MVIS

Business Context and Reporting Period

Company: MICROVISION, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Microvision designs and markets information display and capture products. Operations are divided into two segments: the Microvision Segment (scanned beam technology for displays and image capture) and the Lumera Segment (organic non-linear chromophore materials for optical telecommunications). The company has incurred substantial losses since inception and relies heavily on development contracts with the U.S. government.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 48% to $15.9 million, driven by a higher volume of development contract work, primarily with the U.S. government (83% of 2002 revenue vs. 93% in 2001).
• Cost of Revenue: Increased 15% to $7.0 million. However, as a percentage of revenue, it declined from 57% to 44% due to higher direct labor costs on contracts absorbing more overhead.
• R&D Expenses: Decreased 20% to $25.5 million. This reduction was primarily due to the expiration of a research agreement with Cree Inc. (saving $3.5 million) and the finalization of a HALO technology license fee paid in 2001.
• Liquidity: Cash and investments decreased significantly from $33.7 million to $15.2 million. Net cash used in operating activities was $28.0 million.
• Investment Impairment: The company recorded a $624,000 impairment loss on its entire investment in Gemfire Corporation due to a recapitalization plan by Gemfire.
• Backlog: Total backlog decreased to $2.6 million at year-end 2002 from $6.8 million at year-end 2001.

Guidance, Outlook, and Risks

Outlook and Capital Needs: The company expects to incur significant losses through at least December 31, 2003. Management believes current cash balances ($12.1 million for Microvision and $3.1 million for Lumera as of Dec 31, 2002), combined with $12.6 million raised in March 2003, will fund Microvision's operations through year-end 2003. However, Lumera's cash is projected to last only until June 30, 2003, requiring additional financing or further payment deferrals with the University of Washington.

Key Risks and Contingencies:

• Government Contract Dependency: 83% of revenue is derived from U.S. government contracts, which can be terminated for convenience at any time.
• Liquidity Risk: The company requires additional capital to fund R&D, manufacturing, and commercialization. Failure to secure funding could force substantial operational limitations.
• Market Acceptance: Success depends on the commercial acceptance of scanned beam displays and optical materials, which face competition from established technologies.
• Intellectual Property: The company relies on exclusive licenses from the University of Washington for core technologies (Virtual Retinal Display and Optical Materials). Loss of these licenses would be catastrophic.
• Stock Price: The stock traded below $5.00 per share in late 2002 and early 2003, subjecting the company to "penny stock" rules which may limit liquidity.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of Lumera's cash reserves beyond June 2003 and the status of negotiations for additional financing or payment deferrals with the University of Washington.
• Government Contract Stability: Assess the risk of termination for convenience regarding the U.S. government contracts that comprise the majority of revenue.
• Commercial Product Viability: Evaluate the progress and cost-per-unit of the Nomad (head-worn display) and Flic (bar code scanner) products, as production costs currently exceed revenue.
• Stock Option Exchange: Review the impact of the November 2002 stock option exchange program, which requires the issuance of 1.76 million new options, potentially diluting shareholders.
• License Agreements: Confirm the status of the exclusive license agreements with the University of Washington and any potential disputes regarding the "Virtual Retinal Display" trademark.