MVIS

Business Context and Reporting Period

Company: MICROVISION, INC.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2003
Business Overview: Microvision operates in two segments: the Microvision segment, developing scanned beam technology for displays and image capture (products include Nomad and Flic), and the Lumera segment, developing optical materials for telecommunications. The company is in a development phase with a history of operating losses.

Key Financial Metrics

Liquidity: As of March 31, 2003, the company held $19.9 million in cash, cash equivalents, and investment securities. Management believes Microvision's cash resources will fund operations through December 2003, while Lumera's resources are projected to last through June 30, 2003.

Material Changes vs. Prior Period

• Revenue: Decreased 7% to $3.5 million from $3.8 million, driven by lower contract work volume.
• Cost of Revenue: Decreased 22% to $1.4 million, primarily due to reduced direct labor and overhead allocation.
• Operating Expenses: Total operating expenses decreased 7% to $11.6 million.
  • R&D Expense: Decreased 8% to $6.8 million, largely due to the expiration of a $1.4 million research agreement with Cree, Inc. in the prior year.
  • SG&A Expense: Decreased 5% to $4.3 million due to cost control efforts.
• Inventory Write-down: Recorded a $450,000 write-down of Nomad inventory during the quarter.
• Related Party Receivables: Recorded an additional $200,000 allowance for doubtful accounts on loans to senior officers.
• Financing Activity: Raised $12.6 million (gross) in March 2003 through the sale of common stock and warrants, significantly improving cash flow from financing activities to $11.8 million.

Outlook, Risks, and Unusual Items

Guidance and Outlook:

• Management expects to continue incurring substantial losses and negative cash flow through 2003 and likely thereafter.
• Microvision expects to fund operations through December 2003; Lumera requires additional financing or payment term extensions beyond June 30, 2003.
• Backlog as of March 31, 2003, was $4.4 million, all scheduled for completion within 12 months.

Unusual Items and Subsequent Events:

• Facility Closure: In April 2003, the company began closing its San Mateo, CA facility, expecting to recognize approximately $500,000 in expenses in Q2 2003, with projected savings of $1.0 million over the next year.
• Stock Option Exchange: Employees tendered options for 2.5 million shares in exchange for new options to be granted in June 2003; no immediate compensation charge is expected.

Risk Factors:

• Liquidity Risk: Dependence on additional capital to fund operations; failure to secure financing could force substantial operational limitations.
• Market Acceptance: Uncertainty regarding commercial adoption of scanned beam and optical materials technologies.
• Government Contracts: Significant revenue reliance on U.S. government contracts, which are subject to termination for convenience.
• Intellectual Property: Risks related to patent infringement claims and the necessity of licenses from the University of Washington.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of Lumera's cash resources beyond June 2003 and the status of negotiations with the University of Washington regarding deferred payments.
• Inventory Valuation: Assess the remaining inventory levels for Nomad and Flic and the potential for further write-downs given the $450,000 charge already taken.
• Related Party Loans: Review the collectability of the $1.8 million in receivables from related parties, noting the $900,000 existing allowance.
• Government Contract Stability: Monitor the status of the $4.4 million backlog, specifically the portion derived from U.S. government contracts.
• Facility Closure Costs: Confirm the actual expenses incurred in Q2 2003 related to the San Mateo facility closure against the $500,000 estimate.