Neonode Inc. Q1 FY2021 Earnings Call

Hello, everyone. Thank you for standing by, and welcome to Neonode’s First Quarter 2021 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 with the company’s covering analysts. 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 2021 financial results and provide a corporate update. Our update will include details of customer activities, technology developments, and other items of interest. On today’s call is our CEO, Dr. Urban Forssell; CFO, Maria Ek; and also joining us today are our Regional Sales Vice Presidents, Anthony Uhrick, managing the Americas; Johan Swartz, managing Asia and Pacific; and Jonas Wærn, managing Europe, Middle East and Africa. Before turning the call over to Urban, 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. These 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 future performance and may involve or be 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 obligations to update these forward-looking statements. At this time, it is my pleasure to turn the call over to Urban. Urban, please go ahead.

Thank you, David and welcome everyone. To begin with, I'd like to summarize the key messages in our presentation today. First, we continue to execute on our strategies and build our business pipeline. The demand for our contactless touch solutions continues to increase, giving us an enormous market opportunity to integrate Neonode technology into new and retrofitted equipment, for instance, in Elevators and Interactive Kiosks. We also see significant interest in our zForce and MultiSensing technologies from customers in the Military & Avionics and Automotive segments. To be able to capitalize on more of these opportunities, we'll continue to strengthen our sales marketing and engineering teams in Sweden and internationally. And building on the last point here, let me next introduce our new sales organization. To increase our customer focus and support further growth, we are migrating from our global business area structure that we introduced last year over to a regional sales organization where Anthony Uhrick, who joined the company last month will lead our sales work in the Americas; Jonas Wærn who previously led the business area HMI Solutions, he will lead our sales work in EMEA; and Johan Swartz who previously led the business area HMI Products, he will lead our sales work in APAC. These three gentlemen will all report directly to me. We are then showing here the top level of our org chart for the sales work with the three gentlemen here that you will hear more from later in this call. And it's now my pleasure to introduce the full team on today's call. Besides myself and David that you already met, we have Maria Ek, our CFO. She will, right after this, take us through the first quarter financials. After this, we will hear more from Anthony Uhrick, Jonas Wærn, and Johan Swartz, who are our VP, Sales for different regions. We have also included pictures of everyone on the call and we will in later calls update this and we will also include further information and bios. Today, I will refer you to our website for more information on the bio for the speakers. So, next, we will go to the financial update. I leave the word to Maria Ek, our CFO.

Thank you, Urban. You can find our first quarter earnings release and 10-Q available for download from the Investor section of our new website at neonode.com. To give you an update of the quarter, our total revenues were up by 29% compared to the fourth quarter of the previous year and reached $1.7 million. Our gross margin was down by 14% from the previous year's first quarter to 83%, and I'll come back to that later. As we are continuing to invest in sales, marketing, and product development, our operating expenses were up by 29% from the third quarter of 2020 to $3.0 million. Revenues from our HMI Solutions business area were $1.3 million, which is an increase of 10% compared to the first quarter of 2020. A major part of the revenues from this business area is licensed revenue from our existing printer and automotive customers. We believe this business is still rebounding from a pandemic-related slowdown in the first half of 2020. Revenues from our HMI Product business area were $0.4 million, which is an increase of 227% compared to the third quarter of 2020. This increase is a result of growing deployments of contactless touch solutions, mainly in Asia and mostly driven by our partner network. A major part of the revenue from our HMI Product business area is not surprisingly product space. However, we have also had some non-recurring engineering projects (NRE projects). Our total gross margin for the first quarter of 2021 was 83% compared to 97% for the same quarter of 2020. The decrease is related to high product sales with lower margins. The gross margin for our HMI solutions business area was 100% for the first quarter of 2021 as well as 2020 as there were little or no NRE revenues in both of those quarters. The gross margin for our HMI Product business area was 24% for the first quarter of 2021 compared to 62% for the first quarter of the previous year, where we made some changes to our inventory reserves. The margin for this first quarter was depressed by lower margin AirBar sales. Operating expenses for the first quarter 2021 were $3.0 million, which is an increase of 29% from the same quarter last year, but decreased by 9% from the previous quarter. Operating loss for the first quarter of 2021 was $1.6 million, which is an increase of 50% from the same quarter of 2020, but in line with the previous quarter. The net loss was $1.6 million or $0.14 per share for the first quarter of 2021 compared to a net loss of $1.0 million or $0.11 per share for the same quarter of the previous year. Net cash used in operating activities during the first quarter of 2021 was $2.0 million compared to $1.0 million in the first quarter of 2020. The increase from the previous year was primarily the result of a high net loss and increased inventory to secure our future deliveries. On May 10th, we filed a shelf registration and entered into a $25 million ATM agreement. This allows us to strengthen our balance sheet at a low cost and with minimal dilution, if and when we find it necessary. And now, I hand it over to Urban.

Thank you, Maria. At this point, we would like to give you an update on our strategy and business. I will start with some general remarks before handing over to Anthony, Jonas, and Johan. Neonode is a value-driven company. Everything we do and every decision we take is based on our core values: One Team with purpose, customer focus, and making tomorrow better. Fully in line with this, we have taken measures to streamline and improve our internal organization focused on growth. Last year, we established this business area organization with three separate business areas, separated by the business model they use; i.e., technology licensing for HMI Solutions, product sales for HMI Products, and software licensing for Remote Sensing Solutions, and the markets they address, which include Military & Avionics, Industrial, Elevators, Interactive Kiosks, and Automotive. This business area organization gave us a good positive boost last year, but we are not satisfied and think we can improve and do more with the IP know-how and resources we have. Hence, we are migrating to a different organization where we have a much clearer focus on our core business and on our customers in key market segments, especially Elevators and Interactive Kiosks. As before, we are using and building on our existing IP portfolio know-how and we are exploring every day new and better ways to leverage this to bring value to our customers. For instance, in the form of contactless touch solutions, which are zForce technology and our touch sensor modules are perfect fits. Going forward, we will maintain our focus on Elevators and Interactive Kiosks, but we are also addressing customers in Military & Avionics, Industrial, and Automotive. We are rebuilding our business inside out, starting with contactless touch solutions for elevators and kiosks and then adding further types of applications and market segments. We are making this even more clear now. This is not to say that other areas have no focus or no resources, but the changes we are making are really to increase the push here with our contactless touch business for elevators and kiosks. In terms of organization, we have already presented our new regional sales organization. We are doing similar adjustments to our internal engineering organization. We are constantly reviewing and updating our business and technology partnerships for efficiency and efficacy. We feel that we are on the right track and we have really positive momentum in many things we do, business development, new product development, innovation, and also NRE projects with customers. The demand for our contactless touch solutions is increasing and our product size is ramping up. This is what we mean by saying we are building our business pipeline. Some of these processes take time as there are certain lead-times in the sales and testing and evaluation phases. In many cases, we have customers that want to do pilot runs and smaller installations first. We are motivated by the success we are having here and we see that we are really on the right track. Even long-term, we are also optimistic about the licensing business and we think that this will be a nice complement to the products business to have further and new licensing customers that give us recurring revenues. As the legacy customers we have in automotive and printers and e-readers, for instance, continue to bring good revenues with a high margin to the company. We have an excellent team and we continue to add talent and experience to that team. And speaking of talent, it's now my pleasure to introduce Anthony Uhrick and have him introduce himself and also our business in the Americas. Tony, please go ahead.

Thank you, Urban. A little bit about me. I'm new to the company, but I'm not new to the industry. This is a market I'm very familiar with, and in fact, I've been in the touchscreen industry for over 20 years. I've worked for Fortune 100 companies such as 3M Touch and industry leaders like Planar and Smart Technologies. I've also worked for several startups, including a company based in New Zealand called Next Window, which had a very similar optical touchscreen technology. When I started, I was responsible for developing business in the Americas, that later became a global role. We grew sales from just a few million dollars to almost $100 million in six years, and that company was later sold to Smart Technologies and then they went public. So, let's talk about what our strategy is. Our plan is to refocus the resources in the Americas and to deploy a more direct sales approach into target vertical markets. Our target accounts are known and I've worked with many of these companies in the past. What we have that's unique and different is the ability to add In-Air Touch, and gesture controls to almost any surface. This means that we can offer touch-free, germ-free intuitive alternatives to interacting with kiosks, elevators, and other public surfaces. So, if you think about how many kiosks and elevators are in the market, the potential is huge. If we look at the market in a different way, we can divide it into what we call retrofits, these are existing installations or new installs, which are new project installations, or R&D, which is working with a company to provide a new product feature. But if we look at the sales cycle, or the time-to-market, retrofits represent a huge market opportunity and the quickest path to increasing revenue. Therefore, near-term, our target customer is end users who've already deployed these devices such as hotels and airlines, fast-food restaurants, retail, grocery stores, and medical offices. In addition to the end users, we also intend to target the companies responsible for developing the aftermarket solutions or maintaining and installing these devices, including solution providers, integrators, and value-added resellers. As an example, we are working with MAD Elevator, a global company based in Canada that produces fixtures and interiors for the elevator industry. They've developed a solution called Phantom, designed to convert standard elevator control panels into a touch-free interface. They have a global sales channel comprised of local and regional installers, which provides us direct access to building owners, managers, designers, and other key decision-makers. Our plan is to leverage their industry expertise, product knowledge, and most importantly, their contacts to address early adopters with a low-risk, market-specific solution to prove out the product and confirm the market. It's going to take a little bit of time to institute this strategy, but we know the market and we know where we're going. Back to you, Urban.

Thank you, Tony. And I will immediately hand over to Jonas Wærn, who will talk about the business in EMEA. Jonas?

Thank you, Urban. Let me walk you through the goals I have with the region. We drive successful business in the whole region, including the Middle East and Africa, but make no mistake; the main focus is on the European continent. I feel very comfortable there; I have lived and studied in many different countries. I want to align the region with the corporate mission and vision of Neonode, which is to be smart, intuitive, and to work multimodally. This aligns with both internal and external goals. To review how we segment, position ourselves, and go to market, I will share some of my thoughts here. One of my main concerns is how we can make Neonode easier to buy from, quicker to analyze, what our existing opportunities and leads are, and what we should hold on to, as well as how we can broaden our menu of different types of purchase options, etc. In short, my focus is on topline growth and the development of strategic, comprehensive execution plans for my region focusing on growth. This might sound a bit silly, but sell, sell, sell is going to be key, and the people responsible for working in the EMEA region can't wait to get out there once legislation has been lifted. I want to share with you a few cases of partnerships and relationships we have in the EMEA region. One is a U.K.-based leading supplier of components to the global elevator market. They recently launched a contactless elevator control panel for existing or new elevator installations. This solution that we worked on together is sold as HALO in Europe, and was introduced at the beginning of the year. Another interesting partner is Nicolas Appert, the CEO of Marine Group; they're a manufacturer of kiosk solutions. Their solutions are out there right now, being sold and used by customers. For instance, if you want to buy a Burger King burger in Paris, the Marine Group is your answer. They also work with other QSRs in France, and have piloted a contactless self-ordering system, ideally suited for retrofitting on existing kiosks. We see more of our solutions in the field, being used by the general public.

Thank you, Jonas. And then immediately over to Johan Swartz and APAC business.

Thank you, Urban. It's really nice to focus on my home turf, the Asia-Pacific region again. Having lived in Japan for 15 years and worked in or with East and Southeast Asia for almost 30 years, I'm thrilled to see this region leading the migration towards contactless touch. We have in the past six months fully executed the strategy we defined and presented last fall, building a solid network of distributors, value-added resellers, and system integrators, initially targeting retrofit use cases for elevators and interactive kiosks. As you may have seen from our recent press releases, this has resulted in initial deployments of several projects across the region, with public announcements by several high-profile end customers, meaning that we will hopefully see a substantial contribution to our revenue growth in the second half of 2021. On the right-hand side of this slide, you can see some segments per country where we have particularly good traction, including self-service kiosks and point of sale terminals in Japan, as well as elevated core operational panels in South Korea, China, and Southeast Asia. One of the most important segments for us is self-service kiosks at airport, retail stores, train stations, shopping malls, etc. Recently, Japan Aerospace secured a strategic business win with a major Asian airline to retrofit existing kiosks with contactless touch technology known for check-in and self-baggage kiosks. This solution has now been deployed in multiple airports, and discussions about wider deployment with additional airports and airlines have already started. Having discussions on a weekly basis with Japan Aerospace, I'm confident that they will develop and create business in this segment. Another case is with our partner FineTek in South Korea, which has developed contactless touch elevator control panels that they have marketed to elevator companies in South Korea since mid-last year. We have extreme cooperation, visiting customers frequently, working towards significant breakthroughs with major elevator companies in South Korea. Currently, we are preparing for wide-scale rollouts, with pilot installations having been received very well. So, we are truly optimistic that our business with FineTek can grow significantly across other segments as well.

Thank you, Johan. And I just wanted to summarize the key points regarding our strategy and business. First, we feel we are on the right track; we see high and increasing demand for contactless touch solutions and our touch sensor modules. Our focus continues to be on Elevators and Interactive Kiosks. The markets in Asia, Europe, and North America look a little different, but there are many common denominators, and both markets are large with a huge install basis of equipment and healthy growth. We also see a tremendous opportunity with retrofits that we can do quickly in existing equipment. We are very optimistic still and haven’t forgotten about where we come from. The last 10 years, Neonode has focused on technology licensing, and we continue to work on this to bring attention to our zForce technology that supports touch, gesture sensing, and contactless touch applications. We believe we are well-positioned with our owners and our Board of Directors, and with an excellent ecosystem of partners, including distributors and technology partners. We are currently recruiting more engineers as there is high pressure on our engineering team, but we believe we can manage this and continue to grow. We are excited about the rest of this year and into next year. I would like to thank you all for your attention and we will move to Q&A. David?

I now open the call for Q&A from our covering analysts.

[Operator Instructions] We have a question from the line of Jesper Henrikson with Redeye.

Yes, thank you very much for taking my question. My first question is to Maria. Could you explain the shelf registration and the ATM file that you have recently made with the SEC?

Yes, the shelf registration is filed with the SEC and allows us to share with you the sale of pre-registered securities during a three-year period using what are called takedowns. We’re seeing several types of transactions, the one being the at-the-market offering, known as ATM. This involves selling shares into the existing market without significant market impact, at low cost and without discounts.

Okay. Thanks. Yes, that's good. And so the shelf registration is at $100 million and the ATM is at $25 million? How should investors interpret these numbers?

Great, I understand that. Thank you very much. And then also one question for Urban. Are you experiencing any global component shortage? And if so, how is this affecting your business?

We don't see any problems today with components for our product manufacturing. However, we also recognize the risk. We have secured our component needs for this year and next year, but who knows how long this condition will last. We are exploring alternative sources for some key components to be prepared if this situation continues or worsens next year. For now, however, we are covered.

Okay. Great. And then one last question about the FineTek elevator partnership. Can you say more about how big this could be and how fast it can grow? And also how much resources FineTek is dedicating?

I will hand that question over to Johan, who works directly with FineTek on a daily basis.

Yes, certainly. Both Neonode and FineTek are super serious about this, and both companies have invested considerable time and effort to pass multiple reliability tests and fully qualify these solutions not just with one elevator OEM, but with multiple—actually the two largest elevator OEMs in South Korea. We’re committed to this, and we have pilot installations in hospitals and office buildings that have reportedly been received very well by users and building owners.

Okay, great. Thank you very much. That's all for me.

The next question will come from the line of Christian Schwab with Craig-Hallum Capital.

Hey, thanks for taking my questions. Urban, if we have a 100% sell-through of the components that you've secured for next year, roughly what would be the company's revenue?

Yes. We are ramping up our production first of all, and also our sales. We are targeting aggressive growth and not just percentages, but multipliers. So, I won't give you specific numbers, but I will say that we are targeting several hundred percent growth this year and similar types of numbers next year.

Great. Given the substantial pipeline of opportunities highlighted in the prepared comments, how big of a revenue opportunity do you see, without necessarily putting a time frame on it? How long does it take for the elevator and interactive kiosks business to become a $40 million to $50 million business?

We have really high hopes for this. We think we are onto something very good with these segments, Elevators and Interactive Kiosks. Both have huge installed bases. We are close to 20 million installed elevators in the world, and that number grows by 1.3 to 1.5 million elevators per year. There’s a significant aftermarket for elevators, and we are trying to secure market share and grow off of that installed base and the new equipment. We believe that in the next two, three, four, or five years, we can grow this business into the several tens of millions of dollars for elevators and similar numbers for kiosks. The kiosk market globally is actually much bigger than the elevator market, but it's also more fragmented.

Great. My last question has to do with the recent patent portfolio protection. Is there any update you can share?

Yes, great question. As you know, we have an agreement with a company called Aequitas Technologies LLC. That agreement with them is publicly filed as an 8-K and was established in 2018. They are trying to monetize Neonode’s old patents by transferring ownership to them. Neonode Inc. is not part of any litigation or processes; Aequitas Technologies LLC is managing this independently. They have established a company called Neonode Smartphone LLC, which is separate from us. They have sued companies like Apple and Samsung in Texas, and we are following these developments.

Great. No other questions. Thank you.

Thank you.

The next question will come from the line of Viktor Westman with Redeye.

Thank you so much for taking my question. I have a question for Mr. Johan Swartz. I noticed that Japan Airlines is promoting this contactless solution a lot. Why is it that others are not jumping on this bandwagon?

Japan Airlines is not the only company focusing on contactless kiosks. We have announcements from Changi Airport and Hamad Airport in Qatar. The setup can be complex, as it often involves a combination of airlines, vendors like AIR-INK, or airports managing the kiosks, which complicates things. However, I believe these initial announcements will influence others to adopt similar solutions.

Another question about the report you mentioned, exploring further partnerships. Are you not satisfied with your current ones?

What we refer to relates to our reorganization into regional sales structure. We have found some active partners that have helped us a lot in Asia. However, we believe this model is beneficial for Neonode on a global scale, and we're looking into good value-added resellers and other partners in these regions. We are also exploring technology partnerships.

Okay, understood. One last question from me about the HMI Solutions part. Can you share exciting areas in the military market beyond touch displays for aircraft and vehicles?

There is a very interesting market for our technology with aircraft applications, where displays are becoming touch-enabled. Additionally, there are rugged displays used by military forces, and our zForce technology is a good fit for personal devices for soldiers.

Great. Thank you for clarifying that.

The next question will come from the line of Philip Schwarz with Mark Capital.

Hello. Thank you for taking my questions. I have a question for either Maria or Urban. It feels like shareholders need more information on this shelf registration and also the $25 million sales agreement with B. Riley. Should shareholders understand that B. Riley is now allowed to sell $25 million worth of stock in the market?

The shelf registration is a pre-registration of securities typically shares that we can use for three years. We have set up a new shelf to allow us to conduct direct offerings or ATMs using this shelf. This gives us flexibility but we have no immediate plans to use it. As soon as it's approved, we can use it at our discretion to sell shares through B. Riley without impacting the market significantly.

Yes, absolutely.

If you want to buy shares, give us a call; we can offer them at a good price.

Okay. Thank you very much.

With that, we are showing no further audio questions at this time. Do you have any closing remarks?

I would like to direct your attention to our new website. We want to increase traffic to our newly designed site at neonode.com. We are continuously adding content and updating, so please stay with us through this media and also other social media like LinkedIn and Twitter. Thank you very much for joining today's call.

Thank you all for joining us for our call. Have a good day.