Business Context and Reporting Period
Company: MICROVISION, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1998
Business Overview: Microvision develops Virtual Retinal Display (VRD) technology, which projects images directly onto the viewer's retina. The company is in the pre-commercialization stage, focusing on research and development (R&D) of prototypes for defense, healthcare, industrial, and consumer applications. Revenue is currently derived exclusively from development contracts with government and commercial entities. The company expects no significant product sales revenue until at least the year 2000.
Key Financial Metrics (Year Ended Dec 31, 1998)
| Metric | 1998 | 1997 | 1996 |
|---|---|---|---|
| Contract Revenue | $7,074,100 | $1,712,700 | $102,200 |
| Net Loss | $(7,327,500) | $(4,945,000) | $(3,456,600) |
| Net Loss Per Share | $(1.22) | $(0.85) | $(0.90) |
| Gross Margin | $657,200 (9.3%) | $(107,500) (-6.3%) | $(99,600) (-97.5%) |
| Research & Development Expense | $3,305,600 | $2,593,900 | $1,586,700 |
| Marketing, General & Admin Expense | $4,904,600 | $3,077,500 | $1,849,800 |
| Cash & Cash Equivalents (End of Period) | $2,269,000 | $5,049,200 | $14,265,800 |
| Working Capital | $1,357,700 | $8,441,300 | $13,321,000 |
| Accumulated Deficit | $(22,836,000) | $(15,508,500) | $(10,563,500) |
Material Changes vs. Prior Period
- Revenue Growth: Contract revenue increased by 313% to $7.1 million, driven by a higher volume of development contracts with both U.S. Government (83% of revenue) and commercial entities (17% of revenue).
- Expense Increases: Operating expenses rose significantly. Cost of revenue increased by 253% to $6.4 million due to higher direct costs and investments in technical capacity. R&D expenses increased by 27% to $3.3 million, and Marketing/G&A expenses increased by 59% to $4.9 million due to staff expansion.
- Liquidity Decline: Cash and cash equivalents decreased by approximately $2.8 million to $2.3 million, reflecting a net cash outflow from operating activities of $6.1 million. This was partially offset by net cash provided by investing activities ($3.1 million) from the sale of investment securities.
- Profitability: The company achieved a positive gross margin of $657,200 in 1998, compared to a negative gross margin in 1997 and 1996. However, the net loss widened to $7.3 million due to substantial operating expenses.
Outlook, Risks, and Management Commentary
- Commercialization Timeline: Management does not expect commercial product sales until at least 2000. The company continues to rely on development contracts for revenue.
- Liquidity and Capital Resources: As of December 31, 1998, cash balances were $2.3 million. Management believes this, combined with $11 million raised in private placements in January and April 1999, will satisfy budgeted requirements for at least 12 months. However, the company expects to continue incurring substantial losses and negative cash flow.
- Key Risks:
- Technology Acceptance: No assurance that VRD technology will achieve market acceptance or that products will be commercially viable.
- Patent and IP: Reliance on an exclusive license from the University of Washington; risk of infringement claims or loss of exclusivity.
- Competition: Highly competitive industry with well-funded competitors (e.g., Sony, Texas Instruments) developing alternative miniaturized display technologies.
- Year 2000 Compliance: Potential disruption from internal or third-party Y2K failures, though the company is implementing a compliance strategy.
- Subsequent Events: In January 1999, the company raised $5 million in convertible preferred stock. In April 1999, it raised $6 million in common stock. The company also moved to new headquarters in April 1999, incurring increased lease obligations.
Investor Verification Checklist
- Cash Burn Rate: Verify the company's ability to sustain operations given the $7.3 million net loss and $6.1 million operating cash outflow.
- Revenue Concentration: Assess the risk associated with 83% of revenue coming from the U.S. Government and the potential for contract non-renewal.
- IP Dependencies: Review the terms of the University of Washington license agreement, specifically regarding royalty obligations and exclusivity conditions.
- Commercialization Progress: Monitor the status of prototype development and any new OEM partnerships announced post-filing.
- Dilution Risk: Evaluate the impact of recent and potential future equity issuances (warrants, options, convertible stock) on existing shareholders.