Neonode Inc. (NEON) Q4 2017 Earnings Report, Transcript and Summary

Hello, everyone. Thank you for standing-by. And welcome to Neonode's Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions] I would now like to direct your attention to the company's PowerPoint slide-deck that you are capable of viewing now that you have logged on to this call. The company will control the navigation through the slide-deck to coincide with their prepared remarks. Thank you. At this time for opening remarks and introductions, I would like to the turn the call over to David Brunton, Neonode's Head of Corporate Investor Relations. David, please go ahead and start the call.

Welcome and thank you for joining us. On today's call, we will review our fourth quarter and fiscal 2017 financial results and provide a corporate update. Lars Lindqvist, our CFO is not able to be with us today as he has taken - been ill all week, and I will be covering the financial portion of the call in his unexpected absence. Before turning the call over to Andreas Bunge our CEO, 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 be 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 on 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 my pleasure to turn the call over to Andreas Bunge, Interim Chief Executive Officer of Neonode. Andreas, please go ahead.

Thank you, David. Today I will present the highlights from the fourth quarter and also provide you with a strategic update on where we see Neonode today, and our opportunities going forward. So a quick glance at the fourth quarter, our sales increased by 14% year-on-year to almost $3.3 million in the quarter, primarily due to continued strong performance in the licensing business. For the fourth quarter, we did record a net loss amounting to $1.7 million, the loss includes a non cash inventory adjustment of $1.4 million, which I will discuss later. During the quarter we reached some important milestones. We launched zForce Air modules and shipped the Chigoo, the Chinese producer of smart luggage carriers, and zForce sensor modules were made available worldwide for worldwide shipments through Digi-Key. During Q4, we also announced our intention to regain compliance with the minimum bid price requirement. And we can now confirm that the Board will ask stockholders to approve our stock base as a part of the annual meeting in early June. On January 1, Thomas Eriksson resigned as CEO of Neonode and as you have seen we have a appointed Håkan Persson as new CEO from 1st of April. During my time as Interim CEO, my main focus has been to review the cost structure and to help the organization to put full efforts on specific customer projects to drive sales. As you know, I came in as an investor in August and joined the Board of Directors in October. Our decision to invest in Neonode was based on a couple of observations which I believe still apply. In general, there is an increased demand for more intuitive user interfaces. This is true for a number of industries for example, automotive, consumer, electronics and industrial applications. Neonode has a unique technology and a stronger relationship with a large number of high profile customers. The company built the licensing operation that generates steady cash flow. But we also saw which was confirmed in our review of the operation the need to focus the business scope and to build on strength in the customer relationship. It also means that Neonode has the technology, the resources and the capacity to see profit for growth and our actions to realize that can be summarized into two key priorities. Our first priority has been to secure a balance cash flow. We are focusing on existing products and customers where we are close to a deal. We have taken action to adjust the cost base. So increased focus on customer driven projects, we have seen that we can free up resources. Today assigned for non-core development and more or less speculative project. In this context, we have taken the decision to minimize investments in AirBar business. As a consequence we have taken a conservative approach in reviewing our working capital leading to an inventory adjustment of 1.4 million in the quarter of which AirBar represents the main part. But as previously communicated, we continue to evaluate strategic partnership for AirBar going forward. In addition to these savings, we are also introducing a general type the cash management and cost control. This means that through the cash flow generated by our sales and licensing revenue, we can secure a balance cash flow and also see a low risk in the leveling operation. Our next priority is to step up product sales. We started to see our Air modules and we are focusing on closing key customer deals. We do believe that this is the real growth opportunity for Neonode. Development into new hires will be in close collaboration with key customers in selected strategic markets. To execute on these, we recruited a sales focused CEO, starting the 1st of April. The new CEO Håkan Persson has a solid experience from leading positions in technology company. Our licensing revenues play an important role in our first priority to secure a balanced cash flow. As you can see we continue to see stable revenues from the fee segment, eReaders, printers and the automotive segment. Our licensing fee grew by 13% to $2.5 million in the fourth quarter driven by a strong performance within the printer segment. We continue to see this as a solid and profitable business foundation which we will continue to nurture. But the area where we see the big future opportunity for Neonode is our zForce Air module which was launched in Q4. We did launch, we have increased our offerings to include not only touch interaction, but also the meet our interaction an object sensing. As I mentioned previously, we are now focusing on closing deals already in our pipeline. Development into new areas will built on our close relationship with key customers in selected strategic markets. Based on the key offers we can do a lot. We just offer adjustment to cater the customer needs and thereby also open up new application areas. This is a shift in our way of operating the business. We believe that close customer collaboration is more relevant and an efficient process to product development than speculative in-house product development strategy. So redirecting our R&D resources to customer driven projects, we can free up engineering resources and also reduce the risk level in the development. Our zForce Air technology is relevant for a broad number of application and industries which we will be able to address over time. One industry that's already started to address is automotive where we have a good traction and ongoing customer project. This is the long term opportunity that can generate large volume both in licensing and zForce Air modules. Through our licensing business, we have already strong presence in this segment. Within infotainment systems, we have ongoing relations with seven global Tier 1 customers and a number of OEM. This is an area where we'll continue to increase our presence. In control system, and the steering wheel project with Autoliv, we have now entered into the commercialization phase. Regarding entry systems, door and tailgate solutions we currently see strong interest and are in discussion with several potential customers. With that, I leave the word to David for international updates.

Thank you, Andreas. You can find our 2017 10-K and Quarterly 10-Qs available for download from the Investor Relations section of our website at neonode.com. I will focus the majority of my prepared remarks on the fourth quarter. Please see the MD&A footnotes and other sections in our 10-K for a full discussion on the year-to-year results and other activities. I will start with a summary of our fourth quarter revenues and operating results. Our fourth quarter revenue increased 14% to $3.3 million from $2.9 million in the same quarter in 2016. The main drivers are an increase in license fees from printer customers, plus an increase in NRE revenues. During the fourth quarter we earned approximately 600,000 as we completed final milestones for three NRE projects of which our steering wheel project with Autoliv is the largest. We do expect NRE to continue to generate revenues both from licensing and sensor module customer projects in the future. Our total license fees increased to $2.5 million in Q4 compared to $2.2 million in the same period in 2016. I will discuss license fees in more detail on the next slide. As Andrea has previously discussed, AirBar sales have not met expectations. As a consequence to the slow sellthrough, we have significantly reduced future investments in AirBar development, marketing and sales efforts. We also evaluated the expected net realizable value of our inventory and recorded a $1.4 million non-cash reserve of our component in AirBar inventory in the fourth quarter. Our net loss for the quarter including the non-cash inventory adjustment was $1.7 million or $0.03 per share compared to $400,000 or $0.01 per share loss in Q4 2016. I think it's important to note at this point that on a pro forma basis excluding the non-cash inventory adjustment discussed above, our Q4 loss would have been approximately $300,000 or $0.01 per share. Our licensing is a solid and profitable business which remains stable during 2017 and which will continue to nurture going forward. Our total license revenue increased 13% for the fourth quarter 2017 compared to Q4 2016. Printer license fees in the fourth quarter from five OEMs increased by 45% compared to the same period in 2016. The increase is primarily due to steady fees earned from HP, plus an increase in total printer shipments and fees from both Canon and Epson. Our automobile license fees actually decreased 32% in the fourth quarter compared to 2016. This decrease is primarily due to certain of our customers reaching volume milestone per unit license fee reductions plus decreased sales volumes in certain car models in the Chinese market. These decreases were partially offset by increase in shipments of new cars from Volvo and other OEMs. Our license customers combined shipped 3.2 million units with zForce during the fourth quarter of 2017 compared to 3 million in Q4 last year. Neonode technology has now been integrated into more than 56 million products since 2011 and continues to grow each quarter. I'm going to end by talking about the balance sheet and cash position. As Andrea said, we've taken actions and continue to take action to secure balanced cash flow. And as he discussed, we've implemented either cash management and cost controls, we've focused our development and support activities on key customer driven projects and our total operating expense are currently in the range of $3 million to $3.3 million per quarter and we ended the year with $5.8 million in cash, $1 million of accounts receivable, and $6.2 million of working capital. Our current liabilities including accounts payable deferred revenue and accrued expenses are well within plan. Now I would like to turn the call back to Andreas.

To conclude we have the unique technology with strong customer relationship and a new line of enterprise launched. We have taken actions to secure a balance cash flow that we believe we have sufficient cash flow from operation to build a sustainable and growing business. We remain optimistic about revenue growth opportunity in both licensing and sales of sensor modules. And with Håkan Persson joining us as our new CEO bringing solid expertise from driving sales and technology company we believe that Neonode can secure execution of strategy towards achieving profitable growth. And with that, I open up for questions.

[Operator Instructions] Your first question comes from the line of Mike Malouf with Craig-Hallum Capital.

Can you drive down a little bit into the auto side from the licenses, it sounds like you're getting some pretty big volume discounts, but we haven't seen a lot of volume in that area. So I’m just a little bit confused about that. So can we talk little bit about that and how you see some of these programs that you had in the words for a while rolling out over the next year or so?

There actually have been in certain other cars some volume and sort of a mixed bag in the license side. We have some cars that didn't - specially in the Chinese market that are moving off of the production line I think is what's happening. And they seem to have a shorter life cycle than some of the cars that we've seen in the U.S. markets, but there have been some discounts and that combined with the cars that are leaving the market is what's depressed those from last year's. It’s not that big of a number but it’s gone down. So in the future, we do see cars like the Suzuki and the Volvo and some of the others are actually increasing the number of models. And we are - our sales force is actually going to be going out and meeting with our Tier 1 customers and OEMs in the near term as Andreas said we’re putting our focus on growing the revenue from existing customers where we can in the short-term. And so there's to capture some more cars.

And then we've had discussions going on the tailgates and the door handles for - let’s just say quite some time and I'm just trying to get a sense of where are we with that. The discussions could go on for many more years I guess technically, but are we close to getting designed in and how long would it take even if we do get designed in this year. Can you just give us a sense of where that revenue is and then, also if we could address the steering wheels as well because I know that was kind of hopped for to come in end of this year, but it doesn't sound like that's probably happening?

I can take that question or the two questions. First when you talk about tailgate sensor and entry sensors in general, that’s one of the area where we've really seen a big interest. I know there were project before I came in that had been delayed so it hasn’t happened too much there, but that’s one of the more interesting project that I try to see that we could focus on and I think we got a really good response from the industry. So we are picking up discussions with several companies that have been a bit in waiting mode for Neonode, but we have picked up those activities and it looks really good. We have decided to be very careful about giving projections and forward looking statements because we think it's important for Neonode to be very conservative on that in the future. But the only thing we can say is that something we really are working on and I can't give you anymore timing there. And you had the second question about the steering wheel, what we can say there is that we have ended the concept validation phase with our Autoliv in the end of last year or in Q4. And we are now in the commercialization phase so we are out discussing with OEMs and users of OEM about the steering wheel and of course all discussions have already started before that but now that's the phase we're in and we have to come back when we have something to communicate around that.

And if I could just ask you a little bit of personal question, when you came in last year and put your money into the company stocks down over 50% from that investment. I'm wondering if you could just give investors and myself just a little bit of clarity into what you saw with Neonode over the next few years, where you think the company is going to go and what attracted you to make this kind of investment. And is that investment thesis still valid in your opinion?

I said in my presentation we saw some positive things. We saw that there is a really good technology. There is a lot of customers that are both big and bright for Neonode to work with in the future. And they have really good relationship with the customers I would say they are - they have a really strong relationship and it works fine. The problem has been with delivering to the stock market and to make this profitable company. We have - company are existing for quite a long time and it's still a promising company and we saw that the technology was fine, but we saw also that it was quite - it was not focused and we needed to focus on sales. And that's really what we are looking to and to benefit from all this interest that we have in the market. And also not going for too many speculative projects that has been developed in the company like AirBar and others.

[Operator Instructions] Your next question comes from the line of Viktor Westman with Redeye.

I'm wondering if you can tell us something more about the reallocation of resources from non-core to customer driven projects. If you can give some examples of project that have been canceled?

Yes, one project is of course the AirBar that we have minimized investments in. We have other development projects that are - to develop projects in pure speculation that we think it’s not right in this situation because we have a lot of interest from customers and we mentioned some of the areas where we see the customer interest. For example tailgate and entry systems and we think better to put the resources into those projects and work together with customers in those projects rather than make our own development so, more of a partnership and customer project orientation.

And does that mean for instance that you will focus more on automotive where you have lot of customers or can you say something about what area will be the focus in terms of segments or how you want to?

Automotive is for sure one area that we are focusing on because we see lot of interest from the automotive side both in tailgate but as you mentioned the steering wheel. There are other areas and of course touchscreen - on the touchscreen side where we already have lot of customers may be going for more of larger screens where I think we have a strong opportunity. So it's - but automotive is for sure one area and that's why we mentioned that separately in the presentation.

And one follow-up also on the steering wheels now given that there are some level three cars in the market today. What are your thoughts on the competition there because there are clearly some cars that are semi autonomous that are not using the zForce steering wheel?

There are of course alternative ways of solving this and there are cars out in the market and there is different technologies that could stand - that you're holding the tail wheel or not. But I think we add much more than that in the tail wheel from Neonode. So it’s the next generation as I see it and we got a lot of positive feedback and if you look at for example this year show in Las Vegas, the Autoliv presented it and got a really good interest there. But it takes time and its long-term business. But I can't give you any more projections on when we get sales yes, but we got a good interest from the market.

Last question from me is I just wondered if you could say something about the split in sensor module sale like for instance how much is automotive and how much is AirBar?

In the sensor module sales we haven't really sold to the automotive for the modules so far. So what we are selling there is some parties AirBar then we have made other sales outside the AirBar business. But we just launched the sensor module in Q4 before that it was just prototypes that were out on the market. So we believe that we can see these sales pick up during the year as I said we will come back to that when once we have the sales.

Your next question comes from the line of Walter Schenker with MAZ Partners.

Yeah could you basically give us a better understanding if you have one why AirBar didn't work you had pretty good distribution, you were Walmart that's why did people just did technology just not work?

The technology does work I think - we definitely have the distribution in place for those companies, but those companies have purchased from - they're not out marketing. I don't think at the bottom of it we probably weren’t the right company to actually sell AirBar. We’re a B2B company and we do best when we work with - other entity and other OEM or tier 1 supplier and they integrate our products into their products and they take it to market and sell. And our expertise is certainly and I think the AirBar sort of hit us over the head with that is certainly not going out and trying to rollout a consumer product globally. And that's why Andreas said at this point we’re sort of minimizing the investment and taking those dollars and investing in our core business which is really the B2B business. And then trying to find someone who will either partner up by market or do something with AirBar it does work. It certainly is a product that may have a life out there but we certainly couldn’t realize it.

And therefore since AirBar basically production standpoint not needed of inventory that means the facility that you really build sensor of sales really has largely [north-pole] but isn’t being utilized?

No not at all its quite the opposite the sensor – I mean what the one good thing that AirBar did for us is that it proved the sensor concept because the same architecture inside of the AirBar is the same architecture that used to cross all the sensors that were embedding that were presenting to other company. And so that was I guess a bit of goodness that came out of AirBar for us. But the actual facility for manufacturing is still up and running and we’re selling sensor modules I'll bet in smaller numbers. And we’re still selling AirBars we have an inventory of AirBar and you can go to Amazon any of those sites to mention it still buy there and Ingram Micro has AirBars in stock in fact we just got another purchase order from them and it’s a small purchase order. Our issue was the volume I mean it just AirBar is not in volumes that makes it a fit for us. And so we rather focus our resources on our core business at this point and that’s where we’re pivoting to and that's what on this call we’re trying to reset in your mind is that AirBar been making for us.

And last question given the - its better economics in selling sensors then licensing maybe you see over the next couple of years version by your customers that is in the business machines, portable really ramped the sensor sales?

Well that’s what we expect to see. To be fair we still expect to see licensing - we now we offer an alternative to licensing and that’s the sensor modules, but we still would enter into a license agreement depending on the customers’ need. What we’re trying to focus and I think Andreas’ presentation was leading you down this path we’re moving from sort of a speculative development company to a customer focused product company. And as products are either licensing or they are buying a sensor and we will manufacture the sensor and sell it to them and support them and do all of that or if they say hey we’d rather do a licensing hey we can manage to do that to.

[Operator Instructions] Your have a question from the line of [indiscernible].

I just wanted to know on customer focus new business. For example would you consider the c Trolley such an opportunity or what other examples like that would you give new names like not only where would you?

Yes that is definitely an opportunity and we have – already shipped a series of sensors to them. And so it's up to them now to put them into their trolleys and become successful with their products but they definitely are a bit other markets are medical. There are some industrial things that we’re working on. And so there are other markets and certainly the auto segment I think is probably in terms of customer contacts and customers that have either seen prototypes over the last year and a half or things they have seen final I’ll call it production ready sensors yet are they just starting to see them that’s probably our more mature market when it comes to sensors that we – at this point, but they’re certainly key markets.

So you would say the most…

Let me let Andreas add some color to that okay.

I just wanted to say that another thing is also to go on larger screens I mean what we have done with the licensing technology is more smaller screens for printers and so on. And we see opportunities in bigger screens where we can expand to our customer relations that we have. So there's a lot of – the problem is not that we don't have markets for it it's a lot of markets. We need to focus on and get some rollout in certain areas where we see that we have a good interest. And if we talk about this trolley it's really not the trolley that we use the sensor for we use the sensor for screens that they attach to the trolley. So it’s the bigger screen really that we use for this and what they like is the robustness. And I think we will see more of screens coming out with our sensor modules not just for licensing, but the licensing business is good and it's a good foundation for the company and for us it’s what can generate the steady cash flow that we can build this company on.

So C Trolley is just using the screen but you say that you are having interest from other end-users for this type of screen out in all different industries?

Don't confuse that it's a screen we’re not building a screen we’re building the sensor module that’s going to be going in but the answer is yes. We are working with numerous customers, potential customers I’ll call them they are not - we don’t have signed agreements but we have delivered prototypes or they’ve bought prototypes or development kits from DigiKey for example. And so all of that is in motion and [indiscernible] as you know this is embedded business doesn't happen overnight. And so don't walk away with the idea that next month all of a sudden you’re going to see a bunch of things in the marketplace. It's a process that we’re in and the license fees is a key part of the strategy going forward to provide a stabilization of the revenue as we move down this road.

Your next question comes from the line of Jack Mayer, Private Investor.

Can you comment on what the cash burn was in the fourth quarter and what the trends are on cash in the first quarter, now that you more than two-thirds into it?

I can talk about the fourth quarter, but we're really not going to talk about the current quarter or any future stuff at this point until we get a lot more visibility into what's going on. So fourth quarter, actually the cash burn was - from operations is if you take the take out the non-cash expense for the inventory write-down you get $300,000 loss. There was a probably about $200,000 to $250,000 of non-cash depreciation and stock option expense in there. So I would say that the operational cash burn for the fourth quarter was probably in a neighborhood of anywhere from $50,000 to $100,000.

And in terms of how you see the business going forward and what you're investing in. Do you see anything in 2018 that would significantly increase the cash burn rate, from where you were in the fourth quarter without getting too specific?

No. As we see now we have done the some major investments and on the opposite we believe that we can increase the sales and we are focusing on increasing the sales both in licensing and sensor sales even if as David mentioned sensor takes a little longer time because we have licensing customers that expand their range of products and that could add to the licensing but the sensor sales take some time. But from a cost side, we don't see anything and goal as we said is to - have a balance cash flow over the coming year and we believe in that.

So then asking it somewhat differently, you're comfortable that the cash that you currently have on the balance sheet is enough to do what it is that you're looking to do?

What do we mean by balance cash flow is that we have sufficient cash to do the business plan that have set in front of us.

In terms of AirBar, are you actively looking to partner that out with someone else or do you intend to just sort of let it gradually?

We have some around that and we will continue to see that we have the right partners on that. So we put some energy on it. And of course it's not easier when we haven't sold so much as we expected. This make it more difficult to find a partner. But we still believe that, it's a good technology and people get very impressed and what they see. And with the right partner I think it could be a good product also.

And finally if I understood you correctly with respect to the Chinese auto business which you said is not a very big part of it, but if I understood you correctly the decline in sales has to do with the fact that the model life for these particular models was shorter than it might have been in the West. Did I understand that correctly?

Yes, I think I think that's true. You know it's hard just to sometimes get your arms around what's happening there. But let's take the Bojan I think it's the 5, 6 or something. Last year at the beginning of 2017 end of 2016 that was like the biggest selling SUV in the Chinese market. And Delphi provided their center console for that car, for that SUV. Delphi is our customer. And so they were selling I think at the rate of let's say a hundred and some thousand units a quarter I think. And so, I think they're down to something like 15,000 or 20,000 units a quarter at this point. And it's a awful fast drop off for the number one selling car in the country, right. And that seems to be a pretty common occurrence. Would we know they're still using our - we're not talking about the numbers using our center console versus not, we're talking about the total volume of those cars.

So, to say it somewhat differently, your customer is Delphi not the automotive manufacturer?

That's right.

And then for argument's sake, if they have a follow-on on SUV or there is someone else who is now taking over. If it's not, I mean it's basically a question of whether Delphi is a supplier to that other model?

No because we're not talking about models that are using our touchscreen, we're talking about total models sold in the market. You can go to China, what is it at Auto news and look at the monthly sales of every car in China. And so, when you follow that the actual total volume whether they're using our touch or not in it is dropping rather quickly over the course more than half years, let's say two years. And so you know talking with our internal auto sales guys, they said that the life cycle seems to be very short. They're on top of their stuff. And as Andrea said, we're going to push out to these Tier 1s in an aggressive measure to see if we can find out what's at the bottom of that and also pick up some of their new models, if that's what's happening.

So, you would be working with Delphi to try to get Delphi Incorporated. I mean they're obviously are selling trying to get the business for themselves but you would be working with Delphi to go into the new models whatever they are?

Yes, because remember in the licensing business, one of the barriers to entry for us is that and the cost structure for us is that, for a new model to bring on a new Tier 1 to do all of this stuff, there's a lot of upfront cost on our side to get them into tooling and design all of the stuff. With our current Tier 1 suppliers that has all been done, they already have all the tooling, they have the manufacturing process, they can actually build the thing themselves. And I will use Alpine as an example they are the supplier to Volvo. Alpine we worked for a lot of - put a lot of hours, an upfront expense into getting them live for the XE-90, the first one that is out. Volvo has released several new cars that have award winning center consoles and they're all using our touch. Alpine is providing that touch, but we're not having to do anything. They just pay the license fee because they've already got the tools, the designs everything in place. And so that is kind of short circuit. These guys don’t have to do anything more. All they have to do is, build more. And so we're going to go out and try trying to encourage them to push out to their customers, their OEMs and use ours. Does that make sense?

Yes. And so the Delphi relationship is also a licensing relationship not a selling sensor module?

It is, all the auto infotainment systems are licensing.

But we also look into deals where we have the sensor modules sold for screening as I mentioned and there may be a bigger opportunity for that as the screen grows in size. So, for bigger screens the new sensor module is perfect. And for special screens like car screens then we are unique. But for the traditional smaller screens licensing is the best option for the car manufacturers. So we have different markets for the different solutions. But the important thing is to say once again licensing is a good foundation and sensor module business is really what we see the future. And what we come for the company.

And we have no further audio question at this time.

We want to thank you all for joining us on our call today and have a good day. Thank you. Bye, bye.