<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
[ ] 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 Registrant as Specified in Its Charter)
WASHINGTON 91-1600822
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
19910 North Creek Parkway, Bothell, Washington 98011-3008
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (425) 415-6847
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. [X] Yes [ ] No
At October 29, 1999, the Company had 9,878,679 shares of common stock, no par
value, outstanding.
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PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 - Financial Statements
Balance Sheet at September 30, 1999 and December 31, 1998 3
Statement of Operations for the three and nine months ended 4
September 30, 1999 and 1998
Statement of Cash Flows for the nine months ended 5
September 30, 1999 and 1998
Statement of Comprehensive Loss for the three and nine 6
months ended September 30, 1999 and 1998
Notes to Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings 28
Item 2 - Changes in Securities and Use of Proceeds 28
Item 3 - Defaults Upon Senior Securities 28
Item 4 - Submission of Matters to a Vote of Security Holders 28
Item 5 - Other Information 28
Item 6 - Exhibits and Reports on Form 8-K 28
</TABLE>
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MICROVISION, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 5,835,300 $ 2,269,000
Investment securities available for sale 27,939,700 --
Accounts receivable, net 1,523,600 1,538,800
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,863,900 758,500
Other current assets 866,600 282,800
------------ ------------
Total current assets 38,029,100 4,849,100
Property & equipment, net 2,790,200 1,394,100
Other assets 2,588,300 119,000
------------ ------------
Total assets $ 43,407,600 $ 6,362,200
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 941,300 $ 1,327,700
Accrued liabilities 2,230,800 1,028,100
Allowance for estimated contract losses 274,000 228,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 69,800 771,500
Current portion of capital lease obligations 213,100 136,100
Current portion of long term debt 45,400 --
------------ ------------
Total current liabilities 3,774,400 3,491,400
Capital lease obligations, net of current portion 335,800 281,800
Long term debt, net of current portion 354,000 --
------------ ------------
Total liabilities 4,464,200 3,773,200
------------ ------------
Commitments and contingencies
Mandatorily Redeemable Preferred Stock 1,536,000 --
------------ ------------
Shareholders' Equity
Preferred stock 293,900 --
Common stock 72,735,600 25,742,600
Deferred compensation (277,700) (238,700)
Subscriptions receivable (250,500) (78,900)
Unrealized holding gain on investment securities 13,500 --
Accumulated deficit (35,107,400) (22,836,000)
------------ ------------
Total shareholders' equity 37,407,400 2,589,000
------------ ------------
Total liabilities and shareholders' equity $ 43,407,600 $ 6,362,200
============ ============
</TABLE>
See accompanying notes to financial statements.
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MICROVISION, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Contract revenue $ 1,465,700 $ 1,818,800 $ 5,160,200 $ 5,582,900
Cost of revenue 492,000 1,799,100 3,741,100 4,453,700
------------ ------------ ------------ ------------
Gross margin 973,700 19,700 1,419,100 1,129,200
------------ ------------ ------------ ------------
Research and development
expense 3,190,400 730,400 6,663,100 2,861,600
Marketing, general and
administrative expense 1,470,400 976,000 5,705,800 3,490,600
------------ ------------ ------------ ------------
Total expenses 4,660,800 1,706,400 12,368,900 6,352,200
------------ ------------ ------------ ------------
Loss from operations (3,687,100) (1,686,700) (10,949,800) (5,223,000)
Interest income 448,200 67,600 637,100 257,100
Interest expense (24,100) (11,400) (131,000) (24,300)
------------ ------------ ------------ ------------
Net loss (3,263,000) (1,630,500) (10,443,700) (4,990,200)
Less: Preferred dividend - - (73,400) -
Non-cash beneficial conversion
feature of Series B Preferred Stock (606,300) - (1,754,300) -
------------ ------------ ------------ ------------
Net loss available for common
shareholders $ (3,869,300) $ (1,630,500) $(12,271,400) $ (4,990,200)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.41) $ (0.27) $ (1.62) $ (0.84)
============ ============ ============ ============
Weighted average shares outstanding 9,535,800 6,016,400 7,576,200 5,975,400
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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MICROVISION, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(10,443,700) $ (4,990,200)
Adjustments to net cash used in operations:
Depreciation 473,600 350,900
Non-cash expenses related to issuance of stock,
warrants and options and deferred compensation 208,400 396,400
Changes in:
Accounts receivable 15,200 (1,186,100)
Costs and estimated earnings in excess of billings (1,105,400) 479,000
Other current assets (583,800) (42,400)
Other assets (2,469,300) (90,300)
Accounts payable (386,400) 380,100
Accrued liabilities 1,202,700 604,500
Allowance for estimated contract losses 46,000 -
Billings in excess of costs and estimated earnings (701,700) 476,600
------------ ------------
Net cash used in operating activities (13,744,400) (3,621,500)
------------ ------------
Cash flows from investing activities
Purchases of investment securities (27,926,200) 2,993,200
Purchases of property and equipment (1,635,600) (676,600)
------------ ------------
Net cash used in investing activities (29,561,800) 2,316,600
------------ ------------
Cash flows from financing activities
Principal payments under capital leases (103,100) (41,400)
Principal payments under long term debt (20,600) -
Increase in long term debt 420,000 -
Payment of preferred dividend (73,400) -
Net proceeds from issuance of preferred stock 6,163,900 -
Net proceeds from issuance of common stock 40,485,700 232,100
------------ ------------
Net cash provided by financing activities 46,872,500 190,700
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,566,300 (1,114,200)
Cash and cash equivalents at beginning of period 2,269,000 5,049,200
------------ ------------
Cash and cash equivalents at end of period $ 5,835,300 $ 3,935,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 131,000 $ 24,300
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired under capital leases $ 234,100 $ 266,700
============ ============
Beneficial conversion feature of Series B Preferred Stock $ 1,754,300 $ -
============ ============
Conversion of preferred stock to common stock $ 4,334,000 $ -
============ ============
Exercise of stock options for subscriptions receivable $ 171,600 $ -
============ ============
Deferred compensation for stock grants $ 247,400 $ 137,300
============ ============
Unrealized gain (loss) in investment securities available-for-sale $ 13,500 $ 1,200
============ ============
</TABLE>
See accompanying notes to financial statements.
5
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MICROVISION, INC.
STATEMENT OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss $ (3,263,000) $ (1,630,500) $(10,443,700) $ (4,990,200)
Other comprehensive income:
Unrealized gain (loss) in investment
securities available-for-sale (14,800) 4,700 13,500 1,200
------------ ------------ ------------ ------------
Comprehensive loss $ (3,277,800) $ (1,625,800) $(10,430,200) $ (4,989,000)
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
6
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MICROVISION, INC.
Notes to Financial Statements
September 30, 1999
Management's Statement
The accompanying unaudited financial statements of Microvision, Inc. (the
"Company") at September 30, 1999 and for the three month periods ended September
30, 1999 and September 30, 1998 and for the nine month periods ended September
30, 1999 and September 30, 1998 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, 1998. 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 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, 1998, which are included in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission.
Computation of Net 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) and upon conversion of the Company's preferred stock (using the if-
converted 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.
Sales of Series B Convertible Preferred Stock
In January 1999, the Company raised $5,000,000 (before issuance costs)
from the sale of convertible preferred stock to a private investor in a private
placement. The preferred stock was immediately convertible at a rate of $12.50
per share and carried a cumulative dividend of 4% per annum, payable in cash
or additional convertible preferred stock at the election of the Company. The
investor also acquired an option to purchase an additional 1,600 shares of
convertible preferred stock with a six-month maturity and an option to
purchase an additional 1,920 shares of convertible preferred stock with a
nine-month maturity from the closing date of the transaction.
The conversion price of the convertible preferred stock was less than
the closing price of the Company's common stock on the closing date of the
transaction. This beneficial conversion feature was valued at $1.1 million and
was accounted for as a reduction of the price paid for the preferred stock and
an increase in common stock. This "discount" is treated as a preferred stock
dividend to be recorded to accumulated deficit over the period between the date
of sale and the
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date on which the preferred stock first became convertible. Because the
preferred stock was immediately convertible, the entire value of the
conversion feature was recorded as a dividend during the three months ended
March 31, 1999.
In May 1999, the Company redeemed the convertible preferred stock and,
in connection therewith, issued 400,000 shares of Common Stock as consideration
to the investor. In addition, the Company paid a cash dividend of $73,400 to the
investor at the time of the redemption. In October 1999, the Company filed a
registration statement to register for resale by the investor the shares of
common stock issued upon redemption of the preferred stock.
In July 1999, the investor exercised the option to purchase 1,600
shares of Series B-2 Convertible Preferred Stock for $1,600,000 (before issuance
costs). The preferred stock is immediately convertible at a rate of $16.00 per
share. Unless converted sooner at the election of the investor, the convertible
preferred stock will automatically convert into 100,000 shares of common stock
at the end of its five year term. The Series B-2 Convertible Preferred Stock is
subject to mandatory redemption at the election of the preferred shareholder
upon certain Liquidation Events (as defined). The convertible preferred stock
carries a cumulative dividend of 4% per annum, payable in cash or additional
convertible preferred stock at the election of the Company. Terms of the
preferred stock include certain rights for the investor to have the common stock
issuable upon conversion of the preferred stock registered under the Securities
Act for resale by the holders thereof. Due to the mandatory redemption feature
noted above, the carrying value of the Series B-2 convertible preferred stock is
classified as temporary equity, outside of stockholders' equity, until such time
as it is redeemed.
The conversion price of the Series B-2 convertible preferred stock was
less than the closing price of the Company's common stock on the closing date of
the transaction. This beneficial conversion feature was valued at $0.6 million
and was accounted for as a reduction of the price paid for the preferred stock
and an increase in common stock. This "discount" is treated as a preferred stock
dividend to be recorded to accumulated deficit over the period between the date
of sale and the date on which the preferred stock first became convertible.
Because the preferred stock is immediately convertible, the entire value of the
conversion feature has been recorded as a dividend during the three months ended
September 30, 1999.
Sales of Common Stock
In April 1999, the Company raised $6,000,000 (before issuance costs)
from the sale of 440,893 shares of common stock to a private investor in a
private placement. The investor also acquired two warrants to purchase
additional common stock, one with a five year term and the other with a one year
term. In April 1999, the Company filed a registration statement to register for
resale by the investor the shares of common stock and warrants sold in the
transaction.
In May 1999, the Company raised $4,500,000 (before issuance costs) from
the sale of 268,600 shares of common stock to Cree Research, Inc. ("Cree") in a
private placement. Concurrently with the sale of the stock, the Company entered
into a one year $2.6 million development contract with Cree to accelerate
development of semi-conductor light-emitting diodes and laser diodes for
application with the Company's proposed display and imaging
8
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products. The agreement calls for payment of the $2.6 million cost of the
project in four equal quarterly payments, the first of which was made in
connection with the signing of the agreement. The Company has pledged the
balance of the payments due of $1.3 million as of September 30, 1999 as
security for a letter of credit, which will be used to fund the remaining
payments under the agreement. In August 1999, the Company filed a registration
statement to register for resale by the investor the shares of common stock
sold in the transaction.
In June 1999, the Company received $1,078,900 (before issuance costs)
from the exercise of 49,950 warrants to purchase units, consisting of one share
of common stock and one warrant to purchase common stock, and from the exercise
of the underlying common stock purchase warrants, which resulted in the issuance
by the Company of a total of 99,900 shares of common stock.
In July 1999, the company raised $27.0 million from the exercise of
2,253,430 publicly traded redeemable common stock purchase warrants and issuance
of 2,253,430 shares of common stock. The remaining 20,496 warrants were redeemed
in accordance with the terms of the Warrant Agreement. The Company has delisted
the Warrants from trading on the Nasdaq National Market.
Subsequent Events
In October 1999, the Company granted the holder of the option to
purchase 1,920 shares of Series B-3 Convertible preferred stock an extension of
the expiration date to June 30, 2000. In consideration of the extension, the
holder waived the right to receive dividends on the outstanding Series B-2
convertible preferred stock from the effective date of the extension.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
The information set forth below includes "forward looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and is subject to the safe harbor created by that section. Certain
factors that realistically could cause results to differ materially from those
projected in the Company's forward-looking statements are set forth under the
caption -- "Considerations Relating to the Company's Business" beginning on page
20.
Overview
The Company commenced operations in May 1993 to develop and
commercialize technology for displaying images and information onto the
retina of the eye. In 1993, the Company acquired an exclusive license to the
Virtual Retinal Display-TM- ("VRD-TM-") from the University of Washington
and entered into a research agreement with the University of Washington to
further develop the VRD technology. In connection with its development
9
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activities, the Company incurred costs to incorporate and establish its
business activities as well as to develop and market the VRD technology. Since
the completion of its initial public offering in August 1996, the Company also
has established and equipped its own in-house laboratories for the continuing
development of the VRD technology and has transferred the research and
development work from the University of Washington 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 has produced several prototype versions of the VRD
including monochromatic and color portable units. The Company expects to
continue funding prototype and demonstration versions of products incorporating
the VRD technology at least through 2000. Future revenues, profits and cash flow
and the Company's ability to achieve its strategic objectives as described
herein will depend on 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.
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 the VRD technology. In March 1999, the
Company hired a Vice President, Marketing to identify and assess the 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 plans to continue to pursue, obtain and perform on
development contracts, with the expectation that such contracts will lead to
products incorporating the Company's VRD technology as well as to further the
development of 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 potential products. In March 1999, the Company hired a Vice
President, Research & Product Development, with experience in product
development and technology commercialization, to lead the Company's research and
product development efforts, manage the performance of revenue contracts, and to
direct the Company's internal research and product development activities. The
Company has established, staffed, and equipped in-house laboratories to support
its performance of development contracts as well as product development and VRD
technology development. The Company intends to continue hiring qualified
technical personnel and to continue investing in laboratory facilities and
equipment to achieve the Company's technology development objectives.
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998.
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CONTRACT REVENUE. Contract revenue in the three months ended September
30, 1999 decreased by $353,100 or 19% to $1,465,700 from $1,818,800 in the
comparable period in 1998. Several factors contributed to the decrease,
primarily delays in booking expected development contracts and increases in
certain development project budgets. Revenue in the three months ended September
30, 1999 includes revenue for which pre-contract costs were recognized in the
prior quarter. To date, substantially all of the Company's revenue has been
generated from development contracts. The Company's customers have included the
United States Government and commercial enterprises.
COST OF REVENUE. Cost of revenue includes both the direct and indirect
costs of performing on revenue contracts. Direct costs include direct labor,
materials and other costs incurred directly in the performance of specific
projects. Indirect costs include labor and other costs associated with operating
the Research and Product Development Department and building the technical
capabilities of the Company. The cost of revenue is determined in part by the
level of direct costs incurred on development contracts and in part by the level
of indirect costs incurred in managing and building the technical capabilities
and capacity of the Company. Accordingly, the cost of revenue can fluctuate
significantly from period to period depending on the level of both the direct
costs incurred in the performance of projects and the level of indirect costs
incurred.
Cost of revenue in the three months ended September 30, 1999 decreased
by $1,307,100 or 73% to $492,000 from $1,799,100 in the comparable period of
1998. The direct costs associated with project performance decreased in the
three months ended September 30, 1999 from the costs incurred in the same period
of 1998, reflecting a lower level of work performed on development contracts in
the three months ended September 30, 1999. In the three months ended September
30, 1999, the cost of revenue reflects benefit from a reduction in the allowance
for contract losses expensed in prior periods. The indirect costs incurred in
building and managing the Company's technical capabilities and capacity
increased during the three months ended September 30, 1999 over that incurred
in the same period of the prior year as the Company continued to build
capacity and capabilities in preparation for expected future development
contracts. The lower level of expense in the three months ended September 30,
1999 as compared to the same period in 1998 also resulted from a higher level
of investment made by the Company in developing the technology through work
performed on its own internal research and development projects.
The Company expects that the cost of revenue on an absolute dollar
basis generally to increase in the future. This increase is expected to result
from additional development contract work that the Company expects to perform
and the commensurate growth in the Company's personnel and technical capacity
required for performance on such contracts. The cost of facilities is also
expected to increase as a result of the Company's relocation of its headquarters
to larger facilities in April 1999. See -- "Liquidity and Capital Resources." As
a percentage of contract revenue, the Company expects the cost of revenue
generally to decline in future years as the Company realizes economies of scale
associated with an anticipated higher level of development contract business and
as the Company's expenditures incurred to increase its technical capabilities
and capacity become less as a percentage of an expected higher level of
revenues.
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RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
consists of compensation and related support costs of employees and contractors
engaged in internal research and development activities; payments made for lab
operations, outside development and processing work; fees and expenses related
to patent applications and patent prosecution; and other expenses incurred in
support of the Company's ongoing internal research and development activities.
Included in research and development expenses are costs incurred in acquiring
and maintaining licenses of technology from other companies and options or other
rights to acquire or use intellectual property, either related to the Company's
VRD technology or other technologies. To date, the Company has expensed all
research and development costs.
Research and development expense in the three months ended September
30, 1999 increased by $2,460,000 or 337% to $3,190,400 from $730,400 in the
comparable period in 1998. The increase reflects continued implementation of the
Company's operating plan, which calls for building its technical staff and
supporting activities to further develop the Company's technology; establishing
and equipping its own in-house laboratories; and developing, acquiring and
protecting intellectual property related to the Company's business. In May 1999,
the Company entered into a $2.6 million one year development contract with Cree
Research, Inc. to accelerate development of semi-conductor light-emitting diodes
and laser diodes for application in the Company's proposed display and imaging
products. The increase during the three month period ended September 30, 1999,
includes costs associated with the work performed by Cree Research pursuant to
the development agreement. The Company also began developing prototype units of
the Company's first commercial product during the three month period ended
September 30, 1999. The Company does not expect to begin shipment of the
commercial product until the end of 2000, at the earliest.
The Company believes that a substantial level of continuing research
and development expense will be required to further commercialize the VRD
technology and to develop products incorporating the VRD technology.
Accordingly, the Company anticipates that it will continue to commit substantial
resources to research and development, including hiring additional technical and
support personnel and expanding and equipping its in-house laboratories, and
that these costs will continue to increase in future periods.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE. Marketing, general and
administrative expenses include compensation and support costs for the Company's
sales, marketing, management and administrative staff and their related
activities, and for other general and administrative costs, including legal and
accounting costs, costs of consultants and professionals and other expenses.
Marketing, general and administrative expenses in the three months
ended September 30, 1999 increased by $494,400 or 51% to $1,470,400 from
$976,000 in the comparable period in 1998. The increase includes increased
aggregate compensation and associated support costs for employees and
contractors, including those employed at December 31, 1998 and those hired
subsequent to that date, in sales and marketing and in management and
administrative areas. The Company expects marketing, general and administrative
expenses to increase substantially in future periods as the Company adds to its
sales and marketing staff, makes additional investments in sales and marketing
activities and demonstrator technology to support
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commercialization of its VRD technology and development of anticipated
products, and as it increases the level of corporate and administrative
activity.
INTEREST INCOME AND EXPENSE. Interest income in the three months ended
September 30, 1999 increased by $380,600 to $448,200 from $67,600 in the
comparable period in 1998. This increase resulted from higher average cash and
investment securities balances in the three months ended September 30, 1999 than
the average cash and investment securities balances in the comparable period of
the prior year.
Interest expense in the three months ended September 30, 1999 increased
by $12,700 to $24,100 from $11,400 in the comparable period in 1998. The
increase resulted from increased interest expense on capital lease obligations
and to interest expense on long term debt related to leasehold improvements
entered into in April 1999. See -- "Liquidity and Capital Resources."
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1998.
CONTRACT REVENUE. Contract revenue in the nine months ended September
30, 1999 decreased by $422,700 or 8% to $5,160,200 from $5,582,900 in the
comparable period in 1998. Several factors contributed to the decrease in
revenue during the nine months ended September 30, 1999 compared to the same
period in 1998. Delays in booking expected development contracts and increases
in certain development project budgets also contributed to lower revenue
generation for the nine month period ended September 30, 1999 as compared to the
same period in the prior year. During the nine months ended September 30, 1999,
the Company went through a reorientation of its Research and Product Development
Department to more directly focus its technical capabilities on product
development and production. Because the Company recognizes revenue on a
percentage of completion basis, the resulting loss of direct labor hours worked
on development contracts resulted in lower revenue generation for the period. To
date, substantially all of the Company's revenue has been generated from
development contracts. The Company's customers have included both the United
States Government and commercial enterprises.
COST OF REVENUE. Cost of revenue includes both the direct and indirect
costs of performing on revenue contracts. Direct costs include direct labor,
materials and other costs incurred directly in the performance of specific
projects. Indirect costs include labor and other costs associated with operating
the Research and Product Development Department and building the technical
capabilities of the Company. The cost of revenue is determined in part by the
level of direct costs incurred on development contracts and in part by the level
of indirect costs incurred in managing and building the technical capabilities
and capacity of the Company. Accordingly, the cost of revenue can fluctuate
significantly from period to period depending on the level of both the direct
costs incurred in the performance of projects and the level of indirect costs
incurred.
Cost of revenue in the nine months ended September 30, 1999 decreased
by $712,600 or 16% to $3,741,100 from $4,453,700 in the comparable period of
1998. During the nine months ended September 30, 1999, the decrease resulted
from a decrease in the direct costs
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associated with a lower level of performance on development contracts than in
the comparable period in 1998. The lower level of expense in the nine months
ended September 30, 1999 as compared to the comparable period in 1998 also
resulted from a higher level of investment made by the Company in developing
the technology through work performed on its own internal research and
development projects.
The Company expects that the cost of revenue on an absolute dollar
basis will increase in the future. This increase likely will result from
additional development contract work that the Company expects to perform and
the commensurate growth in the Company's personnel and technical capacity
required for performance on such contracts. The cost of facilities is also
expected to increase as a result of the Company's relocation of its
headquarters to larger facilities in April 1999. See -- "Liquidity and
Capital Resources." As a percentage of contract revenue, the Company expects
the cost of revenue to decline over time as the Company realizes economies of
scale associated with an anticipated higher level of development contract
business and as the Company's expenditures incurred to increase its technical
capabilities and capacity become less as a percentage of a higher level of
revenues.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
consists of compensation and related support costs of employees and
contractors engaged in internal research and development activities; payments
made for lab operations, outside development and processing work; fees and
expenses related to patent applications and patent prosecution; and other
expenses incurred in support of the Company's ongoing internal research and
development activities. Included in research and development expenses are
costs incurred in acquiring and maintaining licenses of technology from other
companies and options or other rights to acquire or use intellectual
property, either related to the Company's VRD technology or other
technologies. To date, the Company has expensed all research and development
costs.
Research and development expense in the nine months ended September
30, 1999 increased by $3,801,500 or 133% to $6,663,100 from $2,861,600 in the
comparable period in 1998. The increase reflects continued implementation of
the Company's operating plan, which calls for building its technical staff
and supporting activities to further develop the Company's technology;
establishing and equipping its own in-house laboratories; and developing
intellectual property related to the Company's business. In May 1999, the
Company entered into a $2.6 million one year development contract with Cree
Research, Inc. to accelerate development of semi-conductor light-emitting
diodes and laser diodes for application in the Company's proposed display and
imaging products. The increase in research and development costs also
includes costs associated with the work performed by Cree Research pursuant
to the development agreement. In addition, during the nine months ended
September 30, 1999, costs related to the acquisition of an exclusive license
were expensed by the Company. See --"Liquidity and Capital Resources" and --
"Notes to Financial Statements."
The Company believes that a substantial level of continuing research
and development expense will be required to further commercialize the VRD
technology and to develop products incorporating the VRD technology.
Accordingly, the Company anticipates that it will continue to commit
substantial resources to research and development, including hiring
additional
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technical and support personnel and expanding and equipping its in-house
laboratories, and that these costs will continue to increase in future
periods.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE. Marketing, general
and administrative expenses include compensation and support costs for the
Company's sales, marketing, management and administrative staff and their
related activities, and for other general and administrative costs, including
legal and accounting costs, costs of consultants and professionals and other
expenses.
Marketing, general and administrative expenses in the nine months
ended September 30, 1999 increased by $2,215,200 or 63% to $5,705,800 from
$3,490,600 in the comparable period in 1998. The increase includes increased
aggregate compensation and associated support costs for employees and
contractors, including those employed at December 31, 1998 and those hired
subsequent to that date, in sales and marketing and in management and
administrative areas. The Company expects marketing, general and
administrative expenses to increase substantially in future periods as the
Company adds to its sales and marketing staff, makes additional investments
in sales and marketing activities to support commercialization of its VRD
technology and development of anticipated products, and as it increases the
level of corporate and administrative activity.
INTEREST INCOME AND EXPENSE. Interest income in the nine months
ended September 30, 1999 increased by $380,000 to $637,100 from $257,100 in
the comparable period in 1998. This increase resulted from higher average
cash and investment securities balances in the nine months ended September
30, 1999 than the average cash and investment securities balances in the
comparable period of the prior year.
Interest expense in the nine months ended September 30, 1999
increased by $106,700 to $131,000 from $24,300 in the comparable period in
1998. This increase resulted from interest related to assignment of certain
accounts receivable under the Company's accounts receivable assignment
facility, to increased interest expense on capital lease obligations,
and to interest on long term debt entered into during the nine month period
ended September 30, 1999.
During the nine months ended September 30, 1999, the Company paid a
cash dividend of $73,400 to the holder of its Series B Convertible Preferred
Stock in connection with redemption of the Convertible Preferred Stock and
issuance of Common Stock. See "Financial Statements--Notes to Financial
Statements."
Liquidity and Capital Resources
Since our inception through September 30, 1999, our principal
sources of liquidity have been net proceeds from the sale of debt and equity
totaling $70.9 million and development contracts totaling $14.1 million. At
September 30, 1999, the Company's total available cash, cash equivalents and
investment securities balance was $33.8 million. The Company has no bank line
of credit.
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In 1998, the Company established a non-recourse receivables
assignment facility (the "Facility") with a financial institution. The
Facility allows the Company to assign accounts receivable to the financial
institution on a non-recourse basis for cash. The maximum amount of assigned
but uncollected receivables at any one time is $2,500,000. The facility
expired in September 1999.
During the nine months ended September 30, 1999, the Company used
approximately $13.7 million of cash in operating activities, an increase of
approximately $10.1 million from the approximately $3.6 million that the
Company used in the first nine months of 1998. This increased use of cash
resulted primarily from an increase in the net loss of $5.5 million for the
nine months ended September 30, 1999 over the loss of the comparable period
of the prior year. During 1999, the Company's operating expenses will depend
primarily on the level of activity that the Company performs on contracts
during the year and on the extent to which it incurs increased expenses in
anticipation of expected future development contracts and product sales.
At September 30, 1999, cost and estimated earnings in excess of
billings on uncompleted contracts increased approximately $1.1 million over
December 31, 1998. The increase is attributable to the difference in timing of
billings on development contracts that are different from that of revenue
recognition. At September 30, 1999, other assets had increased approximately
$2.5 million compared to the balance at December 31, 1998, due primarily from
the use of cash to secure letters of credit established in connection with the
Company's lease on its new facility and with the development contract with
Cree Research.
During the nine months ended September 30, 1999, the Company's
investing activities consisted of net purchases of investment securities of
approximately $27.9 to invest funds received from issuance of capital stock
and additions to property and equipment of approximately $1.6 million,
incurred primarily for tenant improvements associated with the Company's new
headquarters building.
In January 1999, the Company raised $5,000,000 in cash (before
issuance costs) from the sale of convertible preferred stock to a private
investor in a private placement. In April 1999, the Company raised an
additional $6,000,000 in cash (before issuance costs) from the sale of common
stock and warrants to purchase common stock to a private investor in a
private placement. In May 1999, the Company raised an additional $4,500,000
in cash (before issuance costs) from the sale of common stock to Cree and
simultaneously entered into a development agreement with Cree. In May 1999,
the Company redeemed 5,000 shares of its Convertible Preferred Stock and
issued 400,000 shares of Common Stock to the holder of the preferred stock.
In June 1999, the Company received $1.1 million from the exercise of
representatives warrants and underlying common stock purchase warrants and
issued 99,900 shares of Common Stock. See "Financial Statements -- Notes to
Financial Statements."
In July 1999 the Company raised $27.0 million from the exercise of
2,253,430 publicly traded redeemable common stock purchase warrants and
issuance of 2,253,430 shares of common stock. The remaining 20,496 warrants
were redeemed in accordance with the terms of the Warrant Agreement. The
Company has delisted the Warrants from trading on the Nasdaq National Market
System.
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In July 1999, the holder of the option to purchase Convertible
Preferred Stock Series B-2 exercised the option and purchased 1,600 shares of
Series B-2 convertible preferred stock for $1,600,000 (before issuance
costs). The preferred stock is immediately convertible into common stock at a
rate of $16.00 per share. Unless converted sooner at the election of the
investor, the convertible preferred stock will automatically convert into
100,000 shares of common stock at the end of its five-year term. The Series
B-2 Convertible Preferred Stock is subject to mandatory redemption at the
election of the preferred shareholder upon certain Liquidation Events (as
defined). The convertible preferred stock carries a cumulative dividend of 4%
per annum, payable in cash or additional convertible preferred stock at the
election of the Company. Terms of the preferred stock include certain rights
for the investor to have the common stock issuable upon conversion of the
preferred stock registered under the Securities Act for resale by the holders
thereof.
Due to the mandatory redemption feature noted above, the carrying
value of the Series B-2 convertible preferred stock is classified as
temporary equity, outside of stockholders' equity, until such time as it is
redeemed.
In October 1998, the Company entered into a lease for office space
to house the Company's operations over the longer term by providing space to
accommodate planned growth in staff, lab and production space requirements.
Under the terms of the lease, the Company will lease between 92,000 square
feet and 101,000 square feet over the first four years of the seven-year term
of the lease. Based on the initial commitment of approximately 67,500 square
feet, the base rent expense during the first year of occupancy is
approximately $861,000, increasing to approximately $931,000 in the second
year. The lease is a triple net lease, which requires the Company to pay
operating expenses in addition to the base rent. The lease terms include an
option for the Company to extend the initial lease term for one period of
five years, a second option to extend for an additional period of two years,
and other options to acquire additional space during the initial seven-year
term should the need arise. The terms of the lease require the Company to
provide the landlord with a lease bond in the amount of $1,150,000 as credit
enhancement for the lease. The Company was required to secure one-half of the
lease bond with a letter of credit and was required to secure the full amount
of the letter of credit with cash. The requirement to maintain the lease bond
terminates when the Company meets certain financial criteria as described in
the lease. In January 1999, the Company exercised its option to finance
$420,000 of tenant improvements through the landlord and provided a letter of
credit to support the borrowing. The Company was required to secure the
entire amount of the letter of credit with cash. The amount of the letter of
credit required is reduced over the term of the borrowing based on repayments
made. Repayment of the borrowing is included with the Company's rent. The
Company completed its relocation into this facility in April 1999.
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 commercialization activities and
arrangements, 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. In order
to maintain its exclusive rights under the
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Company's license agreement with the University of Washington, the Company is
obligated to make royalty payments to the University of Washington with
respect to the VRD. If the Company is successful in establishing OEM
co-development and joint venture arrangements, it is expected that the
Company's partners would fund certain non-recurring engineering costs for
technology development and/or for product development. Nevertheless, the
Company expects its cash requirements to increase significantly each year as
it expands its activities and operations with the objective of
commercializing the VRD technology and other technologies.
The Company believes that its cash, cash equivalent, and investment
securities balances totaling $33.8 million, will satisfy its budgeted cash
requirements for at least the next 12 months based on the Company's current
operating plan. Actual expenses, however, may exceed the amounts budgeted
therefor and the Company may require additional capital earlier to further
the development of its technology, for expenses associated with product
development, and to respond to competitive pressures or to meet unanticipated
development difficulties. In addition, the Company's operating plan calls for
the addition of sales, marketing, technical and other staff and the purchase
of additional laboratory and production equipment. The operating plan also
provides for the development of strategic relationships with systems and
equipment manufacturers which may require additional investments by the
company. There can be no assurance that additional financing will be
available to the Company or that, if available, it will be available on terms
acceptable to the Company on a timely basis. If adequate funds are not
available to satisfy either short-term or long-term capital requirements, the
Company may be required to limit its operations significantly. The Company's
capital requirements will depend on many factors, including, but not limited
to, the rate at which the Company can, directly or through arrangements with
OEMs, introduce products incorporating the VRD technology and the market
acceptance and competitive position of such products.
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Year 2000 Compliance Strategy
The Company has developed and is implementing a comprehensive
strategy for updating its information technology ("IT") and non-IT systems
for Year 2000 ("Y2K") compliance. These systems include PC-based hardware,
embedded systems, enterprise software (available Company-wide) and individual
software (available on a user-by-user basis). The Company's strategy for
achieving Y2K compliance includes evaluating its current systems and software
for Y2K compliance, purchasing new systems and software where necessary and
developing contingency plans for those systems that the Company cannot
control.
Essentially all of the Company's IT systems have been purchased
within the last three years. During that period, Y2K compliance has been a
consideration in the purchase of all of the Company's primary IT and non-IT
systems. The Company believes that it has currently reached the following
levels of compliance:
Current Level
Technology of Compliance
---------- -------------
PC-based hardware 100%
Embedded systems 90%
Enterprise software 100%
Individual software 99%
In April 1999, the Company moved its headquarters and commenced a
new lease. Pursuant to the terms of the lease, the landlord is responsible
for making the systems serving the facility "Year 2000 Compliant."
The Company's strategy includes identifying third parties whose
failure to be Y2K compliant could have a material adverse impact on the
Company's operations or financial condition. This process includes examining
the Company's interaction with other IT systems including those of vendors
and other third parties with which it communicates via e-mail and other
information systems and on which its operations are dependent for goods or
services. The Company has requested a statement from significant vendors and
other third parties reporting their Y2K compliance status. If such vendors or
other third parties raise Y2K compliance concerns, the Company plans to
utilize alternative vendors that are Y2K compliant. In addition, the Company
is requesting a statement from its customers regarding their levels of Y2K
compliance.
The Company completed its overall Y2K assessment in the third
quarter of 1999. The Company is currently completing implementation of its
contingency plans developed during the Y2K assessment. There is no assurance,
however, that taking the steps described will ensure complete Y2K compliance.
The estimated cost of implementing the Company's Y2K compliance plan
is not considered material.
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The effect on the Company of an internal Y2K failure, a third party
Y2K failure or a combination of internal and external Y2K failures could
range from a minor disruption in the Company purchases to an extended
interruption in the IT and non-IT systems of third-parties whose operations
materially impact the Company's operations. Such an interruption could result
in a material adverse effect on the Company's operating results and financial
position. There can be no assurance that such a scenario, or part of such a
scenario, will not occur.
The Company's contingency plans for a Y2K disruption of its
operations include making additional purchases from vendors for a reasonable
period beginning January 1, 2000 in order to ensure the availability of
components and materials needed for the Company to perform on its contractual
obligations. The Company is also in the process of developing backup plans
that will enable it to continue operations with the least amount of downtime
and expense. There is no assurance, however, that such backup plans will
enable the Company to avoid a materially adverse impact on its results of
operations in the event of a Y2K disruption.
Considerations Relating to the Company's Business
OUR TECHNOLOGY MAY NOT BE COMMERCIALLY ACCEPTABLE. Our success will
depend on the successful development and commercial acceptance of the VRD
technology. To achieve commercial success, this technology and products
incorporating this technology must be accepted by original equipment
manufacturers and end users, and must meet the expectations of our potential
customer base. We cannot be certain that the VRD technology or products
incorporating this technology will achieve market acceptance.
WE HAVE NOT COMPLETED DEVELOPMENT OF A COMMERCIAL PRODUCT. Although
we have developed prototype VRD displays, we must undertake significant
additional research, development and testing before we are able to produce
any products for commercial sale. We cannot be certain that we will be
successful in further refining the VRD technology to produce marketable
products. In addition, product development delays or the inability to enter
into relationships with potential product development partners may delay the
introduction of, or prevent us from introducing, commercial products. Any
delay in developing and producing, or the failure to develop and produce,
commercially viable products would have a material adverse effect on our
business, operating results, and financial condition.
WE HAVE EXPERIENCED NET LOSSES IN EACH YEAR OF OPERATIONS AND DO NOT
EXPECT TO HAVE EARNINGS AT LEAST THROUGH 2000. We have experienced net losses
in each year of operations and, as of September 30, 1999, had an accumulated
deficit since inception of $35.1 million. We incurred net losses of $3.5
million in 1996, $4.9 million in 1997, $7.3 million in 1998 and $10.4 million
in the nine months ended September 30, 1999. Our revenues to date have been
generated from development contracts. We do not expect to generate
significant revenues from product sales in the near future. The likelihood of
our success must be considered in light of the expenses, technical and
operating difficulties, and delays frequently encountered by businesses
formed to develop new technologies. In particular, our operations to date
have focused primarily on research and development of the VRD technology and
prototypes, and we have developed marketing capabilities only during the past
two years. We are unable to estimate
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future operating expenses and revenues based upon historical performance. Our
operating results will depend, in part, on matters over which we have no
control, including, without limitation:
- our ability to achieve market acceptance of the VRD technology
and products incorporating that technology;
- our ability to develop and manufacture commercially viable
products incorporating the VRD technology;
- the level of contract revenues in any given period;
- our expense levels and manufacturing costs; and
- technological and other developments in the electronics,
computing, information display and imaging industries.
We cannot be certain that we will be successful in obtaining additional
development contracts, or that we will be able to generate purchase orders
for products incorporating the VRD technology. In light of these factors, we
expect to continue to incur substantial losses and negative cash flow at
least through 2001 and possibly thereafter. We cannot be certain that the
Company will become profitable or cash flow positive at any time in the
future.
WE RELY ON OUR PATENTS AND OTHER PROPRIETARY TECHNOLOGY AND MAY BE
UNABLE TO PROTECT THEM ADEQUATELY. Our success will depend in part on the
ability of the Company, the University of Washington (the University), and
the Company's other licensors to maintain the proprietary nature of the VRD
and related technologies. Although our licensors have patented various
aspects of the VRD technology and we continue to file our own patent
applications covering VRD features and related technologies, we cannot be
certain as to the degree of protection offered by these patents or as to the
likelihood that patents will be issued from the pending patent applications.
Moreover, these patents may have limited commercial value or may lack
sufficient breadth to protect adequately the aspects of our technology to
which the patents relate.
We cannot be certain that our competitors, many of which have
substantially greater resources than us and have made substantial investments
in competing technologies, will not apply for and obtain patents that will
prevent, limit or interfere with our ability to make and sell our products.
In addition, we are aware of several patents held by third parties that
relate to certain aspects of retinal scanning devices. These patents could be
used as a basis to challenge the validity of the University's patent rights,
to limit the scope of the University's patent rights or to limit the
University's ability to obtain additional or broader patent rights. A
successful challenge to the validity of the University's patents or to the
Company's patents could limit our ability to commercialize the VRD technology
and, consequently, materially and adversely effect our business, operating
results, and financial condition.
Moreover, we cannot be certain that such patent holders or other third
parties will not claim infringement by the Company or by the University with
respect to current and future
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technology. Because U.S. patent applications are held and examined in
secrecy, it is also possible that presently pending U.S. applications will
eventually issue with claims that will be infringed by the Company's products
or the VRD technology. The defense and prosecution of a patent suit would be
costly and time-consuming, even if the outcome were ultimately favorable to
us. An adverse outcome in the defense of a patent suit could subject us to
significant liabilities, require the Company and others to cease selling
products that incorporate VRD technology or cease licensing the VRD
technology, or require disputed rights to be licensed from third parties.
Such licenses may not be available on satisfactory terms, or at all.
Moreover, if claims of infringement are asserted against future
co-development partners or customers of the Company, those partners or
customers may seek indemnification from us for damages or expenses they incur.
We also rely on unpatented proprietary technology. Third parties
could develop the same or similar technology or otherwise obtain access to
our proprietary technology. We cannot be certain that we will be able to
adequately protect our trade secrets, know-how or other proprietary
information or to prevent the unauthorized use, misappropriation or
disclosure of such trade secrets, know-how or other proprietary information.
OUR RIGHTS TO THE VRD TECHNOLOGY ARE SUBJECT TO OUR LICENSE
AGREEMENT WITH THE UNIVERSITY OF WASHINGTON. Our success depends on
technology that we have licensed from the University. If the University were
to violate the terms of our license agreement, our business, operations, and
prospects could be materially and adversely affected. In addition, we could
lose the exclusivity under the UW License Agreement if we fail to respond
timely to claims of infringement with respect to the VRD technology. The loss
of exclusivity under the UW License Agreement could have a materially adverse
effect on the Company's business, operating results, and financial condition.
OUR FUTURE SUCCESS DEPENDS ON COLLABORATION WITH THIRD PARTIES. Our
strategy for developing, testing, manufacturing and commercializing the VRD
technology and products incorporating the VRD technology includes entering
into cooperative development and sales and marketing arrangements with
corporate partners, original equipment manufacturers, and other third
parties. We cannot be certain that we will be able to negotiate such
arrangements on acceptable terms, if at all, or that such arrangements will
be successful in yielding commercially viable products or sales of products.
If we are unable to establish such arrangements, we would require additional
working capital to undertake such activities on our own and would require
extensive manufacturing, sales and marketing expertise that we do not
currently possess. In addition, we could encounter significant delays in
introducing the VRD technology into certain markets or find that the
development, manufacture or sale of products incorporating the VRD technology
in such markets would not be feasible without, or would be adversely affected
by the absence of, such arrangements. To the extent that we enter into
cooperative development, sales and marketing or other joint venture
arrangements, our revenues will depend upon the efforts of third parties. We
cannot be certain that any such arrangements will be successful.
THE INFORMATION DISPLAY INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY
NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE. Our products and the
VRD technology will compete with established manufacturers of miniaturized
CRT and flat panel display devices,
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many of which have substantially greater financial, technical and other
resources than us and many of which are developing alternative miniature
display technologies. We also will compete with other developers of
miniaturized display devices.
The electronic information display industry has been characterized
by rapidly changing technology, accelerated product obsolescence, and
continuously evolving industry standards. Our success will depend upon our
ability to further develop the VRD technology and to introduce new products
and features on a cost effective basis in a timely manner to meet evolving
customer requirements. We may not succeed in these efforts. Our business and
results of operations will be materially and adversely affected if we incur
delays in developing our products or if such products do not gain broad
market acceptance. In addition, our competitors may develop information
display technologies and products that would render the VRD technology or our
proposed products commercially infeasible or technologically obsolete. We
cannot be certain that the VRD technology or our proposed products will
remain competitive with such advances or that we will have sufficient funds
to invest in new technologies or processes.
WE LACK MANUFACTURING CAPABILITY. Our success depends in part on our
ability to manufacture our components and future products to meet high
quality standards in commercial quantities at competitive prices. To date, we
only have produced prototype products for research, development and
demonstration purposes, and currently lack the capability to manufacture
products in commercial quantities. Accordingly, we will be required to obtain
access through our partners or contract manufacturers to manufacturing
capacity and processes for the commercial production of our future products.
We cannot be certain that the Company will successfully obtain access to
these manufacturing resources or, if it does, that these resources will be
able to manufacture components to our design and quality specifications.
Future manufacturing difficulties or limitations of our suppliers could
result in:
- - a limitation on the number of products incorporating the VRD technology
that can be produced;
- - unacceptably high prices for components, with a resulting loss of
profitability and loss of competitiveness for our products; and
- - increased demands on our financial resources, possibly requiring
additional equity and/or debt financings to sustain our business
operations.
WE ARE SUBSTANTIALLY DEPENDENT ON PARTNERS IN THE DEFENSE AND
AEROSPACE INDUSTRIES. Our revenues to date have been derived principally from
product development research relating to defense and aerospace applications
of the VRD technology. The Company believes that development programs and
sales of potential products in these markets will represent a significant
portion of our future revenues. Developments that adversely affect the
defense and aerospace sectors, including reductions or delays in government
funding and a general economic downturn, could, in turn, materially and
adversely affect the Company's business and operating results.
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WE MAY REQUIRE ADDITIONAL CAPITAL TO CONTINUE IMPLEMENTING OUR BUSINESS
PLAN. The Company believes that its current cash and investment balances will
satisfy its budgeted capital and operating requirements for at least the next 12
months, based on our current operating plan. Actual expenses, however, may
exceed budgeted amounts and we may require additional capital to fund long-term
operations and business development. Our capital requirements will depend on
many factors, including, but not limited to, the rate at which we can develop
the VRD technology, our ability to attract partners for product development and
licensing arrangements, and the market acceptance and competitive position of
products that incorporate the VRD technology. We cannot be certain that we will
be able to obtain financing when needed or that we will be able to obtain
financing on satisfactory terms. If additional funds are raised through the
issuance of equity, convertible debt or similar securities, shareholders may
experience additional dilution and such securities may have rights or
preferences senior to those of the Common Stock. Moreover, if adequate funds
were not available to satisfy our short-term or long-term capital requirements,
we would be required to limit our operations significantly.
A SUBSTANTIAL NUMBER OF OUR SHARES ARE ELIGIBLE FOR FUTURE SALE AND
COULD DEPRESS MARKET PRICES. The sale of a substantial number of shares of our
common stock in the public market or the prospect of such sales could materially
and adversely affect the market price of the common stock. As of October 29,
1999, we had outstanding:
- - 9,878,679 shares of common stock;
- - 1,600 shares of Series B Convertible Preferred Stock convertible into
100,000 shares of common stock, subject to adjustment for stock splits,
stock dividends, recapitalizations, reclassifications, and similar
events, and excluding unpaid and accrued dividends payable in shares of
common stock;
- - privately placed warrants to purchase 688,813 shares of common stock;
and
- - "representative's warrants" to purchase 186,250 shares of common stock.
Almost all of our outstanding shares of common stock may be sold without
substantial restrictions. In addition, as of September 30, 1999, we had granted
options under our option plans to purchase an aggregate of 2,273,982 shares of
common stock. All of the shares purchased under the option plans are available
for sale in the public market, subject in some cases to volume and other
limitations. We also have granted the holder of our Series B Stock an option to
purchase 1,920 additional shares of Series B Stock convertible into 100,000
shares of common stock.
Sales in the public market of substantial amounts of common stock,
including sales of common stock issuable upon conversion of the Series B
Convertible Preferred Stock or the exercise of outstanding warrants and
options, could depress prevailing market prices for the common stock. Even the
perception that such sales could occur may adversely impact market prices.
CONTINUED DEVELOPMENT FUNDING IS UNCERTAIN; OUR QUARTERLY PERFORMANCE
MAY VARY SIGNIFICANTLY. Our revenues to date have been generated from a limited
number of
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development contracts with U.S. government agencies and commercial partners.
If the U.S. government or our current and prospective commercial partners were
to reduce or delay funding of development programs involving new information
display technologies, our business, operating results, and financial condition
could be materially and adversely affected. In addition, our quarterly
operating results may vary significantly based on the status of particular
development programs and the timing of deliverables under specific development
agreements. Because of these factors, revenue, net income or loss and cash
flow may fluctuate significantly from quarter to quarter.
WE RELY ON OUR KEY PERSONNEL. Our success depends on our officers and
other key personnel and on the ability to attract and retain qualified new
personnel. Achievement of our business objectives will require substantial
additional expertise in the areas of sales and marketing, technology and product
development, and manufacturing. Competition for qualified personnel in these
fields is intense, and the inability to attract and retain additional highly
skilled personnel, or the loss of key personnel, could have a material adverse
effect on our business, operating results and financial condition.
WE FACE POTENTIAL YEAR 2000-RELATED RISKS. The effect on the Company of
an internal Y2K failure, a third party Y2K failure or a combination of internal
and external Y2K failures could range from a minor disruption in our purchases
to an extended interruption in the information technology ("IT") and non-IT
systems of third parties whose operations materially impact our operations. Such
an interruption could result in a material adverse effect on the Company's
business, operating results, and financial position.
OUR PRODUCTS MAY BE SUBJECT TO FUTURE HEALTH AND SAFETY REGULATION.
Except for regulations related to the labeling of devices that emit
electro-magnetic radiation, we are not aware of any health or safety regulations
applicable to products incorporating the VRD technology. We cannot be certain,
however, that new health and safety regulations will not be promulgated that
might materially and adversely affect the Company's ability to commercialize the
VRD technology. Any such regulation could have a material and adverse effect on
our business, operating results, and financial condition.
OUR STOCK PRICE MAY BE VOLATILE. The trading price of our common stock
could be subject to significant fluctuations in response to, among other
factors:
- - variations in quarterly operating results;
- - changes in analysts' estimates;
- - announcements of technological innovations by us or our competitors;
- - general conditions in the information display and electronics
industries.
In addition, the stock market is subject to price and volume fluctuations that
particularly affect the market prices for small capitalization, high technology
companies. These fluctuations are often unrelated to the operating performance
of these companies.
25
<PAGE>
CERTAIN PROVISIONS OF OUR ARTICLES COULD MAKE A PROPOSED ACQUISITION
THAT IS NOT APPROVED BY OUR BOARD OF DIRECTORS MORE DIFFICULT. Our Amended and
Restated Articles of Incorporation give our Board of Directors the authority to
issue, and to fix the rights and preferences of, shares of our preferred stock
without shareholder action, which may have the effect of delaying, deterring or
preventing a change in control of the Company. Furthermore, the Articles of
Incorporation provide that the written demand of at least 25% of the outstanding
shares is required to call a special meeting of the shareholders. In addition,
certain provisions of Washington law could have the effect of delaying,
deterring or preventing a change in control of the Company.
WE DO NOT ANTICIPATE DECLARING ANY DIVIDENDS. We have not previously
paid any dividends on our common stock and for the foreseeable future expect to
retain any earnings to finance the development and expansion of our business.
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of the Company's cash equivalents and investment
securities are at fixed interest rates and, as such, the fair value of these
instruments is affected by changes in market interest rates. However, all of the
Company's cash equivalents and investment securities mature within one year. As
a result, the Company believes that the market risk arising from its holdings of
these financial instruments is immaterial. In addition, substantially all of the
Company's development contract payments are made in U.S. dollars and,
consequently, the Company believes its foreign currency exchange rate risk is
immaterial. The Company does not have any derivative instruments and does not
engage in hedging transactions.
27
<PAGE>
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to, nor is its property subject to, any
material pending legal proceedings.
Item 2. Changes In Securities and Use of Proceeds
In July, 1999, the Company raised $1.6 million (before issuance
costs) through the sale of 1,600 shares of its Series B
Convertible Preferred Stock (the "Series B Stock") to Margaret
Elardi. The Series B Stock is convertible from time to time into
shares of common stock at a conversion price of $16.00 per share.
This transaction was exempt from registration under the Securities
Act pursuant to Sections 4(2) and 4(6) of that Act and Regulation
D promulgated thereunder.
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
11 Computation of Net Loss Per Share and Net Loss Per
Share Assuming Dilution
27 Financial Data Schedule
b. REPORTS ON FORM 8-K
No current reports on Form 8-K were filed by the Company
during the quarterly period ended September 30, 1999.
28
<PAGE>
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: November 15, 1999 /s/ Richard F. Rutkowski
--------------------------------------------
Richard F. Rutkowski
President, Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 /s/ Richard A. Raisig
--------------------------------------------
Richard A. Raisig
Chief Financial Officer
(Principal Financial and Accounting Officer)
29
<PAGE>
Exhibit 11
Microvision, Inc.
Computation of Net Loss Per Share and
Net Loss Per Share Assuming Dilution
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Loss ($3,263,000) ($1,630,500) ($10,443,700) ($4,990,200)
Less: Preferred Dividend (73,400)
Non-Cash beneficial conversion feature
of Series B Preferred Stock (606,300) (1,754,300)
----------- ----------- ------------ -----------
Net Loss available for common
Shareholders ($3,869,300) ($1,630,500) ($12,271,400) ($4,990,200)
=========== =========== ============ ===========
Shares used in computing net loss per share
and net loss per share assuming dilution:
Weighted average shares outstanding 9,535,800 6,016,400 7,576,200 5,975,400
=========== =========== ============ ===========
Net loss per share and per share
assuming dilution ($0.41) ($0.27) ($1.62) ($0.84)
=========== =========== ============ ===========
</TABLE>
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF MICROVISION, INC., FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,835,300
<SECURITIES> 27,939,700
<RECEIVABLES> 1,574,600
<ALLOWANCES> (51,000)
<INVENTORY> 0
<CURRENT-ASSETS> 38,029,100
<PP&E> 3,904,600
<DEPRECIATION> (1,114,400)
<TOTAL-ASSETS> 43,407,600
<CURRENT-LIABILITIES> 3,774,400
<BONDS> 689,800
1,536,000
293,900
<COMMON> 72,735,600
<OTHER-SE> (35,622,100)
<TOTAL-LIABILITY-AND-EQUITY> 43,407,600
<SALES> 0
<TOTAL-REVENUES> 5,160,200
<CGS> 0
<TOTAL-COSTS> 3,741,100
<OTHER-EXPENSES> 12,341,900
<LOSS-PROVISION> 27,000
<INTEREST-EXPENSE> (131,000)
<INCOME-PRETAX> (10,443,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,443,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,443,700)
<EPS-BASIC> (1.62)
<EPS-DILUTED> (1.62)
</TABLE>
