U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___________to____________.
Commission File Number 0-21221
MICROVISION, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Washington 91-1600822
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2203 Airport Way South, Suite 100, Seattle, Washington 98134
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (206) 623-7055
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 31, 1998, 5,952,631
shares of the Company's common stock, no par value, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
1
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PART I
FINANCIAL INFORMATION
Page
----
Item 1 - Financial Statements
Balance Sheet at March 31, 1998 and December 31, 1997 3
Statement of Operations for the three months ended 4
March 31, 1998 and 1997
Statement of Cash Flows and Statement of Comprehensive 5
Income for the three months ended March 31, 1998 and 1997
Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
2
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<TABLE>
<CAPTION>
MICROVISION, INC.
Balance Sheet
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,698,500 $ 5,049,200
Investment securities available-for-sale 3,837,700 3,792,000
Accounts receivable, net 2,662,900 150,000
Costs and estimated earnings in excess of
billings on uncompleted contracts 273,500 843,800
Other current assets 100,900 113,100
------------ ------------
Total current assets 9,573,500 9,948,100
Property and equipment, net 1,034,700 772,700
Other assets 20,000 20,000
------------ ------------
$ 10,628,200 $ 10,740,800
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 828,400 $ 768,200
Accrued liabilities 710,800 715,900
Billings in excess of costs and estimated earnings
on uncompleted contracts 690,400 -
Current portion of capital lease obligations 40,200 22,700
------------ ------------
Total current liabilities 2,269,800 1,506,800
------------ ------------
Capital lease obligations, net of current portion 128,800 69,600
------------ ------------
Shareholders' Equity
Common stock 25,502,000 25,375,300
Deferred compensation (542,800) (701,200)
Unrealized holding loss on investment securities (4,600) (1,200)
Accumulated deficit (16,725,000) (15,508,500)
------------ ------------
Total shareholders' equity 8,229,600 9,164,400
------------ ------------
$ 10,628,200 $ 10,740,800
============ ============
See accompanying notes to financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
MICROVISION, INC.
Statement of Operations
Three months ended March 31,
---------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Contract revenue $ 1,708,200 $ -
------------ ------------
Research and development expense 1,859,300 649,700
Marketing, general and
administrative expense 1,168,800 680,300
------------ ------------
Total expenses 3,028,100 1,330,000
Loss from operations (1,319,900) (1,330,000)
Interest income 107,400 172,000
Interest expense (4,000) (700)
------------ ------------
Net loss $ (1,216,500) $ (1,158,700)
============ ============
Net loss per share $ (0.20) $ (0.20)
============ ============
Weighted average shares outstanding 5,945,000 5,778,900
============ ============
Net loss per share assuming dilution $ (0.20) $ (0.20)
============ ============
Weighted average shares outstanding
assuming dilution 5,945,000 5,778,900
============ ============
See accompanying notes to financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
MICROVISION, INC.
Statement of Cash Flows
Three Months Ended March 31
---------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,216,500) $ (1,158,700)
Adjustments to net cash used in operations:
Depreciation and write-off of fixed assets 84,900 5,600
Non-cash expenses related to issuance of stock,
warrants and options and deferred compensation 159,200 21,800
Unrealized holding loss on investment securities (3,400) -
Changes in:
Accounts receivable (2,512,900) 25,000
Costs and expenses in excess of billings 570,300 -
Other current assets 12,200 13,500
Other assets - 18,300
Accounts payable 60,200 73,100
Accrued liabilities (5,100) (178,500)
Billings in excess of costs and expenses 690,400 -
------------ ------------
Net cash used in operating activities (2,160,700) (1,179,900)
------------ ------------
Cash flows from investing activities:
Purchases of investment securities, net (45,700) -
Purchases of property and equipment (265,800) (76,500)
------------ ------------
Net cash used in investing activities (311,500) (76,500)
------------ ------------
Cash flows from financing activities:
Principal payments on capital leases (4,400) -
Issuance of common stock 125,900 26,300
------------ ------------
Net cash provided by financing activities 121,500 26,300
------------ ------------
Net decrease in cash and cash equivalents (2,350,700) (1,230,100)
Cash and cash equivalents at beginning of period 5,049,200 14,265,800
------------ ------------
Cash and cash equivalents at end of period $ 2,698,500 $ 13,035,700
============ ============
MICROVISION, INC.
Statement of Comprehensive Income
Three months ended March 31,
---------------------------------------
1998 1997
------------ ------------
Net loss $ (1,216,500) $ (1,158,700)
Other comprehensive loss:
Unrealized loss on investment securities
available-for-sale (3,400) -
------------ ------------
Comprehensive loss $ (1,219,900) $ (1,158,700)
============ ============
See accompanying notes to financial statements.
</TABLE>
5
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MICROVISION, INC.
Notes to Financial Statements
March 31, 1998
Management's Statement
The accompanying unaudited financial statements of Microvision, Inc. (the
"Company") at March 31, 1998 and December 31, 1997 and for the three month
periods ended March 31, 1998 and March 31, 1997 have been prepared in accordance
with generally accepted accounting principles for interim financial information
on a basis consistent with the audited financial statements of the Company for
the twelve month period ended December 31, 1997. These statements include all
adjustments (consisting only of normal recurring accruals) that, in the opinion
of the Company's management, are necessary for a fair presentation of the
financial position, results of operations and cash flows for the periods
presented. The interim results are not necessarily indicative of results that
may be expected for a full year and should be read in conjunction with the
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS set forth herein and with the Company's audited financial statements
for the year ended December 31, 1997, which are included in the Company's Annual
Report on Form 10-KSB as filed with the Securities and Exchange Commission.
Computation of Earnings (Loss) per Share
Net loss per share and net loss per share assuming dilution information is
computed using the weighted average number of shares of common stock outstanding
during each period in which the Company reports a loss. Common equivalent shares
issuable upon the exercise of outstanding options and warrants to purchase
shares of the Company's common stock (using the treasury stock method) are not
included in the calculation of the net loss per share and net loss per share
assuming dilution because the effect of their inclusion is anti-dilutive.
6
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of 21E of the Securities Exchange Act of 1934, as amended. Such
statements may include, but are not limited to, projections of revenues, income,
or loss, capital expenditures, plans for product development and cooperative
arrangements, future operations, financing needs or plans of the Company, as
well as assumptions relating to the foregoing. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify
forward-looking statements, which speak only as of the date the statement was
made. Such statements are inherently subject to risks and uncertainties as
further described herein and in the "Considerations Related to the Company's
Business" section of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997, as filed with the Securities and Exchange Commission.
The Company's actual results may differ materially from the results projected in
the forward-looking statements.
Overview
The Company commenced operations in May 1993 to develop and commercialize
technology for displaying images and information onto the retina of the viewer's
eye. In 1993, the Company acquired an exclusive license (the "Exclusive
License") to the Virtual Retinal Display(TM) technology ("VRD"(TM)) from the
University of Washington ("UW") and entered into a research agreement (the
"Research Agreement") with the University of Washington to further develop the
VRD technology. The Company was in the development stage as of and for the
period ended December 31, 1996. In connection with its development activities,
the Company incurred costs to incorporate and establish its business activities
as well as develop and market VRD technology. As of December 31, 1997, the
Company is no longer considered a development stage enterprise. Since the
completion of its initial public offering in August 1996, the Company also has
established and equipped its own in-house laboratory for the continuing
development of the VRD technology and has transferred the core research and
development work from the HIT Lab to the Company. The Company has incurred
substantial losses since its inception and expects to continue to incur
significant operating losses over the next several years.
The Company's objective is to be a leading provider of personal display
products and imaging technology in a broad range of professional and consumer
applications. The Company expects to achieve this objective and to generate
revenues through a combination of the following activities: technology licensing
to original equipment manufacturers ("OEMs") of consumer electronics products;
provision of engineering services associated with cooperative product
development arrangements and research contracts; and the manufacture and sale of
high-performance personal display products to professional users, directly,
through OEMs or through joint ventures.
7
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The Company is in discussions with systems and equipment manufacturers in
the defense and wireless communications, computing, and commercial and consumer
electronics industries. The Company expects to work with certain of these
manufacturers to develop or co-develop specific products that the Company
believes to be the most commercially viable.
To date, the Company's revenues have been derived generally from
cooperative development projects and government contracts. Revenues from sales
of products may not occur for several years.
The Company currently has several prototype versions of the VRD including
monochromatic and color portable units and a full-color bench-top model. The
Company plans to continue funding prototype and demonstration versions of
products incorporating the VRD technology throughout 1998. Future revenues,
profits and cash flow, and the Company's ability to achieve its strategic
objectives as described herein will depend upon a number of factors, including
acceptance of the VRD technology by various industries and OEMs, market
acceptance of products incorporating the VRD technology and the technical
performance of such products. Additionally, the Company must be able to attract,
retain and motivate qualified technical and management personnel and anticipate
and adapt to a rapidly changing, competitive market for information display
technologies.
Plan of Operation
The Company intends to continue entering into strategic co-development
relationships with systems and equipment manufacturers to pursue the development
of commercial products incorporating VRD technology. The Company continues to
identify, assess and pursue various market and product opportunities available
to the Company for the commercialization of the VRD technology and to identify
and evaluate potential co-development partners. The Company plans to continue to
expand its sales and marketing staff in support of its objective of
commercializing the VRD technology.
The Company also plans to continue investing in ongoing innovation and
improvements to the VRD technology, including the development of component
technology and additional prototypes, as well as design of subsystems and
products. The Company has established, staffed, and equipped an in-house
laboratory to support VRD technology development and product development
engineering associated with current cooperative development projects and future
cooperative development projects, which the Company expects to receive. The
Company plans to continue hiring technical personnel to achieve the Company's
technology development objectives and to continue performing on the Company's
development contracts.
Results of Operations
As of December 31, 1997, the Company was no longer considered a development
stage company. As of March 31, 1998, the Company had an accumulated deficit
since inception of $16.7 million. The Company expects to continue and to
increase expenditures in research and development as well as in sales, marketing
and administration as it continues to focus its efforts
8
<PAGE>
on further development and refinement of the VRD technology and as it continues
to pursue commercialization of the VRD technology.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED
TO THREE MONTHS ENDED MARCH 31, 1997
Revenue in the three months ended March 31, 1998 increased $1,708,200 from
none in the comparable period in 1997. The revenue for the period ended March
31, 1998 was derived from contracts into which the Company entered during both
1997 and the current period.
Research and development expenses in the three months ended March 31, 1998
increased $1,209,600 or 186% to $1,859,300 from $649,700 in the comparable
period in 1997. In the period ended March 31, 1997, the Company made a payment
of $320,800 to the University of Washington pursuant to the Research Agreement.
The balance of the expenses of $1,859,300 and $328,900 in the periods ended
March 31, 1998 and 1997, respectively, were incurred directly by the Company in
part to further develop the VRD technology.
The increase in research and development expenses of $1,209,600 for the
quarter ended March 31, 1998 over the comparable period in 1997 reflects
continued implementation of the Company's operating plan, which calls for
building its technical staff; supporting activities to further develop the
Company's technology; establishing and equipping its own laboratory; and
performing work in support of the Company's sales and marketing activities
related to the commercialization of the VRD technology. The increase also
includes increased costs incurred in the performance of contracts.
In 1997, the Company made the final payment due under its Research
Agreement with the University of Washington, which resulted in the Company now
having paid in full the $5.1 million license fee due under its Exclusive License
for the VRD technology. In September 1997, the Company and the UW agreed to
extend the term of the Research Agreement from October 31, 1997 to March 31,
1998 at no additional cost to the Company. In March 1998, the Company and the UW
agreed to extend the term of the Research Agreement from March 31, 1998 to
December 31, 1998, at no additional cost to the Company. The extension is
expected to enable the UW to complete performance of certain research activities
under the Research Agreement.
The Company expects its research and development expenses to increase in
the future over prior periods. In addition to costs associated with performing
on contracts, the Company plans to continue to build its technical staff and
research capabilities in support of current and future contracts; to expand
internal research and development activities; to increase technical support of
sales and marketing efforts; and to prepare for performing on future contracts
relating to the commercialization of the VRD technology.
Marketing, general and administrative expenses in the three months ended
March 31, 1998 increased $488,500 or 72% to $1,168,800 from $680,300 in the
comparable period in 1997. The increase includes increased aggregate
compensation and associated support costs for employees including those employed
at March 31, 1997 and those hired subsequent to that date in sales and marketing
and in administration. The Company expects marketing, general and administrative
expenses to increase in future periods as the Company makes additional
investments in sales and
9
<PAGE>
marketing activities to promote its VRD technology and anticipated products and
as it adds to its sales and marketing and administrative staff and increases the
level of corporate and administrative activity.
Net interest income in the three months ended March 31, 1998 was $103,400
compared to net interest income of $171,300 in the comparable period of 1997.
This decrease was due to lower average cash balances in the three months ended
March 31, 1998, representing the remaining net proceeds received by the Company
from its initial public offering in August 1996.
In January 1998, the Company received a $1 million contract from the U.S.
Army's Battle Command Battle Lab to build a prototype head worn display to
replace the desktop monitor at workstations within its tactical operations
center in Leavenworth, Kansas. In February, the Company announced the award of a
Small Business Innovation Research (SBIR) contract from the United States Army
to initiate the development of a full-color, high-definition head mounted
display to present visual imagery to helicopter pilots in an operational flight
simulator. In March, the Company announced an agreement to extend and broaden
its commercial development program with Saab AB, in collaboration with Ericcson
Saab Avionics AB, to develop the next generation high-resolution, helmet mounted
display technology for use in advanced aircraft display systems. The joint
effort will test and evaluate the VRD technology's safety and durability to
severe environmental specifications of the military cockpit, which is a key step
toward commercial production.
Subsequent to the end of the quarter, the Company delivered an advanced
helmet mounted display demonstrator for fighter aircraft to a large
international avionics company customer. The Company retrofitted the binocular
helmet mounted display by replacing the pair of miniature Cathode Ray Tubes
(CRT) now in use in the customer's systems, with the Company's patented VRD
technology. The unique advantages of the VRD technology, which include increased
brightness and contrast, high levels of resolution and lower power consumption,
are critical performance and safety factors associated with helmet worn systems
in the jet fighter cockpit environment. Also subsequent to the end of the
period, the Company announced that it had expanded its intellectual property
portfolio with the issuance of four new patents. The Company also announced that
the number of pending applications had increased to eleven and that it expects
to file in excess of 20 new patent applications in 1998.
LIQUIDITY AND CAPITAL RESOURCES
From inception through July 1996, the Company financed its operations
primarily through private equity sales and a private placement of convertible
subordinated notes. In August 1996, the Company completed its initial public
offering of 2,250,000 units, each unit consisting of one share of common stock
and one five-year redeemable warrant to purchase one share of common stock at
$12.00 per share. The Company received net proceeds from the offering of
approximately $15.5 million after deducting underwriting discounts and offering
expenses.
At March 31, 1998 the Company's combined cash and cash equivalents and
investment securities available-for-sale balance was $6.5 million. The Company
believes that these funds together with revenue earned on contracts will satisfy
its budgeted cash requirements for at least the next twelve months based on the
Company's current operating plan. Actual expenses,
10
<PAGE>
however, may exceed the amounts budgeted, and will depend, in part, on the
opportunities that arise for commercialization of the VRD technology. The
Company may require additional capital earlier to develop products, to respond
to competitive pressures, or to meet unanticipated development difficulties.
There can be no assurance that any additional financing will be available when
needed or, if available, on terms satisfactory to the Company.
The Company's future expenditures and capital requirements will depend on
numerous factors, including the progress of its research and development
program, the progress in its commercialization activities, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments and the ability
of the Company to establish cooperative development, joint venture and licensing
arrangements. If the Company is successful in establishing co-development and
joint venture arrangements, it is expected that the Company's partners would
fund certain non-recurring engineering costs for product development.
Nevertheless, the Company expects its cash requirements to increase
significantly each year as it expands its operations.
11
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Part II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes In Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10. Letter dated March 27, 1998 extending the term of the
Research Agreement between the University of Washington and
Microvision, Inc.
11. Computation of Net Loss Per Share and Net Loss Per Share
Assuming Dilution
27. Financial Data Schedule
b. Reports on Form 8-K
During the quarterly period ended March 31, 1998, the Company
filed no Current Reports on Form 8-K with the Commission.
12
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MICROVISION, INC.
Date: May 15, 1998 RICHARD F. RUTKOWSKI
--------------------------------------------
Richard F. Rutkowski
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 1998 RICHARD A. RAISIG
--------------------------------------------
Richard A. Raisig
Chief Financial Officer
(Principal Financial and Accounting Officer)
13
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EXHIBIT INDEX
Exhibit
Number Description
10 Letter dated March 27, 1998 extending the term of the Research
Agreement between the University of Washington and
Microvision, Inc.
11 Computation of Net Loss Per Share and Net Loss Per Share Assuming
Dilution
27 Financial Data Schedule
14
EXHIBIT 10
UNIVERSITY OF WASHINGTON
SEATTLE, WASHINGTON 98105-6613
Office of Research
Grant and Contract Services
March 27, 1998
Richard Raisig
Chief Financial Officer
Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, Washington 98134
Subject: No Cost Time Extension of the Research Agreement Between the
University of Washington and Microvision
Dear Mr. Raisig:
The Research Agreement between the University of Washington and Microvision was
extended by mutual agreement for six months through March 31, 1998 by our letter
agreement of September 30, 1997. We now anticipate that approximately $105,000
will remain as the unencumbered balance on March 31, 1998, and Dr. Furness has
requested that the University and Microvision extend the Project through
December 31, 1998.
Therefore, on behalf of the University and at Dr. Furness' request, I am
formally requesting an extension of the Research Agreement through December 31,
1998. Generally, the additional work to be done during this extension period
will fall within the framework of the original research plan attached to the
Research Agreement and will be a continuation of the work already done on the
original project, but otherwise I leave to Dr. Furness the details of the work
to be done.
I am requesting that you approve our request by signing this letter. Please send
your approval to my attention. Thank you.
Sincerely,
DONALD W. ALLEN
----------------------------------------------
Donald W. Allen, Director
Grant and Contract Services
APPROVED for Microvision, Inc.
RICHARD A. RAISIG
----------------------------------------------
Richard A. Raisig
Chief Financial Officer
3935 University Way N.E.,/Telephone: (206) 543-4043/FAX: (206) 685-1732
Exhibit 11
<TABLE>
<CAPTION>
MICROVISION, INC.
COMPUTATION OF NET LOSS PER SHARE AND
NET LOSS PER SHARE ASSUMING DILUTION
Three months ended
------------------
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Net loss ($1,216,500) ($1,158,700)
============== ==============
Shares used in computing net loss per share and
net loss per share assuming dilution:
Weighted average shares outstanding 5,945,000 5,778,900
============== ==============
Net loss per share ($0.20) ($0.20)
============== ==============
Net loss per share assuming dilution ($0.20) ($0.20)
============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
unaudited financial statements of Microvision, Inc., for the three month period
ended March 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,698,500
<SECURITIES> 3,837,700
<RECEIVABLES> 2,668,900
<ALLOWANCES> (6,000)
<INVENTORY> 0
<CURRENT-ASSETS> 9,573,500
<PP&E> 1,291,500
<DEPRECIATION> (256,800)
<TOTAL-ASSETS> 10,628,200
<CURRENT-LIABILITIES> 2,269,800
<BONDS> 128,800
0
0
<COMMON> 25,502,000
<OTHER-SE> (17,272,400)
<TOTAL-LIABILITY-AND-EQUITY> 10,628,200
<SALES> 0
<TOTAL-REVENUES> 1,708,200
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,022,100
<LOSS-PROVISION> 6,000
<INTEREST-EXPENSE> (4,000)
<INCOME-PRETAX> (1,216,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,216,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,216,500)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
