Neonode's (NEON) CEO Thomas Eriksson on Q1 2014 Results - Earnings Call Transcript

May.12.14 | About: Neonode, Inc. (NEON)

Neonode, Inc. (NASDAQ:NEON)

Q1 2014 Results Earnings Conference Call

May 12, 2014 10:00 AM ET

Executives

Daniel Gelbtuch - Senior Vice President, Corporate Finance and Investor Relations

Thomas Eriksson - Chief Executive Officer

David Brunton - Chief Financial Officer

Analysts

Mike Malouf - Craig-Hallum

Cody Acree - Ascendiant Capital

Rob Stone - Cowen & Company

Orin Hirschman - AIGH Investment

Graham Tanaka - Tanaka Capital

Drew Bookman - FNY

Operator

[Started Abruptly]

… 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.

Daniel Gelbtuch

Thank you. Welcome and thank you for joining us. On today’s call, we will review our first quarter which ended March 31, 2014, we will review the 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, guide, confidence, targets, projects, other similar expressions typically are used to identify forward-looking statements.

These forward statements do not guarantee the future performance that may involve or subject to risks, uncertainties and other factors that may affect Neonode’s business, financial position and other operating results, which include, but are not limited to the risk factors and other qualifications contained in Neonode’s annual report on 10-K, quarterly reports on 10-Q and other reports filed by Neonode with the SEC to which your attention is directed.

Therefore, actual outcomes and results may differ materially from what is expected or implied by these forward-looking statements. Neonode expressly disclaims any intent or obligation to update these forward-looking statements.

At this time, it’s now my pleasure to turn the call over to Thomas Eriksson, Chief Executive Officer of Neonode. Thomas, please go ahead.

Thomas Eriksson

Good morning, everyone, and welcome to the call. To start with, I’m very pleased to announce that Neonode just completed a $10 million unregistered financing loan with an institutional investor. We did this finance in order to fully capitalize upon our growing opportunities and to strength our balance sheet, so that we can optimally address the demand of the biggest companies in the world.

As you can imagine, our opportunities and prospects have extended considerably since our zForce Plus technology received Windows 8 Certification in early March and HP printers with Neonode Touch have been introduced in the market.

I’m also very pleased to announce that Hewlett-Packard has finally released into retail its first printers incorporating our touch technology. We are very excited about this particular milestone, which finally demonstrates the first fruits of our two years of co-development.

Getting into this type of cost-sensitive application really shows the flexibility and maturity of our technology, which is now challenging resistive and capacity touch on costs as well as performance.

I have tested these large printers and I am extremely pleased will how well they work and how Neonode Touch delivering a new level of user experience and responsiveness in printers. I recommend you all experience our technology in these fantastic products from HP.

On the PC front, our Windows 8 Touch Certification in early March opened the doors for several new opportunities for Tier-One PC OEMs. These OEMs are looking to integrate our touch and proximity sensing solutions into notebooks, monitors, all-in one computers and PC peripheral such as keyboards and mouse tab.

Our customers have told us that our technology gives them a much lower bill of material that competing technologies can offer and improve user experience and new opportunities for differentiation.

Our latest technology called zForce Air build upon our Single Side Sensor technology and the use to build slim low cost keyboards that integrate both physical and visual mouse pads.

We and our potential customers are particularly excited about the proximity sensing and keyboard opportunities as our zForce Air solutions address a huge market that’s hungry for innovation and improved user experience.

On the automotive front, we continue to work with the major automotive OEMs, while our sales team continues to add OEMS and Tier-One supplier our expanding list of auto customers.

In close corporation with our auto customers we have enhanced and expand in our offering now support new in car features such as steering wheel sensing, door activation sensors and air gestures control functions.

This quarter a number of products have been successfully concluded, aimed for productions starting late 2014 or early 2015. The first factory installed systems we start shipping later this year and we will see at least three major launches during 2014.

In the past 12 months, Neonode has invested great resources and focused on achieving not only Microsoft Windows 8 Certification, but also improving our core technology for diverse range of applications.

Over the next 12 to 18 months, we expect revenues to be mainly driven by PC and PC-related devices, printers, wearables, automotive and other consumer electronic applications and devices.

Neonode’s focus is to become the preferred touch provider in PCs, printers and autos and to create new markets such as wearables and touch-enabled cases. Neonode is creating greater reasons to add touch to wider range of devices, which will generate additional royalty revenue.

We continue to invest in our IT and have intensified development of our touch proximity and user interface solutions, further expand our patent portfolio. To date, we have 37 patents issued and have 93 patents pending, up from 27 and 87 last quarter.

Finally, I am announcing the upcoming retirement for my dear partner and friendm David Brunton. Who has been our remarkable CFO for the last eight years. While we’ll be sad to him leave position at Neonode we want to assure investors that this orderly transition will be further bolstered by ongoing consultancy.

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

David Brunton

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

For the first quarter ended March 31, 2014, revenues increased 100% to $1 million, compared to $500,000 for the first quarter in 2013. Our revenues for the quarter included $900,000 of licensing fees and $100,000 of NRE fees, compared to $539,000 of licensing fees and $9,000 of NRE fees for the first quarter of 2013.

We previously reported that prior to October 16, 2013 we recognize license fee revenue in the period in which our customers distributed their products. Since that date, we recognize license fee revenue when we receive our customer sales report by the last day of the quarter.

As a result of this change, $700,000 of license revenues related to the quarter ended December 31, 2013 was recognized in our first quarter of 2014. The majority of the license fees related to customer shipments in the first quarter of 2014 will be recognized in our second quarter when we will receive the customer reports.

Our gross margin was $848,000 compared to an increase of 59% compared to $532,000 for the first quarter of 2013. Keep in mind that license fee revenues 100% gross margin, so as our license fees become a larger portion of our overall revenues, the gross margin will increase.

Our product research and development expense increased slightly to $1.8 million, compared to $1.6 million for the first quarter of 2013. This increase is due primarily to an increase in staffing and an increase in our new technology, research and development activities. Our R&D department has 36 employees compared to 29 for the same period in 2013.

Our sales and marketing expense increased 25% to $1 million, compared to $800,000 in the first quarter of 2013. This increase has been driven almost exclusively by an increase in travel expense.

And our general and administrative expense increased 18% to $2 million from $1.7 million in the first quarter of 2013. This increase is due primarily to an increase in stock option expense.

Our net loss was $4 million or $0.11 per share, compared to a net loss of $3.6 million, or $0.11 per share in the same quarter last year. And as of March 31, 2014, we had cash of approximately $6.2 million, plus $700,000 of accounts receivable and working capital of $3.1 million and our shareholder equity is $3.5 million. And as of March 31, 2014, we have 37.9 million shares of common stock outstanding.

On Friday last week, we signed a definitive financing agreement for $10 million. We will issue 2.5 million shares of common stock plus an 18-month warrant on additional approximately 2 million shares of stock that will raise an additional $10 million if exercised.

Now I would 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 our markets that would allow the company to further accelerate growth in 2014 and beyond. Our prospects in both PC and printers continue to expand, particularly with our recent milestones of Windows 8 Certification and initial HP printer shipment.

In addition, our proximity sensing technologies are being integrated into our customer peripheral display units and other optimal application and are gaining interest from major OEM.

This concludes the 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.

Mike Malouf - Craig-Hallum

Hi guys. Thanks for taking my question. I wonder if we can circle back to the PC side. And if you could just give us a little bit of color and update on how those discussions are going. I know that last quarter you talked about being very far with regards to discussions and I’m wondering if we can get an update on that. And with that answer, could you give us a little bit of a sense of the timing and how long it would take from a signed design win to actually seeing products on the shelves? Thanks.

Daniel Gelbtuch

All I would say it is very, very little we can say. As you can imagine the discussions are very sensitive. I will say that we’re very far down the road with the number of OEMs. And we’re talking to them about a wide range of products, all-in-ones, monitors, laptops even peripherals that include keyboards and virtual mice et cetera. And we’re in -- significant -- we’re in a bunch of significant evaluation studies.

But this is not just getting to know you, we’re down the road significantly but we will make sure that everyone is well aware of what happens, when it happens. So there’s little I can say at this moment. I will say we’re very much down the road and will be in touch with everyone when it happens.

Mike Malouf - Craig-Hallum

Has this gone slower than you expected from the Windows 8 certification or is it just taking a little bit longer or is it unplanned?

Daniel Gelbtuch

No, this is definitely on plan. As you can imagine, the companies we’re dealing with are very large, very large companies with multiple groups and multiple people that have to be made happy. You have ODMs that are sitting in the middle of this equation, multiple ODMs. You have Industrial Design people that are involved. You have engineering, that’s involved. You have all different considerations and things are actually progressing have at a pace that we expect that are actually slightly better in certain respects.

Mike Malouf - Craig-Hallum

Okay, great. And then I’m wondering, maybe this is a good question for David. When you take a look at how you’re accounting for the revenue now, you must have a lot of visibility on the second quarter just given that everything kind of moves into this quarter. Can you give us any kind of sense or visibility into that second quarter?

David Brunton

Not at this point. We’re not really going to give projections or anything and I would say probably one of the biggest items as Thomas mentioned the HP printers and all of that. And we haven’t received the reports yet from them. So that’s still a big unknown although we have some indicators. But at this point, we’re not really talking about future projections. Sorry.

Daniel Gelbtuch

As you can imagine, just to expand upon that, this will be -- this quarter will be the first quarter that we’d be getting revenue from -- recognizing revenue from HP. And the first royalty report will be coming in any moment. It should not be a trivial amount of money. However, as you can imagine the first go-around is getting the processes in place and getting the right persons to report the right number, that is always a learning curve.

And so we expect that this will be a little more fluid going forward. But we’re in the first quarter of royalty reporting. So it could happen any day now. We’re not going to be updating people yet on where we think the numbers are going to be or what the number actually is. But we hope going forward, there’s a decent chance we would be able to provide guidance for this.

Mike Malouf - Craig-Hallum

Okay. And you fully expect that to happen this quarter, correct?

Daniel Gelbtuch

Absolutely.

Mike Malouf - Craig-Hallum

Okay. Thanks for taking my questions.

Operator

Your next question comes from the line of Cody Acree with Ascendiant Capital.

Cody Acree - Ascendiant Capital

Thanks guys for taking my question. If we could go back to Friday’s financing and just -- maybe you could spend a minute talking about the deal and why you chose to raise funds through that vehicle versus maybe a more open market secondary?

Daniel Gelbtuch

Well, there are number of considerations we had to deal with. We have obviously market pressures that were unrelenting, that’s number one. Let’s be mindful of that. Number two, we had a situation where we have a lot of activity coming at us from a number of segments. Again the PC segment is very active, very intense situation for us right now.

The printer market is also stepping up the heat as you can imagine when you have our flagship customers starts releasing product or showing it off. And we take out a press release that automatically gets everyone else to perk up. And we’ve had serious amount of attention in that segment.

In addition, we have some significant attention coming from the other segments like or some of emerging segments like Proximity Sensing, our case and peripheral solution. So there is a lot of opportunity that are presenting themselves, particular in PC. We want to be able to adequately address those numerous opportunities. They require a fair amount of hands-on and labor-intensive development and travel et cetera.

Even prototyping is a very big expense that we’re working -- that we’re at the key function that we have to accelerate internally. So we took the opportunity to take or to accept this financing in light of the situation, in light of the cleanliness of the deal. The terms were really clean, shareholder-friendly in our opinion and it’s rather than waiting on too long. We just like to take this now.

Cody Acree - Ascendiant Capital

And maybe David for you, I guess, with the new funding then, how does that change your staffing plans? Daniel talked about projects needs and just what are your expectations for OpEx with that increased level of activity?

David Brunton

I don’t think it actually changes our staffing plan. I think we have plans in place already to take care of all these things. None of these stuffs that Thomas or Daniel has been talking about is unexpected or off moment. So what it really does is it helps us strengthen our balance sheet to equate when these guys start looking at us.

And I start talking to their CFOs and their people who are doing their vendor qualifications. It basically takes it off the table the cash side of thing. And so from my perspective that’s a tremendous advantage for us. And the staffing, I mean, we’re already planning to do that. And so that doesn’t change. It just makes us little more comfortable.

Daniel Gelbtuch

And you have to remember we’re talking with some of the largest companies in the world who we’re negotiating rates and royalties with. And they’ve also taken a very, very deep look and deep dive into our company. I think that it also strengthens our bargaining position at that point. So a lot of these companies are doing the due diligence. They want to make sure that we are in good shape financially and also we want to have the ability to not get pushed around in a negotiation for royalty.

Cody Acree - Ascendiant Capital

And David, with your plans, you can give us any color on your thoughts on OpEx for the rest of the year?

David Brunton

Not, right now. I mean, well, let’s see where this shakes out in the future over the next, probably next conference call.

Cody Acree - Ascendiant Capital

Okay, good. And then lastly just on the PC side, you have obviously a number of these engagements. Any help on the kinds of form factors that you might expect to be in the market first?

Daniel Gelbtuch

As far as form factors, I mean, we’re looking at -- we’re talking about literally everything, ranging from all-in-ones in terms of very large size of 227-inch monitors is also being discussed in a very much interested -- significant amount of interest in that space and going all the way down to high-volume laptops in the 12, 13, 14 or with the 15.6 range. So we’re talking about the spectrum. We’re talking to the wide range of customers and we’re talking to multiple groups.

Cody Acree - Ascendiant Capital

And I’m sorry. I did have one last thing. Daniel, thank you for that. I guess, to the best of your knowledge, do you get a sense for any of the other competitive ITL alternatives that your vendor may also be working with or do you think this is more of your game to win or lose here?

Daniel Gelbtuch

I think that it depends on the applications. It depends on the vendor involved. I think that there is some appetite with the Taiwanese OEMs to deal with capacitive as it stands, the ITL capacitive. I think there are some customers -- I’m talking about really for laptop sizes. And then there is some appetite, I believe, for some metal mesh but ironically, it sounds like the metal mesh suppliers might be those that are in Asia.

And then the larger sizes, I think we’re up against solutions that are camera based. And I think that’s where we have a very distinct advantage. We have a distinct advantage in terms of cost and price at all form factors. But I think our biggest advantage is going to be, where we have a significantly lower bill of materials is in the larger sizes.

Cody Acree - Ascendiant Capital

Okay. Thank you guys.

Daniel Gelbtuch

You’re welcome.

Operator

Your next question comes from the line of Rob Stone with Cowen & Company.

Rob Stone - Cowen & Company

The comment about providing an update on the PC business, obviously, intense investor interest in this process. At what stage, do you think you’ll be able to give some kind of definitive update? Is this at the time of signing a design win or do we have to wait until products are actually in stores before you are going to be able to give us concrete information?

Daniel Gelbtuch

I think that it’s going to be -- I think your initial haunch is probably correct or we hope it’s correct, is that they will be in stages. They will be -- their customers that will be giving us statements of work which is defined as a design win. There will be customers that will be giving us as well will be signing contracts, terms and conditions. So I think that there is different stages and of course, product rollouts will be hopefully announced as well.

And I think that even if we have customer that would be inclined to give us significant or substantial NREs or even repayments, we would hopefully be able to indicate as such. But at this point, we can’t give you any more color as to who and what the timing is because of the sensitivity of the conversations on that we’re in right now.

Rob Stone - Cowen & Company

Sure, that’s reasonable. Thomas, you mentioned a number of things going on in the Automotive segment. And at least one thing likely to be shipping this year and a range of different solutions including steering wheel, doors, air gestures et cetera. Can you give us a sense of which application and version of your technology is likely to be first out in shipping products?

Thomas Eriksson

Yeah, it’s conventional infotainment touch solutions for 7 to 9 inch displays. These are the first that’s coming out. And we talked about air gestures and using steering wheel application is something we have in development with customers. So it’s something we are working on. So, first out to the market will be -- you can say conventional touch system.

Rob Stone - Cowen & Company

Okay. And one segment that you didn’t specifically mentioned in the prepared remarks, but where I thought the single-sided sensor might have a good application, was in consumer white goods. Any update in that sector?

Thomas Eriksson

Yeah. We are actually working with customers using the single side sensor. We actually call it zForce Air from now. But basically that is the sensor that sits on just one side of display compared to a traditional solution, where you have four sensors on all sides of the display. So you can make it much-much more cost effective.

So, yeah, we are looking in that to grow into more modular solutions, so our customer can buy more ready module with our partners. So while that is one application but also you have several things like wearable, like watches, iPhone cases, or cases for mobiles phones, keyboard applications where you can put the mouse pad on top of keyboards and things like that. And that’s what Daniel talked about the PC accessories. So we can sort of touch, enable and we started to see that technology, so it’s a little different.

Rob Stone - Cowen & Company

Great. A couple of housekeeping questions for David. One is -- there was one large customer mentioned in the press release, I think 37% of the licensing. Can you say what that was for?

David Brunton

Yeah, that was LeapFrog.

Rob Stone - Cowen & Company

Okay. And can you provide any more color on the other asset item projects in progress?

David Brunton

Yeah. That’s where we capitalized expenses related to NRE projects, so all of those development projects that the future revenue is sitting down in our deferred revenue account. So, I think we have about $1.3 million worth of NRE deferred, which is related to those -- the work in progress. So when we recognized revenue from the NRE, when the project is completed, we actually move the expense out of the projects in progress and move it over to cost of goods.

Rob Stone - Cowen & Company

Can you give us any sense of the volume of NRE projects that are in those two categories at the moment in terms of number of projects?

David Brunton

Yes. I want to say it’s around 21 projects at this point.

Rob Stone - Cowen & Company

Great. Thanks very much.

Operator

Your next question comes from the line of Orin Hirschman with AIGH Investment.

Orin Hirschman - AIGH Investment

In terms of broadening out within printers itself, what can you tell us at this point in time with your big customers as well as any other potential customers? It is a high volume business.

David Brunton

Well, again, I think we’ve mentioned in the past that we’ve had -- we have a number of design wins with our printer customers. We’ve announced those for the years and as we’ve mentioned in the past, the design cycles for printers is a relatively -- it can be an extended period. So we have plenty that’s on its way and at the same time, our ambition is to capture the rest of the printer market. We are getting a fair amount of interest from other customers. And I think that the odds look very good in our favor.

Orin Hirschman - AIGH Investment

Should we be surprised if we see you with additional printers from your existing big customer and/or additional printers in this calendar year?

David Brunton

I hope so. I hope this is not the first three and it’s not the only three, that’s my point.

Orin Hirschman - AIGH Investment

Okay. Mean, do you have reason to believe that there are further designs in process?

David Brunton

I didn’t understand what your question is.

Orin Hirschman - AIGH Investment

Meaning you keep mentioning additional designs. Do you have good reasons to believe that those designs are actually in-design progress in terms of getting to the end product on those additional designs?

David Brunton

Yeah, I would say that there is pretty good chance on those.

Orin Hirschman - AIGH Investment

Okay. And last question on the printer market, could the printer market by itself be enough to turn the company profitable?

David Brunton

In theory, sure. The printer market is a 110 million unit market. I believe that HP was about $144 million this past year. I think Cannon and Epson are in 20s and Lexmark in the lower, I think the higher single digits. So certainly in aggregate, the printer market should be more than enough, if we capture the majority of it, which is what our ambition is and I see no reason why we can’t, that should take us profitable in and of itself.

Orin Hirschman - AIGH Investment

Okay. Thanks.

David Brunton

Again, I just can’t give you the timeframe, that’s something we can’t guide you to.

Orin Hirschman - AIGH Investment

Okay. Just to follow on that, are you aware of any competing new technology at HP at this point?

David Brunton

No. I think that is a company we’ve done very well, with a partner we’ve done extremely well with and I think that the level of interest that we are getting from everyone else and also the price points and the advantages that we offer, I think that there is -- it’s really a resistive replacement situation. I don’t think that we have much to worry about.

Orin Hirschman - AIGH Investment

Okay. Great. Thanks.

Operator

Your next question comes from the line of Graham Tanaka with Tanaka Capital.

Graham Tanaka - Tanaka Capital

Hi, guys. Just to try to get a little bit better feel for, I think those were the great answers you gave us on the printer market. But what level of breakeven do you see for the company in the next few quarters and when might the company be able to reach breakeven profitably breaking the cash flow? Thanks.

David Brunton

I think on a cash flow basis, we are running -- assuming cash basis, our OpEx is running at about $1.2 million to $1.3 million a month. I have no reason to believe that’s going to dramatically change unless again, we get some significant projects that forces the changes. But right now, again, the ranges of revenue that’s required to breakeven on a cash basis will be somewhere between $3.6 million to $3.9 million a quarter.

Graham Tanaka - Tanaka Capital

And what would you have to do to reach that, if you are looking at both -- all of the different markets that the company is in? And is it expected to be maybe in the fourth quarter, third quarter?

David Brunton

No, we can’t tell you which quarter it’s going to be. And again, we are following our plan. The businesses -- the various businesses that we would need to get us to breakeven would be a combination of printers ramping up as expected. e-readers, we have some business that were hopefully going to be incremental business that we are going to be recapturing or incremental market share, we are going to be recapturing in the second half hopefully. So the e-reader business should be -- hopefully, give us a boost and in terms of the children’s tablet market, that’s also something that’s helping and if we can some auto revenues, that would also help as well in getting to that breakeven mark.

So, I think those were the four major markets I would think that would be contributors to breaking even. And then, of course, you have variables or markets like peripherals, cases, et cetera, which have a relatively quick turnaround and of course anything in PC as well that would have a quick turnaround would be an incremental booster for our profitability. But right now, if we get the profitability, our plan is to do so, hopefully, with relying on printer, children’s tablet, e-reader and auto.

Graham Tanaka - Tanaka Capital

Okay. Now that the PC, you just mentioned there could be some areas of quick turnaround. Why would that be quicker than printer?

David Brunton

Well, printer, we’ve been as we’ve indicated in the past, printer we were winning already back in 2012 and printer actually has a much longer design cycle on a relative basis relative to PC. Each PC segment has its own design period or a relative design period. So for example, a monitor, which has very little intelligence in it and is an independent and relatively dumb device that would have theoretically the quickest turnaround that to be a much shorter turnaround on a relative basis. In addition, retrofit design for PCs, for laptops, I think is also something that could have a relatively quick turnaround. If we were able to retrofit into an existing laptop and squeeze our solution in that would also theoretically have a quicker turnaround.

And then finally, all-in-one desktops, which again is a combination of being retrofitted and a monitor type of size and having little more real estate to work with that could also theoretically have a quicker turnaround. In general, design-up for fee for laptops is going be the longest within PC. As you well know, PC OEMs are refreshed products. 12, having once every year on average and they have mid-cycle upgrades, which are really more modular in nature. But assume once a year, laptops get refreshed, if you pay attention to the printer market, printers get refreshed roughly every two years give or take. Auto is roughly 3 to 5 years. In the case of Children’s tablet, that’s probably once every two years. Each market has their relative design period and testing period. And that usually correlates with the lifetime of the product itself.

Graham Tanaka - Tanaka Capital

And on the auto side, is that -- what kind of volumes are we talking about? Are we talking about individual car models with small unit volumes at first before you get to the larger markets, or is this something that could be lumpy and larger? Thanks.

David Brunton

Well, it could be -- its all shapes and sizes. The nature of the auto business, which makes it very challenging and also a great opportunity, is that it’s a very fragmented business in terms of Tier One suppliers. So you have in the top 20 Tier-One suppliers, all brand names. You have a very tight market share for all of them.

So getting into the Tier-One suppliers is something you have to conquer one by one and then they go ahead and they try to kick off business at the auto OEMs, which is again a very fragmented model by model, region by region business. So, again, the key is to get a view at major OEMs and that hopefully builds up on it. Again the -- our plan, again, is to get -- is to capture big portion of the automotive market, but I believe it starts off in bits and pieces, and that’s what’s happening so far.

Graham Tanaka - Tanaka Capital

Back on the PC side, you gave us great answers on design cycle times and the differences, and I appreciate that. I wonder if you could comment on the cost benefit analysis for each of the major five or six markets. My understanding is that PCs have of course bigger sizeable and valuable screens and then so higher ASPs, but is the cost savings potentially larger for the OEMs to go with this touch?

David Brunton

So it’s dependent on the markets. So as it relates to monitor, monitor large screen sizes where the real competition is not going to be ITO and it’s really not going to be anything but optical camera-based -- camera-based optical. Camera-based optical usually from what we understand is something that retails for more than $2 of diagonal inch and something that we hope to be considerably much, much lower then.

In the case of laptops, that’s a moving target that we’re up against ITO -- traditional -- excuse me ITO capacitive and metal- mesh capacitive of the various flavors. We believe what we understand that the metal-mesh and the ITO is still in the about 50 per diagonal inch range. It’s still somewhat more expensive than where we could be.

In addition, what gives us an interesting edge or interesting value proposition is that since we are not selling anything specifically, we are licensing. We are only looking to protect our licensing rates, royalty rate. And we are at the same time very much motivated to keep the price coming down. So we have a very good price or cost curve that we help our OEMs and our customers take advantage of while keeping the royalty protected. So there is a roadmap to getting lower cost over time as opposed to the people that we’re competing with are ultimately selling an endpoint product, which in order for them to lower the ASP, they have to take a hit on profits.

Graham Tanaka - Tanaka Capital

I’m just wondering, if there is a way for us to understand how the cost benefit is that you are saying significant or much greater cost savings in the camera-based optical etcetera. What are we talking about half the cost, two-thirds of cost? What kind of percentage cost savings could there be?

David Brunton

Well, again, I can’t give specifics and also -- but I would say that I used to be thinking about half the cost that we could be better over time, I hope definitely, that’s something that we’re going to improve over time. But I would be thinking of probably half the cost is the way to think about large and large applications. In addition, just there are other benefits that we have that we bring, so good example would be, for laptops or for anything, for all in ones, we don’t require any front glass, we can’t work with front glass -- so front glass applications, but glass, we have been told can add as much as $10 a unit in terms of excess cost. Certainly, it adds weight in a laptop which is something that’s not desirable. So we do not require anything on the front of our screen or on the front of our touch solution. We don’t have to be under a piece of glass and that also add the significant benefit in terms of weight, in terms of lack of glare.

Graham Tanaka - Tanaka Capital

Thank you.

Operator

Your next question comes from the line of [Mike Davis with Millennium Hedge Fund] (ph).

Unidentified Analyst

Can you address the short seller that can -- the company right now that mentioned IR outdated technology that you guys are in?

David Brunton

There is -- someone is -- one of the shorts is complaining that our technology is outdated, I think that’s absolutely ludicrous. We have as you can see in the numbers of patents that we have been filing and getting accepted. That by definition should be telling everyone that -- and again there has been some significant growth in the patent numbers and patents are getting filed and addressed, they are in the -- that are getting. We are moving on the fast track with lot of these patent applications, and again we have over 37 patents that are issued as of last quarter. So patent, old technologies don’t get patented. That’s number one.

Number two, in addition old and outdated and workless technologies do not get introduce into high end or mid range printers from a Tier-One and world class leading printer company. In addition, there is no other optical solution or optical infrared solution using type of low cost technology, that’s getting a Windows 8 certification. So I think there are so many proofs of the fact that our technology is extremely relevant, is extremely durable. We have 20 million units that are -- excuse me our customers have sold over 20 million units using our technology without return.

So again, it’s not an outdated, it’s not a flimsy, it’s not a weak technology, and we are getting designed into everything from in-flights GPS systems for aircraft, which is a super-high quality requirement. We have patent protection on all our technologies, which keeps increasing. That means it’s also new and relevant, otherwise we would not be getting all these patents issued. And we have world class products coming from world class OEMs. They obviously believe that the technology is very relevant and very new.

Unidentified Analyst

Right. Can I also address a couple other things? You mentioned Amazon, are they back yet, or you can’t discuss that yet?

David Brunton

We can’t comment on Amazon per se. We have indicated in the past that they are a licensee. They were a big customer at one point. And all I can say is, is that we have and we said this in the past that we have new wins and new -- in the eReader space that we hope to be rolling out sometime in the very near future and that should hopefully get back our market share that we lost two years ago.

Unidentified Analyst

When do you think you will see announcements with that?

David Brunton

We could not say, but these are hopefully again in the second half of this year.

Unidentified Analyst

All right. Any other…

David Brunton

If I were you, I would look back and see historically when products get announced in this space and that might be a good indicator for you.

Unidentified Analyst

Okay. That’s great. Any other opportunities that you discussed about LG and Samsung that are your Korean partners, is there anything there? We haven’t heard anything in a while.

David Brunton

Yes. So, again, what we said in the past is that we licensed to two - the two Tier-One OEMs in South Korea. Products did not automatically flow. Generally speaking, design cycles could be anywhere from a year to three years depending on the product. We cannot talk specifically about those customers per se, but we do have projects going on in that region and we hope to keep you updated as they roll out.

Unidentified Analyst

All right. And anything you could discuss about the Apple car play connection?

David Brunton

That we cannot talk about. I think you have to see it for yourself and make your own judgments based on what we put on our website, but we can’t talk specifically about that.

Unidentified Analyst

Okay. Any other comments regarding unusually high short position that’s in the company right now?

David Brunton

Again, there is very little I can say about that I think that a lot of the short position was predicated on the fact that we -- there was a perception we might have had a cash issue which hopefully we’ve taken off the table. We like the discussions surrounding Neonode to be products technology, not on cash position or what we are going to have to invest in to get into new markets etcetera. And so hopefully, we’ve taken that issue off the table.

Our CEO has taken off some of the issue about insider selling because he’s been buying recently. We’ve taken off the issue about getting into the PC space. We are having high quality product by getting Windows 8 certification. We’ve taken the issue of having a no-name printer customer that we announced or that we are started intimating that we had two years ago because that printer customer is in production and you could find the products in retail right now. So we are trying to take as many of the short issues off the table and I welcome your input. What else the short -- what other short issues need to be discussed let me know?

Unidentified Analyst

Okay. Thank you very much.

Operator

Your next question comes from the line of Drew Bookman with FNY.

Drew Bookman - FNY

Daniel, how are you doing?

Daniel Gelbtuch

Hi.

Drew Bookman - FNY

Question is, when you all had a conference call, I believe it was with Aegis, although I am not sure, it seemed as if you’re closer to getting to your goal line. Has anything changed from the month or so ago or a few weeks ago when you had that conference call until now?

Daniel Gelbtuch

Nothing has changed. Things are progressing as expected or as I mentioned slightly better than expected. But what you can’t -- the part that everyone asked to appreciate which again is difficult is that we are dealing with major customers in the PC space. These are very large companies, who do not move willy-nilly overnight. There are processes that have to take place, negotiations that take place. It just doesn’t happen at the pace that everyone who wants it to happen, but that doesn’t mean that the intensity has dissipated. And on the contrary, it’s only gotten more intense. So progress has been phenomenal. We are very excited. We are very bullish about it. But at the same time, we just don’t have the ability to a guide for something that hasn’t happened yet, and therefore we have to plan accordingly.

Drew Bookman - FNY

Is there a drop dead date in your mind for recognizing revenue in the third or fourth quarter of this year versus Neon being a great story for next year?

David Brunton

For which markets are you talking about?

Drew Bookman - FNY

PC, I mean, I understand you have printers and LeapFrog and whatnot, but what I’m interested in is laptops and PCs?

Daniel Gelbtuch

So, again, we can’t comment specifically on PC products because again, A, we don’t have anything to talk about, it’s all confidential, and B, we haven’t announced anything. So, what I can tell you is, is that…

Drew Bookman - FNY

Well, let’s assume, like from the tone of the conference call, I’m assuming that everything is very close and you are on the cost of getting some either, A, fantastic design wins with NREs and with potential money upfront. So that’s what you guys are waiting on? Is there a drop-dead date, meaning that if you get them this month, next month or if it comes sometime in the summer, you wouldn’t be able to recognize any revenues for the fourth quarter, that’s specifically asking?

Daniel Gelbtuch

Yeah. I understand your question. What I can tell you is that the current negotiations are very sensitive and we’re working on, are dealing exactly with that and it would be very hard for us to comment exactly on timing.

But I would say is there are certain parts of these businesses which have quicker turnarounds that theoretically could happen sooner than people might think. At the same time, for the large part, we’re really going forward is for future wins for the, 2015 and beyond.

So, again, anything is possible, especially markets with quick turnaround like monitors and all-in-one might have the quicker turnaround. Retrofits also theoretically have quick turnarounds. But right now this second we cannot comment on specifics.

Drew Bookman - FNY

Okay. That’s fair enough. Is it…

Daniel Gelbtuch

Nothing has changed, all has change is that the intensity has stepped up.

Drew Bookman - FNY

Now is it true that with the Microsoft certification, they actually changed the terms -- changed the criteria for certification and that wasn’t from Neonode asking for the change or was actually from potential customers?

Daniel Gelbtuch

Well, there have been some changes, I really, I don’t think I can go into the details of the changes or the relaxation of some of the standards.

Drew Bookman - FNY

That will be better, that would be a positive for you right?

Daniel Gelbtuch

That will definitely be a positive. If you recall, the biggest challenge that we had, all challenge was that we were initially two finger solution. The big development we made of last year was going to a 5 or 10-finger multi-touch solutions. So, the -- our ability to address the wider market especially with standards were to change that would help us.

Drew Bookman - FNY

Okay. I appreciate, Daniel. Thanks.

Operator

Your next question comes from the line of [Lynn Degallo wit PPF] (ph).

Unidentified Analyst

Thank you taking my call. I have a couple questions for you. One, I’m still struggling with the printer projections. You must have some type of an idea of the orders coming in and the turnaround time for the printers? So I’m struggling with that?

The other thing is the -- is there any update on the options for the patent portfolio, especially in light of the recent trials with Apple and Samsung?

David Brunton

So, we obviously do have projections internally and we have a fair amount of visibility that keeps getting better and better from our big printer customer. However, we can’t necessarily share that with everyone. That’s somewhat confidential. That’s number one.

At the same time, we are hoping to eventually provide guidance especially since we’re working on a schedule or royalty recognition schedule that sort of helps us in the future, announce guidance.

However, since HP has not gotten us their first royalty report, there’s nothing really to guide today. We can’t speculate on something that we haven’t received yet. So, we think that that will improve the speed and the efficiency of those reports will definitely improve going forward and hope we will be able to guide for that. But at this moment, we can’t. We do, however, have some idea of what we’re expecting, of course this year but we’re not going to guide yet until we’re more comfortable with what we see.

Again, this is the first maiden report. So, I think it would be a little presumptuous -- we would be little silly, if we were to go ahead and start guiding before we got it. And regarding IP, IP is something that we are very serious about. We are working on very diligently to find the right option in terms of monetization or doing something with or not doing something at all. However, as you can imagine, this is something that is extremely sensitive and we have to make sure the public is informed on an absolutely need to know basis because that could seriously compromise our IP, if we were just to start giving ideas before we do something.

Unidentified Analyst

So there’s no timeframe in terms of letting us know what’s going to happen with that period?

David Brunton

Again, what I can tell you is that something we’re -- it’s on the top of mind, it’s on the top of the list to take care of, but we cannot say anything until it happens. Again, we’re not dallying on this. This is something that is we are working on diligently but the Board is still working on diligently. We’re not ignoring but we would be self defeating ourselves by announcing something ahead of the actual event.

Unidentified Analyst

All right. Thank you.

Operator

(Operator Instructions) We have a follow-up question from the line of [Mike Davis with Millennium Hedge Fund] (ph).

Unidentified Analyst

Follow-up. What can you discuss about the cell phones and your technologies? Is there any out there that are currently being used or is that in development?

Thomas Eriksson

Yeah. It’s still in development. We have projects active in that field. It’s mainly low cost to medium type applications. It’s also taking more time than expected and I really can’t say anything about that right now. It’s eventually - it’s up to our customer launch plans for that type of product.

Unidentified Analyst

Great. Is Sony using your waterproof technology in their cell phones yet?

Thomas Eriksson

No. They don’t. They should however because our technology actually work underwater and of course, if you make a waterproof device, they will be nice to use the touch screen underwater. So we have solutions for that for mobile phones in fact that customers are looking into, including wirewalls as well, where it’s also important.

Unidentified Analyst

And any idea about the case manufacturers and how far you are away from signing a deal with any of them?

Thomas Eriksson

There’s a lot of interest from a lot of different companies, including mobile phone manufacturers that want to do accessories with it. But normally case manufacturers, it’s not used to integrate a lot of electronic in their cases that we have developed a reference design that we showed at Mobile World Congress a few months ago. So that platform is ready and a lot of different customers are looking into that and see how to integrate that into their cases. This reference design support Apple iPhone application but also android using Bluetooth to supporting both of these type of platforms.

Unidentified Analyst

Okay, great. And anything else you could discuss about the wearable technology that you guys have with the watch? Anything you can discuss about that?

Thomas Eriksson

Not more that we’ve working on and working with our customers. The customer we already have that make this type of product. So it’s in development and again what people are looking for, of course, is be able to use this with water and that type of application but also submerged underwater type application. And we have also solution for round displays and also that system actually works under water.

So our value proposition for this type of application is not only square type of wearable but also around and other proximity functions. So for example, you can use our zForce Air sensors to have touch on top of your hand, for example, or you can do air gestures and not actually touching the display. So we also have encountered solutions for that and all our different customers are looking into that right now.

Unidentified Analyst

You do have designs with certain customers with your watch, and that’s ongoing?

Thomas Eriksson

Yeah. It’s ongoing and soon as we have more design wins on that, we will announce it of course and talk as much as we can about it. But right now, we have nothing really we can go into exactly what we’re doing, still confidential.

Unidentified Analyst

Okay. Is there any relationship with Apple or nothing like that yet?

Thomas Eriksson

It’s the same thing. We can’t comment on any -- that sort of relationship but of course, Apple will be a great customer.

Unidentified Analyst

Very good. Thank you.

Thomas Eriksson

Thank you.

Operator

At this time, there are no further questions. Gentlemen, do you have any closing remark?

Thomas Eriksson

Yeah. I want to thank you all for joining us for the call. We keep you posted on our progress in this year in the future. So thank you and have a good day.

Operator

Thank you for participating in today’s conference call. You may now disconnect your lines at this time.

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Neonode (NEON): Q1 EPS of -$0.11 misses by $0.03. Revenue of $1.0M (+85% Y/Y) misses by $0.17M.