Business Context and Reporting Period
Company: MICROVISION, INC.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2002
Business Overview: Microvision develops information display and capture devices, focusing on retinal scanning displays (Nomad), image capture devices (Flic), and electro-optical materials technology (via subsidiary Lumera Corporation). The company operates in two segments: Microvision and Lumera.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2002 | 9 Months Ended Sep 30, 2002 | 9 Months Ended Sep 30, 2001 |
|---|---|---|---|
| Revenue | $4,186 | $12,724 | $6,511 |
| Gross Margin | $2,267 (54.1%) | $6,799 (53.4%) | $2,530 (38.9%) |
| Net Loss | $(5,401) | $(20,275) | $(26,984) |
| Net Loss Per Share (Basic/Diluted) | $(0.37) | $(1.48) | $(2.25) |
| Cash and Cash Equivalents | $10,763 | $10,763 | $11,991 |
| Total Investment Securities | $9,719 | $9,719 | $18,065 |
| Total Current Assets | $29,083 | $29,083 | $39,451 |
| Total Current Liabilities | $7,322 | $7,322 | $6,353 |
| Accumulated Deficit | $(121,206) | $(121,206) | $(100,931) |
Liquidity: As of September 30, 2002, the company held $20.5 million in combined cash, cash equivalents, and investment securities. Management estimates these funds will meet cash requirements through the end of the first quarter of 2003.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 74% ($1.8M) for the three months and 95% ($6.2M) for the nine months ended September 30, 2002, compared to the prior year. This was driven primarily by increased performance on U.S. government development contracts (83-84% of revenue).
- Expense Reduction: Research and Development (R&D) expenses decreased 36% ($3.0M) for the quarter and 23% ($5.7M) for the nine months. This reduction was largely due to the completion of a $3.6M research agreement with CREE Inc. in 2001 and a shift of overhead costs to Cost of Revenue due to higher contract volume.
- Impairment Loss: The company recorded a $624,000 impairment loss on its long-term investment in Gemfire Corporation in June 2002 due to a recapitalization plan by Gemfire.
- Allowance for Doubtful Accounts: A $500,000 allowance was recorded for receivables from related parties (senior officers) due to concerns regarding repayment ability.
- Inventory Build-up: Inventory increased significantly from $99,000 to $994,000, primarily consisting of raw materials for Nomad production.
Guidance, Outlook, and Risks
Outlook and Capital Needs: The company expects to continue incurring substantial losses and negative cash flow at least through 2003. Based on the current operating plan, additional capital will be required by the end of the first quarter of 2003 to fund operations, R&D, and capital expenditures. There is no assurance that additional financing will be available on acceptable terms.
Management Commentary: Microvision introduced the Flic handheld barcode scanner in September 2002 and continues to commercialize the Nomad retinal display. Lumera announced an optical modulator in August 2002 that outperforms existing products. The company plans to raise additional funds to expand sales staff, add manufacturing capacity, and protect intellectual property.
Risks and Contingencies:
- Market Acceptance: Success depends on the commercial acceptance of retinal scanning and optical materials technologies, which face competition from established manufacturers.
- Manufacturing Costs: Current production costs for Nomad and Flic exceed revenue; the company must achieve commercial production volumes to become profitable.
- Intellectual Property: The company faces potential patent infringement lawsuits and relies on exclusive licenses from the University of Washington.
- Stock Liquidity: The stock price has traded below $5.00, subjecting the company to "penny stock" rules which may limit liquidity.
Subsequent Event: On November 1, 2002, the company announced a voluntary employee stock option exchange program, allowing employees to cancel existing options for new options with an exercise price of at least $7.00 per share.
Investor Verification Checklist
- Cash Runway: Verify the timeline for the next capital raise, as current funds are projected to last only through Q1 2003.
- Revenue Concentration: Confirm the status of U.S. government contracts, which comprised over 80% of revenue, and assess the risk of funding delays.
- Related Party Receivables: Review the $500,000 allowance for doubtful accounts regarding loans to senior officers and the likelihood of recovery.
- Product Commercialization: Assess the progress of Nomad and Flic in achieving cost-effective commercial production volumes.
- Stock Option Exchange: Evaluate the impact of the November 2002 option exchange program on future dilution and employee retention.