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Edited Transcript of MVIS earnings conference call or presentation 2-Nov-17 12:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 MicroVision Inc Earnings Call

REDMOND Jan 8, 2018 (Thomson StreetEvents) -- Edited Transcript of MicroVision Inc earnings conference call or presentation Thursday, November 2, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Y. Tokman

MicroVision, Inc. - CEO, President and Director

* Dawn Goetter

MicroVision - Director, Marketing and Corporate Communications

* Stephen P. Holt

MicroVision, Inc. - CFO and CAO

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Conference Call Participants

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* Glenn George Mattson

Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research

* Henry James

State of Michigan - Analyst

* Kevin Darryl Dede

Rodman & Renshaw Research - MD & Senior Technology Analyst

* Rob Stone

Cowen - Managing Director, Sr. Research Analyst

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Presentation

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Operator [1]

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Welcome to the Q3 2017 MicroVision, Inc. Financial and Operating Results Conference Call. My name is Angela, and I will be operator for today's call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the call over to Dawn Goetter. Dawn, go ahead and begin.

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Dawn Goetter, MicroVision - Director, Marketing and Corporate Communications [2]

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Thank you, Angela. I'd like to welcome everyone to MicroVision's Third Quarter 2017 Financial and Operating Results Conference Call. In addition to myself, participants on today's call include: Alexander Tokman, President and Chief Executive Officer; and Stephen Holt, Chief Financial Officer. The information in today's conference call may include forward-looking statements, including statements regarding benefits under existing contracts and the negotiation of future agreements; our competitive advantages; progress with prospective customers; projections of future operations and financial results; product development, applications and benefits; availability and supply of products and key components; market opportunities and growth in demand; plans to manage cash used in operations; as well as statements containing words like believe, goals, paths, expects, plans, will, could, would and other similar expressions. These statements are not guarantees of future performance. Actual results could differ materially from the future results implied or expressed in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission under the heading Risk Factors relating to the company's business and our other reports filed with the commission from time to time. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in circumstances or any other reason. The financial numbers presented on the call today by Steve are included in our press release and in the 8-K filed today. Both are available from the Investor page of our website. The agenda for today's call will be as follows: Alex will report on the operation results, Steve will then report the financial results, there will be a question-and-answer session and then Alex will conclude the call with some final remarks.

And now I'd like to turn the call over to Alex Tokman.

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [3]

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Thank you, Dawn. Good morning. Thank you for joining us for a discussion of MicroVision's third quarter 2017 business results. We made important and notable gains in the past 3 months executing our engine plans, while advancing development programs with major technology companies. We believe these opportunities could significantly enhance our growth trajectory in the next 3 years.

Our current product portfolio is targeting 3 large market opportunities. First, mobility market, where our solution is a small, power efficient display engine that could be embedded inside mobile devices to create large-screen experiences without changing the portable device's small form factor. Second is the Internet of Things market or IoT, where our interactive display engine, which combines mobility display with 3D sensing could enable others to create a new family of smart home connected products with expanded contextual services, including search, commerce, media. And third, the 3D LiDAR market, where our solid-state 3D sensing LiDAR technology can target emerging applications in industrial, consumer and automotive segments.

Finally, we're developing revolutionary advances to our laser beam scanning or LBS platform, initially applying them to the display solution for a major technology company that could later be extended to all of the markets and engine solutions that we're targeting. We expect this new platform and the performance it will offer for both display and 3D sensing will further distinguish us from the competition. Let's jump to Q3 results.

First, a look at revenue. We are proud to say that third quarter revenue of $6.1 million was the highest revenue quarter in MicroVision's history. Steve will break out the elements that comprise it, but let me foreshadow that one of the main contributors was the delivery of production units of our small display engine to Ragentek. Let's start with this recap.

We started mass production shipments of this engine as planned in early Q3, and continued with on-time deliveries and quality throughout the quarter to our customer. Recall that Ragentek made sales announcement around their flagship VOGA Smartphone with our LBS projector at the end of June. They commenced shipments in late August through sales channels in China, Brazil and other countries. Ragentek has been pleased with the performance of our solution because of its thinness, low power, focus-free feature and overall quality, and they have already begun discussing with us a road map for potential future products.

We're in the process of finalizing orders with several new customers for a possible delivery as early as Q1 2018. Time-to-market, typically, is gated by the OEMs product launch schedules, which is a combination of product development, marketing planning and closing on transactional details. The general feedback from others echoes what we heard from Ragentek. People like our engine's mobile-friendly features. In terms of new enhancements, we also received feedback from prospective customers that a brighter version of the display engine would be very desirable. To achieve increased brightness requires new electronics, and we are accelerating internal efforts to develop new ASICs that will allow for a brightness increase for the second half of 2018. Let's now switch to the interactive display engine.

But before I jump into learnings and results, let me tell you a bit about this exciting market opportunity.

The number of smart speakers with artificial intelligence or AI digital assistants has grown significantly, since Amazon first introduced Echo with Alexa in 2014. Many, including Google, Microsoft, Apple, Tencent, Alibaba have followed with their own smart speakers, all with their own smart digital assistants. The point is, it's not about smart speakers for these companies, it's a battle of smart digital assistants, which they expect to extend into a variety of home connected devices and cars. It begins as a dedicated device, in this case a speaker. It serves as a front end for artificial intelligence digital assistants. And as a result, it acts as a gateway for digital services, such as search, media, communication, commerce. So where is the opportunity for MicroVision here?

Smart home AI products, today, provide voice-based contextual services. Through voice commands, a user can interact with the digital assistant to get basic information in real time: weather, music, news, et cetera. But interaction is very limited, because it is voice-only on most of these products. Our goal is to offer a new feature for such devices - an integrated compact display in 3D sensing solution that can create a new family of products for OEMs that enable expanded contextual services through a more natural visual presentation of content and touch interaction.

We have begun demonstrating this capability to OEMs, and we shipped the first evaluation kits of the interactive display engine as planned in early Q3 to select OEMs and third-party software developers to get their evaluation and feedback. Our interactive display engine is designed to output visible images from its display module and also to output 3D point cloud from its 3D time-of-flight LiDAR portion.

The 3D point cloud is often converted into gestures and other types events by software developed by OEMs and ODMS, integrating our engines inside their products. This 3D point cloud data conversion event is 1 additional step, which is not present for display-only applications, and it requires our customers to build the application software that interfaces our engine inside their product. The initial feedback we received so far made 1 thing clear: most customers will need extra time to create the software applications around our 3D point cloud for their products. And most of the companies with whom we're in discussion, stated that their products could not be ready for commercial introduction before the latter portion of '18.

Through this initial feedback, we also learned that Tier-A players, who are interested in products in this category [are] seeking a brighter solutions in such devices. Because these devices will operate in high ambient light environments such as a kitchen. As a result of both findings, we will continue to provide development kits to OEMs and third-party software developers this year for software applications development. We're also realigning our commercial launch schedule for this engine to account for time required for them to develop software applications and products.

While they use our interactive display engine development kits for the software applications development, we are working on the requested brightness enhancement feature and plan to incorporate it into our first-to-market interactive display engine. As a result, the commercial availability for that engine is now planned to be in the second half of '18. As I mentioned earlier, brightness increase is possible through new electronics, and we are creating new ASICs that will be used by both the interactive display and display-only engine to create multiple SKUs for different customers.

Moving on to 3D LiDAR engine status. Our team made stellar progress last quarter, and shrunk the original demo from CES by 8x, while doubling the 3D point cloud output to 5.5 million points per second, which is one of the largest seen in the industry today. All, while adding better software visualization tools to allow product developers to better access -- to better assess our 3D point cloud. As a result of high customer interest to evaluate our 3D LiDAR scanning engine, we plan to accelerate availability of a development kit for this engine from an originally planned time frame of second quarter of '18 to December of this year, almost 6 months ahead of the original schedule. The solid state 3D LiDAR development kit will possess important attributes sought by our customers. It has very dense 3D point cloud, as I just mentioned, very low latency and dynamic scaling performance that allows to trade-off between high spatial resolution and high temporal performance.

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Why are these performance features considered to be important you ask? 3D sensing particularly for automotive and industrial applications, typically loads, detects and classifies various objects before decisions can be made. If ADAS system has the ability to increase spatial resolution on the fly to better classify a given object, it's a very desirable feature. If ADAS -- on the other hand, if ADAS system tries to simply detect a fast moving object before it's been classified, then improving temporal resolution could become important. Our 3D LiDAR sensor can deliver such capabilities, which we believe gives us a real competitive advantage over others. We plan to use the development kits of our 3D LiDAR engine for exploring new products and application opportunities with OEMs in industrial, consumer and automotive sectors.

-- Switching gears to development programs now. Starting with our $24 million black box project with a major technology company

The goal of this agreement is to develop a high-resolution LBS display, and future production of MicroVision components for this display system. Once the development portion is completed, we expect to be providing a new generation MEMS, ASICs and firmware for the high-resolution display system. The technology company with whom we're working plans to produce the display engine to be incorporated inside its end product. We made good progress during the quarter and recognized $1.8 million in revenue for the work performed.

We're really excited. This is a really, really important opportunity for us and we're really excited about it. Because not only we are being designed into our customers very innovative and disruptive product, we're also in the process of creating a revolutionary high-resolution LBS platform that could be extended to all the segments we're pursuing; mobility, IoT, AR/VR, head-up display and 3D LiDAR.

Let's now switch to the other development programs that we've been executing on, starting with ADAS. Since last year, we were under contract with another major tech company to develop prototypes for their ADAS solution. I'm pleased to tell you that we completed all the deliverables to this customer in Q3, recognized revenue and received the final payments. We anticipate that after evaluating our solution, they will inform us about the next steps.

Regarding AR, in addition to ADAS, remember we had augmented reality project. The deliverables for another major technology company were also completed and we received all payments. This customer is also evaluating the demonstrators we delivered.

So in summary, I want to say that you can clearly see to improve our probability of success, we're pursuing 2 concurrent path to enter high growth markets: the engine business and technology licensing business. Since the launch of our engine business, we engaged and listened to multiple customers. Based on the voice of customer data, we're optimizing our engines go-to-market plan accordingly to ensure that our larger investments into production are timed with our customers go-to-market plans to minimize cash burn.

In summary, we continue to pursue orders for our commercially available display engine, and are accelerating the timing of the next generation brighter version. We have accelerated 3D LiDAR sensor program by approximately 6 months, and expect to have development kits available by the end of this year rather than second quarter of next year. And we are evaluating the commercial timing for the interactive display engine for 2018 to better align with customer products timing, considering the additional application software development time and other feature needs, such as increased brightness.

Given the time-to-market adjustment of the interactive display engine, we anticipate to be at the lower end of our revenue guidance of $30 million to $60 million by January 2019. But it is very important to note that we expect our revenue contribution over the same 12 to 18 months period from the $24 million development contract not included in the earlier engine guidance.

All the development programs we have engaged in over the past year have progressed very well. The solutions that we're developing with the largest technology companies should position us well for participation in high-growth markets.

I will stop at this time, and shift to Steve to review financials.

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Stephen P. Holt, MicroVision, Inc. - CFO and CAO [4]

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Thank you, Alex. As Alex mentioned, in the quarter we began recognizing revenue on shipments of our small form factor engine, in which when combined with the contract revenue on our April contract and 2 other contracts, gave us the highest quarterly revenue in company's history.

Third quarter revenue was $6.1 million, comprised of $2.3 million of product revenue from our small form factor engine; $359,000 of royalty revenue; and $3.4 million of contract revenue. The contract revenue breaks down as follows: $1.8 million from the April development agreement; and $1.6 million from the completion of the ADAS contract, the Phase II augmented reality contract and orders for prototypes and samples. Our total revenue of $6.1 million is 4x higher than last quarter's revenue of $1.5 million, and 52% higher than the $4 million we recorded for revenue in Q3 of last year.

Gross profit for the quarter was $243,000, that's down from $508,000 last quarter and $1.2 million in gross profit in Q3 of last year. The decrease is mostly related to the negative gross profit experienced on product revenue of $926,000, which was offset by gross profit of $1.2 million related to the development agreements and royalties. So let's look at the negative gross profit on product.

So first, let me say that the negative margin on the sale of our engine was in line with what we expected to see when production first starts and is similar to what we experienced in 2015, when we started MEMS production for component customers.

Q3 was when we began production of our small form factor engine, and costs were negatively impacted by 3 factors. First, during the quarter, -- first, during the start of the production, we experienced yields that were lower than what one would expect, once production increases and becomes more established. Second, depreciation and overhead, which are fixed costs were relatively high, given the relatively low number of units on which we recognized revenue. And third, during the quarter, we began MEMS production using a new lower cost process. And as a result, we wrote down the value of the old equipment to salvage value. That contributed about $150,000 to cost of goods sold in the quarter.

Now to operating expenses. Q3 operating expenses of $5.5 million were down $508,000 over last quarter. This is mostly due to resources that would normally be recorded in research and development being deployed on our April contract and as a result, were recorded in cost of contract revenue.

Our Q3 operating expenses were $205,000 higher than in Q3 of last year, mostly due to increased headcount and subcontractor expenses.

Our third quarter 2017 net loss was $5.2 million or $0.07 per share and compares to a loss of $5.5 million or $0.08 per share in Q2. The net loss in Q3 of 2016 was $4.1 million or $0.08 per share.

Now for operating cash flow. This quarter, operating cash usage was $5.7 million. Last quarter, we had cash generated from operations of $4.6 million due to the receipt of a $10 million upfront payment related to our April development agreement. In the year-ago quarter, we had cash usage of $3.8 million.

Cash and cash equivalents on hand at September 30 were $25.3 million. The cash balance reflects $13.5 million we raised in the quarter from the sale of 7 million shares of common stock. Backlog at the end of the quarter was $15.8 million, $4.3 million related to our first engine order, and $11.5 million for contract revenue, most of which is related to the April development agreement. Q2, I'm sorry. Q3 noncash compensation was $324,000. And depreciation and amortization was $536,000.

That concludes the financial results. We will now open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Glenn Mattson.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [2]

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A lot going on. Question on, I guess, the first question on Ragentek. I think you mentioned in the press release that you see the fulfillment of the orders over the next couple of months. Is that something, you mean to say kind of by the year end? Or how is that progressing?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [3]

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That's our current plan.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [4]

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Okay, great. And then the next key highlight, I think was that you talked about potentially finalizing orders for Q1 of '18 for the first engine, maybe can you talk a little bit more about that, is it multiple customers are looking at?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [5]

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Sure, Glenn. Basically, we're working with -- we expect more orders. And we are in the latter stages of closing several new orders for this engine with several customers of ours in Asia. We hoped to get it done before this call. But certain transactional details take longer. So we are working on several orders. And we hope that the timing of their products would be in line with the Q1 potential delivery.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [6]

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And how about magnitude, is it generally same size as the first 1? Or significantly bigger, smaller, or do you want to get into that?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [7]

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I can't comment on this. Just tell you there are a couple of smaller customers. There are a couple of larger customers. The order's proportional to the size of the companies.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [8]

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Okay, great. And then, it's interesting on the other 2 engines they kind of flipped a little bit, right? So now the LiDAR will be available before the interactive. Is it -- is the LiDAR, more the development kits right before the interactive?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [9]

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Glenn, what we learned over the past 3 months after we provided the first dev kits of the interactive display engine is that, every product that uses a LiDAR sensor will require for the OEMs and ODMs to develop application software that takes the output up our engine, which is 3D point cloud and converts it to the events that they need for their specific application. Because we cannot anticipate all the events and all the products that they will base on our engine. We provide 3D point cloud, then they have to process it and convert it to either recognition of different objects, or gestures, or whatever else that they need. So what we realized is the best thing for us to do is to get dev kits of the LiDAR engine a lot earlier than we initially anticipated. So they can start this groundwork earlier, which will hopefully shorten time-to-market for their products.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [10]

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Okay, that sounds good. And then curious on the other 2. The contracts that you completed, the ADAS and the AR. What's the next phase, next step, do you expect further development work? Or would it be, you think there could be contracts for product coming sooner than later?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [11]

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We're going to have to wait. We're obviously hopeful -- but we have to wait for their feedback. We just delivered at the end of the quarter. We were able to recognize and receive all the payments. But they just start evaluation cycle of what we provided. So we have to wait and let them -- give them a little time to give us feedback. But obviously, we're hopeful that something could come up.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [12]

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Okay, great. And Steve, on the black box contract, what do you think the revenue recognition will be over the next, say, 5 quarters on that? Is it just a pretty straight line or you have that built in at all?

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Stephen P. Holt, MicroVision, Inc. - CFO and CAO [13]

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Yes, it's hard to predict that. I think, if you look at what we did in Q1, and that went up again -- I'm sorry, in Q2 when it was 700,000, 800,000 and it was 1.8 million this quarter. Be more consistent with what we're seeing this quarter.

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Operator [14]

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Our next question is from Kevin Dede.

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Kevin Darryl Dede, Rodman & Renshaw Research - MD & Senior Technology Analyst [15]

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Steve, what do you think the share count will be at the end of the year?

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Stephen P. Holt, MicroVision, Inc. - CFO and CAO [16]

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I think we're at about 78 million shares.

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Kevin Darryl Dede, Rodman & Renshaw Research - MD & Senior Technology Analyst [17]

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Okay. And then, Alex back to the ADAS and AR and the further development and the feedback loop. How long you think that feedback loop is?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [18]

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It's a great question, Kevin. We -- it differs so -- it differs between different players with which we've engaged in the past. Sometimes it takes few months, sometimes it takes longer, sometimes it takes shorter. We just -- what we know for sure is what we deliver so far, they like. So we hope that after they test drive it internally and anticipate feedback. Again, timing is so difficult to predict because it's dependent. It's case specific.

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Kevin Darryl Dede, Rodman & Renshaw Research - MD & Senior Technology Analyst [19]

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Okay, fair enough. I'm sure you will keep us posted best you can. What's your take on Ragentek, fulfillment of orders in the field. I mean, what sort of end-customer touch are you aware of and what sort of distribution you think they are selling to?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [20]

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As you know, we're not involved in that, so it's hard for us to comment. What we know is, what we discover in the press. And we know that they launched the phone in the several channels in China, Brazil and several European countries. Some of the limited reviews that we were able to dig out looked positive. But again, remember, they started shipping at the end of August. So they've been in the market for only 2 months, right now. We would hope they, after 3, 4 months, 5 months, they will have good understanding of what this product can do. And our plan is talk to them about future generations and potentially reorders, that's our goal. But from what we've seen, anybody who saw the phone, who actually were able to hold in their hand and turn on, they said, it's very impressive phone. It looks very good. Looks like a million bucks. It has all the latest functionality. And it has our projector seamlessly integrated, so it's very, very thin. It actually doesn't even look like a projector phone. It looks like a normal phone.

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Kevin Darryl Dede, Rodman & Renshaw Research - MD & Senior Technology Analyst [21]

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So I'm glad you mentioned that, Alex. Could you characterize some of the other interaction that you've had with both the smaller and larger customers in Asia. Do you think they're moving to address a competitive threat that they see coming from this particular phone. And could you talk little bit to what you've seen from the Moto brand? I think you've said before you think it's a DLP-based technology. I just was wondering, if you could, sort of, characterize how you see other phone manufacturers looking at this. And what do you think the general appeal could be? Given that laser-based technology seems to be superior to DLP in this implementation?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [22]

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Yes, especially for embedded smartphone applications, Kevin, we believe this strongly. Because, one of the things people really like about small display engine is the fact that it's very, very thin, so allows to be embedded. The difference between Moto Z and the Ragentek for example. Our engine is directly embedded inside the cell phone without compromising its form factor. Moto Z is an attachment that is sold separately at [$259]. Our phone, the whole phone, I think at Ragentek, we don't know what exactly they're pricing, but we seen something like RMB 3,000, which is equivalent of $400 to $500, which is priced relatively attractive we think. But again, market will tell.

So fundamentally, it's the thinness, which allows you to basically have thin phone with projection. Second is the power consumption. That's the big one. Because our engine consumes less than 2 watts, which is, I don't know, fraction of the power consumption of the DLP and other technologies. So it can run on a single battery charge for up to 4 hours, continuously. And it's a desirable feature. And finally, focus free. Everybody hates the focusing wheel. So we know that these are 3 definitive competitive advantages we have. Obviously DLP has some merits for larger devices, where power consumption and form factor is not as important. But for mobility applications specifically, we believe we have specific differentiation that is valuable.

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Kevin Darryl Dede, Rodman & Renshaw Research - MD & Senior Technology Analyst [23]

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Okay. One last one from me. Could you just speak to the ADAS implementation for the 3D sensing cloud? And you talk to both spatial and temporal resolution. Could you offer us, sort of, an example of how you expect all of that to be incorporated in your device and the advantages?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [24]

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Absolutely, Kevin. So let's take a practical example, let's take the vehicle application. One of the key aspects of autonomous vehicles or ADAS, advanced driver assistance systems, is the fact, it has to be bulletproof. There is no margin for error. It has to accurately recognize what's in front of it, or behind it or at its side, and make decisions to keep the occupants of the vehicle safe. In order to do this, you need combining different technologies -- -- sorry, it's a combination of radar, visible light, ultrasound and LiDAR. LiDAR is the essential component to make this work, because until LiDAR, everything was available, but it was difficult. With LiDAR, you can actually have highest degree of confidence and safety. So we're operating in the LiDAR sensors space. Now the question becomes what do we really offer? And if you look at practical example. Let's say, a car is moving at very fast speed and there is some objects further out that is moving fast as well. In this specific scenario, the first priority of automobile is to detect, is this an object? Or is this just distraction or background -- kind of background noise? So to classify this, you would need a high temporal performance of the system. Our sensor, our 3D LiDAR sensor has ability on the fly to increase frame rate to basically freeze-frame something that is far out and moving at the fast speed, so the car can potentially detect, is this a real object or not? Now, once you detect something and you get closer to it, you need to classify it. You need to basically describe it and characterize it, so that the car can -- the system inside the car can make a decision what to do next. At this point in time, you don't need any high frame rate or high temporal performance. Now you need a high spatial resolution to properly classify this object. Is this a brick or is this a cat? And to do this, you need high spatial resolution. Our system automatically dials in highest spatial resolution, dials down the frame rate, because it's not important and it gives you the highest spatial description of this object, so it could be classified more accurately. So we believe this specific feature that we have in addition to very dense point cloud that is 1 of the highest in the industry will separate us from the crowd.

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Kevin Darryl Dede, Rodman & Renshaw Research - MD & Senior Technology Analyst [25]

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Okay. Just before I go, can you give us an outline of what you think you might be able to show everybody at CES in January?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [26]

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We typically try not to foreshadow, but our goal is to show enhancements in every one of those developments that we're describing today. We want to see the next generations versions and more advanced development kits from what you're seeing. So you're going to see very impressive performance on the 3D LiDAR system, on the, obviously, interactive display. And we're going to have some products with our display engine showcased as well.

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Operator [27]

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Our next question is from Henry James.

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Henry James, State of Michigan - Analyst [28]

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First, I would just like to get a clarification on the guidance. The $30 million to $60 million, did you say that, that was sort of still intact?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [29]

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The guidance is still intact, but what we're saying, Henry, because of the changes in go-to-market, commercial go-to-market plan for interactive display engine, we're going to target the lower end of the guidance. Because the engines -- remember, our original guidance implied you have, at least 2 out of 3 engines in the market. Now based on the feedback we're getting from Tier-A players, who are seeking the interactive display engine. They need some additional time to develop software apps. And they also asked for brighter engine. So combination of those 2 factors, point the interactive display engine the availability at some time in the second half. As a result of this, because we operate in -- essentially we take most of the revenue from first engine, we're going to shoot for the lower end of the guidance. However, when we gave the guidance, remember, we did not have $24 million contract that is going to provide new revenue or additional revenue to the revenue of the engine. So we expect to make up some with the development contract.

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Henry James, State of Michigan - Analyst [30]

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Okay. So the development contract then is a part of the $30 million to $60 million?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [31]

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Exactly. It was not originally a part of the $30 million to $60 million, absolutely.

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Henry James, State of Michigan - Analyst [32]

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Okay, okay. Now with respect to enhancements, I guess, for both the initial engine as well as the interactive engine. We're talking about increased brightness. And I was wondering, is that going to have an impact on the size of the engine and the power efficiency of the engine?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [33]

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There is always a trade-off. You're absolutely, right. There is always trade. Nothing in this world is free. You have to trade-off different things. For example, the brighter engine will be a little bit bigger, not much, but a little bit bigger, and it will consume more power. Now why would it be important or less relevant for the interactive display? Remember, for mobility, to get inside smartphone, you want to be the smallest and the lowest power, that's #1 requirement. Obviously. Brightness is important, cost is important. Once you're talking about interactive display, these are the devices that will be stationary on the desk, on the table, so they always will be power plug. So the power is less important and brightness becomes more important, because these device will be placed in very bright kitchens for example. So they are always going to be on. You're not going to be able to dim the lights. They always will have to be on in very bright environments. And because power consumption is less critical at this point in time and size is less critical. People, [will say] brighter. I don't care if it's small, give me something brighter, and I'm willing to live with slight increase in size and a slight increase in power. So it's a combination. Depending on applications and some people will prefer something that is brighter and don't care about increased power consumption and increased size. Some people prefer smallest possible, lowest power and they will be willing to live with lower brightness.

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Henry James, State of Michigan - Analyst [34]

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And so even for the sort of initial engine, but there is a desire for increased brightness there as well.

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [35]

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Absolutely. I mean, just think about what we've done. I mean, if you look at progression that we made so far over the past couple of years. We started with 15 lumen, then we moved -- we helped Sony to build a 30 lumen engine. We just introduced a 40 lumen engine. And our goal is basically to significantly increase from 40 for these interactive display applications, which also the same engine could be used for mobility application. And again, it's going to be a preference of specific customer, if somebody say, you know what, I'm willing to increase my phone size by 5% to accommodate something larger but brighter, we're going to have an option. If somebody says, listen, I absolutely have to stick with my form factor and I'm willing to live with lower brightness for these applications, we're going to have solution as well. So we kind of create choices instead of forcing people into 1 solution.

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Henry James, State of Michigan - Analyst [36]

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Okay. And then as far as the LiDAR sensor, and we just talked about, I guess, you just talked about the vehicle application. Is that something that you're expecting for that engine to be used in vehicles?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [37]

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So the development kit that we're targeting to have for the end of the year, this 1 going to be accelerated by 6 months is specifically to give to -- remember, it's going to output 3D point cloud with very high point density that could be converted into either very high resolution or very high frame rate, depending on the application. So our goal is to give this -- give these development kits and to put in hands of the industrial guys, the robotic guys, specifically. There's a lot of opportunities in industrial robotics. So we're going to find a couple of people to give it to them. We're going to also socialize it with the automotive guys. And we also heard there is some consumer applications, potentially they could be interested in something like this with dense point cloud, and the ability to capture LiDAR data for -- to add depth to the information that's already been captured by camera, 360-degree cameras for consumer application. And because there's so many opportunities in the LiDAR space, we just -- we wanted to determine what are the most important, what are the quickest to market applications we can focus on, so we can convert this into revenue as soon as possible. And to do this, we need to put development kits in the hands of these people in industrial, automotive and consumer space. Get their feedback, so we can then focus our resources on what is the -- has best ROI over the next couple of years. At this point in time, there's so many opportunities. We cannot just predict what is going to be the first application. What we know is if we give this tool and put it at the hands of the developers and OEMs, we will know shortly, what is more important than what is less important. And that's one of the main reasons why we're accelerating 3D LiDAR dev kit availability by 6 months to start this process a lot earlier.

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Henry James, State of Michigan - Analyst [38]

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And do you feel like your ability to do this variable latency and the trade-off between spatial resolution and temporal resolution has other applications beyond the vehicle?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [39]

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Absolutely. We targeted -- the 3D LiDAR sensor could be utilized by many different applications outside of vehicle. Because, obviously, come on, who are we kidding? We know that autonomous vehicles is not something that is going to happen overnight. It's going to take -- so our anticipation is that what we're developing could be used for 3D mapping. There are some applications today that require mapping the streets. What we are producing could be used for that purpose. We looked at multiple opportunities in the robotics space. I mean you've seen what's happening in robots today. I mean, even simple robots like in warehouses. I don't know, if you've seen this. Amazon bought this company that has these robots shoving around the cargo around the warehouses and they all have some kind of sensors to not to run into something else. So this is example, of an opportunity that could be utilized in something like what we're developing. And there are many, many others. There are physical robots that actually walk around or pulling something or security applications. So again, our goal is to provide dev kits as soon as possible, so we can get all the feedback, we will prioritize it and then our product decision will be based on where we're going to have the best business case first and how soon we can get it to market.

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Operator [40]

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Our next question is from Rob Stone.

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Rob Stone, Cowen - Managing Director, Sr. Research Analyst [41]

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I have a few questions. First, I wanted to ask on product gross margins, a little more color, you talked about typical challenges in ramping up the start of production. What do you target for regular run rate production, kind of gross margins on those engines? And in that, you expect to finish off Ragentek orders this quarter. So how do you think about getting to a good volume for overhead absorption? I assume that's driven by the new orders that you are negotiating, that's the first one.

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Stephen P. Holt, MicroVision, Inc. - CFO and CAO [42]

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We expect that the [indiscernible] to be 20%, 25% margin, once we ramp up production -- going with that. As far as what else I could say about margins is, we are making and expect to make costs and operational improvements. Things have been going well through October, so we were pleased with that. There are, obviously, manufacture can give you some variability and we're working to increase volume. But predicting a specific time frame about when we would the required volumes that's premature for us.

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [43]

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And just to point out, since Steve mentioned the operations and quality, since we start the production, the quality for the customers have been exceptional. We have no issues with anything related to quality and what we provided to Ragentek.

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Rob Stone, Cowen - Managing Director, Sr. Research Analyst [44]

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Okay. I wanted to ask with respect to your operating expense trend. You're going to be accelerating the delivery of SDKs and doing work on new ASICs for the brighter display engine. Some costs reallocation, as you noted from R&D to COGS on the contracts. So with all that on your plate, how should we think about sort of run rate trend for operating expenses in next few quarters?

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Stephen P. Holt, MicroVision, Inc. - CFO and CAO [45]

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For the next few quarters, I think where we are now, you look at the last quarter or so. That's kind of the range that I see, this quarter and last quarter, it's a reasonable range to be in.

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Rob Stone, Cowen - Managing Director, Sr. Research Analyst [46]

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But you would expect R&D to come back up some because of the fact that you completed a couple of contracts, and so those resources get to reallocated back to the R&D caption?

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Stephen P. Holt, MicroVision, Inc. - CFO and CAO [47]

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Yes, you got to remember on those, the ADAS contract and AR, the augmented reality contract. Those -- a lot of the cost for those have been balance sheeted over the past 6, 9 months. And because that was recognized on a completed contract basis, so that didn't have quite as much to do with the run rate being down. The $24 million contract is the one that really is contributing to the OpEx being down. And that project's going to go on for another, 3, 4 quarters. So -- or even more than that, 5, I think. So it will keep being, keeping the OpEx lower for that period in time.

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Rob Stone, Cowen - Managing Director, Sr. Research Analyst [48]

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Okay. Could you provide any color on inventory? There was a fair size sequential increase, sort of the breakdown of?

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Stephen P. Holt, MicroVision, Inc. - CFO and CAO [49]

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Yes, the biggest part of that is that we finished production in September. We completed some units and then we shipped those to Ragentek, but they were in transit. And so they reflect that inventory and that's the reason there is a big bump up. It was just finished but it was in transit.

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Rob Stone, Cowen - Managing Director, Sr. Research Analyst [50]

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Finally, this question is for Alex, I guess. So you mentioned the size and power consumption trade-off on the brighter display engine. Can you comment on what you think that's going to cost you as far as the development effort for new ASICs? And then how much that affects the cost of the engine when it's done?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [51]

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Good question, Rob. We really -- there's a couple of things. First of all, cost of new ASICs would be, specifically to boost the brightness, will be under a million dollars. We already invested in ASICs for other reasons. Our ASICs investment typically is leveraged across all the products that we are offering. So for example, Steve spoke over the past 6 months, we made some investment into ASICs to have 3D LiDAR and other technologies. The same investment will be used by the display engine, by the interactive display engine, and by the 3D LiDAR engine. So it's a one-time investment, serves all purposes. In terms of the trade-off, we anticipate to be honest with you, slight increase in size and some increase in power, but it's a fraction, literally a fraction of what the competition specifically DLP can do. So we can dial up the brightness pretty high, perceived brightness, while let's say increase the size of the engine by no more than 10% instead of doubling it like most people do, when they need to get to higher brightness. And the power consumption still stays within the mobility acceptable regions and it doesn't exceed more than a few watts.

That's the advantage. So the only trade-off that few people will have to make: do you really want to have really super thin device, how important is that? Are you willing to put a slightly larger battery, which cost a little more? And that's a decision up to them and people will be able to choose what they prefer.

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Rob Stone, Cowen - Managing Director, Sr. Research Analyst [52]

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But on the cost of the -- you mentioned development cost and I see it spread across your multiple engines. But is the end result an OEM going to pay higher price for a brighter engine as well?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [53]

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Higher engines, it's also actually a very good question. I'm glad you asked. To get to higher brightness, we need to increase number of lasers in the engine, so it does increase cost of that. And again, it's a trade-off that an OEM will have to make. They will have options of going with something brighter. This is little bit more expensive, little bit bigger and consumes a little more power versus something that is very thin, more cost-effective and low power and give up some of the brightness. It's a definite trade-off but it's a trade-off that could be made by cell phone guys, the same trade-off cannot be made with any other technology to achieve brightness as we're targeting.

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Rob Stone, Cowen - Managing Director, Sr. Research Analyst [54]

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Okay. So I realized it may be premature, but you gave us a sense of proportional increase in size and power. So how much higher price point would it need to cover the additional components?

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [55]

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We, obviously, don't provide this information. So again, today, the current engine has 3 lasers for display. We will need to go to 5 lasers for display. And if somebody wants to have interactive display engines with different brightness. The lower brightness would have 3 visible light lasers and 1 infrared. On the other hand, the brighter version will have 5 lasers, 5 visible lasers and 1 infrared. So it's basically the difference is how many lasers you want to put in the engine and how much brightness you need to dial up.

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Operator [56]

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I will now turn the call over to Alex Tokman for closing remarks.

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Alexander Y. Tokman, MicroVision, Inc. - CEO, President and Director [57]

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Okay. Thank you. Look, we had a strong third quarter and plan to follow on with another strong quarter. As you can see, clearly, we are pursuing 2 concurrent go-to-market paths in order to increase the probability of success. Building the engine business to target mobility, IoT, 3D LiDAR markets, and creating new technology, licensing business opportunities for these and other markets. We're actively listening to market and customer feedback and optimizing our go-to-market strategy for engines to align better with customer needs. The development programs we have engaged in have all progressed very well and the work we continue to do with major global technology leaders, we believe positions us well for participation in high-growth markets.

I would like at this time, to close this call. And on behalf of Dawn, Steve, thank you for your continued support and for your participation.

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Operator [58]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.