Neonode Inc (NEON) 2013 Q2 法說會逐字稿

Hello, everyone. Thank you for standing by and welcome to Neonode's second-quarter 2013 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).

At this time, for opening remarks and introductions, I would like to turn the call over to Daniel Gelbtuch, our Senior Vice President of Corporate Finance and Investor Relations. Daniel, please go ahead and start the conference.

Thank you. Welcome and thank you for joining us. On today's call, we will review our second-quarter 2013 financial results and provide a corporate update. Our update will include details of our design wins, technology development, and new customer agreements that we recently announced. The prepared remarks will be provided by Thomas Eriksson, our CEO, and David Brunton, our CFO. Before turning the call over to Thomas and David, I would like to make the following remarks concerning forward-looking statements.

All statements in this conference call other than historical facts are forward-looking statements. The words anticipate, believe, estimate, expect, tend, will, guides, confidence, targets, projects, and other similar expressions typically are used to identify forward-looking statements. These forward statements do not guarantee the future performance that may involve or are subject to risks, uncertainties, and other factors that may affect Neonode's business, financial position, and other operating results, which include but are not limited to the risk factors and other qualifications contained in Neonode's Annual Report 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 now pleasure to turn the call over to Thomas Eriksson, Chief Executive Officer of Neonode. Thomas, please go ahead.

Thank you, Daniel. Good morning, everyone, and welcome to the call.

First of all, I would like to emphasize that I am delighted by the technology and business developments here at Neonode. Over the last quarter, we have made significant leads, particularly in our PC related technology, and have experienced growing traction with new and old customers.

I'm also very proud to announce that our touch and proximity solution that Texas Instruments built for our customers have shipped in over 50 million units. Today, our technology is very mature with a proven high yield manufacturing process and scalability to support large volume projects with these products ramping in children's tablets, consoles, printers, white goods and handsets on their way, intensifying PC activity and emerging accessories and wearable opportunities, I'm extremely excited and increasingly excited by our prospects.

Our Q2 GAAP revenues of $1.080 million excluded approximately $120,000 of revenues that were earned in the June quarter yet were reported after our auditor's reporting deadline. More importantly, our pro forma revenues of $1.2 million were in line with our internal expectations and included two new royalty streams, one from a premier children's tablet OEM and another from Volvo. According to press reports, at least one of our three children's tablet licenses has experienced extreme robust demand and thus we expect growth from this segment here and out.

On the PC front, I'm delighted to report that we have our first design win for the Tier 1 PC OEM, and we are also now engaged with other Tier 1 PC OEMs with whom we have more than a few ongoing development and evaluation projects. In parallel, we're working with Microsoft to make sure our technology fulfills the requirements for Windows 8.

In addition, while all the departments would invigorate to co-developed reference platform so PCs, tablets and automobiles, we are also in development discussions with other PC semiconductor companies to co-develop reference solutions for notebooks, tablets, and other type of devices. Not only will our solutions drive PC touchscreen building materials down to single digits, but they will enable OEMs to add features like low power proximity sensing and air gestures while substantially reducing overall system costs in areas such as keyboards and track pads. Most importantly, in the near term, our OEM customers can rely on our scalable high-yield standard assembly process and the fact our solution has been proven and shipped to end customers in millions to date.

On the printer front, while our prospects have grown extensively over the last quarter, we believe initial ramps have likely slipped into late Q4. This is partly due to our licenses, rigorous testing, and production set up. Investors must remember that, in newly built printers, the time cycle lasts at least 12 to 18 months, and while a touchscreen integration only last a few months. The new roller printer heads, paper trays, etc., must undergo extensive testing. That said, our partnership with these large printer OEMs and their internal creation for 2014 and 2015 has both expanded considerably over the last few months and hopefully continue to do so, especially with the help of our new single-side touch sensor.

Our new single-side touch sensor with a target bill-of-material of $1 could now even be more cost efficient than traditional buttons and in combination with our next-generation controller, the NN1002, give our customers even more features to support high-volume, low-cost projects.

For the rest of 2013, while printer ramps are slightly delayed until the end of the year, we believe stronger seasonality, children's tablet ramps, re-emerging e-reader prospects and substantial upfront licensing deals will temper our cash flow in the near term. Thus, we believe our balance sheet should be able to sustain us to breakeven point. That said, we will continue to reintegrate that. Since we are licensing company with our growth prospects tied to new markets and customers, our visibility of precise roll-out dates and ramps is still limited.

Now, I would like to spend some time talking about Neonode's very positive developments. We have intensified research, developed new technologies, and executed around roadmaps to help our customers to lower their bill-of-material costs for their products. Our new single side touch sensor that is in development and under evaluation with our largest OEM customers could potentially lower total touch solution costs to $1 for a 4-inch device, excluding our royalty fee.

Since the launch of our own integrated controller, the NN1001, in May, 2012, we have been increasingly focused on new strategically important markets such as PC, automotive, mobile devices, office equipment, and home appliances. Over the last quarter, we have signed two Tier 1 licenses in the white goods space and made significant strides in the wearables and accessories, both of which have 1 billion unit plus potential.

As of today, we're working on several customer projects in our key market segments and have signed long-term license and (inaudible) to sign development agreements with Tier 1 global OEMs in all of these markets. Our traction is particularly strong in automotive, children's tablets, white goods, and office equipment sectors, where our customers agree we have the best solutions in terms of performance and system costs.

Going forward, we believe our technology has the ability to be just as constructive and compelling within the emerging PC touch markets. As part of our strategy to address the entire touch market, we are in advanced stages of developing our flush zero bezel solutions.

We also recently launched our vehicular touch solution for variable automotive steering wheel and hand application where you want a one-touch solution. In addition, we're collaborating with Tier 1 OEMs to introduce new and spectacular products that incorporate our proximity sensing solutions which control devices merely with open hand gestures.

Meanwhile, our next-generation controller, NN1002, manufactured by our semiconductor partner Texas Instruments, will soon start sampling to our customers. This second generation optical touch shift is designed to improve performance, add new features, improve flexibility, reduce the power consumption, and lower the total system cost in total.

With our next-generation controller around the corner, we also have started development of our third generation controller, the NN1003, single shift controller which will support very large display sizes and give our customers even more functions and increased performance.

On the IP front, we have been very busy, intensified our research in touch and user interface solutions to expand and support our patent portfolio. To date, we have 16 patents issued, and have 78 patents pending, up from 12 and 72 last quarter.

And now over to David, who will talk about the financials.

Thanks, Thomas. Earlier today, we filed our Form 10-Q with the SEC as well as released our second-quarter financial results and a press release. Both of these are available for download from the Investors section of our website at neonode.com.

For the second quarter ended June 30, 2013, revenues decreased 45% to $1.1 million compared to $2 million in the same period of 2012. Our revenues for the three months ended June 30, 2013 included $600,000 from license fees plus $500,000 of non-recurring engineering fees, or NRE fees, compared to $1.6 million of license fees plus $400,000 of NRE fees for the prior year.

Effective January 1, 2013, we modified our revenue recognition policy. Previously, we included all revenue in the quarter in which the products were shipped as long as we received the customer's product shipment report prior to the filing deadline of the 10-Q. We now only include the revenues for those customers who report their product shipments to us by the 15th day following the end of the quarter. As Thomas mentioned, approximately $120,000 of license fees that were reported after our second-quarter revenue cutoff date will be included in our third quarter.

For the six months ended June 30, 2013, revenues decreased 48% to $1.6 million compared to $3.1 million for the same period in 2012. Our revenue for the six months ended June 30, 2013 includes $1.2 million from license fees plus $450,000 of NRE fees, compared to $2.5 million of license fees plus $600,000 of NRE fees in the prior period, prior year.

The decrease in overall revenues in the three and six months ended June 30, 2013 compared to the same periods in 2012 is primarily due to a decrease in license fees from Amazon. Amazon contributed approximately 53% of our total revenues during the six months ended June 30, 2012, compared to less than 1% in the six months just ended. The decrease in revenues earned from Amazon was partially offset by an increase in revenues earned from Kobo and Medtronic.

Cost of revenues for the three months ended June 30, 2013 increased 34% to $700,000 compared to $500,000 in the same period of 2012. Cost of revenues for the six months ended June 30, 2013 decreased 9% to $700,000 compared to $750,000 for the same period in 2012. As of June 30, 2013, we recorded $600,000 of costs associated with engineering design services to work in process included in prepaid assets on the balance sheet. The engineering design services costs will be expensed as a cost of revenue when the customer project is completed and the corresponding NRE fee that is included in the deferred revenue is recognized.

Total operating expense for the second quarter of 2013 decreased 28% to $3.5 million compared to $4.9 million for the second quarter of 2012. This decrease is primarily due to a $1.5 million decrease in stock-based compensation expense. Total operating expense for the six months ended June 30, 2013 increased 3% to $7.6 million compared to $7.4 million for the same period in 2012. This increase is primarily due to an increase in engineering department staffing, legal expenses related to our patent portfolio, and legal costs related with our customer contract activity. These increases were partially offset by a $1 million decrease in stock-based compensation expense for the comparable periods.

We signed six license agreements with new customers in the first six months of 2013 and now have license agreements with 30 customers. In addition, we have several additional license agreements with new customers in the final review phase.

For the three and six months ended June 30, 2013, our net loss was $3.1 million, or $0.9 per share, and $6.7 million, or $0.20 per share, respectively, compared to a net loss of $3.4 million or $0.10 and $5 million or $0.15 per share in the same two periods last year.

As of June 30, 2013, we had cash of approximately $5.4 million plus $690,000 of accounts receivables and working capital of $2.8 million. Cash used in our operations increased 211% to $4.1 million for the six months ended June 30, 2013 compared to $1.4 million used in the same period in the previous year.

Our shareholder equity is $3.2 million as of June 30, 2013, and there are 34.2 million shares of common stock outstanding. In addition, there are 3.6 million warrants and 1.7 million stock options outstanding for a total of 39.5 million fully diluted shares.

Now, I would like to turn the call back over to Thomas for some closing comments.

Thanks, David. To recap, Neonode continues to gain momentum and visibility in the market that will allow the Company to further accelerate growth in 2013 and beyond. We are not only securing new design wins, but we are aggressively investing in our business to meet customer demand and remain on the leading edge of touch and user-interface solutions.

I would like to take this opportunity to thank all of our customers, partners, investors and our very talented and dedicated employees for their trust and support. This concludes our prepared remarks and we will open the call to questions. Thank you very much.

(Operator Instructions). Mike Malouf, Craig-Hallum Capital.

Hi guys. Thanks for taking my call. I want to talk a little bit about the PC opportunity. You've had sort of a rapid entry into this market, and I'm just wondering if you could give us a sense of maybe the pros and the cons of your solution versus some of the other solutions out there in the market? And then just give us a sense of timing with regards to when we could expect some of these design wins, or at least you had one design win and others hopefully will follow, when those might actually come into the income statement? Thanks.

All right so, Mike. This is Daniel. I'm going to handle the second question in terms of timing, then I'll hand you off to Thomas.

As we mentioned in our prepared remarks, while we cannot comment on the specific timing and plans of our customers, we do generally expect that we will be generating PC related revenues in 2014. In addition, we believe our solutions for this market will be extremely compelling in terms of -- and competitive in terms of performance, system cost, production scalability, and certainly features roadmap and features like proximity sensing, but I'll let Thomas expand on that. Thomas?

Yes, thanks. If you compare this to traditional capacity solutions where our technology is core to non-glass versions, so basically we can improve the picture quality and the weight of a notebook for example, but we also support with our new flush solution other glass type of solutions. So the direction for the Company is to support, make, and win the solutions that can potentially get the costs down to about $5 for a 14-inch display, and glassless and glass solutions to be able to have different industrial designs for example.

And when you're talking about license revenue per unit, would the PC solutions be at a rate that is significantly above kind of your average rate of historical?

Thomas, you want to answer that?

It depends on the volume, of course, the typical size, but typically it's more than our normal license fee for this type of application.

Okay, great, thanks. And I know that, on the printer side, it looks like you pushed it back a little bit into the fourth quarter. Typically, you guys don't have a lot of visibility on when the ramps actually happen. So I'm just curious. How did you get that more clarity around that? And I know you've been more excited about how big this opportunity is. Can you quantify at all about how big or how many printers that we're talking about over the next 12 to 18 months that could roll out with your solution? Thanks.

I'll take that question. Well, we have never commented on size. However, the OEM that we're dealing with, the large OEM that we're dealing with, has first of all increased their forecast for Neonode based units for the next two years. They are certainly hard tooled, but that's the information that we have, and they've already shared -- again obviously they've shared some of their estimates and projections with us. And in addition, we're starting to make some progress into their lower end of their printer line, which is basically button replacement for the most part.

So, while we can't give you precise timing and precise size, we do have an idea what their projections are. They're very considerable and certainly not in the low millions. It's well above that.

So, Thomas, do you have anything to add?

I'll just say that we're also working with our printer customers to work with their roadmap and we have developed new technologies to be able to come into the low-cost printers. And we're actually working with our customers to see if we can make button replacements with our new single side sensor. So we're working on that as well to be able to get into products which traditionally doesn't have touch, just having buttons for example.

Great, thanks a lot for the help.

James Medvedeff, Cowen & Co.

I had a couple of questions about the new licensees that you picked up in the period. You mentioned in your prepared remarks that there were six of them. Reading through the press release, I see the Korean consumer electronics manufacturer and the European appliance manufacturer. Can you speak about the other four?

Thomas, do you want to take that?

Yes. We have wins in the white goods segment. We are working with a new automotive project and children's type of products. So it's a little bit mixed of different type of applications.

I see, okay. Then the automotive and children's applications are extensions of existing license relationships or new ones? Like Volvo --

They're new ones.

Is Volvo an entirely new relationship?

Yes.

Okay.

All of those license -- I'm sorry, this is Dave speaking. All of those license agreements that I said, the six, are all new customers, new relationships. We have multiple products with existing customers, but those are all actually brand new license agreements.

And Volvo is actually an older license agreement. That's not something new. What we said about Volvo is that they first started generating revenue, there's product out on the market as we speak.

Ah, I see, so this is an additional automotive relationship that you're not able to name at the moment.

Yes. We have -- what we've said in the past and will continue to reiterate in the automotive space in particular, we have numerous licensees and it's a very compelling space for us, both on the automotive in-car entertainment system side and also on the auto OEM side. So we have more than the few. However, most of these OEMs on both sides of the fence are very cagey and very close to the vest. They don't want us naming them. The only two that we've named to date have been Volvo who again just started generating revenue this past quarter on the auto OEM side and on the systems side, we announced Alpine last year.

Okay, thanks. The new auto OEM relationship, can you speak geographically as to where it is?

It's a global company. It's a Tier 1 global OEM. We can't give you much more in terms of geography. And you have to remember that the space, especially with the top Tier OEMs, has become very disaggregated and you have OEMs, system OEMs, that now sell to multiple car manufacturers. So it's not like you have one OEM -- excuse me, one system OEM for one auto OEM like we've had in the past. Now, you have no loyalty; everyone's selling to everyone. So it'd be very hard to pinpoint who the licensee is.

Okay. And finally, on the Korean CE manufacturer, what types of products if you can speak to that and when might those licenses turn into revenue?

Thomas, do you want to take that?

Yes. I can't comment on that, unfortunately. It's nothing we can say about it because it's in development and as we know more about it and when they're going to hit the market, we are going to tell everyone about that of course, but right now it's nothing we can talk about.

The only thing I can say is that it's not going to be -- it's not one product. We have multiple projects with them across different segments.

And it's not this year, it sounds like?

It's not this year.

Yes, and the same question on the European appliance OEM.

Thomas, do you want to handle that?

In regards to if it's going to be this year or next year, it's going to be next year as well.

Okay, thank you.

Orin Hirschman, AIGH Investment Partners.

Just a handful of random questions. There's obviously a lot of mention on the call in terms of the loss of Amazon causing the revenue decline. I mean, there will be the improvements you made here in technology, etc. Is there a chance of winning back that large OEM here?

Yes, I'll take that. Yes, the answer is yes. We definitely have a chance to recapture market share in this account, especially with the aid of our new low-cost single side sensor, which drives the bill-of materials, as Thomas mentioned, down to about a $1 per unit.

So we believe current costs for using capacity (inaudible) e-readers is about $10. Considering the desire for guys like Amazon in the e-reader space is the ultimately drive retail prices to below $30 per unit and to make it sort of a giveaway item certainly plays into our favor. Thus, I would say we feel we have an excellent chance to recapture market e-reader share with the single side sensor, which while we can't -- since we cannot comment on specific projects, I will say that, still say that the relationship is very strong with Amazon, who is still a licensee. And I think our odds are pretty good in our favor.

Obviously, the e-book reader market is not growing so much at this point perhaps. Somebody like an Amazon or people like that also obviously have their big new business, which is the Kindle and the tablet business. Is there any chance that you think you can get into the tablet business from Amazon or any of the majors like that?

Thomas, do you want to handle that?

We're working on several tablet projects and we have a few tablets on the market. So, of course we are trying to get into all of these type of tablets, and Amazon of course could be one of them.

Okay. So again, some random questions, I'm skipping round. You mentioned that you're working with (technical difficulty) to try and develop PC reference platforms with a large company. Can you just dig into that a little bit more? Is that for Windows 8 laptops? How does that work together with the fact that you've got the relationship with Texas Instruments? Is it competitive? How does Texas Instruments view that relationship?

I'll take that. So, the customer that we're working is NVIDIA, who is looking to integrate our optical touch solutions into their reference platforms, which they can then turn around and market directly to their PC mobile and automotive customers. As we have mentioned, we are also talking to the other two PC semiconductor OEMs who are looking to accomplish the same thing as NVIDIA. That said, NVIDIA has taken a more proactive and first mover position with us across a number of these end markets, including some beyond PC handsets and automotive. So they're looking well beyond these three.

The idea is to get our optical touch integrated into reference platforms which further validate our technologies and help get it sold. Just to make sure we are clear, these emerging relationships with the Tier 1 PC semiconductor companies only complement our strong relationship with Texas Instruments, who is the manufacturer of our integrated controllers.

These emerging partnerships with guys like NVIDIA would look --- these partners would look to integrate and help us sell our current optical touch solutions, which actually incorporate the controller which is manufactured by TI. So there is no conflict between TI and NVIDIA or the other two OEMs that we are working with. And we hope that they will help us open doors and help sell the product and market it aggressively.

And just not to be facetious, but what's in it for NVIDIA per se?

Pretty simple, NVIDIA is looking to drive volume of their solutions of their application processors under GPUs. Right now, the problem with touch is that, as it exits today it is way too prohibitively expensive, which is going to have -- which might have or they fear it will have an impact on the volume of PC shipments into the market. So it is in NVIDIA's best interest to make sure they provide OEMs with the best reference platforms and the cheapest and most effective high-performance reference platform which allow volumes to actually grow as oppose to erode.

We've seen the numbers this year in the PC space have already been down considerably in the double digits. And NVIDIA as well as AMD and Intel are very much interested in making sure volumes go up, not go down. So they're always on the lookout for solutions that will make Windows 8 Touch very, very inexpensive and very effective with good yields and performance.

Just two or three more, then I'll get back in the queue. But just when does that NVIDIA relationship, this new relationship, begin to yield anything from a revenue perspective?

That, again, we can't comment on any specific projects or OEMs, but we'd hope and we said before and we believe that 2014 will be -- we will be generating PC related revenues. In addition, we would hope as well that some of the other products that we are working with NVIDIA on could also start generating revenues in the next year or so.

Okay. Just in general, a look from top down from the Company in terms of revenues, with the mention of children's tablet market, the ramp going on there and some of the other OEMs that are finally beginning to ramp, albeit at a small clip right now, is it fair to say that it looks like this quarter was the bottom on the revenue size?

I certainly hope so, but again we have not given guidance. Certainly, seasonality stays into our favor. In addition, as we mentioned in the prepared remarks, we had two initial ramps that took place, very small but initial ramps that took place in the second quarter for new products. So we'd hope that this new layering of a children's tablet customer and some automotive would certainly provide some sequential lift off from the current level.

Is it fair to say that there was minimal revenue from those two initial ramps in the quarter?

Yes, that'll be very fair. And in fact, I believe they were, again, a very small percentage but still meaningful that it's a clear indicator that there is a linear ramp taking place going forward.

Okay, just last question. You mentioned about amongst the other technologies that you're working on, a flush version of the smooth version which, for handset market, that seems to be the way people want to go most of the time. Is that a commercially ready product? Is that something in the lab? Can you tell us more about that?

So as we've stated, we are in the advanced stages of developing this flush technology and we expect it will be ready for mass production in 2014. And as you pointed out, we believe that a flush option for our customers will allow us to address a substantially larger portion in the market, for example smartphones or at least upper-tier Smartphones and tablets. Most of them are me-too customers who are looking to copy what Samsung and Apple do, and Samsung and Apple require flush. So with Samsung and Apple dominating both those markets, we have to make this flush development in order to address the market itself, but again we think it's going to be a 2014 event.

But is it in a form where OEMs can play with it?

That's a good question. Thomas can you answer that?

We have of course development with that and showed it to our customers. So yes, of course. And I'd like to add that this function has been going on for quite some while. We are following this and we will provide -- eventually provide both solutions to our PC companies. The system that's required are, one, our glass in front of display, and the companies that do not want the glass in front of display. So as Daniel said, we are now sort of addressing the whole market and adding functions with our new proximity solution to complement the touch with outsider input to have a better offering for this market.

Okay, thanks so much.

(Operator Instructions) Graham Tanaka, Tanaka Capital.

Hi guys. I think it'd be very helpful if you could just comment maybe, Thomas, Dave, on the cost of your new solutions versus existing or anticipated total system costs for some of the major areas, namely for the high-end smartphone for the current market for tablets, for the auto solution, and most importantly for the PC or laptop solution. Thank you.

Well, I'll start with the PC laptop solution. What we've said on the call is that we believe that our bill of materials right now in volume should be in the $5 range for laptop. That excludes our licensing fee but remember that our licensing average right now is anywhere between the $1.00 and $2.00. So that would equate to a total system cost in the single digits, in the mid-single digits.

By contrast, our competitors in this space, whether it's metal-mesh competitors who are quoting a minimum of $25 at the very least with very little roadmap to getting much lower, in addition to ITO which is probably at the least $50, we are a fraction of it. We have no yield issues, no manufacturing issues. We have a very simple design. And we also have, more importantly, we have a roadmap in terms of additional application of features like proximity sensing, and maybe even the most important is that we have a roadmap to get the price down to well below $5 for bill of material. So that's the market I will discuss right now. Thomas, do you want to handle the other markets?

I think it's the same for smaller displays. Of course, it scales down in costs, and as we said on the call, we're working on this for very low-cost projects, the preempted projects, by replacing the keys with the touch. And basically you can get the touch screen for the same cost as the key and at the same time also get touch function. So anything from that up to 10-finger touch solutions for PC.

So, we basically have not only one solution but we're going to have different solutions for different type of products. So if it's a mobile phone, we will have different solutions for that. If it's automotive, you're going to have for example our new circular touch for steering wheel applications in a car, the proximity sensing for interacting with the steering wheel, and our traditional touch for the center console or entertainment system and handheld display.

So, we believe that our current portfolio sort of addresses now the whole touch segment but also the new segments in automotive, where you sort of interact with the car in other ways. For example, opening the door, there's a sensor in the door when you're opening the car and there's button replacement in the car. So it's all sort of replacement where we can put our touch solution.

Great. Now, in the tablet and the smartphone space, what are the -- and maybe perhaps more specifically in the smartphone space, what is the cost of the solution, total cost of the solution versus, say, what's being used now, capacitive touch, etc.?

Yes, go ahead, Thomas.

For example, a low-cost -- our current solution, not a single-side sensor, we are about $1.50 for bill of materials for 4-inch handsets. We, of course, add our license fee depending on the project and it can be different depending on the volumes and so on.

With the single-side sensors, we believe going forward we could accomplish something close to $1.00 for a handset. And we working of course with this technology in development, but we have a clear roadmap, of course, to get the customer -- for our customers down as much as possible and of course expanding our license fee with these customers.

What is the cost of the current capacitive or other solutions for that small size form factor?

(technical difficulty) comment on the technology, the volumes, and so on. So it would be quite different depending on the application, but we believe that we are way below that in this type of application.

okay, so pardon for asking the question about the elephant in the room, but what is it then? Why hasn't the industry embraced the Neonode solution more quickly if the costs are significantly lower?

Well, I'll take this question. In the case of handset or smartphone and tablet for that matter, you have to remember that roughly two-thirds of both those markets are dominated by Apple and Samsung. And those two companies, at least for the time being, are the biggest ambassadors and the strongest ambassadors for capacitive or cap-touch technology.

In addition, in light of the size of the screens and the type of implementations that they want, for example they want an industrial design that has a flush, no bezel, zero bezel. We can't do flush right now. So, we will be able to do it, again, as we said, in 2014, but still we are missing that element. So, we are missing flush for one.

And number two, the cost delta, even though it's still a few dollars at the very least in our belief, the cost delta is not really going to move someone like Samsung or Apple for the time being to abandon their internal strategy and go with us. And so again, we believe, over time, we will make some very serious traction in that space, but for the most part, right now, those two markets specifically are markets where cap-touch is going to be successful in the near term.

Great. Thank you. Actually, am I still on? Hello?

Yes.

Sorry, can I also ask on the printer potential, you suggested that even though it's been pushed out by quarter or so, that the size of potential market now may be larger. Why could it be larger? Is it because it might be applicable now down to the lower price printers or because of new customers?

Now, what we said was, just to be clear, is that our existing large OEM that we are dealing with, that we are in the advanced stages with, they have told us that their internal projections of how many units that they will ship using our technology has gone up. It's not -- I'm not talking about the overall market projections going up. This customer is telling us that their internal projections for printers that are using our technology has gone up for 2014 and 2015. That means basically that we are penetrating more of their lines. We are penetrating across more lines, different types of printers, etc., and that's the basic -- that's basically the answer.

Steve Baughman, Divisar Capital.

Good morning, guys. Thanks for taking the question. Daniel, just a question or clarification for you first on the PC revenue comment in 2014. Is that -- do you guys actually expect to get license revenue in 2014? And I guess another way of asking that is do you expect PC units using your technology to be on the shelves?

Yes, we are expecting actual royalty revenue.

Okay, great. Thank you for that. And then regarding the push out of the printer OEM and kind of expectations for the back half of this year, I think you guys had previously communicated an expectation that you would reach cash flow breakeven in 2013. Is that still your expectation?

For the entire year, the expectation is not cash flow breakeven, but on a quarterly basis we believe it's certainly possible that in the back half we could. So, we have enough, again, as we mentioned, we have enough new segments that are starting to ramp, new customers and new products that are starting to ramp. We hope -- again, we can't -- we have very little visibility because remember these are greenfield projects, greenfield customers in greenfield markets. So, our visibility is still somewhat limited. That said, we believe that there is a very good chance that we will break even on a quarterly basis in the back half, but not for the full year.

But not for the full year. Yes, okay. And then I am wondering if you guys can just talk a little bit more generally about sources of liquidity. Your balance sheet looks a little bit thin. Obviously, it would be incorrect to project the first-half cash burn into the second half, but can you just help us with how you guys think about your liquidity?

All right, so what I will say is very simple. We currently believe that our balance sheet is strong enough to support us to quarterly breakeven point, which couple happen and maybe should happen in the near term.

However, with regard to raising capital. We continuously monitor our cash situation. And since our visibility into customer projects and ramps is somewhat limited, we cannot say exactly if or when we would need to raise capital. However, what is clear is that the management and the Board will make sure that we are not limiting our expansion due to our cash position. So, for example, if we get some major PC projects, etc., we are not going to hold off on investing in those businesses. But I want to be very clear. In the current state, we believe that our existing balance sheet can carry us to breakeven.

Great, okay. And then finally I guess just to follow-up on that, Daniel, I want to first of all thank you guys for filing your 10-Q before the call. It's helpful to have that level of detail. I just noticed that there was a change in kind of the liquidity in capital resources section where I didn't see the statement that you believe that you had sufficient cash to operate for the next 12 months. I mean was that an oversight or (multiple speakers)?

No, that's the function of the orders and legal that they have to put that in. That's where they come in. A belief is one thing. Orders and legal they have to make sure they put in the correct language.

Okay, got you. Thanks very much guys for answering the questions. It's an exciting time. Thanks.

[Jerry Gross], Park Avenue LLC. Please go ahead.

Good morning. Very exciting news so far we've been hearing. You didn't really extend too much on the IP infringement. I know that you had a company that was exploring different options. What can we look for in the future regarding the IP infringement?

I'm sorry to say that we have very little that we can comment on. As you can imagine, the very nature of IP and potential litigation is something that's extremely sensitive, and we can actually not comment for strategic and for legal reasons. The last thing we need is to say something silly and have a DJ filed against ourselves. So, unfortunately, we are very active in the IP front in terms of filing new patents. We have 78 patents that are pending, 16 that are issued. That's up considerably. We are still very active in that space. And in terms of assertion and enforcement monetization of those patents, you're going to have to stay tuned unfortunately because we just can't comment yet.

Okay, I understand you can't comment, but are you continuing to explore pursuing the infringement?

We can't say that we're pursuing -- we can't say anything along those lines, but we are definitely exploring every option toward monetizing our packs. And that's the reason why we're expending a fair amount of resources, both financial and human capital, in that endeavor. So we are always monitoring, we are always looking to monetize, but we cannot comment on specific action of assertion.

Okay, thank you.

I'm showing there are no further questions at this time. I would like to turn the floor back over to Thomas Eriksson for any closing remarks.

Thank you, everyone, for joining us on this call. We will of course keep you posted on our progress in 2013 and the future. I would like wish you all a very good day. Thank you very much.

Thank you. This concludes Neonode's second-quarter 2013 earnings conference call. You may now disconnect and have a great day.