Neonode Inc. (NEON) Q3 2018 Earnings Report, Transcript and Summary

Thank you for standing-by and welcome to Neonode's Third 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]. I would like to direct your attention to the accompanied PowerPoint slide-deck that you can view when you 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 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 third 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, tends, 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 be involved or be subject to risks, uncertainties or 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 Form 10-K, quarterly report on Form 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.

We have been very busy this quarter defining our markets and sales focus. We’ve identified segments and use cases that best suits our technology whether with zFORCE CORE or zForce AIR. We’re also attended numerous trade shows and customer meeting and I more encouraged than ever. In these meetings we’ve presented concrete use cases and how our technology can be used to support OEMs differentiate their product, to growth their business and the feedback has been very positive. I will later bring some more detail on how we plan to capture new business and elaborate on current customer development activities but it is encouraging to conclude that we are engaged in several OEM development projects across different markets. Our third quarter revenues decreased by 17%. To a large extent this is due to the previous decision of shifting from licensing to only selling sensor modules. We have revisited this decision and reengaging with all our license customers. However to regain our position would take time from a sales implementation and customer production perspective. Lars will discuss the impact in more detail later in the presentation. The net loss for the quarter was reduced year-over-year from $1.1 million to $800,000. We also reduced our cash used to $800,000 down from $1.7 million during the third quarter last year. We had some significant events that have taken place after the quarter. We received confirmation of acceptance of our zForce AIR sensor for use in the medical display device and an imaging solution. This is a significant growth area and has one of the largest supplies to the medical industry. We also received a purchase order for sensor modules for our new tax meter solution. We expect both opportunities to begin initial shipments in 2019. I’m also happy to announce that we won the Annual Swedish Embedded Award in the Enterprise category that was announced yesterday for the design and innovation of our zForce modules. Now, let me run through our execution strategies and marketing and sales activities. We have identified the key execution areas that we must address to become profitable. Addressing these areas is of course to a continuous effort due to never changing marketplace for new opportunities but also challenging. We have identified concrete use cases in our targeted markets, automotive, consumer electronics, medical devices and major appliances. We’re using our focused sales process to capture and qualify opportunities. We are directly engaging with our present customers and partners for licensing and sensor sales. We would use a network of partners like tier one suppliers, system integrators and distributors to expand our sales reach. This process has started and will expand over time. We’re putting a lot of efforts in increasing product awareness in those markets and segments where we have a distinct competitive advantage. This process is ongoing with tradeshows, use case demos and improved website and current customer communication activities. We’re continuously improving our technology platforms to decrease costs and increase functionality. And we are preparing for large volume mass production of our sensor modules by meeting industry and customer specific certifications, and we also are evaluating several qualified external production partners to optimize our production capability and cost structure. So let me elaborate on how we’ll capitalize on our market opportunities going forward. Licensing is and remains our revenue foundation to secure a steady cash flow. We have a good position both within automotive area and tier ones and consumer electronics, a position we will continue to build on. There is a potential to extend the existing relationships and to get new licensing projects with existing but also new customers. Sensor modules first were launched in the fourth quarter of 2017. We have made progress in awareness building, both in automotive and other productive segments and see a large interest for our sensor module technology. In automotive, we will put special focus on electric vehicle providers whether there’s need for differentiating technologies and usually a more aggressive time table. We will also focus on solutions that can be deployed both in manufacturing but also retrofit it on produced cars such as trunk openers. We’re addressing other selected segments with shorter lead times to build our revenues faster. Marketing, third-party sales and system integrators using our technology will be fundamental to create market coverage, pipeline and sales. NRE revenues will continue to be an important revenue generator going forward, especially with the cycle times that we’re working with. Main focus will be on development projects with tier 1s and ODMs where we have an existing sales relationship, primarily the automotive industry and new licensing projects. Our prioritized market segments and use cases are presented here in the grid, so you can get a better understanding of how they fit together and interact across markets. We focus on particular segments where we believe we are well-positioned to address capital opportunities with our existing technology offerings. zFORCE CORE supports touch on display while our zForce AIR also supports smart surface touch mid-air interaction and object sensing. Different segments have similar use cases and can be addressed by the respective technology platform that best solves the problem. We’re also pursuing some segment specific use cases such as automated entry system and automated door collision and pinch detection. We will sell direct with our own sales force to our primary markets such as automotive and consumer electronics, other segments will be managed through partners with the segment specific knowledge and competence. We’re establishing a partner network consisting of integrators, sales partners and distributors. On this slide you see a number of opportunities that we are engaged in and are in various stages of maturity. These are customer cases where we are in place call it the corporation, and in some cases sharing development costs demonstrating the customers’ commitment. In the automotive segment we have number of activities ongoing both with automotive area and their tier 1 suppliers. We are engaged with a major automotive OEM for a proof-of-concept evaluation to verify the performance of our mid-air interaction of extensive platforms for trunk opening, collision detection and pinch protection. In addition, we have been selected by three OEMs and a tier 1 for evaluation and demo vehicles for entry and interior control system and touch on windows. We have received a purchase order from a tier 1 supplier who is developing a next generation interactive touchscreen. Final testing is being performed with expected initial roll out in 2019. We have received interest for steering wheel demo from several automated OEMs and these enquiries have been passed over drop-off to lead for further action. In consumer electronics we’re actively working with the OEMs to extend the life of current models and also get into new designs. Epson is currently integrating a touch on display into a new printer model that is scheduled for release over the next couple of years. We have been selected to supply sensor modules for touch on display solution by one of the world's largest global medical device suppliers. This is really an exciting opportunity for us by itself but also for the opportunity to be considered for future products. Aeronautics cockpit display developed by major electronics OEM using our touch on display solution is ready to go and has pending FAA approval. The government approval process is tedious and production will begin when it is received. Our touch on display and mid-air interaction solutions are being evaluated for AI devices for the home, next generation high end interactive displays and large variety of tablets. White goods have become a real opportunity and we are currently in initial selection round for our touch on display solution and are scheduled for round two evaluations. There's still a way to go to final selection but we are progressing well. We’re also working on a project for the fastest growing telecom operator in Sweden to provide touch on small surfaces and mid-air interaction solutions for their new state-of-the-art interactive flagship store. This is not a project that could generate a high volume of sensor module sales but it is an important opportunity to showcase our technologies in a next-generation retail store. Our primary distributor DigiKey has severed 509 valuation kits to companies evaluating our zForce AIR modules. As you can see, we have a lot of customer activities going on. We will keep you updated over the future quarters as we continue to grow our pipeline of opportunities. We are making investments in our technologies to secure our competitiveness for service in use case areas. zFORCE CORE has the best class performance in the industry. Our customers have served 64 million products with AIR returns reported class figures. CORE provides the basis of our licensing business. Our development plan is focused on bringing cost reduction through different component alternatives, allowing for a reduced bill of material while maintaining and improving cost performance. We’re also looking at modularization for faster and more cost-effective implementation and deployment. zForce AIR enables touch on a display in addition to touch on any surface along with gesture and object sensing, providing customers with design freedom and ease of integration. There the emphasis is on automated certification, preparing for mass production and longer sensors allowing for largest form factors. Our competitive position for zForce AIR is excellent. We do not have a direct competitor and stack up well versus competing technologies from those display use cases. We have a competitive advantage, since our technology can be used not only for touch, but for gesture control and audio detection as well. So now, I will turn the call over to Lars.

Thanks, Håkan. You can find our third quarter earnings release and 10-Q available for download from the Investors section of our website at neonode.com. You can also find a slide deck that we present today available from the Investors section of our website. I'm going to start by giving you a summarized view of our third quarter revenues and results. Our total revenue for the third quarter decreased 17% compared to last year. We experienced a decrease in revenues related to license fees and AirBar sales which was offset partially by increased NRE fees related to ongoing automotive projects. Our total license fees decreased 23%, related to printer and automotive. Part of the decrease is related to some adjustment to second quarter revenues recorded in the third quarter. I am going to talk more about the license fees on the next slide. Sensor modules sales decreased by 82% due to our decision to move our focus from AirBar to B2B sales. We have been evaluating different options to transition sales and marketing of AirBar to one or more partners. Sales of our sensor modules to B2B embedded customers increased slightly. Although not a huge increase, this is an encouraging sign and we expect to see continued increase in B2B sensor module sales as we focus sales efforts on selected markets. Revenue generated from NRE design activities increased by $265,000 because of completion of a key milestone in one of our automotive project. NRE revenues typically fluctuate between comparable reporting periods due to the number and price of projects completed. Our operating expenses for the quarter are $2.5 million compared to $3.6 million for the same quarter last year, a reduction of more than 29%. Our net loss was $800,000 or $0.14 per share in the third quarter of 2018 compared to $1.1 million or $0.20 per share loss in same period last year. Please be aware that our results going forward may have a material impact from exchange rate variance between US dollar and Swedish krona. Our total license fee revenue decreased 23%. The decrease was due to a combination of adjustment to second quarter reported revenues along with a decrease in revenues from two of our five printer customers and three of our automotive customers. Printer license fees in the third quarter decreased by 15% compared to last year. We expect to see a continued reduction from Canon because they are moving to an alternative platform. The change has been made because of the design preference. We are reviewing the license fee reporting for one of our customers because there is a discrepancy between exits, purchased and printers reported. We do expect continuing the growth from HP, Lexmark and Epson going forward. Our automotive license business has been decreasing throughout the year and the reduction was 46% in the third quarter of 2018 compared to the same period last year. Historically, the automotive market in China has been dominating part of our automotive and license fee revenues. The automotive market in China has experienced some headwind beginning in the third quarter due to the economic impact of tariff and reduction of overall economy which had negatively impacted numbers of cars sold. The Chinese government acts swiftly, wrote some tax-reduction idea as a way to re-energize the automotive market. Licensing revenues had also as Håkan previously discussed been affected by the strategic decision of the company made in early 2015 to stop early license agreements and only focus on selling sensor modules. We are now reengaging with all our customers and new licensing customers and believe this together with the work we are doing with the new release of zFORCE CORE will provide the ability to grow future licensing revenues. It is indulging to see that Volvo continues to release new car models and with 35% increase of year-over-year license fees. Suzuki has deployed our technology in all car models that they can touch screen such as Vitara, Swift, S-Cross and Ignis and continue to grow license fees. I'm going to end by talking about the balance sheet and cash position. Our total operating expenses for the third quarter are $2.5 million. Going forward, we expect operating expenses will range between $2.5 million to $3 million per quarter. Our cash used by operations was $800,000 in the third quarter compared to $1.7 million in 2017. We have sufficient inventory to meet our near and mid term demand for sensor module sales. As of September 30, 2018 we had $2.7 million in cash and $1.5 million in accounts receivables. On October 1st, we did 10 to 1 reverse stock split and on October 15, 2018 we gained compliance with the NASDAQ capital markets minimum bid price requirements. Now, I would like to turn the call back to Håkan.

Okay. Thank you, Lars. So before I turn the call over to questions, I want to finish with my outlook on the business. And we have a strong and versatile product offering covering several use cases and segments. And we are focusing our efforts on markets where we have a distinct advantage in cost and/or function. Our mission is to help our customers unlock growth by fueling innovation and driving deeper. We have the building blocks to increase our revenues from licensees, NRE and sensor sales. And I'm very pleased that technology evaluations by OEMs and tier 1s in automotive, medical, white goods and consumer product segments are increasing at an accelerated pace. We have been accepted as a sensor module supplier in a very demanding medical display product and have received our first sensor module PO for our next generation taxi meter system. This is I would say real progress. We participated in several industry-specific trade and technology shows and our technology has been received a very positive feedback. We would increase our marketing efforts to showcase the capabilities of our technology. So in short, my confidence is very high that we are on the right path again to profitability. Now, I will hand over the call to the moderator.

Thank you. [Operator Instructions]. We do have a question from Mike Malouf with Craig-Hallum Capital. Please go ahead.

Okay, great. I have a couple questions with regards to manufacturing, where are you with that, are you still going to try to manufacture some of these modules and if not what’s the plan there?

Okay, yes, I mean today our manufacturing facility is the one what we have and obviously in order to place and meet the demand we’re going to use that one. And obviously as I said we are also looking at alternatives, how can we improve on the capabilities of our production and also the cost reduction. So that’s our processes that we are working on at this point.

Yes, okay. And then you have a lot of let’s just call it, irons in the fire with regards to some of these announcements. How soon can we expect and to what extent do you expect a ramp in actual products?

You mean shipments of -- okay. Well, as I said, we will -- we are expecting initial shipment. In the end, it always comes down to what is the production and shipment schedule of our customer. So it's variable, and we are not privy to that information. That's why we feel rather certain about that we will have a -- shipments going on during 2019 cases that I described.

And those have the end of the modules or under licenses?

Well, the two cases I described, the medical case and the taxi meter case, they are both module case.

What was that second one? I didn't quite hear you on the second one. We have medical, and what was the second?

It's a taxi meter case. They are doing an interactive taxi meter that is going to be deployed.

Taxi meter, okay.

Yes, right.

Yes. And those are modules, is that what you said?

Yes. Those are both modules.

And what do those typically sell for?

Well, we don't comment on specific pricing because that could differ between application to application depending on what work we're doing to make it happen for them.

Can you give us a sense of sort of roughly where they are?

No, not in actual numbers, but we are satisfied. Put it that way.

In the taxi meters, would that -- do you have a go-to-market for that as well?

Yes.

Is that here in the U.S. or in Europe?

Sorry?

What geographic area is that?

That's primarily Europe.

Europe, okay. And then maybe a question for Lars. I know you mentioned a little bit on the cash situation. How do you feel about that going forward? You're losing about just under $1 million a quarter. You have a couple million. It sounds like you have a runway of about six to nine months. Is that sort of the run rate to think about it?

Yes. Well, as you can understand, we monitor the cash very carefully, and then cash is always a concern for every small growing company. And we will, for sure do what the -- board think is necessary to make sure we have sufficient operating cash running in the company. And so we monitor this very carefully for sure.

The next question is from John Nelson, Private Investor.

Do you have any estimate as to -- can you give us any estimate as to when you could get to EBITDA breakeven?

Okay. We're still on. So I can't give any specific time line at this point. But obviously, this is something work towards and then every action, every move we take has the capacity -- of the capacity objective.

Okay. And then maybe asking Mike's question in a different way. Do you have any -- can you give us an idea as to what the signs of the market might be for the medical device displays and the taximeters?

I mean, potentially, they can be rather large. I think from the medical perspective, we are looking at the specific device, make sure that the device -- I don't think it sells in millions. It's rather in the thousands. When it comes to the taximeter, I mean, the European play. We need to see how that progress, but I mean there are a lot of factors on it.

[Operator Instructions]. We do have a question from [Ron Chech], private investor.

Gentlemen, what will you do to mitigate the cash concerns here? Are you going to buy -- are the officers going to buy stock? Directors?

Ron, we didn't really hear your question, so I don't know if it's the system or could you speak a little bit louder?

Yes. What are you going to do to help the cash situation? Are the officers and directors going to consider buying stock? What will you plan to do?

Well, I mean, from my perspective, as Lars said, we are monitoring the cash position very closely and having discussions with Board of Directors obviously how we should act (inaudible). And at this point, we do not have any other decision taken on what obviously has come to that.

I'm sorry, I missed the very last part of that. You don't have any...

Today, we cannot give any other information. And then what Lars said that we are closely monitoring the situation, having an active discussion with our stakeholders and we need to take it from there.

How about the sale of AirBar? Is that pursuing, being pursued, the sale to somebody who can effectively market the product?

Yes. Yes. We are looking for partners that we can place it with, that better suited and sell to make it to market. So we have a number of tracks that we are pursuing. I don't want to comment at this stage as to what and when, but this is a matter that is obviously of great importance and that we -- at the end this year, I tell you, we work on that diligently.

Did you say something about by the end of this year? I'm sorry, I didn't understand.

No. I said that, that is a -- this is an important topic for us. We are working on it very diligently. We are pursuing a number of ultimate tracks to get it played to somebody who's better suited than ourselves to take it to market.

Okay. And is there any expectation as to when you may accomplish something?

Well, it's hard to say. It's part of the negotiation. But from my perspective, it needs to be soon. That is what we are aiming for.

I'm -- you're aiming for what? I'm sorry.

We are aiming for having it done soon.

So that would indicate that you're in negotiations, is that right?

We are at least in discussions, yes. But it's -- the negotiation that needs to be had, and you are not there until you have had it, you conclude it.

So there are no active negotiations taking place or there are?

There are discussions, yes.

And would that not go a long way to solving or could it go a long way to solving the cash difficulties?

Well, it will certainly help.

And one more time, somebody else asked about this before. EBITDA breakeven, can you give us a better idea of what you hope to accomplish there?

No, I don't want to promise things that don't need to go back on. But as I said to that question previously, that is what's driving me right now. We need to get to that point in everything we do, both from a sales focus perspective, market addressing customers that we are addressing, controlling costs, always done with that aim.

Is there -- last question, is there any active pursuit of -- by the Board of Directors to evaluate a sale of the company, a merger or something or other?

Not to my knowledge, no.

Okay. Got to get to breakeven.

We do. We will.

At this time, there are no further questions. I would like to turn the conference back over to David Brunton for any closing comments.

Thank you everybody for joining us today and have a good rest of your day. Bye, bye.