Business Context and Reporting Period
Company: MICROVISION, INC. (including consolidated subsidiary Lumera Corporation)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2004
Business Overview: The Company operates in two segments: Microvision, developing scanned beam technology for displays (Nomad, Flic), and Lumera, developing optical materials technology (WiFi antennas, modulators, MicroArray chips).
Key Financial Metrics
| Metric (in thousands) | Q1 2004 | Q1 2003 |
|---|---|---|
| Total Revenue | $2,974 | $3,537 |
| Gross Margin | $1,104 | $2,128 |
| Net Loss | $(6,690) | $(7,396) |
| Net Loss Per Share (Basic/Diluted) | $(0.31) | $(0.46) |
| Cash and Cash Equivalents (End of Period) | $5,716 | $16,911 |
| Total Assets | $27,194 | $33,918 |
| Accumulated Deficit | $(160,960) | $(154,270) |
Liquidity: As of March 31, 2004, the Company held $14.8 million in cash, cash equivalents, and investment securities. Microvision's segment held approximately $14.4 million, while Lumera held approximately $400,000.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 16% to $2.97 million, driven primarily by a 32% drop in contract revenue ($2.30 million vs. $3.40 million) due to lower contract volume and backlog.
- Product Revenue Surge: Product revenue increased 400% to $675,000, attributed to the delivery of over 5,000 Flic units to NCR and other customers.
- Expense Reduction: Research and development (R&D) expenses decreased 32% to $4.62 million. This reduction was largely due to the capitalization of manufacturing overhead (previously expensed) and the absence of a $450,000 inventory write-down recorded in the prior year.
- Inventory Build-up: Inventory increased significantly by $1.24 million to $1.57 million, primarily due to the start of production for the new version of the Nomad system.
- Cash Flow: Net cash used in operating activities increased to $7.47 million from $6.78 million, reflecting the net loss and increased inventory purchases.
Outlook, Risks, and Subsequent Events
Management Commentary & Guidance:
- Microvision expects to begin delivery of the new Nomad units in the second quarter of 2004.
- The Company anticipates continued substantial R&D spending to complete product development.
- Microvision believes its current cash balance will fund operations through at least December 31, 2004. Lumera's cash plus recent financing is expected to fund operations through the second quarter of 2004.
Subsequent Events (April 2004):
- Lumera Financing: Lumera raised $2.3 million via convertible notes (6.5% interest) and issued warrants. This was necessary as Lumera's cash position was insufficient for long-term needs.
- Research Agreement: Lumera amended its Sponsored Research Agreement with the University of Washington, reducing the total payment obligation to $5.75 million.
Risks and Contingencies:
- Capital Requirements: The Company has a history of operating losses (accumulated deficit of $161 million) and will require additional capital to continue operations. Failure to secure funding could force substantial operational limitations.
- Market Acceptance: Success depends on the commercial acceptance of scanned beam and polymer materials technologies, which face competition and long sales cycles.
- Government Contracts: A significant portion of revenue relies on U.S. government development contracts, which are subject to termination for convenience and funding fluctuations.
- Intellectual Property: The Company relies on licenses from the University of Washington; loss of these rights would materially harm operations.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of Lumera's $2.3 million convertible note financing to meet its budgeted requirements beyond Q2 2004.
- Inventory Valuation: Assess the risk of obsolescence given the $1.2 million increase in inventory for the new Nomad version prior to confirmed commercial sales volume.
- Revenue Mix: Monitor the transition from contract revenue (volatile, government-dependent) to product revenue (commercial, scalable) to assess long-term sustainability.
- Government Contract Backlog: Confirm the status of the $2.7 million contract backlog and the risk of termination or funding delays.
- Stock-Based Compensation: Review the pro-forma impact of stock-based compensation, which would increase the net loss per share to $(0.42) under SFAS 123 fair value methodology.