MVIS

Business Context and Reporting Period

Company: Microvision, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Microvision develops high-resolution miniature display and imaging engines based on its PicoP technology platform, utilizing MEMS, lasers, and optics. The company generates revenue through development contracts (primarily with the U.S. government) and sales of prototype units, as well as product revenue from bar code scanners (ROV). The company is in a pre-commercialization phase for its primary PicoP products and relies heavily on external financing.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 63% to $951,000 from $2,570,000. Contract revenue dropped 69% to $712,000 due to reduced contract activity and lower backlog. Product revenue (bar code scanners) declined 17% to $239,000 due to decreased purchasing volume from small and mid-sized businesses.
• Widening Losses: Net loss increased 76% to $8.9 million. This was driven by a 27% increase in Research and Development (R&D) expenses to $5.6 million as the company accelerates PicoP product development, partially offset by a 7.8% decrease in SG&A expenses due to staff reductions.
• Cash Burn: Net cash used in operating activities increased to $8.8 million from $5.3 million. Cash and cash equivalents decreased by $9.1 million during the quarter.
• Derivative Gains: Non-operating gain on derivative instruments (warrants) decreased significantly to $180,000 from $1.7 million in the prior year, reflecting changes in stock price and time to expiration.

Outlook, Risks, and Management Commentary

• Liquidity and Capital Needs: Management states the company requires additional capital in 2009 to fund the launch of its first accessory product and further development of PicoP applications. Without additional financing, the company may need to reduce the scope of its business, delay product launches, and cut staff. Management believes current cash reserves ($19.1 million) are sufficient to fund operations through at least February 28, 2010, assuming scope adjustments if necessary.
• Investment Liquidity Risk: Approximately $2.7 million of the company's investments are held in Student Loan Auction Rate Securities (SLARS). These securities have been illiquid since February 2008 due to failed auctions. While currently rated investment grade, the company may be forced to sell them at a loss if immediate liquidity is required.
• Legal Contingencies: The company is litigating to collect $1.73 million in outstanding loans from a former CEO. The former CEO has filed counterclaims seeking over $15 million in damages. Management believes the counterclaims are without merit but acknowledges an adverse outcome could materially affect financial condition.
• Product Strategy: The company expects to commercially launch an accessory projector in 2009. Future growth depends on market acceptance of the PicoP display engine in consumer, automotive, and eyewear applications.

Investor Verification Checklist

• Financing Timeline: Verify the company's ability to secure equity or debt financing before the projected cash runway ends in early 2010.
• SLARS Liquidity: Assess the risk of realizing losses on the $2.7 million illiquid SLARS investment if the company is forced to liquidate assets unexpectedly.
• Legal Exposure: Monitor the status of the litigation with the former CEO regarding the $1.73 million loan and the $15 million counterclaim.
• R&D Efficiency: Evaluate whether the increased R&D spend ($5.6M) is yielding tangible progress toward the 2009 accessory product launch.
• Government Contract Dependency: Review the stability of U.S. government development contracts, which historically provide a significant portion of revenue but are subject to termination.