Our common stock began trading publicly on August 27, 1996. Our common stock trades on The NASDAQ Global Market
under the symbol "MVIS." We have never declared or paid cash dividends on our common stock. We currently anticipate
that we will retain all future earnings to fund the operations of our business and do not anticipate paying dividends on the common stock
in the foreseeable future.
A 1:8 reverse stock split became effective on February 17, 2012. All of the per share prices shown in the table below have been
adjusted to reflect the effect of this reverse split.
As of March 7, 2013, there were approximately 67 holders of record of 25,237,000 shares of common stock outstanding.
14
The high and low sales prices of our common stock for each full quarterly period in the last two fiscal years and the year to date as
reported by The NASDAQ Global Market, as adjusted for the reverse stock split, are as follows:
A summary of selected financial data as of and for the five years ended December 31, 2012 is set forth below. It should be read in
conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-K. A 1:8 reverse stock
split of MicroVision's common stock became effective on February 17, 2012. All of the share and per share amounts discussed and
shown in the statements and tables below have been adjusted to reflect the effect of this reverse split.
YEARS ENDED DECEMBER 31,
2012
2011
2010
2009
2008
(in thousands, except per share data)
Statement of Operations Data:
Revenue
$
8,365
$
5,617
$
4,740
$
3,833
$
6,611
Net loss available for common shareholders
(22,693)
(35,808)
(47,460)
(39,529)
(32,620)
Basic and diluted net loss per share
(1.05)
(2.57)
(4.17)
(4.29)
(4.23)
Weighted average shares outstanding basic and diluted
We are developing our proprietary PicoP® display technology, which can be used by our customers to create high-resolution
miniature laser display and imaging engines. Our PicoP display technology utilizes our widely patented expertise in two dimensional
Micro-Electrical Mechanical Systems (MEMS), lasers, optics and electronics to create a high quality video or still image from a small
form factor device with lower power needs than conventional display technologies. Our strategy is to develop and supply PicoP display
technology directly or through licensing arrangements to original equipment manufacturers (OEMs) in market segments including
consumer electronics, automotive, and industrial for integration into their products.
During 2012, we aligned our operations to our ingredient brand strategy, simplifying our operations and resulting in an expected
significant reduction to our future cash requirements. Our strategy is to focus our efforts on licensing our technology to partners who will
produce display engines based on PicoP display technology and incorporate the engine into their products. Our development efforts are
focused on supporting our customers in their manufacturing and integration and optimizing PicoP display technology for specific
applications.
The primary objective for consumer applications is to provide users of mobile consumer devices such as smartphones, media
players, tablet PCs and other consumer electronics products with a large screen viewing experience produced by a small projector
either embedded in the device or via an attached accessory. These potential products would allow users to watch movies and videos,
play video games, and display images and other data onto a variety of surfaces, freeing users from the limitations of a small,
palm-sized screen. PicoP display technology could be further modified to be embedded into a pair of glasses to provide the mobile user with
a see-through or occluded personal display to view movies, play games or access other content.
PicoP display technology is currently sold by Pioneer Corporation as part of an aftermarket high-resolution head-up display (HUD)
that projects point-by-point navigation, critical operational, safety and other information important to the vehicle operator. With some
modification PicoP display technology could also be embedded into a vehicle or integrated into a portable standalone HUD.
PicoP enabled devices can be used in field-based professions such as service repair or sales to view and share information such
as schematics for equipment repair, sales data, orders or contact information within a CRM application on a larger, more user-friendly
display. We also see potential for embedding PicoP display technology in industrial products where our displays could be used for 3D
measuring and digital signage, enhancing the overall user experience of these applications. We continue to enter into a limited
number of development agreements with commercial and U.S. government customers to develop advanced prototypes and
demonstration units based on our light scanning technologies.
We develop and procure intellectual property rights relating to our technology as a key aspect of our business strategy. We
generate intellectual property from our internal research and development activities and our ongoing performance on development
contracts. We also have acquired exclusive rights to various technologies under licensing and acquisition agreements.
We currently sell our SHOWWX line of pico projectors. In 2012, we reduced our sales and marketing for these
products and we do not expect to increase our investment in the SHOWWX product in the future.
We also currently sell our ROV hand held bar code scanners, which use our proprietary MEMS technology, and bar code scanner
enabled enterprise solutions. We reduced our sales and marketing efforts on the bar code product in 2009 and we do not expect to
increase our investment in the bar code product in the future.
We have incurred substantial losses since inception and expect to incur a substantial loss during the fiscal year ending December
31, 2013.
16
Key Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent liabilities. We evaluate our estimates on an on-going basis. We
base our estimates on historical experience, terms of existing contracts, our evaluation of trends in the display and image capture
industries, information provided by our current and prospective customers and strategic partners, information available from other
outside sources, and on various other assumptions we believe to be reasonable under the circumstances. The results form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We believe the following key accounting policies require more significant judgments and estimates used in the preparation of our
consolidated financial statements:
Revenue Recognition.
Our product sales generally include acceptance provisions. We recognize product revenue upon
acceptance of the product by the customer or expiration of the contractual acceptance period, after which there are no rights of return.
We have entered into agreements with resellers and distributors, as well as selling directly to the public. Sales made to resellers and
distributors are recognized using either the sell-through method or upon expiration of the contractually agreed-upon acceptance period,
depending on our ability to reasonably estimate returns. Some of the agreements with resellers and distributors contain price-
protection clauses, and revenue is recognized net of these amounts. Sales made directly to the public are recognized either upon
expiration of the contractual acceptance period after which there are no rights of return, or net of estimated returns and allowances.
Provisions are made for warranties at the time revenue is recorded. Our quarterly revenue may vary substantially due to the timing of
product orders from customers, production constraints and availability of components and raw materials.
We recognize contract revenue as work progresses on long-term, cost plus fixed fee, and fixed price contracts using the
percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. We have developed
processes that allow us to make reasonable estimates of the cost to complete a contract. When we begin work on the contract and at
the end of each accounting period, we estimate the labor, material and other costs required to complete the contract using information
provided by our technical team, project managers, vendors, outside consultants and others and compare these to costs incurred to
date. Since our contracts generally require some level of technology development to complete, the actual cost required to complete a
contract can vary from our estimates. Recognized revenues are subject to revisions as actual cost becomes certain. Revisions in
revenue estimates are reflected in the period in which the facts that give rise to the revision become known. Historically, we have made
only immaterial revisions in the estimates to complete the contract at each reporting period. In the future, revisions in these estimates
could significantly impact recognized revenue in any one reporting period. If the U.S. government cancels a contract, we would receive
payment for work performed and costs committed to prior to the cancellation. We recognize contract revenue on the sale of prototype
units and evaluation kits upon acceptance of the deliverables by the customer or expiration of the contractual acceptance period, after
which there are no rights of return.
We establish an allowance for estimated losses if the estimated cost to complete a contract exceeds the remaining contract value.
The entire estimated loss is recorded in the period in which the loss is first determined. We determine the estimated cost to complete a
contract through a detailed review of the work to be completed, the resources available to complete the work and the technical difficulty
of the remaining work. If the revised estimated cost to complete the contract is higher than the total contract revenue, the entire
contract loss is recognized. The actual cost to complete a contract can vary significantly from the estimated cost, due to a variety of
factors including availability of technical staff, availability of materials and technical difficulties that arise during a project. Most of our
development contracts are cost plus fixed fee type contracts. Under these types of contracts, we are not required to spend more than
the contract value to complete the contracted work.
Cost of Revenue.
Cost of revenue includes both the direct and allocated indirect costs of performing on development
contracts and producing prototype units, evaluation kits, SHOWWX and ROV units. Direct costs include labor, materials and other
costs incurred directly in performing on a contract or producing prototype units, evaluation kits, and accessory pico projector products.
Indirect costs include labor and other costs associated with operating our research and development department and building our
manufacturing and technical capabilities and capacity. Our overhead, which includes the costs of procuring, inspecting and storing
material, and facility and depreciation costs, is allocated to inventory, cost of product revenue, cost of contract revenue, and research
and development expense based on the proportion of direct material purchased for the respective activity.
17
Allowance for uncollectible receivables
. We maintain allowances for uncollectible receivables, including accounts
receivable, cost and estimated earnings in excess of billings on uncompleted contracts and receivables from related parties. We review
several factors in determining the allowances including the customer's and related party's past payment history and financial condition.
If the financial condition of our customers or the related parties with whom we have receivables were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances could be required.
Intangible Assets.
Our intangible assets consist entirely of purchased patents. The patents are amortized using the
straight-line method over their estimated period of benefit, ranging from one to 17 years. We evaluate the recoverability of intangible assets
periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset
may be impaired. We compare the projected undiscounted net cash flows associated with the related intangible assets or group of
assets over their remaining lives against their respective carrying amounts. Measurement of an impairment loss for our intangible
assets is based on the difference between the fair value of the asset and its carrying value.
Inventory.
We value inventory at the lower of cost or market with cost determined on a net-realizable value basis. We make
significant judgments and estimates to value our inventory and make adjustments to its carrying value. We review several factors in
determining the market value of our inventory including evaluating the replacement cost of the raw materials, the net realizable value of
the finished goods, and the likelihood of obsolescence. If we do not achieve our targeted sales prices, if market conditions for our
components or products were to decline or if we do not achieve our sales forecast, additional reductions in the carrying value of the
inventory would be required.
Employee Share-Based Compensation.
We issue share-based compensation to employees in the form of options exercisable
into our common stock and restricted or unrestricted shares of our common stock. We account for equity instruments issued to
employees using the straight-line attribution method of allocating the fair value of share-based compensation expense over the requisite
service period of the related award. The value of restricted or unrestricted shares is determined using the fair value method, which is
based on the number of shares granted and the closing price of our common stock on the NASDAQ Global Market on the date of grant.
The value of options is determined using the Black-Scholes option pricing model with estimates of option lives, stock price volatilities
and interest rates, then expensed over the periods of service allowing for pre-vest forfeitures. This widely accepted method results in
reasonable option values and interperiod expense allocation, and comparability across companies. Changes in the estimated inputs or
using other option valuation methods could result in materially different option values and share-based compensation expense.
The key accounting policies described above are not intended to be a comprehensive list of all of our accounting policies. In many
cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no
need for us to apply judgment or make estimates. There are also areas in which our judgment in selecting any available alternative
would not produce a materially different result to our consolidated financial statements. Additional information about our accounting
policies, and other disclosures required by generally accepted accounting principles, are set forth in the notes to our consolidated
financial statements.
Inflation has not had a material impact on our revenues, or income from continuing operations over the three most recent fiscal
years.
Results of Operations
YEAR ENDED DECEMBER 31, 2012 COMPARED TO YEAR ENDED DECEMBER 31, 2011
Product Revenue.
% of
% of
product
product
2012
revenue
2011
revenue
$ change
% change
(in thousands)
Product revenue
$
6,782
100.0
$
4,338
100.0
$
2,444
56.3
Product revenue primarily includes sales of components under our "Image by PicoP" ingredient brand business model and sales of
our SHOWWX™ line of accessory pico projectors.
18
Our quarterly and annual revenue may vary substantially due to the timing of product orders from customers, production constraints and
availability of components and raw materials. In 2012, we reduced our sales and marketing effort on our sales of our SHOWWX™
line of accessory pico projectors and we do not expect to increase our investment in this product line in the future.
Product revenue was higher during year ended December 31, 2012 than the same period in 2011, due to sales of components
primarily to Pioneer Corporation for use in their Cyber Navi automotive heads up display system ("HUD") under our "Image by PicoP" ingredient
brand business model and increased sales of our PicoP display engines compared to the prior periods. The backlog of product orders
at December 31, 2012 was approximately $1.7 million, compared to $1.4 million at December 31, 2011. The product backlog is
scheduled for delivery within one year.
Pioneer has reported a group net loss for the period April to December 2012. The
group net loss has been attributed in part due to lower financial performance for its car navigation system business. As a result of this
performance, we have reduced our expectations for significant 2013 follow-on orders for their after-market HUD product.
Contract Revenue.
% of
% of
contract
contract
2012
revenue
2011
revenue
$ change
% change
(in thousands)
Government revenue
$
156
9.9
$
345
27.0
$
(189)
(54.8)
Commercial revenue
1,427
90.1
934
73.0
493
52.8
Total contract revenue
$
1,583
$
1,279
$
304
23.8
We earn contract revenue from performance on development contracts with the U.S. government and commercial customers and
from the sale of prototype units and evaluation kits based on our PicoP display engine and sales of test equipment built specifically for
use in PicoP display engine production. Our contract revenue from development contracts in a particular period is dependent upon
when we enter into a contract, the value of the contracts we have entered into, and the availability of technical resources to perform
work on the contracts. Our contract revenue from sales of prototype units and evaluation kits may vary substantially due to the timing of
orders from customers and potential constraints on resources.
Contract revenue was higher during the year ended December 31, 2012 than the same period in 2011 due to increased sales of
test fixtures, prototype units and evaluation kits in 2012 compared to the prior year.
Our backlog of development contracts, including orders for prototype units and evaluation kits, at December 31, 2012 was
$100,000 compared to $622,000 at December 31, 2011, all of which is scheduled for completion during the next twelve months.
Cost of Product Revenue.
% of
% of
product
product
2012
revenue
2011
revenue
$ change
% change
(in thousands)
Cost of product revenue
$
6,085
89.7
$
11,640
268.3
$
(5,555)
(47.7)
Cost of product revenue includes the direct and allocated indirect cost of manufacturing products sold to customers. Direct
costs include labor, materials and other costs incurred directly in the manufacture of these products. Indirect costs include labor and
other costs associated with operating our manufacturing capabilities and capacity. In the event that we maintain production capacity in
excess of production requirements, cost of product revenue may also include manufacturing overhead associated with the excess
capacity.
19
Cost of product revenue for 2012 and 2011 included inventory write downs of $1.1 million and $1.6 million, respectively. The write
downs were primarily for lower of cost or market adjustments to our inventory value to reflect the then current estimated selling price for
our inventory, as well as a reserve adjustment for materials which we expect would become obsolete as we introduced new products.
The decrease in cost of product revenue for 2012, compared to 2011, was primarily attributed to a change in product mix from lower
margin SHOWWX products to sales of components to support Pioneer's Cyber Navi production and decreased inventory write downs
compared to the prior year. During 2012 and 2011, we sold inventory which had been previously written down to the lower of cost or
market. Accordingly, cost of product revenue for 2012 and 2011 did not include approximately $1.2 million and $1.7 million of previously
recognized write downs associated with this inventory. During 2012, we recorded a credit of approximately $498,000 to cost of product
revenue as a result of warranty expense lower than previous estimates. During 2011, we recognized approximately $850,000 of warranty expense primarily
associated with our PicoP display engine.
During 2012 and 2011, we expensed approximately $523,000 and $1.3 million, respectively, of manufacturing overhead associated
with production capacity in excess of production requirements.
The cost of product revenue as a percentage of product revenue can fluctuate significantly from period to period, depending on the
product mix, the level of overhead expense and the volume of direct materials purchased.
Cost of Contract Revenue.
% of
% of
contract
contract
2012
revenue
2011
revenue
$ change
% change
(in thousands)
Cost of contract revenue
$
839
53.0
$
1,425
111.4
$
(586)
(41.1)
The cost of contract revenue was lower in 2012 than in 2011 as a result of the lower activity on development contracts. Gross
margin on contract revenue was significantly higher in 2012 compared to 2011. In 2011, we recorded losses on two development
contracts. The losses were primarily as a result of our decision to share costs with one customer for development of advanced
in-vehicle HUD prototypes in anticipation of follow-on revenue opportunities and excess material costs associated with minimum order
quantities for materials required to complete one of our development contracts. The combined impact of the losses on contracts and
lower gross margin was approximately $710,000 in 2011.
The cost of contract revenue as a percentage of revenue was lower in 2012 than in 2011 primarily as a result of not having
recognized contract losses in 2012 as we did in 2011. The cost of revenue as a percentage of revenue can fluctuate significantly from
period to period, depending on the contract cost mix and the levels of direct and indirect costs incurred.
Research and Development Expense.
2012
2011
$ change
% change
(in thousands)
Research and development
$
13,135
$
15,279
$
(2,144)
(14.0)
Research and development expense consists of compensation related costs of employees and contractors engaged in internal
research and product development activities, direct material to support development programs, laboratory operations, outsourced
development and processing work, and other operating expenses. We allocate our research and development resources based on the
business opportunity of the available projects, the skill mix of the resources available and the contractual commitments we have made
to customers.
The decrease in research and development expense during 2012, compared to the same period in 2011, is primarily attributable to
decreased payroll costs associated with reductions in staffing levels compared to the prior year and lower non-cash compensation
expense resulting from the forfeiture of stock option grants.
20
We believe that a substantial level of continuing research and development expense will be required to develop additional
commercial products using the PicoP technology. Accordingly, we anticipate our level of research and development spending will
continue to be substantial.
Sales, Marketing, General and Administrative Expense
.
2012
2011
$ change
% change
(in thousands)
Sales, marketing, general and administrative
$
11,252
$
13,314
$
(2,062)
(15.5)
Sales, marketing, general and administrative expense includes compensation and support costs for marketing, sales, management
and administrative staff, and for other general and administrative costs, including legal and accounting services, consultants and other
operating expenses. We believe that under the ingredient brand business model we will have lower sales, marketing, general and
administrative spending in the future than had we not implemented the strategy.
The decrease in sales, marketing, general and administrative expense during 2012, compared to the same period in 2011,
is primarily due to decreased payroll costs associated with reductions in staffing levels compared to the prior year and lower non-cash
compensation expense resulting from the forfeiture of stock option grants.
Other Income and Expense.
2012
2011
$ change
% change
(in thousands)
Other income and expense
$
174
$
222
$
(48)
(21.6)
The decrease in other income and expense in 2012 from 2011 results primarily from lower average cash, investment securities
balances, and interest rates.
Income Taxes.
No provision for income taxes has been recorded because we have experienced net losses from inception through December
31, 2012. At December 31, 2012, we had net operating loss carry-forwards of approximately $305.9 million for federal income tax
reporting purposes. In addition, we have research and development tax credits of $6.0 million. The net operating loss carry-forwards
and research and development credits available to offset future taxable income, if any, will expire in varying amounts from 2017 to 2032
if not previously utilized. The research and development tax credits and the remaining net operating losses are scheduled to expire
between 2017 and 2032. In certain circumstances, as specified in the Internal Revenue Code, a 50% or more ownership change by
certain combinations of our shareholders during any three-year period would result in a limitation on our ability to utilize a portion of our
net operating loss carry-forwards.
We recognize interest accrued and penalties related to unrecognized tax benefits in tax expense. We did not have any
unrecognized tax benefits at December 31, 2012 or at December 31, 2011.
Liquidity and Capital Resources
We have incurred significant losses since inception. We have funded operations to date primarily through the sale of common
stock, convertible preferred stock, warrants, the issuance of convertible debt and, to a lesser extent, from development contract
revenues and product sales. At December 31, 2012, we had $6.8 million in cash and cash equivalents.
21
Based on our current operating plan, we anticipate that we have sufficient cash and cash equivalents to fund our operations
through the second quarter of 2013. We will require additional cash to fund our operating plan past that time. We are introducing new
products into an emerging market which creates significant uncertainty about our ability to accurately project revenue, costs and cash
flows. If the level of sales anticipated by our financial plan is not achieved or our working capital requirements are higher than planned,
we will need to raise additional cash sooner or take actions to reduce operating expenses. We plan to obtain additional cash through
the issuance of equity or debt securities. There can be no assurance that additional cash will be available or that, if available, it will be
available on terms acceptable to us on a timely basis. If adequate funds are not available on a timely basis we may be required to limit
our operations substantially. This limitation of operations could include reducing our planned investment in development projects
resulting in reductions in staff, operating costs, capital expenditures and investment in research and development.
We have received a report from our independent registered public accounting firm regarding the consolidated financial statements
for the year ended December 31, 2012 that includes an explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern. These financial statements are prepared assuming we will continue as a going concern.
Cash used in operating activities totaled $20.6 million during 2012, compared to $27.9 million during 2011. During 2012, the
decrease in net cash used in operating activities was primarily driven by lower personnel costs and increased margins on product sales,
as well as savings resulting from steps taken to lower our 2012 cash use as described above.
Investing Activities
Cash used in investing activities totaled $92,000 in 2012 compared to cash provided by investing activities of $170,000 in 2011. In
2011, cash provided by investing activities primarily resulted from reductions in restricted cash used as collateral for our lease and other
obligations.
Financing Activities
Cash provided by financing activities totaled $14.5 million in 2012, compared to $21.4 million in 2011. The following is a list of our
financing activities during 2012 and 2011. All share amounts have been adjusted for the 1:8 reverse stock split discussed in this
annual report.
In June 2012, we raised $10.5 million before issuance costs of approximately $823,000 through an underwritten public offering of
4.2 million shares of our common stock and warrants to purchase 2.1 million shares of our common stock. The warrants have an
exercise price of $2.65 per share, a five year term, and are exercisable beginning one year from the date of issuance.
In May 2012, we raised approximately $5.0 million before issuance costs of approximately $71,000 from the sale of 3.3 million
shares of common stock and warrants to purchase 1.0 million shares of our common stock to private investors. The warrants have an
exercise price of $2.12 per share, a three year term, and are exercisable beginning on the date of issuance.
In November 2011, we raised approximately $10.5 million, before issuance costs of approximately $925,000, through an
underwritten public offering of 2.2 million shares of common stock and warrants to purchase 1.3 million shares of our common
stock.
During 2011, we also raised an aggregate of $12.1 million, before issuance costs of approximately $635,000, from the sale of 1.7
million shares of our common stock under our committed equity financing facilities with Azimuth. We terminated one of these facilities
in July 2011 and the other two in November 2011.
Our cash requirements will depend on many factors, including, but not limited to, the rate at which we can, directly or through
arrangements with OEMs, introduce products incorporating our technology and the market acceptance and competitive position of such
products.
22
Future operating expenditures and capital requirements will depend on numerous factors, including the following:
the progress of research and development programs,
the progress in commercialization activities and arrangements,
the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights,
competing technological and market developments, and
our ability to establish cooperative development, joint venture and licensing arrangements.
In order to maintain our exclusive rights under our license agreement with the University of Washington, we are obligated to make
royalty payments to the University of Washington with respect to the Virtual Retinal Display technology. If we are successful in
establishing original equipment manufacturer co-development and joint venture arrangements, we expect our partners to fund certain
non-recurring engineering costs for technology development and/or for product development. Nevertheless, we expect our cash
requirements to remain high as we expand our activities and operations with the objective of commercializing our light scanning
technology.
New accounting pronouncements
See Note 2, "Summary of significant accounting policies," in the Notes to the consolidated financial statements found in
part II, Item 8 of this Form 10-K.
As of the end of 2012, all of our total cash and cash equivalents have variable interest rates. Therefore, we believe our
exposure to market and interest rate risks is not material.
Our investment policy generally directs that the investment managers should select investments to achieve the following goals:
principal preservation, adequate liquidity and return. As of December 31, 2012, our cash and cash equivalents are comprised of short-
term highly rated money market savings accounts.
The values of cash equivalents and investment securities, available-for-sale by maturity date as of December 31, 2012, are as
follows:
Amount
Percent
Cash and cash equivalents
$
6,850,000
100.0
%
Less than one year
-
-
$
6,850,000
100.0
%
Foreign Exchange Rate Risk
All of our development contract payments are made in U.S. dollars. However, in the future we may enter into development
contracts in foreign currencies that may subject us to foreign exchange rate risk. We have purchase orders and supply agreements in
foreign currencies and may enter into such agreements from time to time in the future. We believe our exposure to currency
fluctuations related to these arrangements is not material. We intend to enter into foreign currency hedges to offset material exposure
to currency fluctuations when we can adequately determine the timing and amounts of the exposure.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
To the Board of Directors and Shareholders
MicroVision, Inc.
We have audited the accompanying consolidated balance sheet of MicroVision, Inc. (the "Company") as of
December 31, 2012, and the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows
for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of MicroVision, Inc. as of December 31, 2012, and the consolidated results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Moss Adams LLP
Seattle, Washington
March 13, 2013
25
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of MicroVision, Inc.:
In our opinion, the consolidated balance sheet as of December 31, 2011 and the related consolidated statements of operations,
comprehensive loss, shareholders' equity, and cash flows for the year ended December 31, 2011 presents fairly, in all material
respects, the financial position of MicroVision, Inc. and its subsidiaries at December 31, 2011, and the results of their operations and
their cash flows for the year ended December 31, 2011, in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital
deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regards to these
matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
PricewaterhouseCoopers LLP
Seattle, Washington
March 8, 2012
MicroVision, Inc. (the "Company") is developing its proprietary PicoP® display technology, which can be used
by our customers to create high-resolution miniature laser display and imaging engines. Our PicoP display technology utilizes our
widely patented expertise in two dimensional Micro-Electrical Mechanical Systems (MEMS), lasers, optics and electronics to create a
high quality video or still image from a small form factor device with lower power needs than conventional display technologies. Our
strategy is to develop and supply PicoP display technology directly or through licensing arrangements to original equipment
manufacturers (OEMs) in market segments including consumer electronics, automotive, and industrial for integration into their products.
During 2012, we aligned our operations to our ingredient brand strategy, simplifying our operations and resulting in an expected
significant reduction to our future cash requirements. Our strategy is to focus our efforts on licensing our technology to partners who will
produce display engines based on PicoP display technology and incorporate the engine into their products. Our development efforts are
focused on supporting our customers in their manufacturing and integration and optimizing PicoP display technology for specific
applications.
The primary objective for consumer applications is to provide users of mobile consumer devices such as smartphones, media
players, tablet PCs and other consumer electronics products with a large screen viewing experience produced by a small projector
either embedded in the device or via an attached accessory. These potential products would allow users to watch movies and videos,
play video games, and display images and other data onto a variety of surfaces, freeing users from the limitations of a small,
palm-sized screen. PicoP display technology could be further modified to be embedded into a pair of glasses to provide the mobile user with
a see-through or occluded personal display to view movies, play games or access other content.
PicoP display technology is currently sold by Pioneer Corporation as part of an aftermarket high-resolution head-up display (HUD)
that projects point-by-point navigation, critical operational, safety and other information important to the vehicle operator. With some
modification PicoP display technology could also be embedded into a vehicle or integrated into a portable standalone HUD.
PicoP enabled devices can be used in field-based professions such as service repair or sales to view and share information such
as schematics for equipment repair, sales data, orders or contact information within a CRM application on a larger, more user-friendly
display. We also see potential for embedding PicoP display technology in industrial products where our displays could be used for 3D
measuring and digital signage, enhancing the overall user experience of these applications. We continue to enter into a limited
number of development agreements with commercial and U.S. government customers to develop advanced prototypes and
demonstration units based on our light scanning technologies.
We develop and procure intellectual property rights relating to our technology as a key aspect of our business strategy. We
generate intellectual property from our internal research and development activities and our ongoing performance on development
contracts. We also have acquired exclusive rights to various technologies under licensing and acquisition agreements.
Based on our current operating plan, we anticipate that we have sufficient cash and cash equivalents to fund our operations
through the second quarter of 2013. We will require additional cash to fund our operating plan past that time. We are introducing new
technology into an emerging market which creates significant uncertainty about our ability to accurately project revenue, costs and cash
flows. If the level of sales anticipated by our financial plan is not achieved or our working capital requirements are higher than planned,
we will need to raise additional cash sooner or take actions to reduce operating expenses.
32
We plan to obtain additional cash through the issuance of equity or debt securities. There can be no assurance that additional cash
will be available or that, if available, it will be available on terms acceptable to us on a timely basis. If adequate funds are not available
on a timely basis, we intend to consider limiting our operations substantially to extend our funds as we pursue other financing
opportunities and business relationships. This limitation of operations could include reducing our planned investment in working capital
to fund revenue growth and delaying development projects and reductions in staff, operating costs, including research and
development, and capital expenditures.
Our capital requirements will depend on many factors, including, but not limited to, the rate at which we can, directly or through
arrangements with OEMs, introduce products incorporating the PicoP display engine and image capture technologies and the market
acceptance and competitive position of such products. If revenues are less than anticipated, if the mix of revenues vary from
anticipated amounts or if expenses exceed the amounts budgeted, we may require additional capital earlier than expected to further the
development of our technologies, for expenses associated with product development, and to respond to competitive pressures or to
meet unanticipated development difficulties. In addition, our operating plan provides for the development of strategic relationships with
systems and equipment manufacturers that may require additional investments by us.
We have received a report from our independent registered public accounting firm regarding the consolidated financial statements
for the year ended December 31, 2012 that includes an explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern. These consolidated financial statements are prepared assuming the Company will continue as a going
concern.
A 1:8 reverse stock split of MicroVision's common stock became effective on February 17, 2012. All of the share and per share
amounts discussed and shown in the consolidated financial statements and notes have been adjusted to reflect the effect of this
reverse split.
2
.
Summary of significant accounting policies
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles of the United States
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. We have identified the following areas where significant estimates and
assumptions have been made in preparing the financial statements: revenue recognition, valuation of share-based compensation,
allowance for uncollectible receivables and inventory valuation.
Principles of consolidation
Our consolidated financial statements include the accounts of MicroVision, Inc. and MicroVision Innovations Singapore Pte.
Ltd. ("MicroVision Singapore"), a wholly owned foreign subsidiary. MicroVision Singapore was incorporated in April 2011
and is engaged in advanced research and development activities and operation support functions for MicroVision, Inc. There were no
material intercompany accounts and transactions during the years ended December 31, 2012 and 2011.
Cash and cash equivalents and fair value of financial instruments
Our financial instruments include cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities and long-term debt. Excluding the long term debt, the carrying value of our financial instruments
approximates fair value due to their short maturities. The carrying amount of long-term debt at December 31, 2012 and 2011 was not
materially different from the fair value based on rates available for similar types of arrangements.
Our cash equivalents are comprised of money market savings accounts and equity securities. We classify investment securities
available-for-sale purchased with 90 days or less remaining until contractual maturities as cash equivalents.
33
Intangible assets
Our intangible assets consist entirely of purchased patents. The patents are amortized using the straight-line method over
their estimated period of benefit, ranging from one to 17 years. We evaluate the recoverability of intangible assets periodically by taking
into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. We
compare the projected undiscounted net cash flows associated with the related intangible assets or group of assets over their
remaining lives against their respective carrying amounts. Measurement of an impairment loss for our intangible assets is based on the
difference between the fair value of the asset and its carrying value.
Inventory
Inventory consists of key components under our "Image by PicoP" ingredient brand raw material and finished goods for our
pico projectors and ROV products. Inventory is recorded at the lower of cost or market with cost determined on a net realizable value
basis. We periodically assess the need to provide for obsolescence of inventory and adjust the carrying value of inventory to its net
realizable value when required. In addition, we reduce the value of our inventory to its estimated scrap value when we determine that it
is not probable that the inventory will be consumed through normal production during the next twelve months.
Property and equipment
Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets (two to five years) using
the straight-line method. Leasehold improvements are depreciated over the shorter of estimated useful lives or the lease term. Costs
for repairs and maintenance are charged to expense as incurred and expenditures for major improvements are capitalized at cost.
Gains or losses on the disposition of assets are reflected in the income statements at the time of disposal.
Restricted investments
As of December 31, 2012, restricted investments were in money market savings accounts and serve as collateral for $436,000
in irrevocable letters of credit. The restricted investments balance includes two letters of credit which are outstanding in connection with
a lease agreement for our corporate headquarters building in Redmond, WA. The required balance decreases over the term of the
lease, which expires in 2013. In January 2012, a $350,000 letter of credit which was outstanding under the terms of a supplier
agreement expired.
Revenue recognition
Product revenue is recognized when there is sufficient evidence of an arrangement, delivery has occurred, the fee is fixed or
determinable, and collection is reasonably assured. We have entered into agreements with resellers and distributors, as well as selling
directly to the public. Sales made to resellers and distributors are recognized using either the sell-through method or upon expiration of
the contractually agreed-upon acceptance period, depending on the volume of the sale. Some of the agreements with resellers and
distributors contain price-protection clauses, and revenue is recognized net of these amounts. Sales made directly to the public are
recognized either upon expiration of the contractual acceptance period after which there are no rights of return, or net of estimated
returns and allowances. Provisions are made for warranties at the time revenue is recorded.
Contract revenue has primarily been generated from contracts to develop the light scanning technology and to produce
demonstration units for commercial enterprises and the U.S. government. We recognize contract revenue as work progresses on
long-term cost plus fixed fee and fixed price contracts using the percentage-of-completion method, which relies on estimates of total
expected contract revenue and costs. Our revenue contracts generally include a statement of the work we are to complete and the total
fee we will earn from the contract. When we begin work on the contract and at the end of each accounting period, we estimate the
labor, material, and other cost required to complete the statement of work compared to cost incurred to date. We use information
provided by our technical team, project managers, vendors, outside consultants and others to develop our cost estimates. Since our
contracts generally require some level of technology development to complete, the actual cost required to complete a statement of work
can vary from our estimates. We have developed processes that allow us to reasonably estimate the cost to complete a contract.
Historically, we have made only immaterial revisions in the estimates to complete the contract at each reporting period. Recognized
revenues are subject to revisions as the contract progresses to completion and actual revenue and cost become certain. Revisions in
revenue estimates are reflected in the period in which the facts that give rise to the revision become known. In the future, revisions in
these estimates could significantly impact recognized revenue in any one reporting period. The U.S. government can terminate a
contract with us at any time for convenience. If the U.S. government cancels a contract, we would receive payment for work performed
and costs committed to prior to the cancellation.
34
We recognize losses, if any, as soon as identified. Losses occur when the estimated direct and indirect costs to complete the
contract exceed unrecognized revenue. We evaluate the reserve for contract losses on a contract-by-contract basis.
We recognize contract revenue for prototype units and evaluation kits for development work upon acceptance or the expiration of
the acceptance period, when there is sufficient evidence of an arrangement, the selling price is fixed or determinable and collection is
reasonably assured.
Cost of revenue
Cost of product revenue includes the direct and allocated indirect costs of manufacturing products sold to customers. Direct
costs include labor, materials and other costs incurred directly in the manufacture of these products. Indirect costs include labor and
other costs associated with operating our manufacturing capabilities and capacity.
Cost of contract revenue includes both the direct and allocated indirect costs of performing on development contracts and
producing prototype units and evaluation kits. Direct costs include labor, materials and other costs incurred directly in performing on a
contract or producing prototype units and evaluation kits. Indirect costs include labor and other costs associated with operating our
research and development department and building our technical capabilities and capacity. Cost of contract revenue is determined by
the level of direct and indirect costs incurred, which can fluctuate substantially from period to period.
Our overhead, which includes the costs of procuring, inspecting and storing material, and facility and depreciation costs, is
allocated to inventory, cost of product revenue, cost of contract revenue, and research and development expense based on the level of
effort supporting production or research and development activity.
Concentration of credit risk and sales to major customers
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk are primarily cash equivalents
and accounts receivable. We typically do not require collateral from our customers.
As of December 31, 2012, our cash and cash equivalents are comprised of short-term highly rated money market savings
accounts.
Concentration of Sales to Major Customers
During 2012, one commercial customer accounted for 61% of our total revenue and 96% of our accounts receivable balance at
December 31, 2012. During 2011, two commercial customers accounted for 20% of our total revenue and three commercial customers
accounted for 53% of our accounts receivable balance at December 31, 2011.
Income taxes
Deferred tax assets and liabilities are recorded for differences between the financial statement and tax bases of the assets and
liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable for the period
increased or decreased by the change in deferred tax assets and liabilities during the period.
Net loss per share
Basic net loss per share is calculated using the weighted-average number of common shares outstanding during the periods.
Net loss per share assuming dilution is calculated using the weighted-average number of common shares outstanding and the dilutive
effect of all potentially dilutive securities, including common stock equivalents and convertible securities. Net loss per share assuming
dilution is equal to basic net loss per share because the effect of dilutive securities outstanding during the periods including options and
warrants computed using the treasury stock method, is anti-dilutive.
35
As of December 31, 2012 and 2011, we excluded the following convertible securities from diluted net loss per share as the effect of
including them would have been anti-dilutive. The shares shown represent the number of shares of common stock which would be
issued upon conversion in the respective years.
December 31,
2012
2011
Publicly traded warrants
753,000
753,000
Options and private warrants
5,696,000
2,498,000
Nonvested equity shares
207,000
132,000
6,656,000
3,383,000
Research and development
Research and development costs are expensed as incurred.
Long-lived assets
We evaluate the recoverability of our long-lived assets when an impairment is indicated based on expected undiscounted cash
flows. We recognize impairment of the carrying value of long-lived assets, if any, based on the fair value of such assets.
Share-based compensation
Our share-based incentive compensation plans are described in Note 11.
We use the straight-line attribution method to allocate the fair value of share-based compensation awards over the requisite service
period for each award. The following table shows the amount of share-based employee compensation expense included in the
statements of operations for each period shown:
Year Ended December 31,
2012
2011
Cost of contract revenue
$
34,000
$
143,000
Cost of product revenue
54,000
136,000
Research and development expense
825,000
1,329,000
Sales, marketing, general and administrative expense
1,301,000
1,648,000
$
2,214,000
$
3,256,000
Reclassifications
Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current
year. These reclassifications had no impact on net loss, shareholders' equity or cash flows as previously reported.
New accounting pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued guidance that requires disclosure of amounts
reclassified out of accumulated other comprehensive
income in its entirety, by component, on the face of the statement of operations or in the notes thereto.
Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that
provide additional detail. This standard is effective prospectively for annual and interim reporting periods beginning after December 15,
2012. We do not expect the implementation of this guidance will have a material impact on our financial statements.
36
In July 2012, the Financial Accounting Standards Board ("FASB") issued guidance that will allow an entity to first assess qualitative
factors to determine whether it is necessary to perform a quantitative impairment test for indefinite-lived intangible assets. Under this
guidance, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines,
based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. This guidance is
effective for impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We do not
expect the implementation of this guidance will have a material impact on our financial statements.
3. Long-term contracts
Cost and estimated earnings in excess of billings on uncompleted contracts comprises amounts of revenue recognized on
contracts that we have not yet billed to customers because the amounts were not contractually billable at December 31, 2012 and
2011. The following table summarizes when we will be contractually able to bill the balance as of December 31, 2012 and 2011 (in
thousands).
Year Ended December 31,
2012
2011
Billable within 30 days
$
5
$
63
Billable between 31 and 90 days
-
-
Billable after 90 days
7
7
$
12
$
70
Our current contracts with the U.S. government are primarily cost-plus-fixed-fee type contracts. Under the terms of a
cost-plus-fixed-fee contract, the U.S. government reimburses us for negotiated actual direct and indirect cost incurred in performing the
contracted services. We are not obligated to spend more than the contract value to complete the contracted services. The period of
performance is generally one year. Each of our contracts with the U.S. government can be terminated for convenience by the
government at any time. To date, the U.S. government has not terminated a contract with us.
The following table summarizes the costs incurred on our revenue contracts (in thousands):
December 31,
2012
2011
Costs and estimated earnings incurred on uncompleted contracts
$
1,977
$
1,822
Billings on uncompleted contracts
(2,063)
(1,908)
$
(86)
$
(86)
Included in accompanying consolidated balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted
contracts
$
12
$
70
Billings in excess of costs and estimated earnings on uncompleted
contracts
(98)
(156)
$
(86)
$
(86)
37
4. Inventory
Inventory consists of the following:
December 31,
2012
2011
Raw materials
$
361,000
$
2,741,000
Finished goods
136,000
1,513,000
$
497,000
$
4,254,000
The inventory at December 31, 2012 consisted of key components supplied under our "Image by PicoP" ingredient brand business
model, and finished goods primarily composed of our accessory pico projectors. The inventory at December 31, 2011 consisted of raw
materials primarily for our accessory pico projectors and PicoP display engine, and finished goods primarily composed of our accessory
pico projectors. Inventory is stated at the lower of cost or market, with cost determined on a net realizable value basis. Management
periodically assesses the need to provide for obsolescence of inventory and adjusts the carrying value of inventory to its net realizable
value when required. In addition, we reduce the value of our inventory to its estimated scrap value when management determines that
it is not probable that the inventory will be consumed through the normal course of business during the next twelve months. In 2012
and 2011, we recorded inventory write-downs of $1,094,000 and $1,563,000, respectively.
At December 31, 2012 and 2011, we have aggregate allowances recorded of $9,916,000 and $11,138,000, respectively, offsetting
inventory on hand deemed to be obsolete or scrap inventory.
5. Accrued liabilities
Accrued liabilities consist of the following:
December 31,
2012
2011
Bonuses
$
724,000
$
1,214,000
Payroll and payroll taxes
427,000
590,000
Compensated absences
384,000
508,000
Deferred rent credit
187,000
261,000
Warranty
206,000
490,000
Adverse purchase commitments
634,000
134,000
Accelerated rent expense
109,000
402,000
Professional fees
533,000
415,000
Purchased patents
-
330,000
Other
803,000
769,000
$
4,007,000
$
5,113,000
6. Property and equipment, net
Property and equipment consists of the following:
December 31,
2012
2011
Production equipment
$
5,201,000
$
5,144,000
Leasehold improvements
3,344,000
3,344,000
Computer hardware and software/lab equipment
9,002,000
8,917,000
Office furniture and equipment
1,485,000
1,485,000
19,032,000
18,890,000
Less: Accumulated depreciation
(17,827,000)
(16,543,000)
$
1,205,000
$
2,347,000
Depreciation expense was $1,445,000 and $2,406,000 in 2012 and 2011, respectively.
38
7. Intangible assets
Our intangible assets consist entirely of technology-based purchased patents. The patents are amortized using the straight-line
method over their estimated period of benefit, ranging from one to 17 years. The gross value of our intangible assets was $2.3 million
as of December 31, 2012 and 2011, respectively. Amortization expense was $184,000 and $185,000 in 2012 and 2011, respectively.
In 2012 we recorded an impairment amounting to $284,000 on 35 patents that were abandoned in prosecution. We
estimate that we have no significant residual value related to our intangible assets.
In October 2010, we entered into an agreement to purchase a patent portfolio containing 195 patents and patents pending from
Motorola, Inc. to complement our current portfolio of pico projection and display patents. Under terms of the agreement we issued
approximately 104,000 shares of MicroVision common stock in October 2010, made cash payments of $220,000 and $330,000 in June
2011 and June 2012, respectively.
The following table outlines the estimated future amortization expense related to intangible assets held at December 31, 2012:
Year ended December 31,
Amount
2013
$
158,000
2014
158,000
2015
157,000
2016
157,000
2017
146,000
Thereafter
804,000
Total
$
1,580,000
8. Committed equity financing facility
In August 2010, we entered into a committed equity financing facility (CEFF) with Azimuth Opportunity, Ltd.,
("Azimuth"), under which we completed two draws and raised a total of $5.6 million in gross proceeds from the sale of
approximately 557,000 shares of our common stock. In consideration for Azimuth's execution and delivery of the purchase agreement,
we paid Azimuth $150,000 in cash and 8,047 shares of our common stock. In July 2011, we cancelled this facility.
In May 2011, we entered into a CEFF with Azimuth, under which we raised $1.5 million before placement agent and other issuance
costs from the sale of approximately 203,000 shares of our common stock. In November 2011, we cancelled this facility.
In September 2011, we entered into a CEFF with Azimuth, under which we raised $5.0 million before placement agent and other
issuance costs from the sale of approximately 955,000 shares of our common stock. In November 2011, we cancelled this facility.
Reedland Capital Partners acted as placement agent under each of these CEFFs and received a fee for its services equal to 1% of
the aggregate dollar amount of common stock purchased by Azimuth upon settlement of any draw under the facilities.
9. Common stock
In June 2012, we raised $10.5 million before issuance costs of approximately $823,000 through an underwritten public offering
of 4.2 million shares of our common stock and warrants to purchase 2.1 million shares of our common stock. Details of the warrants are
described below in Note 10.
39
In May 2012, we raised approximately $5.0 million before issuance costs of approximately $71,000 from the sale of 3.3 million
shares of common stock and warrants to purchase 1.0 million shares of our common stock to private investors. Details of the warrants
are described below in Note 10.
In November 2011, we raised approximately $10.5 million, before issuance costs of approximately $925,000, through an
underwritten public offering of 2.2 million shares of common stock and warrants to purchase 1.3 million shares of our common stock.
Details of the warrants are described below in Note 10.
During 2011, we also raised approximately $12.1 million, before issuance costs of $635,000, through the sale of approximately 1.7
million shares of our common stock under our 2010 and 2011 committed equity financing facilities.
10. Warrants
In June 2012, we raised $10.5 million before issuance costs of approximately $823,000 through an underwritten public offering
of 4.2 million shares of our common stock and warrants to purchase 2.1 million shares of our common stock. The warrants have an
exercise price of $2.65 per share, a five year term, and are exercisable beginning one year from the date of issuance.
In May 2012, we raised approximately $5.0 million before issuance costs of approximately $71,000 from the sale of 3.3 million
shares of common stock and warrants to purchase 1.0 million shares of our common stock to private investors. The warrants have an
exercise price of $2.125 per share, a three year term, and are exercisable 60 days from the date of issuance.
In November 2011, we raised approximately $10.5 million, before issuance costs of approximately $925,000, through an
underwritten public offering of 2.2 million shares of common stock and warrants to purchase 1.3 million shares of our common stock.
The warrants have an exercise price of $6.24 per share, a five year term, and are exercisable on the date of issuance.
The following summarizes activity with respect to MicroVision common stock warrants during the two years ended December 31, 2012:
Warrants to
Weighted
purchase
average
common
excercise
shares
price
Outstanding at December 31, 2010
1,042,000
$
25.84
Granted:
Exercise price greater than intrinsic value
1,278,000
6.24
Exercised
-
-
Canceled/expired
(33,000)
22.08
Outstanding at December 31, 2011
2,287,000
14.96
Granted:
Exercise price greater than intrinsic value
3,100,000
2.48
Exercised
-
-
Canceled/expired
(256,000)
17.60
Outstanding at December 31, 2012
5,131,000
$
7.28
Exercisable at December 31, 2012
3,031,000
$
10.49
40
The following table summarizes information about the weighted-average fair value of MicroVision common stock warrants granted
for the periods shown:
Year Ended December 31,
2012
2011
Exercise price greater than fair value
$
0.97
$
2.06
We estimated the fair value of our common stock warrants on the respective grant dates using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants in 2012 and 2011, respectively: dividend yield of zero percent
for both years; expected volatility of 100% and 83%; risk-free interest rates of 0.52% and 1.0% and expected lives of 4 and 5 years,
respectively.
The following table summarizes information about our common stock warrants outstanding and exercisable at December 31, 2012:
Warrants outstanding
Warrants exercisable
Weighted
Number
average
Weighted
Number
Weighted
outstanding at
remaining
average
excercisable at
average
December 31,
contractual
excercise
December 31,
excercise
Range of exercise prices
2012
life (years)
price
2012
price
$2.13
1,000,000
2.39
$
2.13
1,000,000
$
2.13
$2.65
2,100,000
4.47
2.65
-
-
$6.24
1,278,000
3.88
6.24
1,278,000
6.24
$28.80
753,000
0.56
28.80
753,000
28.80
$2.13-$28.80
5,131,000
3,031,000
11. Share-based compensation
We use the straight-line attribution method to allocate the fair value of share-based compensation awards over the requisite
service period for each award. The valuation of and accounting for share-based awards includes a number of complex and subjective
estimates. These estimates include, but are not limited to, the future volatility of our stock price, future stock option exercise behaviors,
estimated employee turnover and award forfeiture rates.
As part of our plan to conserve cash used in operations, we implemented two share-based compensation programs under which
we issued shares of our common stock as compensation instead of cash. We have allocated the expense related to these programs to
various financial statement lines consistent with the method used for allocating all share-based compensation.
In May 2012, we issued 227,000 shares of our common stock to non-executive employees as the remaining payment of 2010
bonuses in lieu of cash. These shares were valued using our closing stock price on the date of grant. We expensed $345,000 of
share-based employee compensation for these awards at grant.
In August 2012, we issued 440,000 shares of our common stock to non-executive employees for retention purposes. These shares
were valued using our closing stock price on the date of grant. These shares vest 40% in August 2012, 30% in December 2012, and
30% in August 2013 and expense is recognized over the vesting period. During 2012, we expensed $562,000 of share-based employee compensation for these awards.
41
In May 2011, we issued 52,000 shares of our common stock as incentive awards to non-executive employees under the 2006
Incentive Plan. The shares were valued using our closing stock price on the date of grant. We expensed $560,000 of share-based
employee compensation for these awards at grant.
In June 2011, we implemented a voluntary program in which certain non-executive senior professional employees could elect to
receive a portion of their 2011 salary in stock instead of cash. During 2011, we issued 136,000 shares of our common stock under the
2006 Incentive Plan as payment of salary. The shares were valued using our closing stock price on the date of grant. The total
share-based compensation expense for these awards was $998,000, for service completed during 2011.
Description of Incentive Plans
The Company currently has two share-based incentive plans. The 2006 Incentive Plan described below is administered by the
Board of Directors, or its designated committee ("Plan Administrator"), and provides for various awards as determined by the Plan
Administrator. In June 2008, we determined not to issue additional options from a second share-based incentive plan, the Independent
Director Stock Option Plan described below.
The 2006 Incentive Plan has 2.8 million shares authorized, of which 218,000 shares were available for awards as of December 31,
2012. The 2006 Incentive Plan permits granting non-qualified stock options (NSOs), incentive stock options (ISOs), stock appreciation
rights, restricted or unrestricted stock, deferred stock, other share-based awards, or cash awards to employees, officers, directors and
certain non-employees of the Company. Any award may be a performance-based award. Awards granted under the 2006 Incentive
Plan have generally been to employees under non-qualified stock option agreements with the following provisions: exercise prices
greater than or equal to the Company's closing stock price on the date of grant; vesting periods ranging from three years to four years;
expiration 10 years from the date of grant; and optionees who terminate their service after vesting have a limited time to exercise their
options (typically three to twelve months).
The Independent Director Stock Option Plan (IDSOP) has 113,000 shares authorized, of which 75,000 are issued and outstanding
as of December 31, 2012. The IDSOP permits granting NSOs to independent directors of the Company. Grants awarded under the
IDSOP generally have the following terms: exercise price equal to the Company's closing stock price on the date of grant, expiration 10
years from the date of grant, and vested grants remain exercisable until their expiration dates if a director leaves the Board. In June
2008, the Company shareholders approved an amendment to the 2006 Incentive Plan described above to allow non-employee
directors to participate in the plan. The Company does not intend to issue additional options from the IDSOP.
Options Valuation Methodology and Assumptions
We use the Black-Scholes option valuation model to determine the fair value of options granted and use the closing price of our
common stock as the fair market value of our stock on that date.
We consider historical stock price volatilities, volatilities of similar companies and other factors in determining estimates of future
volatilities.
We use historical lives, including post-termination exercise behavior, publications, comparable company estimates, and other
factors as the basis for estimating expected lives.
Risk free rates are based on the U.S. Treasury Yield Curve as published by the U.S. Treasury.
42
The following table summarizes the weighted-average valuation assumptions and weighted-average
grant date fair value of options granted during the periods shown below:
Year Ended December 31,
2012
2011
Assumptions (weighted average)
Volatility
98%
85%
Expected term (in years)
4.5
4.0
Risk-free rate
0.6%
1.3%
Expected dividends
0.0%
0.0%
Pre-vest forfeiture rate
8.5%
7.5%
Grant date fair value of options granted
$
1.39
$
6.10
Options Activity and Positions
The following table summarizes activity and positions with respect to options for the two years ended December 31, 2012:
Weighted
Average
Weighted
Remaining
Average
Contractual
Aggregate
Exercise
Term
Intrinsic
Options
Shares
Price
(years)
Value
Outstanding as of December 31, 2010
1,092,000
$
27.20
5.9
$
96,309
Granted
121,000
10.00
Exercised
(5,000)
15.12
Forfeited or expired
(244,000)
31.60
Outstanding as of December 31, 2011
964,000
24.00
5.8
-
Granted
671,000
1.97
Exercised
(16,000)
1.80
Forfeited or expired
(301,000)
21.20
Outstanding as of December 31, 2012
1,318,000
$
13.71
6.8
$
61,871
Vested and expected to vest as of December 31, 2012
1,285,000
$
13.97
6.7
$
59,481
Exercisable as of December 31, 2012
777,000
$
20.34
5.4
$
20,444
The total intrinsic value of options exercised during the years ended December 31, 2012 and 2011 were $13,000 and $12,000,
respectively.
The total grant date fair value of options vested during the years ended December 31, 2012 and 2011 was $2.5 million and $4.1
million, respectively. As of December 31, 2012, our unamortized share-based compensation was $1.3 million which we plan to
amortize over the next 1.5 years.
In March 2011, we issued 85,000 nonvested equity shares of the Company's common stock to executive employees. These
shares vest conditionally upon completion of certain service and performance objectives by June 30, 2014. The nonvested equity
shares were valued at fair value on the date of grant and the share-based compensation expense will be amortized over the service
period.
As of December 31, 2012, our unamortized nonvested equity share-based compensation was $516,000 which we plan to amortize
over the next year.
43
12. Receivables from related parties
Our revenue for the year ended December 31, 2011 included $409,000 from a sale of PicoP engines to Walsin Lihwa Corporation
which integrated the engines into its product sold in China during 2011. Our revenue for the year ended December 31, 2012 does not
include any sales to Walsin Lihwa Corporation. Our accounts receivable balance at December 31, 2012 and 2011 included $159,000
remaining due from this customer. Based on filings with the SEC as of December 31, 2012 and 2011, Walsin Lihwa beneficially owns
approximately 4.0% and 7.3% of our common stock as determined in accordance with SEC rules, through its wholly owned subsidiary
Max Display Enterprises Limited.
13. Commitments and contingencies
Litigation
We are subject to various claims and pending or threatened lawsuits in the normal course of business. We are not currently party to
any legal proceedings that management believes are reasonably possible to have a material adverse effect on the Company's financial
position, results of operations or cash flows.
Lease commitments
We lease our office space and certain equipment under noncancelable capital and operating leases with initial or remaining terms
in excess of one year.
We entered into a 90 month facility lease that commenced in February 2006. The lease includes extension and rent escalation
provisions over the 90 month term of the lease. Rent expense will be recognized on a straight-line basis over the lease term.
Future minimum rental commitments under capital and operating leases for years ending December 31 are as follows:
Capital
Operating
leases
leases
2013
$
62,000
$
642,000
2014
21,000
-
2015
-
-
2016
-
-
2017
-
-
Thereafter
-
-
Total minimum lease payments
83,000
$
642,000
Less: Amount representing interest
(15,000)
Present value of capital lease obligations
68,000
Less: Current portion
(48,000)
Long-term obligation at December 31, 2012
$
20,000
The capital leases are collateralized by the related assets financed and by security deposits held by the lessors under the lease
agreements. The cost and accumulated depreciation of equipment under capital leases was $987,000 and $961,000, respectively, at
December 31, 2012 and $987,000 and $942,000, respectively, at December 31, 2011.
Net rent expense was $708,000 and $1,156,000 for 2012 and 2011, respectively.
44
Long-term debt
During 2006, we entered into a loan agreement with the lessor of our corporate headquarters in Redmond to finance $536,000 in
tenant improvements. The loan carries a fixed interest rate of 9% per annum, is repayable over the initial term of the lease, which
expires in 2013, and is secured by a letter of credit. The balance of the loan was $67,000 at December 31, 2012.
Adverse purchase commitments
We have periodically entered into noncancelable purchase contracts in order to ensure the availability of materials to support
production of our PicoP based products and bar code scanners. We periodically assess the need to provide for impairment on these
purchase contracts and record a loss on purchase commitments when required. During 2012, we recorded losses of $500,000 to cost
of product revenue as a result of commitments to purchase materials for the SHOWWX that were in excess of our estimated future
proceeds from sale of the SHOWWX. During 2011, no losses on purchase commitments were recorded.
14. Income taxes
A provision for income taxes has not been recorded for 2012 and 2011 due to the valuation allowances placed against the net
operating losses and deferred tax assets arising during such periods. A valuation allowance has been recorded for all deferred tax
assets. Based on our history of losses since inception, the available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets.
At December 31, 2012, we have net operating loss carry-forwards of approximately $305.9 million, for federal income tax reporting
purposes. In addition, we have research and development tax credits of $6.0 million. The net operating loss carry-forwards and
research and development credits available to offset future taxable income, if any, will expire in varying amounts from 2017 to 2032 if
not previously utilized. The research and development tax credits and the remaining net operating losses are scheduled to expire
between 2017 and 2032. In certain circumstances, as specified in the Internal Revenue Code, a 50% or more ownership change by
certain combinations of our stockholders during any three-year period would result in limitations on our ability to utilize our net operating
loss carry-forwards.
Deferred tax assets are summarized as follows:
December 31,
2012
2011
Deferred tax assets, current
Reserves
$
3,804,000
$
4,395,000
Other
710,000
806,000
Total gross deferred tax assets, current
4,514,000
5,201,000
Deferred tax assets, noncurrent
Net operating loss carryforwards
104,893,000
97,156,000
R&D credit carryforwards
6,032,000
5,754,000
Depreciation/amortization deferred
26,594,000
26,510,000
Other
7,573,000
6,958,000
Total gross deferred tax assets, noncurrent
145,092,000
136,378,000
Net deferred taxes before valuation allowance
149,606,000
141,579,000
Less: Valuation allowance
(149,606,000)
(141,579,000)
Deferred tax assets
$
-
$
-
45
The valuation allowance and the research and development credit carry forwards account for substantially all of the difference
between our effective income tax rate and the Federal statutory tax rate of 34%.
Certain net operating losses arise from the deductibility for tax purposes of compensation under nonqualified stock options equal to
the difference between the fair value of the stock on the date of exercise and the exercise price of the options. For financial reporting
purposes, the tax effect of this deduction when recognized is accounted for as a credit to shareholders' equity.
We did not have any unrecognized tax benefits at December 31, 2012 and at December 31, 2011.
We recognize interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended
December 31, 2012 and 2011, we recognized no interest or penalties.
We file income tax returns in the U.S. federal jurisdiction and various states.
Due to our operating loss and credit carryforwards, the U.S. federal statute of limitations remains open for 1997 and onward.
15. Retirement savings plan
We have a retirement savings plan that qualifies under Internal Revenue Code Section 401(k). The plan covers all qualified
employees. Contributions to the plan by the Company are made at the discretion of the Board of Directors. In March 2012, the
Company discontinued discretionary matching contributions. Prior to March 2012, we matched 50% of employee contributions to the
plan up to 6% of the employee's per pay period compensation. During 2012 and 2011, we contributed $44,000 and $242,000,
respectively, to the plan under the matching program.
16. Quarterly financial information (Unaudited)
The following table presents our unaudited quarterly financial information for the years ending December 31, 2012 and 2011 (in
thousands, except per share data):
There have been no changes in or disagreements with accountants in accounting or financial disclosure matters during the
Company's fiscal years ended December 31, 2012 and 2011.
(a)
Evaluation of disclosure controls and procedures.
Our Chief Executive Officer ("CEO") and the Chief Financial
Officer ("CFO") evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), prior to the filing of this Form 10-K. Based on that
evaluation, our CEO and CFO concluded that, as of December 31, 2012, our disclosure controls and procedures were effective.
(b)
Management's Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on its evaluation under the framework in
Internal Control - Integrated Framework,
our management concluded that our
internal control over financial reporting was effective as of December 31, 2012.
(c)
Changes in internal controls over financial reporting.
There have not been any changes in our internal control over
financial reporting during the quarter ended December 31, 2012 which have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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