MicroVision Inc (MVIS) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2010 Microvision Incorporated earnings conference call. My name is Derrick and I will be your operator for this event. At this time, all participants are in a listen only mode. We will be facilitating a Q&A session at the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would like now to turn the conference over to Ms. Tiffany Bradford, Investor Relations Specialist. Please proceed.

Thank you. I'd like to welcome everyone to Microvision's third quarter 2010 financial and operating results conference call. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer, and Jeff Wilson, Chief Financial Officer. The information on today's conference call may include forward-looking statements including statements regarding projections of future operations and results, product development applications and benefits, availability and supply of product and key components, business partnering expectations, market opportunities and growth and demand as well as statements containing words like, believes, estimates, expects, anticipates, target, plans, will, could, would and other similar expressions. These statements are not guarantees of future performance. Actual results could differ materially from the future results implied or expressed in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are included in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission under the heading Risk Factors relating to the Company's business and our other reports filed with the Commission from time to time. Except as expressly required by the Federal Securities Laws, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, changes in circumstances, or any other reason. I now would like to turn the call over to Mr. Alexander Tokman. Alex?

Thank you, Tiffany. Everyone, thank you for joining us this afternoon. There is lots of news to discuss. Let me give you the outline for today's call. First I will provide an update on the green laser situation. There are several big news today from Corning, from Microvision. Many of you are wondering what does it all mean. I will provide you with some background information and color and what these important events are and how they will impact 2010, 2011, 2012. Next, we will shift the gears and discuss the revenue, including an update on the engine deliveries to all previously announced OEM customers. Phone sales review, I will update you on other core strategic developments in the areas of automotive, eyewear, and gaming. After that, Jeff will come in and provide the update on the financial results. Following Jeff's financial presentation, I will briefly highlight you on our upcoming plan to launch a new and exciting product in time for the holiday season and will conclude this call with a Q&A session.

Let's begin with the green laser update. Many of you know this initiative is at the heart of our growth strategy. There are several news items to discuss here. Let's begin with Corning. Many of you know that Corning has communicated earlier today that they have decided to stop the synthetic green laser program. Many of you are aware also that this was the second generation synthetic laser G-2000 that was targeted for commercialization for early 2011. Corning has said that they decided to discontinue this effort because it was determined that further development and commercialization of the synthetic green laser product is not practical at this time. The primary reason for that decision is the accelerated progress of the native or direct green laser technology over the past year.

As such, Corning believes that the market opportunity for the synthetic green laser is closing. While these lasers may be viable industry choice today and over the short term, Corning believes that its lifespan will be limited by the upcoming direct Green Lasers. We fully agree with this assessment. We understand that also this was a difficult decision for our Corning colleagues to make because the company has invested lots of resources over the past years into this synthetic green program. As far as the impact on Microvision this year, Corning's decision bears very little or no impact on us in 2010. G-2000 product was always expected to be a commercial offering in 2011, not this year. And we also had -- have had a very predictable supply of lasers from Osram since they first began shipping the quantities in March and we expect that this will continue in 2010, in Q4 of 2010 and throughout 2011. More on this later.

Let's now shift gears onto our second green laser topic, which is the recent announcement, actually early announcement from us about direct green laser progress. We have recently received first direct green evaluation samples from two leading manufacturers and last week, our technical team has successfully integrated them into pico projector bench cell prototypes. The images, interesting enough, produced by these demonstrators were amazingly stable and vibrant, exceeding all expectations for such an early integration. This is a huge milestone not only for Microvision but for the whole display industry as it stems -- this represents the first step towards the commercialization of these lasers within the next 12 months to 18 months. Why is this big news? It all starts with physics and ends with performance and cost benefits.

Let me explain. To produce full color images, you need three primary colors, red, blue, and green. Microvision's current PicoP Projection engine uses red and blue laser diodes and a frequency-doubled or synthetic green laser to create full color image. So what are the differences? The synthetic green lasers produce light in two steps. First, infrared light is created. Second, the infrared light is manipulated to accomplish the process that reduces its wavelength by two to produce the green light. This conversion process creates a complex system of multiple components held to very tight tolerances, making manufacturing more challenging.

Alternatively, direct green lasers are single chip solutions which produce the green light natively, greatly simplifying design and manufacturing process. Because direct green lasers are expected to be manufactured in a manner similar to red and blue lasers diodes, they are expected to be offered at lower cost and they're easier to scale to large commercial quantities. But there's more to that. Direct green lasers will offer better performance, they are smaller, they consume less power and they are more stable devices than their frequency double or synthetic cousins. In addition, which is one of the most important attributes, they will offer a lower cost solutions, which are very important for high volume mobile applications. These direct green laser gains are directly translated into a more powerful PicoP display engine for us. Our next generation PicoP display engine based on the direct green laser is expected to offer significant commercial advantages related to price and performance while becoming even smaller than the current solution that we have today.

Another big difference between the two types of green laser technology is the competitive landscape for each offering. As you know, availability of synthetic green lasers have been limited to two manufacturers, with now one to date. While the direct green playing field is larger, to date there are at least five companies worldwide that have announced their plans to introduce direct green solutions between late 2011 and mid-2012. So all of this is good for us and for you. Okay, so now that we know about Corning and Microvision, how will these green laser events impact us in the next two years. Let's start with 2010. There's no impact from Corning's decision to discontinue the synthetic green program on us this year. As I mentioned earlier, the G-2000 product was targeted for early 2011 and we have had a predictable supply of lasers from Osram since they began shipments early this year. As we previously communicated, we expect green laser availability between 10,000 to 15,000 per month in the fourth quarter and this have not changed.

In 2011, we will rely on the Osram for most of the green laser volume until direct green lasers become available. At this time, we believe that Osram will be able to produce at the rate that they are producing today somewhere between 150,000 to 200,000 green lasers next year. Actually before we learned about Corning's decision, the head of operation and myself, we met with the head of Osram's business unit responsible for green lasers and received a confirmation on these numbers. We continue to work with all of our supply chain partners to ensure that we have adequate supply of other raw materials to match the capacity of the green lasers we expect for 2011. 2012, this really -- a lot of excitement going on inside Microvision. Last week for the first time we have seen our future in the lab, the Pico display engine designed around direct green lasers is expected to offer, as I mentioned, significant commercial advantages and these are the very critical attributes for it to become a de facto solution for all OEMs who want to embed their engine inside mobile devices.

As you know, or as I mentioned last time, our report buyer, which is the online destination for industry sectors, forecasted the direct green laser market size to reach about $500 million by 2016, which is representative of more than 45 million devices by that time. Again, five people are driving towards the finish, all of them guide in the world about availability between lat 2011 and mid 2012. We're going to make sure that we are ready to accept this. As a result of these events -- most recent events, we have immediately accelerated our internal efforts to develop and commercialize the best performance, tiniest low-cost engine for the high volume consumer application based on direct green laser. We're in the process currently of selecting from partners who will help us to accelerate this effort such that our timeline match the commercialization of the direct green laser timelines. I think this about everything I wanted to say on the green laser front. We'll obviously leave a lot of time for Q&A.

Let me shift your attention to the second subject, orders and revenue. Our backlog at the end of Q3 was about $18 million, which is good. The revenue, however, was another story. The Q3 revenue was $1.3 million, most of which was derived from product sales. It was the biggest -- by far the biggest disappointment for me and for us internally as a Company because it was lower number than our internal plan. During the summer, we experienced two events that had a negative -- big negative impact on our revenue for the quarter. First, the OEM customer for the engine has communicated to us that there was a push in their product launch date for the high-end media player. Jeff will tell you a little bit more -- will provide a little bit more color about why this happened, but for now let me just state what happened.

Second, one of our larger accessory product deliveries planned for the third quarter was reduced to a lesser number because the customer asked us to recertify the product to be compatible with the new devices that hit the market during the summer. It was not part of the original product plan but we did do that to accommodate our customer's request. So despite the fact that we can't control our customers' product delivery schedule and the last minute request for product changes, I was still very much disappointed that we did not have a better contingency plan for such unanticipated predicaments. As a result we quickly implemented several measures to better control our destiny going forward. What are these? First, we further restructured sales and marketing team and added several new high caliber senior professionals with extensive experience of building new B2B and B2C channels. The new team has already made strides in Q2 when they increased the number of distribution points from two to 11. In the third quarter, they increased that number from 11 to 19.

They also began executing several new marketing and public relations campaigns to drive awareness and to improve sell-through of our product. As many of you know, who are familiar with the consumer industry, that in consumer electronics, a typical time to fully ramp a distribution channel partner is about six to nine months. We believe that the work that has begun in mid-second quarter of this year and was further enhanced in Q3 will start paying dividends as early as Q4 of this year.

Second item that we implemented to control our own destiny better. We enhanced our product portfolio. I'll let Jeff to first speak about financials and they'll provide you more color on the new product we'll introduce in November. We believe that improving the sales strategy and execution and enhancing our product portfolio and confirming a stable supply of green lasers for 2011 from Osram will allow us to grow revenue in the fourth quarter and next year. The exact number of units, obviously we expect to rebuild them in 2011, will be bounded by the market adoption rate of new product category and number of synthetic green lasers we will be available to us in 2011. There is obviously more questions that you have on sales and orders, and I will let Jeff first to present financials and then we'll close whatever else has not been answered in Q&A.

Moving on to the next subject, innovation and progress in other key areas. During third quarter, it's actually very good news. We received two new contracts from US Army and Air Force totaling approximately $1 million to advance the development of new see-through eyewear as well as an enhanced laser projection display system. Let me quickly give you update on the eyewear. We've made a solid progress in these areas and this funding will allow us to further accelerate this.

We firmly believe in the advantages of the PicoP display technology for see-through eyewear products, but you have to also account for ecosystem that needs to support these new products when they come to market. Unlike the projectors, the success of eyewear product and the category of products is dependent on the ecosystem, particularly around content delivery which is optimized for see-through viewing. Seller of well-known global OEMs and informational providers are working on such content initiatives and we're working very closely with them to pace our eyewear product efforts around their progress.

On the automotive front, we have seen in Q3 we have seen an increased pull for our solutions from the automotive manufacturers as they began to pull themselves out of the economic issues they faced previously. During the quarter, we delivered PicoHUD demonstrators to two major automakers and provided another one with the PicoP engine to implement inside their own aftermarket head-up display. These are very positive signs that we have not seen in the past two years. This renewed interest is a strong indication that automakers are looking for more than just fuel efficiency gains, but also increased safety and comfort features.

Now, let's move to gaming. Our goal has always been to create new applications in verticals that take advantage of our unique PicoP technology. Many of you know that we collaborated with Intel and Capcom recently to introduce a new gaming experience called Infinite Reality. It's a perfect example of application that fully highlights the unique competitive advantages of the focus-free technology. The gaming gun is one of many applications that we're looking at and that -- the interesting part about the gaming gun and applications in general is that using our technology, you can take the gaming experience to completely different level. It offers 360-degree immersion and participation unlike anything that is possible with a fixed screen.

We strongly believe that gaming will be a large pulling application for the PicoP projection products in the future and in order to be able to do it right, you will have to have the attributes that we're creating today; focus-free operation, high color contrast, HD resolution, all at the same time preserving the tiny form factor and low power consumption. At this point, I would like to pause and give Jeff a forum to provide you with financials and color and we'll come back to me and I'll give you update on product introduction.

Thank you, Alec. As Alec mentioned earlier, our financial results for the quarter were negatively impacted by changing customer requirements which postponed our embedded and some of our accessory product deliveries previously scheduled for the third quarter. First, our OEM customer changed the product launch date for its high-end media player. Our customer informed us that they are experiencing delays in their product development schedule which will result in a shift in the launch of their product from September of this year to the first half of 2011. They attributed this delay to several factors, but the primary reason was their decision to switch from the Windows operating system to the Android operating system. We are working together to reschedule our embedded engine deliveries to meet the revised market launch needs.

Second, one of our customers, who was private labeling the accessory projector reduced its deliveries for the third quarter. The changes related to a change in the Apple certification requirements, essentially our accessory product was developed and certified for Apple well before the iPhone 4 and iPad hit the market. Despite the fact that the order was placed before these hot new products were introduced, the customer asked us to modify the design and recertify the accessory for these new Apple products. As you know, this certification process takes time. We agreed to make these modifications in order to help make our customer successful with their product launch. This pushed our product delivery to later in the quarter.

We delivered a lower number of units with the updated capability during the third quarter than originally planned. We expect our customer will take additional units as they grow their marketing and sales efforts. The impact of these two changes was -- reduced our revenue versus our expectations by approximately $2.2 million for the quarter. With these events, our revenue for the third quarter was $1.3 million compared to approximately $900,000 a year ago and for the first nine months of the year, our revenue was $4.1 million compared to $2.9 million last year. Our backlog remain strong at $18 million at the end of the quarter compared to $2 million a year ago. The backlog is composed primarily of orders for our PicoP-based products scheduled for delivery now in 2011.

Our operating loss for the quarter was $12.3 million compared to $9.3 million for the third quarter of last year and $32.9 million for the first nine months compared to $27.9 million a year ago. The higher operating loss was due to lower gross margins and higher operating expenses associated with the commercialization of our accessory and embedded PicoP products for both the quarter and year-to-date periods. Our gross margin for the quarter was negatively impacted by our recording of additional $2 million in inventory reserves. There were two items that had the greatest impact on these inventory reserves.

First, as Alec briefly mentioned, we plan to launch new products in the near future. As a result we recorded reserves for materials we currently have in stock but which will become obsolete as we migrate to the new products. Second, the second item was that as we have discussed in prior quarters, our fully burdened product cost continues to be higher than our expected selling price resulting in a lower cost or market adjustment for the inventory on hand. This is often the case with new products entering new markets. We anticipate that as we launch new products with enhanced features, production volumes will continue to increase and the production cost will continue to decline resulting in a positive gross margin.

We are also looking at opportunities to further reduce our operating cost, including additional streamlining of our operations, partnering with other companies to reduce our product development, production and distribution cost and moving more of our operations to lower cost countries. Our net loss for the third quarter was $11.9 million or $0.13 per share compared to $11.5 million or $0.15 per share a year ago. And $32 million or $0.36 per share for the first nine months of the year compared to $30.8 million or $0.43 per share a year ago. Our net cash used in operating activities for the first nine months of this year was $35 million compared to $23.4 million for the same period a year ago. During the quarter, our net cash used in operating activities was $12.8 million compared to $7.1 million a year ago.

Our working capital requirements increased by $3.5 million during the third quarter primarily due to build-up of inventory of PicoP products to support deliveries originally scheduled for the second half of 2010 which were subsequently extended to the first half of 2011. We have taken steps to reduce our inventory commitments and expect that our working capital cash requirements will decline in future quarters as we sell off our existing inventory and achieve a better balance between inventory and product shipments.

Finally I would like to briefly touch on our recent financing. During the quarter we entered into a committed equity facility which allows us to raise money opportunistically at very low overall cost. This facility provides us with flexibility in the timing of when we raise money and a low cost capital to minimize dilution to our shareholders. We feel it is prudent to have this facility in place to allow us to raise money at our discretion. During the quarter, we raised $12.4 million through this facility we have approximately $47.5 million remaining available under the facility. We ended the quarter with $21.3 million in cash, cash equivalents and investment securities. With that I'd like to turn the call back over to Alec to provide you with information on our new product launch.

Thanks Jeff. Before we turn to Q&A, let me briefly talk about the upcoming new product launch this month. It's an important element of our strategy to grow revenue in 2011. Let me just give you a little color why we've done it and what it is. The existing product that we launched globally earlier this year -- in March of this year has been receiving very positive feedback. People love the fact that it's a true plug and play device. It's very easy to use and it's very light. It sits inside your pocket and allows up to two hours of continuous viewing all while providing you one of a kind feature focused rear-projector which is a must for any mobile applications.

Our customer has also been providing us with some of the suggestion for future releases and two most common asked for future releases were, can you make your product more affordable? And can you make it brighter? So well, I'm pleased to tell you that we have our response, our first response, the new product -- the new accessory will be at 50% brighter than the base unit and we'll have the connectivity to the many new hot selling consumer devices that entered the market since we introduced the first product. The new product will allow us to extend the ShowWX product line and allow to strengthen our position by having several offerings now and so we can basically address the people who are more cost conscious and people who want a higher performing product.

My marketing team has asked me not to disclose any more details at this time but expect to hear more from us in greater detail within the next two to four weeks. Again, we anticipate that this development as well as the regrouping and sales and marketing and implementing and executing new strategy will allow us to increase revenue in Q4 and beyond and make us less sensitive to events such as customer pushes that we experience this quarter. With this, I will open for Q&A and please present your questions and Jeff and I will answer them.

(Operator Instructions) And our first question comes from the line of Doug Reid with Stifel Nicolaus. Please proceed.

Thank you. Alex, can you talk about conversations you had with OEMs regarding possible product ramp in early 2011? I'm interested to see if you're able to make progress with any new OEMs other than the two customers you've highlighted in the past? And I have one follow up.

Yes there are several questions. Let me try to break them up. So first -- let's talk about engine. As you know, the -- to date or until this call, we will have a single customer for the engine, since then in Q3, we received another order for the engines in 2011. It's a smaller order than the first customer but indicative that people are interested in our solutions. We're in the process of working several deals with the brand names and we hope that next time we'll be on a call we can discuss these results. In terms of this individual customer that is planning to introduce their high-end multimedia player, again, we cannot control the delays in their product development schedules. All we can do is control our destiny a little bit better by having back-up options if things like this happen in the future and we put in several measures in place allow us to be less sensitive to such predicaments as we experienced in Q3.

Looks as though you had another $2 million write-off on inventory. Just wondering what amount of the $18 million of backlog rather than sum that's moving into 2011 you think is at risk for the write-down?

This is Jeff. There's two different things going. There's an $18 million backlog and that's for product deliveries that are now mostly scheduled for 2011. The $2 million of write-down was a write-down of inventory that we had on hand at the end of the quarter. Pardon me?

Not finished?

It's a combination, but for the most part it's attributable to the lower cost of market part would be attributable to finished goods based on the current sales prices that we're achieving and then then, as I talked about, there's a (inaudible) reserve that's tied to our plans for introducing new products.

And if I could just squeeze one more in. In terms of the direct green laser you're using now for prototype, you mentioned a couple of products -- or rather, a couple of prototypes ready now with green laser. I'm wondering if you had any insight into just how much less expensive the first generation might be just so I can understand what the cost savings would be?

To our best knowledge, Doug, the direct green are expected to be a fraction of the cost, 20% less of what we paid today for the synthetic green lasers and if you want to use an analogy. Look at today's dual laser which is somewhere depending on the volume could be purchased between single digits to $20. That's the price we expect out of the green lasers in any meaningful volume, which is a fraction of what we're paying today for synthetic.

Okay. Thanks so much.

Your next question comes from the line of Yair Reiner from Oppenheimer & Company, please proceed.

Great, thank you. You said that you'd expect directly as there would be commercializations 12 to 18 months. Is that the time frame in which you expect the lasers actually available in mass quantities?

The answer is yes, Yair. This is a -- several companies have publicly communicated -- I will not point to specific companies but there are three major companies in Japan, one in Germany and one in US have all communicated that they are targeting their commercial launches between end of 2011 and middle of 2012. So we're positioning internally to take this as soon as it becomes available so we're not inducing any more lags into between the lasers become available and when our solution becomes available. Our timelines will be totally synchronized with their offerings.

Got it. And then you mentioned you've had discussions with Osram recently and that you feel they're committed to supplying the synthetic lasers through next year. I imagine, though, in the wake of Corning's decision you're also having to wonder to what extent you can rely on that. So internally as you try to handicap the next 12 months, do you see a risk that Osram could also pull the plug here?

There's always -- it's always it's not a bullet proof proposition, but we believe with very high confidence that Osram will deliver. The difference between Corning and Osram is that Osram's first generational laser is actually have been very good and they've been able to produce it in sufficient quantities. The guidance we communicated earlier -- I'm sorry, the numbers we communicated earlier are representative of what we expect to receive from Osram because we anticipated some difficulties coming from Corning. There's no reason for Osram to tune it down because they already invested into the capacity and as a matter of fact, they also invested in the direct green laser program and there's a natural bridge between the synthetic lasers we're going to get from them next year and direct green following that.

Got it. Thank you. And then final question, the current cash burn looks like you have enough cash for somewhere around two-and-a-half maybe three quarters of operations, are you entertaining any strategic alternatives perhaps what's the plan to bridge you from here until the 12 months to 18 months hence when you get the direct laser?

Sure. This is Jeff, again. We ended the quarter with the $21.3 million in cash and securities. We believe that, that's sufficient to last us through April of next year. We are -- we have an equity -- committed equities facility in place as we talked about that we can draw down up to $47 million on. So we have that in place. As usual, we're always looking at our alternatives for raising additional capital and will go with the lower cost, best alternative, least diluted option for shareholders. At the same time, as we talked about on the call, we're looking at ways to reduce our cash burn. We believe that we can bring the working capital down -- a portion of that down through better management of the inventory to match our sales. And then we're looking at other ways to bring our operating cost down.

Great. Thank you, sir.

Your next question comes from line of Mr. Randy Ho from ProEquities. Please proceed.

Hi, guys, thanks for taking my call. Alex, I know you're marketing people have told you to limit what you can say about the -- this new product. But I guess my question would be generic. From what you described in your short comments on this new offering, it sounds more like a product improvement than a "new product" as you categorized it. Can you give us any color on whether it in fact is a new product versus an enhancement of existing product without disclosing any more detail than that?

Sure, Randy. Let me try. It is a new product because it -- fundamentally, not only is it brighter, but more importantly it has connectivity to the new devices to the earlier product does not have. And one of the salient attributes always is the fact that it will be compatible with the new product and will be certified by well-known names to be part of their ecosystem. I think if you'll be patient for couple weeks, I promise you, we're going to have a very detailed description of all the attributes and you will see more details in addition to brightness and connectivity.

Okay. I'll be patient. If you're going to be launching this into the Christmas season, if you have moderate success for it and I can sense the excitement in your voice, can you give us any feel for potential given your market surveys and the enhancement that your customers ask you to incorporate into a new product which you now have done, it appears. What revenue ramp we could expect from something like this? Is this a significant enough improvement to where this product launch in a very meaningful way in Q1 and Q2 of next year?

I think this is only the first response from us. This is just first step of several that you're going to see within the next six months to nine months. And, again, for the near term, think about every -- typically every company has a portfolio of products that will allow them to go out to different target segments. There are some people who are more price conscious, they care less about the latest and greatest. And some people want the ultimate performance, they're not afraid to pay premium for it. So we would like to have at least two options right now. We can price, we can basically maintain the premium price point with upcoming product and give a more affordable solution on existing product to all the customers who want it.

Again, this is just a first response. In terms of revenue, your question of revenue, we expect that this release as well as the changes that we made and implemented on sales and marketing side will start a dividend as early as Q4. Again, that natural timeline of six months to nine months to round distribution channel partner and again we started it in the middle of Q2 so we're five months into this activity. We enhanced it further in Q3, so Q4 is a natural first step to see what is the impact of all these changes on us -- we expect impact to be positive.

The next extension of that thinking is you've been in the game here for five or six months, a lot of reports are looking at market potential. It's pretty significant for stand-alone projector. Do you -- can you give us a sense, Alex, from your experience so far about real demand being outside that would be looking for these improvements and can stimulate the growth of -- and filling that market pretty quickly or the market's real, is what I'm looking for?

The market is real, Randy. It's just -- it's a margin. It's real but it's emerging. We're at the onset of this emergence. It's not a secret. It's going to explode with having an embedded solution that goes inside smartphones. But accessory represents -- I think we'll present a nice segment for years to come as an alternative for people who do not want to carry everything in a single device. There are some facilitating factors in addition to what we do that will help to drive this market, particularly the new smartphones that are based on the Android operating system.

Unlike the Apple operating system or Mac operating system, the Android is open system, so the smartphones, for example from Motorola such as Droid or HTC or Samsung cannot only project pictures and movies, it can also play games, you can present business aps, something you cannot do today with Apple. We believe the combination with these two factors as prepared is better product and us reaching to far larger number of distributors that we've done just five months ago and the new devices that will fully exploit these features, all of these three developments will help us to increase revenue, not just for us but for everybody who participates in this market.

Thank you, Alex. And I'll go back in the queue. Appreciate it.

(Operator Instructions) Your next question comes from the line of Michael Mays, Private Investor. Please proceed.

Thank you very much. I'm curious about if you can possibly give us an update on our long-standing development agreement with Motorola. So it's a two part question, if we can get an update on Motorola? And then the other part of my question is, let's just say that aside from the direct green laser or the green laser diodes, is all the other technology including chipsets and size parameters and power consumption issues, any other obstacle standing in our way of embedding the PicoP projector inside a smartphone as we speak today, aside from the green laser issue?

Michael, that's a good question. Actually you have two questions, so let me break it up. First Motorola and second, is there anything standing in the way of us and high volume applications other than direct green laser? So Motorola fundamentally nothing has changed between our relationship with Motorola, what did change over the past few years was their position in the market and Motorola internal development. They split up of the mobile unit and -- it's just you're talking about it's a focus inside the company that we personally cannot control. We feel we've done everything that we can and we continue to do this to ensure that they have the latest and greatest solutions from us and we try to basically be accommodating to their other internal problems that they need to rework before they focus on something like this.

Second question, direct green laser. Is there anything else that stands between us and ultimate and better solutions? Really, direct green laser gives us 95% of what we need to be the perfect embedded product for many years to come. With direct green laser comes simplification in our electronics does not exist today. Because direct green lasers are less sensitive to variety of environmental conditions and they're easier to maintain and manage. Because of this predicament, the electronic that is we have today could be greatly simplified to further reduce it, to further miniaturize it, to provide even smaller solution.

Okay. Thank you. Just maybe one afterthought. Do we have any other OEMs out there who are biting at the bit to embed into their smartphones that you could tell us about? Now, we -- as I mentioned earlier, we received a second order for the PicoP embedded engine for our third generation engine from another OEM to embed into their product in 2011.

It's a smaller volume, but keep in mind they're trying to assess the market opportunity before they decide to whether to go to larger volumes. We're obviously working with several well-known brands to create a commercial offering together for their own products and all of this is works in progress as we speak. Once we have something that is meaningful enough and we allow to communicate by our partners, we will immediately communicate to the rest of you.

Very good, thank you for your time.

Your next question comes from the line of Diane Daggatt from McAdams Wright Reagan, please proceed.

Thank you. Two quick questions. On Osram, you mentioned that the fourth quarter you expect to get 10,000 to 15,000 green lasers from them and then in 2011, 150,000 to 200,000 throughout the year. Can you -- is that their full amount or is that what they are going to designate to you? And then second question has to do with backlog on the two customer request for changing products, how much is that going to cost?

Okay, Diane. Let me address the first one. I'll let Jeff to address the second. The first one, yes, the 10,000 to 15,000 communications that we've done six months ago. We anticipated we were going to end up where we ended up. We used basically for the most part, Osram's volume to give you the forward-looking statements and how many lasers we expect to receive. And the volume for 2011 that we discussed, we are the primary customer and we are expected to take 99% of the volume. And second question, Jeff?

Sure. So of the backlog, on the $18 million that's currently in backlog, almost $12 million of that is associated with the embedded OEM customer. There is no backlog right now associated with the other customer. We're expected for them to place additional orders as they sell their existing product, but there's nothing in the backlog for them.

So is the leftover $6 million at risk that are being written down or is it work in progress, or --

I'm sorry. Just again, the backlog are orders that we have in hand to deliver product. So --

I'm sorry.

So delivery for over 2,000. There's no write-down associated with those.

Okay. Going to inventory, so is there any risk in the in the inventory number?

The requirements are that we evaluate the inventory and write it down to best estimate of what we think we can sell it through for? Today, we believe we've taken the write-downs, again, associated with the inventory that we have on hand to write that down to its full realizable value. We don't anticipate further write-down. Because our cost is higher than our current sales price as we turn that inventory, we end with -- end the period with higher inventories or different inventory levels. We could have the lower cost of market write-downs. One of the things that we're working very hard on is to better manage the inventory, the receipts of inventory to delivery to the customers in large part to help ensure that we don't run into this obsolescence issue where you have design changes to become obsolete. Short answer is we think what's fully written down at this time.

Okay. Okay. Thanks.

The next question comes from the line from Joe [Bubrow] from Morgan Stanley Smith Barney, please proceed.

Hey, Alex, thanks for taking the call. I was curious, when do you think you'll be able to deliver samples to your customers that have the native green laser in use?

Good question. It's difficult to predict within -- but our goal is as early as Q4 of next year. But again it's also going to depend on when we will have commercially viable volume for -- from the five manufacturers.

As far as just the samples you're saying Q4 of next year?

The commercial samples or development samples.

Just development samples.

I think we should be in good shape somewhere middle of the year to early Q3.

Okay. And then how far -- if you're going to be developing product in conjunction with the native green laser development? How far ahead of time, do you think you'll have the confidence where your end customer will have the confidence to start placing sizable orders with you?

It's a great question, Joe. This is a great question. And the reason it's a great question because for each customer to embed any product inside their offerings takes about nine months to 15 months depending on the customer, depending on the product. So our goal is we have a strategy, we're going to provide them samples earlier that have based on synthetic, but they will have similar look and feel and form factors. So they can actually develop product using the current technology and replace it with direct green laser technology so we're not slowing the process.

Okay. Let me just make some assumptions here and get to my last question here. I'm going to assume you feel like you have the best technology. I'll assume with the direct green laser you'll be competitive in price. There's a real market. And that you can attract a sizable order or multiple sizable orders once you have the quantity of green lasers. I guess the final question you have to ask is will your current capital arrangement give you the runway to get there and if not, to repeat the question that was asked earlier, I know you're always looking at alternatives, but partnering, strategic give me some ideas?

We're doing three things, Joe. To answer your questions, how do we get through -- how do we manage cash and manage dilutions? We approach this from three different directions. Number one, managing cash. We are looking at means not only to better manage the inventory because that's being essentially the biggest bog in our financials, but also reduce the operating cost by extending our presence into Asia where we can get closer to the trenches where the products have produced and we can do it cheaper. That's one area. The second area is that we're going to rely for the -- for this next generation engine, we're going to very closely align ourselves with one or two strategic partners who will take on a lot more of a development and manufacturing than what was done in the past.

That's number two. Number three, in terms of how we're going to get the cash. Jeff explained the facility we have today, we believe it represents a very viable options for us because we have the control of when and how and it's very inexpensive compared to other methods available today. We also are continuously looking for additional opportunities including strategic investment. This is part of our continuous strategy that we constantly (inaudible) opportunities and we what is the best one at any given time. So all three of these are being works in progress and we continuously monitor and update them.

Thank you very much.

At this time ladies and gentlemen that concludes our Q&A session. I would like to turn the call back over to Mr. Tokman for any closing remarks.

I want to thank you for everyone who joined us. What can I say? Our priorities are clear as glass, we have to grow revenue, we have to manage cash burn and we have to continuously innovate. How do we become less sensitive to customer schedules pushes? We must take greater control of our own destiny. As a result, as I mentioned earlier, we're implemented two key measures to improve the revenue results moving forward, new products and more effective marketing and selling.

The brighter, more advanced product is expected the hit the market in time for the holiday season and will provide us with more flexibility in pursuing new customers. We revamped to sales and marketing organizations and have been implementing stronger distribution channels strategy over the past five months and a new global distribution partners and improving the sell through cycle through better marketing programs are two of the initiatives. Frankly, I expect to see the impact of these changes as early as Q4 of this year.

On the burn side, Jeff has mentioned that we'll be very prudent in managing the inventory and optimizing the cash flow and we're also looking at the opportunities to extend our presence outside of US to improved capabilities at reduced cost. Innovation has been widely acknowledged, everybody knows that our rate of growth is tied directly to the green laser availability in price and the progress has been fundamentally amazing.

The rate of progress on direct green is what forced Corning to make that decision. After all of these years of investment, and -- it's a tough decision. We believe it was the right decision on their part because the direct green lasers are accelerating a lot faster than anybody anticipated. We intend to keep our technology road map consistent with the direct green laser progress so we minimize the gaps between their introduction and our introduction.

Where is this all going? Just imagine this, if you have a [stunning] HD pico projector that offers great colors, matches the resolution of your cell phone, which nobody else will be able to do, and sits inside your pocket without setting your shirt or purse on fire because it generates so much heat you have to keep it in a separate room. It's very simple to use. Now thanks to direct green laser progress, it will be more affordable than ever. All of this is becoming a reality and no longer a dream. And we thank you and I thank you for all the patience and look forward to speaking to you during the next call. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.