David Brunton – Head-Corporate Investor Relations Thomas Eriksson – Chief Executive Officer Lars Lindqvist – Chief Financial Officer Remo Behdasht – VP Business Development and Strategic Alliances.

Mike Malouf – Craig-Hallum Capital James Medvedeff – Cowen & Co. Walter Schenker – MAZ Partners Ron Chase – Investor.

Hello, everyone. Thank you for standing by. And welcome to Neonode's First Quarter 2017 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 introduction, I would like to turn the call over to David Brunton, Neonode's Head of Corporate Investor Relations. David, please go ahead and start the conference..

Welcome and thank you for joining us. On today's call, we will review our first quarter 2017 financial results and provide a corporate update. Our update will include details of customer activities, technology developments, and other items of interest.

Before turning the call over to Thomas Eriksson, our CEO, 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 and 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 be subject to risks, uncertainties or other factors that may affect Neonode's business, financial position and other operating results, which include, but are not limited to the risk factors and other qualifications contained in Neonode's Annual Report on 10-K, Quarterly Reports on 10-Q, and other reports filed by Neonode with the SEC to which your attention is directed.

Therefore, actual outcomes and results may differ materially from what is expected or implied by these forward-looking statements. Neonode expressly disclaims any intent or obligation to update these forward-looking statements. At this time, it is my pleasure to turn the call over to Thomas Eriksson, Chief Executive Officer of Neonode.

Thomas, please go ahead..

Thank you, Dave, and good day, everyone. First, I would like to introduce the people we have on the call today. I have Lars Lindqvist, our CFO, he will give you an update on the financials; and Remo Behdasht, who is running our AirBar business. He will give you an update on the rollout of AirBar.

We will start today's call with some comments from our CFO, Lars. Please go ahead..

Thanks Thomas. You can find our first quarter earnings release and 10-Q available for download from the Investor section of our website at neonode.com. First, I want to remind you that our business has three revenue streams based on our zForce technology platforms.

We own our revenues from royalty based technology license agreement, selling our embedded sensor modules and selling our consumer product AirBar. Let me update you on our first quarter results. We expect our license revenues to increase over the coming quarters.

We know have five printer OEM customer shipping products and all indicators lead us to believe that volumes will continue to increase over the coming quarter and have a positive impact on overall revenues. Our automotive market continues to grow with a slight increase in license revenues for the first quarter of 2017.

We do expect to see both, number of core models and associated license fees to continue to increase throughout the year. I want to remind everyone of how we record revenues related to AirBar sales. We sell AirBar through our global distributor Ingram Micro.

As part of the transaction Ingram Micro has a right of return related to any unsold inventory that it previously purchased.

We are therefore using a tentative method of accounting for revenue recognition, which means that any products that is sold to Ingram and which they had in stock at the end of the quarter has to be recorded as deferred revenues on our balance sheet.

Pursuant to our revenue recognition policy, we recorded $210,000 of sales revenue and approximately $113,000 of deferred revenue related to our AirBar shipments in the first quarter 2017. Remo will discuss AirBar in more details. Total revenues of $2.3 million for the first quarter of 2017, a 26% decrease compared to the same quarter last year.

We expect a decrease of NRE is primarily due to a reduction of $700,000 from the first quarter last year, because we are doing less capital design project. The first quarter of last year included a one-time catch up of approximately $300,000 of licenses.

Our gross margin was 95% for the first quarter compared to 81% in 2016 primarily due to 100% gross margin license fees and largely for the share of our total revenue. AirBar gross margin was on target at 52%. Operating expenses continued to be on plan and decreased 19% to $3.1 million for the first quarter 2017 compared to $3.8 million in 2016.

Our first quarter of average year includes the year-end and legal expenses which are typically higher than other quarters during the year. Our net loss for the first quarter of 2017 was $866,000 of $0.02 per share, compared to a net loss of $1.54 million or $0.03 per share for the first quarter in 2016.

Cash and accounts receivable totaled $2.7 million at March 31 compared to $5 million at December 31, 2016. I think it is important to note that during the first quarter of 2017, we invested approximately 800,000 in inventory. We manufactured 15,000 sensor modules at the end of the quarter inventory translated into using approximately 50,000 modules.

Also we invested approximately $400,000 in manufacturing and here engineering have production set up to produce embedded sensor modules for our OEM customers and new AirBar sizes. The $400,000 are included in our operating expenses for the quarter. Now, I'd like to turn the call over to Remo..

Good morning, everyone. For today's call, I will talk about our AirBar business. AirBar is a unique product and based on new technology that is unlike any product that has ever been sold. We are technology pioneers paving the way for this new idea and product offering which has never existed before.

Because of this, as with any new product end brand, we faced start-up challenges in terms of marketing, sales and retail positioning. All this being said, virtually everyone we meet, they say AirBar is a product that their customers will want.

For the last six months since first shipment, it has been all about execution and preparation needed to make AirBar a success and we are also very excited about the potential of our products. We are now in production and shipping AirBar in all size for Windows 10 laptop, this means screen sizes of 13.3, 14 and 15 inches.

Also shipping is AirBar for MacBook Air 13.3 inches. This is a very key and important milestone. Not only did we expand our single offering to a range, which is very important to our retailers' attention and commitment, but also each global region demands different size.

For example, in the U.S., it's predominantly laptops of sizes 13.3 inches and 14 inches for the early adopters who generally have smaller devices. Yet the mass majority once we reach them will demand 15.6 inches, but we need to get through to the early adopters first.

Airbar is in its various sizes now at Ingram Micro distribution centers around the globe and expected to go live as of late this week on our retail partner websites. And exciting market for us is India, and India is all about 15.6 inch notebooks. This was very evident in our pre-order program conducted last year.

We have made our first shipments to India in all sizes and will go live on Amazon India direct and Flipkart.com, which are two of India's largest online retailers. The next step is Reliance, India's largest technology retailers which will give us in-store presence.

Recently, we signed a contract with Dell to supply to Dell.com, one of the premier retailers of PC products. We are super excited and this has been an important milestone and AirBar product certification.

AirBar is currently listed on dell.com as a first step and will be part of a bundling – and will be part of bundling programs, shopping cart suggestion and mail app promotions in the very near future. It will bring AirBar greater coverage with marketing and promotional activities which are planned with partners and retailers.

Some of these activities include subsidized promotions, bundled price actions and exclusive deals with partners. In all regions, we are planning on expansion to increase AirBar product awareness. In our plan for Asia, now that we have a full range, we'll place greater focus on Malaysia, Indonesia, Thailand, Vietnam, Philippines, South Korea and Japan.

JD.com in China with 250 million customers will be a sole partner in the Chinese market acting as distributor and retailer. We should be live with JD.com early third quarter. In Europe, we are expanding through the largest retailers MediaMarkt in France, Germany, Spain, Italy, Belgium, Holland and a big Nordics launch.

We have just started working with U.K. largest retailer DSG to go live online and have an in-store presence in the third quarter. Nothing beats showing the magic of AirBar on a live demo. We are creating in-store point of sales displays that will make AirBar stand out and help retailers demonstrate the power of AirBar.

In the last six months, there has been a great deal of activity placing AirBar in a position where it will be successful. This is just the beginning, and I will conclude by saying, we have never been more positive and excited without the potential of AirBar.

On a daily basis, we have retailers approaching us wanting to be partners of AirBar opportunity and wanting to offer it to their customers. It has taken time to get to this point, but we are now truly at an inflection point and have established the foundations to take full advantage of this great market opportunity.

I'd like to now hand you over back to Thomas..

Thank you, Remo. Our customers have shipped more than 44 million consumer electronic devices and more than 1.6 million products incorporation our technology without a single return.

We have one of the largest global components of customers in markets ranging from complex automotive and avionics systems to high volume consumer devices, and are diversified across several large markets and applications quite an accomplishment.

Last year we announced adding a new revenue stream by selling embedded module that can be integrated into our customers' products. Since the beginning of the year, we have been making significant progress towards achieving our goal. Let me start with a basic building block of our modules.

We built our manufacturing facility and developed our processes to have to-date manufactured over 45,000 modules. We had a program that we can build our modules with high yields, high quality and high volumes, cost efficiently. AirBar is now shipping in different sizes.

13, 14 and 15.6 inch and we also started to build our embedded modules in various sizes for our OEM customers. It's important to note that all our modules are designed with the same underlying technologies. This makes our process scalable to support most applications.

Our sales efforts has resulted in most of the supply agreements and purchase orders from several new customers for embedded module with expected deliveries start in the second half of 2017.

On top of that, we are working on specific specified high volume program with our Tier 1 customers that will use our modules in entry system and steering wheel application. For distribution, we signed DigiKey, a global distributor of electronic components and modules to support our embedded module business.

DigiKey has more than 500,000 active customers with key focus on new products introduction. DigiKey provides global sales and technology support, and this is the first step in building a robust sales and support system. Our long-time focus is on a B2B business.

We expect the revenues to be generated from a mix of consumer electronics and automotive application using our embedded module. Some project could take a long time for a customer to reach completion, but it's important for us to gain market share as to generate higher volumes.

We are now positioned to support global distribution and sales for both AirBar and our module business. In the near-term, we had royalties generated from our licensed customers, and on top of that, we are focusing our efforts on selling products that contain our modules, such as AirBar and different quick-to-market OEM customer application.

In addition, we are working on some defined products with automotive aftermarkets. We along with customers are currently engaged in advanced development activities in some very exciting areas.

Our modules are and our optical technology is well suited for mobile devices with foldable displays and with current active in developing applications with foldable displays for the consumer electronics and automotive markets.

On top of that, we continue to work without the Autoliv on the development of our steering wheel for self and assisted driving car and our production process to produce automotive qualified components is proceeding according to plan. With that said, I want to conclude, and this concludes the prepared remarks and we will open the call for questions.

Thank you..

[Operator Instructions]. Our first question comes from the like of Mike Malouf of Craig-Hallum Capital..

Great. Thanks guys for taking my questions. My first one is to Remo, I'm wondering if you could just tell us a little bit about where we are now with regards to manufacturing.

Are we constrained on manufacturing still, or are we have we caught up and that maybe we're constrained on demand, meaning that we can manufacture everything we have now, we just need to generate the demand, given some of the positive developments that you outlined with regards to demand for the AirBar? Thanks..

Hi Mike, yeah. For manufacturing, we're actually in a very good position.

So, we've invested a lot of time and making sure that when we start investing and building the demand for product like this, we can actually deliver, otherwise it will be a wasted asset that right now we will be able to you know when we start developing and generating demand that we're going very hard globally, we should be able to live with that demand based on the manufacturing we have in place, if there is no bottlenecks anymore..

What do you think you know your manufacturing rate is, if you went all out right now?.

Well, the manufacturing rate that we've planed is according to – we will believe that the demand that we're going to generate, we'll be able to deliver on that. So, it varies but we can deliver on the demand that we expect to generate for this year..

Any sense of what that number is?.

Lars, you want to talk about numbers?.

Mike, Lars here. Well, say like this, that I mean it's too bit premature to now talk about sector, what volumes we believe.

We are initiating the sales to market, active fearsome marketing phase, having both the 13, 14 and 15 plus the MacBook Air, so I will say that we will see when we come in closer to defect rate as we give effect, what effect we give and then we will communicate that to the market.

But I will say that, well 200,000 is still a possibility to do, but we believe it on a higher range..

And then Thomas, you talked a little bit about module shipping.

Can you give us a sense of roughly what kind of prices are we talking about for these modules and any idea roughly where they are going?.

The thought there is a focusing on applications which is quick to market, so obviously volumes in the beginning, is low. We currently produce right from 40 millimeter to about 340 millimeter and that correlates to 16.6 inch screen size down to 2-inch screen size.

These handsets are not just used for touch and display, it's also for gesture application and other fashionable services. So, we support basically any application now and any size with this module.

We also filling inventory with DigiKey currently with these modules and we support customers and develop software developments case and different activities support to development for this things go into products. So, I'll say multiple activities to get this out on the market quickly..

Okay, and then I know you announced a large auto OEM that was going to start shipping.

Is this part of the auto OEM that's shipping in the related part of the year?.

Yeah, that's part of the – that's part of the module business for sure. So, we are working for factory qualification for the automotive requirement and we expect it to be really by the end of year when we start shipping this module.

So, it's basically two different types of account, one is for the consumer electronics products which has less requirements and then we have automotive qualified types. And this is also something that goes into steering wheel application and tailgate sensors and door sensors, door opening sensors.

So, it's basically same underlying technology, we're using the same traction process for all this which is you know the new things making our module..

Okay great. And then one last question for Lars, you mentioned that the first quarter included sort of seasonally higher expenses associated with the audit and such. And also $400,000 in engineering and manufacturing set-up cost.

Are those $400,000 going to continue to be roughly $400,000 a quarter going forward, or should we see a lower level of OpEx in the second, third and fourth quarter this year?.

Mike, I think as we see this $400,000 that's mainly will be now through – get everything prepared for the embedded different sizes on embedded sales on modules based for the OEM. So, I think that that is, as we focus on that part and we will see that going down going forward.

And also I will say that we are basically on track with the 3 million to validate the quarter, so that's clearly with this [indiscernible], but the $400,000 that we will see that going down..

Okay great. Thanks for taking my questions..

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

Hi good morning or good afternoon depending on where you are. Thanks for taking my question. So, following up on the OpEx question, so it was $3.1 million in the quarter minus the $400,000 would be $2.7 million.

Is there a reason why it should go back up to $3 million?.

Yes, we expect to be in the ballpark of $3 million, because we also do some extra focus on the sales and marketing for AirBar. But also have a focus on the sales marketing of the embedding modules.

We have, as I think you'll recognize increased price of the AirBar from $69 to $79 that's part of that is to basically create room for core advertising, marketing abilities. So, $3 million ballpark figures is quite good for modeling..

My second question is the NRE came in below what we were expecting in the quarter.

Is that a timing issue? How should we think about NRE for the rest of the year?.

Yes, I think it's a pure timing thing, because the basic we record, we have the big – it's quite big and a big project only for the automotive segment and they will over time decline as we expect. So, it's timing, we record NREs when we meet deliveries – distinct delivery point and milestones.

And that's will be the quarter question for the end, fourth quarter up to 500,000, first quarter nothing and you will see some more NRE during the year that I will not sort of say give you any details about that. Yeah, but yes, you can expect that, but over time the NRE will not be the substantial part..

So are you able to put where the additional detail on the license fees, how they breakdown between critters, automotive or number of units, any sort of detail in that area, figures, automtoives, you know e-readers, whatever?.

During the, if you compare then the first quarter last year to the first quarter this year, we continue to basically [indiscernible] automotive side flap, but basically we also meet the reported late report automotive approximately $100,000 in the third quarter this year.

When it comes to e-readers, well, that is down and that also will reach certain of the market that going forward be in a substantial part of our business.

So, there – approximately 200,000 compared to other fourth quarter 2016, and then in printers included in the last year first quarter at $300,000 one-time adjustment coming from one of our biggest customers which is HP.

So, I would say that we had an increase in printers, automotive, somewhat flat but it was a later report that go with the second quarter, and e-readers going down slightly..

Great thank you. My final question if I may is on the balance sheet. You have about $1.7 million of cash and I guess $800,000 sitting in additional added to inventory from the modules, central modules.

What sort of a burn rate are you running at these days?.

If you look into, we use the $1.6 million used during first quarter in cash used by the operations as such. But if you take from the results, you can say that $700,000 of the results of [indiscernible] coming from cash-related expense.

And in that, then including $400,000 related engineering productions for our modules and on top of that we've used 800,000 for project inventory. So, if you add that up, it basically comes to approximately $1.5 million or $1.6 million. So, that's what we use. Very much of this cash use have been for re-investment in [indiscernible]..

But what I'm getting as it, $1.6 million is not the normalized burn rate because of the inventory build, because of the $400,000 manufacturing set up.

What used the normalized burn rate? Of the $1.7 million is down the balance sheet, will last how long is what I'm trying to get at?.

Yeah, when it comes to through the reinvestment we made in order to mark components to get all these things sync and also to prepare for the embedded modules, we have components that supports approximately 50,000 modules to build, which means that we have component on hand and investing in that, that really takes us in hand, takes a bit hit to the coming quarter..

Okay, thank you..

Our next question comes from line of Walter Schenker of MAZ Partners..

First, when you talk in the quarter about OEM supply contracts for embedded sensor modules.

These are new applications or someone who is using your technology to a license and had someone else manufacture it for them?.

Hello. That is new contracts or with an associated purchase order, so that's a good thing we did, this new business we are having, thus we are going to have more visibility in that getting extra purchase order and we can plan production better.

So this is not the license pieces, but we can say that part of the gross margin translate to embed our royalties in to our module..

Okay. And in regard to automotive generally, in the past there is been a fairly steady increase in the number of models which integrated you didn't make modules, you are a technology for touch screens.

Is that suppose to – or can you give us some sense as to how that may continue to grow? Or at this point you are no longer looking to license, but are only looking to sell modules, so it's a different process that's been historically?.

We expect the royalties to grow over this year and next year, but what we have done is that we have started the work to translate all of these customers into using our modules. They all are using our modules the difference is that a lot of other companies including our Tier 1 customer is actually building our modules.

The difference is that we now are going to build the modules ourselves and sell them directly to them. And that's means a much higher ASP and it also means a much higher dollar margin compared to our royalty business. And of course that translates to significant increase in revenues.

We are doing the same thing for our consumer electronic company, so for example our printer business, and that's an ongoing sales work to make them use our modules and sell them directly to their factories.

So, that's part of our strategies to convert all of our customers particularly this year around 10 million devices into using and buying our modules..

But at this point, at least through the first quarter when you talked about three new customers or orders for modules, those are new customers.

So you have not yet at least in the first quarter converted anybody into from a license, they made it themselves or so we'll make it for them to buy the module from you?.

No, we haven't. At least that process will take some time. And just to be clear, these customers buy quite a lot of volume, so we are building capacity to support this project. So, currently we have a capacity here about 3,000 to 4,000 modules per day and we have to increase that obviously a lot to produce 10 million per year.

And that's an ongoing project that we do our own and also with our partners in Asia to scale up the volume production..

Okay. And lastly, in the past you talked and you mentioned it somewhat, in the automotive area, you've talked about utilization of your technology beyond the infotainment touch screen.

When might you get the first revenues either through licensing or selling a module for the various other applications, whether its steering wheel, door handles, lift gates, et cetera..

Yeah. We talked a little bit about that, and we just – so just a short term revenues, we are doing a lot of aftermarket application. So in automotive aftermarket, its product that you can install in a car after it's been sold.

We are doing that also in the consumer space with the products like AirBar, but we're also working on different other similar a project to address the short-term need. And increase of revenue, it's a long-term, obviously, it takes for consumer electronic products, it can take three to 12 months before just the market automotive just little longer.

But we have a plan for that and I think it's progressing really well, seeing that already have customer have placed order, so there is more growth that they barely have seen. So it's a good indication that being automotive customer, if they go in this direction..

Okay. Thank you..

Our next question comes from the line of Ron Chase, an Investor..

You did not answer the question from two people ago cash flow breakeven..

Hello, Ron, Lars here. To be frank, if we need, we have the tools and we can do whatever it take to make the company successful considering all these exciting projects and indication we have talked about..

But you are not answering the question. So when do you expect from operations to be a cash flow breakeven because you have a limited amount of cash and you keep talking about building and using cash, can't keep that up ever.

So when do you expect to get the cash flow breakeven?.

Yes, Ron. I would say we have a massive opportunity in front of us. And we currently are designing modules for this very large company and more is coming to us each week. And demand for modules is strongest. When we go into production in a couple of years, it is in the millions of units, and all indications shows us that discontinue to grow.

And we are I guess and we will to make the necessary investment that Lars talked about to capture on this revenue. And even if it comes to the expense of short-term possibility, it sounds action for that. So as we call about the plan and how we scale going forward..

But you have to make sure that you are still there, and so when do you expect.

Repeat the question again, when do you expect since you do not have unlimited cash, when do expect to be that cash flow breakeven from operations?.

Okay. Can you hear me now? I had a problem with the mic. I mean at this time I can't give you an answer, and I have to tap on that. We will get back, if and what if that happens and so forth..

I am sorry. I didn't hear you..

Well, I cannot, give you any clarity about that. What we can say is that we make whatever is needed to make us a sales force that is the target..

I have one more comment. This conference call is the same as other conference calls over a period of time where you have overpromised and under delivered.

Tell us one reason why this company should not be sold to somebody else to take advantage of these opportunities? And tell me why the Company should not be sold? And you should not be hiring, you should be hiring an Investment Banker now?.

Hey, Ron, this is Dave Brunton.

Of course, we understand what you are saying, but at the same time I think that the Thomas tried to put it in perspective for you and other investors that this point in time, we are at an inflection point on the modules, and I know it hasn't gone as faster as seamlessly as everybody would like to see out there, especially in the short-term environment.

However, we are currently engaged with several brand new customers to deliver modules for different applications this year as we said on the call. We also have several long-term customers in various automotive and commercial, electronic segments that are in extremely high volumes that we are working on.

In order, we can do one of two things at this point. We can look at the very short-term and become cash flow positive by cutting expenses and not operating towards these goals that we have to grow the Company. Or we can look at long-term and say, what we are going to do in the future to make this happen in a significant way.

And the significant way forward for us is to make sure that our modules have the best opportunity they can to be successful in the future. That means we have to take actions today in order to capture that market for one, two, three years out, and that's what we are doing..

I understand in what you are saying. Everybody understands..

I'm telling you that's where we are. And you are telling us we should hire investment bankers, we should sell the company, and frankly, that's not you know, if that becomes a reality for us and management and the board think that's the best way forward, they will certainly look into that..

Everybody understands what you are saying. One second. Everybody understands what you are saying, we've heard this story quarter after quarter and it doesn't happen. So, in the real world you have ex number of dollars of cash. So while you are planning to be there two, three, four years from now, at this rate you'll run out of cash.

So, there is a practical matter of working capital, you just raised money, and once again this is the same story. I don't know why this would not be better housed with another company that knows how to deliver results. And has the balance sheet to support the opportunities you have.

I am not disputing that you have significant opportunities, but they've never seen to happen at the right time. So Thomas…..

This is not a discussion that we are going to settle on this call. So, I guess Ron let's thank you for your comments. Okay. Thanks..

That was our final question. I would like to thank everyone for joining our call today and have a nice day..