MicroVision Inc (MVIS) 2002 Q1 法說會逐字稿

…My name is Sheeka [phonetic],and I will be your conference facilitator today. At this time I would like to welcome everyone to the Microvision first quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press “star” then the number “1” on your telephone key pad. If you would like to withdraw your question, press “star” then the number “2” on your telephone keypad. Thank you.

I would now like to turn the conference call over to Mr. Brian Haigler [phonetic], Director of Investor Relations. Thank you, sir. You may begin your conference.

Thank you. [Technical difficulty] Microvision’s first quarter of 2002 financial results conference call. A press release highlighting the quarterly performance was distributed before the market opened today. If you do not have a copy of the release, please call our office at 425-415-6758, and we’ll be happy to send you one, following the call. With us today are Rick Rutkowski, President and Chief Executive Officer; Bill Sydnes, Chief Operating Officer; Richard Raisig, Chief Financial Officer, and Tom Mino, Chief Executive Officer of Lumera. We will begin with a brief overview of the first quarter, and we will be available to take your questions.

Before I turn the call over to management I would like to remind you that, during the course of this conference call, management may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that these statements are only predictions, and that actual events and results may differ materially. We refer you to the documents that the Company files from time to time with the SEC, specifically the Company’s most recent Form 10-K and Form 10-Q. These documents contain and identify important factors that can cause the actual results to differ materially from those contained in management’s projections for forward-looking statements.

I would now like to turn the call over to Rick Rutkowski.

Good morning, everyone. Thanks for joining us this morning. Microvision embarked on a very aggressive growth plan for 2002, and we’re pleased to report this morning that we’re off to a very strong start with a solid first quarter, and solid outlook for the second quarter of this year. I’ll begin with the -- by reviewing the financial report as described in the press release; and then move the discussion to another area of our growth strategy, that we’re very pleased with the outcomes on so far, which is the launch of First Star, a Nomad product; and the coming launch of our Flic bar code scanning product, later this year.

Revenue for the first quarter of 2002 was -- we achieved a record first quarter at $3.8 million. That reflected a 63 percent increase, compared to $2.3 million for the same period last year; and as I mentioned, was in fact a record. Most of that growth came from increased contract activity, primarily DOD related. There was some commercial contract revenue in there from some work that we’ve begun under contract to a partner for the consumer electronics version of our product. We have announced recently that we also expect to follow this very strong revenue quarter with a stronger second quarter, about 20 percent growth sequentially, and about 150 percent in a comparison to last year, with a second quarter estimate of $4.5 million; and that will be our third record quarter for each respective quarter. Fourth quarter of last year was a record as well.

So as I said, we’re very pleased to come out of the gate with a strong start, from a revenue growth perspective. For the three months ended March 31, Microvision reported a consolidated net loss of $8.2 million. That’s $0.63 per share compared to a net loss of $10.2 million, or $0.86 per share, for the same period last year. Consolidated results, as most of you know, include Microvision and our Lumera subsidiary. The portion of the consolidated loss attributable to Lumera during the first quarter was $230,000, or $0.02 per share, compared to $2.3 million, or $0.19 per share, for the three months ended March 31 of 2001. We did experience improved operating performance during the quarter, due to higher gross margins, and reduced R&D expenses, which were partially offset by increased expenses for marketing, general, and administrative. Clearly, that’s part of what we will see here as we move towards -- further into the process of launching and marketing these very exciting products. We are continuing to grow our sales and marketing effort underneath that, and pushing forward with the success.

We did end the period with $30 million-plus in cash, cash equivalents, and investment securities. As I mentioned before, we’re very pleased with the results of the quarter, in terms of the growth reflected on the top line. We do have an ambitious goal this year, to achieve top line growth -- triple-digit top line growth for the year, in the range of $24 to $27 million; and as I said, we’re pleased that the first quarter was a strong start. We did see some modest initial sales of the Nomad product.

It’s been our expectation, continues to be our expectation, that the Nomad product sales will grow quarter-to-quarter, and I’ll get into some of the details of the how’s, why’s, and wherefores in just a moment. Just to frame the discussion here, we really have three areas that we want to touch on primarily. That’s our contract business, Nomad product sales, Flic market development and products sales; and in an additional area I’d like to close with a discussion of some technology milestones and progress on future products, which also gets into some of the commercial contracts that we’ve recently entered into, and which are a source of revenue to us as well. I’ll then ask Tom Mino to update us on exciting developments at Lumera, and indeed, there are a few, and many coming up as well.

With respect to our contract business, there are several things I would draw your attention to. One is that the strategy of gaining development contracts to facilitate development of products for customers is working quite well. We are seeing a lot of increased activity in the military domain, and looking at in addition to two new contracts, which we signed for just under $6 million, we will be able to report the details as soon as we receive appropriate clearances from the agencies involved. We’re also looking at additional DOD and U.S. government contracts in the third quarter, and possibly again in the fourth quarter of this year. In addition to that, there are some -- a number of both invited and unsolicited proposals in various stages, and those are for both development and possible acquisitions of display products.

And so we’re seeing some of these larger opportunities for production that we’ve not seen before. It’s too early to really prognosticate with clarity about those, but it is an early indicator to us of market needs and business activity that we think is going to be meaningful. In addition to those government and DOD contracts, there is also a strong possibility that we will see additional commercial contracts during the third and fourth quarter; and there is some potential, in fact, that we could see commercials contracts during the second quarter, and the subject matter for those ranges from our consumer displays, mobile Internet kinds of applications and other applications, as well as our image capture work for two-dimensional bar code scanning machine vision and endoscopy; and so hopefully we’ll be able to report some detail on those potentials as they unfold. Right now we’re classifying them as potentials. They're not part of our base revenue plan for the year. So those -- all those things represent, I think, additional upside.

One footnote that I would make is that last year, towards the end of the year, we announced two military contracts -- one from the Navy, one from the Army -- totaling about $5 million. Those contracts are tremendously helpful to us in advancing the development of the Nomad system and funding improvements to that system; and in fact, we have substantially covered a large portion of the second-generation Nomad cost from those contracts. So that’s, I think, a very positive development, and an element of our strategy that you will hopefully see more of as we go forward.

With respect to Nomad sales, so far we’ve sold units to 17 or 18 customers. The forecast for the second quarter, the current guidance that we’re giving, of $4.5 million, actually includes what we think is a pretty conservative number -- revenue number for Nomad. It’s in the range of $500,000 to $700,000. We expect that we will see, as we’ve said in this morning’s press release, sequential growth in Nomad, and there’s several reasons for that. One is that Stryker, who is one of our early launch partners for the product, should be seeing a late Q2 or early Q3 introduction of their product, with shipments really beginning probably early in the fourth quarter; and we do expect some larger volume coming from those initial shipments to Stryker. My understanding is that FDA approval for the product, including Nomad, is expected early this summer; and we do expect to, as they say, start shipping units to Stryker later; actually, during the summer, for continued clinical evaluation, and then throughout the fall with our first volume shipments probably beginning early in the fourth quarter.

The other element that we’re seeing with respect to growth is that in sales of the product, we’ve recently announced over the last several weeks 11 value-added resellers; and in the past day or two another marketing partner. And those relationships, there’s really a short amount of lead-time before they get into gear and actually start selling product. So we would expect that within 90 days or so of first executing a reseller agreement, that we may start to see some volume [indiscernible].

So during the second quarter, we expect some modest participation from resellers, with increased participation in the third and fourth quarter. And we think in the longer term, we’ll get to a point -- I should say really in the intermediate term, probably going into next year, we’ll get to a point where about half of our sales are coming from resellers and half direct; and over time that will shift more and more towards a reseller type distribution network. So increased [technical difficulty] of our activity will be a contributor, primarily to third and quarter; and modestly to second quarter.

Second quarter we should see follow-on sales from our direct sales force to some of the early customers that we have shipped customers -- shipped units to, as well as to some new prospective customers in a variety of categories thus far, and the categories that we’re addressing are medical, construction -- measurement and positioning for construction, we have two resellers signed to date in that category; aviation, both general aviation, and upcoming there will be some additional aviation categories, where we’re actively engaged in a pretty rigorous segmentation of that market as we speak; maintenance, repair, and overhaul is sort of a broad category, and I’ll talk a little bit about the dynamics of that as a category; manufacturing and military; and then there are a variety of other applications that are being developed and tested in laboratories, and things of that nature.

In terms of the rough breakdown, and I emphasize the word “rough” here, because this has changed and will change, going forward -- but to share with you what we see today, in terms of how sales will break down for this year, it’ll be about 20 percent medical, maybe a tad higher than that; construction, measurement and positioning is one that we’ve recently become quite enthused about -- the response of the resellers and actually some of the manufacturers of this laser and GPS-based measurement equipment has been quite strong, and so we’re looking at about another 20 percent of sales from that category; and then aviation and -- both general aviation and other would be an additional 20 percent.

So those are really -- represent in the aggregate about 60 percent of the Nomad sales that we’re projecting. In each of the categories for maintenance, repair and overhaul, manufacturing, military, and what I’ll call “other,” again, a rough estimate would be about 10 percent of product sales for each of those four categories. Now, I’ll single out maintenance, repair, and overhaul a little bit, and -- because one might wonder why that’s a relatively small percentage; and it’s simply that it’s a longer cycle time, in terms of introducing an application into the segment, because there is some customization of the application that needs to be done. And in fact, that same point, really, leads me to describe that in medical, where we’ve been working with Stryker for some time on an application that is really tailored to the Nomad, we have more of a Plug and Play sort of situation.

In construction, measurement, and positioning, this is one of the things that to us is greatly encouraging, and creating excitement, both for ourselves and our resellers and prospective partners. They also have today, an application that is virtually Plug and Play with the existing measurement systems, which today make use of flat panel displays. Aviation -- both general aviation and other, our work with PC Flight Systems, our work with other providers of electronic flight instrument systems, and other types of sensor systems also is one which there’s an interface that exists to an existing application. And so that’s one of the reasons that we’re seeing those as the early areas for growth. The other reasons have clearly to do with the value premise in each of these categories.

Construction, we’re talking about very high value associated in particular with precision grading, and things of that nature. Medical, very high value associated with the orthopedic surgical procedures. And then aviation, a very high value for the application generally, relative to the cost of installing a head up display in an aircraft. So that’s how we see the market today. The process that we’re engaged in, as you know, is one of really identifying the high value, early adopter segments, and then identifying, in addition to that, applications providers who offer something compelling in that space. Now, one thing that is sort of notably absent from what I’ve just described, is something brand-new, which is the Biometric Identification System that we are in the process of co-marketing with Robotic Vision Systems.

Just to be clear about how this works, this is not something that actually reads biometric information from the eye; some folks have been confused about that. The display is actually used to display biometric information that is collected by the system, from either fingerprints or, in fact, information encoded into the bar codes in passports, I.D. cards, things of that nature. This is something that we’re excited about. It’s a very, very hot topic in Washington, D.C. right now, with respect to security and homeland defense, and all of those very topical areas. We don’t have real good visibility in terms of what the near-term demand is, although this is an area, again, which similar to medical, construction, aviation, we do have more or less a Plug and Play application. So from that perspective, there is a potential to move this out pretty quickly, we just don’t have yet a good feel for the sale cycle. I think it will only be a matter of weeks before we have a better feel for it; so we’ll be able to, again, recalibrate these numbers for you as we go.

I guess the good news from my perspective is, the calibration that we have today represents a lot more clarity than we’ve had, even weeks ago, and certainly in prior quarters, with respect to exactly how Nomad distribution is going to break out, and what the value premise is, what the application is, in each of these categories. There’s some others coming up that I think are going to be pretty high visibility. You will see growth, and I think pretty rapid growth, in both the number of resellers and the number of marketing partners affiliated with Nomad. You will also see some evidence very soon here -- we are expecting a purchase, for example, from a major automotive company for an upcoming trial in maintenance, repair and overhaul.

Now, I’m going to circle back here, to maintenance, repair and overhaul -- and again, the reason I sort of single this out is that we believe longer-term -- intermediate to long-term -- this is absolutely one of the larger categories for a Nomad type of product. It is just that going into it, there is that lead-time to link up with those applications. The work that we’re doing with Corena, for example, we think is very significant with respect to aviation maintenance, repair and overhaul; and that’s a good representation of what you’ll likely see going forward in this market. We can -- I’ll just put some dots out there, we’ll connect them later; but an example of this is that we have shipped units to Siemen’s, who is leading the Arvika consortium. Arvika consists of about 18 industrial companies throughout Europe; many of the leading automotive companies are members of the Arvika consortium.

Siemen’s is a provider of wireless pentablet [phonetic] based systems to automotive maintenance bays today. And so it’s a very natural kind of partnership [technical difficulty] to extend that, and especially with the very, very significant work that Arvika has done in heads-up visualization. I would look for development in that area. So we are seeing the market channel and market applications channel -- applications-driven channel come together around the Nomad product. We are, I have to say, just delighted with the response to the product. What we here is that the product is absolutely unique in terms of daylight readability, contrast, and general visualization excellence; expectations very often are that the product may not be as comfortable as people would like, but in practice, it turns out to be more comfortable than they may have anticipated. I would call attention -- if you haven’t seen it, there was an article written by a fellow at a recent trade show; and it’s really -- it was meaningful to us because it was our first third-party and review of the Nomad product, and it was in Arrow News Network. If you can’t find that, if it’s actually maybe difficult to find, we can certainly provide you with copies.

But what was significant about it is that throughout the article, the fellow reviewer was flying an airplane -- this was for a general aviation publication -- wearing the Nomad in the airplane, and he described a) the daylight readability -- “…we took off into the sun. The system was completely readable.” He described the clarity and the legibility of the imagery against that bright-lit background. He described the comfort that he experienced in wearing the system, and described also what we thought was very interesting, was -- he said, “…This system will start out being something that pilots want, and it will eventually become something that pilots need.”

So we were, needless to say, really pleased that at a very thorough review and a very favorable review of the product, and needless to say, a lot of those characteristics -- ergonomic performance, daylight readability -- are relevant in many other categories as well. So generally, to summarize with respect to Nomad, we do expect to see larger sales in the third and fourth quarter. Again, the combination of resellers, the combination of some of the larger orders that we are seeing, the larger prospects that we have, the sales cycle tends to be longer because of some of the approval processes involved; and then also, the Stryker launch will be one of the things in the fourth quarter, that will begin to drive some more volume out for the product. So we’re very pleased about the product’s performance, the product’s acceptance in the marketplace.

The market, I mentioned yesterday to someone visiting here, it’s developing very much the way that we thought it would, with respect to finding these high value relay adopters in vertical application areas; and teaming with applications providers, I can’t emphasize enough the importance of that. The end user is really buying the complete systems functionality. And so when we come across something, as we have with the measurement automated positioning systems for construction, that is a terrific fit. The comment made to us by one of the top vendors in the category was, “we’ve been looking for this for 30 years.” And what they meant was, they’ve been really trying to figure out how to use a head-up display in that application. They’ve tried other wearables; they're not daylight-readable, they're not really transmissive enough to be truly see-through, or truly head-up.

So we continue to get very encouraging information back that affirms the product’s base performance and value features. I’ve mentioned some of the new [indiscernible] and applications. In medical, I failed to mention that we have very significant commercial partners talking to us about two application areas that we’ve mentioned before. One is for radiated seed emplacement [phonetic] for bracket therapy, as it’s called; another is for ultrasound-guided biopsy, which is emerging as a favored technique for breast cancer early diagnosis, and those both represent potential for considerable volumes. We do have a commercial partner who is -- we know quite well, that is talking to us about those areas as well, so we’re seeing -- and we’ve had some very interesting preliminary clinical data for both of those. It’s -- and again, in both cases it’s nearly a Plug and Play sort of application.

With reference to cost on the Nomad product, we are targeting a substantial reduction in cost later this year. That will carry us through to next year. Obviously, volume will be a part of driving cost down further, but some very simple design enhancements and vendor selection are getting us to a very substantial reduction in cost on the product, and obviously that’s terrific news in a number of different ways. With respect to the Flic bar code scanning product, again, I think the -- you know, the primary source of enthusiasm is simply the early acceptance data that we’re getting from the market through our prospective OEM partners, in particular, where our most active dialog is.

The distribution model, here again, is one of distributing Microvision branded products through resellers -- catalogue resellers, value-added resellers, as well as actually bundling it with some large accounts, as well as an OEM private label strategy. We have three OEM private label partners, that we expect to be able to announce sometime between now and the time that we begin shipping the product, and a mid-year commercial launch of the product. And so again I think that this product is one where the price performance, the features, and benefits are being affirmed to us today. It is a unique product in terms of its low cost, and the level of performance we can deliver at that cost-- about a quarter of the price of competing laser scanners; about twice to three times the performance of competing wand-type scanners; and so we think it is really going to enjoy a very nice niche in the marketplace.

As I’ve mentioned before, this really also sets the stage for launching our company into the image capture space. We believe that the very rich follow-on potential, with respect with 2-D bar code scanning -- there is, we believe, substantial pent up demand for solutions that improve upon the flawed ergonomics of CCD and CMOTS [phonetic] based systems today, which are highly sensitive to motion blur and [technical difficulty] depth of focus. Flic, we do expect to launch mid-year for commercial launch; and we do expect product sales, again, primarily in the third and really heavily in the fourth quarter, with strong growth coming through to 2003.

So we continue to be pleased with that. We’re negotiating the OEM deals as we speak, and the sales team continues to come back with very positive prognostications about market development for Flic. Both inside the U.S. and abroad, it seems there is considerable interest in Asia for this particular product. I’d like to touch briefly on some technology milestones that we announced during the last quarter, the first of which was that we built a super VGA, full-color display, using edge emitting LAD’s and our micro scanner. That’s the first time we’ve coupled the LAD’s to the micro scanner. I have to say that performance is outstanding. We believe it exceeds anything in the marketplace, and we believe that the economics of manufacturing this micro scanner/LAD based system will also beat anything in the marketplace from a cost perspective, as well.

So we think that both with respect to cost and performance, the trick is going to be able to be delivering super VGA or higher resolution at below $50, and we think this product is uniquely capable of that. Very soon after we demonstrated this, we completed a development contract with a very large Asian company. They are a global leader; a recognized name in digital imaging, computer peripherals. The task at hand -- it’s a very quick project; we’ll be wrapping it up probably during the third quarter -- is to build an application for the consumer electronics market; and we’d like to say more, but the real importance of this is that we have a large, very well versed partner -- a partner who very well understands imaging, displays, has looked at competing technologies, so I think it’s a real endorsement for the technology.

But it’s also a signal that market for these kinds of higher performance, miniature displays is emerging in the next couple of years. And our model is very much about partnering with companies like this, that have the kind of scale and presence to deliver these products into the consumer electronics marketplace. As you know, the application categories range from digital camera viewfinders, to gaming systems; we’ve seen some very interesting concepts for wearable displays for both, by the way -- home-based and portable gaming systems. Clearly, the display is a real constraint in a portable gaming system, as it is in a mobile device. We’re also seeing continued, and in fact, increased interest from manufacturers of mobile Internet devices, as well as the service providers. And the service providers really have a strong, vested interest in providing a quality visual interface, so that they can full value content on the network. I believe that we -- and again, it’s not in our numbers yet -- but I think there is a very strong potential that we will see increased activity in this area, possibly beginning -- you know, late in the second quarter, but more likely in the second half of the year. And I think as we complete this work [technical difficulty] there’ll be more evidence of what the next steps are in regard to our partnership in Asia.

As you know, we also have a partnership with Losenlewa [phonetic] in Asia, who will be doing the high-volume MEMS fabrication for us. I’m not going to report it today, but we will be able to report to you soon, some very encouraging news with respect to MEMS fabrication; and again, the price advantages, cost advantages of this technology versus competing technologies.

I know the economics of that are really driven by Silicon area and yield. Another very important technology milestone was the demonstration, for the first time, of a system that is -- uses a scanner that is resonant in both directions -- is what we refer to as an ultra low-power scanning technique. It is ultra low-power because the mirror, rather than running in a ramp fashion and stopping the vertical mirror-- it actually runs resonant in both directions, so it’s vibrating like a tuning fork in both the horizontal and vertical directions. This requires some real magic, in terms of the mathematical image processing that we do electronically in this; and we had done some very sophisticated modeling, and we’re getting very good predictive results.

I have to say that the -- when we actually brought this up on the table and demonstrated it, it exceeded our expectations; and so we now view it as a very, very promising path. Now, the significance of this relates not just to power consumption, which can be a very important discriminating feature for portable devices, in particular; but it also relates to the device cost and the overall package size. Because of the simplified drive mechanism that we can avail ourselves of, using this technique, we can reduce the number of process steps associated with fabricating the MEMS device; and we can also create a device that is smaller still than even the smallest scanners that we’ve been able to build to date, and of course the overall package is smaller as well, because it -- the drive mechanism is simpler and smaller.

So there are implications for power consumption, cost and package size, and those are three significant discriminating features, especially for portable products. This would be implemented in what we call our Gen III system; so think of what we have today, and Nomad, as the Gen I. Gen II, you’ll start seeing the first implementations of Gen II designs later this year. We will have some more advanced prototypes of mobile Internet types of devices integrating displays into them; and then Gen III is probably two or three years out. We believe we can go to market initially with the Gen II solution in 2003 -- late 2003, 2004; and follow that with the Gen III solution, as we continue to drive economy as a scale; and drive towards higher performance and increased discriminators, with respect to package size and power consumption.

So with respect to technology milestones and future products, I did talk a little bit about our partnering work on the consumer-oriented display. The markets that we’re targeting that with some of the [technical difficulty], some of the things that we might see later this year. I mentioned briefly, and I’ll just mention it briefly again, that the other area where we are active at the moment is identifying and talking with partners, for possible applications and development projects relating to image capture, and so the initiative there is to get into -- with this laser scanning camera approach -- this two-dimensional laser scanning camera approach.

Again, the application areas that are candidates are machine vision, laser scanning endoscopes, and two-dimensional bar code scanners; and there is considerable interest in, actually, two out of the three areas. Machine vision, we have not really done a lot of work in just yet; but there’s a really compelling value premise in that category, as well. So in summary, I think it’s been an outstanding quarter for us; we are looking forward to an even better quarter. We’re looking forward to growing sales, greater visibility on sales of the Nomad system, and today we’re able to provide, I think, much greater clarity as to where we see that system headed than we have been in the past; and I expect that that will only improve in the weeks ahead. I’d like to now turn it over, briefly, to Tom Mino, who is the Chief Executive Officer of Lumera, to describe their recent activities, and give us some indication of what we can look forward to in the future, in the way of milestones from Lumera.

Thank you, Rick. Last quarter was one of significant progress in Lumera’s product development cycle. We have had many accomplishments in the last three months. One was that we have successfully synthesized new chromophores with unprecedented levels of EO activity; we made an announcement about this in the last week. In parallel with that, we’ve worked with the University of Washington, and their research indicates that there is [indiscernible] significant improvement over the materials that we’ve developed in the last quarter. But the current materials that we have developed within the last three months give us a capability of a device with twice the performance of the existing lithium niobate solution of 10 GigaHertz.

We’ve also successfully processed five level wave guide devices, with all the [indiscernible] material; which means we’ve made our own core material out of the chromophores in the guest host system; and also all of our own platting material and buffer material with customized polymers; and all of these have matched indices, which will give us the highest performance available, from a standpoint of the wave guide and its application dual modulator. We are very close to a 10 GigaHertz prototype and we expect to achieve that device within this quarter; and we are currently completing Phase I of the contract that we had with the NRO, and negotiating with the NRO for additional funds for Phase II.

During quarter, to enhance our capability to provide the device prototype, we added two people, very experienced people, in the device area; and [technical difficulty] one person in the characterization and test area, and so we’re currently up to a headcount of about 30 people. We spent much of the quarter planning for engineering samples later this year, and the facilities and the people and place to accomplish that; and at the same time controlling our costs in such a way that we can make sure that we have the cash required to get this product ready to get to the market sometime later this year or early next year.

Can you talk a little bit about some of the things you're doing, laying the ground work for scale up?

Yeah. One of the issues that probably has not been addressed in the past by anybody looking at this area, is the ability to take the very complex molecules that are required to get the high EO activity, and make larger quantities. Typically, when you read the publications from the universities, they're talking about half-gram kind of quantities; and most of our competitors that talk about having any materials at all are talking between two and five grams. We have been working diligently at making sure that we can not only produce these in laboratory kind of quantities, but in production kind of quantities which will sustain our fabrication facility through early production. And currently we have the capability in-house to scale most of these materials up to between 25 and 50 grams, as far as the core materials are concerned; and anywhere between 200 and 500 grams, as far as the polymers themselves are concerned.

We are also working with a partner, at this point in time, who has a very successful track record of scaling up complex polymers; and we’re currently working with them with two of our materials to be able to establish within probably a year, kind of, timeframe, the ability to make between 500 and 1,000 grams of these materials at a time. It’s a very complicated process because as you increase the quantities, the thermal properties and the surface effects actually have an effect on the electrical and optical performance of the materials. So we are setting the stage for all of that, but we have already put the proof of concept in place that indeed, we can not only make these materials, but we can scale them up in quantity.

So you mentioned that later this year or early next year you’d begin shipping product. It sounds like, then, that initially we’d be using our own source of materials, and that the scale up would begin to apply for higher volumes?

Yeah. It wouldn’t be possible for us to get a partner in place probably before the middle of next year.

Right.

So we do have internal capabilities to sustain quantities through that period of time. And we have additional floor space available; we could convert the lab space and put the equipment into, to do additional scale up on site. And we have the people in place here to do the quantities we’re talking about now, and with our agreement with the University of Washington, they're putting 12 post-ops and 12 graduate students in place who would have the capability of helping us with this scale up. So we have a pool of resources, and we’d have the facility and the people to be able to do the scale up ourselves, to sustain us until the partner came on board.

Right. Just in closing, if you could sort of describe again what you think that initial product is, and what its distinguishing features and benefits are? And then you might also comment on -- you know, this is a market that has received an awful lot of attention because of its severe downtrend, that you experienced while you were at Agere -- how you see that market today and what you're hearing from the industry?

Well, we went to OFC this quarter, which was a significant event from a standpoint of us collecting information, get a chance to talk to our customers, and some potential suppliers and partners face to face. I think the general consensus that I walked away with, and with follow-up phone calls with companies like Nortel and Cisco, is that the bottom of the trough is here, and we’re moving along it; but nobody can right now forecast when the trough will end and the upward projection of the installation of optical equipment at the levels we were at previously would begin.

The consensus right now is, we’re probably not going to see a significant change for the balance of this year, and that the general feel is that the business will start to come back first quarter next year; ramp second and third quarter of next year; and probably be at a good level -- not the great levels we had two years ago -- by the end of next year. The product that we’re going to offer to start with is going to be a 10-gigabit modulator for the metro space. The advantages we think we take into that market, based on everything we know today about lithium niobate and indium-phosphide solutions, is very low power and very low loss -- significantly better than lithium niobate in the power and the loss area, and the equivalent of indium-phosphide in the power level, and significantly better in loss.

Thanks very much. I think we can turn it over to questions and answers. I will tell you that in addition to being very pleased with the quarter that we have experienced at Microvision, and the one that we are looking forward to, I am very, very excited about what Tom and the folks at Lumera are doing, and think it holds enormous prospects in the long-term; and very exciting -- it’s going to be a really significant milestone that we’re really looking at any time now, with respect to modulating light through a Lumera-built modulator. And the fabrication process is up and running, so we’re not far off from that event. So I think we’re ready for questions and answers at this point. We have probably 15 or 20 minutes to cover some questions and answers.

Your first question comes from Dan Campbell of Roth Capital.

Good morning. Thanks for the conference call. A quick couple of questions. You didn’t talk about the timing of the positive contract modification, or also the development contract for the automobile manufacturer. Are those 2003 items, or 2002 items?

Oh, no. I'm sorry. The timing -- the -- two of the contract modifications have been signed; we expect to sign a third in -- you know, depending upon what the negotiation period is, early next week to the end of next week. So those are all imminent. With respect to the automotive work -- and thank you for pointing that out -- that contract has been signed. There are a couple of different parts to it; the most recent of them was signed, I think, in the last week or so. And that is to build a system that we believe will be demonstrated in a prototype automobile, at a show later this year. We can’t identify the automotive manufacturer; I will tell you there is more activity in the area. We have tended to not play up too much what’s going on there, because again, it’s early days for us. And I think there are a couple of other of these sort of significant growth categories that are emerging, that we’re just being somewhat conservative about providing a guidance on, until we have greater clarity.

Just a follow up on that. I assume that the $5.7 million positive variance for the military is spread over the life of the contract, not all in 2002 or 2003?

It’s mostly 2002. These tend to be year-to-year contract modifications; in those particular vehicles we’re moving towards a time, possibly next year and the following year, in which you’ll start to see more multi-year contracts. And some of the larger contracts, that involve both development and acquisition that I mentioned, that we’re [technical difficulty] those, those would be multi-year as well. But most of what you see from us tends to be year-to-year; and so it either -- in this case, these are typically one year. If they began in April, early May, they’d be running through March, April, or May of next year.

Rick is there any way to put the scale in scope on the potential VAR’s [phonetic] for Flic, and the OEM channel partners? I have a sense that the numbers are attractive, but I think the long-term potential there is outstanding, but really have no firm feel for what we’re looking at, interim.

Yeah. Well, what you have is kind of an interesting split. The -- from an OEM perspective you're not talking large numbers of OEM’s, necessarily. But probably the largest of our OEM’s has a significant presence in retail point of sales, so they can be responsible for some pretty good product volumes this year, and some outstanding product volumes, we think, going forward. It’s becoming more and more the case that a backup scanner -- what’s called an exception scanner, will accompany a point of sale terminal. It’s more and more common in retail environments these days. They -- you’ll see it at Home Depot; you’ll see it at Cosco; you're increasingly starting to see it in all manner of other places. So retail point of sales is a growing space, and they are a huge presence in that category. With -- so as I mentioned, we’ve got about -- there are three OEM partners today that we are very far along with. I don’t know that the number for this year will be much greater than that. If so, it might be another one or two, later this year and into next year. On the channel distribution side of the equation, you have today -- I think the number in the U.S. is in the neighborhood of [technical difficulty] 11,000, somewhere in the catalog distributors of bar code scanning products; and they range from simple catalog [technical difficulty] to people who are doing more value-added kinds of [indiscernible] products from most of the vendors in the category of handheld products. But it’s a very well established distribution environment. There are master distributors that distribute to the sub-distributors; the sub-distributors also catalog some products that the mater distributors don’t have.

So it is a market that today has a quite mature distribution infrastructure; it’s multi-tiered and it’s accessible, to the extent that you’ve got a product, as we do, that has a meaningful cost performance role to play in the marketplace. So I'm not sure I answered your question, Dan, but --

You got close, and the fact that you got the people in place also is a bonus. Last question and I’ll hop off and give somebody else a chance. Tom Mino, on the -- do you need an integration partner for Lumera optical modulators? Or do you foresee this as a components sale?

No, Dan, I -- we have to have the component to have the proof of life and show the reliability of the technology; but I think forward-looking, this is a platform which will be used to integrate other components. And one of the things we’ve discussed is what kind of device partner would we want, moving into the future, and as a point of fact, we’ve got people contacting us, based upon some of our announcements. So --

Well, the natural partner, I assume, would be lasers? Or is there another natural partner?

Well, if you just want to do a mock sender, your natural partner would be a laser manufacturer. If you can bring a big advantage to the transponder marketplace, it’d be somebody that has a broader variety of active components available in the IC.

Great. Thanks.

Your next question comes from Peter Jacobs of Wells Fargo.

Good morning, gentlemen.

Good morning.

Rick, could you just talk about the VAR revenue recognition, how you’ve approached that in the first quarter and how you expect to approach that, going forward? Is it going to be a typical -- you record the revenue when you sell into the channel?

Yeah, in -- it’s a good question. Thanks for asking it. They’re -- the way most of these VAR’s work is, they're not stocking a lot of boxes. They're doing custom installations for a customer, or they’ve got an order from a customer. So it’ll move through the channel pretty much in real time. You're not going to see a lot of channel stocking. Probably the one exception to that would be Stryker, because of the scale that they're operating at, they may actually inventory some product. So by and large, we’re recognizing revenue, I think -- is it 10, 15 days -- there’s a 15-day acceptance period, which is usually enough time for the VAR to actually have delivered the product through to his end-customer. So there’s not a lot of fluff in the channel, here. It’s a pretty lean channel, and things will tend to sell through and in fact, have already been pre-sold through, before they actually are ordered from us, in almost all instances.

I think you mentioned early in the conference call that you sold about 17 customers in the first quarter? Did I understand that right? But did you give out how many units were actually sold out of the channel in the first quarter, and also what the unit sales expectations might be for the second quarter?

Yeah. It was a smaller number of customers in the first quarter. It’s 7 to 18 customers to date; I think during the first quarter, it was really a handful -- five or six; it was maybe on the order of a dozen units. If you remember, during the last call we talked about the process that we went through during Q1 of vendor quality assurance and quality assurance generally, prior to ramping up the manufacturing. As I did mention earlier, that in the $4.5 million figure for Q2, the current revenue guidance that we’re giving, that probably $500,000 to $700,000 of that is Nomad sales. And that’s --

What might that equate to on a unit basis?

Well, ASP is in the neighborhood of $10,000; MSRP, $12,000; and then we’ve got various sort of channel arrangements that discount, based on volume.

The sales in the first quarter of about 12 units -- were those direct sales, or did they go through the reseller channel?

No, the reseller channel really was being built during the quarter, for the most part.

Okay, so that’s going to be more of a go-forward?

Yes, that’s exactly right. And that’s why I’m saying what we’re -- those are the things that we think are going to drive increasing volume, going forward, is that these resellers, there’s a sale cycle time for them; there’s just a time -- a period of time where we’re bringing them up on the product, and so you -- there’s a little bit of delay line in that.

And two other quick questions, here. First of all, did you give the revenue outlook for this year? The -- I think the guidance that you gave at the end of the fourth quarter was approximately $24 to $27 million, based on the percentage increases. Is that still look achievable?

I did. I mentioned -- I affirmed that earlier in the call.

Okay. Sorry, I got on a little bit late. And could you just quickly give an overview on how you expect that revenue composition to look like?

I think it’s consistent with what we’ve said before. We expect it to be somewhere between 50 percent contract and 50 percent product, to 60 percent contract, 40 percent product. Within the product category, you're looking at two-thirds display or Nomad products, and one-third Flic.

Okay. And lastly, you -- the private placement that you did late March, I would assume that that $6 million would have been reflected in the first quarter balance sheets, meaning that your cash burn rate then, for the quarter, was about $9 million? If I do the math, you're down about $3 million in cash; then if I add in the $6 million that you would have gotten in the first quarter, that would have given a [indiscernible] of about $9 million. Is that a fair --?

Yeah. That’s about right, Peter.

And -- hi, Richard. And what do you -- do you expect that kind of a burn rate to continue over the next couple quarters -- increasing sales, but increased product development? How does that all wash out?

Well, R&D is actually starting to flatten a little bit. I mean, there is some increases; that’s being somewhat offset by the growth in contract revenue, because some of that -- some of those bodies are being allocated as direct cost to projects; and then you also have a gross margin contribution from those projects, which has been averaging around 40 percent. So on a net basis, the trend looks to be flat to down in terms of -- I mean, the consensus estimates actually have it that way, for the most part, as kind of flat to down on an EPS basis, over the next three or four quarters -- you know, ending the year at a lower -- at a reduced burn rate from where we are now. And then, for 2003, we really haven’t really given guidance yet, other than sort of a broad-brush thing that we would expect it to be -- expect operating losses to decline substantially.

Okay, super. Thanks, and I’ll turn it over to somebody else

Appreciate it.

Your next question comes from Joe Eshoo of Ladenburg Thalmann.

Hello.

Good morning.

A couple of bookkeeping questions. Depreciation expense in cap-ex the first quarter?

Cap-ex was about $300,000 for the first quarter, Joe.

Okay.

And the depreciation was what, about -- a little bit less than $700,000.

Okay.

On a consolidated basis.

Okay. These guys ask all the good questions right away! What was the Lumera [technical difficulty]?

[technical difficulty] revenues. For Lumera it was a little bit less than $300,000 for the quarter.

Okay. Okay. Can we talk a little more about the channel distribution that you’ve already got set up for Flic? I mean, you’ve already mentioned that you’ve got a multi-tiered system that’s out there; you’ve already got relationships established. Could you go into some detail as to when do you think that you're going to be delivering product into that channel? And -- you know, what kind of expectations you have?

Sure. We’re looking at a mid-year launch, with volume production of the product probably early in the third quarter. The -- in terms of the expectations that we have for the product, this year the likelihood is going to be in the 60,000 to 70,000 unit sort of range, with -- you know, you're going to get five, maybe six months of product sales under your belt for 2002. We would expect in 2003, obviously, because of the additional quarters, that you’ll see at least double those volumes, plus we’re actually expecting a reasonably significant growth rate, although we haven’t really given longer-term guidance on them -- on the Flic product.

We’re in the process now, with the OEM partners, establishing exactly those kinds of considerations -- what sorts of volumes we can expect from them. In one case, we’ve had a partner ask us to consider exclusivity in a particular category for them; and obviously, we would require certain kinds of volume commitments in order to do that. But it all -- right now, our best visibility sort of bubbles up to the numbers that I just gave you for short-term, and we’re looking at a -- internally, anyway, right now a pretty bullish forecast for 2003 growth. The reception of the product has been very good; the OEM’s have been test-marketing the product in parallel with their ongoing negotiations with us, and continuing to get also very good feedback from their customers, as well.

Now, switch over to Nomad. The sales that you’ve had so far, or commitments you’ve had so far, have you seen any concentration or any patterns to the sales, as far as a particular application or industry sector, or also, by the actual seller of the unit? VAR versus -- you know, what type of distribution do you have within all your different channels?

Right. I’ll go back to some of the comments I made earlier, which is that -- you know, it’s not so much looking in the rearview mirror here for a pattern that we saw with the -- some of the early customers; but what we’re seeing emerge, day-to-day and week-to-week here, is a picture of the market going forward. And the pieces of that are -- have to do with the application. [Technical difficulty] an awful lot. So -- you know, one good example of that was in this category, for earth moving and paving -- what we call automated machine control -- are getting interest from the actual equipment manufacturers, manufacturers of the position and equipment. We were able to quickly understand why that interest developed as quickly as it did, and it had to do with the fact that, again, you had an application in place that the Nomad could easily plug into, and could offer a very clear, extended benefit to that existing product and application.

And I think that’s really representative of what we have seen, and probably will see, in the early market is you want to be able to go in, plug in something, have it work easily, and have an obvious and compelling benefit associated with it. The nature of that has to do with the -- in this case, the nature of the benefit that can be derived from utilizing the system. So in -- that’s the high value piece of the equation. So I think beyond that, the pattern that’s emerging for us is the one that I mentioned earlier, where obviously, we’ve worked for a long time with Stryker; we’ve continued to plant a lot of seeds in various clinical environments in medical; so we’re starting to have real good clarity on the type of applications for medical.

Most of them -- for example, when we think about bracheotherapy [phonetic], which is irradiated seed implants placement; ultrasound -- guided ultrasound biopsies; and the orthopedic surgery system, in every case you're actually using [technical difficulty] as an alignment, almost as a sighting mechanism or an instrument of that kind. So we’re seeing those sorts of common themes emerge, in terms of the application work with for a long time, through the Arvika consortium. I think what’s really gratifying to us there, is we’re really sort of emerging as the display of choice. Arvika’s focus is on what they call “augmented reality.” In other words, the idea of using this technique of a see-through display, specifically.

So all of the application work that they're doing with their member companies, which include Volkswagen, Daimler-Chrysler, BMW, and many of the others in a European industrial environment, are focused on this notion of how you use this sort of head up visual technique in that environment. And the Nomad really has just [technical difficulty] itself as being able to uniquely support that kind of use, because you get a true see-through experience -- it’s truly transmissive and high-contrast. So there are [technical difficulty] in marketing the system, because when we do discern that sort of pattern, that for example, in medical, the fact that, gee, where people are really -- where this is really creating some resonance is in areas where people are actually guiding an instrument of some kind.

Then that can really help to further focus our further exploration of that market. But at the same time, there’s also sort of a range of these kinds of things. With the robotic vision systems, identity system, which is a relatively new application, the primary benefit there [technical difficulty] the people doing these security checks; and two, the ability to actually stay heads-up in looking at the person that you're doing the security check on, while checking the biometric information.

So the answer is yes, we’ve seen some patterns; the answer is also that we’re seeing more and more things emerge with each passing day, and I think -- again, I’d go back to the comment that I made earlier [technical difficulty] that we gave on how the market breaks out in percentage terms, is very rough guidance; it’s guidance that -- you know, has changed already, and John, what we see today are in the categories of medical; the precision grading and automated machine control for construction; and aviation, including general aviation and some other categories. And then there’s another three or four categories, that are smaller pieces, early on. I also mentioned that maintenance, repair and overhaul, today, is a relatively smaller piece, probably about 10 percent of what we might see in product sales for this year, but we expect that to be one of the higher growth categories, simply because the total available market there is so very large.

The reason that it starts out a little smaller is that it has a more protracted cycle of application development, because these tend to be sort of multi-part systems, and they tend to be customized, certainly from a software perspective, with respect to the particular field of use. So -- you know, automotive maintenance versus aviation maintenance use. You're obviously using different types of digital information.

Could you kind of give me just a rough estimate of your sales -- the direct sales, versus channel sales, for Nomad for this quarter?

Yeah. Well, for the current quarter, we expect to see -- you know, somewhat limited reseller activity. I would say -- you know, maybe 10 percent. Somewhere between 0 and 10 percent in the current quarter. In fact, I think in our current numbers we’re not really counting on any reseller sales, maybe one or two units. So there’s upside there, potentially. But I would expect that during the third quarter, that number goes up to probably about 15 percent of total sales, maybe even 20 percent; and in the fourth quarter it could be 30 percent or more. We expect it to start moving up to about 50 percent, for two reasons -- one, because the existing resellers will start to see growth internally; and two, because the number of resellers will grow. And just like anything -- you know, 20 percent of our resellers will ultimately probably do 80 percent of our sales. We do expect to have 50 in place by the end of the year, but for this year I would say, in the aggregate, you're probably looking at less than 30 percent of total sales coming out of the reseller channel.

Okay. Thanks for the info.

Thank you.

Your next question comes from Dan Campbell of Roth Capital.

[indiscernible] for one. I'm not sure if I got the price points right on the SVGA edge emitting LED and micro scanning piece. You said below $50? I assume that’s per eye for the LED and the micro scanning piece?

Yeah, actually, what we’re looking at there is a complete display module, electronics optics, scanner, light sources, that could be integrated in -- you know, you’d have your design interface and it could be integrated into products and sold complete, for under $50.

Holy cow! So -- you know, a sub-$100 -- actually, when you gross it up, probably $250 price point for a binocular, SVGA optical system?

Right. I mean, that’s where we think you have to go to penetrate the consumer electronics market. And that really is -- you know, to us, sort of the fundamental dilemma that micro displays have faced, is on the one hand, if -- you know, if I'm going to use this type of system for a gaming application or something, I really want something that’s going to give me some pretty good resolution -- you know, certainly, at least what I’m used to getting on my computer screen. But on the other hand, it has to be in line with the prices that I'm paying for gaming systems and consumer products of that kind. That’s been a really tough mix to achieve with miniature flat panel displays, because of the -- you know, the silicon area and yield problems that cause cost to go up exponentially, as you try to scale higher resolutions.

And so, as I say, we’re going to have I think some additional very good news on that silicon area and yield front, coming up very soon. We’ve -- we’re working on that, even for Nomad II, and have some very encouraging early results that we’ll be able to report on as well. But that’s sort of the nub of the consumer electronics positioning, is the ability to deliver that combination of performance at that very low cost, that’s going to be necessary to really create the kinds of volumes that are possible.

And prototyping would be next year sometime?

Well, we’ve got prototypes of the systems now; the -- in fact, you’ll see, probably later this year, some additional embodiments that start to look an awful like consumer products, incorporating Gen II variant, or -- you know, a first phase of what we’re going to call Gen II -- a variant of it. Gen II is about the size of the tip of your index finger, including the optics and the scanner and the light sources. One of the other things we’re seeing, by the way, on the light source side of this is -- you know, one of the things we do is, we want to integrate red, green, and blue LED’s with some sort of combining optic; and in our travels in Asia we are really thrilled with what we’re seeing. We’ve shown -- and a lot of folks here have seen us demonstrate, where we mount LED’s on an X-prism -- a cube prism; and we can get those very small, but what we’re seeing from suppliers in Asia are a lot smaller than anything we’ve showed to anybody yet. So [technical difficulty]. So it’s very encouraging that your supplier chain is now starting to move towards this sort of value-added component, where they're actually doing the integration of the LED’s and some of the optics, and things of that nature.

Consumer-based, head-mounted display?

They're -- what they're using these combiners for today is things like DVD heads, which is terrific, because you’ve got some very, very high volumes. They're not using RGVA light sources for them; they're using -- you know, red and infrared lasers to do reading and tracking of optical storage. So it’s really been -- I'm trying to think, primarily, I think the storage industry that has driven [technical difficulty] these integrated light source packages. But they're really -- you know, they're really impressive little works of art.

Well, that’s it. I’ll hop off.

Thanks.

I was just wondering when you can see Microvision selling an actual product to either the Army, or some other DoD department?

The -- you know, historically we’ve said that production contracts probably wouldn’t begin until 2005, 2006, and that’s on the basis of the current work that we’re doing for these helmet-mounted displays for aviation. Now, we are seeing some prospective opportunities that would have a [technical difficulty] sooner than that, and I guess in one case, Bill, it may be even as soon as sometime next year. But as I said earlier, it’s really too early to prognosticate about that; but on the other hand, [technical difficulty] and it’s in some cases the degree of pain for these customers is quite high. We have done some work internally that I don’t want to talk about just yet, that is very encouraging in terms of our potential ability to address a large replacement market in the DoD arena. And so there is a lot of stuff brewing in that [technical difficulty]. I apologize for not being able to give you more that you can hang your hat on. But I guess the conservative approach is to think 2005, 2006, for military; and we’re going to add more clarity on what actually might be happening there, that could provide that upside.

Now, this goes sort of back to the longer-term potential in terms of production, but I did mention also earlier, that we have a number of invited proposals and unsolicited proposals in various stages of development, for not just acquisition and production, but also development; future combat systems is something that we would very much like to be involved in. We’ve done a lot of work with Boeing in the past, [technical difficulty] and so we have proposed into them for that. And there’s other work that we’re doing; one of the things that I should mention -- I think I can mention this -- is that one of our contract modifications recently came from NASA for the first time. Another of them came from the Army, to put a Spectrum system into flight-testing. And the schedule, I believe, for that is later this year. They will be flight-testing a Spectrum display. Now that’s a significant milestone event, because it’s actually the first time one of our systems will have flown in an aircraft.

And the Spectrum -- the other significance of that is that this is really the first time that the military has demonstrated interest in Spectrum. For aviation applications, most of what we’ve done there has been with the -- what we call the “virtual cockpit program,” which is a much higher resolution display. The good news with the Spectrum is, it’s something that we could build and put into service more quickly, because it’s a simpler system; it’s a less expensive system to implement than the virtual cockpit helmet. And so that also, depending upon the outcome of that flight-test, and what the Army’s further interest is at that time, could represent something that would pull that time frame for production to the left. What they're looking at -- part of the reason for that is because of the greater simplicity of Spectrum; part of the reason is that the application that they're looking at wouldn’t actually have to be designed into the aircraft. It’s something [technical difficulty] would be what’s referred to as an “appliqué kit,” and could be interfaced with an aircraft in a couple of hours on the flight line. So it’s something that was meant to be [technical difficulty].

Ladies and gentlemen, we have reached the allotted time for questions and answers. Mr. Rutkowski, are there any closing [technical difficulty] remarks?

Yes. Thank you very much. I would like to again, thank everyone [technical difficulty] for joining us today. We’ve had a terrific quarter; we’re looking forward to a better second quarter. I do believe there’s -- continues to be upside in the second quarter, and we’re looking forward [technical difficulty] begin to really emerge that are going to drive product sales. I’m particularly pleased that we’ve been working with Stryker for a long time. I think this is going to be a really terrific reference application in the medical domain. I happen to believe that it is really just a killer application; the functionality of the system is absolutely magical when people see it, and so I think that in addition to the fact that we should see some of our first volume from them later this year, it’s exciting what that will mean for growth in the space, generally; and as I’ve said, we’ve already seen interest in spreading that Nomad display into two other application areas in medical, which are -- offer the potential for higher volume, as well.

So we’re generally very, very pleased with what we like to call “traction,” that we’re getting -- you know, from day to day; and we’ll continue to report to you on that, and as I mentioned earlier, I think we have some technology milestones to share in the offing, that are very significant, both with respect to the short-term implications for cost improvement; and with respect to the long-term implications for the competitiveness of our low-cost micro display products. So having said that, again thank everyone for joining us this morning, and we look forward to speaking with you next quarter and to reporting an awful lot of news between now and then. Thanks again.

Thank you for participating in today’s Microvision first quarter financial results conference call. You may now all disconnect. (CONFERENCE CALL CONCLUDED)