Sean Peasgood, President & CEO

Marcel Valentin, Vice President

www.SophicCapital.com

AWE-GMENTED

REALITY The Next Disruptive Computing Technology

June 14, 2017

VR/AR/MR are real technologies that will redefine our world,

how we interact with it, with information, and with each other.

At AWE 2017, the world’s largest augmented reality

conference, we saw numerous headsets and enterprise

applications. Retailers, educators, energy companies,

construction firms, are embracing these technologies, and

enterprising firms are thinking not only about how to create

value propositions for these industries but also how the next

generation of the Internet could be defined. This report details

key industry trends and what larger vendors are doing.

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Why You Should Read this Report

At AWE 2017, we uncovered the following AR themes:

1. Find out how the Internet could evolve;

2. Uncover what we learned at AWE 2017, the world’s largest augmented reality conference, and;

3. Discover what the biggest tech companies are doing in AR and VR.

Introduction

It’s been two years since we attended Augmented World Expo (AWE), the world’s largest

augmented reality (AR) and mixed reality (MR) conference (virtual reality has managed to

creep in too). After spending 3 days immersed in the latest AR/MR head mounted displays

(HMDs), testing the newest applications, and speaking with some of the 5,000 industry insiders

and enthusiasts in attendance, we firmly believe that reality technologies will reshape our world

and how we function within it. Augmented reality will eventually replace our smartphones,

liberating our hands and making us look ahead instead of downwards. Because of this, companies

at AWE 2017 showcased how they plan to capture their share of what could be an industry worth

trillions.

AR is thriving in the enterprise because it reduces costs. Over the 3 days at AWE 2017,

companies presented case studies on how AR improved worker productivity. When a tractor

company adopted augmented reality to inspect its final products, it reduced the time to complete

and document the process by about 40%. In another instance, wiring an airframe was 6 times faster

with AR than the default method. Augmented reality improved inventory picking efficiency by

25% at a warehouse. These stories were not the exceptions. We heard similar stories from numerous

vendors attending AWE.

Consumer adoption of AR and MR HMDs still needs a few years. At AWE 2017, we met

several companies leveraging

smartphones designed with

Google’s Tango AR system.

Retailers are marketing apps

to enhance customer

experiences. And even

though a lot of the content is

captivating and engaging,

holding a smartphone in your

hand to access AR content is

cumbersome. But the

AR/MR developers’

community wants to liberate

our hands to simplify our

AR/MR experiences. This

raises numerous new

technical and social issues

that will have to be defined

and solved. One day, info will overlay our real world via AR/MR glasses.

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Augmented Reality Will Change our World Like the PC Did

PCs, the Internet, and mobile phones were technologies that transformed our lives. The last

generation of the Internet was about digitizing information and databases (i.e. flight schedules,

baseball box scores, etc.) and making them available to the masses. The next generation of the

Internet will be about digitizing every object and superimposing it onto our world. Augmented

reality glasses will enable this vision. It will provide us with layers of predictive information based

upon who and where we are and what we want. Our hands become liberated from keyboards and

touchscreens, increasing our productivity. We’ll no longer search for a Thai restaurant on a specific

app; instead, we’ll tell the glasses to find a Thai restaurant and let it pull in whatever app is suitable

to complete the task and then present the information to us. Even better, it may overhear us say

something the day before like, “I’m craving Thai food,” remember our craving, then automatically

present us with recommendations as we walk around during the next day’s noon-hour.

In prior Sophic Capital reports, we

discussed how AR/MR consumer adoption

would occur once form factors resemble

current, fashionable glasses – that’s

partially correct. Microsoft1 and Meta have

released developer versions of their

HoloLens and Meta 2 (respectively) HMDs.

Vuzix (VUZI:NASDAQ) has had successful

deployments, including one with DHL, and

we saw numerous other companies at AWE

2017 that are winning enterprise contracts. But to date, consumer AR experiences have come from

smartphone apps like Pokéman Go. Why? AR HMDs are bulky and – if we can be honest – look

“nerdy”. It’s one thing to wear an unstylish yet productive HMD in the workplace; quite another to

wear one in public where fashion matters.

Even after OEMs create more fashionable AR and MR HMDs, other socially awkward issues

concerning reality technology adoption remain. We listened to an Intel (INTC:NASDAQ)

strategist describe the potential of using vision for input. With laptops we use mice and keyboards.

With smartphones and tablets we use touchscreens. With AR glasses, we could use hand waves,

voice, and/or eye tracking. But gesturing in public would look odd and draw unwanted attention.

If everyone was speaking simultaneously to uncover information, our world would be noisy. And

eye tracking could strain our eyes as we spend the day with bulging eyes to select options. What

the strategist suggested was that we could use our fingertips to navigate the devices. Our hands

could be by our sides, our laps, or in front of us, and a simple finger wiggle could allow us to select

what we need by either typing or virtual mouse clicks.

1 Microsoft also was granted a U.S. patent for an “augmented display apparatus” for a “wearable food

nutrition feedback system”.

Vuzix’s Blade 3000 AR Smart Glasses are consumer-ready. Source: Vuzix

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Content Developers Needed

Another issue with consumer AR/MR

adoption is the lack of knowledge and

content. Pokéman Go exposed many

consumers to AR technology. But beyond

gaming, many do not see AR’s potential.

Google (GOOG:NASDAQ) Glass (status

unknown) sought to overlay information like

email alerts into users’ realm of vision. But

the $1,500 cost was a budget buster for many

people willing to try it, but that may have

been part of Google’s strategy to ensure early

adopters would invest their time to learn

about AR and its potential. But Google went

beyond Glass and released Tango, an augmented reality computing platform that Lenovo

(0992:HKG) is using in its Phab 2 Pro smartphone and ASUS (2357:TPE) in its ZenFone AR

handset. Tango overlays virtual objects and information atop the surroundings viewed through

these devices, providing deeper experiences for users to engage with. It’s Tango and these handset

manufacturers are educating consumers about AR’s potential.

AR/MR Content Defines our Future Relationship with Info

Augmented reality content is real and awesome. In other Sophic Capital reports, we’ve shared

our experiences with virtual reality content, especially that from the gaming industry. And although

AWE presented new augmented reality hardware, we were awed by the AR/MR content developed

for enterprise workers. We saw jet engine parts assembled by a person who was guided by a second

person located offsite, they connected and viewed the same components through their own pairs of

AR glasses; we experienced a virtual AR office, where Excel and Skype windows were

superimposed in our real worlds; we even spoke with a gentleman whose AR glasses perfectly

restored his centric vision to the point where he can drive at his farm. He can’t drive on public roads

because the Department of Motor Vehicles won’t let him wear his AR glasses for the eye test

required to get a driver’s license. From what industry experts and enthusiasts told us at AWE, AR

content is about to accelerate.

Differences Between Augmented, Virtual, and Mixed Realities

We’ve written a lot about Virtual Reality (VR), since it is

a technology that the gaming and 360° video markets have

embraced. Virtual Reality is our immersion into a computer-

generated environment. We achieve this by strapping on

head-mounted displays (HMDs) that block external audio and

visual stimuli. It is the first “reality” market to gain enterprise

and consumer adoption, so we’ve focused much of our

research on VR. Source: Oculus CV Virtual Reality HMD

Google’s Tango overlays digital content in the real world Source: Google

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Augmented Reality (AR) will be a larger market than VR. AR is overlaying computer generated

images and text in our world. Part of the reason AR will be a larger market than VR is because

many industries and enterprises see AR as a productivity enhancement technology that can reduce

costs, improve safety, and even protect the environment. Another reason why AR will be bigger

than VR is that users remain mobile. With AR, we still see the real world whereas with VR, the

real world is blocked from

our sight and hearing,

rendering users relatively

immobile for safety

reasons. As an AR

application example,

OneSoft Solutions

(OSS:TSXV) has a

Microsoft

(MSFT:NASDAQ)

HoloLens AR application

that energy pipeline

operators can use to spot

pipeline anomalies

detected by OneSoft’s

machine learning software.

Repairing these pipeline

anomalies prevent ruptures,

injuries, and death as well

as stop environmental

disasters from occurring.

Mixed Reality (MR) is a combination of VR and AR. MR HMDs scan the surroundings to

overlay real-time digital content for the user to interact with as though the content really is a part

of the environment. The main difference between AR and MR is that AR applications are passive

such as text overlaid on an appliance, reading an email, or selecting a phone number from a list.

MR, on the other hand, is active such as having generated characters break through a real wall and

placing virtual furniture in a real room.

Augmented Reality Will Be a Big Market

Enterprises see the value of AR technology, and this will drive the AR industry. Although

third-party market AR forecasts vary, their numbers are big. We recommend that investors focus

not on the individual third-party forecasts but on the idea that all have large estimates. Consider the

following numbers:

• Allied Market Research projects a 65.7% CAGR from 2016 through 2022, culminating in a

2022 AR market worth $59.1 billion;

• Gartner forecasts AR HMDs could generate $72 billion of revenue over the next 10 years;

• Global Market Insights pegged the 2015 AR market at $570 million and sees 80.8% CAGR

from 2016 to 2024;

OneSoft Solutions’ HoloLens application. The augmented reality squares on the pipe indicate potential anomalies that could lead to pipeline ruptures.

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• MarketsandMarkets is forecasting a

$117.4 billion global AR market by 2022

and a 75.7% CAGR between 2016 and

2022;

• MarketsandMarkets also stated that the

2015 AR software market was worth

$2.13 billion and could grow to $35.22

billion by 2022;

• SuperData Research sees VR hardware

growing from $3.6 billion in 2017 to

$17.8 billion by 2020;

• Tractica believes that AR’s 342.8 million

monthly active users (MAU) in 2015 will

grow to 1.9 billion by 2022 (Exhibit 1),

and annual AR mobile app revenue rising

from $749 million to $18.5 billion over

the same period. Over the same period,

software and services will scale from $1.3

billion to $19.9 billion;

• Zion Market Research believes the global AR market could reach $133.78 billion in 2021,

growing at an 85.2% CAGR between 2016 and 2021;

• CBInsights see about $2.15 billion global AR/VR funding (Exhibit 2) based on YTD 2017

(May 12, 2017) investments.

Exhibit 1: Consumer Mobile AR Users, Apps, and Downloads

Source: Tractica

Virtual Reality software segments. Source: SuperData Research

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Exhibit 2: 2017 Could Be a Record Year for Financing AR/VR Companies

Source: CBInsights

To Cable or Not to Cable

When will these headsets become untethered? Investors constantly ask Sophic Capital this

question, and it was a point of discussion at AWE 2017. An investor panel composed of Silicon

Valley VCs agreed that cabled VR and AR

headsets are impeding consumer adoption. We

agree and disagree on this point. We agree in

that we are a wireless society, and mobile VR

would facilitate new business cases including:

wide-space gaming, architecture, and retail2

experiences. We disagree in that not all VR

applications need to be high-end quality, which

requires tethering an HMD to a gaming

computer. Google Cardboard’s success is

evidence of this: An untethered VR HMD

driven by a user’s smartphone was how Google

brought VR to the masses.

2 One company we met is focusing an application around the premise that buying goods is an experience.

They are developing a MR application that would allow you to transform a room in your home into a

customized retail space, specific to a brand – in essence, bringing the store into your home.

Source: PCMag.com

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Needless to say, making HMDs wireless is the goal within the VR/AR/MR industries. AWE

2017 unveiled that there is a market for mobile VR, even though users cannot see or hear the real

world. The headsets need to have a sense of presence and the ability to map the real world so that

the user doesn’t trip over a coffee table or step in front of a moving car. We should have 5G

networks by 2020, and they could provide sufficient bandwidth to drive the data required for current

high-end, wireless headsets.

Wireless solutions are interesting but face challenges. One of the biggest issues is keeping up

with the bandwidth demands of an evolving market, such as Kopin’s (KOPN:NASDAQ) Elf VR

which will have three times the resolution of Oculus Rift and HTC Vive. Wireless also imparts

additional costs to HMD design and bill of materials, adds significant weight, power concerns and

potentially reduced battery life. Plus, there is the safety issue of having a battery strapped to the

user’s head (remember those exploding phones)?

AMD’s (AMD:NASDAQ) acquisition of Nitero (terms not disclosed) is further evidence that

the market demands high-end wireless experiences. Nitero’s website states that it provides “60

GHz wireless for AR and VR.” TPCast and DisplayLink are similar technologies which initially

didn’t impress some reviewers but are now gaining traction. The Oculus CV1 and HTC Vive VR

implement 1080 x 1200 pixel resolution at 90Hz frame refresh for each eye, and 60GHz solutions

should be able to remove the cables. However, tomorrow’s technology will be 4K video; 4096 x

2160 pixels (4K by 2K) at 90 to 120Hz frame refresh. HDMI 1.4 allows for a maximum data rate

of 10.2Gb/s. Without getting technical, wireless can’t handle that right now, so we believe that

current Nitero technology may not be able to deliver 4K video. But Nitero’s IP could provide a

foundation for AMD to develop technology to deliver wireless 4K experiences some time in the

future.

Cable or Wireless Won’t Determine a Consumer HMD Winner

Pricing and performance are the major drivers of consumer adoption of VR HMDs – NOT

wired or wireless technology. AR/MR/VR headsets are available at various price points and

performance capabilities (Exhibit 3). In general, lower price devices allow consumers to try VR

without a huge investment. Gear VR has been very successful with over 5 million units sold even

though performance is relatively low. HTC and Oculus have had less success than expected mainly

due to consumer reluctance to spend so much for an emerging technology. High end standalone

devices are interesting, but today’s price points will be beyond acceptable levels for consumers.

However, we believe that Microsoft’s MR devices will hit the sweet spot of low price and high

performance, especially with marketing and sales channels of Microsoft and its partners.

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Exhibit 3: Price/Performance and NOT Wired/Wireless Drive AR/VR/MR Adoption

Source: Sophic Capital

Consumers weren’t ready to invest in high-end AR/VR/MR HMDs. HoloLens’ $3,000 price

tag has driven AR/MR out of the hands of most consumers for the moment. Plus, there isn’t much

content outside of the enterprise. Oculus began accepting DK2 pre-orders on January 6, 2016 at a

price of US$599 (Best Buy now sells Oculus HMDs for US$499.99 or bundled with the Touch

controllers for US$599.98). We thought that it wasn’t a bad price for leading technology, however,

to get a “WOW!” VR experience without distortion, consumers needed US$1,500 high-end gaming

computers to power the headsets. HTC began taking pre-orders for its US$799 Vive on February

29, 2016, which also needed a US$1,000 processing unit. Developers and gamers didn’t balk at the

headset pricing (many complained about the US$399 price that Oculus had originally floated).

They bought HMDs because these people likely already had the supporting PC to drive the VR

headsets. However, these prices were a lot for most consumers. But since then, gaming computer

pricing has significantly declined (a Lenovo IdeaCentre Y700, recommended by Oculus, costs

US$649), making virtual reality more affordable and accessible to consumers.

We’ve written in the past about how we thought Sony’s (SNE:NYSE) PlayStation VR HMD

could be a winning platform. The reason is that PlayStation VR is an addendum to Sony’s PS4

gaming console. As Exhibit 4 shows, PS4 has been the best selling gaming console since it was

introduced in 2013. This tells us that PlayStation VR’s US$400 price point is acceptable to

consumers, especially those who already have a $400 PS4 console. Sony also has the advantage of

an extensive gaming library. And as we stated earlier, content is important for consumer adoption.

And this is why we believe Microsoft’s VR HMDs could be future winners – read on!

`

Sophic Capital cost estimate

$250 $500 $750 $1,000

Retail Cost

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igh

Low

Mobile MobileTethered

PC /Console Tethered

* Santa Cruz* *

Standalone

*

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Exhibit 4: Top Selling Gaming Consoles by Year (Units)

Source: VGCharts, Sophic Capital

Microsoft Defining the Future of Computing

On October 26,

2016, Microsoft

announced a

team of powerful

partners to bring

its Windows 10

VR HMD to

market. PC

OEMs recognize

that PCs and

tablets aren’t as

popular as they

once were, and

they need a new

computing

platform to grow with. VR HMDs are the computing platform, and Microsoft appears to want to

lead the way. Microsoft announced that Dell (private), Asus (2357:TPE), Lenovo (0092:HKG), HP

(HPQ:NYSE), and Acer (2353:TPE) will build and ship its headsets in 2017. At CES 2017,

Microsoft showcased the first VR prototypes from its partners and suggested a starting price of

US$299. The HMDs can integrate into a Microsoft Surface Studio computer, and Windows 10 will

drive the device. One differentiator is inside/out tracking, something not available on high-end

Oculus or HTC Vive systems. This means that the Microsoft HMD won’t require external sensors

like the Oculus Rift or HTC Vive. It also means that it can track a person’s position in space, unlike

Samsung’s GearVR. The Microsoft HMDs are tethered to a computer, likely to take advantage of

an external power supply and processing power.

Marketing and content are other

reasons why we think Microsoft’s

HMDs could become the next reality

headset winner. Microsoft, Intel, the

aforementioned OEM partners, all

have the resources to promote the

platform to consumers. Net

Applications lists Windows operating

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (YTD) TOTAL

DS 10,991,195 20,776,966 29,508,695 29,663,772 27,573,530 20,620,707 8,759,675 3,012,615 818,084 151,725,239

PSP 9,613,346 9,488,584 12,814,297 14,048,403 9,855,987 9,243,328 7,459,539 4,220,108 2,973,884 391,786 80,109,262

X360 1,178,267 6,801,532 7,879,552 10,913,123 10,160,518 13,253,914 13,808,365 10,677,206 6,239,751 2,600,902 928,456 391,737 35,467 84,868,790

Wii 2,954,781 16,553,289 24,188,263 21,295,417 17,320,956 11,522,685 5,082,024 1,947,850 515,969 74,946 101,456,180

PS3 1,252,040 7,922,055 10,204,758 12,997,974 13,896,438 14,706,691 12,150,117 8,252,038 3,547,908 1,342,092 517,916 71,016 86,861,043

3DS 13,250,062 14,112,182 14,369,898 9,745,610 7,326,085 7,939,845 1,253,596 67,997,278

PSV 481,573 3,674,466 3,204,823 2,419,726 2,681,299 2,041,540 389,707 14,893,134

WiiU 2,247,216 3,113,285 3,674,351 3,459,547 1,525,551 100,601 14,120,551

PS4 4,430,139 14,244,356 17,510,227 17,130,861 4,234,849 57,550,432

XOne 3,075,770 7,905,271 8,631,257 8,306,621 1,642,268 29,561,187

NS 3,488,881 3,488,881

TOTAL 21,782,808 41,273,903 74,677,888 89,018,319 81,883,426 74,335,343 69,988,590 55,175,934 48,425,522 45,045,879 41,953,909 37,854,071 11,216,385

Source: Net Applications

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systems as commanding 90% of the world’s market share. And with this market share comes an

ecosystem of products that are embedded in our personal and business lives: Office, Skype, Internet

Explorer, and LinkedIn. With Microsoft, computer OEMs, Intel on board and a low $300 price

point, we believe it will be difficult to usurp Microsoft HMDs.

AR on the Minds of Big Tech Companies

Until now, companies like Google and Microsoft have been at the forefront of developing and

promoting AR to the masses. But Facebook (FB:NASDAQ) and Apple (AAPL:NASDAQ) have

become more vocal about the technology.

The “Camera” is Facebook’s AR Platform

During Facebook’s F8 global developer conference, CEO Mark Zuckerberg detailed how

augmented reality is one of the company’s next big bets. Using cameras across Facebook’s

applications was “Act 1”, in Zuckerberg’s words. Act 2 is giving developers new AR tools to build

on the camera. Many people are familiar with Facebook’s AR smartphone applications: face masks,

those computer-generated hats and animal faces that overlay your face as you communicate with

friends over Messenger, and art frames. Although Facebook seems content to continue building

these types of mobile smartphone AR content, Mr. Zuckerberg expanded his AR vision to where

people share information by leaving digital messages in bars or notes on a refrigerator.

The Apple of My Eye

In our VRy Interesting VR report published January 10, 2017, we revealed an Apple

(AAPL:NASDAQ) patent that may have been for an AR HMD. The patent shows that Apple is

using an external display for internal and external viewing modes. It’s unclear about whether the

patent is for AR, VR, or MR.

Since then, rumours built speculating that Apple is working on AR. The Financial Times

reported “that Apple is stepping up its efforts in AR eyewear, according to people with knowledge

of its efforts.” Bloomberg wrote that “Apple is working on a set of smart glasses, reports

Bloomberg. Citing sources familiar with Apple's plans, the site says the smart glasses would

connect wirelessly to the iPhone, much like the Apple Watch, and would display "images and other

information" to the wearer.”

We believe Apple could be a leader in AR

even though it could be years behind

Google and Microsoft in development.

Where Apple holds an advantage is in

consumer design - building aesthetically

pleasing devices. Apple is fashionable.

Apple is reliable. The company has not

always been first to market with innovation:

Xerox invented a $300 mouse that Steve

Jobs refined to a $15 price; Korea’s Saehan

WE WILL “HAVE AR EXPERIENCES

EVERY DAY, ALMOST LIKE EATING

THREE MEALS A DAY. IT WILL BECOME

THAT MUCH A PART OF YOU.” APPLE CEO TIM COOK SOURCE: Bloomberg

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Information Systems massed produced its MPMan portable digital music player long before we

heard of the iPod; and Microsoft had tablets before Apple. Where Apple excels is evolving

electronics into functioning, stylish, high-end hardware that appeals to the masses. AR glasses that

look like glasses instead of bulky helmets is a key factor for consumer adoption, and Apple’s history

of sleek consumer design may give the company an advantage over rivals. Consumers also see

Apple as a luxury brand, enabling the company to command higher prices earlier in the adoption

cycle.

Google Leverages Its Expertise in Machine Learning for VR

Google (GOOG:NASDAQ) CEO Sundar Pichai gave a keynote speech that outlined the

company’s vision for AR and VR. Google revealed a Qualcomm-based reference VR design to

hardware OEMs looking to get into this space. The new VR headset is self-contained and doesn’t

rely upon a smartphone to provide the

screen, unlike prior Google offerings like

Cardboard and Daydream View. The

HMD doesn’t require an external

computer and uses inside/outside

mapping to navigate, relying upon

machine learning rather than GPS or an

external sensor apparatus. Both Lenovo

(0992:HKG) and HTC (2498:sTPE) are

apparently ready to build the device, and

they should be available later this year.

Mr. Pichai also announced that ASUS

would produce a second-generation

Tango phone. Tango is Google’s

augmented reality computing platform.

Lenovo released its PHAB 2 Tango

phone at the end of 2016. Several handset

OEMs already offer Daydream-

compatible phones.

Simply Amazong!

Amazon appears interested in VR and AR’s potential with its customers. We’re not sure what

Amazon is up to, although the Mixed Reality opportunity listed below mentions the responsibility

to, “Build customer facing VR and AR applications across multiple platforms” and mentions high-

end tethered HMDs Oculus and PlayStationVR. The VR Tech Lead (top red circle below) states

that the role requires “design and develop new systems which will bring a unique shopping

experience to new devices.” We’re speculating here, but similar VR shopping platforms immerse

shoppers into virtual stores that can range from wide selections of clothing to arranging furniture

and decorating a room. With AR, we’ve seen applications that disclose information when the user

looks at merchandise. Perhaps Amazon is exploring a similar concept, since Amazon shoppers are

currently limited to 2D storefronts and text product descriptions.

Handset OEMS are aboard with Google’s new VR HMD design concept. Source: Google

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Microsoft’s Surprise

In a research paper with little fanfare, Microsoft (MSFT:NASDAQ) unveiled an AR

prototype that looks like a “normal” pair of glasses. This is not Microsoft’s first foray into

augmented reality; the Company’s HoloLens has gained traction in the developer community. But

the new prototype represents a step to make an

HMD as innocuous as regular reading glasses,

and we believe this is critical for mass consumer

adoption. This is not easy technology to

develop, and Microsoft Research is frank in the

challenges they face – “There’s still a lot of

work to be done.” For those wanting a better

understanding about the technical hurdles

required to develop an AR HMD would benefit

from reading Microsoft Research’s paper.

Amazon VR and MR career postings.

Microsoft’s prototype AR glasses

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A Great HMD “IMMY” Opinion

IMMY (private) is unique in that they have focused their technology around the optics to

create an AR/VR headset that closely mimics the human eye. Their Company invested over ten

years developing its distortion-less optics,

solving the problem of projecting an image

onto a curved surface. IMMY’s, Natural Eye

Optic™ (N.E.O). replicates the human vision

system, providing the most natural and

comfortable viewing experience possible.

IMMY’s N.E.O. technology eliminates the

limitations of existing optics technologies, thus

delivering a large field of view, 3D AR/VR

capability in a lightweight, wearable and

mobile form-factor.

The Biggest Company You May Not Have Heard of

Have you ever heard of JD.com (JD:NASDAQ)? Us neither, which is why we were shocked to

find out that it is China’s largest retailer – both online and offline. In 2016, JD.com did $37.5 billion

in revenue. At AWE 2017, we listened to a Company executive detail how customer experience is

paramount to success. And part of JD.com’s strategy is to leverage technology to deliver

compelling customer experiences. JD.com streams a live VR shopping channel via a mobile app.

And now, JD.com is focusing on providing more digital experiences to customers. There is a

problem, however. Retail experiences need retail products, and this requires digitizing those

products so they can be imported into VR and AR. JD.com has over 200 million SKUs. Digitizing

all those products would take forever, so the Company hosted a competition to discover companies

that could develop technologies to rapidly digitize those SKUs. Stay tuned.

The Smallest Company Doing Big Things

At AWE 2017, we met Amber

Garage, a company that is doing

to AR what Google’s Cardboard

did to VR – bringing the

technology to the masses. Google

did this by creating an inexpensive,

smartphone-based VR HMD

constructed from cardboard. Amber

Garage has created HoloKit, which

we think of as Cardboard’s AR

cousin. HoloKit is made from

cardboard and, similar to Google’s

Cardboard, Amber Garage’s

HoloKit is an open-source design,

so anyone can build one. Using a

Tango-based smartphone installed

in HoloKit, we watched a solar

IMMY's Mark 1™ AR/VR Glasses

HoloKit Founders

AWE-GMENTED REALITY

Sean Peasgood: www.SophicCapital.com June 14, 2017 - 15

system of planets swirl around the floor. It worked and was better than some of the content we saw

with HMDs costing thousands. HoloKit should help bring AR experiences to consumers who have

never tried it before.

Conclusion

VR/AR/MR are gaining importance. At AWE 2017, we saw numerous headsets and enterprise

applications. Retailers, educators, energy companies, construction firms, are embracing these

technologies, and enterprising firms are thinking not only about how to create value propositions

for these industries but also how the next generation of the Internet could be defined. AR/MR will

change our world on a scale similar to how smartphones and the Internet did. This could spawn

hardware, software, solutions, apps, and advertising markets collectively worth trillions of dollars.

We believe that VR/AR/MR will be an investment theme for many years to come.

Acronyms Used in this Report

AR augmented reality

AWE Augmented World Expo

HMD head mounted display

MR mixed reality

VR virtual reality

AWE-GMENTED REALITY

Sean Peasgood, www.SophicCapital.com June 14, 2017 - 16

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