Neonode's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: Neonode, Inc. (NEON)

Neonode, Inc. (NASDAQ:NEON)

Q2 2013 Earnings Call

August 8, 2013 10:00 AM ET

Executives

Daniel Gelbtuch – SVP, Corporate Finance and IR

Thomas Eriksson – CEO and Co-Founder

David Brunton – CFO

Analysts

Mike Malouf – Craig-Hallum Capital

James Medvedeff – Cowen & Co

Orin Hirschman – AIGH Investment Partners

Graham Tanaka – Tanaka Capital

Operator

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)

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.

Daniel Gelbtuch

Thank you and welcome and thank you for joining us on today’s call, we’ll review our second quarter 2013 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, tend, will, guides, confidence, targets, projects, and other similar expressions typically are used to identify forward-looking statements.

These forward-looking statements do not guarantee the future performance that may involve or 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 and 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’s now pleasure to turn the call over to Thomas Eriksson, our Chief Executive Officer. Thomas, please go ahead.

Thomas Eriksson

Thank you, Daniel. Good morning everyone and welcome to the call. First of all, I’d 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 technologies and have experienced growing traction with new and old customers.

I’m also very proud to announce with our touch and proximity solution, the 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, all sorts of 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 $1,080,000 excluded approximately $120,000 of revenues that were earned in the June quarter. Yes they’re reported after our auditors 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 other from Volvo.

According to press reports, at least one of our premier children’s tablet licenses is experienced extremely robust demand and thus we expect growth from this segment here and out. On the PC front and the license report that we have, our first design win for the Tier One PC OEM and we are also not engaged with other Tier PC OEMs with whom we have more than a few ongoing development and evaluation projects.

In parallel, we’re working Microsoft to make sure our technology fulfills to requirements for Windows 8. In addition, while all the department would endeavor [ph] to co-develop reference platform so PCs, tablets and automobiles. We are also in development discussions with other PCs semiconductor companies to co-develop reference solutions for notebooks, tablets and other type of devices.

Not only will our solutions drive PC touchscreen bill-of-materials down to the single-digit, but they will enable OEMs add features like low powered proximity sensing and air gestures. While substantially reducing overall system cost, in areas such as keyboards and track pads. Most importantly in the near term, our OEM customers can rely on our scalable high yield down at the sounded process and the fact our solution will be proven and shipped to end customers in million to-date.

On the printer front, while our prospects have grown extensively over the last quarter. We believe initial ramp 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 last at least 12 to 18 months and while a touch screen integration only last a few months.

The new roller printer head paper shredder [ph] etc, not undergo extensive testing. With that said, our partnership with these large printer OEMs and their internal creation of 2014 and 2015 has both expanded completely 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 the targets bill-of-materials of $1 could now even be more cost efficient than traditional bottoms and in combinations with our next-generation controller the nm1002 [ph] give our customers even more features to support high volume low-cost projects. For the rest of 2013, more printer RAMs are slightly delayed until the end of the year we believe strong seasonality, children’s tablet RAMs re-emerging nearly the prospect and substantial upfront like in the build would tamper our cash flow in the near term.

Thus we believe, our balance sheet should be able to sustain after breakeven time. With that said, we will continue to reintegrate that since we have license in company, we’ve got growth prospect type of new markets and customers. Our visibility of precise roller [ph] updates and rounds is still limited. Now I’d like to start on time talking about Neonode’s very positive development.

We have intensified research, developed new technologies and executed around roadmap to help our customers to lower their bill-of-materials cost for their product. Our new single side touch-sensor thus in development and under evaluation with a large OEM customers to potentially lower, total touch solution cost to $1 for a 4-inch device excluding our royalty fee.

Since the launch of our own integrated controller the nm1001 [ph] in May, 2012. We have been increasingly focused on new strategically important markets such as PC automotive, mobile devices, office equipments and home appliances. Over the last quarter, we have signed two Tier One licenses in the white goods space and made significant strides in the wearable’s and accessories, both of which have a billion unit plus potential.

As of today, we’re working on several customer products in our key market segment and have signed long-term license and referenced to sign development agreement with Tier One 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 build just a 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 flash finger-based solution. we’ve also recently launched our vehicular touch solution, the variables automotive steering wheel and hand application where you want, around touch solution.

In addition, we’re collaborating with Tier One OEMs to introduce new and particular products that incorporate our proximity sensing solutions which control devices module with open air gestures.

Meanwhile our next-generation controller nm1002 [ph], 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 nm1003 [ph] seeing a controller which will support very large display size and give our customers more functions and increase performance. On the IC front, we have been very busy intensified our research and touch and user interface solution to expand and support our patents 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.

David Brunton

Thanks, Thomas. Earlier today we filed our Form 10-Q with the SEC as well as released our second quarter financial results and the 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 in 2012.

Our revenues for the three months ended June 30, 2013 included $600,000 from license fees plus $500,000 of non-recurring engineering 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 customers product shipment report prior to the filing deadline of the 10-Q.

We now only include the revenue for those customers, who report their product shipment 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 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 revenue aren’t from Amazon was partially offset by an increase in revenues earned from Cobo [ph] and electronics. 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, 2012 we recorded $600,000 of cost associated with engineering design services to work in process included in prepaid assets on the balance sheet.

The engineering design services cost 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 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 cost related with our customer contract activity. These increases were partially offset by $1 million decrease in stock based compensation expense for the comparable periods.

We signed six licensed 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 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’d like to turn the call back over to Thomas for some closing comments.

Thomas Eriksson

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 and meet customer demand that remain on the living edge of cost and user interface solutions.

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

Question-and-Answer Session

Operator

(Operator Instructions) our first question comes from the line of Mike Malouf with Craig-Hallum Capital.

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 rapid entry into this market and I’m just wondering if you could give us a sense maybe the pros and 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 obviously you have one design win and others hopefully will follow, when those might actually come into the income statement? Thanks.

Daniel Gelbtuch

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, well 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 competitive in terms of performance, system cost, production scalability and certainly features roadmap and features like proximity sensing, but I’d like Thomas expand on that. Thomas?

Thomas Eriksson

Well thanks. If you compare this to traditional capacity solutions where our technology core to normally last version. So basically we can improve the picture quality and the weight of notebooks for example, but we also support with our new Flush solution of a glass type of solution. So the direction for the companies is to support make it win the solutions that can potentially get the cost down to about $5 for 14-inch display and glass solutions to be able to have different industrial designs for example.

Mike Malouf – Craig-Hallum Capital

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?

Daniel Gelbtuch

Thomas, you want to answer that?

Thomas Eriksson

Depends on the volume of course, the typical size, but typically it’s more than our normal licenses for this type of application.

Mike Malouf – Craig-Hallum Capital

Okay, great thanks and I know that on the printer side. It looks like you pushed it back a little into the fourth quarter. Typically, you guys don’t have a lot of visibility on when the ramps actually happened. So I’m just curios, 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 solutions? Thanks.

Daniel Gelbtuch

I’ll take that question. We have never commented on size. However, the large OEM that we’re dealing with, as first of all is increased their forecast for Neonode base units for the next two years. They’re certainly hard tool, that 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 below millions, it’s well above that.

So Thomas, do you have anything to add?

Thomas Eriksson

I guess, 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 printer and we’re actually working with our customers to see we can make button replacement, what we did Neo’s single side sensor.

So we’re working on that as well to be able to get into the product, which traditionally doesn’t have touch just cutting buttons for example.

Mike Malouf – Craig-Hallum Capital

Great, thanks a lot for the help.

Operator

Our next question comes from the line of James Medvedeff of Cowen & Co. Please go ahead.

James Medvedeff – Cowen & Co

Good morning, good afternoon to you. 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. I’ve read in through the press release, I see the Korean consumer electronics manufacturer and the European appliance manufacturer, can you speak about the other four?

Daniel Gelbtuch

Thomas, you want to take that?

Thomas Eriksson

Yes, we have ones in the white goods segment. We are working with new automotive project and children’s type of products with little bit mix of different type of applications.

James Medvedeff – Cowen & Co

I see okay, but then the automotive and children’s application are extensions of existing license relationships or new ones?

Daniel Gelbtuch

They’re new ones.

James Medvedeff – Cowen & Co

Is Volvo an entirely new relationship?

David Brunton

Yes.

James Medvedeff – Cowen & Co

Okay.

David Brunton

All of those licenses. 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.

Daniel Gelbtuch

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.

James Medvedeff – Cowen & Co

I see, so this is an additional automotive relationship, but you’re not able to make it at the moment.

Daniel Gelbtuch

Yes. We have, what we’ve said in the past and we continue to reiterate, we are in the automotive space in particular. We have numerous licensees and it’s a very compelling space for us both on the automotive and 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 system side. We’ve announced Alpine last year.

James Medvedeff – Cowen & Co

Okay, thanks. The new auto OEM relationship can you speak geographically as to where (inaudible)?

Daniel Gelbtuch

It’s a global company, it’s a Tier One global OEM, we can’t give you much more in terms of geography and you have to remember that, the space especially the top Tier OEMs has become very disaggregated and you have system OEMs that now sell to multiple car manufacturer.

So it’s not like you have 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.

James Medvedeff – Cowen & Co

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?

Daniel Gelbtuch

Thomas, you want to take that?

Thomas Eriksson

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, when they’re going to hit the market. We could not tell, everyone about that of course, but right now it’s nothing we can talk about.

Daniel Gelbtuch

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

James Medvedeff – Cowen & Co

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

Daniel Gelbtuch

It’s not this year.

James Medvedeff – Cowen & Co

Yes and the same question on the European appliance OEM.

Daniel Gelbtuch

Thomas, you want to handle that?

Thomas Eriksson

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

James Medvedeff – Cowen & Co

Okay, thank you.

Operator

Our next question comes from the line of Orin Hirschman of AIGH Investment Partners. Please go ahead.

Orin Hirschman – AIGH Investment Partners

Hi good morning. Handful of landing questions, there’s obviously a lot of mention on the call in terms of the law standards on growth in the revenue decline. I mean, there’ll be the improvements you make sure technology etc, is there a chance of winning back that large OEM here?

Daniel Gelbtuch

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. We believe the current cost for using capacitive touch in e-reader is about $10 and 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 well 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 licensee and I think, our odds are pretty good in our favor.

Orin Hirschman – AIGH Investment Partners

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

Daniel Gelbtuch

Thomas, do you want to handle it?

Thomas Eriksson

We’re working on several tablet projects and we have two tablets on the markets. So of course, we are trying to get to into all of this type of tablets and Amazon of course could be one of them.

Orin Hirschman – AIGH Investment Partners

Okay, so again some random question on skipping round. You mentioned that you’re working with one of the developer 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 together with a fact that, you get the relationship with Texas Instrument, is it competitive added Texas Instrument view that relationship?

Daniel Gelbtuch

I’ll take that, so the customer that we’re working is NVIDIA, who’s looking to integrate our optical touch solutions into their referenced platforms, which they can then turn around and market directly to their PC mobile and automotive customers. As we’ve mentioned, we are also talking to the other two PC semiconductor OEMs and we are looking to accomplish the same thing as NVIDIA.

With that said, NVIDIA has taken more proactive and first mover position with us across a number of these end markets including some beyond PC handsets and automotives. 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 One 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 – we partners would look to integrate and help us sell our current optical touch solutions which actually incorporates 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 aggressively.

Orin Hirschman – AIGH Investment Partners

And just to not be fictitious, what’s in it for NVIDIA per se?

Daniel Gelbtuch

Pretty simple, NVIDIA was looking to drive volume of their solutions of their application process under GPUs. Right now the problem with touch is that it is, as it is today. It is way too prohibitively expensive which is might have or they fear will have an impact on the volume of PC shipments in for 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 and the PC space have already been down considering 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.

Orin Hirschman – AIGH Investment Partners

Just two or three more, then I’ll get back on the queue, but just wonders that NVIDIA, this new relationship begin to yield anything from a revenue perspective?

Daniel Gelbtuch

That again, we can’t comment on any specific projects or OEMs, but we’d hope as we said before and we believe that 2014 will be, we will be generating PC related revenues. In addition, we’d 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.

Orin Hirschman – AIGH Investment Partners

Okay and just general look from top down from the company in terms of revenues. With the mention with children’s tablet market, the ramp going on there and some of the other OEMs that are finally beginning to ramp up, be end in the small clip right now.

Is it fair to say that, it’s looked like it is quarter with the bottom under that revenue size?

Daniel Gelbtuch

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 have 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 children’s tablet customer and some automotive would certainly provide some sequential lift off from the current level?

Orin Hirschman – AIGH Investment Partners

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

Daniel Gelbtuch

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

Orin Hirschman – AIGH Investment Partners

Okay and then just last questions. You mentioned about amongst the other technology take you’re working on it, have lost fruition of the smooth revision which to that handset market, it seems to be the way people want to go most of the time. Is that a commercially ready product, is that something in the lamp. Can you tell us more about that?

Daniel Gelbtuch

As we’ve stated, we are in the advance 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 need-to 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 developments in order to address the market itself, but again we think it’s going to be 2014 event.

Orin Hirschman – AIGH Investment Partners

I believe and that’s swarmed with OEM to come play with it?

Daniel Gelbtuch

That’s a good question, Thomas can you answer that?

Thomas Eriksson

We have course development with that and showed it to our customer. So yes, of course and I’d like to have is that this function is been going on for quite some while. We follow this and we will eventually provide both solutions to our PC companies, particularly that’s required or one our glass in front of display and the companies that do not want to 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 our present input to have a better offering for this market.

Orin Hirschman – AIGH Investment Partners

Okay, thanks so much.

Operator

(Operator Instructions) our next question comes from the line Graham Tanaka of Tanaka Capital. Please go ahead.

Graham Tanaka – Tanaka Capital

Hi guys, I think it’d be very helpful if you could just comment maybe Thomas, Dave one of the cost of your new solutions versus existing or anticipated total system cost 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 solutions. Thank you.

Daniel Gelbtuch

Well, at least I’ll start with the PC laptop solution, what we’ve said on the call is that. we believe that our billing material is right now in volumes should be in the $5 range for laptops, that excludes our licensing fee but remember there are licensing average right now. So anywhere between the $1 and $2. So that would equate to total system cost in the mid-single digits.

By contrast our competitors in this space, whether it’s metal-mesh competitors who are quoting 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 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 that we have a roadmap to get the price down to well below $5 for billing material.

So that’s the market I’ll discuss right now, Thomas do you want to handle the other markets?

Thomas Eriksson

I think it’s the same for smaller displays. Of course, it scales down in cost and as we said on call. We’re working on this for very low cost projects that preempted projects by replacing the keys for the touch, 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 solutions but we’re going to have different solutions for different type of products. So if it’s a mobile phone, we will have a different solutions for that, if it’s automotive, you’re going to have for example our new circular touch for steering wheel applications in the car.

The proximity sensing for interacting with the steering wheel and our traditional touch for the sensing console entertainment system and handheld display.

So we believe that our current portfolio sort of address now the whole touch segment but also there are 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.

Graham Tanaka – Tanaka Capital

Right in the tablet and a smartphone space, what are the and well maybe perhaps more specifically in the smartphone space, what is the total cost of the solution versus say, what’s being used now capacitive touch etc?

Daniel Gelbtuch

Yes, go ahead. Thomas.

Thomas Eriksson

For example low-cost current solution, not a single side sensor. We are about $1.5 for wealth of bill-of-materials for 2-inch to 4-inch handsets and we of course, add our licensee depending on the project and it can be different depending on the volumes and so.

With the single side sensors, we believe going forward we could accomplish something close to $1 for a handset. And we work in of course, which is technology and development but we have a clear roadmap, of course to get the customer –for customers down as much as possible, now then of course expanding our license fee, with these estimates.

Graham Tanaka – Tanaka Capital

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

Thomas Eriksson

Comment on the technology, the volumes and so on. So it’d be quite different depending on the application, but we believe that we are way below that in this type of application.

Graham Tanaka – Tanaka Capital

okay, so pardon for asking me the question about the elephant in the room, but what is it then why haven’t the industry embraced the Neonode solution more quickly, if the cost are significantly lower?

Daniel Gelbtuch

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 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 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 overtime, 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.

Graham Tanaka – Tanaka Capital

Thanks.

Daniel Gelbtuch

Thank you.

Graham Tanaka – Tanaka Capital

Actually, am I still on? Hello?

Daniel Gelbtuch

Yes.

Graham Tanaka – Tanaka Capital

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 maybe larger, why could it be larger because it might be applicable now down to the low price printers or because of new customers?

Daniel Gelbtuch

Now what we said was just to be clear is that our existing large OEM that we are dealing with, that we are in advanced stages with, they have pulled us that their internal projections of how many units that they will shift using our technology has gone up. It’s 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 have gone up for 2014, 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.

Operator

Our next question comes from the line of Steve Bowman [ph] of the (inaudible) Capital. Please go ahead.

Unidentified Analyst

Good morning, guys. Thanks for taking the question. Daniel, just a question of clarification for you first on the TC 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?

Daniel Gelbtuch

Yes, we are expecting actually royalty revenue.

Unidentified Analyst

Okay, great. Thank you for that and then regarding the push out of the printer OEM in 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 at breakeven in 2013, is that still your expectation?

Daniel Gelbtuch

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 are starting to ramp. We hope that, we can there is very little visibility because remember these are Greenfield projects, Greenfield customers in Greenfield markets.

So our visibility is somewhat limited that said, we believe that there is a (inaudible) chance that we will break even on a quarterly basis in the back half, but not for the full year.

Unidentified Analyst

But not for the full year. Okay and then I wondering if you guys can just a little bit more generally about sources of liquidity looks a little bit thin. Obviously it would be incorrect to project the first half cash burn into the second half, can you just help us with how you guys think about your liquidity?

Daniel Gelbtuch

All right, so what I’ll say is very simple. As 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 and 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’d be 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 to major PC projects etc we are not going to hold off and 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.

Unidentified Analyst

Great, okay. And then finally I guess just a 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 that you guys.

Daniel Gelbtuch

No that’s the function of the orders and legal that they have to put that in, that’s where they come in. I believe is one thing, orders and legal they have to make sure they put in the correct language.

Unidentified Analyst

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

Daniel Gelbtuch

Thanks.

Operator

Our next question comes from Jerry (inaudible) of Park Avenue LLC. Please go ahead.

Unidentified Analyst

Hi good morning, guys. Very exciting news so far we’ve been hearing, you didn’t really extend touch on the IP infringement. I know that you had it a company that was exploring as an options, what can we look for in future regarding the IP infringement.

Daniel Gelbtuch

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 the DJ [ph] 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. it’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.

Unidentified Analyst

Okay, I assume you can’t comment. But are you continuing to explore pursuing the infringement.

Daniel Gelbtuch

We can’t say anything along those lines, but we were definitely exploring every options toward monetizing our past and why we’re expanding 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.

Unidentified Analyst

Okay, thank you.

Operator

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

Thomas Eriksson

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

Operator :thank you. This concludes Neonode’s second quarter 2013 earnings conference call. You may now disconnect and have a great day.

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