Neonode Inc (NEON) 2008 Q1 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen, and welcome to the Neonode's first quarter 2008 earnings conference call, hosted by Rudy Barrio, from Allen & Caron Investor Relations. My name is Ina and I will be your coordinator for today's conference. For the duration of the call, you'll be on listen only. However, the end of the call, you'll have the opportunity to ask questions. (OPERATOR INSTRUCTIONS).

I'm now handing you over to your host to begin today's conference.

Good morning and welcome to Neonode Inc.'s investor conference call to discuss its financial results for the company's first-quarter 2008. As mentioned by Ina, I am Rudy Barrio of Allen & Caron Investor Relations.

Before we start this morning's call, there are a couple of items I'd like to cover. Many of you received a copy of the press release announcing the company's results for its first quarter 2008. It was released this morning. If you did not receive a copy of the press release, it is posted on the Investor Relations of Neonode's web site at www.Neonode.com, and in the client section of our web site at www.AllenCaron.com. You may call our office in New York at 212-691-8087 and we will e-mail it to you right away. It is also posted on Yahoo! Finance.

As mentioned earlier, this call is being recorded. A replay will be available through June 15, and may be accessed from North America by calling 866-583-1035, and entering access code 1095614. International callers should dial 44-020-81-96-1035.

This call is also being broadcast live over the internet and may be accessed via the Investor Relations section of Neonode's web site at investor.Neonode.com or by visiting Thomson Reuters webcast site. A replay of the webcast will be available immediately following this call and will continue for 30 days.

Additionally, I have been asked to make the following statement. Certain statements in this conference call are forward-looking statements that involve risks and uncertainties, including statements regarding future products and technology developments. Such statements are only predictions, and the Company's actual results may differ materially from those anticipated in these forward-looking statements.

Factors that may cause such differences include but are not limited to the ability of Neonode to develop and sell new products and technologies, these factors and others are more fully discussed in the document the Company files from time to time with the Securities and Exchange Commission, particularly the Company's most recent form 10-K and form 10-Q. Neonode and Neonode logo are registered trademarks of Neonode, Inc.

With us this morning in Stockholm is CEO and President, Mikael Hagman, and CFO, David Brunton from San Ramon, California. I would now like to turn the call over to Mikael. Good morning, Mikael, or should I say good afternoon.

Good morning, and good afternoon. This is Mikael Hagman from Neonode in Stockholm. Welcome to Neonode's first-quarter 2008 conference call. And thank you for joining us.

With me today is Dave Brunton, our Chief Financial Officer. I'm going to ask Dave to start the call by reviewing our financial results. I will then discuss significant events for the quarter and then we will open the call for questions-and-answers.

With that, I would like to turn over the call Dave. Dave?

Good morning, this is Dave Brunton. And thank you for joining us today for Neonode's first quarter 2008 investor conference call. I'm going to start with a quick review of our results for the first quarter of operations ended March 31, 2008.

Our net sales for the first quarter of 2008 were $391,000 compared to $249,000 in the first quarter of 2007. With the exception of a modest number of phones sold through our web site, we did not ship any products to our customers during the quarter.

As you may recall, we use the sell-through method of revenue recognition. All the revenue that we recognized in the quarter just ended, is the result of products shipped to our customers in previous quarters that they sold through to their customers during this quarter.

The revenue for the same quarter last year is primarily from the amortization of a technology licensing agreement that we entered into in 2005, and was amortized to revenue over a 24-month period. The amortization period ends in June of 2007. Mikael will elaborate on the status of our customers later.

Our gross margin for the quarter was a negative 63% compared to a 99% gross profit margin for the first quarter of 2007. As you know, our gross profit margin is highly dependent upon our raw materials pricing and production department utilization rates. And as I previously stated, we did not ship any products during the quarter, and as a result our cost of goods is distorted by the fact that the fixed costs associated with our productions and supply chain management departments were not absorbed efficiently. The high gross margin for last year is because the revenue was related to a technology licensing agreement and there was minor product-related costs.

Our production department was formed in the second quarter of 2007 when we began to produce our rN2 mobile phone. So last year there was no production department or supply chain management departments included.

Our total operating expenses in the first quarter of 2008 were $5.8 million compared to $2.6 million in the first quarter of 2007. The increase is due to several items. First, our salaries increased as a result of an overall increase in our headcount from approximately 30 employees in the three months ended March 31, 2007, to over 40 employees for the quarter just ended.

Second, we used a significant, larger number of engineering design consultants for product development for the quarter just ended compared to last year. Last year, we had seven consultants and this year we had 12.

Third, our legal and accounting costs increased significantly during the quarter just ended compared to the same quarter last year. These costs are associated with the first year-end audit as a public company, along with numerous legal issues associated with our required regulatory filings as a result of the funding transactions that we've entered into. And the creation of Neonode USA, and just general filing requirements that we have as a public company.

And finally, we incurred significant product marketing costs during the quarter, with our attendance at CES show in January and the final payments related to our product rollout of the N2 in Europe in December.

For the quarter ended, we reported a net loss of $11.4 million or $0.47 per share basic and diluted, compared to a net loss of $2.5 million or $0.25 per share basic and diluted in the first quarter of 2007. The net loss for the quarter just ended includes a $5.5 million of non-cash expense adjustments related to the fair value calculations for the beneficial conversion features of prior financings, compared to $143,000 in the same quarter last year.

The accounting regulations require that these financial instruments must be revalued each quarter as though they had an actual market value. The changes in the calculated fair value are recorded as either income or expense in the current income statement.

As you may realize, our auditors qualify their opinion for the year ended December 31, 2007, because they questioned our ability to remain financially stable. We recently took proactive steps to reduce our cash expenditures.

For the past few months, our cash operational expenses have been averaging approximately $1.5 million per month. Our new plan of operational expense levels, before any cash contributions from sales, is $600,000 per month. We are confident that we will reach our targeted expense levels over the next two to three months. Mikael will discuss the significant expense reductions that we initiated.

We also just completed a financing that provides approximately $4 million after offering expenses. The funds from the financing were provided by a repricing of existing warrants to purchase our common stock. We issued approximately 3.8 million shares of our common stock and 8.5 million warrants to purchase common stock for $1.45 a share. The warrants cannot be exercised for six months.

We also extended the due date for approximately $2.8 million of secured notes that were due on June 30, 2008, until December 31, 2008. We issued approximately 879,000 warrants to purchase our common stock for $1.45 a share to the noteholders as consideration to extend the notes' due date. I want to add that members of our Board of Directors and management contributed approximately $500,000 to this fundraising effort.

After the financing, we have approximately 29 million shares of common stock, 13.9 million warrants to purchase our common stock at $1.45 a share, and 2.8 million employee stock options outstanding. We believe that the combination of the cash expense reductions associated with our reorganization, and the cash infusion from the financing, will provide the necessary liquidity to finance the Company going forward on our revised business plan.

That concludes my comments, and I'll turn the call back to Mikael. Mikael?

Thanks, Dave. As most of you know, the sales and shipping of the Neonode N2 was initiated late in Q4, 2007. In the subsequent quarter, a radio frequency reception issue was detected. Simply put, the voice reception in certain networks were on the low end of the acceptable scale.

As we are a new brand, it is important to ensure that we're always on the upper level of the scale in all aspects of the technology and the quality. Therefore, we decided to voluntarily recall already shipped units from affected European markets experiencing the RF issue, and take them back to our manufacturer in Malaysia for the necessary rework.

The rework process took longer than anticipated, and as a result our customers are delayed in their payments of almost $3 million. This setback also delayed the shipment to new markets such as Turkey, Malaysia, Indonesia, Taiwan, Thailand, and Singapore.

The necessary rework of the N2 has been completed, and we have made a strategic decision to reposition some of the units into new markets. In April, we entered the markets in Asia, and made initial shipments to Turkey and Germany. We have adjusted our strategy and our building on customer-financed orders instead of forecasts.

Even though we got off to a rough start this year, we continue to vigorously pursue the sales of the N2 for 2008. We believe that our initial sales target of 200,000 is still achievable, but we're currently not on track to achieve this in 2008.

In addition, we're experiencing issues in India regarding payment, which has postponed the further shipment to this market, but we're currently looking into alternative models, new payment terms, and a different structure for this market. We still believe that India will prove to be one of the major markets for us, and we anticipate strong sales potential for our products there.

We will continue our geographic expansion into larger but fewer territories. This will enable us to efficiently capture a larger portion of the markets, of each individual market, at the same time allow us to keep our costs associated with their expansion in line with our resources.

Going forward, we have revised our business plan and have already initiated the necessary organizational and cost adjustments. We have reduced headcount by approximately 40%, and with a more focused markets approach, we have an opportunity to operate on a lower operational expenditure level.

We continue to concentrate on the licensing of our technology, and are currently in discussions with a number of companies ranging from medical, technical manufacturers to mobile phone carriers. I would like to emphasize that the technical issues experienced with the N2 was not related to our proprietary technology.

We believe C-force is a unique technology that will find its place in various devices. But as you are probably aware, licensing technology is generally a long process. Once a customer selects our technology, although we may receive an up-front payment, we still anticipate it takes up to 12 to 24 months before we realize any appreciable, ongoing royalty revenue.

Before concluding, I'd like to comment on the progress we've made post quarter one. This quarter we have entered into a number of new markets such as Germany, Turkey, Malaysia, Indonesia, Taiwan, Singapore, and Thailand. We have or are in the process of shipping to all of these markets. We have made a number of enhancements to the Neonode N2 and continue to aggressively pursue the management and growth of our patent portfolio.

We had one additional patent issued in Japan, and our chief patent engineer is constantly looking to ensure the further protection of our proprietary technology.

We continue to receive great reviews for the Neonode N2, our user interface nino and our touchscreen technology zForce. We believe that further development of these technologies will generate future sales of both licenses and devices.

According to a recent report from Display Search, a respected expert in consumer and retail market research information for over 40 years, the market of touchscreen technology is expected to grow to 3.3 billion, or 660 million units by 2015.

We've been developing finger based touchscreen technologies since 2001, and consider ourselves a leader within the new wave of touchscreen technology. We're seeing tremendous growth in consumer electronic devices that are fitted with touchscreen, and we believe we are in a good position to capitalize on this growth.

Thank you for your time today, I will now hand over to the operator for the question and answer session.

Thank you, ladies and gentlemen. (OPERATOR INSTRUCTIONS). We have a question from the line of Lily Wu from TGRA Capital, go ahead.

Yes, thank you. So, it sounds like part of your new strategy going forward is fewer markets, but targeting larger markets. In that regard, could you address what your expected target markets are for -- target plans are for the US? And also, is that part of the cost savings is to get from 1.5 to 600,000? Will that reduce a certain amount of marketing spend in some of the smaller markets?

Hi, Lily, this is Mikael Hagman. Yes, to answer your last question first. Focusing on fewer markets, drives down a number of cost points in our organization from marketing to sales, and actually also to the engineering department, where we have to adapt the product to fewer markets.

Regarding the US, we are in contractual negotiations with a customer there. It has been delayed slightly because of issues in the contracts but we are pursuing that, and that is something that we're focusing on.

Okay. And so, that is something that we expect in 2008 or --?

Well, before we conclude the contract, it's difficult for me to say. But definitely that's our ambition to have a 2008 launch for the Neonode N2 in the US.

Okay. In terms of the patent, if that continues to be a core focus, do we have sales teams focused on that, in terms of trying to develop -- work on the sales cycle for licensing out those patents?

Absolutely. We are in negotiations and discussions with a wide ranging number of companies in that. So we have a sales team deployed for that through Neonode USA.

Okay. And specifically on the touchscreen patent, I was wondering if I could get clarification. Is it for the navigation technique or for the actual -- for example, the N2 phone uses, I think a IR grid instead of a capacity screen. Does the method, the physical method of a touch sensor, is that part of the patent or is it just the navigation strokes? For example, I'm trying to understand --

It's actually both, Lilly. So it's the actual physical configuration of the device where there's an infrared grid, but it's also a patent application for the software in terms of how you utilize sweeps and gestures. So it's actually both.

Okay. For example, one of the phones that we see a lot in Asia is from HTC, they've got a phone called the Touch, which is already in its second generation. And it's out there -- I think they've passed already the million mark for units sold.

For example, is something like that -- that's often compared to the Apple Touch and Suite modes, are those things which are a different kind of touch software technology, which isn't in the scope of the zForce patent or, how could you differentiate that for me?

If I remember correctly, they use resistive technology for their touchscreen application. And that's a separate technology and a competing technology. But I would say -- on my list, HTC is a potential customer for our technology.

Okay. All right. Great. Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS). We have a question coming from the line of Kevin Dede from Morgan Joseph, go ahead.

Hi, Mikael. Thanks for hosting the call.

Hi, Kevin.

I was wondering if you could be a little more specific about the headcount reduction. Where were you, well, you were 40 at the end of the quarter. Where are you now? How's that relate to operating expenses given your run rate of 5.8 million? And if you could just fill us in on how those headcount are allocated in terms of their strategic effort in driving the Company forward.

I think we have to -- thanks for the question, Kevin. I'll answer part of it, and I'll hand over some parts of it to Dave.

They're pretty fairly spread across all our departments. So there's some on the engineering side. There's some on the sales side. And there's some on the administration side.

There's also a reduction related to the geographical retrenchments where we're moving back from certain markets and pursuing more focused markets, or a limited number of markets, more focused. One should also remember that we've done a lot of work on our technologies and on our phone, although it's always an ongoing effort. For a limited period of time, I will be able to survive on that and capitalize on the work that's already done and the enhancements that have been implemented into the fold.

Dave, could you give Kevin some more detail on the numbers, please.

Sure. Kevin, basically we had about 42 employees in the Company and work, and we've cut back 10 employees. And we also had a numerous number of consultants working for us, primarily in the engineering and the sales area, and we have cut back all of those consultants at this point.

Our focus, when we looked at where to make the reductions, was we wanted to keep as much as possible the engineering area, as many engineers on staff as possible. So we went pretty lightly in that area. And in the sales and marketing side, we really took a look at what we needed to have to actually support the fewer markets that we're going into.

And so what we looked at was having a sales team for each market that is comprised of a sales person, a technical support person, and a marketing person that they go out and they actually train the retailers at the retail level and help the distributors market the phone. And so by reducing the number of markets that we're actively pursuing, we can actually, we think reduce the costs associated with the sales and marketing side quite dramatically, but actually be a little bit more effective in getting phones out. And then, across the board, when you make reductions like this, your phone bills and travel expenses and virtually everything across the board come down.

The other area that we expect to see some dramatic decreases are in the use of accounting and legal services outside. We have spent a lot of money over these last six months on accounting and legal services associated with the regulatory filings associated with the financial packages that we've put together and the financings, plus the year end audits. So we expect that to level out and be reduced quite dramatically over the next couple of months.

I do have to tell you that it takes, especially in Sweden, a couple of months to effect the reductions in personnel because of the labor laws, etc., of each of the countries. And so we do have requirements. So we expect to see that the decreases occur over travel and things immediately. But headcount related over the next two to three months. So that is a consideration at this point that we have to take into account.

Okay, so essentially you're saying that all the cost savings won't be realized in June, but also into September -- ?

Yes, depending on the individuals, they have packages that by law have to be paid out either over one, two, or three months. So we've factored that in, and in the Company, probably 70% of the expenses are employee or contractor related. So in order to reduce expenses, we really need to attack those areas.

And then of course, as I said before, the accounting and legal fees have been extremely high because of the -- a bunch of things that have happened as far as the fundraising and the year-end audits and the derivative accounting and all of these new things that are out there, and so we expect those to level out.

Okay. So if you were to give us a ballpark on OpEx, what do you think that number is in June?

In June I think it's going to be somewhere around sub-900,000. We're targeting June to be really closer to 800,000.

Okay.

That's what we're looking at. And then going down --

Down from the 5.8 million in March --

No, I'm just talking for one month, right?

Oh, oh, okay, okay, okay.

And I'm talking about cash expenses. Remember, there are non-cash items in that $5.8 million. And so, we're focusing on cash at this point. And so, the actual cash expense average for the last three months has been about $1.5 million. And in that $1.5 million have been some fairly high marketing dollars associated with our -- as I said, our attendance at CES and the rollouts in Europe of programs, so the marketing dollars in the first quarter that were spent in excess of $1 million. And we don't expect to see that repeated.

In addition, the accounting and legal bills have been certainly in excess of $500,000. And we expect to see that be reduced. And so, if I looked at a normalized amount, if I pull those things out, it's probably somewhere in the neighborhood of $1 million a month on an expense run rate. And we expect in June to reduce that to --

800 to 900 --

Yes, sub-900. Probably between 850 and 800,000, somewhere in that neighborhood and then July will be a bit lower. And we expect to see the full impact of the reductions by August, late July, August.

Very good. How would you account for the $1.3 million differential in non-cash between, say, 4.5 and operating cash expense during March and the 5.8 on the P&L?

Okay. I didn't -- repeat that again.

Yes. So, there's $1.3 million roughly in the March quarter that are non-cash operating expenses. I was wondering if you could detail them for me. Not excruciating detail but roughly --

Yes. There's stock option expenses in there. There are -- that are obviously non-cash, right. We extended the options for some of the Swedish option holders because we couldn't get the shares registered because of some restrictions based -- put on us. And so, when we extended those out two months to allow them to exercise, we had to take a pretty big hit option expense. We had to revalue them. We also have revaluing of some other financial instruments that's sitting up in there. So --

On an ongoing basis, what do you think that number is?

I think that number, on an ongoing basis, is probably going to be a couple hundred thousand dollars maximum.

Okay.

Yes. It's -- I don't know how familiar you are with accounting regulations, but whenever you modify or extend stock options or anything, or make a change to any sort of stock grant, then all of a sudden you have to revalue it, and you typically take some pretty big non-cash hits.

Okay. Thank you, David.

Mikael, one last question for you from me. It's more specifically directed toward the markets that you're addressing now. You said you started shipping. Could you give us more, specifically the date that you started shipping. And when you think you might be able to record revenue on a sell-through basis.

And also, can you give us an idea on who your target carriers are. And what their subscriber levels are. I mean, it's one thing to say, hey, we're attacking Germany. But I -- it's a little bit different if you could give us an idea on who within Germany has accepted the N2 on their network.

Okay.

Just as an example.

That's a good question. So, in Germany we are accepted by all the major networks, so it's T-Mobile, Orange, O2, and it slips my mind, EuroNix I think is the fourth one. They all subsidize the phone.

But in Germany, the market is slightly different. That's one of the reasons where we're approaching that market, not just because of the size. The phone and the carrier subsidy actually meet on the retail level in Germany. So it doesn't have to go through the certification process of the major carriers.

There are such certification processes, as well. But you're able to bypass that in Germany by going through distributors and then on to retailers. So the subscriber base for those is basically the entire German market I think between all of those.

So our focus is on larger markets such as Germany and India, who are less carrier-centric, where the burden on our engineers to certify the product and comply with certification needs that the carrier has is less. And so it's an easier and quicker route to market.

Okay. Then how about, more specific information on timing and revenue recognition?

We initiated --

Given the delays --

Yes, we initiated shipment a couple of weeks ago to the markets mentioned in the call. Not all of the markets have received product yet. But I don't have that detail in front of me. But we initiated shipments to some markets. And we do expect revenue recognition to be on average around eight weeks after first shipment.

So the product will be shipped to a distributor who will then ship them to either a wholesaler or directly to a retailer, who will then sell through. So we expect on average to have around eight weeks between shipment and potential revenue recognition on a normal sell-through basis.

Very good. And you mentioned that your target is still 200,000 units for '08?

It's still achievable, but we're not on track for that target now with the misstep during the first quarter. So we still think it's potentially possible. But we're not on track to reach that within the given timeframe.

Okay. When will you be able to share more information on your licensing activities? Granted, given the 12 to 24-month cycle there? I mean, you mentioned other handset manufacturers and also medical device manufacturers.

Yes. I would say during 2008 we hope to announce a number of these deals. But it's very tough to say when because it's -- some of these companies are also -- the customers are not so eager to announce that they have made a deal with us. And to disclose who they are and so forth.

Very good. Understandable. Thanks so much for entertaining my questions.

Thank you, Kevin.

We have no further questions. I'll hand you back to Mikael to wrap up today's conference.

Okay. Thank you, everybody, for listening in today. And hopefully we can report a stronger quarter the next quarter. Thank you very much.

Thank you for joining today's conference. You may now replace your handsets.