E 2018E 2019E E 2018E 2019E

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Key Financials

List: First North

Market Cap: 152 MSEK

Industry: Human Interaction

CEO: Johan Castevall

Chairman: Claes Nylander

7.0 points 5.0 points 5.5 points 0.0 points 3.0 points

Share information

Share price (SEK) 10.4

Number of shares (m) 14.6

Market Cap (MSEK) 152

Net cash (MSEK) 54

Free float (%) 77 % Daily turnover (’000) 200 Analysts: Dennis Berggren [email protected] Anton Wester [email protected]

AR is now reality

 XMReality is offering AR based solutions for knowledge sharing towards global companies wishing to improve their service operations. The company is unique in its software offering and we believe that XMReality has potential to show high growth the coming years.

 AR is no longer regarded as science fiction and numerous leading global industrials are either using or evaluating AR based solutions for rationalization purposes, which is demonstrated by XMReality’s impressive list of customers.

 We initiate coverage of XMReality with a fair value of SEK 14.5 per share in the most likely base scenario. Our bear and bull scenarios yield fair values of SEK 6.5 per share and SEK 23 per share, respectively.

0 2 4 6 8 10 12 14 16

26-Apr 25-Jul 23-Oct

OMXS 30 XMReality

Management Ownership Profit outlook Profitability Financial strength

Summary

XMReality

(XMR.ST)

Redeye Rating (0 – 10 points)

2015 2016 2017E 2018E 2019E

Revenue, MSEK 4 5 6 17 44 Growth 333% 46% 17% 181% 156% EBITDA -4 -9 -20 -22 -7 EBITDA margin -119% -174% -330% -136% -16% EBIT -4 -10 -22 -25 -10 EBIT margin -119% -194% -356% -149% -22% Pre-tax earnings -4 -10 -22 -26 -10 Net earnings -4 -10 -22 -26 -10 Net margin -121% -195% -358% -150% -22%

2015 2016 2017E 2018E 2019E

P/E adj. 0.0 0.0 -6.7 -5.7 -15.0

EV/S 0.9 -3.8 15.6 7.2 3.1

EV/EBITDA -0.7 2.2 -4.7 -5.3 -19.3

2015 2016 2017E 2018E 2019E

Dividend/Share 0.00 0.00 0.00 0.00 0.00

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Redeye Rating: Background and definitions

The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.

Company Qualities

The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth. We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 – Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.

Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points.

The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys.

Management

Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 – Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.

Ownership

Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.

Profit Outlook

Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 – Competitiveness.

Profitability

Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit margin or EBIT.

Financial Strength

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Investment case

 Market for AR-solutions expected to grow significantly  Technological advantage with strong industrial focus  Scalable offering

AR market is growing rapidly

From being a technology regarded as science fiction, AR solutions are now being adopted by enterprises. The consumer and enterprise driven demand of AR solutions is increasing rapidly, illustrated by estimates suggesting that the total AR/VR market will grow at a CAGR of 198% during 2015-2020.

AR based solutions open up opportunities for improved service processes in field service organizations. Reports indicate that the industry now is ready to adopt AR-technologies on a larger scale, where industrial maintenance is expected to spur some of the largest AR investments in 2017, related to the trend of digitalizing industry processes (Industry 4.0). The interest from large global industrials is proven by XMReality’s current list of clients including actors such as Atlas Copco Rock Drills, Bosch Rexroth and Siemens Industry Turbomachinery.

Technological advantage with strong industrial focus

There are numerous competitors targeting field service companies with different AR-based solutions for knowledge sharing. XMReality, however, has a short term competitive advantage in its offering of a software solution that incorporates hands overlay, is deployable in areas of weak network capacity and is supported on smartphones, tablets and smartglasses. Remote guidance adds value to customers by increasing the mobility of the clients support organization and rationalizing their operational efficiency by improving first time fix rates. It further provides opportunities for

significant costs savings, illustrated by the client Bombardier which reported savings of SEK 20k in a single service session. The solution also provides a solid resource for internal training which is an important factor for companies dealing with an aging workforce.

Scalable offering

XMReality’s business model is highly scalable where the company faces negligible marginal cost of adding additional licensed users to the platform. The scalability of the company’s offering is further illustrated by the

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Several large clients are currently running evaluations and tests of XMReality’s Remote Guidance solution and we believe that the market disregards the potential of large scale software roll-outs within existing client organizations during the coming years.

Counter-thesis (bear points)

 New competitor(s) with superior solution

Our belief is that there is a risk of potential superior solutions introduced by competitors. We believe that new solutions could arise through new market entrants or successful development by current competitors. The AR/VR market has traditionally been affected by high M&A volumes and there is a possibility that XMReality’s competitive situation will be affected by this.

 Price pressure

There is further a risk of potential price pressure as the number of competitors increase. XMReality applies a premium price strategy that could be difficult to retain if new competitors are able to offer solutions with similar value proposition as XMReality. This becomes even more relevant in the long-run if the technology becomes a standardized solution within industrial service operations. It is therefore important that XMReality retain its technological advantage through successful development of its software.

 Delayed ramp-up

We believe that the greatest risk with an investment in an early stage is that XMReality’s great prospects never come to materialize or is delayed due to inflexibility among large clients’ organizations that increases the duration of large scale implementations.

We initiate coverage of XMReality with a fair value of SEK 14.5 per share in our base case, SEK 6.5 per share in our negative bear case and SEK 23 per share in our positive bull case.

XMReality: Fair value range

Source: Redeye Research

0 5 10 15 20 25 30

0 Bear-case: 6.55 10 Base-case: 14.515 20Bull-case: 2325 30

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About XMReality

XMReality is a developer of industrial augmented reality solutions based in Linköping, Sweden. The company is targeting field service businesses within sectors such as industrial manufacturing, energy and oil & gas with an AR-solution for knowledge sharing. The offering, consisting of software, smartglasses and point pads, has been developed with the intention to rationalize customers’ service operations. The Remote Guidance software is currently the base of the company’s offering.

History

XMReality was founded in 2007 by scientists employed by the Swedish Defence Research Agency (FOI). The company initially offered consultancy services for the Swedish Defence Materiel Administration (FMV) and BAE Systems (one of the world’s largest defence companies). XMReality did at the time develop and offer AR-solutions for education and support of technical field equipment. The company did, for example, develop an AR-solution used for demining which illustrates XMReality’s technological strength.

XMReality performed a change of strategy in 2012, going from offering consultancy services towards the defence industry, to develop and offer a remote guidance solution for industrial companies. The company thereby developed to become a product company, offering their first remote

guidance solution consisting of helmet mounted smart glasses and software installed on a laptop.

The company has since then driven towards becoming a software company by increasing its efforts in developing software for knowledge sharing. The software solution Remote Guidance was launched in 2015 and incurred a new business model. XMReality applies a subscription model where customers pay per licensed user using the application. The company has since the launch of Remote Guidance focused on enhancement of the offering by introducing more software features, making it more efficient and also compatible with the most commonly used hardware devices.

Today

Increased focus on its

software offering

2007 - Year of founding. Offered consultancy

services toward the defence industry

2012 - Changed focus from defence industry

to industrial clients

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Today

XMReality became publicly listed on Nasdaq First North the 26th of April 2017. The company raised about SEK 60m before transaction costs in the IPO, where 4.4m shares were issued at a price of SEK 13.7 per share. The IPO increased the number of outstanding shares to 14.6m, which

correspond to a post-trade market capitalization around SEK 200m. The share price has, however, declined somewhat since then and is currently trading around SEK 10.4 per share.

XMReality has been successful in attracting new customers in large global industrial companies during the last two years. Companies such as Atlas Copco Rock Drills, Bosch Rexroth, Siemens Industrial Turbomachinery and Wärtsilä are currently found among the company’s impressive list of customers.

The organization is growing rapidly, illustrated in the number of employees which has increased from 5 people in 2015 to 18 employees and 7

consultants in the end of October. The employees are based in Linköping, active within development, sales and marketing.

Management

Johan Castevall has held the position as CEO since 2015. Before joining XMReality as Operations Manager in 2014, Castevall held various management positions at the software company Medius where Castevall worked for about 10 years. We believe that CEO has had an important part in shifting the company’s focus towards its industrial software offering.

A majority of XMReality’s management positions have been appointed during 2016 and 2017, implying that the management team consist of a relatively new constellation. Our perception is that the company has performed several important changes of strategy and adopted a business model that is scalable and opens up for high margins. We further believe that the management team shows good understanding of the market by focusing on the most relevant segments and sticking to XMReality’s core strengths despite the unbound potential areas of applications. We would, however, have liked to see larger holdings among the management team. Please see the appendix for further details about the members of the management team.

XMReality: Management

Name Position Joined Ownership

Johan Castevall CEO 2015 213 700 shares/10 000 options

Claes Pettersson CFO 2017 2 220 shares

Henrik Krohn COO Q4 2017

-Per Unell CTO Q4 2017 1 000 shares

Åsa Davidsson Marketing Director 2017 5 220 shares

Source: XMReality

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Board of Directors

The position as Chairman of the board (CoB) is held by Claes Nylander since 2012. CoB Nylander has management experience after holding management positions at firms such as Unilever and Alcatel and being CEO of Sensistor Technologies. Claes has previously held positions as business developer, financial manager and acting CEO at XMReality.

Three of the company’s board members possess holdings of XMReality shares, where board member Lars Svensson and chairman of the board Claes Nylander is represented among the largest shareholders. Björn Persson is a representative of ALMI Invest AB and thereby indirectly constitutes one of the largest owners. Apart from large holdings, we also appreciate that CoB Nylander has been active within the company for a longer period of time and that the board compromises a good mix of members possessing different knowledge and experiences.

Ownership

As noticeable in the table of owners above, there are three institutional investors among the 10 largest shareholders, which is rather unusual for a company of this size. Another interesting note is that board member Lars Svensson and chairman of the board Claes Nylander are represented among the 10 largest shareholders. The founders Per Carleberg and Torbjörn Gustafsson are each currently holding 5.48% of the outstanding shares. The ownership structure is, however, rather fragmented in the sense that there is no owner holding more than 10% of the shares.

XMReality: Board of Directors

Name Position Joined Ownership

Claes Nylander Chairman of the board 2012 537 200 shares1

Anders Ferntoft Member of the board 2014 93 334 shares2

Björn Persson Member of the board 2016

-Lars Svensson Member of the board 2015 831 560 shares2

Jonas Tornerefelt Member of the board 2016

-1

Private and through company holdings 2_{Through company holdings}

XMReality: Ownership

Rank Owner No of shares Capital (%) Votes (%)

1 Handelsbanken Fonder 1150000 7,87% 7,87%

2 AMF Försäkring & Fonder 1100000 7,53% 7,53%

3 ALMI Invest AB 1002880 6,87% 6,87% 4 Lars Svensson 831560 5,69% 5,69% 5 Per Carleberg 800000 5,48% 5,48% 6 Torbjörn Gustafsson 800000 5,48% 5,48% 7 Avanza Pension 598772 4,10% 4,10% 8 Claes Nylander 547200 3,75% 3,75%

9 C WorldWide Asset Management 479280 3,28% 3,28%

10 Nordnet Pensionsförsäkring 377577 2,58% 2,58%

Source: Holdings per 2017-09-30 Board members,

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Options

XMReality has issued options as part of the company’s incentive program during the last three years, where the most recent issue was held in December 2016. The total outstanding options amount to 12 075, which at full exercise will increase the amount of outstanding shares by 390 000, corresponding to a dilution of about 2.7%. CEO Castevall holds 10 000 options which yields the right to subscribe for 200 000 shares at full subscription.

6000 of the outstanding options with exercise period in March 2019 are currently in the money, which at full exercise would increase the amount of shares with 120 000.

XMReality: Options

Issued No of options Exercise period Price Amount of shares

Feb 2013 75 1-31 March 2018 11 150 000

May 2016 6000 1-31 March 2019 8.6 120 000

Dec 2016 6000 1-31 January 2020 15 120 000

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Product and technology

Augmented Reality

XMReality is offering software and hardware based on Augmented Reality (AR) technology. AR is a technology that combines reality with an overlay of digital objects such as texts, images or illustrations. An example of a smartphone AR-application was the gaming success Pokémon Go that allowed users to see virtual Pokémons in their real-world environment. AR differs from Virtual Reality (VR) as virtual reality is built on an entirely artificial experience while AR combine users’ physical environment with digital objects. XMReality’s primary focus is development and sales of its AR-based software offering.

Software – Remote Guidance

XMReality is since 2015 offering its application Remote Guidance towards field service companies. The software is a peer-to-peer solution for real-time video communication between two parties. The solution is structured such that a guide (support) and a follower (on-site personnel) are viewing a video of what the follower is facing (for example an industrial machine) in which the guide is able to add digital information such as text, hands overlay (gestures) or other illustrations/annotations (graphical pointers). Video and audio is synchronized, implying that the guide and the follower are able to communicate as the guide instructs the follower on how to proceed with the task. The guide can also instruct the follower by sending/screening drawings of the object in need of repair.

Source: Osterhout Group Appcenter; XMReality

The software runs on computers, smartphones, tablets and smartglasses. The software is not limited to XMReality’s own smartglasses (see below), but is also compatible with hardware running on Android version 5 (or later), IOS 9.0 (or later), Windows v-7.0 and v8.1 (or later).

Remote Guidance has been developed to serve in rugged environments and is built to be useful in areas of weak network capacity. The solution

incorporates an adaptive technique adjusting the quality of the video depending on the environment and accessible bandwidth. It is furthermore possible to use satellite networks in locations without cellular connections, where the technique is deployable in situations where the bandwidth connection is as low as 128 kb/s.

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It is possible to record the video session and store it for later use, which thereby creates a resource for internal training purposes. The solution can thus be used to increase the knowledge transfer between the guide and on-site personnel but also as a training resource for guides and on-on-site staff. The primary benefit of using Remote Guidance is that it enables for flexible service mobility as there is no requirement of on-site support in order to solve problems. This implies that field service companies are able to increase the efficiency of their service organizations by improving their resource allocation and minimizing costs as it eliminates the requirement of a physical visit by the technician. Customers are thereby able to reduce travel costs and non-billable time. Bombardier has, for example, stated that they were able to save €2000 in a single guidance session1_{by avoiding costs} of travel.

Generation 6 – New version of Remote Guidance

In the mid of November, XMReality announced the new software version Generation 6. The company states that the new version incorporates a new interface that allows for more efficient usage and faster connectivity. It further supports mobile-to-mobile communication, which implies that an instructor is able to instruct a field technician without being bounded to a guide station. Another important feature is the administration of licenses, which increases customers’ flexibility of license management. XMReality has also stated that the new version will include KPI’s that will illustrate statistics such as ROI, which thereby will highlight the value customers get by using Remote Guidance.

XMReality has also stated that the new version will include functions that will ease the process of switching between guiding/following mode, hands overlay and annotations among other things that increase the ease of use. It will also support standardized protocols and encryption to suit customers’ IT policies.

We believe that the new software is a potential game-changer. We especially value the mobile-to-mobile function which increase the scalability and flexibility of the solution while making the software independent of hardware. The increased flexibility would further incur shortened leads to reach growth in user volume. We believe that this will increase value added for customers and also increase the potential user base substantially. Our interpretation is that XMReality has been eager to adopt customers’ suggestions of features in the new version and we believe that the launch of the new software update significantly will increase the likelihood of

generating large scale roll-outs.

1_{https://xmreality.com/customer-story/}

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Hardware

Smartglasses

Smartglasses are wearable computer glasses that add digital information to the wearer’s vision. There are different technologies applied depending on the intended use of the glasses, but a general solution is that digital information is projected and reflected in the glasses of a head-mounted display. The smartglasses incorporates a camera that captures the vision of the wearer which is broadcasted to the guide’s device. As the guide sees what the wearer is facing, the guide can instruct the wearer how to solve a specific on-site problem by using instruction tools such as the hands overlay feature (gestures) and pointers.

Smartglasses are preferred to smartphones in situations where the operator needs to be able to use both hands and are built with video see-through (where video and reality is matched). It is furthermore important that the field of vision is open and that the hardware is not imposing any

distractions or blocking the vision of the operator. This is especially important in rugged industries, where the operator is facing a risk of being injured by machines.

In-house developed smartglasses

XMReality has spent several years in developing smartglasses that are optimized for industrial applications and rough conditions. XMReality has put emphasis on developing glasses with an optimal field of view, meaning that the projected video accounts for a large share of the field of view, which is important in situations with high demands of precision. The company’s own hardware is mounted on the operators head with a nape band as visible in the image below and could also be mounted on a helmet for use in hazardous environments. The manufacturing of the company’s smartglasses is outsourced to HANZA KA.

Osterhout Design Group (ODG) smartglasses

XMReality is also selling smartglasses developed by Osterhout Design Group (ODG). ODG is a leading producer of AR hardware and is unique in the AR industry as the company successfully has been shipping glasses to enterprise customers for years. ODG’s technological strength within the AR-industry is proven by the licensing of patents to Microsoft for an amount up to USD 150m2_.

2_{Techcrunch. “Microsoft Paid Up To $150M To Buy Wearable Computing IP From The Osterhout}

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XMReality has broadened their product portfolio through the agreement with ODG. We find this to be beneficial as industrial customers have different preferences regarding hardware. XMReality has also made its software available on the Reticle Appcenter (the OS used in ODG

smartglasses), implying that XMReality can generate software sales from users who have purchased ODG glasses from other vendors. XMReality has thereby increased the possibility of selling more software by extending its hardware portfolio and made the software compatible with other

smartglasses.

Point pad/Guide station

XMReality is also selling guide stations that can be used by guides to instruct the field personnel. The guide station is a complete solution equipped with a point pad, camera and lights. As illustrated in the image below, the station is used together with a PC or a tablet that show the vision of the person on the field. The guide is then able to instruct the follower by illustrating the actions that the follower needs to perform beneath the camera. The station is suitable for uses in fixed locations, such as a support center, but is also mobile as it can be folded and brought for operation outside the office. The point pad is, however, not a requirement for the guiding session as guides also can instruct field personnel by simply using the rear camera of a smartphone.

Intellectual property

XMReality holds a patent for a system for synchronization of images for distance remote guidance solutions. The company’s current product is, however, not built on this patent and XMReality is thus not holding any intellectual property protecting the company’s current offering.

Hardware compatibility is an important enabler of increased software sales

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Business model & strategy

Software

XMReality’s pricing model for its software offering is built on license fees where customers pay per application used. Licenses are priced on a monthly basis, where we assume the pricing to differ slightly between customers and their intended user base. We expect that the company will charge an average price about 600-750 SEK/month per licensed user. It is, however, reasonable to expect that the average license price charged will decrease in situations where the company succeeds in generating orders of greater volume, which we find to be plausible when the client base exceed approximately 500 licensed users. The license price of the windows software used with the guiding station is about 1200 SEK/month. The agreement periods are usually around 12 months, where licenses are paid upfront. The business model thus opens up for recurring revenues.

Hardware

Sales of hardware is important as industrial customers often are interested in integrating a complete solution in their business, which highlights the importance in offering a broad hardware portfolio in order to generate software sales. Hardware has historically been sold or rented to customers, where a majority of the customers have purchased hardware. The

XMReality smartglasses are priced around SEK 40k whereas the guide station is offered at a price about SEK 10k per unit. The ODG R-7 is

currently retailed by ODG around $2,750 and we find it plausible to assume that XMReality, as a partner of ODG, is offering the product below the official retail price. All sales of hardware is booked at delivery of the products.

The company has not stated any detailed financial targets of hardware sales but we assume the gross margin to be about 15-25% depending on client and their intended use. It is yet important to remember that sales of hardware should be regarded as an enabler of increased software sales.

Sales process

The company’s sales process is built on direct sales, incoming client enquires on the website and more recently also through the sales partner IFS. XMReality had 18 employees in the end of October, whereof 4 are sales staff, and 7 consultants.

The period of integration for larger customers is often protracted as

customers want to familiarize with the technology, evaluate various existing hardware and software solutions and run tests before launching the

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We believe that it is reasonable to expect that XMReality also will increase its efforts towards meeting the demand from smaller enterprises. An example of such a move could be an enhancement of the web offering allowing customers to purchase software licenses online.

Strategy

XMReality’s strategy is to focus on sales of software, where hardware sales has transcended into being a tool of generating software sales. We see several reasons for the company to focus on its software. At first, the software offering is highly scalable and not necessarily dependent of the hardware that the company is selling. Secondly, the business model applied for software sales will further generate higher margins than hardware sales and implies recurring revenues. We also believe that it is less competitive than the market for AR headsets which is challenged by giant tech actors. Customers are either using the solution internally to support field service personnel or integrating the solution in its service offering towards their customers. The latter thereby constitutes for a B2B2B concept for XMReality as they are selling software to enterprises which in turn offers the solution to their customers. The B2B2B concept is highly scalable where XMR has potential to reach large user bases given that customers decide to incorporate XMReality remote guidance in their large scale service

offerings.

XMReality is currently putting great emphasis on getting existing

customers to scale up its usage of Remote Guidance while simultaneously targeting new large industrial actors to increase the client base. The company also puts great emphasis on continued development of the software which is illustrated by the announcement of Generation 6. Software offering opens

up for high margins and recurring revenues

Scalability of B2B2B offering

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CEO Castevall has stated that XMReality is increasing its efforts in making the software compatible with more hardware devices. The new generation of the software is a step towards that goal, but it also important to continue developing the software to be compatible with more devices. As an example, we believe that the potential client base would increase if XMReality would be able to partner up with Microsoft and make the remote guidance software compatible with HoloLens.

There is a further potential in signing new channel partners that would market XMReality’s Remote Guidance solution. We are, however, expecting this to be more relevant when we have seen larger software roll-outs among existing customers.

The company has stated that it is important to keep its premium offering and not deviate from its pricing strategy in order to keep the pricing level. It is furthermore important that the premium strategy does not impose any restrictions on the company’s scalable offering.

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Market

Forecasted worldwide AR/VR spending

The market of AR solutions has developed rapidly during the last years to become a technology that now is ready to be adopted by larger masses as smartphones become more powerful and headsets become both affordable and more efficient. Smartglasses have improved substantially during recent years and are now lighter, possess better batteries and provide wider field of view which altogether make it more suitable to use.

The AR market is growing rapidly and is expected to continue increasing significantly during the coming years. Estimates from IDC3_{suggests that} the worldwide revenues for the total AR/VR market will amount to USD 13.9bn in 2017, implying an annual increase of 130.5% compared to 2016. IDC further predicts that the AR/VR spending will grow at a CAGR of 198% during 2015-2020 to reach USD 143.3bn in 2020. An interesting note is that the growth of AR is expected to be driven by a demand from both consumers and enterprises in comparison to the adoption of PC which primarily was enterprise driven and smartphones which initially was adopted by consumers.

There is a noticeable variance of estimated worldwide revenues among research firms. Digi-Capital forecasts the worldwide AR/VR revenues to reach USD 108bn in 20214_{, whereas Goldman Sachs estimates that the} AR/VR market will reach USD 80bn in revenues first in 20255_{. Common for} most reports is that AR is expected to constitute a larger share of the total market. Digi-Capital, for example, expect the AR market to amount for approximately USD 82bn out of the total AR/VR estimate of USD 108bn in 2021.

Driven by large tech giants

The great interest in augmented reality solutions is illustrated by the growing number of actors developing hardware and software based on AR-technology as well as numerous eye-catching VC financing and M&A transactions. Giant tech actors such as Apple, Amazon, Microsoft, Google and Facebook have all invested significant amounts to benefit from the rapidly growing AR/VR-industry. Microsoft is one regarded as one

important driver of AR innovation, primarily due to the development of the mixed reality headset HoloLens.

3_{IDC. “Worldwide Spending on Augmented and Virtual Reality Forecast to Reach $13.9 Billion in}

2017”. https://www.idc.com/getdoc.jsp?containerId=prUS42331217

4_{Digi-Capital. ”After mixed year, mobile AR to drive $108 billion VR/AR market by 2021”}

https://www.digi-capital.com/news/2017/01/after-mixed-year-mobile-ar-to-drive-108-billion-vrar-market-by-2021/#.WcIxW7JJaUl

5_{Goldman Sachs. “Virtual & Augmented Reality: Understanding the Race for the Next Computing}

Platform” (2016). http://www.goldmansachs.com/our-thinking/pages/technology-driving-innovation-folder/virtual-and-augmented-reality/report.pdf

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Google is another important actor within the AR space that was rather early in its launch of consumer smartglasses. Google has, like Apple, introduced an AR developer platform (ARCore) that allow developers to create better AR experiences in their Android applications. The ARCore SDK is

consisting of three main elements: motion tracking, environmental

understanding (detecting size and location of surfaces) and light estimation (matches light of virtual objects with the current environment). By the use of camera and motions sensors, platforms like ARCore and ARKit (Apple) improves the tracking of the environment which enhance the experience when scale and perspective is changed.

Introduction of AR developer platforms like ARCore and ARKit improves the opportunities for developers to improve their existing AR-applications but also for new application as developers no longer have to develop their own tracking systems. For XMReality, this implies that they can use the platforms to improve their own offering but also that it becomes easier for developers without existing tracking systems to create well-functional AR applications. It is yet important to remember that XMReality’s strengths are found in the combination of the AR solution, real-time communication system and industrial focus.

Field services

MarketsandMarkets predict that the field service management market will grow from USD 1.78bn in 2016 to USD 3.61bn in 2021, corresponding to a CAGR about 15.1%6_{. The research firm argues that the growth will be driven} by needs of central systems, increased operational efficiency, real-time communication between stakeholders at different locations in addition to a widespread use of mobile devices. IDC 7_{forecasts that industrial}

maintenance will attract some of the largest AR investments, expected to amount to USD 249m in 2017, suggesting that the industry now is ready to adopt AR-technologies on a larger scale.

The expected investments in AR-solutions within the field service industry is driven by the increasing focus on digitalizing industry processes.

Professionals are commonly referring to the phenomenon as Industry 4.0 which is a concept of an industry where all stages of production are digitalized. Apart from connecting and digitalizing machines, it further incorporates digitalization of other parts of the value chain and industrial ecosystem such as digital solutions for maintenance. Large field service enterprises are facing challenges in scaling up their service operations and we find it reasonable to expect increased investments in digital solutions targeting to solve this issue.

6 _{MarketsandMarkets}_._{Field Service Management Market by Solution (Schedule & Dispatch, Work}

Order Management, Mobile Field Execution), Service (Implementation, Training, Consulting), Deployment Type, User Type, Industry Vertical, and Region - Global Forecast to 2021

7_{IDC. “Worldwide Spending on Augmented and Virtual Reality Forecast to Reach $13.9 Billion in}

2017”. https://www.idc.com/getdoc.jsp?containerId=prUS42331217

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The ongoing digitalization is further related to the trend of enterprise mobility, where companies are increasing their investments in mobile enterprise systems to increase efficiency and to support a mobile workforce. Solutions for remote assistance is thereby expected to attract demand from companies wishing to strengthen their workforce mobility. The increasing age of the workforce is furthermore a demographic trend that is expected to generate a demand of remote assistance solutions. As the aging workforce eventually reach age of retirement, there will be a need of solutions that support on-the-field education of new young employees.

According to a survey examining field service companies interest in AR solutions by theservicecouncil8_{, 71% of the field service industry}

respondents waive that AR is most suited to improve on-the-job support and 57% respond that AR applications are suited to solve overall service by reducing resolution time.

68% of the respondents argue that the growth of AR is driven by increasing complexity of service products whereas 55% respond that it is driven by an aging workforce as AR could enhance the learning of new young field service personnel.

Interestingly, 12% of the companies state that their organization is currently using AR for service and support while 60% are currently evaluating the technology. Only 28% respond that they are neither using nor evaluating the technology.

A majority of the respondents (81%) argue that their technicians will use smartphones to run AR content, while 47% are using tablets and 44% use smartglasses. This illustrates the importance of offering a solution that runs on all the mentioned devices in order to reach a large user base and we believe that this make up for one of XMReality’s greatest strengths, especially following the release of Generation 6.

8_The_{Service Council. ”The Feasibility of Augmented Reality in Service” (2017)}

Increased mobility and an aging workforce induce demand of solutions for remote assistance

Most technicians will use smartphones to run AR solutions

Field service organizations AR usage

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The survey illustrates that field service professionals have realized the potential impact AR could have, where respondents primarily identifies major room for improvements in field service training and support. We further find it interesting that a majority of the asked organizations are already either using or evaluating AR-solutions to improve their efficiency. Altogether, the above sections illustrate that investments in AR/VR

technology is expected to increase significantly going forward. The field service market is further expected to increase their expenditures on

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Customers

XMReality is targeting businesses within field services sectors where there is a need of large service organizations, such as industrials, service

providers, energy and oil and gas. The customers could further be divided into two types of customers, one which incorporates XMReality’s remote guidance solution in their internal service organization and one group where customers incorporates Remote Guidance in their external service offering. The latter thus constitutes a scalable B2B2B offering.

XMReality has quite an impressive list of customers with several leading worldwide enterprises such as Bosch Rexroth, Siemens, Atlas Copco and Bombardier. The total number of paying enterprise customers is currently exceeding 30. There is a noticeable variance in size of the customers and their respective usage. Bosch, for instance, is currently the largest client in terms of number licensed software users, which amounts to about 100 users. Smaller customers are currently running tests with between 5 to 10 active users. It is furthermore important to stress that there is a variance in customers’ hard- and software usage.

An example of how the solution is utilized by a customer is found in the case of Siemens. In March, XMRreality revealed that they had signed an agreement with Siemens Industrial Turbomachinery which is a part of the global Siemens corporate group. XMReality has mentioned that Siemens at the time had evaluated various existing solutions on the market for two years before investing in XMReality’s solution. The deal is covering use of the Remote Guidance software which will be used as Siemens service offering towards its customers and is thus considered a B2B2B deal for XMReality.

Another example is Bosch Rexroth which has incorporated XMReality’s software in their service offering Hägglunds InSight Live. Bosch is also selling smartglasses as an add-on package to the Remote Guidance offering.

XMReality: Clients

Source: XMReality

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The solution thereby give customers of Bosch Rexroth the ability to request instant expert guidance over smartphone, tablets or smartglasses, leading to a reduction of waiting time and costs of travel.

Sales process

Sales activities towards larger field service customers are usually through direct sales where the sales process differs slightly depending on client and their intended usage. As XMReality is targeting large organizations within capital intensive industries, customers are often performing rigorous tests and evaluations to show proof-of-concept before investing and

implementing the solution within their organization.

One should expect long sales cycles with larger industrial actors that intend to incorporate XMReality Remote Guidance in their service offering towards customers. It is first important to illustrate why the customers would benefit from incorporating an AR-solution for remote guidance and further convince customers that XMReality’s solution is more efficient than the solutions offered by competitors. If the company succeed in doing so, the client will then start running tests of the solution which could take up to 6 months. This would usually be followed by an evaluation period of several months before finally deciding whether to roll out the technology on full scale or to discontinue the trial. We therefore find it reasonable that the total sales and evaluation period in most cases could exceed one year before potentially yielding a large roll-out. This illustrates that it is important for XMReality to work strategically and close with customers in order to favor large roll-outs and that this process is time demanding.

It is yet important to emphasize that many customers still are relatively new and currently run evaluations of XMReality’s solution and that large scale roll-outs are not expected in the short-run for a majority of the current client base. We, however, see good potential for one or two larger roll-outs during the upcoming 6 months, which we find highly valuable.

Partners

In May, XMReality disclosed that the global enterprise software solution provider IFS has integrated XMReality Remote Guidance in their IFS Field Service Management platform. By integrating the XMReality software as a part of IFS’s solution, XMReality has broaden the potential customer base while IFS at the same time has managed to strengthen their own offering. IFS is a valuable partner for XMReality given their strong position as a software provider to manufacturing, maintenance and service

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Competitive market

There are several AR-focused businesses developing software solutions to improve enterprises service organizations. Our perception is that Fieldbit, Librestream, Re’flekt and SightCall currently are the closest competitors given their strong focus and position within the field service segment, despite the fact that none of these offers the hand overlay function. Fieldbit

Fieldbit is an Israeli company founded in 2013. The company is, like XMReality, offering AR solutions for remote assistance with a strong focus on targeting field service companies. Fieldbit’s software solution Hero is compatible with smartglasses, smartphones and tables. Current customers are found in Atlas Copco, Fujifilm, Intel, Kodak and Xerox. Fieldbit has further partnered up with hardware manufacturers such as EPSON and ODG.

Librestream

Librestream is a Canadian actor offering a video platform for remote guidance to field service companies. The company is VC backed and received CAD 11m in the latest round of funding in March 2016. The Onsight offering is compatible with smartphones, tables, smartglasses, smart cameras and computers. The solution is, according to Librestream, currently deployed globally in over 10 million devices. Librestream has an impressive list of clients including actors such as GM, Rolls-Royce, Shell, Toyota and BAE Systems as well as partners in Cisco, Verizon and Samsung.

Re’flekt

Re’flekt is a German company founded in 2012, having over 60 employees working with development of AR and VR software. The company is developing different solutions depending on the demand of specific client, but Re’flekt is also offering a complete platform for remote guidance and thereby constitutes for a competitor to XMReality. Example of current clients are Getinge, Bosch, Daimler and Range Rover.

SightCall

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There are numerous competitors that offer software with AR annotations (ability to draw or place a pointer on the followers screen) towards field service companies with a similar value proposition that XMReality offers. Help Lightning is, to our knowledge, the only competitor offering a solution with a hands overlay (merged reality) that is compatible with iOS and Android devices. It is further compatible with smartglasses from Vuzix and RealWear, but does not allow users to record the communication. Help Lightning further has a more horizontal focus than XMReality, which is fully focused on the field service industry.

The above is furthermore illustrating that numerous competitors have leading global industrial companies as clients and partners which clearly highlights industrials’ strong interest in AR based solutions.

Most competitors are not publishing official price lists, but common for all companies is that pricing tends to be customized according to specific customers and their intended user base. XMReality has stated that they apply a premium price strategy for its software solution and our

interpretation is that this also holds for competitors with strong

technological offerings such as Librestream and Help Lightning. XOEye’s pricing starts at $59/month per user which thereby is slightly lower than XMReality’s price. Rescue Lens official pricing for the remote assistance solution supported on mobile devices is $1749 per seat/year. It is important to highlight that these are official prices and we find it plausible to assume that the average user price charged for larger customers will be lower. XMReality: Competitive market

Company Founded Location Focus Received funding 1

Technology Other

XMReality 2007 Sweden FS N/A

AR Software for RG with hands overlay. Also offers in-house develped smart glasses

Offers hardware from ODG. Partnership with IFS

Fieldbit 2013 Israel FS $2.21m Software with AR annotations

Re'flekt 2012 Germany Broad, includes FS &

Medical N/A

Tailored AR & VR solutions. Offers AR software for RG with annotations

Offers a platform for instructions and visualising components that supports publication to HoloLens

SightCall 2007 US FS, Insurance, Customer

service & Healthcare $9.7m Videocall software with annotations

Offers an addon for Salesforce

Librestream 2003 Canada FS $20.28m Software with AR annotations that

also runs on smart cameras

ScopeAR 2010 US FS $2.12m

Software with AR annotations. Also offering a platform for "Smart instructions" (WorkLink)

WorkLink is compatible with HoloLens

Help Lightning 2009 US Broad, includes FS &

consumer $1.68m

AR Software for RG. Offers a function with hands overlay (merged reality)

Offers an addon for Salesforce. Compitable with Vuzix and RealWear glasses

XOEye 2013 US FS $2m Video communication software. No

AR annotations

Uses smartglasses from Wuzix

Rescue Lens 2003 Netherlands Customer Support, FS N/A

Videocall/remote control software with annotations. Not compatible with smartglasses

Owned by LogMeIn, which offers a broad selection of SaaS solutions

Upskill 2 ₂₀₁₀ _US _FS _$28.61m

Videocall software supporting annotations on screenshots. Compatible with smartglasses

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All in all, we believe that XMReality has a technological advantage in its offering of a remote guidance solution with support for annotations, hands overlay, recording and that works well in rugged environments. It further runs on smartphones, tablets and several smartglasses which is a very important factor given customers different hardware preferences. Technological strength

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Opportunities & Challenges

Field service companies are showing interest in digital solutions that could rationalize their operations, a statement that is backed by XMReality’s impressive list of customers. Opportunities arise as XMReality has differentiated their offering by being unique in its offering of software for remote guidance with functions for both hands overlay and annotations, recording, is deployable in areas of weak network capacity and that further is supported on smartphones, tablets and various smartglasses.

We believe that XMReality has good potential to generate large orders given the size of customers’ service organizations and the scalability of the B2B2B model. There is potential for ramp-ups during the coming year as

customers finalize their evaluation and test periods before potentially implementing the solution in their service organization. As an example, a ramp-up from 100 to 2500 licensed users would incur an increase of SEK 18.7m in annual revenues given an average selling price of SEK 650 per month. It would further be reasonable to expect additional revenue arising from sales of hardware or point pads.

We further believe that there is opportunities in additional partnerships with hardware developers as it would broaden the addressable user base. We see Microsoft (HoloLens) and RealWear as good examples of possible hardware partners. Apart from broadening the potential customer base by making the software compatible with more devices, it would further strengthen XMReality’s position as a leading developer of AR software. Long term opportunities

We believe there are opportunities to create lock-in effects by becoming a part of a large actor’s service offering towards customers, especially if XMReality succeeds in delivering remote guidance as a part of its customers’ service organizations.

XMReality is focused on continued development of remote guidance AR-software. There are multiple areas of application that might be relevant in the future, such as medicals, education, rescue/safety as well as consumer service. This analysis is, however, fully focused on XMReality’s current core business. We have therefore not considered any additional areas of

application in our financial forecasts.

It would further be beneficial to find new channel partners that would strengthen the sales organization, especially towards larger industrial customers that typically are difficult to penetrate. We, however, regard this to be likely first as the company has demonstrated that industrials truly are ready to adopt the solution on a larger scale.

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Challenges

The market of augmented reality solutions is growing rapidly which is demonstrated by the increasing number of actors competing on the market. We expect the number of competitors to increase as the market evolves and there is always a risk of new arising competitors with superior offerings compared to XMReality. We believe that XMReality’s most important challenge in the short term is to get existing customers to implement their technology on a larger scale.

The AR market is rapidly changing and there is also a possibility that highly technological AR companies are broadening their focus to also include field services. It is further possible that the market for field service/industrial AR solutions will be affected by M&A transactions, where a merge of two competitors possibly could make up for a superior competitor. An example of such an M&A transaction is Upskill’s (formerly APX Labs) acquisition of Pristine.

We believe that an important challenge for XMReality is to retain a

premium pricing strategy without harming the scalability and vice versa as opportunities for large roll-outs arise. This becomes especially relevant as the market continues growing as we find it possible that the increased number of competitors will have an effect on the market price of AR solutions for remote guidance. This further highlights the importance of continued software development in order for XMReality to retain its technological advantage vís-a-vís competitors.

SWOT-analysis

Strenghts

Technological strength in its software offering and strong focus on FS

applications.

Weaknessess

Relatively small player compared to competitors such as Librestream and

Rescue Lens.

Opportunities

Expected strong underlying market growth. Large industrials are showing

great interest in solutions that can rationalize their operations. Possible to

achieve lock-in effects if integrated in large scale operations.

Threats

Introduction of new solutions with technological advantage from existing or new competitors. Price pressure on

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Financial forecasts

XMReality held SEK 56.4m in cash, long-term debt of SEK 1.7m and interest bearing short-term debt of SEK 0.7 as of September 30th 2017, implying net cash about SEK 54m. The operating cash flow during the period January – September 2017 amounted to SEK -12.8m, implying that the company’s current annual burn rate is about SEK 17m. The company has not announced any financial goals other than that the capital raised during the IPO should be sufficient to reach break-even.

XMReality is still in an early stage of business where the company recently performed a change of strategy to become more focused on developing and selling software. The company has increased their net sales during the last two years as an effect of an increased client base running tests of Remote Guidance. It is, however, noticeable that net sales still is on a rather low level as there is no client running the solution on a larger user base. The increased focus on software is visible in lower CoGS during 2017, illustrating that the share of software sales is increasing. XMReality is currently exhibiting negative EBIT as an effect of ramped up development and sales efforts.

The increased number of employees is noticeable in cost of staff which has increased from SEK 3.6m in 2015 to SEK 7.5m in 2016 and has continued to increase throughout 2017. XMReality has furthermore announced

recruitments of a COO and a CTO that will join XMReality during Q4. We find it plausible to assume cost of staff to increase further going forward as the company continues to expand its organization.

XMReality started to capitalize development costs as of 2014 when the company increased its efforts in developing software. The current level of capitalized development costs is about SEK 11m, of which a lion’s share originates from the development of Generation 6. We thus expect D&A to increase following release of the new software version.

Base case

In line with the above, we expect the cost of staff, external costs and D&A to increase during the following years. We see good potential for a large software roll-outs during the coming years which has potential to yield between SEK 10-20m in annual license revenues depending on customers and their intended user base.

Our base case entails the scenario where the company successfully

generates one significant software order during 2018 while simultaneously attracting new customers which will spur revenues from new license agreements.

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Our belief is that Siemens Industry Turbomachinery and Bosch Rexroth are good examples of customers that potentially could implement XMReality’s software throughout their service organization. Apart from the evaluations of AR hardware and software Siemens has been running during the recent year, XMReality announced 2nd_{of October that Siemens has purchased} hardware for an amount of SEK 0.5m. We believe that this could be an indicator of that Siemens is preparing for a larger implementation of XMReality’s Remote Guidance solution.

We are further assuming two additional large software orders during 2019, which implies that the company would be able to reach net sales around SEK 44m in 2019. Although our estimates primarily are based on software sales, we still expect sales of hardware to have an impact on net sales the coming years. The increased sales of software will be followed by an increase in gross margins. In our base case, we assume a long-term gross margin about 83%. These assumptions imply that break-even will be reached during the second half of 2019 as revenue (TTM) exceed SEK 40m. We thus believe that the current level of cash is sufficient to reach break-even.

Regarding our long-term estimates, we assume that XMReality will continue to attract software orders from large field service organizations leading to strong growth after 2020. We are also assuming increasing costs due to increased efforts in expanding the sales organization as well as continued software development. Our forecast period ends in 2025 where we assume XMReality to exhibit revenues about SEK 169m and EBIT around SEK 58m.

Bear case

In our pessimistic bear case, we assume a large software roll-out first during the second half of 2018 and an additional large roll-out during 2019. The difference from the base scenario is that the sales growth is significantly lower due to assumptions of a delayed breakthrough. This is based on assumption of a slower adoption among existing customers as well as a lower inflow of new customers. We are, however, expecting high sales growth during the coming years driven by the launch of the new software update and believe that the company will exhibit revenues around SEK 37.5m in 2020.

Break-even reached during the second half of 2019 in base case

XMReality: Estimates in Base case

(SEKm) 2014 2015 2016 Q1'17 Q2'17 Q3'17 Q4'17E 2017E 2018E 2019E 2020E

Net sales 0.8 3.5 5.2 0.9 1.4 1.6 2.1 6.0 17.0 43.5 73.1 CoGS -0.1 -2.4 -4.3 -0.3 -0.4 -0.7 -0.9 -2.4 -4.0 -8.7 -13.2 Gross margin (%) 82% 32% 17% 62% 71% 56% 57% 61% 76% 80% 82% Staff costs -2.9 -3.6 -7.5 -2.6 -3.7 -2.9 -4.0 -13.3 -16.9 -21.2 -25.0 External costs -4.4 -3.9 -5.7 -3.2 -4.5 -4.4 -4.5 -16.6 -19.2 -21.6 -25.9 EBITDA -3.9 -4.2 -9.0 -4.0 -5.0 -4.6 -6.3 -20.0 -22.1 -7.0 10.0 D&A 0.0 0.0 -1.0 -0.2 -0.2 -0.5 -0.8 -1.6 -3.3 -2.7 -2.2 EBIT -3.9 -4.2 -10.0 -4.1 -5.2 -5.1 -7.1 -21.6 -25.4 -9.6 7.9 Growth (%) - 333% 46% - 53% 17% 28% 17% 181% 156% 68% EBIT Margin (%) -483% -119% -194% -454% -373% -315% -336% -356% -149% -22% 11%

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We are further assuming slightly lower costs while keeping the long-term gross margin slightly below base case due to a somewhat lower share of software sales. The mentioned assumptions ultimately result in that XMReality will reach break-even on EBITDA level first during 2021.

Our bear case further entails price pressure in the long run, where we assume lower average price per software user. Fewer large scale

implementations of Remote Guidance, lower inflow of customers and price pressure results in an estimate of SEK 120m in revenues by 2025.

Bull case

Our optimistic bull case reflects the scenario where XMReality receives two large orders of software licenses during 2018 while the inflow of new customers remain strong. We believe that two larger software orders and new customers running software on a slightly lower user base could lead to revenues about 24 MSEK for the full-year 2018 given that the larger software orders are received during the beginning of the year.

We are further expecting several large scale software implementations among customers during 2019 and 2020 which implies a substantial sales growth during 2018-2020. Our bull case further entails slightly higher gross margins than our base case which is driven by larger software orders. We are, however, also assuming that XMReality succeed in generating several significant orders which put pressure on average license prices.

We are also assuming that the company is more aggressive regarding the expansion of the organization which leads to slightly higher costs of staff and external costs compared to our previous cases. The above assumptions result in the assumption that break-even will be reached during the mid of 2019. We are from that point expecting continued strong sales growth until 2025, where we estimate revenues about 218 MSEK.

XMReality: Estimates in Bear case

(SEKm) 2014 2015 2016 Q1'17 Q2'17 Q3'17 Q4'17E 2017E 2018E 2019E 2020E

Net sales 0.8 3.5 5.2 0.9 1.4 1.6 1.9 5.8 10.3 22.0 37.4 CoGS -0.1 -2.4 -4.3 -0.3 -0.4 -0.7 -0.9 -2.4 -2.6 -5.5 -8.6 Gross margin (%) 82% 32% 17% 62% 71% 56% 51% 59% 75% 75% 77% Staff costs -2.9 -3.6 -7.5 -2.6 -3.7 -2.9 -3.8 -13.1 -16.1 -20.1 -22.5 External costs -4.4 -3.9 -5.7 -3.2 -4.5 -4.4 -4.3 -16.4 -18.2 -20.5 -23.0 EBITDA -3.9 -4.2 -9.0 -4.0 -5.0 -4.6 -6.1 -19.8 -25.6 -23.1 -15.7 D&A 0.0 0.0 -1.0 -0.2 -0.2 -0.5 -0.8 -1.6 -3.3 -2.7 -2.2 EBIT -3.9 -4.2 -10.0 -4.1 -5.2 -5.1 -6.9 -21.4 -28.9 -25.8 -17.8 Growth (%) - 333% 46% - 53% 17% 13% 12% 78% 114% 70% EBIT Margin (%) -483% -119% -194% -454% -373% -315% -372% -369% -280% -117% -48%

XMReality: Estimates in Bull case

(SEKm) 2014 2015 2016 Q1'17 Q2'17 Q3'17 Q4'17E 2017E 2018E 2019E 2020E

Net sales 0.8 3.5 5.2 0.9 1.4 1.6 2.4 6.3 23.7 59.5 104.1 CoGS -0.1 -2.4 -4.3 -0.3 -0.4 -0.7 -0.8 -2.2 -5.2 -11.9 -16.7 Gross margin (%) 82% 32% 17% 62% 71% 56% 68% 65% 78% 80% 84% Staff costs -2.9 -3.6 -7.5 -2.6 -3.7 -2.9 -4.2 -13.5 -17.7 -23.3 -29.1 External costs -4.4 -3.9 -5.7 -3.2 -4.5 -4.4 -4.7 -16.9 -20.2 -23.8 -29.7 EBITDA -3.9 -4.2 -9.0 -4.0 -5.0 -4.6 -6.3 -20.0 -18.4 1.6 29.7 D&A 0.0 0.0 -1.0 -0.2 -0.2 -0.5 -0.8 -1.6 -3.3 -2.7 -2.2 EBIT -3.9 -4.2 -10.0 -4.1 -5.2 -5.1 -7.1 -21.6 -21.7 -1.1 27.5 Growth (%) - 333% 46% - 53% 17% 44% 22% 276% 151% 75% EBIT Margin (%) -483% -119% -194% -454% -373% -315% -301% -343% -92% -2% 26%

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The table above illustrates the variance in estimates between our different scenarios. As previously mentioned, all cases incorporates the case where XMReality receives at least one large software order during 2018. We are, however, assuming larger and additional software orders in our base and bull case compared to the bear scenario. We are further assuming a

stronger inflow of new clients in the base and bull cases, which will generate higher sales growth during the subsequent years.

There is also a significant difference in estimated margins, where we assume a larger share of software sales in the base and bull cases leading to higher EBIT-margins compared to the bear case. We assume that

XMReality, in 2020, will achieve an EBIT-margin of 11% in our base case and 26% in bull case, whereas the bear case reflects the scenario where the company still is exhibiting negative EBIT.

XMReality: Estimates summary

Net sales (SEKm) 2018E 2020E 2025E

Bear 10 37 120 Base 17 73 169 Bull 24 104 218 EBIT-margin (%) Bear -280% -48% 26% Base -149% 11% 34% Bull -92% 26% 41%

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Valuation

We have used a discount rate (WACC) of 14.5% valuation purposes. The discount rate we use is based on a number of different parameters that together form Redeye’s rating model. The underlying factors aim at capturing the company-specific risk and take into account everything from management and owners to market position and the balance sheet. Our valuation is based on three scenarios: a most likely base case, a pessimistic bear case and a positive bull case. The bear case represent the lower end and the bull case represent the upper end of the valuation range. Base scenario

The valuation in our base scenario is a result of the estimates presented in forecasts section. We believe that there is good potential for high sales growth during the coming years arising from several large scale

implementations of the Remote Guidance solution within existing client organizations. This is reflected in our sales growth assumptions of 83% (CAGR) between 2017 and 2020 and a CAGR of 13% between 2021 and 2026.

We believe there is great potential for high margins given the scalability in the offering. As noticeable in the table below, we expect to see higher margins first after 2020, where we assume an average EBIT-margin of 32% between 2021 and 2026.

The above assumptions ultimately result in an estimated fair value of SEK 14.5 per share, indicating a potential upside about 40% from the current share price.

Bear scenario

Our bear case incorporates the scenario where XMReality receives fewer large software orders during 2018-2020 as well as a lower inflow of new clients which leads to a lower sales growth between 2017 and 2020 compared to our base case.

XMReality: Base case assumptions

Assumptions: 2017-2020 2021-2026 DCF-value

CAGR Sales 83.3% 13% WACC 14.5%

EBIT-margin (avg.) -142.1% 32% PV of FCF 49

ROE (avg.) -35% 34% PV of Terminal Value 108

Terminal EV 157

Sales growth 2.0% Net cash 54

EBIT-margin 34.3% DCF-value 211

Fair value per share 14.5

Current share price 10.4

Potential/Risk 39%

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The assumptions of lower sales growth is illustrated in the table below, where we estimate XMReality’s revenues to grow at a CAGR of 60% during 2017-2020. As mentioned in the estimates section, our bear case reflects the scenario where break-even is delayed until 2021. More conservative sales assumptions will ultimately affect the estimated EBIT-margin, which is assumed to average 21% during 2021-2026. The terminal value is based on the assumption of a terminal EBIT-margin of 26%.

Our somewhat negative bear scenario assumptions ultimately results in an estimated fair value of SEK 6.5 per share.

Bull scenario

Regarding our optimistic bull scenario, we assume that XMReality will receive two large software orders during 2018 and two additional large Remote Guidance orders during 2019, which implies an assumption of high sales growth during 2017-2020. We are further assuming a strong inflow of new clients following a successful launch of the new software update.

We are furthermore assuming that XMReality will continue to exhibit strong growth after 2021, illustrated by our sales growth assumption

(CAGR) of 11% until 2026. Assumptions of substantially higher sales growth leads to a noticeable difference in EBIT-margins compared to previous cases. In this case, we assume an average EBIT-margin of 39% during 2021-2026 and a terminal EBIT-margin of 41%.

XMReality: Bear case assumptions

EBIT-margin (avg.) -201.5% 21% PV of FCF -19

ROE (avg.) 97% -51% PV of Terminal Value 60

Terminal EV 41

EBIT-margin 26.1% DCF-value 95

Fair value per share 6.5

Potential/Risk -37%

XMReality: Bull case assumptions

EBIT-margin (avg.) -122.8% 39% PV of FCF 113

ROE (avg.) -22% 31% PV of Terminal Value 167

Terminal EV 280

EBIT-margin 41.1% DCF-value 334

Fair value per share 23

Potential/Risk 120%

E 2018E 2019E E 2018E 2019E

AR is now reality

XMReality

(XMR.ST)

Table of Contents

Investment case

About XMReality

History

Today

Today

Management

Board of Directors

Ownership

Options

Product and technology

Software – Remote Guidance

Hardware

Business model & strategy

Software

Hardware

Sales process

Strategy

Market

Customers

Competitive market

Opportunities & Challenges

Challenges

SWOT-analysis

Financial forecasts

Valuation