Neonode Inc (NEON) 2014 Q2 法說會逐字稿

Hello, everyone. Thank you for standing by, and welcome to Neonode's second-quarter 2014 earnings conference call. (Operator Instructions) Thank you. 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 financial results and provide a corporate update. Our update will include details of our design wins, technology developments 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, can, 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. They may involve or subject to risks, uncertainties and other factors that may affect Neonode's business, financial position and other operating results which includes, 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 my 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 off, I would like to proudly announce that Neonode's zForce PLUS multi-touch PC solution has been selected by a premier PC OEM. Our technology has gone through multiple transformations and once again has shown its versatility in obtaining Windows 8 certification and addressing OEM demands for touch on small to large displays and surfaces.

Our multi-touch solution, zForce PLUS, was selected due to its high performance, cost advantage industrial design possibilities, manufacturing simplicity and technology roadmap. We are competing with low-cost capacity sensors such as metal mesh and other optical touch solutions. To put things in perspective, it's worth mentioning that we are also fighting against pre-active capacitive touch oversupply and price dumping, and even in these environments our solutions are still very competitive.

Our feature-rich, high-performance solutions will still be able to reward the OEM with considerable cost savings. In addition to zForce cost savings, the performance benefits and different shapes of usability roadmaps for both zForce PLUS and ZForce AIR further enhance our competitive position.

Neonode is focusing on penetrating and taking market share for the entire PC market. This concludes notebooks, all-in-one PCs, monitors, keyboards and track pads. Total income market, over 300 million devices per year. The adoption of touch in PC devices is still low, mostly due to the high cost of capacitive touch solutions. However, the opportunity for increasing touch deployment in a greater percentage of devices is big, and Neonode has the perfect technology, cost structure and roadmap to make this happen.

Due to the major delta in cost of implementation between Neonode in competing technologies, we are able to earn a higher royalty rate for our zForce PLUS multi-touch solutions. Our offering includes delivering pre-assembled and tested touch and proximity sensing modules through our EMS partners, who we have been working with for many years. Modules will relax the need for fully custom-designed and make it easier and faster to scale up volumes. The OEMs and their ODMs cannot purchase modules directly from Neonode's partners, but they can get an easy-to-integrate, fully tested module at a competitive price.

Neonode is increasing its module-making partnership to include Tier I ODMs to ensure that we can meet the expected future demand for our technology. The ODMs buy directly from our EMS partners, and the royalty is paid to Neonode via the OEM. To expand this further, at any single point in time, all OEMs typically use the same screen sizes and aspect ratios. This allows the OEM to source displays from multiple display manufacturers.

For Neonode, this is a major advantage. If they are making standard-size modules, we can provide the OEM finished touch solution ready for assembly by the OEM. Neonode can also leverage to find a solution for various OEMs for tooling and modular production processes, yet again reducing costs and delivering the best possible solution to the OEMs.

Moving on to the printer segment, during the second quarter zForce touch was integrated into numerous Hewlett-Packard printers, including three on recent shelves. The (inaudible) review 8610, 8620, and 8630 models. During the second quarter, HP accounted for more than 10% of revenue, and we expect printing revenues will keep growing as we move forward.

With our new technology, zForce AIR, it is our strategy to become the leader supplying touch solutions for the printer segment. Along these lines, we expect a second licensee to start shipping printers with zForce touch in 2015.

On the e-reader and children's tablet front, while these markets have been under significant pressure and will increasingly become a sideshow for Neonode, expect a major e-reader OEM, along with a premier kids' tablet OEM, to launch new zForce-based products in the third quarter. More importantly, while these two verticals are not critical for Neonode's forward-looking prospects, these two OEMs are large corporations who are already showing keen interest in integrating Neonode's technologies into device opportunities.

On the automotive front, Neonode recently signed a license with Magneti Marelli, a top-tier auto system OEM supplier. While the time cycle remains quite extended, we expect to have as many as 10 customers shipping entertainment systems incorporating our technology in 2015.

And now I'd like to move over to technology updates. Our zForce AIR is a revolutionary technology that enables touch on any surface with minimal footprint and design impact. To further improve on this technology, Neonode has put a significant effort on developing a motorized system to reduce the effort of implementation.

Our fundamental goal as a licensing Company is to continue to work on lowering the cost of the hardware components and the manufacturing methods for our solution while at the same time improve on the features such as the response time accuracy and power consumption. To achieve this goal, we have expanded our development focus on new manufacturing methods that integrate components into one scalable package, thereby eliminating the need to subassembly and reducing tolerance and sensitivity.

The elimination of individual components and assembly enables Neonode's partners to manufacture ready-to-use sensor package at a greatly reduced cost. To add new features and to further reduce the total power consumption of our solution, we are currently finalizing the specification of our next-generation sensor chip, the NN1003. The NN1003 will offer faster tracking of touch objects, reduce power consumption and a lower tool subsystem cost for larger display from touch surfaces.

Gesture sensing is an important feature of zForce AIR. Development is ongoing to bring affordable gesture sensing into new areas and consumer markets as well as the automotive industry. zForce AIR enables the freedom of design and seen in all our (inaudible) markets. To extend the use such of zForce AIR into new segments and product types, development is ongoing to extend the range increased accuracy of the technology. Initial target for this new technology is PC track pads, air gestures for menu activation in monitors and to enable touch and gestures on mechanical keyboards.

All zForce technologies enable the elimination of a cover glass from devices. Even if the market is reacting positively on these opportunities, there are still devices that can benefit from a glass design. To address this, Neonode is continuing developing on two new technologies, zForce SPR and zForce LIQUID. These technologies can potentially bring new options in design, such as carved and flexible displays that show potential for providing (inaudible) with palm reaction and enabling soft skin-like touch surfaces.

We continue to invest in our IP for touch and proximity sensing and user interface solutions to further expand our patent portfolio. To date, we have 45 patents issued and 105 pending, up from 37 and 93 the first quarter of 2014.

Finally, I'd like to announce that Neonode appointed Mr. Per Lofgren to become a new independent Director and the Chairman of our audit committee. He will be replacing Mr. Lars Lindqvist, who will become Neonode's new Chief Financial Officer. Mr. Lofgren has been employed for the past 30 years in various management positions for Erickson, a multi-national provider of communications technology and services. Since 2011, he has served as Executive Vice President and Chief Financial Officer of Erickson North America. From 2008 until 2011, Mr. Lofgren served as president of Erickson Sweden AB. Prior to 2008, he served in various Erickson business units globally as division CFO, controller, marketing and other management positions. The new Chief Financial Officer, Mr. Lindqvist, previously served as a Director of Neonode since 2011 and served as Chief Financial Officer for Mankato Investment Group; Chief Financial Officer for Microcell, a Finnish ODM of mobile phones; and Chief Financial Officer of Ericsson mobile phones.

Our amazing CFO and my dear friend David Brunton will retire on August 15 and transition into an open-ended consulting role. While we will be sad to see Dave leave us, we want to ensure investors that his orderly transition will be further supported by his ongoing consultancy.

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

Thank you, Thomas. Earlier today, we filed our Form 10-Q with the SEC and released our second-quarter financial results in a press release. Both of these are available for download from the investor section of our website at Neonode.com. Let's get right to it.

Our second-quarter revenues were approximately $900,000 compared to approximately $1.1 million for the second quarter in 2013. Our revenues for the quarter included $400,000 of license fees and $500,000 of NRE fees compared to $600,000 of license fees and $500,000 of NRE fees for the second quarter of last year.

The decrease in revenues for the quarter compared to the same period in 2013 is primarily due to a 46% decrease in license fees earned from customers shipping e-reader products. This decrease was partially offset by license fees earned from new product shipments of children's tablets in printers by Leapfrog and HP, respectively.

We do continue to see a general weakness in overall e-reader shipments but expect to see the market leader in this segment release a new product in late Q3 this year. Our total operating expenses were $4.3 million for the quarter just ended compared to $3.5 million for the same quarter in 2013. The 23% increase in total operating expense is due to several factors including legal expense related to patent filings and increase in headcount primarily in our engineering department and an increase in travel-related costs, primarily for sales and engineering activities to support the emerging PC market.

Our net loss for the second quarter was $3.9 million, or $0.10 per share, as compared to a net loss of $3.1 million, or $0.09 per share, for the same quarter last year.

For the six months just ended, revenues were approximately $1.9 million compared to approximately $1.6 million for the same period in 2013. Our revenues for 2014 include $1.3 million of license fees and $600,000 of NRE fees, compared to $1.2 million of license fees and $400,000 of NRE fees for the same six-month period of 2013. The increase in revenue is primarily due to license fees earned from new product shipments of children's tablets, printers, and dealer-installed automotive infotainment systems by Leapfrog, HP, and Volvo, respectively. These new license fees were partially offset by a 29% decrease in license fees earned from customers shipping e-reader products. We do expect that license fees earned from the printer segment will steadily increase over the coming quarters as new printer products are released to the market.

Our total operating expense was $9.1 million for the six months just ended compared to $7.6 million for the same period in 2013. The 20% increase in total operating expense is due to the same factors that were previously discussed for the quarter. We expect our cash operating expenses to range between from $15 million and $17 million for the full year of 2014. This will be totally dependent on the assets and efforts needed to service new high-growth business areas, particularly for PCs and printers.

Our net loss for the six months ended June 30, 2014 was $7.9 million, or $0.20 per share, as compared to a net loss of $6.7 million, or $0.20 per share, for the same period last year. Our operations used approximately $6 million of cash during the six months ended June 30, 2014, compared to $4.1 million of cash for the same period in 2013. We expect our net cash burn rate to decrease over the coming quarters.

As previously reported, we completed a financing transaction in the second quarter, raising approximately $9.3 million, net of costs, from the sale of 2.5 million shares of our common stock. And as of June 30, 2014, we had cash of approximately $12 million plus $700,000 in accounts receivable and working capital of $8.8 million. Our shareholder equity is $9.2 million, and we have approximately 40.5 million shares of common stock outstanding.

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

Thanks, David. To recap, Neonode continues to gain momentum on its ability in our key markets that we allowed the Company to further accelerate growth in 2014 and beyond. Our prospects in both PC and printers continue to expand. In addition, our proximity-sensing technologies are being integrated into peripherals, display, and automotive solutions and continue to gain interest from our major OEMs.

This concludes our prepared remarks, and we'll open the call for questions. Thank you very much.

(Operator instructions) I would now like to turn it back over to Dave Brunton, CFO, would now like to make some comments.

Hello, everyone. I'd like to take a few moments before we move into the Q&A portion of the call to talk about my upcoming retirement. My last day as the CFO for Neonode will be August 15. I have served you and the Company with pride and commitment for the past eight years and have enjoyed getting to personally know many of you who are on this call today.

For the past 16 months, Thomas and I have thought long and hard about this decision and have both come to the conclusion that now is the time for me to retire from the day-to-day activities. I know that I leave the Company in capable hands with Lars moving into the CFO position from his duties as the audit chair on the Board of Directors.

Rest assured, though, you won't lose me that fast. I will continue to serve the Company in a consulting role to make sure that this transition to Lars is seamless. One thing of which I am certain, now is a good time to be a Neonode shareholder. We are at the beginning of some exciting times with both PC and printer market opportunities sitting right in front of us ripe for the taking. I know; I am betting my stock ownership on our success.

And now I'd like to pass the baton to Lars and let him briefly introduce himself. Lars?

Thank you, David. I am for sure extremely excited at the opportunity to transition from the Board to the CFO position at Neonode. And I, too, believe that we are in the beginning of an exciting growth period, and I do want to participate. I only met some of you at past conferences and meetings, and I now look forward to getting to know more of you in the future.

So that's all for me for now. Operator, please open the call for questions.

Cody Acree, Ascendiant Capital.

Dave, congratulations on the at least pseudo-retirement. It sounds like you are still going to be busy. On the PC engagement, congratulations on that. Can you just help us out with maybe the breadth of that engagement and where we might see -- where and when we might see your products show up first?

Well, at this time we are in very sensitive negotiations with this big OEM towards finalizing a contract. And we expect that we will be successful across -- in the PC space across all product lines, whether it be monitor -- we have a very compelling large-screen solution. Whether it be notebook, Chromebook, all-in-one PCs, and even keyboards and track pads. So we expect to be very successful across all PC equipment lines.

And where might you show up first, I guess? Knowing that there is going to be some legging in of this, I would assume?

It's going to be tough to say because each product line has a different design cycle. I think monitors might have a quicker design cycle relative to all-in-one PCs and laptops. It's going to be tough to say at this moment. I think we are going to keep you apprised in the coming weeks or months as these wins become a little more clear for us and become a little more visible in terms of timing. I think we mentioned in the prepared remarks that we expect to generate revenue from PC in 2015.

Any thoughts on when in 2015 we might see it? Is it as early as the first half or first quarters?

That's very possible.

And I guess what were the hurdles left to be worked out? You said you are in kind of final negotiations. What's left to be done?

The hurdles are mostly legal and literally paperwork in terms of the general commitment we have. We have a commitment. In terms of getting the lawyers to agree on all the little dotting the I's and crossing the T's, that could take a few weeks. But we will hopefully be able to announce something at that point.

And I think in previous calls, Clarence had talked about a negotiated licensing kind of target range. Any help on where that may be finally landing?

We can't really give you -- again, that's something that's a little sensitive right now. However, we do expect it to be much higher than the average that we have right now.

How much higher than average?

Nothing has changed in terms of where we think -- we have said it's going to be. Certainly a richer license fee than we typically get.

So do you make significantly more if you are working directly with the OEM versus the OEM managing that process?

I wouldn't say that right now. But right now, it's still going to be rich on both ends, whether we are working directly with the OEM or the ODM.

And last for me, you had talked previously about the possibility of one of your PC efforts possibly looking at prepaid license fees rather than maybe your typical NRE structure. What is that starting to look like?

Again, we can't mentioned that. Typically speaking, we normally get some -- either it's upfront fees or -- in typical fashion, either it's upfront fees or NRE fees or prepaid. We expect this to be no different, but we haven't -- we are still in negotiation at this point. It's a little sensitive at this time to discuss it.

Alright. Perfect, guys. Thank you, and congratulations.

Mike Malouf, Craig-Hallum Capital.

I'm wondering if we can just talk a little bit about timing. If things go as you expect with regards to the PC OEM, what might we expect to see over the next three to six months? Are we looking for more announcements from you with regards to solidifying this agreement? And then should we expect some products at, for instance, CES and then launch in the spring? Is that sort of the timing you are thinking of?

I would say, first of all, I would say yes, yes, and yes. At the same point, we are -- right now, we are going to -- we believe we are going to be taking the entire market. We are in discussions -- it's -- getting through the first one is the hardest. We certainly had to jump through a lot of hoops. And we are now much better prepared for number two, number three, number four, and we are currently engaged with multiple OEMs to that end.

Okay. So there's no exclusivity associated with this contract?

Absolutely not. Absolutely not. There is no exclusivity. Again, we are talking to a total of three more right now.

Three more. Okay. Great. And then with regards to the printer side, we are still pretty small. Can you talk a little bit about the ramp-up with the printers? I know we have the 8610, 8620 and 8630 are on the shelves, but is that -- are those shipments and those sell-throughs now fully reflected in that number? Because it still seems to be in the early ramp-up stage.

Right now, we can't comment on future products with anyone specifically. However, I would explain that we recognize revenues -- the royalties are generated when products actually get shipped from the OEM into the retail channel. So even though this particular OEM that we have has been manufacturing since December, has been building pre-launch inventory for all this time, just remember that the revenues that were reported this past quarter were pre-launch revenues. Meaning, in the March and April time frame there were barely products on the shelves. So the third quarter would be the first time we would have theoretically a fuller quarter of retail availability; that's number one. And number two, as we said in our prepared remarks, we expect to have many more product lines but we cannot say which ones until they are actually on the shelves.

Okay, great. And then you had mentioned also in the release that you are working with two other tier-one printer companies. But then I think Thomas said that he expected one more printer company in 2015. So could you just sort of talk about those? I'm a little confused.

Yes. So (multiple speakers) --

Hello. Yes, I mean, we -- our strategy is to take the whole printer market. So we have one big company now launching printers, and then that of course has opened opportunities for us to get into the next companies in size in this business. So our ambition, of course, is to look at taking this whole market, including using our new technology, zForce AIR, that we developed that can enable us to get into printers that traditionally doesn't have touch because of the cost. So we have a road map to address the market in printers from small to larger sizes of display. So that's our ambition, at least. Right now, we are working on two other major players in this business which are progressing very well.

Okay. Great. Thanks for all the color.

Rob Stone, Cowen and Company.

Hi, guys. I wanted to focus on the design activity a little bit, Thomas, of NRE recognized in the quarter. I know you can't comment specifically on what products for which customer, but if you could give us any color on how many different projects are included in that and perhaps just generally what segments are represented.

It's a mix of different segments; it's not just one. But NRE -- sometimes we shot small to large amounts of NRE. So you can't really say if it's a lot of projects or a few projects. Its amount represents various different devices ongoing in development.

This is Daniel. As you can imagine, we are extremely inundated with design activity in printers, in PCs and peripherals and auto as well. So you can only imagine that our engineers are very busy, and we typically charge for that design work in the form of NREs. So we are pretty busy at this point.

Great. And I wanted to follow up a little bit on the commentary about expenses -- ranging cash expenses from $17 million. A two-part question -- one is, if you have a comment on the non-cash expenses; in other words, where you think you might land on a GAAP basis for the year. And then the other is, is the additional expense going to be mostly incremental headcount, or are there other outside costs that might significantly impact the expenses in the second half? Thanks.

So the non-cash stock compensation expense is roughly about $2 million. And if you look at the expenses -- the cash expenses for this past quarter, they were about $400,000 of non-recurring charges.

So that implies that you might have a sequentially lower (technical difficulty) in --

In theory. In fact, I think the first-half stock compensation expense was actually relatively high due to some new employees and some newer incentive packages at the beginning of the year. So I think on both ends, it could be -- it should be lower going forward.

Okay. So with respect to the ramp-up of design programs, are you supply constrained by headcount at the moment? Do you need to add some more people -- a significant number of people in the second half?

We do not need to add. We have added enough. We've actually swapped out a number. And we definitely have the right team. We have an excellent sales team at this point; blue-chip sales team, blue-chip product development team, and we've added a number of key salespeople from big companies, name-brand companies that should help us really dive into these end markets.

Okay. So if you have it handy, what is the total headcount end of the quarter?

Approximately 56.

Great. Thanks, gentlemen.

Sam Ginsberg, First New York.

This question is to Daniel or anybody that can answer. It's great that you have the design wins and finally getting things going. Describe to me the process of going from a design win to a license agreement. How soon do you think that can happen? And if you can please be any more granular on the upfront and the dollar amount of the licenses that you think you have. Like you have probably said that -- you know, a number, and now you think it is going to be even better. How are we supposed to get our heads around that?

Well, I would say two things. Number one, the way it works typically is that you get the license and some sort of commitment. The terms and conditions are items that are negotiated but are literally more of a formality -- it shouldn't be taking that much longer. We are talking about weeks, not months, to get this done. So this is something that again is roughly a foregone conclusion that is going to get signed. The main points have been already negotiated for the most part.

Upfront fees, as I mentioned, were in the negotiation phase. So typically there is something upfront from most of our -- from all our OEMs, whether it be NRE or upfront payments. We can't discuss that because that is a negotiation point at this moment. And when we do finalize the contracts, and if there are any upfront payments, we will let you know as soon as we can. So, again, that's a sensitive area.

The key thing here is that we got the major commitment and major -- the buy-in from the company. That is the key thing here in terms of design. The formalities will be getting the contracts -- the T's crossed and the I's dotted going forward, and that shouldn't be a long time.

So the way I could look at this as an investor now is that major hurdle in getting Microsoft's certification that we all waited for -- those that are in the stock -- major getting a design win. And now you are comfortable saying that you are dotting I's, crossing T's; within a few weeks, you should be rewarded with a license fee. Now, typically we all know that when you get a license fee from a major OEM that there should be some upfront. At that point in time, will you be able to tell us with whom it is and the amount of upfront and the license agreement that you signed with them? Would you be allowed to give us (multiple speakers)?

The odds that we are going to be able to say who it is, at least at this point, will be probably nil. I think that will be something that we can announce when products get at least shown, possibly, or products hit the market. So that, you'd have to wait for a little bit.

The details -- the precise details of the contract also probably are not going to be available to the public. However, you will be able to theoretically see from our change in cash or even deferred revenues, you might be able to sense something by backing into it by looking at our future cash flow statements, et cetera.

And again, I think the other major hurdle which should not be discounted at all is that getting through all the ODMs -- I'd say somewhat hostile ODMs and the installed base of the capacitive Taiwan ink was something -- we had to jump through a lot of hurdles here. And I think it's a major accomplishment that we get through this very big -- these many hurdles at this very, very large OEM. It should augur well for the next ones down the pike. We know what to expect, and we know how to counter all the efforts of the capacitive group.

Okay. So at this point, Neonode is as close to having runway in front of them than you have ever been before?

Yes. This is probably the closest we have ever had on PC and printer. So PC, we already start ramping. This will be -- this coming quarter will be the first quarter of retail-based royalties, and we have others that we are talking to, as we mentioned. At least two major printer OEMs. We have one PC OEM that's committed, and we are talking to three others at this point. So this is probably the best we have seen our prospects and most visible at this point.

Okay. And last quick question, is there anything you can say to us about the comment on Amazon, please?

Well, we can't make comment on Amazon, per se. I think you might be -- it might help for you to look at our 10-Q for the first quarter. It might give you some indication. All we can say is that we expect a new -- just like Dave stated in his prepared remarks, we expect a very large e-reader customer to launch a new product in this coming quarter using our technology. And that's all I can say.

No sense as to the scope of what it could be?

I couldn't say. But, again, this would be a very large e-reader OEM. Look at the Q1 10-Q; it might give you some indication.

All right. Well, this is good stuff. Thanks a lot, Daniel.

Orin Hirschman, AIGH Investment Partners.

Hi, guys. It's Aaron Martin, actually, for Orin. Congratulations on the PC win. A lot of my questions have been answered. I want to rehash a little bit in terms of the printer OEM revenue recognized in this quarter is really from builds or shipments in Q1, and next quarter we will be recognizing revenue that's shipped already as of today. When do you find out from the OEM how many have shipped into the retail channel as of June 30?

I'll that David Brunton answer this.

Yes. We are talking about HP here, right? And so they have a staggered year end, so their quarter ends -- let's see -- April, May, June -- July 31, and we get to report 45 days after the end of July 31. So we will get in mid-September.

Okay. So it's not 45 days from your quarter end? It's 45 days from their quarter end?

From their quarter end. So it will be in our third quarter, right? Because our third quarter ends September 30. We will get the report by September 14, it is. It's (multiple speakers) --

So does that mean on your September 30 quarter you are going to be getting recognized from the revenue from what they have shipped from February 1 to April 30?

No. It's from -- we already got the report from their April quarter. That's in this June quarter. So the April quarter, they really started stocking the shelves I want to say mid-April. So it's about a couple of weeks' worth of shipments. That's what probably maybe people were expecting a bigger number this quarter. But that was the very beginning of these product shipments. They have been moved -- accelerated into May, which is now the second quarter, which will be our third quarter, if that makes any sense.

Okay. So you are not really a quarter behind; you are really two months behind in terms of the recognition.

Yes, we are a couple months behind because of the lag. So they report 45 days after the end of their quarter. Their first quarter ended in our second quarter. Their second quarter ends in our third quarter.

So just to be clear, for the September -- our September quarter, we will be reporting May, June, July shipments.

Okay. Thanks for the clarification, and most of my other questions have been answered already. Thanks a lot.

Graham Tanaka, Tanaka Capital.

Hi, guys. Thanks for all your help. David, congratulations. We are going to miss you. I think there's still not a lot of certainty -- although the last discussion helped -- on revenue recognition and the time lag. So, not only the printer business but the large PC OEM. So just to understand, you were saying that the May, June, and July shipments of HP to its retailers are reported in our third quarter?

Yes, because they're -- we will get -- remember, it's reported when we get the report from them. They give us the report 45 days after the end of their quarter, which means their quarter ends July 31. 45 days after that is September 15 approximately, right? So we get the report and the payment September 15. That's when we will know two things: how many of the 8610, 8620, and 8630s they have shipped worldwide; and did they release any additional SKUs of other products during that period and start shipping those. Because they detail every company they ship to, the products they ship, the numbers, and all of that stuff comes down to a total amount that they owe us, then they send us the money. So those are the two pieces of information that we get on that report.

Okay. So 45 days in the middle of -- for the month -- or quarter which halfway through is really another 45 days. So you are really 90 days delayed, on average. So it's really three months.

Yes, well, from the first shipment of the quarter we are more than 90 days, right? We are 120, 135 days from the first day of each quarter.

Right. Right.

And so then by taking it out, the next report we are going to get is in January -- actually, 45 -- let's see, July, and we have December 15. Yes.

December 15. Okay. So the other question we have is what proportion of their -- roughly their shipments would be these printers? We are on all the 8610s, 8620s, and 8630s -- new editions?

Yes.

Yes.

So is that half their shipments for those three months or a quarter or a third?

That's a level of detail that we don't get. They are not going to share -- you have to remember all of these companies across the board that we are talking to are very -- it's very sensitive information. They don't tell us prior shipments. They don't give us forecasts. They don't give us anything. The only way we even get an inkling of what they are going to potentially do in the future is from the TI chip production purchases, but that's an inkling. It's not true; we don't know if they are buying inventory, if they put it on the shelf, any of that stuff. But it gives us an idea.

I think we also have some indication of how much they are manufacturing on a regular basis. But you have to remember that manufacturing does not necessarily equate to direct royalty because we earn the royalty when the product leaves the HP premises to the retailer, not when it hits a boat or it gets manufactured somewhere in Asia. You have to be very cognizant of that.

So there's been a lot of building of product since December, but the first products that hit retail were in May. And we are first reporting May, June, July and September. So you have to understand there is a lag here.

I think the key thing to remember is that it is a process of ramping up. Obviously they catch up. They are very good at building exactly what they need and matching it to expected sell-through, and if it turns into a very steady and visible annuity going forward as these new SKUs keep ramping up.

Let me ask it a different way, then. So you can't give total numbers. What proportion of HP's printer volume or business do we expect to have in a certain period of time -- say, within -- are they rolling it out to their entire product line?

We can't give that information out at this point. But would say we have pretty substantial -- or very substantial penetration in this account. But, again, I can't -- I could have 90-something SKUs; I couldn't tell you how many or how much that represents.

Well -- I'm sorry, you could have 90 what?

No, no, no. What I said is if you go on HP's website, you will see they have about 90 different printer models. They have -- I would say about 50 of them -- 53 or 54 of them are, I'd say, mid-range, and then you have some very, very high end. There is a lot of SKUs in the high end and some very low end. I couldn't tell you -- it would not be within our right to tell anyone how many and what that number represents. However, you should be thinking about us in mainstream -- mostly mainstream models.

Mostly mainstream. Well, I thought that the 8610, 8620, 8630 where the higher end. No?

8610, 8620, 8630, I believe, are in the $199, $299, $399 range. That's considered to be mainstream.

Okay. Got it. Okay, great. In other words, the last quarter is really not an indication of what you could be doing with HP?

Not at all.

Absolutely not. It is not a proxy. My point is that it's really pre-retail launch, is what be reported this quarter. And we didn't say the number, but it was greater than 10% of revenues.

Okay. And then, secondly, the PC revenue recognition, is that going to be any different? Is that structure to be any different? Are we talking about the same book revenues when they ship to retail, or how is that going to work?

It will be roughly one-quarter lag because whatever quarter we receive the report in, the royalty reporting is the quarter that we recognize the revenue. So if a PC company is working on a December fiscal quarter, their report will come in January or February which means that we recognize it in the first quarter. So 4Q revenue for our customer will land in our fiscal first quarter. If the company is on off-quarter -- let's say the company reports on a January quarter much like our printer customer and a few other PC companies, we would also be reporting their January quarter in -- excuse me, their January end quarter in our March quarter. So I would say it's somewhere between two to three months lag.

And so do you know when the first shipments might be made? Any idea on that? Have they indicated when the first shipments for whatever product they've might do to PC OEM?

We couldn't say at this point. That would be a confidential information. But, again, we will let you know as soon as we can. As soon as the products are available or being displayed publicly, we will try to make sure everyone is aware.

I am a little surprised -- I believe you said that you expect to have shipments across their entire line of products.

We didn't say across their entire line. We expect to be able to penetrate every single product line across the entire PC sector.

Of this particular OEM, you expect to penetrate --

This OEM and the other OEMs we are talking to.

Okay. You are just saying -- so in other words, you are not saying there's an agreement -- you have an agreement to supply this particular OEM for all their requirements. You are just expecting to be able to attack the markets for the entire PC?

Yes. We have products, and we have interests across all product lines. We cannot disclose at this point exactly which product lines we have wins in. However, our products are being evaluated for all. They are competitive in every single segment.

I would tell you, just as a matter of fine-tuning your outlook, is that the larger the screen size, the greater the delta between -- the greater the cost advantage is between us and the competition. So that sort of helps. However, we are competitive across every single PC product line, and we have interests across every single PC product line.

Are you competitive for tablets?

Tablets is not considered something that is a PC product line from our perspective. But in theory we should be competitive, but it's not really a strategic area considering that it already has a capacitive incumbency, and about 65%, 70% of that market is controlled by Apple and Samsung, who are big capacitive advocates.

Alright. So could you just give us an example of -- since the cost advantage is so important and you described how important that it -- you mentioned earlier -- Thomas did -- what kind of example can you give of the cost in, say, a 19-inch or 20-inch monitor? Say, an 11-inch or 15-inch notebook?

Hello. For larger monitors, as we said earlier, it's now up to 50% less cost for our total solution compared to the competition. In this case, it's pre-active, capacitive touch, including low-cost solutions like metal mesh or (inaudible) and these type of technologies. And include also the old-fashioned optical camera-based solutions that we (technical difficulty). So we basically compete with everything. And also there is, in some cases, an overcapacity on the market, oversupply with displays on touch and combinations of that that we can compete with as well. So we have quite a lot of headroom up to the competition in terms of pricing.

So you are saying there is oversupply of capacitive touch displays?

What we are saying is -- what Thomas was saying is essentially there has been some oversupply, and some of the capacitive OEMs have been junking price. They have been cutting prices dramatically. Even in those scenarios, we have as much of a 50% price benefit -- cost benefit relative to the recently reduced and drastically reduced pro-cap prices. So that is -- I'm saying we are very competitive across all product lines, and we have as much as 50% price benefit, even in cases where the pro-cap suppliers have junked prices.

Okay. So just say as an example -- for a monitor, are we talking about $50 savings or $100? Just order of magnitude, just roughly -- I just want to see what incentive is for the other post-PC companies to convert.

We cannot give you dollar amounts at this point. We can probably take this off-line. But, again, think 50%. If you go out and look at what a monitor with touch in it costs online relative to the cost of a non-touch monitor of the same size and you assume about a 50% -- excuse me, 100% mark-up for the cost of the touch, you can get an idea and work it backwards and see that we are 50% lower cost.

So if a monitor is $250, you'd say $125 is cost of bill materials and the monitor. And the (technical difficulty) might be 50% lower? Or no? That's --

Yes. If you look at it -- let's say you go online and you look at, for example, a 20-inch monitor, and it's -- they are charging $129 for the non-touch, and the touch version of that same size is double that. And assume that they are charging -- they are making 100% margin on the addition of touch. You can get a pretty good idea of where our cost lies.

Great. That's very, very helpful. Thank you. The other thing is, Thomas, we have not heard -- I know you have been analyzing, and maybe it's too early, how do monetize the intellectual property? We were hoping to speak with you about that at some point. Where are you in that process? What are the options? Thank you.

We continue to looking into that, and I don't really have much more to say right now. We are working on it, and we will come back with that as we go.

The cash burn rate -- I'm sorry, if we can just get a bracket around what that might do this year and next year.

Well, again, we can't really give you a forecast. However, our cash burn is about -- this past quarter on a recurring basis was about $1 million a month. We do not anticipate to have a large or any increase or major increases in the OpEx -- the cash OpEx. We expect that revenues will start ticking up relatively soon as the printer business keeps ramping, as new e-reader products start hitting the market, et cetera.

Okay. So you know I was getting to this, Daniel. So when -- what level of revenues or when in time could you possibly reach breakeven on a cash flow on an operating cost basis? Thanks. You knew I was going to ask that, right?

Yes. Dave, do you want to answer that?

Sure. I think -- and as I said -- we said earlier, we expect that the operating expenses would range between $15 million and $17 million, somewhere in that neighborhood depending on what we need to do to capture the rest of the printer and PC market. So that's the number. And so at this point, it's highly dependent on at what point in time the PC guys go and start ramping, and how fast HP starts releasing printers, and how quickly some of the automotive and certainly some of the other printer companies come online next year. Those are the dependencies. It's not e-readers. It's not kids' tablets; it's those things. And so, I think we have said over and over that we don't have a lot of visibility into the future. We don't get projections. We don't get purchase orders. And so it's sort of after the fact. I think internally, we sort of expect sometime mid next year -- somewhere a little later than that. Somewhere around there -- and it's completely dependent on those things. It could be earlier or later.

Thank you very much.

I know that doesn't answer your question specifically, but that's as close as we can get.

I just want to make sure because there's not a lot of sell-side research published coverage. I just want to make sure that they are not too optimistic of that time when you are -- we are -- you are fundamentally ramping because if they get too optimistic, then it looks like a disappointment.

I understand.

Thank you.

Robert Davis, TAC Capital.

You mentioned that the -- you can't mention the name Amazon, but they are shipping product this quarter. Is there anything that we can see by the specs of the device that it's your actual product without obviously mentioning the name Amazon?

I think the best you are going to do is they typically release product in the September time frame and usually Engadget does breakdowns and things like that of the products, and that's probably when you will see it.

Okay. Great. And is there anything else you can mention as far as addressing the short position that even that last devastating falsified article that came out?

Along those lines, you can feel free to check out the New York legal dockets. We just filed a complaint -- a legal complaint against Seeking Alpha to try to again stop this type of shenanigans. That article that came out was loaded with false information and it was egregious, and we are trying to take some action. Not that that gives shareholders any comfort, but, again, we are going to try to defend ourselves.

That's great. That's the first time you are letting everyone know that.

Yes.

Okay. Great. Thank you very much.

Cody Acree, Ascendiant Capital.

I just had one quick follow up. So for those SKUs that you are working with your PC partner on, do you have a sense or do you know if they are planning on using you exclusively for those? Or do you think there will be a blending of you and maybe other alternatives?

Well, again, that's hard to say because we are not necessarily privy to everything. I think practically -- and we saw this even in the printer space -- is that OEMs, they typically dip their toe in the water somewhat conclusively, but it's never 100%. They always keep things just for safety's sake and for prudence sake, for risk management's sake. They make sure they have parallel development.

However, getting into this particular OEM was over a year's process. We jumped through so many hoops, I can't even tell you. Ones that we anticipated and many of which we didn't. We think this sounds like -- and we can tell -- is that this is a strategic partnership which will again be very pervasive across multiple product lines. But, again, for me to be sure, that's something, A, I couldn't tell you, and, B, I wouldn't be allowed to tell you. But, again, I think it's a very, very positive statement. It took us a very long time, a tremendous amount of effort. Kudos to our engineering team and sales teams that literally didn't sleep for probably about 14 months to get this done.

Great. Thank you.

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Hello. We want to thank you all for joining us for this call. We believe this is a very exciting time for in Neonode in the market, and we will keep everyone updated on our progress as it happens. Have a very good day. Thank you very much.

Thank you. That does conclude today's conference. You may now disconnect.