Sean Peasgood, CEO

(416) 565-2805

Sean@SophicCapital.com

VIRTUAL REALITY The Industry Forges Ahead

January 10, 2015

Virtual Reality (VR) is about to become mainstream and could

be a $7 billion market by 2018. Samsung has released its Gear

VR head-mounted display to the public, while Oculus and Sony

continue development on “consumer-ready” products.

Microsoft is experimenting with VR, and reports of Apple

looking for a VR developer possibly signals its desire to tap into

the market.

We detail some of the more interesting technologies in this

report and highlight several companies participating in the

market including Sophic Capital client Spectra7 Microsystems

(SEV-TSXV).

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Introduction

In our first virtual reality (VR) report, VIRTUAL REALITY: A VIRTUAL GOLDMINE FOR

INVESTORS, we detailed how major technology firms are vying to capture share of the

virtual gaming market, which we estimate could be worth $7 billion by 2018. Samsung and

Oculus (purchased by Facebook for $2 billion in 2014) appear to lead the pack, with Sony not far

behind and recent new additions include Microsoft with Apple toying with the technology.

“In a couple of years from now, we are going to see virtual reality changing the entire gaming

experience.”

Shawn Laydeni, chief executive of Sony Computer Entertainment America

Since publishing our first VR report, we’ve seen more news about non-gaming VR

developments. Entertainment and marketing continue to adopt VR to create immersive

opportunities for target markets. New companies appeared on our radar screens, and many more

articles have been written about the technology and its future applications. We detail new

developments in the VR space (bringing humans into computer generated worlds) as well as the

augmented reality (AR) space (bringing computer generated images, characters, objects into our

world).

Hurrahs for Samsung!

Samsung’s Gear VR is now on sale! This is the second commercial head-mounted display (HMD)

available (the first was Google’s Cardboard). Samsung has priced Gear VR at $199, and consumers

can purchase it at Samsung’s website - but before you rush online to buy one, we remind you that

Gear VR requires a Galaxy Note 4, which isn’t part of the package. To support Gear VR, Samsung

announcedii at CES 2015 that it would expand its Milk suite of entertainment services to virtual

reality for Gear VR users. This represents a major VR milestone, a milestone that could start the

mass adoption of VR content such as gaming, concerts, movies, and marketing.

Source: Samsung

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No word on when Facebook’s

Oculus will release its Rift

HMD to the public. Facebook’s

Oculus has development kits

available, but here’s the

interesting thing: Samsung’s

Gear VR is available for pre-

order via Oculus’ websiteiii. Gear

VR is powered by Oculus

hardware, but iFixitiv uncovered

that the Oculus Rift’s display is a

Galaxy screen, complete with

Samsung’s logo. The two

competitors are almost one-in-

the-same.

Oculus has made acquisitions. On December 11, 2014, Oculus announcedv that it had acquired

Nimble VR (formerly 3Gear Systems) and 13th Lab. Nimble VR provides a camera/software

combination that enables hand-tracking. 13th Lab maps and models 3D interiors. No reason was

given to why Oculus made the acquisitions, but we believe first and foremost that the reasons were

to create a more immersive VR experience for the user, allowing her to potentially use her hands

to interact with VR objects, potentially from the comfort of a 3D model of her home. We further

speculate that the end application could part of an futuristic computing platform that uses a VR

interface.

No news on Project Morpheus, Sony’s VR offering for its PS4 gaming platform. In September

2014, Shuhei Yoshida, the President of Sony’s Worldwide Studios, stated that Sony has finished

85%vi of Morpheus’ development. However, Sony may be getting close to completion because

Oculusvii has told Sony not to release Morpheus if it causes motion sickness1. Oculus’s advice is

sage - the first HMD released to the masses has to work flawlessly or else the entire VR industry

could face the backlash of angry consumers and cynical journalists - but the timing of the message

raises the question, “Why now?” Is Sony nearing 100% completion of Project Morpheus?

Google Cardboard is not a gimmick.

Google announcedviii on December 10,

2014 that over half a million consumers had

purchased Cardboard. Developers appear to

have embraced the HMD because the

number of Cardboard apps continues to

grow. And to help fuel Cardboard app

development, Google released a

development kit for both Android and Unity

(a 3D game engine platform). Google even

provides support for third-party Cardboard

manufacturers (Cardboard’s plans are open

source, meaning anyone can make and sell

them).

1 Motion sickness can occur when the HMD’s video refresh cannot keep up with a user’s motion.

Source: Comedy Central

Source: Google

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Razer unveils a $199 HMD development kit at CES that it expects to ship in June 2015ix. CEO

Min-Liang Tanx stated the Open-Source Virtual Reality (OSVR) Hacker Dev Kit isn’t meant to

compete against Oculus Rift but complement it. Mr. Tan wants to sell gaming peripherals and

created OSVR to accelerate VR hardware and software gaming development. One way Razer plans

to accomplish this is by releasing every detail of the headset to aid the development community,

even if this results in competitive products.

Microsoft tinkers with VR. At the 2014 Game Developers Conference, Microsoft Game Studios

executive Phil Spencer commented that virtual reality “… is really interesting, and it’s definitely

something we’ve been playing with for quite a while.xi” Microsoft has since been “hush hush”

regarding its VR development activities, and rumorsxii abound that the company will mass produce

an HMD in 2015. This may be more than a rumor, though: VRFocus claimsxiii that developers

working on the next XBOX console have developer kits. And if that isn’t convincing, Microsoft

filed a patent that specifically mentions “The peripheral display may be used for augmented reality,

virtual reality and enhanced vision applications.”

It seems as though new HMDs are announced every day. We haven’t written about all of them,

but consulting firm KZero has an excellent table (Exhibit 1) that concisely summarizes the space.

Exhibit 1: KZero’s Q1/2015 VR/AR HMD Update

Source: KZero

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The Apple of Virtual

Reality’s Eye

We know that Apple filed a

patentxiv

for a head

mounted display goggle

system. But we didn’t know

that they were recruiting for

VR opportunities. This post

to the (right) is one of two VR

career opportunities offered

by Apple. Note that this

position requires a

programmer “to enable

development of Apple’s next

generation of products.”

“Game development” is

listed in the description.

Could Apple be secretly

developing their own VR

platform?

Perhaps not. A second

Apple career posting for an

app developer specifically

mentions Oculus Rift and

Leap Motion, a company

developing controllers for

Macs and PCs. It sounds to

us that Apple is definitely

interested in creating VR

apps. Maybe one day they’ll

surprise us with an HMD?

More non-Gaming

Apps Appear

Our first report detailed

how we believed the gaming

industry would embrace

virtual reality, especially mobile gaming. Over the past few months, we’ve uncovered more non-

gaming VR apps than developments in the gaming world. Entertainment is taking a large bow with

HMDs. Jauntxv, a cinematic VR developer for live content, recorded a Paul McCartney concert

that users can download as an app and watch on Google’s Cardboard and Oculus Rift HMDs. The

app places viewers on stage, giving them not only a Blackbird’s eye-view of Sir Paul but also his

surroundings, including the 70,000 pulsing fans.

Apple Recruiting for VR/AR Programmer

Source: jobs.apple.com

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I can see for miles! Sixties mod-rockers The Who also jumped onto the VR bandwagon. The band

released an immersive appxvi celebrating their 50th anniversary. Amazing how these “dinosaurs” of

the music industry are amongst the first to embrace cutting-edge technology.

The kids are all right. Following Paul McCartney’s and The Who’s dive into VR, other musicians

decided to take the plunge. Coldplay has teamed up with NextVR to release the band’s Ghost

Stories Reality Concert Experience. Similarly, Jack White has partnered with Jaunt to create an app

to watch certain songs from a Fenway Park concert in Boston.

Automobile marketers realize the power of VR in conveying brands. Audi paired with

Samsung Gear VR to give potential U.K. clients a spin around a racetrack with the new Audi TTxvii.

Similarly, Volvo teamed with Google Cardboard to provide customers with a virtual tour of

Volvo’s XC90 SUVxviii. And to reinforce the message about quality manufacturing, Chrysler xix

created a VR experience that brings consumers into the factory to see firsthand the care put into

every vehicle built.

Travel agency Thomas Cook is piloting a VR initiative that allows clients to experience select

destinations before purchasing vacations. The VR tours include a helicopter ride over

Manhattan, a trip to a resort in Rhodes, and visit a restaurant in Cyprusxx. Should the technology

prove valuable, Thomas Cook could add more content and deploy the technology on a wider scale.

British Sky Broadcasting is searching for VR start-ups. CNBCxxi reported that Sky’s Vice

President of Business Development Hilary Perchard was in San Francisco to build partnerships that

will help Sky as entertainment moves to the web and smartphones. This includes VR, which

Perchardxxii stated “by next Christmas there will be a decent number of early adopters on the market

and the year after it will be really big.”

Paul McCartney Concert recorded by Jaunt

Source: Jaunt

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Kickstarter project EON Sports is leveraging VR to improve football player training. The

simulator (see photo above) allows players to run specific plays, react to scenarios, and undertake

drills. And in case some critics may think that this is gimmicky, EON Sports is backed by legendary

player and Coach Mike Ditka of ‘da Bears.

Mozillaxxiii

has created a VR browser called MozVR. Available for download on OS X and

Windows 64-bit platforms, MozVR works with Oculus Rift HMD (only available in developer

kits). The goal of MozVR is to help foster the emerging virtual web; “A VR website about VR

websitesxxiv” is how Mozilla is positioning its browser; a place to “share experimental VR Web

experiences, provide resources, and showcase work from developers in the growing VR web

community. xxv” This is bold new stuff especially given that no company has released a consumer

HMD yet.

Project Tango by Google seeks to extend a mobile device’s physical world beyond its screen’s

dimensions. Tango’s goalxxvi is to give mobile devices a human-scale understanding of space and

motion. Sensors within the mobile device record over a quarter million measurements each second

and use the data to map 3D motion. Applications for the technology could include: creating a

customized game setting, mapping a store’s contents to provide directions to specific products, and

helping the visually impaired to navigate a building. Google offers development kits for

programmers interested in exploring the future of 3D sensing.

Intel’s RealSense technology enables device control with a wave of the hand, a head nod, and

even a wink. In essence, a person becomes the input device for a computing device. Needless to

say, this should foster a community of VR and AR development. Games could be developed for

the platform, or perhaps a word processor won’t require a keyboard as a person types in mid-air.

On another tangent, Intel was the co-lead on a $9.37 million Series A round for Avegantxxvii

.

Glyph (see below) is Avegant’s flagship HMD. An array of 2 million micro mirrors reflect the light

Football simulator Source: EON Sports

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from a low-powered light-emitting diode onto the retinas, which mimics how our eyes receives

light reflected from real objects. There’s no need for a screen or external mobile device.

Big Players Turn to VR to Distribute Content

The NBA’s got game! The NBA and Samsung are partnering to bring virtual reality, courtside

basketball to Samsung Milk subscribers. In an interview with Fast Companyxxviii, Jeff Marsilio, the

NBA’s Associate Vice President of Global Media Distribution said, “When the day comes that 100

million or a billion people from mainland China can feel like they're attending a Houston Rockets

game courtside, that's the dream.” So although we may not get full game coverage for some time

yet, it appears as though the NBA is willing to invest in virtual reality to build its audience.

Fox Home Entertainment is betting on VR. According to The Hollywood Reporterxxix, Fox Home

Entertainment worldwide president Mike Dunn believes VR will go mainstream and could possibly

penetrate 25 million households by 2017. And to kick off Fox’s enthusiasm for VR technology, it

plans to present a 3 minute video for Samsung’s Gear VR at CES 2015.

VR will reappear at Sundance in 2015. Nine VR experiences are scheduled to appear at the

festival’s New Frontier program, which focuses on innovation in filmmakingxxx. This isn’t the first

time that the festival has presented VR content; in 2012, Nonny de la Peña’s Hunger in Los Angeles

utilized Oculus HMDsxxxi.

360º Cameras for VR Content

Whether for gaming, navigation, or marketing, 3D camera companies are racing to create

VR and AR content. We apologize for missing some of these companies in our first VR report;

our focus was on VR’s market opportunity, HMD manufacturers at the industry’s forefront, and

how gaming represented VR’s greatest potential. Like television, radio, and blogs, content is king,

so we discuss some of the leading companies developing the hardware and the content that will

help make VR a mainstream technology.

Avegant's Glyph

Source: Avegant

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In August 2014, Jaunt, the

company providing the Paul

McCartney concert app, received

a $27.8 million round of series B

financing, bringing the company’s

total financing to $34 million.

Google Ventures participated in the

series B, as did British Sky

Broadcasting (a prior existing

investor.)xxxii Jaunt’s latest camera,

seen right, has 28 cameras capable

of capturing 3.5 gigapixels per

second. Jaunt is also creating

content beyond Paul McCartney; it

has three other properties, all

available for Google Cardboard and

Oculus Rift HMDs.

Not to be outdone, FIGURE

Digital has created Panopticam

(right), a 5 kilogram sphere

encasing 36 cameras. Judging by

the content on FIGURE Digital’s

website, it appears the company is

targeting corporate marketing.

“FIGURE Digital is pioneering the

use of virtual reality for companies

and brands looking to create truly

mind-expanding experiences. Using

the very latest cutting-edge VR

techxxxiii,” says the company. Tesco,

Marks & Spencer, and Abbott

Pharmaceuticals are clients.

Samsung is moving beyond Gear VR and into cameras with Project Beyond. The camera’s 16

full-HD cameras capture 360º of action at one gigapixel per second. According to Samsung’s Think

Tank Team websitexxxiv, the goal is to take the cameras around the world to beautiful locations.

Gear VR users will have access to the content and can teleport to places they have always wanted

to see. A reviewerxxxv of a Project Beyond demo noted that the experience is immersive, and it’s

possible to have a 360º view. However, Project Beyond is a stationary camera that cannot fulfill

the temptation to step into the scene and interact.

Matterport has a vision to bring 3D to mobile devices. The company already has a consumer

3D camera that they sell for $4,500, but it plans to leverage Google Tango and Intel RealSense’s

vision of embedding 3D sensors in mobile devices by creating an app that will enable people to

create, share, and interact in 3D worlds

FIGURE Digital's Panopticam Source: WIRED.co.uk

Jaunt's latest 3D camera Source: WIRED

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Companies

Almost every day, we hear about new VR companies. The VR universe is expanding, and

admittedly, we missed several companies that we should have featured in our first report. We could

easily double the length of this report with the new companies that have cropped up – we’ve barely

written about the hardware companies in Exhibit 2. Instead, we focus on the stories that are doing

something different. But by the time we publish this report, the entire VR landscape will have

changed again.

AWE is simply awesome! The Toronto-company has a portfolio of AR engines that allows

developers to fill the world with characters. AWE too is focusing on the mobile experience and has

a patent pending on its TIME TABLET software, which creates 3D interactive characters. TIME

TABLET works across Android, iOS, and Windows platforms, which will help it reach a broad

audience of AR enthusiasts.

Exhibit 2: KZero’s VR Hardware Universe Update for Q4, 2014

Source: KZero

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Hyve-3D creates immersive VR experiences without the need for HMDs. It is a collaborative

tool that allows users across the globe to interact. The interface is a half hemi-sphere, 3D sketching

environment that translates 2D drawing planes into 3D space. Users manipulate the planes via

tablets. On November 10, Bloomberg interviewed Hyve-3D; you can watch the video here.

Leap Motion has developed a 3D hands-free controller. Unlike Intel’s RealSense, which is

integrated into the computing device, the Leap Motion Controller is an external device that plugs

into a Mac or PC. Controller is available now at a price of $99.99. To spur app development and

use of Controller, Leap Motion has offered $75,000 in prizes via its 3D Jam contest. Developers

have accepted Leap’s challenge; check out this Pokémon VR entry for 3D Jam.

Next Galaxy (NXTA:OTC) has a platform, CEEK, that it wants to use to build meeting places

of the future. The plan is for CEEK to bring people together at live events such as concerts,

sporting events, or business meetings via AR and VR. Content is already in the works; Next Galaxy

announcedxxxvi that it will work with Grammy Award winning producer Teddy Riley to create a

Michael Jackson VR experience.

A Way to Invest in a Possible $18 Billion Industry (by 20182)

We recommend that investors seeking to invest in VR should consider Spectra7 Microsystems

(SEV:TSXV), a Sophic Capital client. Spectra7 is neither a HMD manufacturer nor a VR game

or app developer. What it does is create the smallest sized interconnect chips that support HDMI

video and high speed data. The company’s VR7100 DisplayDirect™ VR can condense four bulky

cables (HDMI, USB, audio, and power) into a single, ultra-thin VR cable. Why is this important?

Many HMDs are tethered to a computer or other hardware, and four cables introduce significant

weight and mobility issues. Although less is more in terms of cabling, Spectra7’s VR7100 does not

2 Consulting firm KZero estimates VR hardware revenues to be worth $2.3 billion by 2018. The firm also

predicts about $4.7 billion2 of VR software (games and apps) revenues by the same time. Summing the two

KZero forecasts, we arrive at the $7 billion estimate.

Hyve-3D Environment

Source: Hyve-3D

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sacrifice performance. In fact,

the VR7100 provides more

performance in a smaller

package making it one of the

most important components in

VR hardware, in our opinion.

But we’re not the only people

who hold this opinion…

Spectra7 Microsystems’

VR7100 powers Oculus

headsets. iFixit’s teardownxxxvii

of the Oculus Rift uncovered the

chip (right photo) and caused

them to comment that it was “Hot

stuff!” Given that the VR7100 is

part of Oculus Rift, it’s not a

stretch to think it is also designed

into Samsung’s Gear VR, which

Samsung co-developed with

Oculus. This is a reason why we

recommend Spectra7 for

investors who want to invest in

VR: Spectra7’s interconnect

chips will likely find homes in

HMDs. Some HMDs will

succeed; others will vanish; and

Spectra7 Microsystems will win

regardless of which HMDs

consumers’ purchase.

Another reason to consider investing in Spectra7 Microsystems: wearables. We believe the

potential for wearable input systems is large for VR gaming. Gloves, bodysuits, and exoskeletons

will allow interaction with applications; university researchersxxxviii are investigating sound waves

exerting slight pressure on the skin as a way to bring the sense of touch to virtual reality. How does

Spectra7 Microsystems fit into this? The company offers weavable interconnects that can thread

through wearable input systems and deliver real-time 4K-Ultra HD resolution.

Spectra7's VR700 inside the Oculus Rift, Source: ifixit.com

Spectra7's VR7100 facilitates dramatic cabling reduction

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Acronyms Used in this Report

4K horizontal resolution of 4,096 pixels

AR augmented reality

CES consumer electronics show

HDMI high-definition multimedia interface

HMD head-mounted display

OSVR open-source virtual reality

Ultra HD ultra-high definition

VR virtual reality

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References

i Tim Bradshaw, Sony executive heralds a revolution in virtual reality, The Financial Times, November 30,

2014 ii Samsung, SAMSUNG Expands Milk Services to TV, Web and Virtual Reality, January 5, 2014 iii http://www.oculus.com/blog/oculus-mobile-sdk-now-available/ iv iFixit, Oculus Rift Development Kit 2 Teardown, March 19, 2014 v Oculus VR, Nimble VR, 13th Lab, and Chris Bregler join Oculus, December 11, 2014 vi The Wall Street Journal, Sony Dreams of Profit With Morpheus Virtual-Reality Headset, September 19,

2014 vii Stuart Dredge, Oculus warns Sony to solve motion sickness before launching a VR headset, theguardian,

November 4, 2014 viii Google Developers Blog, Google Cardboard: Seriously Fun, December 10, 2014 ix Razer x Sean Hollister, Razer Has Its Own $200 Virtual Reality Headset, January 6, 2015 xi Mitch Dyer, GDC: Microsoft Has Worked on VR 'For Quite a While', The Verge, March 21, 2014 xii Aaron Lee & Joseph Tsai, Microsoft rumored to make head-worn gaming device in 2015, DigiTimes,

December 18, 2014 xiii Jamie Feltham, Developers Confirm Work on Xbox One VR Kit , VRFocus, December 19, 2014 xiv Apple, Inc., Head-mounted display, United States Patent and Trademark Office xv Jens Christensen, Jaunt’s First Cinematic VR Content is Now Available, Jaunt, November 20, 2014 xvi http://thewho.com/immersive-app-celebrating-hits-50-3d/ xvii Chris Hall, Audi deploys Samsung Gear VR headsets to add virtual reality to Audi TT launch, Pocket-

lint, November 14, 2014 xviii Steve Hall, Volvo Creates Virtual Reality Tour Of XC90 SUV, Marketing Land, November 14, 2014 xix Rae Ann Fera, Chrysler Reveals The Finer Details Of Car Production In Virtual Reality, Fast Company,

November 21, 2014 xx Victoria Woollaston, Try before you FLY: Travel agent uses virtual reality to let holidaymakers explore

their dream destinations, Daily Mail, November 28, 2014 xxi Ari Levy, Sky scours Silicon Valley for virtual reality start-ups, CNBC, December 3, 2014 xxii Ibid xxiii http://mozvr.com/downloads.html xxiv Mozilla, Mozilla Launches MozVR.com to Help Bring Virtual Reality to the Web, November 9, 2014 xxv Ibid. xxvi https://www.google.com/atap/projecttango/#project xxvii PRNewswire, Avegant Closes Extended Series A Round of Funding Led by Intel Capital and NHN

Investment, November 4, 2014 xxviii Jason Feifer, Inside The NBA's Plan To Give Every Fan A (Virtual Reality) Courtside Seat, January 5,

2014 xxix Carolyn Giardina, CES: Fox Is Bullish on Virtual Reality, But Is It the "Real Deal" for Hollywood?,

January 2, 2015 xxx Angela Watercutter, VR Films Are Going to Be All Over Sundance in 2015, December 4, 2014 xxxi Ibid. xxxii Jaunt, Jaunt announces $27.8 million funding to scale its cinematic VR technology, August 21, 2014 xxxiii http://www.figuredigital.com/ xxxiv Think Tank Team, http://thinktankteam.info/beyond/# xxxv Nathan Ingraham, Samsung announces Project Beyond, a 360-degree 3D camera that creates virtual reality worlds, The Verge, November 12, 2014 xxxvi PRNewswire, Next Galaxy to Create VR Concert with Grammy Award Winner and Acclaimed Michael

Jackson Producer Teddy Riley, December 4, 2014 xxxvii iFixit, Oculus Rift Development Kit 2 Teardown, March 19, 2014 xxxviii Darrell Etherington, Sound Might Be The Key To Touching Objects In Virtual Reality, TechCrunch,

December 3, 2014

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Disclaimers

The particulars contained herein were obtained from sources that we believe to be reliable, but are

not guaranteed by us and may be incomplete or inaccurate. The opinions expressed are based upon

our analysis and interpretation of these particulars and are not to be construed as a solicitation of

offer to buy or sell the securities mentioned herein. Sophic Capital Inc. (“Sophic Capital”) may act

as financial advisor, for certain of the companies mentioned herein, and may receive remuneration

for its services. Sophic Capital and/or its principals, officers, directors, representatives, and

associates may have a position in the securities mentioned herein and may make purchases and/or

sales of these securities from time to time in the open market or otherwise.