# MICROVISION, INC. (MVIS) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MICROVISION, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/65770/000149315224008335/form10-k.htm
Accession: 0001493152-24-008335
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MVIS/
All MD&A years: /company/MVIS/mda/
Previous year: /company/MVIS/mda/fy2022/ (FY 2022)
Next year: /company/MVIS/mda/fy2024/ (FY 2024)

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.

22

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.

23

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

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","$ change","","","% change"],["(In thousands)"],["Revenue","","$","7,259","","","$","664","","","","6,595","","","","993.2"]]
[[/GREPCENT_TABLE]]

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.

24

Cost
of revenue

[[GREPCENT_TABLE]]
[["","","","","","% of","","","","","","% of"],["","","2023","","","revenue","","","2022","","","revenue","","","$ change","","","% change"],["(In thousands)"],["Cost of revenue","","$","2,772","","","","38.2","","","$","100","","","","n/a","","","$","2,672","","","","2,672.0"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","$ change","","","% change"],["(In thousands)"],["Research and development expense","","$","56,707","","","$","30,413","","","$","26,294","","","","86.5"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","$ change","","","% change"],["(In thousands)"],["Sales, marketing, general and administrative expense","","$","36,689","","","$","24,041","","","$","12,648","","","","52.6"]]
[[/GREPCENT_TABLE]]

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.

25

Bargain
purchase gain, net of tax

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","$ change","","","% change"],["(In thousands)"],["Bargain purchase gain, net of tax","","$","1,669","","","$","-","","","$","1,669","","","","-"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","$ change","","","% change"],["(In thousands)"],["Other income (expense), net","","$","5,510","","","$","799","","","$","4,711","","","","589.6"]]
[[/GREPCENT_TABLE]]

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.

26

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

[[GREPCENT_TABLE]]
[["","\u25cf","In August 2023, we entered into a $35.0 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 $35.0 million through Craig-Hallum. As of December 31, 2023, we had completed sales under such sales agreement, having sold 6.1 million shares for net proceeds of $15.5 million. As of December 31, 2023, we have approximately $19.0 million available under this ATM agreement."],["","\u25cf","In June 2023, we entered into a $45.0 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 $45.0 million through Craig-Hallum. As of June 30, 2023, we had completed sales under such sales agreement, having sold 10.9 million shares for net proceeds of $43.9 million. No further shares are available for sales under this agreement."],["","\u25cf","In June 2021, we entered into a $140.0 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 $140.0 million through Craig-Hallum. As of December 31, 2022, we had issued 8.3 million shares of our common stock for net proceeds of $81.8 million under this ATM agreement. During the quarter ended March 31, 2023, we issued 5.0 million shares of our common stock for net proceeds of $12.5 million under the agreement. The sales agreement was terminated in June 2023."]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","\u25cf","Perceptions of our ability to continue as a going concern;"],["","\u25cf","Market acceptance of products incorporating our technology;"],["","\u25cf","Changes in evaluations and recommendations by any securities analysts following our stock or our industry generally;"],["","\u25cf","Announcements by other companies in our industry;"],["","\u25cf","Changes in business or regulatory conditions;"],["","\u25cf","Announcements or implementation by our competitors of technological innovations or new products;"],["","\u25cf","The status of particular development programs and the timing of performance under specific development agreements;"],["","\u25cf","Economic and stock market conditions;"],["","\u25cf","The cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;"],["","\u25cf","Our ability to establish cooperative development or licensing arrangements; or"],["","\u25cf","Other factors unrelated to our company or industry."]]
[[/GREPCENT_TABLE]]

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.

27

Contractual
obligations

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

[[GREPCENT_TABLE]]
[["","","Payments Due By Period"],["Contractual Obligations",""," 1 year","","","1-3 years","","","3-5 years","",""," 5 years","","","Total"],["Open purchase obligations *","","$","10,414","","","$","320","","","$","-","","","$","-","","","$","10,734"],["Minimum payments under finance leases","","","-","","","","-","","","","-","","","","-","","","","-"],["Minimum payments under operating leases+","","","2,951","","","","6,819","","","","6,686","","","","8,527","","","","24,983"],["","","$","13,365","","","$","7,139","","","$","6,686","","","$","8,527","","","$","35,717"]]
[[/GREPCENT_TABLE]]

*
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.