MVIS

Business Context and Reporting Period

Company: Microvision, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2004
Business Overview: Microvision designs and markets information display and image capture products based on scanned beam technology. Key products include the Nomad Expert Technician System (a wearable head-mounted display) and the Flic Laser Bar Code Scanner. In July 2004, the company deconsolidated its subsidiary, Lumera Corporation, following Lumera's initial public offering, changing its accounting treatment to the equity method.

Key Financial Metrics

Note: The company reported a gross margin of $2.0 million in 2004, a significant decrease from $7.6 million in 2003, driven by high costs of product revenue relative to sales volume.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 22% to $11.4 million. Contract revenue dropped 35% to $8.8 million due to lower levels of development contract business. However, product revenue increased 129% to $2.6 million, driven by higher sales of Nomad and Flic units.
• Deconsolidation of Lumera: Following Lumera's IPO in July 2004, Microvision ceased consolidating Lumera's financials. This resulted in a non-cash change in ownership interest gain of $13.7 million recorded in equity and a reduction in consolidated R&D expenses.
• Increased Losses: Net loss increased to $33.2 million from $26.2 million. This was exacerbated by a shift in accounting for Nomad production costs; in Q4 2004, the company began fully absorbing manufacturing overhead into Cost of Product Revenue rather than expensing it as R&D, causing Cost of Product Revenue to exceed Product Revenue.
• Liquidity Position: Cash and cash equivalents dropped significantly from $10.7 million to $1.3 million due to operating losses and inventory build-up.

Guidance, Outlook, and Risks

• Outlook: Management expects to incur substantial losses through at least 2005. The company anticipates requiring additional capital to fund operations in 2006. Based on current plans and a $10 million financing secured in March 2005, the company believes it can fund operations through 2005.
• Strategic Focus: Continued development of scanned beam technology for automotive, defense, medical, and consumer applications. The company is pursuing strategic partnerships to reduce capital requirements for commercialization.
• Key Risks:
  • Liquidity: Significant history of operating losses and an accumulated deficit of $187.5 million. Failure to secure additional financing could force substantial operational limitations.
  • Government Contracts: 42% of 2004 revenue came from U.S. government contracts, which are subject to termination for convenience at any time.
  • Market Acceptance: Success depends on the commercial acceptance of scanned beam technology, which faces competition from established display technologies.
  • Intellectual Property: Reliance on a license from the University of Washington for Virtual Retinal Display technology; loss of exclusivity could materially harm operations.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of the $1.3 million year-end cash balance plus the $10 million March 2005 financing to cover 2005 operating expenses and R&D commitments.
• Product Margins: Assess the timeline for achieving positive gross margins on Nomad and Flic products, given that production costs currently exceed revenue.
• Contract Backlog: Confirm the execution of the $7.1 million backlog, noting that $7.0 million is derived from development contracts subject to government termination.
• Lumera Investment: Monitor the value of the 33% equity stake in Lumera, which represents a significant portion of Microvision's assets and potential liquidity source.
• Debt Covenants: Review the terms of the Senior Secured Exchangeable Convertible Notes issued in March 2005, specifically restrictions on incurring additional debt.