Business Context and Reporting Period
Company: MICROVISION, INC.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2004
Business Overview: Microvision designs and markets information display and image capture products, primarily the Nomad head-mounted display and the Flic barcode scanner. Historically, the company consolidated its subsidiary, Lumera Corporation, but following Lumera's Initial Public Offering (IPO) in July 2004, Microvision reduced its ownership to 33% and changed its accounting method for Lumera from consolidation to the equity method.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2004 | Nine Months Ended Sep 30, 2004 | Balance Sheet (Sep 30, 2004) |
|---|---|---|---|
| Total Revenue | $2,729 | $8,101 | - |
| Gross Margin | $263 | $1,935 | - |
| Net Loss | $(10,031) | $(25,233) | - |
| Net Loss Per Share (Basic/Diluted) | $(0.47) | $(1.18) | - |
| Cash and Cash Equivalents | - | - | $8,752 |
| Total Assets | - | - | $29,536 |
| Total Liabilities | - | - | $6,905 |
| Accumulated Deficit | - | - | $(179,523) |
Liquidity: As of September 30, 2004, the company held $8.8 million in cash and cash equivalents. Management estimates this balance will fund operations only until mid-January 2005.
Material Changes vs. Prior Period
- Revenue: Total revenue for the nine months ended September 30, 2004, decreased 24% to $8.1 million from $10.6 million in the prior year. This was driven by a 39% decline in contract revenue ($6.3M vs $10.3M), partially offset by a 467% increase in product revenue ($1.8M vs $0.3M) due to sales of Flic and Nomad units.
- Profitability: Net loss for the nine months increased to $25.2 million from $21.0 million in the prior year. Gross margin declined significantly due to inventory write-offs and high production costs for the Nomad product.
- Inventory: Inventory increased sharply to $2.8 million from $0.3 million at year-end 2003, primarily due to raw material purchases for Nomad production. The company recorded inventory write-offs of $0.8 million in the third quarter and $0.5 million in the first nine months due to obsolescence.
- Deconsolidation of Lumera: Following Lumera's IPO in July 2004, Microvision deconsolidated Lumera's financials. This resulted in a non-cash change in ownership interest gain of $13.7 million recorded directly to stockholders' equity (Additional Paid-in Capital), not net income.
- Financing: In September 2004, Microvision raised $10.0 million through the sale of mandatorily redeemable convertible preferred stock and warrants.
Guidance, Outlook, and Risks
Outlook and Guidance:
- Cash Runway: Management explicitly states that current cash reserves will satisfy budgeted requirements only through mid-January 2005. Additional financing is required to continue operations beyond this date.
- Product Commercialization: The company expects Nomad production costs to exceed revenue through the fourth quarter of 2004 and possibly longer. Commercial production status is anticipated in Q4 2004.
- Future Losses: The company anticipates incurring operating losses at least through the year ending December 31, 2005.
Material Risks and Contingencies:
- Financing Risk: There is no assurance that additional financing will be available on acceptable terms. Failure to secure funds could force substantial reductions in operations, staff, and capital expenditures.
- Government Contract Dependence: A significant portion of revenue (57% for the nine months) is derived from U.S. government development contracts, which are subject to termination for convenience.
- Market Acceptance: Success depends on the market acceptance of scanned beam technology, which faces competition and rapid technological change.
- Intellectual Property: The company relies on licenses from the University of Washington and faces potential patent infringement litigation.
Investor Verification Checklist
- Financing Status: Verify if Microvision has secured the additional capital required to fund operations beyond mid-January 2005.
- Inventory Valuation: Assess the risk of further inventory write-offs given the $2.8 million inventory balance and history of obsolescence.
- Nomad Economics: Monitor the timeline for Nomad to reach "commercial production" status where production costs are fully absorbed by revenue.
- Lumera Investment: Track the market value of the 33% Lumera stake (approx. $42.9 million as of late Oct 2004) and the impact of the six-month lock-up agreement on liquidity.
- Preferred Stock Terms: Review the terms of the newly issued mandatorily redeemable convertible preferred stock, including the $10 million liquidation preference and conversion features.