MVIS

Business Context and Reporting Period

Company: MICROVISION, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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 an accessory pico projector and previously sold barcode scanners.

Key Financial Metrics

Liquidity: As of March 31, 2010, the company held $35.6 million in cash, cash equivalents, and investment securities available-for-sale. This includes $2.6 million in auction rate securities (ARS) which lack an established primary orderly market. Management anticipates sufficient cash to fund operations through the first quarter of 2011.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 30% to $668,000 from $951,000 in Q1 2009. This was driven by a 58% drop in contract revenue ($298k vs $712k) due to reduced government and commercial contract activity.
• Product Revenue Shift: Product revenue increased 55% to $370,000, driven by the launch of the accessory pico projector ($264k). However, barcode scanner revenue dropped 56% to $106k as the company de-emphasized this product line.
• Gross Margin Deterioration: The company reported a negative gross margin of $(619,000) compared to a positive $327,000 in the prior year. This was primarily caused by a $756,000 inventory write-down for the accessory pico projector, where production costs currently exceed selling prices.
• Operating Expenses: Total operating expenses decreased slightly to $8.886 million from $9.424 million, with R&D expenses dropping 11% to $4.998 million.
• Derivative Gain: A non-operating gain of $395,000 was recorded on derivative instruments (warrants), compared to $180,000 in the prior year, partially offsetting the net loss.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Capital Needs: Management expects to require additional cash to fund operations past the first quarter of 2011. Future funding is planned through equity or debt issuance, with no assurance of availability or terms.
• Backlog: Product order backlog increased significantly to approximately $16.8 million (up from $138,000 in Q1 2009), driven by an $8.5 million purchase order from an OEM for embedded PicoP engines. Contract backlog remains low at $59,000.
• Commercialization: The company is focusing resources on commercializing PicoP-based products rather than new development contracts.

Risks and Contingencies:

• Liquidity Risk: Continued operating losses and the need for future financing pose a risk to operations. If funds are not available, the company may need to limit operations, reduce staff, or delay projects.
• Inventory Valuation: The cost per unit for PicoP-based accessory projectors currently exceeds profitable selling levels. Further write-downs may occur if costs cannot be reduced.
• Auction Rate Securities: $2.6 million of investments are in illiquid auction rate securities. While currently valued at fair value, a forced sale could result in losses.
• Market Acceptance: Success depends on OEM adoption of the PicoP engine and market acceptance of the accessory projector.

Investor Verification Checklist

• Inventory Write-Downs: Verify the $756,000 lower-of-cost-or-market adjustment and assess the timeline for reducing unit production costs below selling prices.
• Cash Runway: Confirm the accuracy of the "first quarter of 2011" liquidity estimate given the high burn rate ($9.6M cash used in operations for Q1).
• OEM Order Execution: Monitor the status of the $8.5 million OEM purchase order and the timeline for delivery of embedded engines.
• Financing Plans: Watch for announcements regarding new equity or debt issuances required to fund operations beyond Q1 2011.
• Auction Rate Securities: Track the liquidity status of the $2.6 million in auction rate securities and any potential impairment charges.