Business Context and Reporting Period
Company: Microvision, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: Microvision designs and markets scanned beam display and image capture products. Key offerings include the Nomad Expert Technician System (a head-worn wearable computer) and the Flic laser bar code scanner. The company is developing prototype displays for automotive, defense, medical, and consumer applications. Following the July 2004 IPO of its former subsidiary, Lumera Corporation, Microvision accounts for its remaining stake in Lumera using the equity method.
Key Financial Metrics
| Metric (in thousands) | 2005 | 2004 |
|---|---|---|
| Total Revenue | $14,746 | $11,418 |
| Net Loss (Available to Common Shareholders) | $(30,284) | $(33,543) |
| Net Loss Per Share (Basic & Diluted) | $(1.35) | $(1.56) |
| Cash and Cash Equivalents (Year End) | $6,860 | $1,268 |
| Working Capital | $(4,723) | $903 |
| Accumulated Deficit | $(215,650) | $(187,467) |
| Long-Term Liabilities | $4,412 | $52 |
Revenue Composition (2005): Contract revenue (development work) totaled $11.4 million (77% of total), while product revenue (Nomad and Flic) totaled $3.4 million (23% of total). The U.S. government accounted for 35% of total revenue, and a single commercial customer (Ethicon Endo-Surgery) accounted for 33%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 29% to $14.7 million, driven by a 29% increase in contract revenue and a 29% increase in product revenue.
- Cost of Product Revenue: Increased 123% to $8.6 million. This was primarily due to a $3.7 million write-off of obsolete Nomad and Flic inventory and the shift to full absorption of manufacturing overhead costs for the Nomad product.
- Research & Development (R&D): Decreased 55% to $6.6 million, largely due to the deconsolidation of Lumera and the reclassification of Nomad manufacturing costs from R&D to Cost of Product Revenue.
- Debt and Interest: Interest expense surged to $3.3 million from $0.2 million due to the issuance of $20 million in convertible notes in March and December 2005. The company recorded a $3.3 million loss on debt extinguishment related to the amendment of March notes.
- Derivative Gains: The company recorded a non-operating gain of $6.0 million related to changes in the fair value of embedded derivative features and warrants associated with its convertible notes.
- Investment in Lumera: Recorded a $3.2 million equity loss in Lumera but recognized a $2.7 million gain on the sale of 812,000 Lumera shares.
Guidance, Outlook, and Risks
Liquidity and Going Concern: The independent auditor has issued a report with an explanatory paragraph raising substantial doubt about the company's ability to continue as a going concern. As of December 31, 2005, cash was $6.9 million. Management expects cash to fund operations only through July 2006. The company plans to raise additional capital through equity or debt offerings before this date.
Management Commentary:
- Product Strategy: The Nomad product has not achieved planned commercial acceptance. The company is reducing sales and marketing costs for Nomad while defining new business cases and a go-to-market strategy, expected to take the first half of 2006.
- Future Products: Focus remains on developing the integrated photonics module for automotive head-up displays, pico projectors, and full-color eyewear. The company aims to enter agreements with Tier 1 suppliers for head-up displays in 2006.
- Restructuring: In January 2006, the company reduced executive officers and vice presidents by 50% and appointed a new CEO (Alexander Tokman) to target a 30% reduction in operating loss.
Key Risks:
- Capital Requirements: Failure to secure additional financing by July 2006 could force substantial curtailment of operations.
- Customer Concentration: Heavy reliance on a limited number of government and commercial development contracts, which can be terminated for convenience.
- Market Acceptance: Uncertainty regarding the commercial viability of scanned beam display technology compared to established LCD and CRT technologies.
- Intellectual Property: Dependence on a license from the University of Washington for Virtual Retinal Display technology; loss of exclusivity could be material.
Investor Verification Checklist
- Cash Runway: Verify the status of financing efforts to extend operations beyond the projected July 2006 liquidity horizon.
- Inventory Valuation: Review the $3.7 million inventory write-off and assess if further write-downs are necessary given the shift in product strategy.
- Debt Covenants: Examine the terms of the $20 million in convertible notes, specifically the embedded derivatives, conversion prices, and potential dilution to common shareholders.
- Contract Backlog: Confirm the $3.4 million backlog (mostly government contracts) and the risk of termination for convenience.
- Lumera Investment: Monitor the value of the remaining Lumera stake (approx. 12% ownership) and the impact of the switch from equity method to cost method accounting following the January 2006 sale.