MVIS

Business Context and Reporting Period

Company: MICROVISION, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: Microvision develops and commercializes Virtual Retinal Display (VRD) technology for displaying images on the retina. The company is in a pre-revenue product stage, generating revenue primarily through government and commercial development contracts. It has incurred substantial losses since inception and expects to continue doing so through at least 2000.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Contract revenue decreased 19% ($353,100) in the three months ended September 30, 1999, compared to the same period in 1998. For the nine months, revenue decreased 8% ($422,700). Declines were attributed to delays in booking development contracts and a reorientation of the R&D department.
• Cost of Revenue: Decreased significantly by 73% ($1.3 million) in the quarter and 16% ($712,600) for the nine months, reflecting lower direct costs on contracts and a shift of costs to internal R&D.
• Operating Expenses:
  • R&D: Increased 337% ($2.46 million) in the quarter and 133% ($3.8 million) for the nine months. This was driven by hiring technical staff, equipping in-house labs, and a new $2.6 million development contract with Cree Research, Inc.
  • SG&A: Increased 51% ($494,400) in the quarter and 63% ($2.2 million) for the nine months due to expanded sales, marketing, and administrative staff.
• Liquidity: Cash and investment securities grew from $2.27 million (Dec 31, 1998) to $33.78 million (Sep 30, 1999). This increase was funded by significant equity raises, including $27.0 million from warrant exercises in July 1999 and private placements totaling over $17 million earlier in the year.

Guidance, Outlook, and Risks

• Outlook: Management expects to continue incurring significant operating losses through 2000 and possibly beyond. The company does not expect to begin shipment of its first commercial product until the end of 2000 at the earliest.
• Liquidity Position: With approximately $33.8 million in cash and investments, management believes funds are sufficient to meet budgeted requirements for at least the next 12 months. However, additional capital may be required earlier if expenses exceed budgets or if product development faces delays.
• Key Risks:
  • Commercialization: No commercial product has been completed; success depends on market acceptance of VRD technology and partnerships with OEMs.
  • Patents: Reliance on licensed technology from the University of Washington; risk of patent challenges or inability to protect proprietary technology.
  • Competition: Highly competitive industry with rapid technological change and well-funded competitors.
  • Manufacturing: Lack of in-house manufacturing capability; reliance on third-party partners for commercial production.
  • Year 2000 (Y2K): While the company is largely compliant, third-party failures could disrupt operations.
• Unusual Items: The net loss includes non-cash charges related to beneficial conversion features of Series B Preferred Stock ($606,300 in Q3; $1.75 million for the nine months) and preferred dividends ($73,400).

Investor Verification Checklist

• Capital Runway: Verify if the $33.8 million liquidity is sufficient given the accelerating burn rate (operating cash outflow of $13.7 million in nine months).
• Product Timeline: Confirm the feasibility of the "end of 2000" commercial product shipment target given the current prototype stage.
• Contract Revenue Stability: Assess the risk of revenue volatility due to reliance on a limited number of government and commercial development contracts.
• Dilution: Review the impact of outstanding options (2.27 million shares), warrants (688,813 shares), and convertible preferred stock (100,000 shares) on future share count.
• Patent Status: Investigate the status of pending patent applications and the strength of the license agreement with the University of Washington.