MVIS

Business Context and Reporting Period

Company: Microvision, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Microvision develops miniature display and imaging engines based on its Integrated Photonics Module (IPM) architecture, utilizing MEMS light scanning technology. Key product lines include the "PicoP" miniature projector, automotive Head-Up Displays (HUD), color eyewear, and the "Flic" handheld laser bar code scanner. The company relies heavily on development contracts with the U.S. government and commercial partners to fund R&D.

Key Financial Metrics

Note: Revenue consists of Contract Revenue ($5.275M) and Product Revenue ($1.768M). Gross margin was negative ($1.123M) due to high costs of product revenue relative to sales.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 52% to $7.0 million, driven by a 54% drop in contract revenue and a 47% drop in product revenue. Commercial contract revenue fell 73% due to the completion of a major contract with Ethicon Endo-Surgery, Inc. ($4.9M in 2005 vs. $0.8M in 2006).
• Product Mix Shift: The "Nomad" product line was discontinued in June 2006, resulting in a 90% drop in Nomad revenue. Flic scanner revenue remained relatively flat.
• Cost of Revenue: Cost of product revenue was $4.8 million (270% of product revenue) due to $1.2 million in inventory write-offs related to the Nomad discontinuation and obsolete components.
• R&D Increase: Research and development expenses increased 63% to $10.7 million as the company shifted focus to internally funded development projects for the IPM platform.
• Liquidity Improvement: Cash and cash equivalents more than doubled to $14.6 million, bolstered by a $35.1 million net proceeds from equity offerings in 2006 and a $7.3 million gain on the sale of Lumera common stock.

Guidance, Outlook, and Risks

• Capital Needs: Management anticipates requiring additional cash by February 2008 to fund operations. The company plans to raise capital through equity or debt issuances.
• Strategic Focus: The company is pivoting to supply IPM-based engines to OEMs for consumer electronics (mobile projectors) and automotive HUDs. New contracts were signed in 2006 with General Dynamics C4 Systems ($5.95M) and Visteon.
• Key Risks:
  • History of Losses: The company has an accumulated deficit of $239.6 million and expects to incur significant losses in the future.
  • Government Contract Dependency: 51% of 2006 revenue came from U.S. government contracts, which can be terminated for convenience at any time.
  • Market Acceptance: Success depends on the commercial adoption of light scanning technology, which faces competition from established display manufacturers.
  • Debt Obligations: Convertible notes totaling approximately $2.8 million (principal and interest) are due in March 2007, secured by pledged Lumera stock.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of the $14.6 million cash balance and the potential proceeds from the sale of pledged Lumera stock (valued at ~$7.5M as of March 2007) to cover operations through 2007 and the March 2007 debt maturity.
• Contract Backlog Realization: Confirm the execution of the $6.8 million contract backlog, specifically the $5.95M General Dynamics contract, to ensure revenue recognition in 2007.
• Product Commercialization: Assess progress on the "PicoP" and automotive HUD prototypes and the status of agreements with Tier 1 automotive suppliers and consumer electronics OEMs.
• Inventory Valuation: Review the remaining inventory levels and the risk of further write-downs given the discontinuation of the Nomad product and the low volume of Flic sales.
• Dilution Risk: Monitor upcoming equity offerings required to fund operations, which may significantly dilute existing shareholders.