Business Context and Reporting Period
Company: MICROVISION, INC.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2001
Business Overview: Microvision develops retinal scanning display technology and optical materials. Operations are divided into two segments: Microvision (retinal displays) and Lumera Corporation (optical systems components, a majority-owned subsidiary). The company is pre-commercial, deriving revenue primarily from government and commercial development contracts.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2001 | 9 Months Ended Sep 30, 2001 | 9 Months Ended Sep 30, 2000 |
|---|---|---|---|
| Revenue | $2,402 | $6,511 | $5,256 |
| Gross Margin | $1,064 (44%) | $2,530 (39%) | $1,188 (23%) |
| Net Loss | $(8,198) | $(26,984) | $(19,688) |
| Loss Per Share (Basic/Diluted) | $(0.68) | $(2.25) | $(1.75) |
| Cash and Cash Equivalents | $11,991 | $11,991 | $16,061 |
| Total Investment Securities | $22,507 | $22,507 | $34,034 |
| Total Liabilities | $7,667 | $7,667 | $6,130 |
| Accumulated Deficit | $(93,121) | $(93,121) | $(66,137) |
Note: Investment securities include $21,883 in available-for-sale and $624 in long-term investments. Total liquidity (cash + investments) is approximately $33.9 million.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 22% ($400k) for the quarter and 24% ($1.25m) for the nine months compared to the prior year periods. All revenue was derived from development contracts.
- Expense Increases:
- R&D Expenses: Increased 48% ($2.75m) for the quarter and 77% ($10.6m) for the nine months. This reflects hiring, lab expansion, and specific costs including a $1.1m expense for the HALO technology license and $2.25m in payments to the University of Washington for Lumera's sponsored research.
- SG&A Expenses: Increased 43% ($1.1m) for the quarter and 35% ($2.8m) for the nine months due to increased compensation and support costs.
- Loss Expansion: Net loss widened significantly due to the surge in operating expenses outpacing revenue growth. The nine-month loss increased by $7.3 million compared to the prior year.
- Segment Activity: Lumera Corporation, which had no significant activity in 2000, contributed $301k in revenue and significant expenses in 2001 following its formation and capital raise.
Guidance, Outlook, and Risks
Outlook and Guidance:
- The company expects to introduce a production version of its retinal scanning display in late 2001 and Lumera's first product (an electro-optic modulator) in late 2002.
- Management anticipates continued high levels of R&D spending and increasing operating losses through at least 2002.
- Backlog of development contracts as of September 30, 2001, was $7.3 million, all scheduled for completion within 12 months.
Liquidity and Capital Resources:
- Cash used in operating activities was $27.2 million for the nine months ended September 30, 2001.
- Financing activities provided $22.2 million, primarily from Lumera raising $21.4 million via preferred stock issuance.
- Subsequent Event: In October 2001, the company raised an additional $11.0 million through the sale of common stock and warrants.
- Management believes current cash plus the October proceeds will satisfy budgeted requirements for at least the next 12 months, though additional capital may be needed sooner if development accelerates or difficulties arise.
Key Risks:
- Market Acceptance: No assurance that retinal scanning or optical materials technology will achieve commercial acceptance.
- Profitability: History of operating losses with an accumulated deficit of $93.1 million; no assurance of future profitability.
- Intellectual Property: Reliance on licenses from the University of Washington; risk of patent challenges or infringement suits.
- Manufacturing: Lack of current capability to manufacture in commercial quantities; reliance on third-party partners.
- Concentration: Revenue is highly sensitive to defense and aerospace industry funding and the telecommunications sector (for Lumera).
Investor Verification Checklist
- Cash Burn Rate: Verify the sustainability of the $27.2 million operating cash burn over nine months against the $33.9 million liquidity position.
- Contract Backlog: Confirm the $7.3 million backlog and the timing of revenue recognition for these development contracts.
- Lumera Funding: Review the terms of the $21.4 million preferred stock issuance by Lumera and the obligations under the University of Washington sponsored research agreement ($750k quarterly payments).
- Product Timeline: Assess the feasibility of the late 2001 and late 2002 product launch dates given the current prototype stage.
- Subsequent Financing: Confirm the details and dilution impact of the $11.0 million October 2001 stock offering.