MVIS

Business Context and Reporting Period

Company: MICROVISION, INC.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2003
Business Overview: Microvision operates two segments: Microvision (scanned beam technology for displays and image capture) and Lumera Corporation (electro-optical polymer materials). The company relies heavily on development contracts with the U.S. government and commercial partners, alongside limited sales of commercial products (Nomad display and Flic barcode scanner).

Key Financial Metrics

Liquidity: As of September 30, 2003, the company held $6.2 million in cash, cash equivalents, and investment securities. Management believes Microvision's cash will satisfy requirements for at least one year, while Lumera's cash is projected to last through the first quarter of 2004.

Material Changes vs. Prior Period

• Revenue Decline: Revenue for the nine months ended September 30, 2003, decreased by 17% ($2.1 million) compared to the prior year. This was primarily due to delays in completing contract negotiations with development partners. Government contracts accounted for 56% of revenue in the nine-month period (down from 84% in 2002).
• Operating Expenses: Research and development (R&D) expenses decreased slightly by 2% ($359,000) for the nine-month period, largely due to the expiration of a development agreement with Cree, Inc. in the prior year. However, R&D expenses included $460,000 in costs related to the closure of the San Mateo facility and $290,000 in severance/relocation costs.
• Inventory Write-down: The company recorded a $450,000 write-down of Nomad inventory during the nine months ended September 30, 2003.
• Related Party Receivables: An additional $200,000 allowance for doubtful accounts was recorded for receivables from related parties (senior officers), bringing the total allowance to $900,000.

Guidance, Outlook, and Risks

Outlook and Capital Needs:

• The company expects to continue incurring substantial losses and negative cash flow at least through 2004.
• Microvision plans to introduce a new, smaller, and less expensive version of the Nomad display in the first quarter of 2004.
• Subsequent to the reporting period (November 3, 2003), the company raised $22.25 million from the sale of common stock.
• Lumera amended its Sponsored Research Agreement with the University of Washington to reduce quarterly payment obligations, deferring $1.875 million in unpaid payments until May 2005.

Risks and Contingencies:

• Market Acceptance: Success depends on the commercial acceptance of scanned beam and polymer technologies, which face competition from established manufacturers.
• Government Dependence: A significant portion of revenue is derived from U.S. government contracts, which are subject to termination for convenience and funding fluctuations.
• Intellectual Property: The company relies on licenses from the University of Washington; loss of these rights could halt commercialization.
• Manufacturing: Current production costs for Nomad and Flic exceed revenue; the company has not yet achieved "commercial production" maturity.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of Lumera's cash reserves through Q1 2004 and the impact of the amended University of Washington agreement on future cash outflows.
• Contract Backlog: Confirm the status of the $1.9 million development contract backlog and the $600,000 product order backlog scheduled for completion within 12 months.
• Related Party Loans: Review the collectability of the $1.823 million in receivables from related parties, given the $900,000 allowance for doubtful accounts.
• Inventory Valuation: Assess the risk of further inventory write-downs for Nomad and Flic products as production costs remain high relative to sales.
• Equity Dilution: Monitor future capital raises, as the company explicitly states it will require additional funding to continue operations, likely through equity issuance.