The company is running low on cash (cash and equivalents were $16 million and free cash flow was negative $5.8 million in the March 2007 quarter). Given that the Company has never posted more than $16 million in annual sales (March ’07 revenues were down Y/Y at only $2.2 million), the likelihood of an external capital raise were questionable, at best. However, Microvision has 12.4 million warrants outstanding with an exercise price of $2.65 per share. According to the warrant provision, if the average closing bid price of MVIS averaged over $5.30 for any 20 consecutive trading days, then conversion can be forced by the company.
While this will provide Microvision with roughly $34 million in cash, it will also put 12.4 million registered and freely tradeable shares into the float. Given that the warrants specifically prevent cashless exercise, the warrant holders will have to exercise their warrants and immediately sell the shares that they receive in order to lock-in any profits. An analysis of the closing bid prices since May 21st shows that after Monday June 18th , Microvision can force conversion and collect the cash. Microvision now has a market cap of $350 million (not the $240 million shown on Yahoo or Bloomberg). Many investors have not factored in the additional warrants and thus the street’s understanding of the valuation has been skewed by the reporting of only basic shares.
OK…now that we understand that the company’s equity is likely to experience a massive dilution, we turn to an analysis of the company’s product offering (or lack thereof)…
Demonstrations of the PicoP projector at the CES show in January and the SID show more recently last month have investors speculating that the Company may be on cusp of a massive ramp in sales. Our checks with contacts in the laser industry leave us more skeptical. A look into the science of the PicoP projector reveals that the product is not mass manufacturable with the technology currently available. The PicoP relies on 3 very small lasers (red, green, and blue). The red and the blue lasers are not that tough and have been around for some time. The green, however, is another story. The three laser partners (Novalux, Osram, and Corning (GLW) are working on productizing green lasers, but to date, the technology is strictly for R&D labs only (cost is >$10,000 per system). Moreover, these three ‘partners’ are focused on the projection TV and Digital Cinema markets as their primary end markets.
This distinction is critical to understand, as the power requirements for a theater are much different than that of a cell phone. To date, no one has been able to produce a green laser on less than 3 watts of power (the total PicoP module with 3 lasers, the MEMS mirror, and the display controller chip needs to consume less than 2 Watts) and no one in the laser industry has ever built a production line for millions of units. This is why Coherent (COHR) licensed its laser technology to Osram in the first place.
While bullish investors may point to the massive potential of the Company, those in the advanced display community point out that the technology hasn’t changed in the past 10 years (display veterans may recall demonstrations from Laser Power Systems back in 1996) and the prospects for a portable, low power, and low cost laser system is still several years out. In reality, laser-based projection for any market (Digital Cinema, Rear Projection TV, or portable projection) is not expected to be commercially available until late 2008, at the earliest. Assuming the technological challenges of size and power consumption can be overcome, Microvision hopes to be able to sell the PicoP projector into the mobile embedded markets for as low as $150.
Given that this cost is greater than that of most of the devices Microvision hopes to be embedded in, the probability of deep market penetration is low. If the product can be manufactured in volume for less than $150 and there are manufacturers willing to pay that price, then the issues of image quality (less than 10 lumens) and usage still need to be addressed. To put things in perspective, one needs to realize that a low end office projector (that still needs the lights turned down) usually produces an image with over 1,000 lumens. To view an image of only 10-20 lumens, the room would need to be exceptionally dark and the viewer would need to be very close to the small image.
This begs the question of what is the application? Is this for viewing music videos on an i-Phone? Last night’s episode of 24? A powerpoint presentation? Pictures of the kids? The PicoP projector is a solution without a problem. MVIS is about to dump 12.4 million shares on the market and has yet to sign any large purchase orders for display products. Existing shareholders of MVIS need to decide if they believe the potential of purchase orders materializing sometime in 2008 justifies a willingness to hold the stock as it is diluted by over 25% this week. The primary driver behind the recent run in the stock is the hope that has been created by management that design agreements (not purchase orders) can be signed by late summer 2007. At a cost per share of $2.65, one has to wonder how committed the warrant holders will be interested in holding on to a company burning nearly $8 million per quarter and valued at more than 30x sales.
Disclosure: Author is a hedge fund manager that is short Microvision
MVIS 1-yr chart