Business Context and Reporting Period
Company: MICROVISION, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Microvision develops high-resolution miniature display and imaging engines based on its proprietary PicoP display engine platform. The company focuses on supplying these engines to OEMs for consumer electronics, automotive, and defense applications. It also sells accessory pico projectors and barcode scanners.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 | Balance Sheet (Sep 30, 2010) |
|---|---|---|---|
| Total Revenue | $1,301 | $4,057 | -- |
| Net Loss | $(11,850) | $(32,040) | -- |
| Gross Margin | $(2,811) | $(4,700) | -- |
| Operating Loss | $(12,286) | $(32,921) | -- |
| Cash and Cash Equivalents | -- | -- | $18,658 |
| Total Assets | -- | -- | $37,929 |
| Total Liabilities | -- | -- | $12,808 |
| Shareholders' Equity | -- | -- | $25,121 |
| Accumulated Deficit | -- | -- | $(363,610) |
Liquidity: As of September 30, 2010, the company held $18.7 million in cash and cash equivalents and $2.6 million in auction rate securities (ARS). Management anticipates sufficient cash to fund operations through April 2011.
Material Changes vs. Prior Period
- Revenue: Total revenue for the nine months ended September 30, 2010, increased to $4.1 million from $2.9 million in the prior year period. This was driven by a significant increase in product revenue ($3.5 million vs. $0.5 million), primarily from the accessory pico projector. Conversely, contract revenue declined sharply to $0.6 million from $2.3 million due to reduced government and commercial development activity.
- Profitability: The company reported a net loss of $32.0 million for the nine months ended September 30, 2010, compared to $30.8 million in the prior year. The loss widened due to high costs of product revenue, which included $3.5 million in inventory write-downs.
- Cost of Revenue: Cost of product revenue was $8.6 million, significantly exceeding product revenue of $3.5 million. This resulted in a negative gross margin for the period. The high cost included inventory write-downs reflecting lower-of-cost-or-market adjustments and obsolescence reserves.
- Derivative Gains: The company recorded a net gain of $0.9 million on derivative instruments for the nine months ended September 30, 2010, compared to a loss of $3.0 million in the prior year. This gain was primarily due to changes in the fair value of common stock warrants.
Guidance, Outlook, and Risks
- Outlook: Management expects to require additional cash to fund operations past April 2011. They plan to raise capital through equity or debt issuance. There is significant uncertainty regarding revenue projections due to the emerging nature of the market.
- Financing: In August 2010, the company entered a committed equity financing facility with Azimuth Opportunity, Ltd., allowing the sale of up to $60 million of stock. In September 2010, $12.5 million was raised under this facility. Approximately $47.5 million remains available.
- Going Concern: The independent auditor's report for the year ended December 31, 2009, included an explanatory paragraph expressing substantial doubt about the company's ability to continue as a going concern.
- Risks: Key risks include the inability to achieve market acceptance for PicoP products, failure to reduce manufacturing costs below selling prices, dependence on a limited number of customers and suppliers, and potential intellectual property litigation. The company also faces risks related to the illiquidity of its auction rate securities.
- Subsequent Event: On October 29, 2010, the company agreed to purchase a patent portfolio from Motorola, Inc., issuing approximately 830,000 shares and agreeing to future cash payments.
Investor Verification Checklist
- Cash Runway: Verify the company's ability to secure additional financing before April 2011 to avoid operational curtailment.
- Inventory Valuation: Review the $3.5 million inventory write-down and the remaining $7.7 million inventory balance for potential further impairment given the high cost of goods sold relative to revenue.
- Product Margins: Assess the timeline and feasibility of reducing the cost of PicoP-based products to achieve positive gross margins.
- Backlog Realization: Monitor the $16.9 million product backlog to ensure orders are fulfilled and revenue is recognized as scheduled.
- Financing Terms: Evaluate the dilution impact of the committed equity facility and potential future equity issuances.