MVIS

Business Context and Reporting Period

Company: MICROVISION, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1999
Business Overview: Microvision develops Retinal Scanning Display (RSD) technology, which projects images directly onto the viewer's retina. The company is in the pre-commercialization phase, generating revenue primarily through government and commercial development contracts rather than product sales. Key applications include defense, medical, industrial, and consumer electronics.

Key Financial Metrics (Year Ended Dec 31, 1999)

Material Changes vs. Prior Period

• Revenue Decline: Contract revenue decreased by approximately 2% ($171,000) to $6.9 million. This was attributed to a lower level of development contract business and a reorganization of the Research and Product Development Department which reduced direct labor hours billable to contracts.
• Significant Increase in Expenses:
  • R&D Expenses: Surged 210% to $10.2 million (from $3.3 million) due to building technical staff, equipping in-house laboratories, and a $2.6 million development contract with Cree, Inc. for LED/laser diode development.
  • SG&A Expenses: Increased 52% to $7.4 million (from $4.9 million) driven by expanded sales, marketing, and administrative staff.
• Liquidity Improvement: Cash and investment balances grew from $2.3 million to $32.2 million, primarily due to $49.2 million in net proceeds from financing activities (issuance of common and convertible preferred stock).
• Non-Cash Charges: The net loss available to common shareholders was impacted by a $1.75 million charge for the beneficial conversion feature of Series B Preferred Stock and a $227,800 preferred stock dividend.

Outlook, Risks, and Management Commentary

• Commercialization Timeline: The company sold engineering prototypes in Q4 1999 and plans to sell additional units in H1 2000. A production version is targeted for introduction in 2001, though sales may be delayed.
• Capital Requirements: Management believes current cash ($32.2 million) will satisfy budgeted requirements for at least the next 12 months. However, significant additional capital may be required for manufacturing capacity, sales staff, and IP protection.
• Subsequent Event: In March 2000, the company secured a commitment for a private placement of 500,000 shares for $25.0 million.
• Key Risks:
  • Market Acceptance: No assurance that RSD technology will achieve market acceptance or compete with established CRT/flat panel technologies.
  • Profitability: The company has a history of operating losses and expects to incur significant losses through 2001 and possibly beyond.
  • Manufacturing: The company currently lacks commercial manufacturing capability and relies on partners or contract manufacturers.
  • Intellectual Property: Reliance on exclusive licenses from the University of Washington; risks of patent infringement lawsuits or loss of exclusivity.

Investor Verification Checklist

• Revenue Concentration: Verify the status of the U.S. government contracts (82% of 1999 revenue) and the specific terms of the $4.2 million Army contract and $2.6 million Cree contract.
• Product Roadmap: Confirm the timeline for the transition from prototype sales to production version sales scheduled for 2001.
• Capital Runway: Assess the burn rate relative to the $32.2 million cash balance and the likelihood of needing further equity financing before profitability.
• Intellectual Property: Review the status of the University of Washington license agreement and any pending patent litigation or oppositions (specifically regarding the "VRD" trademark).
• Stock Dilution: Evaluate the impact of the 2.46 million outstanding stock options and the recent $25 million private placement on existing shareholder value.