MicroVision, Inc. (MVIS) Q3 2017 Earnings Report, Transcript and Summary

Welcome to the Q3 2017 MicroVision Inc. Financial and Operating Results Conference Call. My name is Angila and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Dawn Goetter. Dawn, go ahead and begin.

Thank you, Angila. 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 believes, 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 reasons. The financial numbers presented on the call today by Steve are included in our press release and in an 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 would like to turn the call over to Alex Tokman.

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 three months executing our engine plants, while advancing development programs with major technology companies. We believe these opportunities could significantly enhance our growth trajectory in the next three years. Our current product portfolio is targeting three 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 to 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 extended contractual 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 look at revenue. We are proud to say the 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 or 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 the 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 roadmap 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 given by the OEM product launch schedules, which is a combination of product development, marketing plan and closing on transactional details. The general feedback from others, of course, what we heard from Ragentek, people like our engines mobile friendly features in terms of new enhancements we also received feedback from prospective customers that the 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 earnings and results, let me tell you a bit about this exciting market opportunity. The number of smart speakers with artificial intelligence or AI digital assistance has grown significantly since Amazon first introduced Echo with Alexa 2014. Many including Google, Microsoft, Apple, Samsung, Alibaba have followed with their own smart speakers all with their own smart digital assistance. The point is it’s not about smart speaker for these companies, it’s a bellow of smart digital assistance, which they expect to extend into a variety of home connected devices and cars. It begins as a dedicated device in this case of speaker, it serves as the front end for artificial intelligence digital assistance and as a result it access 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 contractual services through a voice command 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 and integrated compact display in 3D sensing solution that can create a new family of products for OEMs that enable expand the 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 it’s display model and also to output 3D point cloud for it’s 3D time of flight LiDAR portion. The 3D point cloud is often converted into gestures and other touch events by software developed by OEMs and ODMs integrating our engines inside their product. This 3D point cloud data conversion event is one additional step, which is not present for display only application 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 one thing clear, most customers who 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 discussions stated that their products could not be ready for commercial introduction before the latter portion of 2018. Through this initial feedback, we also learn that Tier A players who are interested in products in this category seeking a brighter solution for such devices because these devices will operate in high ambient light environment such as kitchen – 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 scheduled for this engine to account the 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 corporate 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 2018. As I mentioned earlier, brightness increase is possible through new electronics and we’re creating new ASICs that will be used by both the interactive display and display only engine to create multiple SKU’s for different customers. Moving onto 3D LiDAR engine status. Our team made stellar progress last quarter and shrunk the original demo from CS by 8 times, while doubling the 3D point cloud output to 5.5 million points per second, which is one of the largest in industry today, all will add an 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 timeframe of second quarter of 2018 to December of this year. Almost six months ahead of the original schedule. The solid state 3D LiDAR development kit will possess important attributes supported by our customers. It has very dense 3D point cloud as I just mentioned very well wait and see and dynamic scaling performance that allows to tradeoff between high-spatial resolution and high temporal performance. Why are these performance features considered to be important you ask? 3D sensing particularly for automotive and industrial applications typically involves detect and classifying various objects before decisions can be made. If ADAS system has the ability to increase spatial resolution on the fly to better classify given object it’s a very desirable feature. 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 comparative advantage over others. We plan to use the development kits of 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 working plans to produce the display engine to be incorporated inside it’s 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 are pursuing mobility, IoT, ARVR, 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 receive 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 are pursuing two concurrent paths to enter high gross market the engine business and technology licensing business. Since the launch of our engine business, we engaged and listen to multiple customers. Based on the voice of customer data we are 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 commercial available display engine and are accelerating the timing of the next generation brighter version. We have accelerated 3D LiDAR sensor program by approximately six months and expect to have development kits available by the end of this year or rather the 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 and considering the additional application software development time and other future needs such as increased brightness. Given 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. This is very important to know 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 and high gross markets. I’ll stop at this time and shift to Steve review financials.

Thank you, Alex. As Alex mentioned, in the quarter we begin recognizing revenue on shipments of our small form factor engine and which when combined with the contract revenue on our April contract and two other contracts gave us the highest quarterly revenue in company 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 augment reality contract and orders for prototypes and samples. Our total revenue of $6.1 million is 4 times higher than last quarter’s revenue of $1.5 million and 52% higher than the $4 million we recorded 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 stars and is similar to what we experienced in 2015 when we started MEMS production for component customers. Q3 only began production of our small form factor engine and costs were negatively impacted by three 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-cost were relatively high given the relatively low number of units on which we recognized revenue. And third, during the quarter we began MEMES 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 it compares to a lost 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 the $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. Q3 non-cash compensation was $324,000 and depreciation and amortization was $536,000. That concludes the financial results. We will now open the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Glenn Mattson. Please go ahead.

Hi. Thanks guys. 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?

That’s our current plan.

Okay. Great. And then the next key highlighted thing was that you talked about potentially finalizing orders for Q1 of 2018 for the first engine. Maybe can you talk a little more about that – is it multiple customers you’re looking at and…

Sure, Glenn. Basically we are working with – we expect more orders. We are in the latter stages of closing several new orders for this engine with several customers in Asia. We are hope to get it done before this call but certain things, 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.

How about magnitude? Is it generally same size as the first one or they bigger or smaller or do you want…

I can’t comment on this, I’ll just tell you there are couple smaller customers, there are couple larger customers and the orders proportional to the size of the companies.

Okay. Great. And then it’s interesting on the other two engines they kind of flipped a little bit right? So now the LiDAR will be available before the interactive – LiDAR it’s more it’s development kits right before the interactive.

Glenn, what we’ve learned over the past three months after we provided the first develop 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 of 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 face in our engine, we provide 3D point cloud than they have to process and convert it to – is a recognition of different objects and gestures and whatever else that they need. So what we realize is the best thing for us to do is to get deve 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 product.

Okay. Sounds good. And then it appears on the other two the contracts that you completed the ADAS and AR. What’s the next phase – next step for those do you expect further development work or would it be – do you think there could be contracts for product coming sooner than later?

We’re going to have to wait. We are very 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’ve 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.

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

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

Okay. All right, great. That’s it for me guys. Thanks.

Thanks, Glenn.

Our next question is from Kevin Dede. Please go ahead.

Hey guys thanks for taking the question. I think since you’re – what do you think the share account be at the end of the year.

I think we’re at about 78 million shares.

Okay. Thanks. And then Alex back to the ADAS and AR and the further development and the feedback loop. How long do you think that feedback will bis?

It’s a great question, Kevin. The difference between different players we engage in the past sometimes it takes few months, sometimes it takes longer, sometimes it shorter. We know for sure is that what we delivered so far they like. So we hope that after they test drive it internally and we anticipate a feedback. Again timing is so difficult to predict because it’s depend on it’s case specific.

Okay, fair enough. I’m sure you’ll keep us post the 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 do you think they’re selling to.

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 several channels in China, Brazil and several European countries. Some of the limited reviews that we were able to dig out a little positive but again remember they started shipping at the end of August. So they’ve been in the market for only two months right now. We hope after three or four months, five months they will have good understanding on what this product can do and then our plan is to 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 we’re able to hold in their hand and turn on. They said, it’s very impressive phone, it looks very good, looks like a million box, it has all the latest functionality and then it has our projector, seamlessly integrated. So it’s very, very ascend, it actually doesn’t even look like a projector phone, it looks like a normal phone.

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 are moving to address a competitive threat that they see coming from this particular phone. And could you talk a little bit to what you seeing from Moto brand. I think you 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 you think the general appeal could be given that laser based technology it seems to be a superior to DLP in this implementation.

Yes. Especially for embedded smartphone applications can we believe strongly because one of the things people really like about the small display engine is the fact that it’s very, very thin and 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 the form factor. Moto Z is an attachment and they sold separately at $259. Our phone, the whole phone – I think Ragentek, we don’t know what exactly they are pricing but we received something like RMB 300,000, which is clearly $400 to $500 which price relatively attractive. But again the 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 a big one you know because our engine consumes less than 2 watts, which is I don’t know a fraction of the power consumption of the DLP and other technology. So it can run on the single battery charge full for up to 4 hours continuously it’s a desirable feature. And finally focus free – obviously everybody hates the focusing wheel. So we know that these are three definite competitive advantage we have. Obviously DLP has some merits for a larger device for power consumption and the form factor not as important. But for the mobility applications specifically we believe we have specific differentiation that is valuable.

Okay. So thanks for that Alex. One last one for 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 in corporate your device and the advantages.

Absolutely Kevin. Let’s give a productive example, let’s take the vehicle application. One of the key aspects of autonomous vehicle or ADAS, advanced driver assistance systems, is the fact it has to be bullet proof, there’s no margin fur it has to accurately recognize what’s in front of it or behind it or at it side and make decisions to keep the occupants of the vehicle safe. In order to do this you need to combine a different technologies – it’s a combination of radar, invisible, ultra sound and LiDAR. LiDAR is the essential component to make this all. Because until LiDAR everything was available but it was difficult, with LiDAR you can actually have a higher degree of confidence in safety. So we’re operating in the LiDAR sensor 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 a very fast speed and there are some objects further out that is moving fast as well. In this specific scenario the first priority of automobile is to detect it is an object or is it just a distraction or backgrounds kind of background noise. So to quantify this you would need a high temporal performance of the system. Our sense, our ultra LiDAR sensor has the 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 it is 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 make – the system inside the car can make a decision what to do next. At this point in time you don’t need any more 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 a high spatial resolution. Our system automatically dials even higher 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 one of the highest in the industry will separate us from the crowd.

Wow, okay. Thanks Alex. All right, 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?

We typically try to not to foreshadow, but our goal is to show enhancement in every one of those developments that we’re describing today. We want to see the next-generation’s versions and more advanced development kits from what you’ve seen. So you are going to see some very impressive performance on the 3D LiDAR system, obviously interactive display and we’re going to have some products with our display engine showcase as well.

Thank you very much Alex. I appreciate the time and taking the questions.

No problem.

Our next question is from Henry James. Please go ahead.

Good morning gentleman. 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?

The guidance 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 had it was two out of three engines in the market. Now based on the feedback we’re getting from the Tier A players who are seeking the interactive display engine. They need some additional time to develop software out and they also asked for brighter engine. So a combination of those two factors point the interactive display engine the availability sometimes in the second half. As a result of this because we operate in – especially we expand most of the revenue from the first engine we’re going to shift for the lower end of 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 developing contract.

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

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

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.

There is always a tradeoff, you are absolutely right. There’s always a trade. Nothing in this world is free, you have to tradeoff different things. So 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 number one requirement. Obviously brightness is important, cost is important. Once you are 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 the last important and brightness becomes more important because these devices will be placed in very bright kitchens for example. So they always going to be on, you are going to be able to dim the lights they always have to be on and very bright environment. And because power consumption is the less critical at this point in time and size is less critical people [indiscernible] I don’t care if it’s small, give me something brighter and I’m willing to live with a slight increase in size and slight increase in power. So it’s going a combination, depending on the applications some people will prefer something that is brighter and don’t care about increased power consumption and increase size, some people prefer small as possible low as power and they will be willing to live with lower brightness.

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

Absolutely. Just think about what we’ve done. I mean, if you look at the progression that we made so far over the past couple of years we started with 15 women, then we moved we helped Sony to build a 30 woman engine, we just introduced a 40 woman 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 applications. And again, it is going to be a preference of a specific customer if somebody say you know what I’m willing to increase my phone side by 5% or accommodate something larger but brighter we’re going to have an option. If somebody said, 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 social as well. So we can create choices and sort of forcing people into one source.

Okay. And then as far as the LiDAR sensor, we just talked about – I guess you just talked about the vehicle application is that something that you are expecting for that engine to be used in vehicles.

So let me clarify. The development kit that we’re going to – we targeted to have by the end of the year and this one we accelerated by six months is specifically to give to – remember, its going to output 3D point cloud with a very high point density that could be converted into a very high resolution or very high frame rate depending on the application. So our goal is to give this – to give these kits and to put it in the hands of the industrial guys – the robotic guys specifically there’s a lot of opportunities in robotics, industrial robotics so we have given – we’re going to find a couple people to give it to them. We’re going to also socialize it with the automotive guys and we also heard in some consumer applications potentially that could be interested in something like this with dense point cloud and the ability to capture LiDAR data for – to add that to the information is already been captured by cameras. Like 360 degree cameras for a consumer applications. And because there’s so many – there’s so many opportunities in the LiDAR space, we just – we want 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 the industrial, automotive and consumer space get their feedback. So we can then focus our resources on what has the 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 in hands of the developers and OEMs we will know shortly what is more important more than what is less important. And that’s one of the main reasons why we accelerate in 3D LiDAR depth availability by six months to start of this process a little earlier.

And do you feel like your ability to do this theory of the latency and the tradeoff between spatial resolution and temporal resolution has other applications beyond the vehicle?

Absolutely, we would target – the 3D LiDAR sensor could be utilized by many different applications outside a vehicle because obviously, come on – we know that a autonomous vehicles is not something that is going to happen overnight it is going to take. So our anticipation is that what we developing and could be used for 3D mapping. There are some applications today that require map in the street. What we’ve produced and could be used for that purposes. We look at multiple opportunities in the robotic stage, 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 have seen this Amazon bought this company that 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 it’s just a sample of an opportunity it could be utilized in something like we’re developing. And there are many, many others. There are physical robots that actually walk around or police something or security applications. So again, our goal is to provide deve 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 for us and how soon we can get it to market.

Okay, thank you.

Our next question is from Rob Stone. Please go ahead.

Hi, guys. I have a few questions. Thanks. First, I wanted to ask on product gross margin a little more color. You’ve talked about the typical challenges in ramping up the start of production. What do you target for as you know regular run rate production kind of gross margins on those tangents? And then you expect to finish off REG-Intec orders this quarter. So how do you think about getting to a good volume for overhead absorption? And I assume that’s driven by the new orders that you’re negotiating. That’s the first one. Thanks.

Right, we expect that the engine business to be 20%, 25% margin once we ramp up production in there. We’re up and growing with that. As far as – on what else I could tell you about margins. We are making and expect to make cost and operational improvements, things that are going well through October. So we were pleased with that. They’re obviously in manufacturing give you some variability and we are working to increase volume, but predicting a specific timeframe that when we would hit the required volumes and that’s premature for us.

Okay.

And just to point out since Steve you mentioned the operations and quality. Since we’ve started the production, the quality to the customers had been up exceptionally. We had no issues with any – anything related to quality on what we provided to REG-Intec.

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

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

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

Yeah, you’ve got to remember on those the eight hours contract in the AR, the admin and reality contract. Those – well, the cost for those have been balance sheeted over the past six-nine months and they – and because that – that was recognized on a completed contract basis. So when we – 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 is going to go on you know for another three, four quarters, so – or even more than that, five I think. So it will keep being a – keeping the OpEx lower for that period.

Okay. Could you provide any color on inventory, you know, there was a fair sized sequential increase sort of the breakdown.

Yeah, you know, the biggest part of that is that we finished – we finished production in September – when we’ve completed some units. And then we shipped those to REG-Intec, but they were in transit. And so they reflect as inventory and that’s the reason there’s a big popup.

Okay.

So it was just finished within transit, yeah.

Finally, this question is for Alex I guess. So you have mentioned the size and power consumption trade off on the brighter sort of display engine. Can you comment on, you know, what you think that’s going to cause you as far as the development effort for new ASICs? And then how might that effects the costs of the engine when it’s done?

Good question, Rob. We already – there is a couple of things. First of all, the cost of new ASICs would be – specifically to boost the brightness would be $100 million. We already invested in ASICs for other reasons. And our ASIC investment typically is leveraged across all of the products that we are offering. So for example, we already – Steve spoke over the past six months. We made some investments into ASICs to have 3D LiDAR and other technologies. The same investments is will be used by the display engine by the interactive display engine and by the 3D LiDAR engine. So, it’s a one-time investments serves all purpose. In terms of the trade off, you know, we anticipate to be honest with you, we anticipate slight increase in size and some increase in power, but it’s a fraction – a fraction of what they competition specifically DLT can do. So we can dial up the brightness pretty high, received brightness, well – let’s say increase the size of the engine by no more than 10% instead of double and most people do when they need to get the higher brightness. And the power consumption still faced within the mobility acceptable regions and it doesn’t exceed more than few watts. That’s the advantage. So the only trade off that people who have to make that 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 the decision up to them and people will be able to choose what they prefer.

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

So, higher engine, it’s also – it’s actually very good question. I am glad you asked. To get to higher brightness, we need to increase the number of lasers in the engine. So it doesn’t increase cost of that. And again, it’s a trade off that an OEM will have to made, they will have options of going with something brighter. There is a little bit more expensive or a little bit bigger and a little – it consumes a little more power versus something that is very thin – more cost effective and low power and gives up some of the brightness. It’s a definite trade off, but it’s a trade off that we could be made by cellphone guys. The same tradeoff cannot be made with any other technology to achieve brightnesses that we are targeting.

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

We obviously don’t provide this information we just – so again it’s going to – today the current engine has three lasers for display, we would need to go to five lasers for display. And if somebody wants to have interactive display engines with different brightnesses the role of brightness would have three visible light lasers and one infrared. On the other hand the brighter version will have five lasers, five visible lasers and one 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.

Okay. Thanks for that. The detail is very helpful. Thanks guys.

Okay.

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

Okay thank you. Look we had a strong third quarter and point to hold on with another strong quarter. As you can see clearly we are pursuing two concurrent go-to-market paths in order to increase the probability of success, build in the engine business to target mobility, IoT, 3D LiDAR markets and create a 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 the 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 Don, Steve. Thank you for your continued support and for your participation.

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