Neonode Inc. (NEON) Q2 2014 Earnings Report, Transcript and Summary

Hello everyone. Thank you for standing by and welcome to Neonode’s Second Quarter 2014 Earnings 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 session. [Operator Instructions]. Thank you. At this time for opening remarks and introductions, I would like to turn the call over to Daniel Gelbtuch, our Senior Vice President of Corporate Finance and Investor Relations. Daniel, please go ahead and start the conference.

Thank you. Welcome and thank you for joining us. On today’s call, we will review our second quarter financial results, and provide a corporate update. Our update will include details of our design wins, technology developments, and new customer agreements that we recently announced. The prepared remarks will be provided by Thomas Eriksson, our CEO and David Brunton, our CFO. Before turning the call over to Thomas and David, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts are forward-looking statements. The words anticipate, believe, estimate, expect, tend, will, guides, confidence, targets, projects, and other similar expressions typically are used to identify forward-looking statements. These forward-looking statements do not guarantee the future performance that may involve or are subject to risks, uncertainties and other factors that may affect Neonode’s business, financial position, and other operating results, which include, but are not limited to the risk factors and other qualifications contained in Neonode’s Annual Report and 10-K, quarterly reports on 10-Q and other reports filed by Neonode with the SEC to which your attention is directed. Therefore, actual outcomes and results may differ materially from what is expected or implied by these forward-looking statements. Neonode expressly disclaims any intent or obligation to update these forward-looking statements. At this time, it is now my pleasure to turn the call over to Thomas Eriksson, Chief Executive Officer of Neonode. Thomas, please go ahead.

Thank you, Daniel. Good morning everyone and welcome to the call. First off, I would like to proudly announce that Neonode’s zForce PLUS our multi-touch PC solution has been selected by premier PC OEM. Our technology has gone through multiple transformations and once again, has shown its versatility in the training Windows 8 Certification and the OEM demands the touch to small to large displays and surfaces. Our multi-touch solution, zForce PLUS, was selected due to high performance, cost of touch, industry design possibilities, manufacturing competency and technology roadmap. We are competing with low cost capacity sensors such as metal-mesh and other optical touch solution. To put things in perspective, it’s worth mentioning that we are also fighting against pre-active capacitive touch oversupply and price dumping, and even in these environments, our solutions are still very competitive. Our future rich, high performance solutions was still be able to reward the OEM with considerable cost savings. In addition to zForce cost savings, the performance benefits and differentiated usability roadmap of both zForce PLUS and zForce AIR, further enhanced our competitive position. Neonode is focusing on penetrating and taking market share in high PC markets. This includes notebooks, all-in-one PC, monitors keyboards and track pads, totaling a market of over 300 million devices per year. The adoption of touch in PC devices is still low mostly due to the high cost of capacity touch solutions. However, the opportunity for increasing touch deployment in a greater percentage of devices is big, and Neonode has the perfect technology, cost structure and roadmap to make this happen. Due to the major delta in costs of implementation between Neonode and completing technology, we’re able to earn a higher royalty rate for our zForce PLUS multi-touch solutions. Our offering include delivering pre-assembled and tested proximity sensing modules through our EMS partners who we have been working for many years. Modules were relaxed and need for fully custom designs and make it easier and faster to scale up volumes. The OEMs and ODMs can now purchase module directly from Neonode’s partners, but they can get integrate fully extensive module at a competitive price. Neonode is increasing its module making partnerships include Tier 1 ODM to ensure that we can meet the expected future demands for our technology. The ODM buy directly from our EMS process and the royalties paid to Neonode via the OEM. To explain this further, if anything at this point in time all OEMs typically use the same screen sizes and aspect ratio. This allows the OEM to source its play from multiple display manufacturers. For Neonode, this is a major advantage of making standard size module we can provide the OEM, finished touch solutions ready for assemble by the ODM. Neonode can also leverage design solutions for various OEM, tooling and module production processes, yet again reducing costs and delivering the best possible solutions through OEMs. Moving on to the printer segments, during the second quarter, zForce Touch was integrated into numerous Hewlett Packard printers, including three on recent shelves, the positive review 8610 8620 and 8630 model. During the second quarter, HP accounted for more than 7% of revenue and we expect printing revenues will keep growing as we move forward. With our new technology, zForce AIR, it is our strategy to become the leader supplying touch solutions for the printer segment. Along these lines, we expect a second licensee to start shipping printers with zForce Touch in 2015. On EV, on children’s tablet front, while this market has been on significant pressure and will increasingly become a sideshow for Neonode, we expect a major EV ODM along with a premier tablet OEM to launch new zForce based product in the third quarter. More importantly, while these two verticals are not critical for Neonode’s forward-looking prospects, these two OEMs large preparations who are already showing keen interest in integrating Neonode Technology’s into diverse opportunities. On the automotive front, Neonode recently signed a license with Magneti Marelli, our top tier auto system OEM supplier. While the sign site remains quite extended, we expect to have as many 10 customers shipping into payment systems, incorporating our technology in 2015. And now I’d like to move over to technology update. Our zForce AIR is a revolutionary technology that enables touch from any surface with minimum footprint and design. To further improve on this technology, Neonode has put significant effort on developing a motorized system to reduce effort of implementation. Apart from the mental goal as a licensing company is to continue to work on lowering the cost of the hardware components and the manufacturing methods for our solutions. While at the same time, improve on the features such as the response time, accuracy and power consumption. To achieve this goal, we have extended our development focus on new manufacturing methods that integrate components into one scalable package, thereby eliminating the need to sub-assembly and reducing tolerance of sensitivity. The elimination of individual components in assembly Neonode’s partners to manufacture ready-to-use sensor package at a greatly reduced cost. To add new features, and to further reduce the total power consumption of our solutions, we’re currently finalizing the specification for our next generation sensor NN1003. The NN1003 will offer faster tracking of fast objects, reduce power consumption and a lower system cost for larger display for touch surfaces. Gesture sensing is an important feature of zForce AIR. Development is ongoing to bring affordable gesture sensing into new areas in few markets as well as automotive industry. zForce AIR, in the freedom of design seeing in all our existing markets. To extend the usage of zForce AIR into new segments and product tide, the development is ongoing to extend the range and increase accuracy of the technology. The initial target for this new technology is PC track pads, air gestures for menu activation and monitors and to enable touching gestures on mechanical keyboards. All zForce technology enabled elimination over covered glass from devices even if the market is reacting positively on these opportunities, there are still devices that can benefit from a glass design. To address this, Neonode is continuing developing on two new technologies, zForce STR and zForce liquid. These technologies can potentially bring new options in designs such as curve and flexible display. That shows potential for providing passkey (inaudible) time reaction and enabling top skin like touch services. We continue to invest in our IT for touch and proximity sensing and usage of solutions to further expand our portfolio. Today we have 45 patents issued and 105 pending up from 37 and 93 in the first quarter of 2013. Finally, I’d like to note that Neonode appointed Mr. Per Lofgren, to become our new independent Director and the Chairman of our Audit Committee. He will be replacing Mr. Lars Lindqvist who will become Neonode’s new Chief Financial Officer. Mr. Lofgren has been employed for the past 30 years in various management positions for Ericsson and most national provider of communication technology and services. Since 2011, he has served as Executive Vice President and Chief Financial Officer of Ericsson, North America. From 2008 until 2011, Mr. Lofgren served as President of Ericsson Sweden AD. Prior to 2008, he served in various Ericsson business units globally as position CFO, controller and marketing and other management position. The new Chief Financial Officer, Mr. Lindqvist, previously served as a Director of Neonode’s since November 2011 and served as Chief Financial Officer for Mankato Investments Group, Chief Financial Officer for Microcell, a Finnish ODM of mobile phones and Chief Financial Officer of Ericsson Mobile phones. Our amazing people and my dear friends, David Brunton will retire on August 15th and transition into an open ended consulting role. While we’re sad to see Dave leave us, we want to show investors that his orderly transition will be further supported by his ongoing consultancy. And now, over to David who will talk about the financials.

Thank you, Thomas. Earlier today, we filed our Form 10-Q with the SEC and released our second quarter financial results in a press release. Both of these are available for download from the investor section of our website at neonode.com. Let’s get right to it. Our second quarter revenues were approximately $900,000 compared to approximately $1.1 million for the second quarter in 2013. Our revenues for the quarter included $400,000 of license fees and $500,000 of NRE fees, compared to $600,000 of license fee and $500,000 of NRE fees for the second quarter of last year. The decrease in revenues for the quarter compared to the same period in 2013 is primarily due to a 46% decrease in license fees earned from customer shipping e-reading products. This decrease was partially offset by licensed fees earned from new product shipments of children’s tablets and printers by LeapFrog and HP respectively. We do continue to see a general weakness in overall e-reader shipments, but expect to see the market leader in this segment release a new product in late Q3 this year. Our total operating expenses were $4.3 million for the quarter just ended, compared to $3.5 million for the same quarter in 2013. The 23% increase in total operating expense is due to several factors including, legal expense related to patent filings, an increase in headcount primarily in our engineering department and an increase in travel related costs, primarily for sales and engineering activities to support the emerging PC market. Our net loss for the second quarter was $3.9 million or $0.10 per share as compared to a net loss of $3.1 million or $0.09 per share for the same quarter last year. For the six months just ended, revenues were approximately $1.9 million, compared to approximately $1.6 million for the same period in 2013. Our revenues for 2014 include $1.3 million of license fees and $600,000 of NRE fees, compared to $1.2 million of license fees and $400,000 of NRE fees for the same six months period of 2013. The increase in revenue is primarily due to license fees earned from our new product shipments from children’s tablets, printers and dealer installed automotive infotainment systems by LeapFrog, HP and Volvo respectively. These new license fees were partially offset by a 29% decrease in license fees earned from customer shipping e-reader products. We do expect that license fees earned from the printer segment will steadily increase over the coming quarters as new printer products are released to the market. Our total operating expense was $9.1 million for the six months just ended compared to $7.6 million for the same period in 2013. The 20% increase in [Audio Gap] discussed for the quarter. We expect our cash operating expenses to range between $15 million and $17 million for the full year 2014. This will be totally dependent on the assets and efforts needed to service new high growth business areas, particularly for PCs and printers. Our net loss for the six months ended June 30, 2014 was $7.9 million or $0.20 per share as compared to a net loss of $6.7 million or $0.20 per share for the same period last year. Our operations used approximately $6 million of cash during the six months ended June 30, 2014 compared to $4.1 million of cash for the same period in 2013. We expect our net cash burn rate to decrease over the coming quarters. As previously reported, we completed a financing transaction in the second quarter raising approximately $9.3 million net of costs from the sale of 2.5 million shares of our common stock. And as of June 30, 2014 we had cash of approximately $12 million, plus $700,000 of accounts receivable and working capital of $8.8 million. Our shareholder equity is $9.2 million and we have approximately 40.5 million shares of common stock outstanding. Now, I’d like to turn the call back over to Thomas for some closing comments.

Thanks, David. To recap, Neonode continued to gain momentum and visibility in our key markets that would allow the company to further accelerate growth into 2014 and beyond. Our prospects in both PC and printers continue to expand and in addition, our proximity sensor technologies are being integrated into peripherals, display and automotive solutions and continue to gain interest from our major OEMs. This concludes our prepared remarks and we open the call for questions. Thank you very much.

[Operator Instructions].

Hello.

I would now like to turn it back over to Dave Brunton CFO who would now like to make some comments.

Hello, everyone. I’d like to take a few moments before we move into the Q&A portion of the call to talk about my upcoming requirement. My last day as the CFO of Neonode will be August 15th. I have served you and the company with pride and commitment for the past eight years and have enjoyed getting to personally know many of you who are on this call today. For the past 16 months, Thomas and I have thought long and hard about this decision and have both have come to the conclusion that now is the time for me to retire from the day to day activities. I know that I leave the company in capable hands with Lars, moving into the CFO position, from his duties as the Audit Chair and Board of Directors. Rest assured though, you won’t lose me that fast. I will continue to serve the company in a consulting role to make sure that the transition to Lars is seamless. One thing of which I’m certain, now is a good time to be Neonode shareholder. We are at the beginning of some exciting times with both PC and printer market opportunities sitting right in front of us right for the taking. I know, I’m betting my stock ownership on our success. And now I’d like to pass the phone to Lars and let him briefly introduce himself. Lars?

Thank you, David. I’m for sure extremely excited to have the opportunity to transition from the Board to the CFO position at Neonode. And I too believe, that we are in a beginning of an exciting roles and I do want to participate. I already had met some of you at past conferences and meetings and now look forward to get to know more of you in the future. So that’s all from me for now. Operator, please open the call for questions.

And your first question comes from the line of Cody Acree of Ascendiant Capital. Cody Acree – Ascendiant Capital: Thanks for taking my question and Dave congratulations on the, at least soon over time sounds like you’re still going to be busy. May be on the PC engagement, congratulations on that, can you just help us out with may be the breadth of that engagement and where we might see – where and when we might see our product show up first?

At this time, we’re in very sensitive negotiations with this big OEM towards finalizing the contract, and we expect that we will successfully across in the PC space across all product lines whether it’d be monitor, we have a very compelling large screen solutions whether it’d be notebook, chromebook, all-in-one PCs and even keyboards and track pads. So, we expect to be very successful across all PC equipment lines. Cody Acree – Ascendiant Capital: And where you might show up first? I guess knowing that there is going to be some legging in at this I would assume.

It’s going to be tough to say because each product line has a different design cycle. I think monitors might have a quicker design cycle relative to all-in-one PCs and laptops. It’s going to be tough to say at this moment. I think we’re going to keep you upright in the coming weeks or months as these winds will become a little more clear for us and become a little more visible in terms of timing. I think we mentioned in the prepared remarks that we expect to generate revenue from PC in 2015. Cody Acree – Ascendiant Capital: Any thoughts on when in 2015 we might see it? Is it early as first half first quarter?

That’s very possible. Cody Acree – Ascendiant Capital: And I guess what are the hurdles left to be worked out during the final negotiations what’s left to be done?

Our hurdle is mostly legal and literally paperwork in terms of the general commitments we have. We have a commitment in terms of getting the lawyers to agree on all the little dying across entities that could take a few weeks and hopefully we’ll be able to announce something at that point. Cody Acree – Ascendiant Capital: And I think in previous calls Clarence had talked about a negotiated licensing kind of target range. Any help on where that may be finally landing?

We can’t really give you census right now however, we do expect it to be much higher than the average that we have right now. Nothing has changed in terms of where we think we’ve richer licensee is what we typically gave. Cody Acree – Ascendiant Capital: That do you make significantly more if you’re working directly with the OEM versus the OEM that is managing that process?

I wouldn’t say that right now but right now it’s still going to be rich on both ends whether working directly with the OEM or ODM. Cody Acree – Ascendiant Capital: And last for me, you had talked previously about possibility with one of your PC effort possibly looking at prepaid license fees rather than may be your typical NRE structure. What is that starting to look like?

Again, we can’t mention that just in typically speaking, we normally get some either it’s upfront fees – or in typical fashion or its upfront fees or it’s RE fees or prepaid. We expect this to be no different, but we’re still in negotiation at this point. It’s a little sensitive at this time to discuss it. Cody Acree – Ascendiant Capital: All right. Perfect guys. Thank you and congratulations.

Your next question comes from the line of Mike Malouf of Craig-Hallum & Capital. Michael Malouf – Craig-Hallum: Great. Thanks guys for taking my questions. I’m wondering if we can talk a little bit about timing if things go as you’d expect with regards to the PC OEM. What might we expect to see over the next three to six months? I mean are we looking for more announcements from you with regards to solidifying this agreement? And then should we expect some products at for instance CES and then watching the spring. I mean is that the sort of timing that you’re thinking of?

I would say first of all yes, yes, and yes and at the same point, we are right now we believe we are going to be taking the entire market. We are in discussions. I mean it’s getting through the first one is the hardest and certainly had to jump through a lot of hoops [Audio Gap] Michael Malouf – Craig-Hallum: Associated with this.

Absolutely not. There is no exclusivity. We are again we are talking to a total of three more right now. Michael Malouf – Craig-Hallum: Three more, okay. Great. And with regards to the printer side, still pretty small can you talk a little bit about the ramp up with the printers. I know we have 8610, 8620 and 8630 are on the shelves but is that are those shipments and those sell-throughs now fully reflected in that number because it’s still seems to be in the early ramp up stage?

Right now we can’t comment on future products with anyone specifically however, I would explain that we recognize revenues our royalties are generated when products actually get shipped from the OEM into the retail channel. So even though this particular OEM that we have has been manufacturing since December has been building pre-launch inventory for all this time just remember that the revenues that were reported this past quarter will pre-launch revenues, meaning that in the March and April timeframe they were barely products on the shelves. So the third quarter would be the first time we will have a theoretically a fuller quarter of retail availability, that’s number one. Number two, as we said in our prepared remarks, we expect to have many more product lines but we cannot say which ones and so they are actually on shelves. Michael Malouf – Craig-Hallum: Okay, great. And then you had mentioned also in the release that you’re working with two other Tier 1 printer companies, but then I think offset that he expected one more printer company 2015 so can you just sort of talk about those I’m a little confused.

Hello. Yeah I mean our strategy is to take the whole printer market. So we have one big company now launching printers and that of course has opened opportunities for us to get into the next company’s in size and this business. So our ambition of course is to look at and taking to the market including using our new technology zForce AIR that we developed at and can enable us to get into printers that traditionally doesn’t have touch because of the cost. So we have a roadmap to address the whole market in printer from small to larger sizes of display. So that’s our ambition at least. And right now we are working on two other major players in this business, which are progressing very well. Michael Malouf – Craig-Hallum: Okay, great. Thanks for all the color.

Your next question comes from the line of Rob Stone of Cowen & Company. Robert Stone – Cowen & Company: Hi, guys. I wanted to focus on the design activity a little bit Thomas. So NRE recognized in the quarter I know you can’t comment specifically on what products for which customer but if you could give us any color on how many different projects are included in that and perhaps just generally what segments are represented?

It’s a mix of different segments. It’s not just one. And there is sometimes we shot small to large amount of NRE. So you can’t really say if it’s a lot of products or a few products. So this amount represents various different devices ongoing in development.

What I think… This is Daniel. But as you can imagine, we are extremely inundated with design activity in printers in PCs and peripherals and order as well. You can only imagine that our engineers are very busy. And we typically charge for that design we’re going to NREs. So we are pretty busy at this point. Robert Stone – Cowen & Company: Great. Then I wanted to follow up a little bit on the commentary about cash expenses ranging from 17 million, but two part question. One is, if you have a comment on the non-cash expenses as to where you think you might land on a GAAP basis for the year? And then the other is, is the additional expense going to be mostly incremental headcount or there are other outside that might significantly impact the expenses in the second half? Thanks.

The non-cash stock compensation expense is roughly about $2 million and if you look at these expenses, the cash expenses for this past quarter, they were about $400,000 of non-recurring charges. Robert Stone – Cowen & Company: So that implies you might have a sequentially lower than in

Yeah, in theory and the fact that the first half stock compensation expense was actually a relatively high due to some new employees and some newer incentive packages at the beginning of the year. So I think I’m on both ends it should be lower going forward. Robert Stone – Cowen & Company: Okay. So with respect to the ramp up of design programs are you supply constraint by headcount at the moment do you need to add some significant number of people in the second half?

We do not need to add we’ve added enough. We’ve actually swapped out a number and we definitely have the right team. We have an excellent sales team at this point blue chip sales team, blue chip product development team. And we’ve added a number of key sales people from big companies, name brand companies that should help us really dive into these end markets. Robert Stone – Cowen & Company: So if you have at handy, what is the total headcount end of the quarter?

Approximately 56. Robert Stone – Cowen & Company: Thanks, gentlemen.

Thanks.

Your next question comes from Sam Ginzburg of First New York. Samuel Ginzburg – First New York: Hey guys. This question to Daniel or anybody that can answer, it’s great you have the design wins and finally getting things going. Describe to me the process of going from a design win to a license agreement how soon do you think that can happen? And if you can please be any more granular on the upfront and the dollar amount of the licenses that you think you had? You publicly said a number and now you think it’s going to be even better. How are we supposed to get our heads around that?

I will say two things, number one, the way it works typically is that you get the license and some sort of commitment of the terms and conditions or items that are negotiated but are literally more of a formality shouldn’t be taking that much longer. We’re talking about weeks not months to get this done. So this is something yet again roughly a foregone conclusion that’s going to get signed. The main points have been already negotiated for the most part upfront fees as I mentioned were in the negotiation phase so typically there is something upfront from all our OEMs whether it’d be NRE or upfront payments, we can’t discuss that because that is a negotiation point at this point. And when we do finalize the contract and if there are any upfront payments, we will let you know as soon as we can. So again, that’s just sensitive area. The key thing here is that we got the major commitment and the major the buy-it from the company. And that is the key thing here in terms of design. The formalities of getting the contracts the crossed and going forward and that should be a long time. Samuel Ginzburg – First New York: So the way I can look at this as an investor, now is that major hurdle thing in getting Microsoft certification that we all waited for those that are in the stock major hurdle getting design wins. And now you’re comfortable saying that you’re eyes crossing Ts within few weeks, you should be awarded with a license fee. Now typically we all know that when you get a license fee for major OEM that there should be some upfront and at that point in time will you be able to tell us with whom it is and the amount of upfront and the license agreement that you saw.

I said that they we’re going to be able to say who it is read this point we at this point probably milk I guess that would be can’t announce when products get every shown possibly were hit the market. So for that, you’d have to wait a little bit. The details the precise details of the contract also probably are not going to be available to the public. However, you will be able to theoretically see from our change in cash or even deferred revenues, you might be able to send something by packing to it into by looking at our future cash flows statement etcetera. I think the other major hurdle which should not be discounted is getting through all the ODMs is somewhat half ODMs and the installed base of capacitive was something… We had to jump through a lot of hurdles here and I think it’s major accomplishment that we go through this very big many hurdles at this very large OEM. It should harbor well for the next one down the pipe. We know what to expect and we know how to counter all the efforts of the capacitive group. Samuel Ginzburg – First New York: So at this point, Neonode is that close to having runway in front of them than you’ve ever been before?

Yes this is probably the closest we ever have. PC we already start ramping. This coming quarter will be the first quarter of retail based royalties and we have others that we’re talking to as we mentioned. At least two major printer OEMs, we have one PC OEM that’s committed that we’re talking to three others at this point. So this is probably the best we see in our prospects and most visible at this point. Samuel Ginzburg – First New York: Okay. Last quick question is there anything you can say to us about the comment on Amazon please

Well we can’t make comment on Amazon per se, I think it might help you to look at our 10-Q for the first quarter it might give you some indication. All we can say is that we expect a new just like Dave stated in his prepared remarks we expect a very large customer to launch a new product in the coming quarter using our technology and that’s all I can say. Samuel Ginzburg – First New York: No sense of the scope of what it could be?

I couldn’t say. But again this would be a very large and look at the 10-Q that might be give you some indication. Samuel Ginzburg – First New York: Well listen to this good stuff. Thanks a lot Daniel.

Your next question comes from the line of Orin Hirschman of AIGH Investment Partners. Aaron Martin – AIGH Investment Partners: Hi guys. It’s Aaron Martin actually for Orin. Congratulations on the PC win. A lot of my questions have been answered I wondered rehash a little bit in terms of the printer OEM revenue. Obviously the revenue recognize in this quarter was built from shipments in Q1 and next quarter we will be recognizing revenue that’s shipped already as of today. When do you find out from the OEM how many have shipped into the retail channel as of June 30th?

I’ll let David Brunton answer this.

We’re talking about HP here so they have a stay here at year end so their quarter ends in April July 31st and we get the reports 45 days after the end of July 31st. So we will get it in mid September. Aaron Martin – AIGH Investment Partners: So it’s not 45 days from your quarter end, 45 days from their quarter end?

From their quarter end, so it will be in our third quarter, because our third quarter ends at September 30th, we’ll get a report by September 14th. Aaron Martin – AIGH Investment Partners: Does that mean on your September 30th quarter you’re going to be getting the recognize on the revenue from what they’ve shipped from January 1st to April 30?

No, we’ve already got the report from their April quarter that’s in this June quarter. So in their April quarter they really started stocking the shelves I want to say mid-April so it’s about couple of weeks' worth of shipments that’s why probably may be people are expecting a bigger number this quarter. But that was at the very beginning of these product shipments. They’ve been moved, accelerated into May which is now in the second quarter which will be now in our third quarter, if that makes any sense. Aaron Martin – AIGH Investment Partners: So does that mean you’re not really quarter behind early two months behind in terms of

We’re couple months behind because of the lag, so they report 45 days after the end of their quarter. Their first quarter in our second quarter, their second quarter ends in our third quarter.

So just to be clear, our September quarter we will be reporting May, June July shipments. Aaron Martin – AIGH Investment Partners: Okay. Thanks for the clarification and most of my other questions have been answered already. Thanks a lot.

Your next question comes from the line of Graham Tanaka of Tanaka Capital. Graham Tanaka – Tanaka Capital: Hey guys. Thank you for all your help and David congratulations, we’re going to miss you but I think there is still not a lot of certainty over the last discussion held on revenue recognition and the time lag. This is not only the printer business but the large PC OEM. So just to understand you were saying that the May, June and July shipments of HP to its retailers are reported on our third quarter?

Yes, because we will get… Remember the quarter when we get the report from them, they get us the report 45 days after the end of their quarter, which means their quarter ends July 31st, 45 days after that is September 15 approximately right? So we get the report and the payment, September 15th. That’s when we will know two things, how many of the 8610, 8620 and 8630 they have shipped worldwide and did they release any additional skews of other products during that period and start shipping those because they detail every country they ship to, the products they ship, the numbers and all of that stuff, comes down to a total amount that they owe us they may send us the money. So those are the two pieces of information that we get on that report. Graham Tanaka – Tanaka Capital: So 45 days and the middle of the prior quarter which halfway through is really another 45 days. So you’re really 90 days delayed on average that’s really three months.

From the first shipments of the quarter, we’re more than 90 days right? We’re 120 or 135 days from the first day of these quarters. And so by taking it out, the next report we’re going to get is in January actually July we have December 15th. Graham Tanaka – Tanaka Capital: December 15th okay. So the other question we had is what proportionate of their roughly their shipments would be these printers? Were all the 8610 8620 8630s new additions?

Yeah. Graham Tanaka – Tanaka Capital: So is that half their shipments for those three months or the quarter?

That’s the level of detail we don’t get. But they’re not going to share. You have to remember all of these companies across the board that we are talking to it’s very sensitive information. They don’t tell us prior shipments, they don’t give us forecast, they don’t give us anything. The only way we even get an ink clean of what they are going to put potentially due in the future is from the TI chip production purchases. But that’s an in-clean that’s not true, we don’t know if they are buying inventory, if they put it on the shelf any of that stuff. But it gives us right?

I guess we also have some indication as to how much the manufacturing on a regular basis. But you have to remember that manufacturing does not necessarily equate to direct royalty, because we earn the royalty when the product leaves the HP premises to the retailer. Now when it hits the boat or gets manufactured somewhere in Asia, you have to be very cognizant of that. So, there’s been a lot of building of products since December, but the first products that hit retail were met. And were first reporting May June, July and September so you have to understand there is a lag here. The key thing to remember that it is a process of ramping up obviously they catch up. They’re very good at building exactly what they need and matching it to expected sell through. If it turns into a very steady and visible annuity going forward as these new SKUs keep ramping up. Graham Tanaka – Tanaka Capital: So let me ask in a different way then, so you can’t give total numbers. So what proportion of HP printer volume or business do we expect to have in a certain period of time say within are they rolling out their entire product line?

We can’t give that information out at this point, but I would say we have pretty substantial or very substantial penetration this account. I could have 90 something SKUs I couldn’t tell you how many or how much that represents. Graham Tanaka – Tanaka Capital: I’m sorry, you could have 90 what?

No, no. I said if you go to HP’s website, you will see they have about 90 different printer models, I’d say about 50 of them or 53 or 54 of them, are in the mid range and then you have some very, very high end. There is a lot of SKUs in the high end and some very low end. I couldn’t tell you it would not be within our rights to tell anyone how many and what that number represents, however, you should be thinking of us mostly mainstream models. Graham Tanaka – Tanaka Capital: Mostly mainstream. I thought that the 8610, 8620, 8630 were the higher end no or?

8610, 8620, 8630 I believe are in the 1.99 2.99 3.99 range that’s to be mainstream. Graham Tanaka – Tanaka Capital: Okay, got it. Okay. Last quarter really is not an indication of what you’ve been doing at HP?

Absolutely not. It’s not a proxy. It’s really free retail watch is what we reported this quarter and we didn’t say the number but it was greater than 10% of revenues. Graham Tanaka – Tanaka Capital: And then secondly, the PC revenue recognition is that going to be any different? Is that stretching to be any different? Are we talking about the same book revenues when they ship to retail or how is that going to work?

It will be roughly one quarter lag, because whatever quarter we receive the report in, they were two reporting is quarter that we recognize the revenue. So, if the PC company is working on December fiscal quarter, their report will come on January or February which means that we recognized it in the first quarter. So 4Q revenue for our customer will land in our fiscal first quarter. If the company is on off quarter let’s say the company reports on a January quarter, that’s like our printer customer and few other PC companies, we would also be reporting their January end quarter in the March quarter. So I’d say somewhere between two to three months lag. Graham Tanaka – Tanaka Capital: So do you know when the first shipments might be made? Any idea on that have they indicated when the first shipments for whatever product they might do this PC OEM?

We couldn’t say at this point. That is confidential information. But again, we will let you know as soon as we can. As soon as the products are available or being displayed publicly, we will try to make sure that everyone is aware. Graham Tanaka – Tanaka Capital: I’m a little surprised I believe you said that you expect to have shipments for across their entire line of products .

We didn’t say that across their entire line, we expect to be able to penetrate every single product line across the entire PC sector. Graham Tanaka – Tanaka Capital: Of this particular OEM you expected penetrating…

This OEM and other OEMs we’re talking about. Graham Tanaka – Tanaka Capital: So in other words, you’re not saying there was an agreement to supply this particular OEM for all their requirements you’re just expecting to be able to attack the market of the entire

Yeah, we have products and we have interest across all product lines. We cannot disclose at this point exactly which product lines we have wins in however, our products are being evaluated for all. They’re competitive in every single segment. I would tell you just as a matter of fine tuning your outlook, is that the larger the screen size, the greater the delta between the greater the cost between us and the competition. So, that sort of helps. However, we are competitive across every single PC product line, and we have interest across every single PC product line. Graham Tanaka – Tanaka Capital: Are you competitive for tablets?

Tablets is not considered something that’s PC product line from our perspective. But in theory, we should be competitive but it’s not really a strategic area considering that it’s already has a capacitive incumbency and about 65% 70% of that market is controlled by Apple and Samsung which are capacitives advocates. Graham Tanaka – Tanaka Capital: So could you just give us an example of since the cost advantage is so important, you described how important that is, you mentioned earlier. What kind of example can you give us of Logi they have 20-inch monitor 11-15 inch notebook.

Hello. For Logi monitors, as we said earlier, it’s down up to 50% less cost for our total solution compared to the competition and in this case is capacitive touch including a low cost solutions, like metal-mesh or nano wires and this type of technology. And include also the old fashioned optical camera based solutions that. So we basically compete with everything and also there is in some cases over capacity in market over supply with this place in combination that we can compete with as well. So we have quite a lot of headroom up to competition in terms of pricing. Graham Tanaka – Tanaka Capital: So you’re saying there is oversupply of capacitive touch displays?

What we’re saying, was essentially there has been some oversupply and some of the capacitive OEMs have been chunking price. They’ve been cutting prices dramatically. Even in those scenarios, we have as much as a 50% price, cost benefit relative to the recently reduced and drastically reduced pro-cap prices. So that is I’m saying we’re very competitive across all product lines and we have as much as 50% price benefit even in cases where the pro-cap suppliers have jumped prices. Graham Tanaka – Tanaka Capital: Okay. And so, just as an example, for a monitor, are we talking about $50 savings or $100 or just order of magnitude just roughly I just want to see what the incentive is for the PC other post PC companies to convert?

We cannot give you dollar amount at this point, but we can probably take this offline but again, I think 50% if you go out and look at what a monitor with touch in it costs online, relative to the cost of non-touch monitor of the same size, and you would assume about a 100% mark up for the cost of the touch. You can get an idea work it backwards and see that we’re 50% lower cost. Graham Tanaka – Tanaka Capital: Monitors tune in $250 you’d say $125 is cost material and the monitor might be 50% lower or no?

If you look at, if you go online for example, a monitor a 20-inch monitor and they’re charging $129 for the non-touch and the touch version of that same size is doubled at as soon as they are charging they’re making a 100% margin on the addition of touch. You can get a pretty good idea of where our cost lies. Graham Tanaka – Tanaka Capital: That’s very, very helpful. Thank you. The other thing we’ve not heard much late, I know you’ve been analyzing maybe it’s too early how do you monetize the intellectual property, we’re hoping to see if you could that at some point. Where are you at the process? What are the options? Thank you.

We continue to looking into that and I don’t really have much more to say right now. We’re working on it and we’ll come back with that as we go. Graham Tanaka – Tanaka Capital: The cash burn rate, I’m sorry if you could just give us a bracket around what that might do this year, next year?

Again, we can’t really give you a forecast however, our cash burn is about this past quarter on a recurring basis, was about 1 million a month. We do not anticipate to have a large or any increase or major increases in the cash OpEx. And we expect that revenues will start picking up relatively soon as the printer business keeps ramping, as new e-reader products start hitting the market etcetera. Graham Tanaka – Tanaka Capital: You know I was getting to this Daniel, so when, what level of revenues or when in time could you possibly reach breakeven on a cash flow on a operating cost basis? Thanks. You know I was going to ask that right?

Yeah. Dave you want to answer that?

Sure. I think as I said, we said earlier we expected the operating expenses to range between $15 and $17 million somewhere in that neighborhood, depending on what we need to do to capture the rest of the printer and PC market. So that’s the number. So at this point, it’s highly dependent at what point in time, the PC guys go and start ramping. And how fast HP starts releasing printers and how quickly some of the automotive and certainly some of the other printer companies come online next year. Those are the dependencies it’s not e-readers, it’s not kids’ tablets it’s those things. And so, I think we’ve said over and over that we don’t have a lot of visibility into the future. We don’t give projections, we don’t get purchase orders so it’s sort of after the fact I think internally, we sort of expect some time mid next year, somewhere a little later than that, somewhere around there. It’s completely dependent on those things, it’ll be earlier or later. Graham Tanaka – Tanaka Capital: Thank you very much.

I know that doesn’t answer your question specifically, but that’s as close as we can get. Graham Tanaka – Tanaka Capital: I just want to make sure that not a lot of multi research published coverage and I just want to make sure that they are not too optimistic when you are fundamentally ramping because if they get too optimistic then it looks like a disappointment.

I understand. Graham Tanaka – Tanaka Capital: Thank you.

Your next question comes from the line of Robert Davis of (inaudible) Capital.

Hi, how are you? You mentioned that the you can’t mention the name Amazon but the shipping product this quarter. Is there anything we can see by the specs of the device that it’s your actual product without obviously mentioning the name Amazon?

I think the best we’re going to do is, they typically release product in the September timeframe and usually in gadget does breakdown and things like that at the products and that’s probably when you’ll see it.

Okay, great. Is there anything else you can mention as addressing short position even that devastating falsified article that came out?

Along those lines, you can feel free to check out the New York legal dockets, we just filed a legal complaint against Seeking Alpha to try to again stop this kind of shenanigans. That article that came out was loaded with false information and it was outrageous and we’re trying to take some action not that gives us shareholders any comfort, but again we’re going to try to defend ourselves.

That’s great. It’s the first time you’re letting everyone know that.

Yes.

Okay, great. Thank you very much.

Your next question is a follow up from the line of Cody Acree of Ascendiant Capital. Cody Acree – Ascendiant Capital: Hey guys, just one quick follow up. So for those skews that you’re working with your PC partner on, do you have a sense or do you know if they’re planning on using you exclusively for those or do you think they’ll be a blending of you and may be alternatives?

Well, it’s hard to say because we’re not necessarily purvey to everything. I think practically we saw this even in the printer space, is that OEMs they typically dip their to in the water. Some are conclusively but it’s never a 100%. They always keep things just for safety sake and for prudent sake, for risk management sake. They make sure they have parallel development. However, getting into this particular OEM was over a year’s process. We jumped through so many hoops I can’t even tell you. Once that we anticipated at which we did it. We think this sounds like and what we can tell is that this is a strategic partnership which will again be very pervasive across multiple product lines, but again for me to be sure, that something A, I couldn’t tell you and B, I wouldn’t be allowed to tell you. I think it’s a very, very positive statement. It took us a very long time, a tremendous amount of effort, kudos to our engineering team and sales teams that literally didn’t sleep for a probably about 14 months to get this done. Cody Acree – Ascendiant Capital: Great. Thank you.

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Hello. I want to thank you all for joining us for this call. We believe this is a very excited time for us in Neonode. In the market, we’ll keep everyone updated on our progress as it happens. Have a very good day. Thank you very much.

Thank you. That does conclude today’s conference. You may now disconnect.