MathStar Q3 2007 Earnings Call Transcript

Nov. 9.07 | About: Sajan, Inc. (SAJA)

MathStar Inc. (NYSEARCA:MATH)

Q3 2007 Earnings Call

November 7, 2007 9:00 am ET

Executives

Doug Pihl – CEO

Dan Sweeney - COO

Jim Cruckshank - CFO

Alexis Pascal - IR

Analysts

Joel Achramowicz - MDB Capital

Clint Morrison - Feltl & Co

Chuck Bennett - Janney Montgomery

Philip Smith - Feltl & Co

Larry Mckolov - Private Investor

Operator

Welcome to the MathStar Inc. quarterly earnings conferencecall for the third quarter ended September 30, 2007. (OperatorInstructions) With that, I would nowlike to turn the call over to Ms. Alexis Pascal of StapletonCommunications. Please go ahead.

Alexis Pascal

Thank you. As areminder, today’s presentation contains forward-looking statements and informationthat are based on management’s belief and assumptions. Forward-looking statements are not guaranteesof future performance or results, and are subject to certain risks, uncertaintiesand assumptions including, but not limited to, the following factors whichcould cause the company’s future results and shareholder values to differmaterially from historical results, or from those expressed in theforward-looking statements made by, or on behalf of, the company:

The company’s ability to generate revenue; its ability todevelop new FPOA architectures and designs and new FPOA design tools; risksinherent in the use of third parties to test and fabricate the company’sproducts; its ability to compete; and the extent to which the company’sproducts are accepted in the marketplace; the need for, and availability of,additional capital; the potential for litigation regarding patents and otherintellectual property rights; and the progress of product development.

All numbers today are GAAP unless otherwise noted.

With that, I’d like to turn the call over to Mr. DougPihl.

Doug Pihl

Thank you, Alexis. Good afternoon and welcome to the MathStar third quarter 2007 conferencecall. With me today is Dan Sweeney, ourChief Operating Officer; and Jim Cruckshank, our Chief Financial Officer.

First, I’d like to address our commercial revenue ramp. Our most important objective is to focus onlarge commercial customers to get revenue as fast as possible. We believe we are on track and we have strongcustomer relationships, and we are moving forward with great confidence.

This quarter’s revenue picture requires someexplanation. On our second quarterconference call, we guided to a revenue range of a $150,000 to $175,000 for thethird quarter. We recognized revenue of$63,000 but during the quarter, MathStar received a purchase order from LGElectronics for the first 55 units of the MPEG-4 to MPEG-2 transcoder that willbe used for initial deployment.

This purchase order, totaling $156,000 was for both theinitial non-recurring engineering and the delivery of the first 55pre-production units. We have completed theNRE portion, but we are unable to recognize the revenue in the third quarterbecause it is considered a multiple element arrangement. This decision was made after consulting withour auditors concerning the proper treatment to multi-element orders. We will recognize the entire $156,000 ofrevenue upon delivery of the 55 units.

During the third quarter, we made steady progress inattracting additional customers, engaging with potential large volume customersand executing in our key operating areas. As we have discussed on past calls, we have had challenges introducingour new technology to the market, but we are having successes as well. Everyone on the management team understandshow MathStar’s Field Programmable Object Array (FPOA) can dominate key highgrowth segments of the programmable logic market, and we are excited andoptimistic that MathStar will be a big success.

We continue to see this as a market opportunity that exceeds$1 billion. The FPOA continues to be thefastest programmable chip on the market today. The increased processing capability of the FPOA means that users requirefewer chips for their applications. Thisreduces their system space requirements, improves system power efficiency andsaves money. This is our sales message, and our first commercial customers areproving it.

Our FPOA is an excellent solution for a wide range ofapplications that require high performance. Currently, we are experiencing the best market reception in the rapidlygrowing professional video market and we now have diverted most of ourapplication resources to winning in this market. The creation and distribution of highdefinition video images is creating enormous growth markets for compression,distribution, storage and decompression of video data at very high speeds. TheFPOA is ideally suited for this kind of work and the market has the right mixof industry players: neither highly fragmented nor highly concentrated. MathStar is engaged with, or has as customers,several of the top companies in this market.

In most cases, the obstacle we face when convincing aprospective customer to select our technology for their project is to prove oursales message; that of higher performance at a lower cost, before our customerwill change to a new kind of chip. Thismeans that we need to demonstrate a complete application solution to prove ourclaims.

As you know, we have developed a library of IP for theprofessional video market, including an MPEG-2 high definition and multi-streamdecoder and a JPEG-2000 high definition encoder. On August 7th, MathStar, introduced an MPEG-2high definition encoder, co-developed with one of our Certified Design Centerpartners, Adaptive Micro-Ware.

In the segment of the professional video market thatrequires high definition multi-protocol, multi-stream encoding and decoding, weare clearly the performance and cost leader. We are now able to demonstrate our chip running high quality videoencoding and decoding applications to prospective customers in the professionalvideo markets.

In addition to our growing library of IP for theprofessional video market, we now have three Certified Designed Centers withexpertise in video system design to complement the expertise we have builtwithin MathStar. As a reminder, ourthree CDCs are Adaptive Micro-Ware, Nuvation and Wind River.

The professional video markets need transmitting HighDefinition video through a existing transmission links is driving changes totheir application standards and we are positioning ourselves to be theperformance and cost leader for H.264 applications.

The H.264 standard is beginning to be deployed in highdefinition video markets, providing a higher compression rate that will enablenetwork providers to save significant money on transmission costs. It is a highly complex algorithm, much morecomplex than previous compression standards, and we believe the next generationof the FPOA is ideally suited to become the platform of choice for this standardwhen programmability is required.

The next generation FPOA is a 90-nanometer chip that we willproduce in two versions. The firstversion that targets the professional video market will contain more ALUobjects or arithmetic logic units than multiplier objects. We are incorporating lessons learned fromcustomers and from our own considerable video application expertise developedover the past few years.

The second version of the 90-nanometer chip will containapproximately 300 multiplier objects, making it ideally suited forhigh-performance filtering applications in medical imaging and test and measurement. The development of our 90-nanometer part isproceeding as planned and we will receive first silicon early next year andwill sample customers approximately six weeks later.

We continue to make progress in the development of our nextgeneration of tools which will give our customers and our applications team thechoice of programming our chips in either our current graphical design entrymethod or by using the industry standard Verilog Hardware DescriptionLanguage. We are targeting this tool forthe new 90-nanometer FPOAs and are planning to make the new tool suiteavailable to customers during the remainder of the year to begin design entry.

The goal of our new and improved tool suite is to make ourdevelopment tools easier to use and more productive for our customers, ourindependent Certified Design Center partners and our internalapplications development team.

We continue to add to our list of qualified prospects in professionalvideo, medical imaging, test and measurement and machine vision markets. We do believe that we will see furthermomentum as our first commercial customers ramp production.

During the quarter, we made good progress with severalpotential large volume customers in the video decoder market and we are doingeverything we can to prove our claims of products superiority. We are continuing to meet milestones with ourpartner, Adaptive Micro-Ware, on the design of an FPOA based video decoder forthe multi-unit dwelling market using IPTV. This product will require extensive field trials and we believe thisopportunity could become significant for us. We believe we have the bestsolution in terms of both performance and cost.

In addition to this opportunity, we are in the process ofdemonstrating our capabilities with a well-regarded set-top box manufacturer,among others. We are also developing FPOA-basedsolutions for the rapidly growing video server market where we are working withthe industries top players. Our FPOAoffers an ideal video server solution due to its ability to support real-time,high-definition encoding and decoding across multiple standards.

As I stated earlier, during the quarter LG Electronicsissued a purchase order for the first 55 units of its hospitality industryapplication in the professional video market. The FPOA is a cost-effective, high performance solution for transcodingthe new High Definition MPEG-4 transmission to legacy MPEG-2 transmissions fordistribution throughout a hotel property. By partnering with our Certified Design Center,Adaptive Micro-Ware, we were able to provide LG Electronics with a complete solution.

During the course of this project, we have taken our more ofthe design responsibility to ensure that we are providing LG and its endcustomer with the best product solution, while meeting schedulerequirements. We have worked closelywith LG to achieve their aggressive cost targets, expanding our marketopportunity.

Dan Sweeney, our COO, recently visited the Korean facilitythat will produce the production units in order to begin the process oftransferring the final design for production. Product delivery will occur through our worldwide distribution partner,Arrow Electronics, so Dan also met with their representatives in Koreato initiate broader representation of the FPOA in Korea.

We are also pleased to announce that as of October 1st, RussellCorvese joined us as Vice President of Worldwide Sales. Russell has extensive experience in theprogrammable logic market and was attracted to MathStar’s FPOA concept. He is excited to be taking on the challengeof executing on our sales strategy and is already engaging with large,commercial volume accounts.

Looking forward to the fourth quarter, we are guiding therevenue of $300,000 to $350,000. We havenot yet received a final commitment from LG as to the timing or size of theinitial production order and so have not included that revenue in our guidance.

I’ll now turn the call over to Jim Cruckshank to discuss thefinancial report.

Jim Cruckshank

Thank you, Doug. Forthe quarter ended September 30, 2007we recorded revenues of $63,000 compared with $28,000 for the same period lastyear. Revenue was from the sale ofdevelopment units, licensed software and NRE fees. Revenues for the quarter ended September 30, 2006 was from the saleof software licenses.

Cost of goods sold for the quarters were $58,000 and $21,000. Cost of goods sold in the third quarter of2007 included evaluation system manufacturing cost, subcontracted servicesassociated with NRE and the cost of third-party software licenses. Cost of goods sold for the third quarter of2006 consists of the cost of third-party software licenses.

During the quarter ended September 30th, 2007 we completed an invoice, the firstphase of multi-element arrangement, for $78,000. That amount has not beenrecognized as revenue as we did not meet certain criteria for revenuerecognition as spelled out in accordance with EITF 00-21 and SAB104. We will recognize the full value of thearrangement totaling $156,000 on completion of the other elements which areexpected to occur in the fourth quarter. Had we recognized the $78,000 of revenue, reported revenues would havebeen $141,000.

Research and development expenses in the third quarterdecreased $1.6 million or 38% to $2.7 million from $4.3 million. The decrease was the result of reductions inengineering material of $1.3 million due to the tape out of the Arrix chip inthe prior year; lower internal and external development costs; and loweradministrative costs. These decreaseswere partially offset by increases in employee-related expenses and contractedengineering services.

Selling, general and administrative expenses decreased$400,000 or 16% to $2.2 million from $2.6 million for the quarter ended September 30 2007. The decrease was primarily the result oflower employee-related expenses of $300,000 which was the result of increasesin compensation expense, less the elimination of restricted stock chargesrecorded in prior periods.

Turning to the nine months ended September 30, 2007 we recorded revenue of$275,000 compared with $46,000 for the same period last year. Revenue for the nine months ended September 30, 2007 was from the saleof production FPOA chips, software license fees and NRE fees.

Revenue for the nine months ended September 30, 2006 was from the sale of softwarelicenses and NRE. Cost of goods sold forthe nine month periods were $181,000 and $27,000. Cost of goods sold for the nine months endedSeptember 30, 2007 were from the manufacturing cost of chips and evaluationsystems; the cost of third-party software licenses and subcontracted NREservices. The cost of goods sold for thenine months ended September 30th, 2006was the cost of third-party software licenses.

For the nine months ended September 30th, 2007 we incurred research and developmentcosts of $8.4 million, a decrease of $1.9 million or 19% from $10.3million. The decrease was the result oflower engineering material cost of $1.3 million due to the takeout of the Arrixchip in the prior year; and lower contractor and outside service expenses of$100,000; lower design tool licenses of $300,000; lower allocated building rentof $300,000; lower development costs of $200,000; and lower maintenancecontracts of $200,000. These were offsetby higher employee-related expenses of $600,000 due to more research anddevelopment staff.

Selling general and administrative expenses for the ninemonths ended September 30, 2007decreased $400,000 or 6% to $6.7 million from $7.1 million. The decrease was the result of loweremployee-related expenses of $800,000 which was the net result of an increasein compensation expenses of $1 millionoffset by the elimination of restricted charges of $1.8 million recorded in theprior period. The decrease was offset byother miscellaneous administrative costs.

Net cash used in operating activities was $15.1 million forthe nine months ended September 30, 2007. We continue to believecash burn for the fourth quarter will be between $4.5 million and $5 million.

I will now turn the call back over to Doug.

Doug Pihl

Thanks Jim. Insummary, we are making good progress in the key areas we have outlined for ourshareholders:

  • We are making inroads with the large commercial volume customers.
  • We are becoming application experts in the high growth professional video market.
  • We are expanding our library of full applications.
  • We are proving our claims of superior performance and lower costs.
  • We are improving our tools.
  • We are introducing next generation products.

We have a team of highly talented individuals who are committedto mast our success in the high performance programmable logic markets. I am confident that we will achieve the highexpectations we have set for our company.

I will now open the call for questions.

Question-and-AnswerSession

Operator

Your first question comes from Joel Achramowicz - MDBCapital.

Joel Achramowicz -MDB Capital

I’m encouraged with your cash burn; the focus. You are usingyour cash wisely. I’m also encouraged with the visibility that you’ve discussedhere in terms of additional traction in the marketplace.

Have there been any objective articles or publications ofany kind, Doug? Or any industry circulars that might point to more visibilityfor the FPOA among the actual engineering community?

Douglas Pihl

I’ll let Dan answer that. We haven’t gotten any new articles. We’ve gotten some in the last several quarters. Nothing recent, I don’tbelieve, is there Dan?

Daniel Sweeney

Since the last conference call, Joel, there has not been anynew industry articles.

Joel Achramowicz -MDB Capital

I’ve been doing a little bit of work in the video area andyou guys obviously know there is enormous amount of complexity and calculationinvolved which obviously is perfectly suited to using the FPOA as a foundation.You would think somewhere along the line that these guys in the video areawould be really touting this particular platform.

Douglas Pihl

Well, its also a very competitive market. One anotherreasons that we have customers whose names we can’t really disclose is thatthey tend to be very secretive about their secret sauce in how they doparticular video encoding and decoding applications, so they tend not to reallypublish a lot of that.

Joel Achramowicz -MDB Capital

It is kind of a catch-22 at this period in MathStar’s history.In order to get these orders you have to be real quiet, but some day you wantit to become known that the FPOA is obviously a ready-made platform for thesekinds of applications.

Douglas Pihl

Absolutely, we would love to promote that.

Daniel Sweeney

We try to promote it today Joel, the problem is because ofthe competitive nature most customers don’t want to disclose they are using ourpart until they are very close to having a system-level product available totheir customers.

Joel Achramowicz -MDB Capital

Dan, when your technical guys talk to engineers that areactually in the video area, that are actually making decisions on whether touse an FPGA platform and looking at the master FPOA, I mean do you haveevidence of excitement there and interest in the new platform because of power?

Daniel Sweeney

Absolutely. We solve a problem that they can’t solve todaywith the current parts that are available. So we get a tremendous amount of excitement from the engineers that aretrying to provide solutions, especially in the non-consumer side; on theprofessional video side, heading encoders, non-linear editors, video servers,those types of equipment were off-the-shelf parts just don’t solve their problemstoday.

Joel Achramowicz -MDB Capital

A lot of the engineers I’ve talked to are very excited aboutthe deterministic nature of the FPOA and that’s very encouraging. I meanthis is definitely a unique platform and it just doesn’t seem that -- I mean itreally is completely different from the FPGAs. It is just amazing that wehaven’t heard more about it.

Douglas Pihl

That’s absolutely true. The other factor is as we are now out showing people our encoders anddecoders we are getting good reviews from the engineers, the video engineers onthe quality of our implementation. Ifyou look at these -- well they call them video standards, and they are, butthere is also a lot of variability within the standards in terms of particularimplementations in the way you actually do things. That is part of theproprietary nature of the algorithms that individual customers implement.

But we’ve gotten good reviews on the video quality of ourimplementation. We think that bodes wellfor our future applications as well.

Joel Achramowicz -MDB Capital

We can assume that based on your comments that you areworking with either Motorola or Cisco in the set-top box area?

Douglas Pihl

We are talking to all of the big players, absolutely.

Joel Achramowicz -MDB Capital

Good. You were talking about may be having tape out expensesin the fourth quarter for the 90-nanometer designs, is that still in terms ofyour plan for operating expenditures in the fourth?

Daniel Sweeney

We will either recognize the expense either late in Q4 orearly Q1, but the cash outlay won’t happen until Q1.

Joel Achramowicz -MDB Capital

Finally, one issue I had, I think you lose to the ILEC progressin that regard, and Corvese is getting up to speed in the sales channel area?

Douglas Pihl

Absolutely. He has spent the last three weeks on the road.

Joel Achramowicz -MDB Capital

A real hard-driving executive?

Douglas Pihl

Absolutely.

Operator

Your next question comes from Clint Morrison - Feltl &Co.

Clinton Morrison - Feltl & Co.

I just wanted to make sure I fully understand this wholething with the revenue and the 55 boards; none of that revenue showed up in thethird quarter and you are basically saying you are going to book the full 156 in Q4?

Douglas Pihl

That’s our expectation. The remaining part of it is the delivery of the 55 units, as Jim stated,we’ve completed the engineering portion of it and so now we are well underwaywith manufacturing the 55 units.

Clinton Morrison - Feltl & Co.

Correct me if I am wrong -- I thought we are going to getthose boards manufactured and in the field by a month plus ago? Give us a senseto why we are behind the schedule?

Douglas Pihl

I think it’s not that far behind schedule. We’ve taken over a lot more of the design ofthe unit and that is part of what’s gone into it, things like the thermalanalysis and chassis design, in order to really keep the project onschedule. We’ve done a lot more of thatwork in Dan’s group.

Daniel Sweeney

Quite honestly, we did give Zenith and their customer in ourkick-off effort when we took over the system-level design and schedule and weare probably within a week of what we committed to Zenith and their customer inearly August. So we are tracking prettyclose to our commitments.

Douglas Pihl

Part of the confusion might be we have delivered boards toboth Adaptive and to Zenith for testing, so in both facilities they’ve hadboards that have been well tested.

Clinton Morrison - Feltl & Co.

But we are talking about the boards that are actually goinginto the field for evaluation, correct?

Daniel Sweeney

So there was an alpha phase and then there is the productionphase. We are running the applicationcurrently on the alpha phase of the boards. The effort we are working on now is the production boards that willphysically go into the chassis that will get deployed into the field inproduction.

Clinton Morrison - Feltl & Co.

And your guidance or expectations of when those actuallygoing into the field?

Daniel Sweeney

We expect that to happen early next year.

Clinton Morrison - Feltl & Co.

So the field evaluation boards early next year?

Daniel Sweeney

No, we will go into production early next year.

Clinton Morrison - Feltl & Co.

In the past you talked about a couple other applications,broadcast video that I think you were expecting a commitment by the end of thisyear; another one, big opportunities in the cellular space, it was mid nextyear. Can you give us an update as towhere those are at or are we still on schedule?

Douglas Pihl

The one you referred to is probably the IPTV applicationthat we are working with Adaptive Micro-Ware on. That one is seems to be movingahead nicely in the design phase and we continue to get positive feedback fromAdaptive’s customers. We are optimisticthat one is going to continue to move ahead.

Clinton Morrison - Feltl & Co.

Are you thinking we get a commitment? I remember you saying youthought you would get a customer commitment by the end of the year, is thatreasonable?

Daniel Sweeney

I think we will move forward, I don’t know if we’ve made anycommitment of closing that for the end of the year.

Clinton Morrison - Feltl & Co.

The other one in the cellular, something coming together midnext year? Is that still making progress?

Douglas Pihl

We are actually talking to several people in the cellular interms of algorithms like beamforming and that kind of thing; I am not recallingthat we actually talked about a specific customer engagement there.

Clinton Morrison - Feltl & Co.

Well we won’t mention specific customer names. Thank you,that takes care of me.

Operator

Your next question comes from the line of Chuck Bennett - JanneyMontgomery.

Chuck Bennett -Janney Montgomery

I want to get the story straight here. Doug, you’ve been around a while and it lookslike you guys are basically coming into a market that’s been around a longtime. A year past you had two bigwinners, the NetStar that you sold to Ascend and then you had the RocketChips thatyou sold to Xilinx.

So now what you are doing is you are coming into an industrywhich is pretty much dominated by Alcara and Xilinx. Am I right so far?

Douglas Pihl

Yes.

Chuck Bennett -Janney Montgomery

If in fact you have a real innovation here, then it would bea no-brainer -- QLogic is in the same category, is that correct?

Douglas Pihl

Generally, they are in a kind of programmable logic market butit’s an entirely different type of chip and really focused much more on lowpower applications. They don’t haveanywhere near the performance that we have.

Chuck Bennett - JanneyMontgomery

Howmuch cash do you have left right now?

Jim Cruckshank

At September 30th we had approximately $34 million.

Chuck Bennett - JanneyMontgomery

$34 million in cash, your mortgage cap is somewhere around $50million, is that right, with the share count?

Jim Cruckshank

Right.

Chuck Bennett - JanneyMontgomery

How long -- and maybe this is the wrong question to ask but-- how long until you will be able to tell people who you have as customers? Imean, you already have them, but you withhold the names. How long do we have to go on before thesecret is out?

Douglas Pihl

As we have said on a number of our calls, and Dan justmentioned again now, the reason that our customers don’t want us really todisclosing their names -- and we jumped through quite a few hoops to get LG toallow us to use their name in this one application -- but the reason is that theysee it as a real competitive advantage and until they really get out with theirproduct, selling their product into the marketplace, they are reluctant to havetheir name used for fear that it will disclose the competitive advantages oftheir own product.

Hopefully as we get some of these out there, then it willget more and more recognized that the FPOA is in a number of these products. That’sclearly what we are pushing toward.

Chuck Bennett - JanneyMontgomery

Typically how long does it take for a company to get theproduct ready out to market? Does it take a year, six months, two years?

Douglas Pihl

On average probably about a year.

Chuck Bennett - Janney Montgomery

And how far along are you, do you think?

Douglas Pihl

Well again, with the LG application we’ve been working onthat with them and with Adaptive Micro-Ware for about a year and that really isjust now coming into the production phase.

Chuck Bennett - JanneyMontgomery

So some of these other names you started after you teamed upwith LG?

Douglas Pihl

Yes.

Chuck Bennett - JanneyMontgomery

A long time after?

Daniel Sweeney

We had our first production samples of the chip availableearly last year. We went into formalfull production, full qual’d at TSMC this February, so it’s been about 12months that our first volume production is coming in. We have others that we have engaged over thecourse of that time as we’ve had other IP available to run on our chip thatwere are in the process of bringing into production.

Chuck Bennett - JanneyMontgomery

Now, if you can name one thing that could make thetransition and get this company going better with revenue, besides a time machine,what do you think you could use? Maybe a better salesforce, what do you need toget across the hump and actually start bringing revenue in? Anything besides time?

Daniel Sweeney

The two areas really we are continuing to work on and put alot of effort into – which again, we have mentioned several times -- thedevelopment of some of these video applications by our own internal engineeringstaff and in partnership with our Certified Design Centers. The ability to really demonstrate a fullyfunctioning video encoder or a decoder, for example, is a major selling pointfor customers. To really be able to seesomething that they can touch and feel and test and understand in theirlanguage that it really does work.

The other area which I mentioned in my comments is our suiteof tools, the software that we provide to our customers and use internally forthe development of these applications. We are coming out with a major newrelease of those tools that we think will make the development of theseapplications significantly easier.

So those are two things as we develop our IP library furtherand as we develop our tools, we think that will make development of productseasier and more efficient, more productive. Other than that, I think you’re right; it’s just time and getting oursalesforce out there meeting with customers and really demonstrating theproduct and engaging as many of them as we can.

Chuck Bennett - JanneyMontgomery

I’m a firm believer in history, so maybe three is a charm?

Douglas Pihl

Well, that’s what we are all planning on.

Operator

Your next question comes from Joel Achramowicz - MDBCapital.

Joel Achramowicz -MDB Capital

Doug, I noticed that LodgeNet is putting a lot of resourcesin upgrading their infrastructure in their hotels and the like so I hope this augers well for the extent ofthis application you have in the funnel. Do you still feel strongly that it’s avery high volume opportunity in the tens of thousands of units long term?

Douglas Pihl

Yes, absolutely. There are two ways they can upgrade. One is there is a new class of flat panel TVs that in fact LG themselvesand others are introducing with built-in MPEG-4 decoders. Now they are justbecoming available on the market and we believe that if you look at individualhotels, it will be a mix of providing our solution which will broadcastthroughout an existing network to MPEG-2 set-top boxes and some of thesehigh-end TVs that they will put probably in the upscale rooms, the executivesuites and that kind of thing. So there really will be a mix of technologies inthe hotels.

Joel Achramowicz -MDB Capital

Very good. And so youcan say that you feel confident that in terms of your vertical sectors, your chosensectors that you feel comfortable that you have made progress in your salesfunnel this last quarter?

Douglas Pihl

Absolutely, no question about that.

Joel Achramowicz -MDB Capital

Well we will look forward to getting more color on thosedeals hopefully in the next couple of months and obviously in the next quarterannouncement as well. Good luck goingforward.

Douglas Pihl

Thank you.

Operator

Your next question comes from Philip Smith - Feltl &Co.

Philip Smith - Feltl& Co

Would you take a moment please and update the tape out ofthe 90-nanometer?

Daniel Sweeney

Right now, Phil, as you know we have put two chips actuallyon the same asset. So we will have, asDoug mentioned in the script, we will have one that is really optimized forvideo type applications and another chip that’s really optimized for highperformance filtering applications that we typically see in test and measurementand medical imaging. So both those chipswill tape out either the very end of this year or early next year and as Dougmentioned, then we will receive first silicon early next year and then we willstart sampling to our customers about six weeks later.

That program is tracking ahead per the schedule and we tendnot to share the information on that chip with customers because than itbasically defers the sale of our current 2400 chip. There were customers that we have shared thespecifications for those two chips that we code named Utahand Nevada. The reception for those chips has been verystrong.

Operator

Your next question comes from Larry Mckolov - PrivateInvestor.

Larry Mckolov -Private Investor

The cash burned roughly about 4.6, same as the last quarter?

Douglas Pihl

Correct.

Larry Mckolov -Private Investor

Investment securities, I see that’s a new line, can you justbriefly describe those?

Daniel Sweeney

We laddered out the $40 million we raised in June to time,very conservatively time, our cash needs as we burn cash through the nextcouple of quarters. We have invested in stuffthat is virtually principal safe, so there are no mortgage-backed securities,Larry.

Larry Mckolov -Private Investor

Okay, I was hoping for that. Just to clarify, that testing with LG with those 55 boards will behappening at the end of this month or December in the hotels in Chicagoarea?

Daniel Sweeney

The plan would be that we’ve got the application runningtoday on what we call the alpha boards or the prototype boards and in the firstpart of December we will start the trial, so we will actually deliver theproduction levels systems and we will start the trial efforts. That willproceed to the beginning part of next year, those trials.

Larry Mckolov -Private Investor

The trials are beginning in next year. How secure or safe are we that this is anorder from LG as opposed to just them looking at different applications that mightbe available for them?

Daniel Sweeney

No, this is a solution that both Zenith and their customersare committed to; we are really the only option they have that is this far alongto be able to deployed, so I’m confident that this is something that we willenjoy early production revenue from next year, Larry.

Larry Mckolov -Private Investor

So they would have to replace all the TV sets that are inbasically all the hotels?

Daniel Sweeney

The only option would be to go back to the customers thatthey’ve sold over the last year-and-a-half these expensive flat-panel TVs andsay to actually get the high definition now you have to replace all those andthat would be not well received.

Larry Mckolov -Private Investor

Are you seeing that application being used in other areasthat might involve Zenith?

Daniel Sweeney

DirecTV is rolling out, the HD content they launched theirsatellite in July and there was recently eight full-page ads in the Wall StreetJournal advertising their 70 channels of high definition content availabletoday. So, Zenith is starting to seeenquiries from other customers besides their large ones because that’s becomingmore in demand now as that HD content becomes available.

Larry Mckolov -Private Investor

Any examples of who those other customers might be?

Daniel Sweeney

I can’t talk about Zenith customers, Larry, I am sorry.

Larry Mckolov -Private Investor

You’ve mentioned on the IPTV about field trials -- any ideawhen those might be occurring?

Daniel Sweeney

That would probably be the early to the middle portion ofnext year, Larry.

Operator

Your next question comes from Clint Morrison - Feltl &Co.

Clinton Morrison - Feltl & Co.

My question got answered, thanks.

Operator

I am showing that we have no further questions at this time.Please continue with any closing remarks.

Douglas Pihl

In closing, I just would like to repeat again that all of ushere at MathStar really committed to making this company a great success as wesee some of these potential activities really developing, we are more confidentthan ever that we are on the right track and we will succeed as the leader inhigh performance programmable logic.

So with that, I will just say thank you for your time and wewill see you on the next conference call.

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