MVIS

Business Context and Reporting Period

Company: MICROVISION, INC.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2004
Business Overview: Microvision develops scanned beam technology for information displays (Nomad, Flic) and previously consolidated its subsidiary, Lumera Corporation (optical materials). In July 2004, Lumera completed an IPO, reducing Microvision's ownership to 33% and triggering a change in accounting method to the equity method. Microvision expects to record a non-cash gain of approximately $13.0 million in Q3 2004 due to this transaction.

Key Financial Metrics

Cash Flow (Six Months Ended June 30, 2004):
- Operating Activities: $(17,637) used
- Investing Activities: $6,980 provided (primarily from sales of investment securities)
- Financing Activities: $3,090 provided (proceeds from notes and stock issuance)

Material Changes vs. Prior Period

• Revenue Decline: Total revenue for the three months ended June 30, 2004, decreased 47% to $2.4 million from $4.5 million in the prior year period. Contract revenue dropped 59% due to fewer new contracts and lower backlog, while product revenue increased 299% driven by Flic sales.
• Expense Reduction: Research and development (R&D) expenses decreased 45% to $3.3 million (Q3) and 38% to $8.0 million (YTD) compared to 2003. This was largely due to a $2.4 million reduction in Lumera's research liability following an amendment to the University of Washington Sponsored Research Agreement.
• Inventory Build-up: Inventory increased significantly to $2.8 million from $331,000 at year-end 2003, primarily due to purchases of Nomad components. A $100,000 write-down of Flic inventory was recorded in Q3.
• Debt Issuance: Lumera issued $2.3 million in convertible promissory notes in April 2004, increasing current liabilities.

Outlook, Risks, and Management Commentary

• Liquidity Warning: Management states that current cash and marketable securities ($6.0 million) will satisfy budgeted requirements only through September 30, 2004. Additional financing is required to fund operations beyond that date. There is no assurance that financing will be available on acceptable terms.
• Lumera IPO Impact: Following Lumera's July 2004 IPO, Microvision holds 33% of Lumera stock. A six-month lock-up agreement prevents Microvision from selling these shares. The company expects a $13.0 million non-cash gain in Q3 2004 upon changing the accounting method to equity.
• Product Development: Nomad production costs currently exceed revenue; Microvision does not expect "commercial production" status until at least Q4 2004. Flic sales are expected to grow as customers complete trials.
• Risk Factors: The company has a history of operating losses (accumulated deficit of $169.5 million) and expects to incur significant losses through at least mid-2005. Risks include dependence on U.S. government contracts, potential patent litigation, and the need for additional capital.

Investor Verification Checklist

• Financing Needs: Verify the status of additional financing required post-September 2004 to avoid operational limitations.
• Lumera Accounting Change: Confirm the timing and magnitude of the expected $13.0 million non-cash gain in Q3 2004 related to the Lumera equity method transition.
• Inventory Valuation: Assess the risk of further inventory write-downs given the $2.8 million balance and the $100,000 write-down already recorded for Flic units.
• Contract Backlog: Review the $4.9 million development contract backlog and the reliance on U.S. government contracts (54% of YTD revenue).
• Stock Price Volatility: Note that the stock traded below $5.00 per share (closing at $4.26 on Aug 6, 2004), subjecting it to "penny stock" rules which may limit liquidity.