Saturday, December 11, 2010

Microvision: Equity or Debt Financing to Stay as Going Concern

During the month of August 2010, Microvision raised $12.5 million dollars from Azimuth Fund in order to prepare the 3rd Qtr 2010 financial on a “going concern basis.

Here's what they said in the 10-Q filing for the 3rd Qtr earning report...

“In August 2010, we received a report from our independent public accounting firm regarding the consolidated financial statements for the year ended December 31, 2009 that includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared on a going concern basis.

In August 2010, we entered into a committed equity financing facility under which we may sell up to the lesser of $60.0 million or 17,771,901 shares of our common stock to Azimuth Opportunity, Ltd over a 24-month term. In September 2010, we raised $12.5 million through the sale of approximately 6.3 million shares of our common stock under this facility. As of September 30, 2010 we have the lesser of approximately $47.5 million or 11.4 million shares of common stock remaining available under the facility, though we may not be able to sell shares under the facility in the amounts desired or at all. Based on our current operating plan, we anticipate that we have sufficient cash and cash equivalents to fund our operations through April 2011.”

Now three months later, in November 2010, I would expect Microvision to address the “going concern basis” issue again... because they probably burned another $12 million dollars during the three months from August to November leaving them essentially at the same financial spot they were in August of 2010.

Today is December 12th and so far we have not heard a thing about any additional funding from Azimuth or any other form of equity or debt financing. We did, however, hear about the Memorandum of Understanding [MOU] with Pioneer Corporation of Japan...
MicroVision and Pioneer to Jointly Commercialize Innovative Laser Display Products

Here's the link to the news...
http://www.businesswire.com/news/home/20101208005686/en/MicroVision-Pioneer-Jointly-Commercialize-Innovative-Laser-Display

According to the news on MOU with Pioneer...

REDMOND, Wash.--(BUSINESS WIRE)--MicroVision, Inc. (NASDAQ: MVIS), a leader in innovative ultra-miniature laser display technology, announced today that it has entered into a memorandum of understanding (MOU) with Pioneer Corporation, one of the top original equipment manufacturers (OEMs) of high-performance audio, video and computer equipment for the home, car and business markets, to develop, manufacture and distribute display engines and display engine subsystems for consumer and in-vehicle head-up displays (HUDs) using the MicroVision PicoP® laser display technology.
“We believe that by combining our respective market and product development capabilities, and leveraging best practices in manufacturing, MicroVision and Pioneer can accelerate introducing next-generation laser display products while reducing the total cost for both companies in getting there.”
Earlier this year, the two companies executed a joint development agreement to develop two critical components of the PicoP display engine: a laser light source module using direct red, blue, and green lasers and a separate display engine subsystem based on MicroVision’s patented PicoP laser scanning technology. Both are key pieces of the next-generation PicoP display engine that will offer OEMs significant commercial advantages in price, size, power, and performance for embedded solutions ranging from cell phones and eyewear, to airplanes and automobiles.”

Now this is what I'm wondering, just like thousands of other Microvision investors...

This is almost middle of December, and since there is no news of SEC filings on any funding from Azimuth or any other entity; there's the risk of “going concern” statement from the independent accounting firm in the 10-K Annual Report... unless the funding issue has been addressed, in some shape or form, by the MOU and soon to be announced details of some equity stake in Microvision by Pioneer Corporation.

If Pioneer Corporation were to share cost of future development, manufacture and distribution of whatever CE products and modular components they have agreed to; and also take an equity stake in Microvision; that would explain the silence on the funding front.

However, if Pioneer shares the cost of future engagement with Microvision, but does not take an equity position, then there would be some need for additional funding... possibly from the Azimuth Fund facility.

At the most recent 3rd Qtr earnings conference call, Mr. Jeff Wilson, Microvision CFO addressed the $48 million funding that is still available from Azimuth… but left some of us wondering how that may play-out in view of current MVIS stock price that dropped sharply after the CC.

“The terms of Azimuth funding are quite complicated to say the least. However, one thing seems clear that with MVIS stock trading at $1.25 or lower, there may not be any funding available from Azimuth?

Does that mean Pioneer Corporation is our “knight in shining armor” coming to Microvision rescue?

It surely looks that way from what I hear.

However, even with some equity funding and future cost shared with Pioneer, there is the impact of low MVIS stock price on Azimuth funding to flow. Here’s what the terms of Azimuth funding say in the 8-K filing…

“Threshold Price” is the lowest price at which the Company may sell Shares during the applicable Pricing Period as set forth in a Fixed Request Notice (not taking into account the applicable percentage discount during such Pricing Period determined in accordance with Section 3.2); provided, however, that at no time shall the Threshold Price be lower than $1.25 per share."

Microvision's first draw was allowed to be up to 12.5 million, but the subsequent draws are not. Subsequent draw limits are tied to the price of the stock. Since MVIS is currently in the price group─ $1.75 to $2.00, the maximum fixed amount they can request is $2 million dollars per draw every three weeks.

Two million dollars every four weeks [including 5 days waiting period] is about $6 million a Qtr and that is not so bad when you consider that Microvision is able to share future development cost with Pioneer; and with some equity funding [from Pioneer] they can make the Azimuth funding facility last to the middle of 2011.

That's the good part of the story.

The bad part is...

If the price drops below $1.25, then they can't raise anything, and that's obviously bad.

When you have only $21 million in cash─ as of September 30, 2010, spend $3 to $4 million per month, but you can only raise a maximum of about $2 million per month─ with the stock price in $1.75 to $2.00 range, the math is simple to do. You would run out of cash by middle of 2011… even though there would theoretically still be cash left on the Azimuth funding deal.

Not that I think the BODs would let them get all the way down to zero before adopting creative sources of alternate funding [like Pioneer] or dramatically cutting cost before shutting things down.

I see future cost sharing with Pioneer... with some equity funding as well.  What I don't see is any efforts to dramatically cut costs... and that has me wondering why?

At this point, it seems that any dilutive financing is pretty much priced into the stock.

Now consider this...

What would happen if the company issued debt instead?

Or, even better, what if a “white knight” like Pioneer took an equity stake in the company as Walsin Liwa did in 2009.

“Microvision could very well be the phoenix that rises from the ashes once the last remaining negative event [financing] is behind them.”

[… to quote Paul Marganski at http://www.picopros.com/]

Anant Goel