MicroVision - Q2 2024

Transcript

Operator (participant)

Good afternoon, and welcome to the MicroVision Q2 2024 financial and operating results conference call. Should anyone require operator assistance at any time, you may press star zero on your telephone keypad. At this time, all participants are in a listen-only mode. At the end of today's presentation, there will be an opportunity to ask questions via a chat line. Investors can submit their questions within the meeting webcast by typing them into the Q&A button on the left side of your viewing screen. Analysts who publish research may ask questions on the phone line. For analysts to ask a question on the phone line, please press star one on your telephone keypad. Please note, this event is being recorded. I would now like to turn the conference over to Drew Markham. Please go ahead.

Drew Markham (Head of Investor Relations)

Thank you, Tom. Good afternoon. I'm here today with our CEO, Sumit Sharma, and our CFO, Anubhav Verma. Following their prepared remarks, we will open the call to questions. Please note that some of the information you'll hear today will include forward-looking statements, including, but not limited to, statements regarding our customer and partner engagement, market landscape, opportunity, and program volume and timing, product development and performance, comparisons to our competitors, product sales and future demand, business and strategic opportunities, projections of future operations and financial results, availability of funds, as well as statements containing words like intend, believe, expect, plan, 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.

Anand Balaji (VP of Industrial Technology Equity Research)

We encourage you to review our SEC filings, including our most recently filed annual report on Form 10-K and our quarterly reports on Form 10-Q. These filings describe risk factors that could cause our actual results to differ materially from those implied or expressed in our forward-looking statements. All forward-looking statements are made as of the date of this call, and except as required by law, we undertake no obligation to update this information. In addition, we will present certain financial measures on this call that will be considered non-GAAP under the SEC's Regulation G.

For reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure, as well as for all the financial data presented on this call, please refer to the information included in our press release and in our Form 8-K, dated and submitted to the SEC today, both of which can be found on our corporate website at ir.microvision.com under the SEC Filings tab. This call will be available for audio replay on the investor relations section of our website. Now, I'd like to turn the call over to our CEO, Sumit Sharma. Sumit?

Sumit Sharma (CEO)

Thank you, Drew, and welcome everyone to this review of our Q2 2024 results. I would like to start by updating you on our automotive OEM engagement for RFQs and new potential customer development explorations. Second, I will update you on our progress and sales opportunities for industrial segments. Finally, I will update you on the market outlook on what we're seeing ahead of us. Let's dive in. The best long-term opportunity for our technology and our company remains with the automotive OEMs focusing on ADAS Level 3 and Level 2+ features for passenger vehicles. We remain engaged in 7 RFQs with automotive OEM for passenger vehicles. MAVIN and MOVIA S are engaged in all conversations. The pace for reviews and decisions remain with the OEMs.

Anand Balaji (VP of Industrial Technology Equity Research)

Start of production for these high-volume programs are targeted towards the end of this decade, so decisions are pushing out into later this year. We are cautiously optimistic about these targets to decisions, but remain aggressively engaged. A new era of engagement has opened up with multiple OEMs across Europe and U.S. OEMs are engaging with us to investigate the opportunity for a more strategic hardware and software exploration in developing a more customized MAVIN and MOVIA S design for L3 products. We are actively working on this as it represents near-term revenue opportunities, as well as delivering a more custom sensor for their B-sample needs for RFQs. We are working on exploring integration of MAVIN behind windshield, as well as a new 180-degree field of view MOVIA S sensor that would integrate into a car body with small bumps resembling the current camera module bumps.

These are exciting opportunities, and I see them as potentially a faster path to RFQ decisions. Some of these e-engagements are for RFQs that are targeted for 2025. I'm sure investors are wondering why we continue to stay in the race and what evidence do we have that we will win? I will offer this: Our products are exactly what OEMs are looking for. We are a couple of years behind... We were a couple of years behind to get to the evaluation point because we did not have the capital to invest heavily early. But with our acquisition in Germany, we are all caught up. The MOVIA products series was developed by our Germany team for a German OEM after they delivered a SCALA 1 sensor to this OEM.

Our MAVIN sensor was developed on our MEMS technology based on all the specifications OEMs required and to be at cost targets. We are aggressively working with OEMs on adoption. We are in a cycle where OEMs have slowed down in their programs. We are at the same evaluation level as our competition. In the meantime, our competition has really faltered. One of them is focused on 1,550 nanometer, which is inherently the most expensive high-power technology, and it's taking billions to get to this point and will cost billions to get the cost down to OEM targets. None of their partnerships have materialized to volume production.

Our other main competition in 905-nanometer launched a first-generation product that ended up costing the Tier 1 more than $240 million in losses to bring to market and has been abandoned, and they're starting with a new technology node for second generation and are no further along. Combined, these companies have spent billions of dollars to capture the market, and they're not dominant because they did not deliver any product or have the technology. This is our competition. There is demand from OEM, and it may look like we are behind in the race, but we're not. In EU and North America markets, we have no competition from the Chinese LiDAR companies since Western LiDARs are not being adopted in China, and Chinese LiDARs are not being adopted in the West due to the closed software background.

So I totally understand the frustration, but we need to be focused and patient as things are clearing up. But inferior products spend billions, and marketing should not be the reason to fall out of the race. Best products will always win. We're spending moderately compared to all our competition and remain competitive as they further falter. We will be there as the stable company with the technology to deliver. We are in a race and may not be first yet, but have the strongest team and product portfolio. We must be resilient and see the race through. Meaningful partnerships are up for grabs in the very near future, but revenues from these partnerships are still four years away as OEM production cycles are long. The solution to the revenue problem lies with our industrial strategy.

Now, let's move, let's move to update our industrial sales opportunities and progress we've made there. Sales in the industrial segment are important, as we expect they may bridge the gap for our, from now till automotive OEM revenues come alive later in this decade. We have made good progress on this in identifying segments that will support these opportunities. We have been working on developing partnerships in the heavy industrial market segment that has the potential for sales of an estimated 10,000 to 30,000 units per year, starting next year. This segment would leverage our currently available MOVIA L sensor and include a modified version of our perception software for this specific segment. Again, our product is well suited for the space in which humans work in proximity with heavy equipment operated by humans.

These machines are now planned to integrate ADAS features developed for automotive in their industrial environment. Our advantage here is speed to market with an automotive-qualified product for the industrial market, with a big library of software to enable our potential customers. The mature software we have to offer, integration, and the small solid-state 3D LiDAR is exciting for the industry. We are going aggressively after this market segment. We are forecasting meaningful revenues from this segment starting 2025. Again, I'm sure investors are wondering why we continue to stay in the race with industrial and what evidence do we have that we will win? I will offer you this. The grandfather in the industrial LiDAR market is SICK AG. No one has come close to their annual revenue stream. They do this with effectively a line scanner with up to four lines.

Today, we have a 3D sensor with much higher resolution and better cost, in addition to perception software we will offer to our customers. We can disrupt this market and take a sizable chunk, which we intend to. The LiDAR world is generally facing headwinds, but it is a race for the more established and reliable markets in EU and North America. We must have resilience to make it through. We have the best products by far with our near eye technologies. I'm going to keep my prepared remarks brief today, as we have received a large list of questions from our shareholders, and I would like to address that as the main narrative. I would like to now turn off the call to Anubhav to talk about our financials. Anubhav?

Anubhav Verma (CFO)

Thanks, Sumit. Auto OEMs, Tier Ones, and ADAS companies in the U.S. and E.U. continue to experience some market pressure, driven primarily by stiff competition in terms of both technological innovation as well as cost from Chinese players. Second, not being able to generate return on investments made in the last several years due to weaker than originally anticipated demand for EV and slower adoption of autonomy levels. The OEMs in U.S. and E.U. continue to be under pressure to produce vehicles with advanced ADAS features, powered by multimodal sensors, including vision, LiDAR, and radar-based systems to improve safety and autonomy in order to compete with their counterparts. But given the cost pressure and macroeconomic climate, OEMs are expecting downstream LiDAR suppliers to, A, bear the cost in the initial years, even when the volumes are low at the start of the production.

Anand Balaji (VP of Industrial Technology Equity Research)

And secondly, have diversified revenue streams from non-automotive to sustain the company during the multi-year ramp-up phase for automotive OEMs. This is primarily the reason why LiDAR companies are under pressure from investors and markets, especially LiDAR companies that have announced nomination wins or serial production awards from OEMs. The current business challenge for all LiDAR players is to accept low volume, low revenue projects from auto customers in the near term, and tap into other industries for the revenue needed to sustain these initial years to emerge as one of the few standing LiDAR companies. We believe that some of our peers have untenable capital structure, as well as unsustainable business model, coupled with excessive OpEx run rate of over $300 million a year. There's a huge demand for LiDAR in the second half of this decade, which is being driven by the global competition and marketplace.

However, only a few companies who are fiscally disciplined will be able to withstand this low point in the cycle and come out the other side. We believe MicroVision is very well positioned to capture this demand and remain one of the few standing LiDAR companies due to the following four factors. Number one, as Sumit described, we have the most relevant and strategic product portfolio, with products able to solve the complex technological problems at attractive price points for customers. Number two, we're focused on our efforts on big volume passenger car projects from OEMs. Making the right selection is very important for us. We want to commit resources for large volume OEM projects, as that will be the best use of our capital. Number three, we have extended our runway and further streamlined our cash burn.

We reduced our OpEx in Q2 to now focus on MAVIN and MOVIA, with perception software inside. This was a strategic move to conserve resources for these products and terminate all expenses and projects related to MOSAIK and sensor fusion. Number 4, in the short to medium term, we have to pursue significant revenue streams and partnerships from non-automotive industrial channels with shorter sales cycles, such as the heavy equipment vertical, to reduce the dependence on low volumes in the automotive in the initial years. This is very essential, as all serial production revenue will be material only with the economies of scale, which won't happen until later this decade. Now, let's review our Q2 financial performance. For the Q2, we recorded revenue of $1.9 million, slightly ahead of expectations.

Revenue in the Q2 was primarily attributable to the sale of our sensors to a leading agricultural equipment company for industrial applications. Most of the revenue in Q2 was from non-automotive customers. This is in line with our strategy to focus on revenue streams from non-automotive customers, while revenue from automotive customers ramps up. From a gross margin profile standpoint, on an adjusted basis, after adding back the amortization of the acquired intangibles, the gross margin was approximately 39%. We continue to differentiate ourselves significantly from our peers, who either have upside-down negative gross margins or near zero margins. This demonstrates our unique business model, and we believe this will further entrench us as one of the last standing American LiDAR companies focused on the U.S. and EU markets. So let's talk about our expenses.

Our expenses have trended down since Q1, primarily due to the reductions in force we implemented to focus the company on MAVIN and MOVIA, driven by perception software offerings, and away from MOSAIK and sensor fusion. We had approximately $22 million of R&D and SG&A expenses in the Q2. Now, this includes, number one, $3.2 million of one-time, non-recurring restructuring charges, including severance, et cetera. Number two, $3.4 million of non-cash charges related to stock-based compensation expense. And number three, $1.4 million of non-cash charges related to D&A. After normalizing for these charges, our new OpEx run rate, including R&D and SG&A, is now $55 million to 60 million per year. These actions were taken in line with our business strategy to focus on near-term and long-term revenue-generating opportunities, which are in the auto and industrial markets.

For the Q2, $18.6 million cash was used in operating activities, which is in line with our previously communicated expectations. We expect this number to come down by 20% to 25% on a run rate basis once all the restructuring charges have been paid out in the Q3. In Q2, we incurred a non-cash impairment charge on our MOSAIK software asset acquired as part of the Ibeo acquisition. Please keep in mind, this is a one-time, non-cash charge to impair the carrying value of the software asset acquired from Ibeo. We impaired this asset as we decided to strategically conserve the cash to focus on perception software driven products, which are MAVIN and MOVIA, for the auto and industrial customers.

The perception software asset, which has the highest carrying value, remains a key differentiator and has significant competitive advantage for our products, both MAVIN and MOVIA. To remind our investors, we continue to show financial discipline with our cash burn being within our expectations and on a healthy trajectory, including extended runway. As expected, Q2 CapEx was $0.2 million. Our balance sheet as of June 30, 2024, we have made all payments, including the last payment for the Ibeo acquisition. Our total liquidity was $179 million as of June 30, including $57 million of cash and cash equivalents and investment securities, and $123 million availability under the current ATM facility with Deutsche Bank, Mizuho, and Craig-Hallum.

With the new ongoing OpEx run rate of $55 million to 60 million, we believe we have sufficient liquidity, along with our ATM facility, to have an adequate runway. MicroVision continues to stand out and beat competitors in terms of maintaining a clean capital structure and one of the lowest cash burns in the industry, with a highly talented pool of approximately 160 engineers in the U.S. and Germany. We sold approximately 5 million shares for net proceeds of $5 million under the current ATM facility in the Q2. With a new cash burn rate and given our cash on hand, we are well situated to deliver to our customers. For the rest of 2024, we believe we're on track for $8 million to 10 million revenue from the following revenue streams.

1, revenue related to the sales of LiDAR sensors to both automotive OEM and non-automotive customers. 2, direct sales channels that include sale of our hardware and software to non-automotive customers that include forklifts, warehouse automation robots, agricultural and mining equipment companies. 3, NRE, or one-time development fee for customization projects for customers in both automotive and industrial. From a cash burn standpoint, our new annual OpEx, including R&D and SG&A, is expected to be between $55 million to 60 million per year. We believe we have all the necessary engineering resources to deliver on our existing and anticipated customer projects. To summarize, we're really excited about 2024 and beyond. Operator, I would now like to open the questions, open the line for questions.

Operator (participant)

Thank you. At this time, we are conducting a Q&A session. Investors can submit their questions within the meeting webcast by typing them into the Q&A button on the left side of your viewing screen. Analysts who publish research may ask questions on the phone line. For analysts to ask questions on the phone line, please press star one on your telephone keypad now to join the queue. We do ask, if listening on speakerphone today, that you pick up your handset while asking your question to provide optimal sound quality. Once again, for analysts to join the queue to ask a question, please press star one on your telephone keypad. Please hold a moment while we poll for questions. Our first question is from Andres Sheppard from Cantor Fitzgerald. Andres, your line is live. Please go ahead.

Anand Balaji (VP of Industrial Technology Equity Research)

Hey, guys, this is Anand on for Andres. Thanks for taking our questions and congrats on the quarter. I was wondering, is there maybe some sort of timeline you might be able to give us on an OEM win? I know, this was talked about, and, is there something we could think about maybe for the second half of this year, or is this something for next year? I mean, none of us have a good foresight into this, but, you know, any color would help.

Sumit Sharma (CEO)

I think, thank you for the question. If I was to just go by, you know, what the OEM shared with us, you know, it's a second half decision. But as I said, right, we're cautiously optimistic because, as you know, their launch cycles are in, SOP, start of production in 2028, so delays could happen. And so far, you know, there's lots of things changing within the OEM themselves and their strategies. Most of the delays are not related to us, you know, so, we're hopeful and cautious, about, you know, what they're saying, and that's what we're sharing, that, you know, you know, second half of this year is what they have indicated.

Anand Balaji (VP of Industrial Technology Equity Research)

Gotcha. And, I guess with respect to the seven RFQs, are there any of them that you wanted to highlight that you're excited about, or if there's something that you could potentially highlight to investors at a, as a catalyst for the company, maybe this year or early next year?

Sumit Sharma (CEO)

What I find interesting is all of them, first of all, are for passenger vehicles. If I think about 7 of them, right, would I say that, you know, there are 2 or 4 of them that are, that we covered? Yeah, it's the ones that have the highest volume and where the integration gives MAVIN, which has got the lowest profile, the biggest advantage. You know, so of course, you know, those we care about. You know, so if you're gonna spend this much, and you have to wait 4 more years for big revenues, they should be big enough. That's great. Out of the 7, some of them are for models that are smaller, you know, they have to integrate in a headlamp, and, you know, it's kind of like a small volume part of it.

Anand Balaji (VP of Industrial Technology Equity Research)

So they're all equal, right? I think, you know, we want to win all of them, right? But there are certain of them that are high volume that, of course, we put a lot of effort into.

Gotcha. Gotcha. Appreciate the color. I guess, switching gears, maybe a question for Anubhav, a little bit on liquidity. I think you had on your presentation about $60 million in cash, and you've got the ATM as well. I was wondering how you're thinking about your cash burn and your runway for the next, for the rest of the year?

Anubhav Verma (CFO)

Yep. Thanks, Anand. So the way I think the, the reductions that we did in the Q2, are actually very strategic because they have brought down our OpEx. And as, as I mentioned, right now, our, run rate OpEx, including R&D and SG&A, is between $55 million to 60 million. As it is, we already have, a year worth of cash, and obviously, we have the ATM on top of that, to tap into accordingly, as, you know, as the market opportunity presents itself. So we feel pretty comfortable, in terms of having the resources to meet our, capital needs, for the next 12 to 18 months.

Anand Balaji (VP of Industrial Technology Equity Research)

Got you. Sounds good. That's, that's very helpful. Appreciate the color. Congrats again on the quarter. That's it for me. I'm happy to pass it on.

Anubhav Verma (CFO)

Thanks, Anand.

Operator (participant)

Thank you. I will now turn this call back over to Anubhav Verma to read questions submitted through the webcast. Thank you.

Anubhav Verma (CFO)

Thanks, Tom. All right, so the first question is: I'm a newish investor and started following the company and LiDAR space only recently, a few years ago. I'm still confused by what everybody, everybody says about the 905 nanometer products versus the 1550. Help me understand why you're gonna win, and I should stay invested in the stock.

Sumit Sharma (CEO)

I'll take that one. Thank you for the question. It's actually a very, very good question, and it's about the right time to talk about it because a lot of things are coming to a head. So just a little bit of context, since you're newish in this space, so perhaps you've done this research, but I'm just gonna repeat it for some that may not. So if you think about, you know, this whole purpose of 905 nanometer, 1550, what benefits in one versus the other, right? Depending on the audience, they'll say different things. But here are the facts. The only automotive LiDAR that has shipped in volume was Valeo SCALA. Everybody knows this. SCALA 1 was done by the Ibeo guys here in Hamburg, and SCALA 2 was followed on by them.

Anand Balaji (VP of Industrial Technology Equity Research)

It's the only thing that shipped in volume. Let's be clear about that. That's 905 nanometer, fully qualified with a laser that the automotive customers know. They know the cost structure, they know the performance, they know everything about it. What they care about is the steering mechanism, which is where we come with MEMS, where we can do a wide field of view and far into low resolution, whereas others spin a piece of glass called a prism, right? 1550 nanometer certainly can do a lot. You can do a continuous wave LiDAR with that. You can get a velocity, you can do a time of flight LiDAR with that, like somebody else does, right? And there are other reasons to do it, because they wanna have higher sensitivity on the detector. But the overall system is much more expensive.

So if you think about, you know, the structure that we have, the architecture that we have with our 905 nm laser and our MEMS and electronics, it is the lowest cost, lowest form factor system and low power, whereas a 1550 nm is significantly more power, regardless of what people say. On top of that, the material physics that's over there in 1550 nm requires billions of dollars of investment to bring it down to the level what a laser diode costs us right now. So you can imagine you're going into an industry that wants to sell in the millions, and they're not known for paying premiums. They pay premiums on software, they don't pay premium on hardware.

So you're best off listening to the OEM, seeing where they're going, and there is a very nice laser that's been qualified, that's already there. So we chose to build our architecture around it, because we know a lot about that laser, and so does the OEM base and the only competitor that's ever shipped anything. So I think that's, that's the key thing to walk away on. A LiDAR system with a 905 nanometer laser can be made eye safe. I mean, this is. There's a whole body that does the testing for that, right? There's standards written for that. There's no doubt. And the only company that's ever shipped LiDAR in volume into automotive is 905.

So I think in general, I believe 905 nanometer is the right choice for the automotive space, for high volume production long term. You have to run this product for a decade, so you wanna have the most stable system that does not keep requiring hundreds of millions of dollars of investment to have, you know, you know, new laser sources to be developed, new sensing sources to be developed, and new aids to be developed. So, that's we believe, that's we've invested, and clearly, if you look at what the OEMs respond to, is that, the 905 nanometer technology node.

Anubhav Verma (CFO)

Thanks, Sumit. Let's take a second question. I understand that no deals with OEMs have been announced unlike some of the competition. I am a believer in the company and management and trust that they walked away from some deals as they were not high volume. I also understand the focus to bring in near-term revenue from the industrial markets. What has the management done since April 1, 2024, to increase the adoption of LiDAR? How can I evaluate the progress that's being made in this direction?

Sumit Sharma (CEO)

I'll take that. That's a good question, and I'll answer it in two sections. One is gonna be, of course, our industrial space, the other is gonna be on the automotive side. So on the industrial space, what we've done, you know, we've been doing consistently, right? But since you're saying April first, we're focusing on key accounts, meaning that we've identified a market segment. We know the top people in there, in that space, I would say, that represent 70% of the market share for their product in that space, and we're engaged with them directly. So we aggressively work with them on key strategic accounts.

Anand Balaji (VP of Industrial Technology Equity Research)

So instead of thinking about industrial sales as sounding like onesie, twosie here and there, like some other what competitors do, that requires a huge OpEx, we're focusing our, you know, you know, our treasure on our engineers and a very small effective sales team that targets these key customers. And for them, we are customizing our product, so to speak, with the software, to demonstrate to them how we can really solve the problem. So we're not really selling them a LiDAR, we're selling them a solution. And software discussions, I can tell you this, because I've been to all the key customers myself, with my team. They are pretty deep into it, right? What really compels them to move forward is the software.

Imagine you are in a heavy industry space where you have humans operating machines that can hurt other humans, slow speeds moving around, and volumes in the annual range of something, you know, somewhere between 10,000 to 30,000, if you can imagine. Because they would be able to put them into new products going forward, but also retrofit it to other equipment they've sold over the years, because some of their equipment last more than a decade, so they have an install base. So when you think about these volumes, it's pretty compelling. And somebody actually told me this statistic recently, that about 100 people, actually one of my board members told me this, about 100 people die a year in this space. So think about it, a person dies in this space once every three days.

This is a problem they want to solve. This is or, dies, and of course, you can think about injury as well. So this is a real problem to solve, and what compels them is not just the LiDAR, LiDAR, LiDAR, LiDAR. That's there. Absolutely, that's a piece of hardware. But it's the software that was created for the automotive OEM, which we call the perception software, and features like automatic emergency braking or, you know, ACC and others, right? Free space. That allows them to do things in their field of view automatically from our LiDAR, so they don't have to write huge amounts of code or spend a lot of money developing code on top of the LiDAR that could take years.

I think, you know, some of the videos that we have published recently about this, we've been, you know, very active about that. Our team works on it. We collect some videos. You know, those are actually part from real demonstrations that we published there. But it kind of shows you the kind of environments you're working in. And now imagine that happening a 20 hour shift per day, 7 days a week, just in America by itself, right? And then imagine if America and, you know, parts of Europe and parts of Asia. So it's a big market. There's a big problem, and that's we're focused on. And the way we're turning that over is focusing on key accounts, not instead of what, you know, casting a wide net.

On the automotive OEMs, you know, after what happened in Q1, you know, it really was not a surprise, but, you know, we'll talk a little bit more about it if we have to. But just in general, right, we chose to engage more directly, me personally also, with the OEMs that we are in the RFQs and try to figure out from them or their executive teams, of where this is all headed, so we're more intimately connected. What's come out of this is that, you know, RFQs are kind of, like, generic, right? That's how you think about it, like, you know, it's an RFQ. But what they're really looking for is something a little bit deeper.

I mean, the best way to describe it is what they're looking for is a more of a deeper collaboration with somebody special in more of a white box approach. So effectively, we would work in a collaborative manner because there's things that we can do in our hardware that would enable them and give them an advantage, reducing the cost of their system, and it would not be, you know, that incredibly expensive to develop. But on top of that is the perception software we have that allows them to have an advantage. Now, this is kind of a tricky thing, right? That's IP, but we wanna make sure that we actually control our IP going forward and the value that it creates for our investors, but we also need a partnership. So I think you have to look deeper. You have to...

You know, when they open up and say, "You know what? We want to explore a white box approach with you," and of course, and this has just happened in the last quarter, you know, we're involved in that to make sure that we support them as they need to explore what their product would be. You know, software is such a big deal now that no one team can develop all the software. You know, if you think about in a ICE engine, you know, ignition control, that's not done by an OEM. They probably go to Bosch or somebody else that does the ignition control. So all that software is their IP. So ultimately, the space is gonna go back to that. So our perception software is valid. It's very, very valuable.

The hardware install base is what this perception is gonna enable, and OEMs starting to look at it as a more customizable feature that suited for them. I think that's what we're focusing ourselves, and that's where we're giving ourselves confidence that we are really competitive, still competitive in this space.

Anubhav Verma (CFO)

Thanks, Sumit. Next question is: Seeing the Hesai news this week has started, has us started to feel worried. Hesai is announcing new design wins with GM, Ford, and prominent European automotive brand, and announcing that it has secured design wins with 18 OEMs and tier one suppliers globally, covering approximately 70 vehicle models as of Q1. The company also holds mass production agreements with 6 of the top 10 Fortune 500 automakers. We know that Sumit has never said that he's targeting the Chinese market, but it leaves us concerned as to what the future holds for MicroVision if we do not get a similar announcement.

Let me take this question and, you know, give you a financial perspective of this.

Anand Balaji (VP of Industrial Technology Equity Research)

I think we have seen Chinese LiDAR companies clocking almost over $250 million in annual revenue, selling over 220,000 LiDARs every year. Yet, the U.S. markets and the investors do not give them any credit. They are trading just barely over their cash value, which I think is a very important testament, and a telling sign that the U.S. markets and investors do not have the confidence or the comfort in their business model. And remember, this is not the first time that this has happened. This is a very important area because governments are getting involved, and all the U.S. and E.U. OEMs are in the middle of it.

As recently as a few days ago, the U.S. Commerce Department came out with an article to propose to bar Chinese software in autonomous vehicles in the U.S. Now, that is a very significant shift for everybody who had been using Chinese LiDAR in the U.S. and E.U. so far. So data privacy is a very clearly a very important concern, and I feel that this is why there's going to be a barrier between the U.S. and Chinese ... where obviously we cannot go sell in China, and the Chinese LiDAR players will not be able to be successful in the U.S. market, just given the transparency and given where the political climate is.

Now, having said all that, I think it is becoming beyond clear doubt that there is a LiDAR market here in the U.S. and E.U., and that demand can only be fulfilled by American LiDAR companies, which are headquartered in the U.S.

Let me take the next question. I understand that the company is trying to capture market share in the industrial space where Ouster is deeply entrenched. How does MicroVision plan to capture market share?

Sumit Sharma (CEO)

Let me take that. All right, I think if you think about the industrial space, I think you have to cast your vision bigger. There's a much bigger market than one LiDAR company whose revenues people follow. And I think I mentioned names today. If you think about, if you really wanna understand the market, think about SICK AG. That one company by itself is the majority of the LiDAR market in the industrial space. They sell a line sensor, right? And effectively, you know, you know, it's not a 3D sensor. It's like a effectively 2D sensor, and one version's got 4 lines and there maybe an 8-line version. Whereas our smallest product that we make, right, our MOVIA L, has got, like, 80 lines. And our MAVIN product has got, like, 500 lines. So these are vertical lines of scans.

Anand Balaji (VP of Industrial Technology Equity Research)

You can imagine the amount of resolution we can get. So in the MOVIA L sensor, MOVIA L sensor is ready now. But what the real differentiator is, if you think about an integrator, you know, you know, somebody in the industrial space, they get a LiDAR, but what do they do with it? You know, they have to write a bunch of code for the point cloud to enable them. In the case of SICK, they have these, like, zone detection, that they can give them warning, and the vehicle has to take some action. That's not real perception. That's just, you know, some zones just trickling off yellow, you know, red, yellow, green light.

But what we can do is we can provide them all the software to the level where we can actually instruct these, you know, heavy industrial vehicles to stop or to slow down or to, you know, like, for example, if two of them are going, the one in front is carrying a heavier load and is moving slower, the one behind is coming at a higher speed, and the operator does not notice. Instead of rear-ending or slamming on the brakes and, you know, their payload goes and hurts somebody else, that the vehicle automatically starts following the speed of the one in front. Now, think about that. That's no different than ACC, you know, adaptive cruise control, that some of the cars that most of us cars have ACC nowadays.

So you can imagine that in the industrial space, you have somebody that, you know, by their own admission, that their, their expectation is, like, EUR 850 million a year of revenue from the LiDAR space, okay? So it's a big market, and that's just one player, and there's others, actually. And they have actually a much bigger market that they're, they're planning to go after, okay? For us, you know, that is it. So focus on that market, take some of the key segments, places that we have an advantage, where our software is a differentiator, where we can get a partner up and running quicker. We would license the software to them. They would have to buy the hardware, and through that deal, we enable them to actually have content.

Because, you know, we may have to be in an industry where there's a wall, the China market is different, the US and European market is different, where Chinese would not be coming in, but they compete in a space with the vehicles, the heavy industrial vehicles that they make, they compete against the Chinese. And so therefore, the Chinese vehicles are cheaper, but if they give higher level of safety as part of their their product, they'll be able to compete. And again, this is not something that I read in a market report. I've actually visited their customers and talked to their leadership, and this is their biggest concern.

I asked them, "What are the three problems you want me to solve for you as soon as possible so we can partner?" The number one is, can you actually give us something like, you know, enable them with our software in kind of, you know, some intimate partnership. So again, that's how we're looking at it. That's how we intend to capture the market, which is we have an asset. It is not impinging upon our capability to go after the really big market called automotive, LiDAR, and software in the future. But if we can enable a partner right now and get embedded, and we can bridge the gap from today till that revenue starts, then we should leverage what we have.

Anubhav Verma (CFO)

Thanks, Sumit.

Operator (participant)

Thank you. And sorry, next question. We do have a question from the dial-in line right now, from Kevin Garrigan of WestPark Capital. Kevin, your line is live. Please go ahead.

Kevin Garrigan (Senior Research Analyst)

Yeah. Hi, all. Thanks for letting me ask a couple questions. I hopped on late, so I apologize if you may have answered some of these already. But you know, we've started to see robotaxis or L4 vehicles kind of make a comeback over the last few months, I'd say. You know, you have Tesla talking about it. You had Uber making their fleet. The 7 RFQs that you're in, are any of those for L4, or are they all kind of geared more towards L2+ and L3?

Sumit Sharma (CEO)

All the RFQs we're in are for L3 and L2 plus.

Kevin Garrigan (Senior Research Analyst)

Okay, perfect. And then, Sumit, you kind of answered this a little bit on as part of the last question, but, you know, I know you're not looking to go into the Chinese market, but just with the, you know, the recent talks of the US looking to ban Chinese automotive software, have you seen an increase in engagement with Chinese OEMs, where they're looking to just use, you know, all non-Chinese suppliers for the European or US markets?

Sumit Sharma (CEO)

I'm not really sure I can, you know, definitively or with authority say that, right? I mean, you hear things, right, but I don't think it's probably appropriate for me to just talk about some rumor that I've heard from some place, right? What I can clearly tell you is I've been to OEMs, multiple OEMs, and they've said that these are OEMs in U.S. and Europe, they've clearly said that their management decision is that moving forward, they're not gonna entertain any Chinese supply chain even in your LiDAR. So they wanna know, yeah, great that you're an American German company but what key components are, where they're coming from, they wanna know your value chain. So it's to the point where we cannot even use some of the key components that go inside our LiDAR to come from the Chinese supply chain.

Anand Balaji (VP of Industrial Technology Equity Research)

So I know that doesn't answer your question, but I'm telling you the gravity of what is happening right now in this space, where EV cars and the fully, you know, you know, ADAS and autonomy for the future, these are seen as key technological areas that, you know, the European Union and American companies, they wanna own. North American OEMs wanna own, and China's got its own firewall that they have created for themselves, right? So, that's probably the better way to answer that question.

Kevin Garrigan (Senior Research Analyst)

Yep, got it. Got it. Okay, that makes sense. Thank you.

Anubhav Verma (CFO)

Thanks, Kevin. The next question is: I've been a long-term shareholder in the company, and all I've heard is from the management that our products are best in class, and yet there have been no deals that have been announced. I've also heard the management point out the shortcomings of other LiDAR players. I don't want to hear about other players, I want to understand how MicroVision will win. Help me become a believer.

Sumit Sharma (CEO)

I'll take that. I think that's a fair question, to be honest with you. That's a very fair question. I'm a shareholder in the company also, by the way, right? And not just the shares that Anubhav and Drew, right? Not just the shares that the company's assigned me as part of my employment, but I'm a shareholder in the company. So that's a great question. I clearly am a believer, so let me convince you why you need to be a believer. I think before you can pick up on, you know, a winner, like where you wanna put your money, think about the space. Think about what's happening.

Anand Balaji (VP of Industrial Technology Equity Research)

There's clearly like, if governments are getting involved, if LiDAR companies are, you know, not the, the source information, but the OEMs are, that tells you there's a market that's developing that's gonna be around for decades because there's some sort of major transformation, major disruption is happening in transportation, right? So if you think about disruption, the industry is about to get disrupted, and it's been trying to get itself disrupted for five years, and it's gonna take another five years, I guess, right? But it's big enough that there is just a lot of people involved, where governments are involved now, right? So that's, believe it or not, good news. That tells you there's an opportunity here. And the opportunity is that the current players, which is the typical Tier 1s, they do not have a leg up on anything.

So the true value of their shares is, you know, already to where it is. This new space as it breaks up, where new revenues will come in, and there'll be great opportunity to sell software with higher margin, is becoming open. So that's to keep in mind. There's a market segment opening up, a massive market segment opening up, that will last for decades, and there'll be players. And the current big Tier 1s that you think about, none of them have the technology, okay? And one of them that partnered with another LiDAR company, admitted, their CEO admitted they'd lost $250 million trying to industrialize that. So there's evidence that people are playing with real money in this space, and somebody's gonna win, okay? Why am I a believer? Yes, we're a little company, right?

We don't have 1,000 employees, but that's not what you need. Right now, we're in the phase where you have to go develop the product and get some partnerships done. All right? And those partnerships are gonna be for revenue, but you know what? It's not gonna be, everybody talks to me about dilution and shareholder value. Trust me, I live that every day. I lose a lot of sleep over that. I can assure you that. I think about that all the time. All of us do, right? But you have this big opportunity, and on top of that, you have a company that seems to have a lot of things ready and is saying the logical thing, where it's not gonna cost billions to capture the market. That's ridiculous.

There's no billions of dollars, you know, as a public company that you can raise just to capture the market, because the market size to recover that billions of dollars is gonna take you, like, three decades. So that doesn't make any sense. So we've done everything right. We've spent, you know, kinda trickle along, least amount of what makes business sense, and we have the goods. We have the technology. Some of you have come and seen it, right? But, you know, think about just your judgment, right? I think, you know, you walk up to something, you walk up to a car that you have to buy someday. Are you ever gonna buy it with a big bump out on the roof? Does not matter you're investor. You have to buy a car for your family. You want this ADAS feature.

But you're gonna want it to look nice because it's still a $50,000, $70,000 vehicle in the future, so therefore, it's gonna be important. Well, what sensor? Well, I don't think you buy the car for the sensor. You buy it because it's embedded, the software is there, and you drive the car, but it has to look beautiful. Well, so far, out of all the companies out there, there's only one that actually has a product that can actually do that, achieve that to us, which is us, in the MAVIN product. And we're taking the product that the team here in Germany has created, the MOVIA product, which is the MOVIA L, which clearly cannot fit into the car, cannot get integrated into the car in the most beautiful manner, and we're actually investing in it to miniaturize that further.

Once that's done, you could actually provide LiDAR hardware and your software running on it. So you'll have a platform where your own software runs, and you'll have an opportunity to go into that market. So you have this big opportunity that the OEMs are going after, that is gonna be enabled by LiDAR. I know there's one OEM out there that says that, "No LiDAR." I think that's okay. We'll find out who's, you know, where it all ends up. But companies, there's one company here, of course, in Germany, that has actually delivered a operational L3 car. I mean, it is at 37 miles per hour, right? But it is fully qualified.

So that tells you that a company that has delivered all the innovation to automotive for more than 100 years, takes the LiDAR, and they're continuously looking for the better LiDAR that goes to their next generation product quality. So therefore, you know the space is there. You know there's lots of money to be made there. There's a disruption. None of the big Tier 1s that are, you know, at the position that any of us investors could buy into and, you know, extract any kind of real value, they're not in it. Some of the technology companies that are there, one of these... No, more than one, I guess, right? But I would say us, one of us will rise and capture it all if we're aggressive, and we're smart about how we step-by-step plan our ascent.

So I'm clearly a believer, and I hope you are as well, because think about not just the MicroVision. That's great, and I really want you to think about MicroVision. I'm glad you're an investor. What I really want you to think about also is the space. What's really happening in the space? And where the opportunity is. And the opportunity is, MicroVision creates a product, we create a solution, but the problem exists somewhere else, and the problem can be verified, and you can see how much money people are spending on it. That kind of tells you the kind of revenues you can get in the near future. So that's really my thesis of why we should all be believers in the company.

Anubhav Verma (CFO)

Sumit, if I can add one more thing, because I think, and while we talk about our peers, I don't think we're trying to slam our peers, or I think we're just trying to point out the obvious. Because talking about the peers is an important aspect because none of the LiDAR companies have, in the U.S. have, steady state revenues, right? And I think it's very important what Sumit described, to have a business model that is sustainable and a capital structure that is tenable, right? How can a company burn through $80 million in a quarter with about, you know, you know, a revenue that doesn't even match up? And again, they talk about the, the gaps, the gross profits widening next quarter.

Anand Balaji (VP of Industrial Technology Equity Research)

That tells you that this is a cash guzzling business, and I think that's why the market's really penalizing them. And I think the reason why I'm bringing this up is because all it's saying to us is the market will decimate companies which are not being thoughtful. And I think the whole idea is, if you are being careful, if you are being prudent, you're gonna be one of the few guys who would be able to capture this demand, because the demand clearly exists out here. And I think that's the reason why we're trying to, not slam, but point out the very obvious facts about the business model. And I think it's not about us, tooting our horns, but really pointing out what else exists out there in the market, and how a smart investor will look at investing in a LiDAR company.

Let's take the next question. How many FTEs are on staff, and what are they primarily spending their time doing? Specifically, we have program managers, salespeople, operations people, engineers, who are currently cost centers of the company without any meaningful revenue or partnerships to keep them occupied. Let me take that question, actually. So we have 160 engineers, post the reductions that we carried out in the Q2, in both U.S. and Germany, working on these products. So you have to understand that these projects are very demanding. It's not like the work that's after the award. We have to be engaged with the customers, defining the RFQ, responding to the RFQ, working with their engineers to understand their technical requirements, to understand the problems they have had with previous LiDAR suppliers that they have used in the past.

So they are getting smarter, and I think that's why these engineers are required to be constantly working with these, with the customers' engineers. And obviously, the work will start, the majority of the work will start afterwards, but I think a lot of the legwork has to be done in order for the customers to overcome their business problem, their business and technological problems. So this, this is where we are using our resources, and that's just for automotive. The same thing is applicable for the industrial customers, as Sumit described, because we are essentially using our perception software for solving their ADAS problems, and their ADAS problems is their robots or their heavy equipment moving at, again, speeds that are not as fast as 80 miles, but still that can cause significant damage to either human life or the things that they are carrying.

So I think that's where our resources are concentrated and focused on getting these customers. Let's take the next question: Is MicroVision continuing to explore strategic options, either a takeover or strategic partnerships? Dilution overhangs with little revenues and cash burn appears to be restricting sustainable share price movement. What is the progress that's been made here? Let me take that question. So look, we are a public company, and actually one of the cleanest public companies. We do not, we are not a defector, as you can imagine. As some of these other companies falter and start disappearing off the map, our value inherently rises just because of the bad decisions and the bad business models the others have created.

You know, obviously, I cannot comment on what are some of the live discussions that are going on, but I think we would always be making strategic choices, like we did with Ibeo, to make sure that we are creating value. And again, the goal is very simple, to have a business model that survives the uncertainty and the ability to capture the demand when it shows up later this second. So I think it's very important to build a sound business model, and hence, that's why all the discussions around acquisitions and partnerships, we do that in as part of a corporate development efforts on a regular basis. But like I said, our goal is to build a company that is here to survive and thrive and actually capture the demand that exists out there.

Let's take the next question: What were the reasons Sumit's contract was extended as CEO? This is not meant to be a snarky question, but rather a genuine question that would allow to address a topic that is on many shareholders' minds. Why have Anubhav and Drew also received additional performance incentive stock awards? Sumit, I'll let you take that.

Sumit Sharma (CEO)

Okay, yeah, thank you for the question. I think I expected that, this one. So, listen, I think, you know, we are committed to the company. I think, think about our board. You know, this is not like, you know, we just award ourselves. This is a independent board, independent comp committee that reviewed it. I mean, I'm encouraged that they believe that we are the right people to actually take the ship all the way through the tough storms and to some safe harbors. And, you know, I think we are very thankful that they acknowledged that it was important to have some retention value in the company. Look, we're not, you know, having equity in the company, you know, we're always, all of us giving cash.

Anand Balaji (VP of Industrial Technology Equity Research)

So I know like everybody believes, us as shareholders always believe that, well, you know what? You know, why, why, why, right? But, having equity in the company actually motivates people because there's a reason to build more, and that's what we're gonna continue doing. So but keep in mind that, you know, this is our, our board and our comp committee evaluating the situation and realizing the team that they wanna go forward with, because, they engage with us day-to-day, right? They engage with us every month and every quarter, and they know what's going on within the company, how we're performing, all the things we're going through to make sure that we make the right choices at the right time, and not miss a single beat. So I think, you know, certainly wanna thank them for acknowledging our contribution to date.

Anubhav Verma (CFO)

Thanks, Sumit. Do you have any comments about the recent buyout of Cepton by Koito, and do you think more companies will consolidate directly under Tier 1s versus partnering?

Sumit Sharma (CEO)

I think that was a very unique one. I think that was kind of, you know, accounts a long time ago. I think, you know, where they've ended up, I think, you know, we'll just see in the future where Koito is able to deliver a product and how prominent they are. But I think, in my experience, and I think, you know, I started off in my prepared remarks, of course, I talked about one Tier 1 that lost nearly $250 million. So you can imagine they have no desire to do anything. I know for a fact because when we've spoken to them, they said, "There's no appetite in the company.

Anand Balaji (VP of Industrial Technology Equity Research)

Any VP brings this up is gonna get fired." Okay, so all Tier 1s are going through, like, you know, if you just read in the U.S. and in Germany what the Tier 1s are doing, right? Even in Japan, actually, there's like, they're shutting down programs, and for the first time in decades, right, they have something like 17,000 people getting laid off in some of these companies that have, you know, hundreds of thousand employees. So they're going through a transformation as well. You know, their business is gonna change as the ICE engine age extends, but still, you know, a portion of it becomes into EV towards the end of the decade. So ICE engine has been around for a long time, but we all know that, but the business model is changing.

So is there gonna be opportunities for things like that? I mean, who knows, right? Anybody that's got capital, if they see a big market and they are a believer and the share price is right, why not, right? Our job is to execute on everything we say, create value, and if the share price reflects that, and if there's a premium on that in the market, great. And that's what, you know, most investors believe in, is what the company is doing, what the management is doing, and what evidence they're showing. But, you know, you can imagine if somebody believes that long term, there's a bigger value than what the share price represents, that could happen at any time, right? So is it Tier 1? Is it somebody else? We're a public company, right? So as you can imagine, that's, that's always on the table.

Anubhav Verma (CFO)

Thanks, Sumit. The next question, to be brutally honest, the takeaways on the last call were that management didn't understand the business environment, questionably put all eggs in one basket, and now lacks leverage after losing that OEM deal. Ask yourself, how can we square these issues with the investors? And our share price has been greatly impacted by these actions.

Sumit Sharma (CEO)

Yeah, I'll take that one. So I was very intimate in that deal, right? So, and I think I always, I think, get lots of private notes of encouragement from some of you, but also, you know, that you were not so excited about, the tone at the last call and how we talked about it, right? So let's just, let's just talk about it, you know, clarity. If we had enough cash balance, if we had alternative revenues, everything was done, everything was fine. We were, you know, Anubhav and I were involved in this since November, and it was all about the financial longevity of the company. This is the truth, right? So I think, like, I, I think it's, it's a fair question, right?

Anand Balaji (VP of Industrial Technology Equity Research)

But I think, you know, there's some context missing because it was not that we were caught flat-footed. It's not that we were not engaged. It, you know, that the judgment was impaired. Because something this large that can transform the company, right, was not just me, by myself, and a couple of people involved. The board was involved. Everybody was involved. Everybody knew what was going on. But at some point, if somebody keeps moving the goalpost, and the goalpost is, you know, we have very good standing with them. You know, that's I mean, we, you know, we think highly of them. They think highly of us.

I think it's all good, but the deal did not make sense, where we would have all the risks, and if on their side, there were software delays in development, years could be added to the program, where we'd be sitting there idle with all this investment, making all this money, and no revenues would be coming in. So, I'm not sure, you know, who posted this question, but I'm sure some of the investors on the call today remember the April 2017 contract. Imagine that contract, but even with more significant burden, where we would have to have a massive OpEx to support their program, very little input from them, and all the risk that they can delay the program unilaterally on because of their side of it. Nothing to do with us, right?

We have to be cautious, because if we had done that right now, today, you know, whatever, however you're grading our performance right now, I'm not really sure with the cash we have, we won't get a raise. What is happening in the market right now, we would be around it. So we had to take a critical decision, and we were very cordial about it. You know, we parted on good terms. We just let them know that we are certainly able to do anything, but we're gonna need some financial support. And if their programs cannot support that because they're concerned about their own timelines, we, you know, certainly thank them for being so upfront with us. It's like, "Hey, there's some risk with that." We had to make the critical decision.

So I would not say that we were, you know, surprised by, we put our eggs in one basket. We were in 9 RFQs. One of them kind of just melted away because they are redoing their product strategy. So I think, you know, the automotive OEMs will always be a big chunk of our attention, because long term, that's the biggest revenue opportunity for the company, real growth and an opportunity to sell lots and lots of software features, okay? So I think we did okay there, but I think it was the right decision. It was the right decision because it would have handicapped us towards anything else that we could ever do.

Because if you take a program like that with very little rev opportunity in the future, and all your people are working on that, every one of these calls will be boring because I could not talk about other customers. We can't afford to bring on another 100 to 150 engineers to work on a different program. So it was that kind of thing, right? And as I said in the call, for the right partner, for the right program, let's say there was a million-unit order potential for that, that's a risk worth taking, right? Convincing them. But the same things that we learned from there, like, you know, balance sheet, future revenue, stability of the company, you have to make all the right choices. They know you're gonna be around for a decade. It's not just a promissory note that I write.

They have to know it, they have to see it, they have to believe it, that we're gonna be around for more than a decade.

Anubhav Verma (CFO)

Thanks, Sumit. I'll take one last question. "Will MicroVision provide additional videos and press releases, updates outside of quarterly results, conference calls? It would be nice if these were provided up-to-date information and reassured between quarterly calls that we are on the right path in the future if this was happening. Being kept in the dark doesn't help one bit." Let me take this question. I think, again, this is not an attempt to slam others because, but I think context has to be important here. I think we are trying to establish how do we run a traditional company, where the company is communicated on a regular cadence with the markets and informing the markets about wins, contracts, and awards that are significant to the company's future.

Anand Balaji (VP of Industrial Technology Equity Research)

I think we all agree that we have gone past beyond those days where people are posting selfies, people are posting trivial updates. And I think it's reflective in the stock price as well. You know, people can have giant, mega media events, but and maybe that's what's leading up to the $80 million cash burn, which is, again, you know, it's again, going back to the discipline, right? Because if you don't use the cash judiciously, clearly, that's not gonna help. And clearly, that's what the markets are dictating or telling all the LiDAR companies, that none of these publicity stunts are gonna get you anything. So I think that's why it's important to understand the context of why we're being we are setting the record for how...

And I think you, you probably have heard Sumit and I talk about the, that we had predicted this long ago, that the markets would be L2 and L3 and not full autonomy long ago, right? And I think we have been really right about forecasting where the nature of this industry is gonna be. And I think this is yet another moment in time where we are, again, stating the same fact, that you have to run, you have to have a traditional cadence, you have to run this company like a traditional business, so that you are gonna be one of the few guys standing when the demand comes. And that's why we're sticking to our schedules, we're sticking to our cadence.

And if and when the awards or events that are material to the company during the quarter, we would be announcing them and having investor events. But until then, we really don't need. We really don't see the use of cash and our time to do these media and publicity events on social media and even in-person events. Because, again, I don't understand how companies can sustain this amount of cash flow, and which is what's being proven by the markets. All right, I think we have run quite past the hour. I again thank everybody on the call and being patient with us.

I think, I'm hopeful that you got the theme of the call and as to why we feel very confident about the future, and how we believe that MicroVision is positioned to, be the successful, one of the few successful LiDAR companies, to capture this demand. Again, I thank you, all the investors, for joining this call.

Sumit Sharma (CEO)

Thank you, everyone.

Operator (participant)

Thank you. This concludes today's conference. All parties may disconnect, and have a great day.