $21.8 million, bolstered by $34.5 million in cash provided by financing activities, primarily from the sale of common stock and Lumera preferred stock.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects to incur substantial losses and negative cash flow at least through 2004. The Company believes its cash position is sufficient to fund operations through 2004, but Lumera requires additional financing to fund operations beyond April 2004.
- Product Strategy: Microvision plans to introduce a next-generation Nomad (smaller, lighter, lower cost) targeting automotive and military markets. Flic sales are expected to grow following the NCR order. Lumera is developing WiFi antennas and optical modulators.
- Risks:
- Capital Requirements: The Company has an accumulated deficit of $154.3 million and requires additional capital to continue operations and product development. Failure to secure funding could force a substantial limitation of operations.
- Government Contract Dependency: A significant portion of revenue comes from U.S. government contracts, which can be terminated for convenience at any time.
- Market Acceptance: Success depends on the commercial acceptance of scanned beam and optical material technologies, which face competition from established manufacturers.
- Intellectual Property: The Company relies on exclusive licenses from the University of Washington for core technologies; loss of these rights would be materially adverse.
- Unusual Items:
- Related Party Loans: The Company reclassified $1.8 million in outstanding loans to senior officers to shareholders' equity due to a lack of repayment and SEC guidance.
- Facility Closure: Costs of $540,000 were incurred to close the San Mateo, California R&D facility.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $21.8 million cash balance to fund the 2004 operating plan, particularly given the need for Lumera to raise additional capital by April 2004.
- Government Contract Stability: Assess the risk of termination for convenience regarding the 49% of revenue derived from U.S. government contracts.
- Commercial Product Traction: Monitor the execution of the NCR Flic order and the commercial adoption of the new Nomad system by automotive partners (e.g., Honda).
- Related Party Transactions: Review the status of the $1.8 million reclassified loans to senior officers and the $900,000 allowance for doubtful accounts associated with them.
- Intellectual Property Status: Confirm the standing of the exclusive license agreements with the University of Washington for both Virtual Retinal Display and Optical Materials technologies.