Neonode Inc. (NEON) Q2 2018 Earnings Report, Transcript and Summary

Hello, everyone. Thank you for standing-by and welcome to Neonode's Second Quarter 2018 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. I would like to direct your attention to the Company's PowerPoint slide-deck that you can view when logged on to this call. The Company will control the navigation through the slide-deck to with their prepared remarks. Thank you. At this time for opening remarks and introductions, I would now like to turn the call over to David Brunton, Neonode's Head of Corporate Investor Relations. David, please go ahead and start the conference.

Welcome and thank you for joining us. On today's call, we will review our second quarter 2018 financial results and provide a corporate update. Our update will include details of customer activities, technology developments and other items of interest. On the call today with us is Hakan Persson, our CEO; and Lars Lindqvist, our CFO. Before turning the call over to Mr. Persson, 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 or 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 Hakan Persson, Chief Executive Officer of Neonode. Hakan, please go ahead.

Thank you, David. My first quarter with Neonode has been very exciting and encouraging with a lot of customer, partner and employee interactions. And it is clear to me that we have a technology that is much in demand. The technology and the value it provides, is very tangible and can be used for a variety of industries and use cases. This is the platform we need to build and capitalize on. We need to show with concrete use cases, our technology can be used to help trigger the imagination of customer. I will later go into more detail how we planned to capture new business and elaborate on current customer development activity, but it is encouraging to conclude that we are engaged in several OEM development projects across [indiscernible]. As you have seen, our revenues came in lower than the same quarter last year, however due to improved customer approach, our operating expenses were less than $3 million and as a result than as loss amounted to $1 million which is in line with last year. Lars will discuss second quarter financial results in detail later on, but first let me reiterate our short-term action program to achieve profitable growth. After my customer meetings and company review where we remained short that Neonode has the technology to resources and the capacity to achieve profitable growth. Let me elaborate. We continue to focus on capturing the full potential of our licensing business based on zForce CORE. This is our foundation which is very important one. We are started to update zForce CORE to increase performance, decrease the cost structure and to look at new implementation models for easier and faster integration of the technology to decrease customer costs and time to market. This will enable us to grow our licensing business by organic growth from existing customers as to release new models and new projects the existing customers and for new customer acquisition. This is a profitable business that provides steady cash flow as we intend to grow, that’s enabling us to execute the Company’s growth. We have increased the number of customer related development project in our pipeline, which potentially will bring us increased NRE revenues and customer commitments to our technology leading up to both sensor module sales and additional licensing business. I will go into this in more detail later on, on the service lines. We have participated in the number of high profile events during second quarter. Among them Sensors Expo in California demonstrating in a concrete fashion, our zForce technology can be used and evaluate [indiscernible]. Based on this and the feedback we received, there is a lot of interest across the industries for our technology. The key will be to show concrete use cases and to collaborate with customers and partners implementing. This will provide the groundwork for substantial sensor module shipments every time. We have identified a number of key trends across our key markets where our technology offers unique solutions and we believe we have a competitive edge. Our sensor technology enables our customers to unlock product differentiation without degradation of user experience and function. We have robust technology platforms with a zForce CORE using licensing and zForce AIR using Sensor Modules. Those of which provide very efficient solutions to enable our customers different use case required touch interaction, high performance touch interaction for any display and surface providing solutions ranging from high-end displays in cars, medical devices, home appliances rugged and environment independent industrial display. Therefore zForce CORE and AIR technology provide superior test of all. The individual use case will determine which technology will best support the customer surge. In addition, zForce AIR provides additional ways to interact with the device and expands our market opportunity to include use cases that require mid-air interaction, enabling AirBar gesture controls to identify an object such as a door or allow interaction whether the object, surface cannot be touched or [indiscernible] the authentication reasons, and probably sensing object detection to avoid collision with an object or to be pinched by an object by dynamically sensing moving object, creating a competitive advantage for our technology. We have several development projects in our pipeline with customers across current and new industry segments at various stages of maturity depicted by the color coding in this slide. This slide shows projects that have met our use case evaluation criteria. These are customer cases where we are in close cooperation and in some cases sharing development costs demonstrating the customers' commitment. I will not go through them all, but we’ll give you some highlights of what I believe or the most important case. In automotive industry the pace of introduction of new technologies increasing driven to a large extent by the electric vehicle players in the market, currently there're more than 300 new players in the EV market with very aggressive plan where we have the opportunity to secure a new biz with proven develop solutions, primarily using our AIR technology. Our cooperation with Autoliv is progressing well with several new OEMs starting soon with evaluation project that we believe will come into fruition in the next 3 to 4 years. Our zForce drive technology is seen as a key component in future autonomous cars, entry systems is a key area for AIR technology where we see increase interest from a number of OEM and Tier 1. We have started deliveries of the external door sensors collision detection through automotive OEM discussed in the Q1. In addition we are engaged in several implementations with tailgate opening solutions. Our zForce Air technology is uniquely positioned to support these functions due to its ability to work among other things in harsh conditions. We expect these projects to start shifting over the next few years. As you know the automotive industry is complex with the longest time cycles, but enduring [indiscernible] for the long term. This is why automotive is a very important. Our global aeronautics customer who has developed the solution for an aircraft cockpit instrumentation panel is in final stages of obtaining FAA approval for market deployment. We have shifted preproduction sensor modules in preparation for volume production. We also see interest from an additional aeronautics customer using our technology. In other markets where we see opportunities for medical devices, we are engaged together with partners with the med tech provider for display solution. We have delivered prototypes and are in final tuning of the solution. Our technology is well suited for the medical device market because of sensors ability to work in sterile environment. We believe that this proved to be the substantial market for us going forward. [indiscernible] Diverse activity of our technology enables us to address different industries with similar solutions. As you can see from the slide, we get request from the different industries that have similar use case requirements. This provides us with the pathway to sell to multiple industries where time to market is potentially fast. In addition, we see increasing sales of our development kit through our partner [indiscernible]. Today more than 100 customers from different industries are evaluating our sensor technology providing a platform for future opportunities. As you can see, we have a lot of customer activities going on and I will keep you updated on our progress. And now I'll turn over to Lars.

Thanks Hakan. You can find our second quarter earnings release and 10-Q available for download from the investor section of our website at neonode.com. You can also find the slide deck that we present today available on the investor section of our website. I'm going to start by giving you a summarized view of our second quarter revenues and results. Our total revenues for the second quarter decreased $453,000 or 90% compared to last year. We experienced a decrease in all three of our reported revenue generating activities license fees, sensor modules and NRE. Our total license fees during the quarter $1000 [indiscernible] adjustments to first quarter that we recorded in [indiscernible] in licensing revenues. I'm going to talk about that [Audio Gap] a bit more in details on the next slide. Sensor module sales decreased $128,000 or 60% due to slowing sales of AirBar. This decrease was expected. On a positive note, sales of sensor modules to B2B embedded customers increased by 18% or $18,000 although not a huge number. This is an encouraging sign and we expect to see continual increase in B2B sensor module sales as we focus our sales effort on a selected market segment. We have been evaluating different options to position sales and marketing of the AirBar to one or more retail savvy partners. Revenue generated from NRE design activities decreased $128,000 or 80%. NRE revenues typically fluctuate between comparable reporting parts due to the number and price or projects completed. The second quarter of 2017 recorded $100,000 of NRE from our steering wheel development projects with Autoliv, that project was completed in Q4 2017. Our operating expenses for the quarter amounted to $0.9 million compared to $3.1 million for same quarter last year they're on plan. On net loss was $1 million or $0.02 per share in the second quarter 2018 compared to $1 million or $0.02 per share loss in the same period 2017. Please be aware that our results going forward may have a material impact from exchange rate variance between USD and SEK by approximately 85% of our operating expenses are in SEK and/or revenues in U.S. dollars. The 10% variance in exchange rate will impact the result with approximately $300,000. So our total license fees revenue decreased 10% year-over-year. The decrease was due to a combination of adjustments to first quarter reported revenues along with a decrease in revenues from two Chinese automotive customers. Our licensing fee is a good foundation, which focused on capturing the full potential going forward. Printer license fees in the second quarter increased by 4% compared to last year. However, the second quarter was negatively impacted by $200,000 adjustment related reported first quarter revenues from one of our printer customers. [indiscernible] Epson adjustments license fees from our five printer customers would have increased by total of 23% year-over-year. Our automotive license business decrease 42% in the second quarter of 2018 compared to the same period in 2017. Historically, the automotive market in China was a dominated part of our license fee revenues. The second quarter was reflected by license fee report adjustments of $100,000 for some of our Chinese automotive customers. The decrease excluding these adjustments would have been 27%. However, the decrease is primarily due to statistic decision the Company made in early 2016 to shift from selling license agreements to focus on selling sensor modules only. As a result, two of our Chinese Tier 1 customer chose alternative designs for revisions of the infotainment system in certain car models that previously used our technology. [indiscernible] decision has been changed and we are reengaging with all our current and new licensee customers and believe these together with the work we’re doing with a new release of zForce CORE will allow us to grow future license fee revenues. Volvo continued to release new car models and we had an increase year-over-year of 150%. Suzuki is deploying our technology in all car models that include touch screens such as Vitara, Swift, S-Cross, Ignis. Second quarter is typically challenging for designers in Indian automotive market due to seasonality effects in these markets. Customers like Volvo have more diversified market mix and are not typically affected by seasonality issues. For license customer shipped 2.7 million products during the first quarter of 2018 and accumulated more than 61 million product shipped since 2011. I'm going to end by talking about the balance sheet and cash position. We believe we have sufficient cash to execute our business plan. We have implemented tight cash management and cash controls. We are focused on customer finance development projects and are no longer doing speculative projects. Our total expenses, operating expenses for the second quarter accounted slightly less than $3 million, which is on plan. Our cash used by operations was $900,000 in the second quarter compared to $1.4 million in 2017. For the first half of this year, we had cash used of $1.4 million in total. We have a sufficient inventory to meet our expected near and mid-term demand for module sales. As of June 30, 2018, we had $3.7 million of cash and $1.8 million of accounts receivables, which gives cash equivalent of $5.5 million. Our account liabilities excluding accounts payable deferred revenues and accrued expenses are well within plan and our working capital is sufficient to grow our business. At the last shareholder meeting in June, shareholders approved the proposal to give our board the authority to do a reverse stock split in the range of 145 to 150 shares. NASDAQ got a confident additional 180 days to June at the stock price deficiency and the board continues to review alternatives to maintain our NASDAQ listing. Now, I would like to turn the call back to Hakan.

Okay. Thank you, Lars. So to conclude those declared interest for our technology and use cases is the allowance. Our zForce technologies have robust and flexible touch gesture and object detection providing unique value across several industries. As a result, we see a significant increase in customer projects and lead to persist. We have a clear business plan and we are in control of our operating cost and we have sufficient cash to execute our business plan. Our licensing business is an important foundation for our growth strategy and will be continually improved to service our customers' requirements. To capture new business, we are taking clearly refined actions to make the value of our solutions even more visible through a concrete use case demonstrations and implementations. We have made progress expanding to customers in new industry segments and are engaged in several exciting projects using our sensor module. I am optimistic about the growth opportunities going forward. We have taken the steps necessarily to enable our customers to understand the value of our technology how it can be used and be easily implemented. This gives me confidence that our plan to add B2B sensor modules sales to our licensing business is on track and can be achieved. Thank you. I now hand over to the moderator for questions.

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

I'm wondering if you could just focus a little bit more on the automotive side particularly on the module entry side. I know you've been working a lot on door handles and rear entry systems. And it sounds like you're getting into the prototype phase. But if you could just give us a little bit more color on timing of that, and the size of that, and what the opportunity is? That would be helpful. Thanks.

This is a very, very interesting area for us because it’s passed across smallest supplier in this market segment. It also gives an opportunity I would say for retrofitting because that this type of technology can be done after the [indiscernible] in a certain situation. So, we’re looking at various types of implementations, one on the platform itself but also as retrofitted type of project. So, this has become a very important use case. We see a lot of interest from those players in this space to actually discuss with us. So, this is in a very active discussion that we’re having and we have some very concrete case discussed they're working with you.

And then maybe one question for Lars. Can you talk a little bit about you said that you have enough cash to sort of get you to your goals. Can you expand a little bit on that -- when you take a look over the next few quarters, are you going to need to have some inflows of cash? And is that in your expectations? And then specifically on the inventory side, what is the makeup of your inventory right now? Is that all AirBar and now you're just going to sort of fill that overtime or what’s the plan with AirBar?

Well, let me explore on your first as a question about the cash and how it looks going forward. That if we look into basically for half of the as a sum up and starting we think that the first quarter there were adjustments to the sales of approximately 300,000 also affecting some of the cash flow. If you took that out of the first quarter, we will basically have closed first quarter minus 5 million instead of a minus 700,000 and then adjusted second quarter with a correct report. Then we would basically made 2.1 million in licensing revenues and we would have made the results of 700,000. And 700,000 for us if we -- it’s basically also [indiscernible] type of equivalence than return on cost, means that 1.4 million used in cash for a total of well 700 per quarter basically where we stand just now. If we then save an account for the inventory, well it’s not basically AirBar inventory, it’s sensor module inventory and because we did write-down that basically the key part or the majority part or that’s all of the AirBar related inventory, we made a position of in the fourth quarter estimated record. So if you look for a little bit on, okay, we’re obviously hitting where we're going. Well, we do expect inventory has a downtime mainly in automotive with the Chinese customers, which we tried to recap. We do expect analyst, not analyst license fees to increase overtime especially for the printer, which has nice development and also automotive to really recapture at a nice also flow with Volvo and Suzuki. So maybe it could be a couple hundred thousand dollars there over capital. I’m not talking about next quarter I’m talking about looking at this forward. Now, we’re looking into the programs, customer programs that work on presented data. That illustrates there are quite a lot of things ongoing where we naturally focused very much, but we do also basically try to get decent NREs after these projects as we ordered -- had part of that find out. And we expect to maybe have coming back to little bit NREs we have for maybe 2 to 3 years expect, but maybe in the ballpark of $100,000 to $200,000 per quarter going into 2018 maybe in that quartile. And then we start partners actually sensor modules where we do expect to see an increase, if we take some time that this all can expand will also have some the short and mid-term customers that we expect to get the revenues from going forward. That give you answer on the question, Mike?

And your next question comes from the line of James Meredith with Cowen & Company.

I have a couple of questions. So looking at expenses, good job on controlling them, but the question that I have is whether we have reached the bottom in expenses? Or if there is any downside like you can tune them further?

Hi, James. Lars here. Well, I think what we have done is basically that when living little bit so to say too much futuristic project and try to focus more on customer focused project. We have had the possibility to be more focused in our development work. So, I would say the level we see that the target to reach around $3 million. We are a little bit below and we maybe even get a little bit lower, but the target is to set that at this level. And we may have to have some sense to queue some of the project that we are dealing with. But I think as we put guidance I would say well $3 million is a level that we try to keep tight control over.

And then you mentioned in aeronautic project that I think you said is in the final stages of FAA approval. Normally, those FAA getting approved for an aircraft is even more difficult and time consuming or time takes a more time than getting approved for an auto project. So, could you just talk a little bit more about this opportunity and sort of where it stands? And how big it might be?

Yes, well, the information we have received with respect to the timeline for the FAA approval actually comes from the customer. I mean they maintained should be the experts on this part. There is about instrumentation panel in the aircraft, and obviously form a volume perspective, there is firstly as how many aircrafts are out there that are being the case. So obviously that will simply decide how many units in the end that will be served and basically we do not control our accounts' sales process, but we see this as a very interesting reference for our technology. And as I mentioned in the slide decks we growth now getting let's say request and interest from other players in the aeronautic industry that would take a look at our technology to see how that could be there.

So is it a licensed or sensor -- we see -- is the project written -- will it be a license or will it be a financial sensor module?

Hi, this is David, if this is a sensor project.

And then just one more on that. I assume this is a private what we call general aviation. This isn't a big commercial aircraft, right. This is either military or general aviation aircraft?

I would say seen on the commercial side.

Sorry. Could you repeat that?

Hi, this is David. Commercial application and as far as your FAA question you asked earlier, they’ve actually submitted it for qualifications some time ago. So, this, it is not like since now going to the FAA. So if that process has been ongoing now for one or two quarters, I would say at this point.

If I can just squeeze one more in, I’d like -- if you could give a little more detail on the Chinese automotive programs that looking exactly clear, if they went away and maybe they terminated, maybe you can designed out of the next generation of cars from the those people. Could you just little more color on what happened there?

Well, that is -- I can do that and within automotive, if it makes because we have a very nice developments with Suzuki and Volvo and new programs and so forth. But it is a consequence of decision stake and early 2016 and that well really the licensing issues for the sensor module. And that's always been at least that your customers feel that well they won't take care, I want to say. So, that we are not out, it’s not cancelled agreement that we have significantly lower volumes and some of the programs or car models we have been sort to say design at of, but target is not to recapture this customers so an active reengagement and after meet them and so forth.

And your next question comes from the line of John Nelson and he's a private investor.

Beside the Chinese Tier 1 automotive manufacturers are you engaged with other potential auto manufacturers in other countries and if so could you name those countries such as U.S., Japan, Korea, Germany, et cetera.

Well, I will not name Tier 1, but I can say like we have eight, it was basically seven, eight Tier 1. So they have the biggest in the board I would say and that is everything from Germany to sentimental of them or in China naturally, but it’s a mix and the Volvo you know as Europe is based in Sweden most of the organization so forth. So, there is a mix of them, but I would say we have agreement today with all major Tier 1s in automotive for different type of applications, but this is for infotainment system.

And I wanted to compliment Hakan on his purchase of insider purchase of stock recently and just wanted to say that I think it would be a good sign of confidence, if other board members also step up as a show of confidence in the Company's future.

Thanks for that comment.

[Operator Instructions] We do have a question from Lindsey Whiteman with [indiscernible].

I wanted to ask about there was a deal with Figo [ph] from [indiscernible]. I don't think that was much on the revenue, but is there more of those types of deals coming?

I mean that is part of the pipeline. I hope you can hear me by the way. It seems that there is slight issue with my [indiscernible]?

No, I do yes.

But yes, well, as you can see from the slide and where we have described little bit what is happening in terms of pipeline. We have a number of cases in various stages of maturity. Figo [ph] is using us. It's using our technology. So, they're developing according to their internal plan. And we hopefully will see some deployments going forward. And but the rest to sure, we are pondering on the market, meeting customers every day, trying to grow the pipeline and also progress the opportunities through the pipeline, which we try to show here in the slide.

Is there still any value in patent value that the Company has the years ago, if this was discussion? Is there anything to that any value left?

This is Dave. I mean you never know right answer those things that are have sort of they can be valuable or they can't. So, we evaluate that periodically and we have an evaluation going on now of our patent portfolio in general. So I mean we don't bank on anything like that because it's you never know, right.

Right.

The patent still have life on them, so it's hard to say.

Okay.

It's not included in our model, let me put it that way.

Okay. I just wasn't sure what do you tell me about the Figo [ph] deal. Is that a continuing revenue or that was a onetime deal or that's a continuing, they continue to use and buy components?

Yes that's a continuous still and obviously the volumes are depends upon their sales activities, but it's not enough. There is a continuous deal that will grow according to their sales growth.

And at this time, we have no further questions. I would now like to turn the call back over to David for any closing remarks.

Thank you so much for joining us today and have a good rest of your day.