Microvision (MVIS) Q2 2021 Earnings Call Transcript

Microvision (MVIS)
Q2 2021 Earnings Call
Aug 04, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the MicroVision second-quarter 2021 financial and operating results conference call. [Operator instructions] Please note, this event is being recorded. I would now like to hand the conference over to Lindsey Stibbard. Please go ahead.

Lindsey Stibbard -- Paralegal

Thank you. Good afternoon, and welcome, everyone to MicroVision's second-quarter 2021 financial and operating results conference call. Joining me on today's call are Sumit Sharma, chief executive officer; and Steve Holt, chief financial officer. The information in today's conference call includes forward-looking statements, including statements regarding product road maps, potential product sales, potential impact of products in the market, ongoing development of technology, scalability of technology and designs, expected performance of products, comparisons with competing products or technology, market opportunities and future demand, advantages of our technology, business execution, product development applications and benefits, availability and supply of products and key components, commercialization of our technology, strategy for customer sales, maximizing shareholder value, managing costs, future royalties, projections of future operations and financial results, availability of funds as well as statements containing words like opportunity, potential, possibly, intend, believe, goals, paths, expects, plans, will, could, would, likely 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. We encourage you to review our various SEC filings, including our annual report on Form 10-K filed on March 15, 2021, and our Form 10-Q filed on April 30, 2021, as well as various other SEC filings made from time to time in which we discuss risk factors associated with investing in MicroVision. These risk factors could cause 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 is except as required by law, we undertake no obligation to update this information. The financial numbers presented on the call today are included in our press release and in the 8-K filed today. Both are available from the Investor Relations section of our website. This conference call will also be available for audio replay in the Investor Relations section of MicroVision's website at www.microvision.com.

And now I'd like to turn the call over to Sumit Sharma. Sumit?

Sumit Sharma -- Chief Executive Officer

Thank you, Lindsay. Good afternoon, everyone. It's great to have the chance to update you on our progress. Later in the call, I will also update you on our strategy for initial direct sales of lidar sensors, while we work on developing opportunities for sales to OEMs and tier-one partners.

We refer to these sales opportunities to OEMs and tier-one partners as strategic sales. We remain profoundly confident in our ability to successfully execute this strategy that I believe will drive long-term value creation for our shareholders. Let me start off by thanking our shareholders for their enormous support and confidence in the company. The continued support of our shareholders has allowed the company to fund development and maintain all ownership of rights to our technology.

We are purposefully driving toward a future inflection point, where I believe our cash flow from these investments will lead to significant greater value creation. I will also provide some additional perspective on how we plan to position our technology and products toward the expected automotive lidar market. I believe we should give you greater insight into our bullish view of the future. I would like to sincerely thank our employees for their continued hard work and dedication.

We began transitioning back to the office in July and it is great to see some normalcy return. I would also like to warmly welcome potential business partners to this call who are starting to join and follow our public updates. I'm happy to report that we have made great progress since our last call, building on our work from the past year. Since last year, we have been submitting responses to RFIs or request for information initiated by OEM, tier one, and mobility-as-a-service companies.

With the completion of our A-sample, we were able to share our data from outdoor testing with OEM and tier-one companies that demonstrated our sensor operating at ranges greater than 200 meters, high-resolution, and velocity output, among other features. Our team has been actively concocting outdoor testing on various development platforms since December 2020. This has allowed us to share performance data and support various deep dives into our technology to highlight advantages of our hardware and software as part of these RFIs. We have been building bridges to these potential partners throughout our development.

With COVID-related international travel restrictions and constraints placed by companies in Europe and North America, limiting onsite visits, we were required to share tremendous amounts of data for RFI inquiries. With travel restrictions listing, we are now beginning to plan in-person trips and public demonstration of our lidar technology, starting with IAA mobility show in Munich in September. The feedback we have received from potential customers so far has been very positive. With our proprietary active scan locking architecture, which is based on proven technologies, we believe our lidar meets or exceeds their product, expectations and will be the most cost-effective lidar product on the market.

Our features and costs are two key sustainable strategic advantages of our technology that we expect to maintain well into the future. While we still have work ahead of us in completing partnerships, we believe our technology can clearly meet our customers' short and long-term needs. We often get questions from our investors about publishing a comparison of our specification versus our competitors. On our last call, I went into detail of our specifications and advantages of our technology and road map.

Unfortunately, such clarity on relevant specifications is not available from our competitors. Since providing incomplete comparison charts would not be constructive and could be misleading, we will instead periodically release updates from our track testing program and other validation efforts. We remain confident that our lidar sensor is best in class. I am pleased to report that this month, we will start conducting moving platform testing at a third-party track.

We will test our lidar with a test vehicle at speeds typical for highway driving. The track will have various test protocols set up, which are specified by National Highway Traffic Safety Administration or NHTSA and Euro NCAP to achieve ADAS safety ratings for OEM vehicles. With the interest we have received so far, we expect to continue expanding our funnel for target partnerships with the addition of a business development team in Germany. We also expect to add business development teams to address North America and Asia Pacific markets at some time in the future.

Automotive lidar represents the biggest opportunity in the history of our company. To successfully engage potential partners, it is important for our customers to understand our commitment and our pedigree. To appreciate the important reason why we received such interest from OEM and tier ones, we need to look back at where we have been and what we have accomplished over our company's long history. Early applications of our technology included heads-up displays for U.S.

military and automotive systems. In the market today, our technology can be found in Microsoft's HoloLens 2 product. In the past, we have worked with other global brands to incorporate our core technology into their consumer products as well. Our hardware and software teams know what it takes to develop technology that meets or exceeds extremely high expectations.

Our core technology has proven its ability to successfully perform and scale to mission-critical standards. Our team is very experienced and has a pedigree of delivering products that have the potential to open large markets with a laser beam scanning technology. With our strong history of reliability, predictability, and precision, we feel confident that our automotive lidar sensor will perform to the standards expected by the industry. I'm honored to say with confidence to our potential customers that we are well established, well funded, and committed to deliver.

We see great long-term value in our lidar strategy to address the immediate market with direct sales and in parallel, engaging OEMs and tier ones for potential long-term partnerships for our hardware, custom ASICs and proprietary software as part of strategic sales. Let me first elaborate on the importance of our direct sales strategy. We expect to introduce our lidar family of products, which will include four new product models. This will include our premium product with dynamic field of view with near, mid, and far field of view in a single product.

We believe this product could someday be considered a standard for ADAS safety. We will also introduce three additional models with fixed fields of view in near, mid, or far fields. All four models will be built on our current hardware with their appropriate software. Because all four products will be built on the same hardware, it will limit our inventory exposure, while allowing our business development team to have flexibility in converting our sales funnel.

We believe our product with dynamic field of view will ultimately be our flagship product. By supporting our customers with six focus sensors and plugging gaps that may exist in their current sensor suite, we expect the opportunity of providing them a softer transition to our hardware platform. We are looking at every opportunity to accelerate sales and adoption of our hardware, while targeting a blended margin in the range of 50% for direct sales opportunities. Our capability to potentially enable ADAS safety features directly from our sensor will allow us to demonstrate to OEMs and tier ones of ADAS features currently in the market can be improved.

Current ADAS systems utilize low-cost camera module technologies that are limited to daytime use. With our track testing program, we expect to show potential partners the capability of our lidar to perform day or night and still be cost competitive. We are excited at this prospect. I would now like to discuss strategic sales.

Our strategic sales will focus on the biggest volume opportunity in the lidar market we see coming from automotive OEMs and tier-one partnerships. About 24 million passenger vehicles are projected in 2024 to have advanced safety features, ranging from level two and higher, with an expected increase to about 37 million vehicles by 2030. The current industry leader selling level two camera module-based system, safety systems, has publicly announced its push into lidar. We believe we are ahead of this and other companies with our current sensor specifications, long-term competitive cost and proven maturity of our technology.

With a large market and significant growth ahead of us, we see great opportunity for further value creation with our focus on strategic sales. I'm excited about our dual-path strategy to drive revenue and profitability. Now, let me turn the call over to Steve to discuss the second-quarter results and then I'll be back to provide some additional perspective. Steve?

Steve Holt -- Chief Financial Officer

Thank you, Sumit. Good afternoon, everyone. For the second quarter, revenue was $746,000, a 56% increase over last quarter's revenue of $479,000. All the second quarter's revenue was royalty revenue and attributable to Microsoft Corporation, who we've previously referred to as our April 2017 customer.

As I pointed out before, royalties related to this customer will be credited against the nonrefundable prepayment the customer made in 2017. Once the prepayment is exhausted, the customer will begin making cash payments for royalties due. At the end of Q2, the balance of the prepayment stood at $6.5 million. The $6.5 million is on the balance sheet as a contract liability.

Our second quarter cost of revenue included a $31,000 credit related to the reversal of a warranty accrual. The result is a second-quarter gross profit of $777,000. In comparison, gross profit was $484,000 in the prior quarter. Operating expenses were $15.7 million in the second quarter, which is higher than our guidance of $13 million to $14 million we discussed on April 29 and up from $6.7 million in the prior quarter.

The increase in opex was primarily due to non-cash compensation of $7.9 million. Recruiting and payroll expenses associated with an increase in headcount came to about $800,000, and there was a write-off for unused production equipment related to our interactive display -- the interactive display product of around 660,000. Our headcount at the end of June was 74, up from 57 at the end of March. And we are really very pleased that we were able to attract 17 new employees in the quarter given the tight labor market.

And we remain in a hiring mode and plan to hire more people, primarily in engineering, but we will also expect to fill positions in sales and other administrative functions. We expect that by the end of the year we could be up to 110 to 125 people. Now much of the increase in the projected headcount is for our software and hardware teams. As Sumit mentioned, we plan to add features and reduce costs to enable strategic sales in the level two and higher categories.

And these people will be needed to make that happen. Given the higher operating expenses in the second quarter, our net loss was $15 million or $0.09 a share. In second quarter, cash used in operations was $6.7 million. First-quarter loss was $6.2 million or $0.04 per share and first-quarter cash used in operations was $4.5 million.

The increase in cash used in operations during the second quarter was primarily attributable to salaries and recruiting expenses in connection with the increased headcount, development materials, and suppliers as we continue development on our long-range lidar and prepayments to vendors for materials and software tools and inventory that we expect will be used to build product in the fourth quarter. Cash and cash equivalents at the end of the second quarter was $135.3 million, up from $75.3 million at the end of the prior quarter. The increase was a result of the company raising funds on the $140 million ATM we put in place in June. In the second quarter, we issued 4 million shares and raised $67.8 million in net proceeds.

We've not raised any additional funds on the ATM thus far in the third quarter. We were pleased to put the ATM in place and raise the cash we did as it gives confidence to prospective customers and partners as well as employees and prospective employees that MicroVision will be a strong long-term partner in the automotive lidar market. Now, I'd like to turn to the third quarter, give some thoughts on our spending and cash usage as we move forward through this year. So Q3 will also have a significant amount of non-cash compensation.

Additionally, we continue to hire and get ready for production and begin promoting our lidar sensor, the direct sales and I expect to see our Q3 operating expenses in the range of $14 million to $16 million. As for cash used in operations, in addition to the increased expenses I mentioned, we will begin adding inventory in advance of starting production in Q4. So I expect to see cash used in operations in the $9 million to $11 million range in the third quarter, not Q4, but that's Q3 -- in Q3, $9 million to 11 million. Finally, let me echo Sumit's excitement about our competitive position and the progress we've made so far in 2021.

We are focused on the successful start of direct sales of our lidar sensor and we're also focused on building a company that can succeed with the long-term strategic sales that Sumit discussed earlier. I'll now turn the call back over to Sumit for some comments before we open up the call to questions.

Sumit Sharma -- Chief Executive Officer

Before we open the call up for questions, let me revisit a couple of important themes from this call. Today, our focus remains on establishing ourselves as a trusted partner for automotive OEMs, tier ones, and mobility-as-a-mervice companies. We expect our closely integrated hardware and software to enable the ADAS safety market while also supporting potential partners in the autonomous driving market. We expect to start validating our ADAS safety capabilities to our track testing program by second-quarter 2022.

Nothing is more important to us than getting this right with our products and partnerships. Our technology and company have already demonstrated our pedigree and enabled large global brands. I expect us to establish ourselves and lead the ADAS and autonomous driving space with a hardware and software into the future. We remain confident in our ability to successfully execute on our strategy.

I am clearly bullish on our future. Let's open the call up for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Glenn Mattson from Ladenburg Thalmann and Co. Please go ahead.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Hi. Thanks for taking the questions. Sumit, first of all, interesting that you're able to name Microsoft finally as the customer, the April 17 customer. I know that's been pretty well-known for a very long time now, but it's -- just curious as to why you're able to actually talk about it publicly now.

And now that we're talking about it publicly, maybe can you give us a more clear sense -- updates on just kind of like the road map that they're on, what kind of growth do you expect from them over, say, the next 18 months with regards to that project any color there. Thanks.

Steve Holt -- Chief Financial Officer

Yes, Glenn. This is Steve. So we evaluated our legal obligations and the information that was in the market and disclosed the information today. As far as any discussion of road map or anything like that, we have no comment on that.

I will note, if you're just looking for what does revenue look like this year on the royalties, as you're well aware, we disclose our estimate for that in the revenue footnote in the SEC filings. So that will be in the queue that we have. I think it's going to show about $2.3 million is what's expected for the -- for 2021. But of course, that's subject to change as we get more information.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

So as more of the production a possibility for early test sample product sales in Q4, is there any sense of what kind of volume you would expect? I think you kind of talked about production and shipments in Q4 for the lidar. So can you just give us any sense for what kind of -- I know, obviously, it's very early, but just kind of what kind of level we should expect?

Sumit Sharma -- Chief Executive Officer

I think as we said, right, we just call it initial sales are expected to be small. I think there's no more update to that beyond that. As you can imagine, creating a product getting going, it's early times. So I think we'll still call it just initial sales by Q4.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

And how many of the additional personnel would you -- it sounds like you're building up a bit of a sales force to support the product, so can you get a sense of how big that sales force would be and how difficult is it to find people in this specialized niche and just color there too.

Sumit Sharma -- Chief Executive Officer

I can't really share, like specific it right, but as Steve mentioned, right, we expect to be somewhere between 110 to 125 people, and there's a mix of that. But it all depends on the needs that we see ahead. Certainly, a lot of that is investing in the engineering because we really still have to think about the bigger markets and think about the cost reductions and the improvements in the features that we would like to get done. And I think as far as the sales team is concerned we will be appropriately sized from a strategic sales standpoint and a direct sales standpoint.

So we're so -- we have some thoughts here, but we're going to -- as we roll out we'll understand more of size appropriately.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

And on the ATM, can you give us a sense on what level of cash you feel is necessary to support the business? Its cash obviously balances gone up tremendously over the last year or so. So where should investors think that you think you need to be in terms of the cash on the balance sheet?

Steve Holt -- Chief Financial Officer

We'd like to raise the remaining roughly $70 million is on the ATM. We would like to, but we don't have any specific plans to do that at this time. Part of the reason -- well, a lot of the reason for the ATM is the confidence it's giving to customers and suppliers and employees and prospective employees. So it's been very helpful.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

OK. Did you see what stock comp would be in Q3? I might have missed that, Steve.

Steve Holt -- Chief Financial Officer

I didn't give a projection on that. I expect it to be less than what it was in Q2. The volatility of the stock makes it difficult to be predictive. I'm kind of thinking $6 million plus or minus is in that ballpark, but it is -- it really matters on what the stock price is on the day of a specific brand and with our volatility.

That's tough to predict.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

OK. All right. That's it for me. Thanks, guys.

Operator

Your next question comes from Richard Shannon from Craig-Hallum Capital Group. Please go ahead.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Well, hi, guys. Thanks for taking my questions. Just one or two on lidar here. I guess, Sumit, the first one is you talked about a family of four products your premium one and then three others that have single range specs here.

Maybe you can help us understand the driving force behind the split of specifications. Any way you can discuss what those specs are relative or quantitative and then the use cases you expect for each of them that would be great to hear.

Sumit Sharma -- Chief Executive Officer

And it's a great question. So as you can imagine, Richard, in all the different partners that may be testing a system, perhaps they have a flash-based, short-range lidar, and they're lacking the capability for long-range only, but they don't want to completely change over yet, because they've developed a bunch of software on it. So having four different products in the family does not foresee one solution, which may be the ultimate solution, right, right off the bat. So to accelerate sales, you want to accommodate that their specific need, maybe, for example, mid-range only needed added on because they're not going high with speeds or somebody wants to go even longer-range and a short-range only.

So it allows them to mix and match for their specific needs. So it allows us also the flexibility of connecting with them and offering them the benefits of our hardware platform. I still believe having a single lidar with all three fields of view, those kind of ranges, allows you the flexibility of low speeds, all the way to highway speeds, I think I've spoken about this before, and getting the resolution and the velocity, all of those at the single LIDAR level as a feature. But I think any kind of new technology being introduced, you allows -- like a more softer introduction to it with the hardware.

The benefit, of course, is it's all on the same piece of hardware that we have right now that we made. That would be one single-family product. And of course, the software and other things would be slightly different in there. But that allows us to maintain our inventory levels at a very low level.

There's no risk on that one and we can provide the features, specific features that our potential customers may need. To some extent, people have different needs. They may have low resolution at a certain range, and they just need something to plug that in, and then they start seeing the other benefits of it, and that allows them to come back onto our ecosystem.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Maybe just to restate what I think I've heard here, Sumit. So the -- is the three products with singular range is supported there. Those are expected to be plugged into platforms where they have a whole and lidar needs there, whereas your premium one is expected to be the one around which the platform is designed. Is that a fair way to think about it?

Sumit Sharma -- Chief Executive Officer

That's fair to say. Direct sales will use the 3 that are fixed, most likely. I mean, we will sell the dynamic field of view version as well. But yes, for strategic sales, think about the dynamic field of view as a premier product.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

My other question here, I may have missed the terminology you assume it, so please correct me on this one, but I think you said you're expecting to start a validation by second quarter of '22. Is that with this current A-sample as you describe it or is there going to be a forthcoming version that you might label as a B or C sample here? Just help us understand that. And is the ones that you're validating starting in Q2, is that the one you expect to be ramping to reduction in '24, '25?

Sumit Sharma -- Chief Executive Officer

The sample that we have right on, the hardware sample, is the sample that we're going to be testing part of this program in Q2 2022. Let me be sort of a little bit more clear on what that is about. So as I mentioned in the earlier part of the call that we're starting our track testing program. So obviously, it's going to be over a long period of time.

And starts with ground proof testing and other scenarios, safety scenarios that OEMs always have to design sensor suites for. The Q2 2022 mentioned that I had, that's the first opportunity we want to show that we can be -- from -- right from our lidar, that we are able to actually address some of these safety protocols, test protocols that are defined by NHTSA and Euro NCAP. Performance ride from the lidar by itself. So it's a different kind of products.

If you think about level two and level two plus, plus and some of the features that are in level three, I think there's always a new level that's always created, Richard. Those can be addressed what we believe from a lidar alone. For example, A, B, front collision warning, there's a whole lot of features that can be addressed. And the bigger market, of course, still remains at the level two, level two plus plus, as you know.

And we want to be able to demonstrate that through track testing, someplace where NHTSA and Euro NCAP testing is done.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Your answer here actually brings up another quick caution for me, which is on the topic of safety. Wonder if you could talk about the importance -- relative importance to safety over the last six months here, both from an OEMs perspective, but also -- and I think you referred to it here briefly is regulatory bodies in the various jurisdictions worldwide. What are they seeing here? What are they expecting to do or are you expecting them to do? We're going to see something more standardized here that will ultimately drive more lighter penetration in faster.

Sumit Sharma -- Chief Executive Officer

I think the -- this is a really good question, because if you think about ADAS safety, it is really determined by these governing bodies, these regulations that test protocols you have to pass to be able to get your product qualified, and this is at the OEM level. So us being able to demonstrate that removes barriers of adoption, the things that are hardware that can actually solve the problem early on. As far as, I think you may have read, I think recently, in Europe, I think Germany, a level four system, some controlled test will be allowed. But it all -- at the end of the day, every one of these things, before it gets into a car, it has to go through qualification that these regulatory bodies will define and test protocols that every OEM, tier-one lidar company would have to meet.

So, therefore, that's the path effectively. And so far, level two and level two plus, plus, those have test protocols available. Level three, still not dominantly available right now. And level four is just starting to become there.

But no legislation that I've read so far has been clearly defined of a time line for level four technology to be out on the -- available to the public effectively, maybe in some control cases, but not really openly available yet. So the main volume still remains in level two and level two plus plus and other features or other sub-levels that can be created to replace the level three. And that's why the number I gave, 24 million approximately, a bulk of that is including those levels as well, level two, level two plus plus and others that may arrive.

Steve Holt -- Chief Financial Officer

We'll now respond to some of the over 150 questions we received from investors via email. Many of the questions are variations on the same topic and many of the questions were addressed in our prepared remarks. We tried to consolidate the questions on the same topics, but try to address the basic issue. We won't be able to answer every question submitted, but we will go through some of them here.

Then we will open up the call to investors like we did on the last call. So the first question is, can you provide an update as to the progress on your internal testing and external validation of the sensor and supporting partner and customer confidential evaluations.

Sumit Sharma -- Chief Executive Officer

As I mentioned earlier, we've been conducting indoor testing on various development hardware since December 2020. Our engineering team is focused on exercising the hardware and developing features toward our objectives for initial sales. We share data from our development progress, features, and progress of indoor and outdoor validation test with interested parties, potentially interested parties. The commonly expected understanding is that a laser product that has not been CE marked in the EU or has been -- or has a product report submitted to the CDRH in the U.S.

may be operated by anyone else other than the manufacturer in certain cases and approved and qualified manufacturer representative. Once the product is ready for initial sales, we will, of course, have class one laser qualification complete and then any potential customer can purchase. Till that time, we need to be present to demonstrate the device. This is understood by folks we speak with.

Folks with -- also folks internationally that we speak with right they understand this as well. It is prudent that in a private event or setting, the valuation sample that is not being CE mark is always maintained under the physical control of manufacturers, personnel and not left with the customer. So because of this restriction, right, I think we've done the best we can. They share as much, as I said, tremendous amount of data that we've shared with them with COVID restrictions still in place internationally, and of course, locally, some restrictions off non-employees being on site.

Steve Holt -- Chief Financial Officer

The next question relates to opening the German office. Can you shed more light on the reason for that office. And did the regulatory environment have anything to do with it?

Sumit Sharma -- Chief Executive Officer

European OEMs and tier one in Germany have been the most active in ADAS space, mostly because of regulation on ADAS L2 safety and beyond. As we have mentioned before, we have been active -- actively promoting our technology in Germany since 2019. It just made sense to have an office there that can be responsive to those companies in the same time zone and same language.

Steve Holt -- Chief Financial Officer

We received a number of questions about the upcoming trade show in Germany. What can we expect to be showing at this event?

Sumit Sharma -- Chief Executive Officer

We're very excited about the trade show and can show our sensor publicly and be able to highlight the advantages of our technology, I've mentioned in previous calls. We will have several displays and live them out there that I would not want to steal thunder from. But we, of course, will share videos from the show. We make them public during the show and after the show.

Steve Holt -- Chief Financial Officer

The next question that we had was questions around the ATM. I think I answered address those when Glenn asked his questions about it. Again, I think the point to make here is that the ATM and the cash that we have with a strong balance sheet has been advantageous when dealing with customers, suppliers, and employees. So that is a big reason for the ATM.

Next question was also about the April 2017 customer and which we disclosed as Microsoft. And again, we answered those questions with -- when Glenn asked his question. The next one is -- question is often asked about our plans for production, specifically, can you provide progress -- a progress report on the long-term -- on the long-range lidar sensor, pilot line in Redmond or your planned Asian production line.

Sumit Sharma -- Chief Executive Officer

Our original plan was to develop our pilot line in Redmond during COVID restrictions and transfer tooling, automation, and our process to Asia. One of the partners is -- in this plan is in Japan. Unfortunately, Japanese COVID travel restrictions are still in place. Our team needs to travel to the partner for a successful transition.

Once we became aware of this in second quarter, we adapted our plan. All the automation is being delivered in to our Redmond headquarters. We tend to qualify the line and produce our initial quantities for Q4 sales in Redmond. As before, we expect to transition to a partner for scaling from there, and we are evaluating all our options.

Steve Holt -- Chief Financial Officer

Next question relates to other verticals. What is the status of these verticals and are you actively pursuing or investing in them now?

Sumit Sharma -- Chief Executive Officer

As I shared in previous calls, all our effort is on automotive lidar. We believe there is value in other verticals and we stand ready to support a potential customer as needed. But that is not our focus now.

Steve Holt -- Chief Financial Officer

Next question is about strategic alternatives. What can you share about strategic alternatives? As we mentioned in the prepared remarks, for the past year, we've been responding to RFIs, sharing data, and sharing test data and we will continue this work. But as we have previously disclosed in SEC filings, we currently have no agreements or commitments to engage in any specific strategic transaction. And the last question before we take more live questions relates to the MEMS production.

What can you report about your fifth-generation MEMS and your MEMS fab partner?

Sumit Sharma -- Chief Executive Officer

I'm happy to report that we have received our first wafers from our MEMS fab partner. In fact, they are in the devices we are building now. I expect our Q4 initial sales units will use dyes produced from our MEMS fab partner. Beyond that, I think there's -- we're not commenting any more than that.

Steve Holt -- Chief Financial Officer

OK. We will now take some live questions from investors. Operator, we're ready for the first question.

Operator

Thank you. Your next question comes from Tye Bordner. Please go ahead.

Unknown speaker -- Unknown speaker

Yes. Hi. Can you guys hear me?

Steve Holt -- Chief Financial Officer

Yes.

Unknown speaker -- Unknown speaker

Congratulations on -- you guys and the entire company to the progress you made in Q2. So congrats on that. Steve, I think in the last call, you mentioned that you were projecting around 80 headcount by the end of the year, and obviously, now that's changed. I think current projection is 110 to 125.

So can you comment on why that significant increase?

Steve Holt -- Chief Financial Officer

I tried to hit that in my prepared remarks. It's -- there's an opportunity to get our sensor into the ADAS level two, two plus, and higher. And to do that, we need some software, some hardware teams to build some features and get the cost down. And so that's really the focus.

We think there's an opportunity there, but we'll need some people to do that.

Unknown speaker -- Unknown speaker

OK. So I guess that wasn't necessarily well-known back in Q1.

Steve Holt -- Chief Financial Officer

I think in Q1, we talked about a future product road map. But as we've been able to do work and dig into what the opportunity is and the time frame of what we think we could do it in, what it would take for resources that was all happening in Q1 and Q2, we've kind of developed a plan, and we think it makes sense to go forward with.

Unknown speaker -- Unknown speaker

OK. Got it. Also, in -- back in the Q1 filing, you mentioned extending the contract with sharp for an additional year. Any -- can you provide any status on that? Have you had any communication with them at all?

Steve Holt -- Chief Financial Officer

I mean, the reason we extended that contract was just to give them time because COVID was a difficult period for people to get out and make new product decisions. So we thought it was made sense to extend that. They've been a good partner and we want them to succeed. So that's really the reason for the extension.

Do we communicate with them? Yes. Today, as a matter of fact, but I don't have anything I could tell you about, specifically about that. I believe they're still working to find customers.

Unknown speaker -- Unknown speaker

OK. And last question, this is for Sumit. Sumit, you've used a lot's changed over the last 17 months, 12 months. So MicroVision is clearly in a different position than you were then.

And you used an analogy back then, specifically, I think in regards to negotiating with the large companies and you used a reference -- a wrestling analogy of being on the mat. And I guess my question to you is now, do you feel like you are up off the mat now?

Sumit Sharma -- Chief Executive Officer

The best way I can say it, the way I think about it, philosophically, if you're not a trillion-dollar company, you're always on the mat. All right. So you got to go, build value, launch expenses and just keep government. Right? That's got the best answer I gave, the best answer I can give you.

Unknown speaker -- Unknown speaker

OK. Thanks. That's all I got.

Operator

Your final question comes from Mike Wolken. Please go ahead.

Unknown speaker -- Unknown speaker

Hey, guys. Great progress in Q2, and congratulations. I'm excited as well as an investor. I wanted to talk a little bit about -- you mentioned that you would be able to manufacture and sell small quantities of the automotive lidar sensor in Q4.

Are these sensors being manufactured and sold to automotive OEMs for their own internal advanced road testing or exactly how are they -- in other words, it's a small number. We don't know what that number is. What are they going to use those for? We've given them data on our own internal testing and we'll continue to. But what are these sensors for?

Sumit Sharma -- Chief Executive Officer

I think, Mike, think about these. These are, as we said, initial sales, small quantities, therefore, our direct sales. So there's going to be a cohort of potential customers that we will be addressing these. And they will all have different needs.

There could be all different segments. It's not specifically one segment we're saying. There could be robotics, there could be this. It could be people that autonomous driving software development.

It could also be tier one, tier two, it could be a whole group of people. So, therefore, the sensor by itself, right, people are going to use for different things. So think about the market is many, many different segments. And if you think about some of our competitors when they talk about their public sales that are significant amount over the years, it's that kind of strategic sales, where different people use for different things.

So it would be hard to say like what specific thing use for now. Your question about test data, test data is important because you have to validate what you are believing that you can do, how you can actually solve a big problem. And when you think about an automotive OEM or tier one, they're going to make a product that they were going to support for 15 years after they make the purchase. So they look for something different.

Right? So before you can enter that phase of making that product forever, you have to actually do some initial work. And it could be a wide range of things that could be used for. So it would be very hard to say specifically. But the most basic thing is, if you say it does something, they have to go validate that and they may have some special requirements themselves that is not common to anybody else, right, that we would work with them and support them.

So it's a varying -- a variety of things that could be done. But yes they're going to definitely test it, stationary, moving, calibrating to other things that have already done. Right? So it would be pretty hard to comment on what they will use it for. We really have to comment publicly what they're going to use.

We certainly will know what they're using it for, but publicly, of course, we're not going to comment, Mike.

Unknown speaker -- Unknown speaker

And one other question about the business development office in Germany. Dr. Luce, who is going to be Head of Business Development there was -- has previously been for seven years CEO of a company called Optoflux in Germany. And of course, he's going to go to work for the company, which is great based on his credentials.

Going to their website because Optoflux is an interesting company and I could see the possible connection between our two companies. Going to their website, he still is going to represent Optoflux as a managing director, even though he's taking the job of head of business development in Germany for MicroVision. Is there an engineering partnership or any connection between the two companies that you can share with us?

Sumit Sharma -- Chief Executive Officer

So Thomas Luce joined MicroVision in September. So till then, he is still CEO and managing director there. So once he joined MicroVision, he's going to be with MicroVision.

Unknown speaker -- Unknown speaker

Any connection between the two companies with respect to engineering or LRL going forward in terms of product design.

As Steve mentioned, right, our hardware and software, our teams are going to be here based in Redmond, Washington, and that's where we're doing the scale-up.

OK. Thanks for answering my questions.

Steve Holt -- Chief Financial Officer

Our pleasure.

Unknown speaker -- Unknown speaker

You're welcome.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Lindsey Stibbard -- Paralegal

Sumit Sharma -- Chief Executive Officer

Steve Holt -- Chief Financial Officer

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Unknown speaker -- Unknown speaker

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