MICROVISION, INC. (MVIS)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated
financial statements and the related notes included in Part II, Item 8 of this Form 10-K. The following discussion focuses on the results
of our operations for the year ended December 31, 2024 compared to the year ended December 31, 2023. Similar discussion of the results
of our operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 can be found in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K
for the year ended December 31, 2023.

Overview

Currently,
our development and commercialization efforts are focused primarily on perception solutions for autonomy and mobility applications,
including industrial and automotive perception systems and advanced driver-assistance systems (ADAS), where we can deliver safe
mobility at the speed of life. Our integrated solution combines our perception software stack, lidar sensors utilizing our
MEMS-based and flash-based technologies, and custom application software targeted
for sale to industrial and automotive OEMs, automated warehouse operators, robotic developers, Tier 1 automotive suppliers, other industrial market players, and the military and defense technology companies.

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Although
perception solutions, including industrial and automotive lidar, are our priority now, we have developed solutions for augmented reality (AR), interactive displays, and consumer lidars. In the recent past, our strategy had been to sell AR displays or components,
interactive displays, or consumer lidars to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) for
incorporation into their products. Previously, we developed AR and helmet-mounted displays for military applications.

We have incurred substantial losses since inception and expect to incur
a significant loss during the fiscal year ending December 31, 2025. 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,
product sales and licensing activities. In October 2024, we entered into a securities purchase agreement with an institutional investor
for the purchase of senior secured convertible notes of up to $75.0 million. See Part II, Item 8, Note 7. Notes Payable and Derivative
Liability. In February 2025, we entered into another securities purchase agreement with the same institutional investor for the issuance
and sale of $8.0 million in shares of common stock, plus warrants to purchase additional shares of common stock for approximately $9.0
million. See Part II, Item 8, Note 16. Subsequent Events. There can be no assurance that additional capital will be available or
that, if available, it will be available on terms acceptable to us on a timely basis. We cannot be certain that we will succeed in commercializing
our technology or products.

Critical
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 materially affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent liabilities. We evaluate our estimates on a continuous basis. We base our estimates on
historical data, terms of existing contracts, our evaluation of trends in the consumer display and 3D sensing 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 regarding 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 significant judgments and estimates used in the preparation of our consolidated
financial statements.

Business
Combination

Our
business combination is accounted for under the acquisition method. We allocate the fair value of purchase consideration to the tangible
and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the
fair value of the underlying net assets acquired and liabilities assumed over the purchase consideration is included in bargain purchase
gain in the Consolidated Statement of Operations. Such valuations require management to make significant estimates and assumptions, especially
with respect to intangible assets.

Intangible
Assets

Our
intangible assets consist of acquired technology from the January 2023 Ibeo asset purchase and purchased patents. The estimated fair
value of acquired technology was calculated through the income approach using the multi-period excess earnings and relief from royalty
methodologies. The intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from
one to seventeen years. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable. Recoverability of these assets is measured by comparison of their carrying values to the projected undiscounted
net cash flows associated with the related intangible assets or group of assets over their remaining lives. 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. During 2024, we
recorded a non-cash impairment charge of $4.2 million related to our Reference software. See Part II, Item 8, Note 8. Financial Statement
Components – Intangible Assets.

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Share-Based
Compensation

We
issue share-based compensation to employees in the form of stock options, restricted stock units (RSUs), and performance stock units
(PSUs). We account for the share-based awards by recognizing the fair value of share-based compensation expense on a straight-line basis
over the service period of the award, net of estimated forfeitures. The fair value of stock options is estimated on the grant date using
the Black-Scholes option pricing model. The fair value of RSUs and non-executive PSUs is determined by the closing price of our common
stock on the grant date or the period end date for the awards that are being measured by the service inception date. For performance-based
awards, expense is recognized when it is probable the performance criteria will be achieved. If the likelihood becomes improbable that
the performance criteria will be achieved, the expense is reversed. The fair value of RSUs and PSUs (other than certain executive
PSUs) is determined by the closing price of our common stock on the grant date or the period end date for the awards that are being measured
by the service inception date. Executive PSUs issued in 2022 were valued using a Monte Carlo simulation model using the following inputs:
stock price, volatility, and risk-free interest rates. Changes in estimated inputs or using other option valuation methods may result
in materially different option values and share-based compensation expense.

Leases

Significant
judgment may be required when determining whether a contract contains a lease, the length of the lease term, the allocation of the consideration
in a contract between lease and non-lease components, and the determination of the discount rate included in our office lease. We review
the underlying objective of each contract, the terms of the contract, and consider our current and future business conditions when making
these judgments.

Derivative
Liability

We
evaluate our financial instruments, specifically, our notes payable, to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives in accordance with ASC 815, “Derivatives and Hedging”. For derivative financial instruments
that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the issuance date and is
then re-valued at each reporting date, with changes in the fair value reported as an unrealized gain or loss in earnings on the consolidated
statements of operations.

Results
of Operations

Revenue

Revenues
are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration
that we expect to receive in exchange for those goods or services. We recognize revenue either at a point in time, or over time, depending
upon the characteristics of the individual contract. If control of the deliverable(s) transfers over time, the revenue is recognized
in proportion to the transfer of control. If control passes to the customer only upon completion and transfer of the asset, revenue is
recognized at the completion of the contract.

The
decrease in revenue for the year ended December 31, 2024 compared to the same period in 2023 was primarily due to revenue associated
with the Microsoft contract partially offset by the sale of sensors to an existing industrial customer for agricultural equipment and
service parts, an increase in shipments of MOVIA L sensors to Daimler Truck North America and affiliates as part of their RFQ evaluation
process, and increased sales to a second industrial customer.

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Cost
of revenue

Cost
of revenue includes the direct and allocated indirect costs of products and services sold to customers. Direct costs include labor, materials,
reserves for estimated warranty expenses, and other costs incurred directly, or charged to us by our contract manufacturers, in the manufacture
of these products. Indirect costs include labor, overhead, and other costs associated with operating our manufacturing capabilities.
Overhead includes the costs of procuring, inspecting and storing material, facility and other costs, and is allocated to cost of revenue
based on the proportion of indirect labor which supported revenue activities.

Cost
of revenue can fluctuate significantly from period to period, depending on the product mix and volume, the level of overhead expense
and the volume of direct material purchased. The increase in cost of revenue for the year ended December 31, 2024 compared to the same
period in 2023 was primarily due to inventory write-downs primarily associated with older configurations of the MOVIA L sensors.

Research
and development expense

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 assign 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 our customers. We believe that a substantial
level of continuing research and development expenses will be required to further develop our scanning technology.

The
decrease in research and development expense during the year ended December 31, 2024 compared to the same period in 2023 was
primarily due to lower salary and benefits expense and non-cash compensation of $11.2 million as a result of 2024 restructuring
events (see Part II, Item 8, Note 14. Restructuring Charges), lower depreciation expense of $0.8 million, lower freight costs
of $0.2 million, lower direct materials and equipment costs of $0.2 million, and lower travel expenses of $0.2 million. These
decreases were partially offset by restructuring charges of $5.4 million, and higher IT and software costs of $0.5
million.

Sales,
marketing, general and administrative expense

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.

The
decrease in sales, marketing, general and administrative expense during the year ended December 31, 2024 as compared to the same
period in 2023 was primarily due to lower salary and benefits expense and non-cash compensation of $4.6 million as a result of 2024
restructuring events (see Part II, Item 8, Note 14. Restructuring Charges), lower professional fees of $1.8 million primarily
related to legal and audit fees associated with the acquisition of Ibeo in 2023, lower subcontractor fees of $0.7 million, lower
business insurance fees of $0.6 million due to favorable rates obtained, and lower advertising costs of $0.3 million. These
decreases were partially offset by restructuring charges of $0.6 million, higher IT and software costs of $0.4 million, higher trade
show expense of $0.2 million, and higher building expenses of $0.2 million.

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Impairment
loss on intangible assets

Impairment
loss on intangible assets includes impairment charges on intangible assets. During the year ended December 31, 2024, management identified
impairment indicators related to MOSAIK software. We performed an assessment of projected future cash flows and determined the software
was fully impaired, which resulted in a $4.2 million impairment charge. See Part II, Item 8, Note 8. Financial Statement Components
for additional discussion.

Bargain
purchase gain, net of tax

During
the year ended December 31, 2023, we recorded a bargain purchase gain related to the acquisition of assets from Ibeo. The bargain purchase
gain represents the excess of the fair value of the underlying net assets acquired and liabilities assumed over the purchase consideration
paid in the transaction.

Interest
expense

The
increase in interest expense during the year ended December 31, 2024 compared to the same period in 2023 relates to $4.4 million of non-cash
interest expense on notes payable that originated in October 2024. See Part II, Item 8, Note 7. Notes Payable and Derivative Liability
for additional discussion.

Unrealized
loss on derivative liability

Unrealized
loss on derivative liability reflects the revaluation of our derivative liability associated with notes payable as of December 31, 2024.
Due to the increase in the fair value of the derivative liability as of December 31, 2024 relative to its initial measurement on October
23, 2024, we recognized an unrealized loss during 2024. See Part II, Item 8, Note 7. Notes Payable and Derivative Liability for
additional discussion.

Other
income (expense), net

The
decrease in other income during the year ended December 31, 2024 compared to the same period in 2023 is primarily due to a payment received
in 2023 of $3.0 million as an incentive to terminate our previous building lease.

Income
Taxes

During
the years ended December 31, 2024 and 2023, we recognized tax expense of $0.5 million and $1.1 million, respectively, mainly related
to income in foreign jurisdictions offset, partially offset by a deferred income tax benefit generated by the reduction to a deferred
tax liability created as a result of the acquisition of Ibeo in Q2 2023. The change in income tax expense during the year ended December
31, 2024 was largely the result of lower profitability in foreign jurisdictions. As of December 31, 2024, we had net operating loss carryforwards
of approximately $498.0 million for federal income tax reporting purposes. In addition, we have research and development tax credits
of $11.1 million. During 2024, $28.2 million federal net operating losses and $0.2 million general business credits expired unused. A
majority of the net operating loss carryforwards and research and development credits available to offset future taxable income, if any,
will expire in varying amounts from 2025 to 2044, if not previously used.

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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 use a portion of our net operating loss carryforwards.

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, 2024 or at December 31, 2023.

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,
product sales, and licensing activities. As of December 31, 2024, the Company had $54.5 million in cash and cash equivalents and
$20.2 million in short-term investment securities, or $74.7 million total. In February 2025, we raised net proceeds of $7.8 million
through sale of common stock to an existing investor. In addition to cash and cash equivalents, the Company also has potential
availability of $143.6 million comprised of the following:

[[GREPCENT_TABLE]]

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated
financial statements and the related notes included in Part II, Item 8 of this Form 10-K. The following discussion focuses on the results
of our operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. Similar discussion of the results
of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K
for the year ended December 31, 2022.

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Overview

Currently,
our development and commercialization efforts are focused primarily on automotive lidar and advanced driver-assistance systems
(ADAS) markets where we can deliver safe mobility at the speed of life. Our integrated solution combines our lidar sensors,
including our MEMS-based dynamic-range and flash-based short/mid-range, with perception software, to be integrated on our custom
ASIC, targeted for sale to premium automotive OEMs and Tier 1 automotive suppliers.

Although
automotive lidar is our priority now, we have developed solutions for Augmented Reality, Interactive Displays, and Consumer Lidars.
In the recent past, our strategy had been to sell AR displays or components, Interactive Displays, or Consumer Lidars to
original equipment manufacturers (OEMs) and original design manufacturers (ODMs) for incorporation into their products.

We
have incurred substantial losses since inception and expect to incur a significant loss during the fiscal year ending December 31, 2024.
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, product sales and licensing activities. There can be no
assurance that additional capital will be available or that, if available, it will be available on terms acceptable to us on a timely
basis. We cannot be certain that we will succeed in commercializing our technology or products.

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 materially affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent liabilities. We evaluate our estimates on a continuous basis. We base our estimates on
historical data, terms of existing contracts, our evaluation of trends in the consumer display and 3D sensing 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 regarding 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 significant judgments and estimates used in the preparation of our consolidated
financial statements.

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Business
combination

Our
business combination is accounted for under the acquisition method. We allocate the fair value of purchase consideration to the tangible
and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the
fair value of the underlying net assets acquired and liabilities assumed over the purchase consideration is included in bargain purchase
gain in the Consolidated Statement of Operations. Such valuations require management to make significant estimates and assumptions, especially
with respect to intangible assets.

Intangible
assets

Our
intangible assets consist of acquired technology from the January 2023 Ibeo asset purchase and purchased patents. The estimated fair
value of acquired technology was calculated through the income approach using the multi-period excess earnings and relief from royalty
methodologies. The intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from
one to seventeen years. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable. Recoverability of these assets is measured by comparison of their carrying values to the projected undiscounted
net cash flows associated with the related intangible assets or group of assets over their remaining lives. 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.

Share-based compensation

We issue share-based compensation to employees in the form of stock options,
restricted stock units (RSUs), and performance stock units (PSUs). We account for the share-based awards by recognizing the fair value
of share-based compensation expense on a straight-line basis over the service period of the award, net of estimated forfeitures. The fair
value of stock options is estimated on the grant date using the Black-Scholes option pricing model. The fair value of RSUs and non-executive
PSUs is determined by the closing price of our common stock on the grant date or the period end date for the awards that are being measured
by the service inception date. For performance-based awards, expense is recognized when it is probable the performance criteria will be
achieved. If the likelihood becomes improbable that the performance criteria will be achieved, the expense is reversed. Executive PSUs
that have market-based performance criteria are valued using a binomial option pricing model using the following inputs: stock price,
volatility, and risk-free interest rates. Changes in estimated inputs or using other option valuation methods may result in materially
different option values and share-based compensation expense.

Leases

Significant
judgment may be required when determining whether a contract contains a lease, the length of the lease term, the allocation of the consideration
in a contract between lease and non-lease components, and the determination of the discount rate included in our office lease. We review
the underlying objective of each contract, the terms of the contract, and consider our current and future business conditions when making
these judgments.

Results
of Operations

YEAR
ENDED DECEMBER 31, 2023 COMPARED TO YEAR ENDED DECEMBER 31, 2022.

Revenue

Revenues
are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration
that we expect to receive in exchange for those goods or services. We recognize revenue either at a point in time, or over time, depending
upon the characteristics of the individual contract. If control of the deliverable(s) transfers over time, the revenue is recognized in proportion
to the transfer of control. If control passes to the customer only upon completion and transfer of the asset, revenue is recognized at
the completion of the contract.

In
April 2017, we signed a contract with Microsoft Corporation to develop an LBS display system; the contract terminated effective
December 31,2023. Under the agreement, we received an upfront payment of $10.0 million. In March 2020, Microsoft took over
production of components that we had been producing for them. As a result, beginning in March 2020, we earned a royalty on each
component shipped approximately equal to the gross profit we would have earned if we had continued to produce and ship the
components. The increase in revenue for the year ended December 31, 2023 compared to the same period in 2022 was primarily due to
the recognition of the remaining $4.6 million of revenue as we believe the likelihood of further deliveries under the contract is remote. We do not expect to recognize any
further revenue in connection with this contract.

The
remaining increase in revenue during the twelve months ended December 31, 2023 compared to the prior year was primarily a result of
customer contracts assumed in connection with our January 2023 acquisition of assets from Ibeo.

The revenue backlog during the twelve months ended December 31, 2023 was $3.1 million as compared to $0.0 million
in 2022.

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Cost
of revenue

Cost
of revenue includes the direct and allocated indirect costs of products and services sold to customers. Direct costs include labor, materials,
reserves for estimated warranty expenses, and other costs incurred directly, or charged to us by our contract manufacturers, in the manufacture
of these products. Indirect costs include labor, overhead, and other costs associated with operating our manufacturing capabilities. Overhead includes the costs of procuring, inspecting and storing material, facility and other
costs, and is allocated to cost of revenue based on the proportion of indirect labor which supported revenue activities.

Cost
of revenue can fluctuate significantly from period to period, depending on the product mix and volume, the level of overhead expense
and the volume of direct material purchased. The increase in cost of revenue for the twelve months ended December 31, 2023 compared to
the same period in 2022 was primarily due to the amortization of intangible assets obtained in the acquisition of Ibeo assets of $1.4
million. The increase in 2023 was also driven by materials and labor associated with the corresponding increase in revenue this year.

Research
and development expense

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 assign 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 our customers. We believe that a substantial
level of continuing research and development expenses will be required to further develop our scanning technology.

The
increase in research and development expense during the year ended December 31, 2023 compared to the same period in 2022 was primarily
due to the Ibeo acquisition that resulted in higher salary and benefits expenses as a result of increased headcount of $21.2 million,
increased depreciation expenses of $1.6 million, increased facilities and information technology expenses of $1.6 million compared to
the prior year.

Sales,
marketing, general and administrative expense

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.

The
increase in sales, marketing, general and administrative expense during the year ended December 31, 2023 as compared to the same period
in 2022 was primarily due to the Ibeo acquisition that resulted in increased salary and benefits expenses as a result of increased headcount
of approximately $7.0 million, increased professional services of $1.3 million incurred in connection with the Ibeo acquisition, increased non-cash
compensation expense of $1.1 million, increased depreciation expense of $1.1 million and increased purchased labor of $0.7 million.

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Bargain
purchase gain, net of tax

During
the twelve months ended December 31, 2023, we recorded a bargain purchase gain related to the acquisition of assets from Ibeo. The bargain
purchase gain represents the excess of the fair value of the underlying net assets acquired and liabilities assumed over the purchase
consideration paid in the transaction.

Other
income (expense), net

The
increase in other income during the twelve months ended December 31, 2023 compared to the same period in 2022 is due to a payment of
$3.0 million as an incentive to terminate our previous building lease. The remainder of the increase is primarily due to income from
investment securities.

Income
taxes

During
the years ended December 31, 2023 and 2022, we recognized tax expense of $1.1 million and $0.0 million, respectively, mainly related
to income in foreign jurisdictions offset, partially offset by a deferred income tax benefit generated by the reduction to a deferred
tax liability created as a result of the acquisition of Ibeo in Q2 2023. The change in income tax expense during the year ended December
31, 2023 was largely the result of profitability in foreign jurisdictions related to the Ibeo acquisition. As of December 31, 2023, we
had net operating loss carryforwards of approximately $463.1 million for federal income tax reporting purposes. In addition, we have
research and development tax credits of $10.1 million. During 2023, $23.1 million federal net operating losses and $0.3 million general
business credits expired unused. A majority of the net operating loss carryforwards and research and development credits available to
offset future taxable income, if any, will expire in varying amounts from 2024 to 2043, if not previously used.

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 use a portion of our net operating loss carryforwards.

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, 2023 or at December 31, 2022.

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, product sales,
and licensing activities. At December 31, 2023, we had $45.2 million in cash and cash equivalents and $28.6 million in investment securities.
We also have approximately $19.0 million availability left on our existing $35.0 million ATM facility that was put in place in the third quarter of 2023. Based
on our current operating plan for 2024 and beyond, we anticipate that we have sufficient cash and cash equivalents to fund our operations
for at least the next 12 months.

Operating
activities

Cash
used in operating activities totaled $67.1 million during 2023, compared to $38.0 million in 2022. Cash used in operating activities
resulted primarily from cash used to fund our net loss, after adjusting for non-cash charges such as share-based compensation, depreciation
and amortization charges and changes in operating assets and liabilities. The changes in cash used in operating activities were primarily
attributed to the Ibeo acquisition that resulted in increased operating expenses to support the development of our lidar sensors. During
the second half of 2023, we made a payment of $3.1 million to our contract manufacturing partner in connection with the buildup of MOVIA
sensor inventory for direct sales to both automotive and non-automotive customers. Moreover, we expect to make additional payments to
this partner totaling approximately $6.2 million over the first six months of 2024 in line with agreed-upon deliveries.

Investing
activities

Cash
provided by investing activities totaled $21.8 million in 2023, compared to cash used in investing activities of $38.1 million in
2022. During the twelve months ended December 31, 2023, we purchased short-term investment securities totaling $41.7 million and
sold short-term investment securities totaling $76.7 million. During the twelve months ended December 31, 2022, we purchased
short-term investment securities totaling $90.2 million and sold short-term investment securities totaling $60.6 million. Purchases
of property and equipment during the twelve months ended December 31, 2023 and 2022 were $2.0 million and $4.4 million,
respectively. During the twelve months ended December 31, 2023, we made payments totaling $11.2 million related to the acquisition
of Ibeo assets. We expect to make the final payment related to the Ibeo acquisition of approximately $3.0 million and we expect
restricted cash of $3.3 million to be released from escrow to Ibeo during the first quarter of 2024. In 2022, operating funds
advanced to Ibeo during the pre-closing period totaling $4.1 million were included in cash used in investing activities.

Financing
activities

Cash
provided by financing activities totaled $72.4 million in 2023, compared to $14.3 million in 2022. During the year ended December 31,
2022, we made principal payments under long-term debt totaling $0.4 million related to the loan under the Paycheck Protection Program
of the 2020 CARES Act (PPP) administered by the Small Business Administration compared to $0.5 million in the prior year. Proceeds received
from stock option exercises totaled $0.3 million during 2023 compared to $0.7 million during 2022.

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The
following is a list of our financing activities during 2023 and 2022.

Our
capital requirements will depend on many factors, including, but not limited to, the rate at which OEMs and other potential customers
introduce products incorporating our technology and the market acceptance and competitive position of such products. Our ability to raise
capital will depend on numerous factors, including the following:

If
we are successful in establishing OEM co-development arrangements, we may receive full or partial funding for certain non-recurring engineering
costs for technology development and/or product development. Nevertheless, we expect our capital requirements to remain high as we expand
our activities and operations with the objective of commercializing our technology.

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Contractual
obligations

The
following table lists our contractual obligations as of December 31, 2023 (in thousands):

*
Open purchase obligations represent commitments to purchase materials, capital equipment, maintenance agreements and other goods used
in the normal operation of our business.

+
Minimum payments under operating leases included payments associated with the forward-starting lease of MicroVision GmbH with a target
commencement date of August 1, 2024.

Recent
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.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included in Part II, Item 8 of this Form 10-K. The following discussion focuses on the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. Similar discussion of the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.

Overview

Currently, our development efforts are primarily focused on automotive lidar sensors and perception software for ADAS applications. Our integrated solution will combine our MEMS-based lidar sensor, custom ASICs, and software targeted for sale to automotive OEMs and Tier 1 automotive suppliers. We are forecasting small quantities of sales in 2023, but we do not expect to achieve significant, sustained revenue from our ADAS solution in the near term.

Although automotive lidar is our priority now, we have developed solutions for Augmented Reality, Interactive Displays, and Consumer Lidars. For the past few years, our strategy has been to sell AR displays or components, Interactive Displays, or Consumer Lidars to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) for incorporation into their products. Currently, our sole customer is Microsoft Corporation. Our arrangement with this customer generates royalty income; however, the volume of sales and resulting royalties from that arrangement are not significant. In the recent past, we have been unable to secure additional customers to launch one of our products.

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We have incurred substantial losses since inception and expect to incur a significant loss during the fiscal year ending December 31, 2023. 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, product sales and licensing activities. There can be no assurance that additional capital will be available or that, if available, it will be available on terms acceptable to us on a timely basis. We cannot be certain that we will succeed in commercializing our technology or products.

Continuing Impact of COVID-19 on Our Business

Our business operations continue to be impacted by the ongoing COVID-19 pandemic. Government restrictions in the early days of the pandemic caused us to mostly close our offices in early 2020. To support our hardware development efforts, we reopened our offices in July 2021 while maintaining compliance with government mandates and health agency protocols, including masking requirements and encouraging vaccination. Some of our office employees continue to work remotely or on hybrid schedules. We may experience reductions in productivity and disruptions to our business routines while our hybrid work policy remains in place, or if our employees become ill and are unable to work, which could have an adverse effect on the timing of our development and productization activities. We will continue to prioritize the health and safety of our employees as we adapt our workplace policies based on evolving government regulation, health agency advice, and industry best practice.

In addition, several of our suppliers have experienced closures or have been operating at reduced capacity, resulting in lower component availability. Continued disruptions to our supply chain could have a material impact on our development and future operations. Moreover, various global travel restrictions and office closures have hampered our business development efforts, making it more difficult to engage with potential customers and partners, which could have a material negative impact on our business prospects.

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 materially affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We evaluate our estimates on a continuous basis. We base our estimates on historical data, terms of existing contracts, our evaluation of trends in the consumer display and 3D sensing 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 regarding 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 significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition

Revenues are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. We generate all of our revenue from contracts with customers.

Our contract revenue 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. We recognize contract revenue either at a point in time, or over time, depending upon the characteristics of the individual contract. If control of the deliverable(s) occur over time, the revenue is recognized in proportion to the transfer of control. If control passes to the customer only upon completion and transfer of the asset, revenue is recognized at the completion of the contract. In contracts that include significant customer acceptance provisions, we recognize revenue only upon acceptance of the deliverable(s).

We identify each performance obligation in our development contracts at contract inception. The contracts generally include product development and customization specified by the customer. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct within the context of the contract. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Performance obligations that are not distinct at contract inception are combined.

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If we identify multiple distinct performance obligations, we evaluate each performance obligation to determine if there is a stand-alone selling price. In instances where stand-alone selling price is not directly observable, such as when we do not sell the product or service separately, we determine the stand-alone selling price using information that may include market conditions and other observable inputs. Judgment is required to determine the stand-alone selling price for each distinct performance obligation.

Our development contracts are primarily fixed-fee contracts. If control of deliverables occurs over time, we recognize revenue on fixed fee contracts on the proportion of total cost expended (under Topic 606, the ‘input method’) to the total cost expected to complete the contract performance obligation. For contracts that require the input method for revenue recognition, the determination of the total cost expected to complete the performance obligations on fixed fee contracts involves significant judgment. We incorporate revisions to hour and cost estimates when the causal facts become known.

Share-based compensation

We issue share-based compensation to employees in the form of stock options, restricted stock units (RSUs), and performance stock units (PSUs). We account for the share-based awards by recognizing the fair value of share-based compensation expense on a straight-line basis over the service period of the award, net of estimated forfeitures. The fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model. The fair value of RSUs and non-executive PSUs is determined by the closing price of our common stock on the grant date. For performance-based awards, expense is recognized when it is probable the performance criteria will be achieved. If the likelihood becomes improbable that the performance criteria will be achieved, the expense is reversed. Executive PSUs that have market-based performance criteria are valued using a binomial option pricing model using the following inputs: stock price, volatility, and risk-free interest rates. Changes in estimated inputs or using other option valuation methods may result in materially different option values and share-based compensation expense.

Leases

Significant judgment may be required when determining whether a contract contains a lease, the length of the lease term, the allocation of the consideration in a contract between lease and non-lease components, and the determination of the discount rate included in our office lease. We review the underlying objective of each contract, the terms of the contract, and consider our current and future business conditions when making these judgments.

Income taxes

Significant judgment is required in evaluating our tax position and in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We record a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. Based on our history of losses since inception, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets. Our actual tax exposure may differ from our estimates and any such differences may impact income our tax expense in the period in which such determination is made.

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.

Results of Operations

YEAR ENDED DECEMBER 31, 2022 COMPARED TO YEAR ENDED DECEMBER 31, 2021.

License and royalty revenue

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License and royalty revenue is revenue under license agreements to our PicoP® scanning technology. We recognize revenue on upfront license fees at a point in time if the nature of the license granted is a right-to-use license, representing functional intellectual property with significant standalone functionality. If the nature of the license granted is a right-to-access license, representing symbolic intellectual property, which excludes significant standalone functionality, we recognize revenue over the period of time we have ongoing obligations under the agreement. We will recognize revenue from sales-based royalties on the basis of the quarterly reports provided by our customer as to the number of royalty-bearing products sold or otherwise distributed. In the event that reports are not received, we will estimate the number of royalty-bearing products sold by our customers.

As described above, in March 2020, our customer took over production of components that we had been producing for them. As a result, beginning in March 2020, we earn a royalty on each component shipped that is approximately equal to the gross profit we would have earned if we had continued to produce and ship the components. The decrease in license and royalty revenue for year ended December 31, 2022 compared to the same period in 2021 was due to a lower number of royalty-bearing products being communicated to us as distributed by our customer. As we recognize this revenue, we record a corresponding reduction in the $10.0 million prepayment that we received from this customer in 2017; accordingly, no cash will be received for this royalty revenue unless and until the prepayment is exhausted.

Cost of product revenue

Cost of product revenue includes the direct and allocated indirect costs of products sold to customers. Direct costs include labor, materials, reserves for estimated warranty expenses, and other costs incurred directly, or charged to us by our contract manufacturers, in the manufacture of these products. Indirect costs include labor, manufacturing overhead, and other costs associated with operating our manufacturing capabilities and capacity. Manufacturing overhead includes the costs of procuring, inspecting and storing material, facility and other costs, and is allocated to cost of product revenue based on the proportion of indirect labor which supported production activities.

Cost of product revenue can fluctuate significantly from period to period, depending on the product mix and volume, the level of manufacturing overhead expense and the volume of direct material purchased. Cost of product revenue was higher during the twelve months ended December 31, 2022 compared to the same period in 2021 due to inventory write-downs for obsolete materials.

Research and development expense

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 assign 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 our customers. We believe that a substantial level of continuing research and development expense will be required to further develop our scanning technology.

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The increase in research and development expense during the year ended December 31, 2022 was primarily due to higher personnel costs as a result of increased headcount of $3.9 million, higher facilities expenses of $1.1 million higher non-cash compensation expense of $808,000 and higher purchased labor of $542,000 compared to the prior year.

Sales, marketing, general and administrative expense

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.

The increase in sales, marketing, general and administrative expense during the year ended December 31, 2022 was primarily attributed to increased salary and benefits expenses as a result of increased headcount of approximately $1.5 million, higher professional services of $1.0 million and increased business insurance of $1.0 million compared to the prior year, offset by lower consulting expenses of $1.4 million and lower non-cash compensation of $631,000.

Income taxes

No provision for income taxes has been recorded because we have experienced net losses from inception through December 31, 2022. At December 31, 2022, we had net operating loss carryforwards of approximately $440.3 million for federal income tax reporting purposes. In addition, we have research and development tax credits of $9.6 million. During 2022, $22.0 million federal net operating losses expired unused. A majority of the net operating loss carryforwards and research and development credits available to offset future taxable income, if any, will expire in varying amounts from 2023 to 2042, if not previously used.

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 use a portion of our net operating loss carryforwards.

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, 2022 or at December 31, 2021.

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, product sales, and licensing activities. At December 31, 2022, we had $20.5 million in cash and cash equivalents and $62.2 million in investment securities.

Between the effectiveness of the Asset Purchase Agreement, December 1, 2022, and the closing of the acquisition, January 31, 2023, we advanced operating funds to Ibeo totaling approximately EUR 6.6 million or approximately $7.1 million to support its ongoing operations while in insolvency. These funds included costs incurred by Ibeo to reduce its headcount so that only approximately 250 employees would transfer to MicroVision upon closing of the acquisition. The costs related to the headcount reductions will be reimbursed to MicroVision by way of deduction from the purchase price per the Asset Purchase Agreement. In addition, at closing, MicroVision paid EUR 7.0 million or approximately $7.6 million to Ibeo and EUR 3.0 million or $3.3 million to an escrow account to be available to cover properly established claims by MicroVision. We expect to make the remaining final payment during the second quarter of 2023.

As of January 31, 2023, we had $18.5 million in cash and cash equivalents and $59.2 million in investment securities after making the payments to Ibeo as described above, but excluding the expected impact of the noted final payment that we expect to make in the second quarter. Based on our current operating plan for 2023 and beyond, we anticipate that we have sufficient cash and cash equivalents to fund our operations for at least the next 12 months.

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Operating activities

Cash used in operating activities totaled $38.0 million during 2022, compared to $29.4 million in 2021. Cash used in operating activities resulted primarily from cash used to fund our net loss, after adjusting for non-cash charges such as share-based compensation, depreciation and amortization charges and changes in operating assets and liabilities. The changes in cash used in operating activities were primarily attributed to increased operating expenses to support the development of our lidar sensor and software solution.

Investing activities

Cash used in investing activities totaled $38.1 million in 2022, compared to cash provided by investing activities of $35.3 million in 2021. During the year ended December 31, 2022, we purchased short-term investment securities totaling $90.2 million and sold short-term investment securities totaling $60.6 million. During the year ended December 31, 2021, we purchased short-term investment securities totaling $32.8 million. In 2022, operating funds advances to Ibeo during the pre-closing period totaling $4.1 million were included in cash used in investing activities. Purchases of property and equipment during the twelve months ended December 31, 2022 and 2021 were $4.4 million and $2.5 million, respectively. The increase in 2022 was primarily due to one-time $2.2 million investment in tenant improvements for build-out construction for our new HQ office and lab space in Redmond, WA. We expect to recover this investment through the contractual incentive payment agreed to be paid by the new incoming tenant for timely exiting our old headquarters in Redmond, WA.

Financing activities

Cash provided by financing activities totaled $14.3 million in 2022, compared to $131.2 million in 2021. During the year ended December 31, 2022, we made principal payments under long-term debt totaling $392,000 related to the loan under the Paycheck Protection Program of the 2020 CARES Act (PPP) administered by the Small Business Administration compared to $488,000 in the prior year. Proceeds received from stock option exercises totaled $726,000 during 2022 compared to $2.7 million during 2021. Principal payments under finance leases were $26,000 in 2022 and $28,000 in 2021.

The following is a list of our financing activities during 2022 and 2021.

Our capital requirements will depend on many factors, including, but not limited to, the rate at which OEMs and other potential customers introduce products incorporating our technology and the market acceptance and competitive position of such products. Our ability to raise capital will depend on numerous factors, including the following:

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If we are successful in establishing OEM co-development arrangements, we may receive full or partial funding for certain non-recurring engineering costs for technology development and/or product development. Nevertheless, we expect our capital requirements to remain high as we expand our activities and operations with the objective of commercializing our technology.

Contractual obligations

The following table lists our contractual obligations as of December 31, 2022 (in thousands):

Recent 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.

ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations
should be read in conjunction with our audited financial statements and the related notes included in Part II, Item 8 of this Form 10-K.
The following discussion focuses on the results of our operations for the year ended December 31, 2021 compared to the year ended December
31, 2020. Similar discussion of the results of our operations for the year ended December 31, 2020 compared to the year ended December
31, 2019 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in
Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

Overview

Currently, our development efforts
are primarily focused on automotive lidar sensors and an advanced driver-assisted systems, or ADAS, solution. Our integrated solution
will combine our solid-state lidar sensor, custom ASICs, and software targeted for sale to automotive OEMs and Tier-1 automotive suppliers.
Our development efforts continue and we expect to test our solution and demonstrate its capabilities during the first half of 2022. Although
we are forecasting small quantities of sales in 2022, we do not expect to achieve significant, sustained revenue from our ADAS solution
in the near term.

Although automotive lidar is our priority now, we have developed
solutions for Augmented Reality, Interactive Displays, and Consumer Lidars. For the past few years, our strategy has been to sell AR
displays or components, Interactive Displays, or Consumer Lidars to original equipment manufacturers (OEMs) and original design manufacturers
(ODMs) for incorporation into their products. Currently, our sole customer is Microsoft Corporation. Our arrangement with this customer
generates royalty income; however, the volume of sales and resulting royalties from that arrangement are not significant. In the recent
past, we have been unable to secure additional customers to launch one of our products.

We have incurred substantial losses since inception and expect to incur
a significant loss during the fiscal year ending December 31, 2022. 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,
product sales and licensing activities. There can be no assurance that additional capital will be available or that, if available, it
will be available on terms acceptable to us on a timely basis. We cannot be certain that we will succeed in commercializing our technology
or products.

Continuing Impact of COVID-19 on Our Business

Our business operations continue to be impacted by the ongoing COVID-19
pandemic. Government restrictions in the early days of the pandemic caused us to mostly close our offices in early 2020. To support our
hardware development efforts, we reopened our offices in July 2021 while maintaining compliance with government mandates and health agency
protocols, including masking requirements and encouraging vaccination. Some of our office employees continue to work remotely or on hybrid
schedules. We may experience reductions in productivity and disruptions to our business routines while our hybrid work policy remains
in place, or if our employees become ill and are unable to work, which could have an adverse effect on the timing of our development activities.
We will continue to prioritize the health and safety of our employees as we adapt our workplace policies based on evolving government
regulation, health agency advice, and industry best practice.

In addition, particularly in connection with the recent resurgence of COVID-19
and its new variants, several of our suppliers have experienced closures or have been operating at reduced capacity, resulting in lower
component availability. Continued disruptions to our supply chain could have a material impact on our future operations. Moreover, various
global travel restrictions and office closures have hampered our business development efforts, making it more difficult to engage with
potential customers and partners, which could have a material negative impact on our business prospects.

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In April 2020, we received funds in the amount of approximately $1.6 million
pursuant to a loan under the Paycheck Protection Program of the 2020 CARES Act (PPP) administered by the Small Business Administration.
The loan has an interest rate of 0.98% and a term of 24 months. Due to an extension of the program, no payments were due until August
2021, although interest accrued during that period. Thereafter, the loan became repayable in monthly installments through April 2022 to
retire the loan plus accrued interest. Funds from the loan could only be used for certain purposes, including payroll, benefits, rent
and utilities, and a portion of the loan used to pay certain costs was forgivable, all as provided by the terms of the PPP. The CARES
Act provided that the forgivable portion of the PPP loan could be reduced if the borrower reduced full-time equivalent employees during
the covered period as compared to a base period. As of December 31, 2020, all of the funds received under the PPP had been used for qualified
purposes. We applied for and received partial forgiveness of the loan of approximately $690,000 in accordance with PPP guidelines. The
forgiveness was recorded in our financial statements in the third quarter of 2021. As of December 31, 2021, we have made principal payments
totaling $488,000 on the loan. The loan is evidenced by a promissory note, which contains customary events of default relating to, among
other things, payment defaults and breaches of representations and warranties. We may prepay the loan at any time prior to maturity with
no prepayment penalties.

Key accounting policies and estimates

Our discussion and analysis of our financial condition and results of operations
are based upon our 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 materially affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We evaluate our estimates on
a continuous basis. We base our estimates on historical data, terms of existing contracts, our evaluation of trends in the consumer display
and 3D sensing 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 regarding 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 significant judgments
and estimates used in the preparation of our financial statements.

Revenue recognition

Revenues are recognized when control of the promised goods or
services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those
goods or services. We generate all of our revenue from contracts with customers.

Our contract revenue 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. We recognize contract revenue either at a point in time, or over time, depending upon the characteristics of the individual
contract. If control of the deliverable(s) occur over time, the revenue is recognized in proportion to the transfer of control. If control
passes to the customer only upon completion and transfer of the asset, revenue is recognized at the completion of the contract. In contracts
that include significant customer acceptance provisions, we recognize revenue only upon acceptance of the deliverable(s).

We identify each performance obligation in our development contracts
at contract inception. The contracts generally include product development and customization specified by the customer. In contracts with
multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct
within the context of the contract. Determining whether products and services are considered distinct performance
obligations that should be accounted for separately versus together may require significant judgment. Performance obligations that are
not distinct at contract inception are combined.

If we identify multiple distinct performance obligations, we evaluate
each performance obligation to determine if there is a stand-alone selling price. In instances where stand-alone selling price is not
directly observable, such as when we do not sell the product or service separately, we determine the stand-alone selling price using
information that may include market conditions and other observable inputs. Judgment is required to determine the stand-alone selling
price for each distinct performance obligation.

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Our development contracts are primarily fixed-fee contracts. If control
of deliverables occurs over time, we recognize revenue on fixed fee contracts on the proportion of total cost expended (under Topic 606,
the ‘input method’) to the total cost expected to complete the contract performance obligation. For contracts that require
the input method for revenue recognition, the determination of the total cost expected to complete the performance obligations on fixed
fee contracts involves significant judgment. We incorporate revisions to hour and cost estimates when the causal facts become known.

Share-based compensation

We issue share-based compensation to employees in the form of stock options,
restricted stock units (RSUs), and performance stock units (PSUs). We account for the share-based awards by recognizing the fair value
of share-based compensation expense on a straight-line basis over the service period of the award, net of estimated forfeitures. The fair
value of stock options is estimated on the grant date using the Black-Scholes option pricing model. The fair value of RSUs and non-executive
PSUs is determined by the closing price of our common stock on the grant date. For performance-based awards, expense is recognized when
it is probable the performance criteria will be achieved. If the likelihood becomes improbable that the performance criteria will be achieved,
the expense is reversed. Executive PSUs that have market-based performance criteria are valued using a binomial option pricing model using
the following inputs: stock price, volatility, and risk-free interest rates. Changes in estimated inputs or using other option valuation
methods may result in materially different option values and share-based compensation expense.

Leases

Significant judgment may be required when determining whether a contract
contains a lease, the length of the lease term, the allocation of the consideration in a contract between lease and non-lease components,
and the determination of the discount rate included in our office lease. We review the underlying objective of each contract, the terms
of the contract, and consider our current and future business conditions when making these judgments.

Income taxes

Significant judgment is required in evaluating our tax position and in
determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. We record a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized.
Based on our history of losses since inception, the available objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets. Our actual tax exposure may differ from our estimates and any such differences may impact income our tax expense
in the period in which such determination is made.

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 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 financial statements.

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Results of Operations

YEAR ENDED DECEMBER 31, 2021 COMPARED TO YEAR
ENDED DECEMBER 31, 2020.

Product revenue

Product revenue is revenue from sales of our products which are LBS modules
and their components. Revenue is recognized when control of the goods passes to the customer.

The decrease in product revenue for the year ended December 31, 2021 compared
to the same period in 2020 was due to ceasing product shipments in March 2020 in connection with our transfer of production to our customer.
From the third quarter of 2019 through the end of February 2020, we produced and sold to the customer components to a high definition
display system that we developed for the customer pursuant to a development agreement. The volume and resulting revenue and gross profit
from this arrangement was fairly low. Therefore, in March 2020 we transferred production of the components to the customer. Starting in
March 2020, instead of recognizing product revenue and the related cost, we earn a royalty from the customer for each unit shipped.

Product revenue backlog at December 31, 2021 and 2020 was zero.

License and royalty revenue

License and royalty revenue is revenue under license agreements to our
PicoP® scanning technology. We recognize revenue on upfront license fees at a point in time if the nature of the license granted is
a right-to-use license, representing functional intellectual property with significant standalone functionality. If the nature of the
license granted is a right-to-access license, representing symbolic intellectual property, which excludes significant standalone functionality,
we recognize revenue over the period of time we have ongoing obligations under the agreement. We will recognize revenue from sales-based
royalties on the basis of the quarterly reports provided by our customer as to the number of royalty-bearing products sold or otherwise
distributed. In the event that reports are not received, we will estimate the number of royalty-bearing products sold by our customers.

As described above, in March 2020, our customer took over production of
components that we had been producing for them. As a result, beginning in March 2020, we earn a royalty on each component shipped that
is approximately equal to the gross profit we would have earned if we had continued to produce and ship the components. The increase in
license and royalty revenue for the year ended December 31, 2021 compared to the same period in 2020 was primarily due to this change,
resulting in revenue from this arrangement being recognized as royalty revenue rather than as product revenue with a related cost of product
revenue. As we recognize this revenue, we record a corresponding reduction in the $10.0 million prepayment that we received from this
customer in 2017; accordingly, no cash will be received for this royalty revenue unless and until the prepayment is exhausted.

Contract revenue

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Contract revenue includes revenue from performance on development contracts
and the sale of prototype units and evaluation kits based on our PicoP® scanning module. Our contract revenue 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. We recognize contract revenue either at a point in time, or over time, depending upon the characteristics
of the individual contract. If control of the deliverable(s) occurs over time, the revenue is recognized in proportion to the transfer
of control. If control passes to the customer only upon completion and transfer of the asset, revenue is recognized at the completion
of the contract. In contracts that include significant customer acceptance provisions, we recognize revenue only upon acceptance of the
deliverable(s).

The decrease in contract revenue during the year ended December 31, 2021
compared to the same period in 2020 was attributed to decreased support contract activity with our customer and no prototype shipments.
Our contract backlog at December 31, 2021 and 2020 was zero.

Cost of product revenue

Cost of product revenue includes the direct and allocated indirect costs
of products sold to customers. Direct costs include labor, materials, reserves for estimated warranty expenses, and other costs incurred
directly, or charged to us by our contract manufacturers, in the manufacture of these products. Indirect costs include labor, manufacturing
overhead, and other costs associated with operating our manufacturing capabilities and capacity. Manufacturing overhead includes the costs
of procuring, inspecting and storing material, facility and other costs, and is allocated to cost of product revenue based on the proportion
of indirect labor which supported production activities.

Cost of product revenue can fluctuate significantly from period to period,
depending on the product mix and volume, the level of manufacturing overhead expense and the volume of direct material purchased. Cost
of product revenue was lower during the twelve months ended December 31, 2021 compared to the same period in 2020 due to ceasing product
shipments to our customer after we transferred production to the customer in March 2020 and lower inventory write-downs.

Cost of contract revenue

Cost of contract revenue includes both the direct and allocated indirect
costs of performing on contracts and producing prototype units and evaluation kits. Direct costs include labor, materials and other costs
incurred directly in producing prototype units and evaluation kits or performing on a contract. 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.

The decrease in the cost of contract revenue during the year ended December
31, 2021 compared to the same period in 2020 was attributed to reduced contract activity.

Research and development expense

20

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 assign 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 our customers. We believe that a substantial level of continuing research and development expense will be required to
further develop our scanning technology.

The increase in research and development expense during the year ended
December 31, 2021 was primarily due to higher non-cash compensation expense of $5.4 million and higher personnel costs as a result of
increased headcount of $3.2 million compared to the prior year. Research and development expense also includes increases in direct material
of $1.1 million and direct equipment of $1.0 million related to the development of our lidar sensor.

Sales, marketing, general and administrative expense

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.

The increase in sales, marketing, general and administrative expense
during the year ended December 31, 2021 was primarily attributed to higher non-cash compensation expense of $8.6 million, increased professional
services of $3.3 million and increased business insurance of $1.3 million compared to the prior year.

Income taxes

No provision for income taxes has been recorded because we have experienced
net losses from inception through December 31, 2021. At December 31, 2021, we had net operating loss carryforwards of approximately $431.4
million for federal income tax reporting purposes. In addition, we have research and development tax credits of $9.0 million. During 2021,
$31.2 million federal net operating losses expired unused. A majority of the net operating loss carryforwards and research and development
credits available to offset future taxable income, if any, will expire in varying amounts from 2022 to 2041, if not previously used.

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 use a portion of our net operating loss carryforwards.

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, 2021 or at December 31, 2020.

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, product sales, and licensing activities. At December 31,
2021, we had $82.6 million in cash and cash equivalents and $32.7 million in investment securities.

Based on our current operating plan, we anticipate that we have
sufficient cash and cash equivalents to fund our operations for at least the next 12 months.

Operating activities

Cash used in operating activities totaled $29.4 million during 2021, compared
to $16.1 million in 2020. Cash used in operating activities resulted primarily from cash used to fund our net loss, after adjusting for
non-cash charges such as share-based compensation, depreciation and amortization charges and changes in operating assets and liabilities.
The changes in cash used in operating activities were primarily attributed to increased operating expenses to support the development
of our lidar sensor.

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Investing activities

Cash used in investing activities totaled $35.3 million in 2021, compared
to cash provided by investing activities of $123,000 in 2020. During the year ended December 31, 2021, we purchased short-term investment
securities totaling $32.8 million. During the year ended December 31, 2020, we sold fixed assets to our customer for $525,000 as part
of our agreement with them to take over production of the components we had been producing. Purchases of property and equipment during
the twelve months ended December 31, 2021 and 2020 were $2.5 million and $402,000, respectively.

Financing activities

Cash provided by financing activities totaled $131.2 million in 2021, compared
to $27.0 million in 2020. Principal payments under finance leases were $28,000 in 2021 and $29,000 in 2020.

The following is a list of our financing activities during 2021 and 2020.

In June 2021, we entered into a $140.0 million
ATM equity offering agreement with Craig-Hallum. Under the agreement we are able, at our discretion, to offer and sell shares of our common
stock having an aggregate value of up to $140.0 million through Craig-Hallum. As of December 31, 2021, we had issued 4.0 million shares
of our common stock for net proceeds of $67.8 million under this ATM agreement. There were no transactions under this agreement in the
second half of 2021.

In February 2021, we entered into a $50.0 million ATM equity offering agreement with Craig-Hallum. Under
the agreement we were able, at our discretion, to offer and sell shares of our common stock having an aggregate value of up to $50.0 million
through Craig-Hallum. We issued 2.5 million shares of our common stock for net proceeds of $48.8 million under this ATM agreement. No
further shares are available for sales under this agreement.

In December 2020, we entered into a $13.0 million ATM equity offering agreement with Craig-Hallum. Under
the agreement we were able to, from time to time, at our discretion offer and sell shares of our common stock having an aggregate value
of up to $13.0 million through Craig-Hallum. As of December 31, 2020, we had issued 1.0 million shares for net proceeds of $6.1 million
that was received in January 2021. The $6.1 million was classified as subscriptions receivable on our December 31, 2020 balance sheet
and is not included in the cash balance as of December 31, 2020. In January 2021, we issued 1.1 million shares of our common stock for
net proceeds of $6.6 million under the agreement. In total, we issued 2.1 million shares of our common stock for net proceeds of $12.7
million under this ATM agreement. No further shares are available for sales under this agreement.

In November 2020, we entered into a $10.0 million ATM equity offering agreement with Craig-Hallum Capital
Group. As of December 31, 2020, we had completed sales under such sales agreement, having sold 4.9 million
shares for net proceeds of $9.6 million.

In April 2020, we received funds in the amount of $1.6 million pursuant to a loan under the PPP administered
by the Small Business Administration. The loan has an interest rate of 0.98% and a term of 24 months. As of December 31, 2020, all of
the funds received under the PPP had been used for qualified purposes. We applied for and, in July 2021, received partial forgiveness
of the loan of approximately $690,000 in accordance with PPP guidelines. The forgiveness was recorded in our financial statements in the
third quarter of 2021 as a gain on debt extinguishment. Due to an extension of the program, no payments were due until August 2021, although
interest accrued during that period. Thereafter, the loan became repayable in monthly installments through April 2022 to retire the loan
plus accrued interest. As of December 31, 2021, we have made principal payments totaling $488,000 on the loan.

In December 2019, we entered into a Common Stock Purchase Agreement with Lincoln Park granting us the right
to sell shares of our common stock having an aggregate value of up to $16.0 million. Under the terms of the agreement, Lincoln Park made
an initial purchase of 1.5 million shares of common stock for $1.0 million at a purchase price of $0.6531 per share. Subject to various
limitations and conditions set forth in the agreement, we were able to sell up to an additional $15.0 million in shares of common stock,
from time to time, at our sole discretion to Lincoln Park over a 24-month period beginning December 2019. In consideration for entering
into the agreement, we issued 375,000 shares of our common stock, having a value of $277,000, based on the closing stock price at the
date of grant, to Lincoln Park as a commitment fee. We incurred an additional $90,000 in issuance costs. As
of December 31, 2020, we had completed sales under such sales agreement, having sold 22.2 million shares for net proceeds of $15.6 million.

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Our capital requirements will depend on many factors, including, but not
limited to, the rate at which OEMs and ODMs introduce products incorporating our LBS technology and the market acceptance and competitive
position of such products. Our ability to raise capital will depend on numerous factors, including the following:

If we are successful in establishing OEM or ODM 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 capital requirements to remain high as we expand our activities and operations with the objective
of commercializing our LBS technology.

Contractual obligations

The following table lists our contractual obligations
as of December 31, 2021 (in thousands):

* Open purchase obligations represent commitments
to purchase materials, capital equipment, maintenance agreements and other goods used in the normal operation of our business.

+ Minimum payments under operating leases included payments associated with
our forward-starting lease with a target commencement date of July 1, 2022.

Recent accounting pronouncements

See Note 2, "Summary of significant accounting
policies," in the Notes to the financial statements found in Part II, Item 8 of this Form 10-K.

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