Neonode Inc.

Hello, everyone. Thank you for standing by and welcome to Neonode's first quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session with the company's covering analyst. To ask a question, please press the star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. At this time, for opening remarks and introductions, I would like to turn the call over to Urban Fersel, Neonode's CEO. Urban, please go ahead and start the conference.

Welcome and thank you for joining us. In today's call, we'll review our first quarter 2022 financial results and provide a corporate update. Our update will include details about our business strategies, customer activities, and other items of interest. Joining me on today's call is our CEO, Fredrik Milliam. Fredrik will present the financial results of the company for the first quarter 2022. After this, I will come back and comment on overall strategies, customer activities, and other operational

topics. Before we proceed with the main part of the presentation, I'd like to

read the following legal disclaimer. This presentation contains and related oral and written statements on Neonode Inc. and its management may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information about current expectations, strategy, plans, potential financial performance, or future events. They may also include statements about market opportunity and sales growth, financial results, use of cash, product development and introduction, regulatory matters, and sales efforts. Forward-looking statements are based on assumptions, expectations, information available to the company and its management and involve a number of known and unknown risks, uncertainties and other factors that may cause the company's actual results, levels of activity, performance, or achievements to be materially different from any expressed or implied by these forward-looking statements. These uncertainties and risks include but not limited to our ability to secure financing needed on acceptable terms, risks related to new product development, our ability to protect our intellectual property, our ability to compete, general economic conditions including as a result of the ongoing COVID-19 pandemic or political conflicts such as the war in Ukraine, as well as other risks outlined in the finance of the company with the U.S. Securities and Exchange Commission, the SEC, under the Securities Exchange Act of 1934 as amended, included sections entitled risk factors and management discussion and analysis of financial conditions and results operations. Prospective investors are advised to carefully consider these various risks, uncertainties, and other factors. Any forward-looking statements included in this presentation are made as of today's date. The company and its management take no duty to update or revise forward-looking statements. This presentation has been prepared by the company based on its own information as well as information from public sources. Certain of the information contained here may be derived from information provided by industry sources. The company believes such information is accurate and that the sources from which it has been obtained are reliable. However, the company has not independently verified such information and cannot guarantee

the accuracy of such information. Thank you. At this point, I would like to turn

the call over to Fredick who will review the financial results for the first quarter. Fredick, please go ahead.

Thank you, Erlan. You can find our first quarter 2022 earnings earnings and thank you with the details of the financial performance in the first quarter of 2022 available to download from the Investors section on our website, Nino.com. In the interest of

time, I will only summarize the key points here. Our total revenues through the first quarter of 2022

reached 1.3 million. That is a decrease of 21% compared to the same period in 2021. License revenues for the first quarter of 2022 was 1.1 million compared to 1.3 million for the same period in 2021. The decrease is primarily the result of component shortages within the printing and automotive markets related to the COVID-19 pandemic which in turn impacted our license revenues for the first quarter of 2022. Product revenues for the first quarter of 2022 was 147,000. An increase of 24.20 compared to the previous quarter. In the first half of 2021, we saw an increase in the product sales. In the second half of 2021 and continuing into the first quarter of 2022, product sales were negatively impacted due to COVID-19 lockdowns in Asia. Our elevating CHOSC customers in Asia have been first adopters of our competitive patch technology and have expected most of our initial T-firm sales are related to retrofit solutions and are more limited. New customer equipment launches can take 6 to 8 months or even longer

before customers ready to begin mass production. Our gross margin for products was

65% for the first quarter of 2022 which is an increase of 41% each year compared to the previous quarter. If we look at the gross profit and gross margin only for two seconds and adjust the runtime effects, we can see a positive trend for the gross margin with 62% in the first quarter of 2022. Long term, as volumes continue to increase, we will probably see a pressure on the margin. But short and medium term, we are confident that our margin in the product system will be around 40%. Operating expenses for first quarter of 2022 decreased to 12% compared to the same period in 2021. The decrease is primarily due to lower professional fees and lower depreciation and compensation. We continue to invest in marketing and product development and hire new company team members. These investments are strategic and will extend to mass medium and long term. These investments are fully language-based but will communicate with the developing parties in terms of the next proceeds of a registered direct offering, we give in October 2021. Summarizing the results of the first quarter of 2022, net loss attributed to NUMC Inc. was 1.4 million compared to 1.6 million for the same period in 2021. Net cash used in operating activities during the first quarter of 2022 was 2.3 million. Compared to the previous quarter, net cash from operating activities has decreased to 16%. In the first quarter of 2022, we purchased components of the 1.1 billion to secure future production of our Q&A's.

I will now hand over the floor back to Uwe. Thank you, Fredrik. At this point, I would like to go into strategy and business updates. Our vision is to transform the way humans interact

with machines. We strive for this by offering innovative touch, contactless touch,

gesture sensing, and theme analysis solutions. Our business model rests on two pillars.

Technology licensing and product sales. We combine this with non-recurring services. Our licensing offer is a combination of the two. Our new strategy is 100% focused on business to business and revitalizing and growing our licensing business in parallel to growing our product business. In our product business, we mainly target customers in the elevator, and interacting key segments. We also see potential and are working with some customers in the industrial automation, digital signage, and medical equipment segments.

Our licensing business

has

historically

been focused around e-reader, printer, and automotive customers. Currently, the main license revenues from legacy customers comes from printer manufacturers than automotive tier ones. Going forward, we see the largest potential to grow in the automotive segment. But we also believe it can grow significantly in the military and avionics and industrial automation segments. And potential in retail segments is also apparent with our multi-sensing software, as I will describe

in more detail later. C-Force is a technology platform that comprises IP

-related optics, electronics, software, and algorithms for advanced IR-based touch-detection features. The C-Force platform is well proven. We have sold over 85 million C-Force licenses to customers worldwide in the last 10 years. And we continue to sell every month a number of licenses to existing customers. And the current customer base includes some of the world's largest printer manufacturers and automotive tier one suppliers. C-Force also underpins our products, the TSMs, which are ideal for contactless touch applications,

as I'll describe later. Multi-sensing is a scalable AI platform

that can be used to create advanced scene analysis applications, driving in cabin monitoring features in vehicles, and retail analytics features. We offer bespoke customer applications tailored for each customer's specific needs, and thanks to the flexibility of the multi-sensing software platform and the efficiency of

the

underlying machine learning algorithms, the applications require very different footprint and work well even with low-res cameras, and hence offering a

lot of customer value.

It gives some insights into our ongoing business development work to secure new development projects that can help us grow our licensing business in the future. I'm sharing the snapshot of our business development portfolio directed towards licensing customers. As you can see, we have several ongoing engagements with automotive OEMs and tier ones, as well as with several avionics companies, and actually one major printer manufacturer as well. Automotive DMS. DMS stands for Driver Monitoring System. This opportunity is obviously related to our multi-sensing platform. The others that we show here and that we're working on are related to the C-PORS platform. First group is concerning applications of C-PORS to detect foreign objects obstructing projector in HEDA display units, which is an area that is drawing a lot of attention in automotive these days. We are working with several tier ones and we have come quite far with a couple of them in development of prototypes and proving the concept. This is super interesting new application area for our C-PORS technology. With avionics companies, we talk about rugged touch and touching demanding aircraft applications. With typically professional pilots or professional other people in the cockpit or in the passenger space of the aircraft. Of course, printer touch is more like for us straightforward touch application, similar to what they have done for HP and other printer companies

for more than 10 years. It should be noted here that the sales and development

cycles are fairly long when we indicate here what we can expect. If we are nominated to any of these automotive projects that we indicate here, we can expect an application development for two, three years to come. And only after this, new royalty revenues will start to come from these customers. And this has of course to do with the long development cycles in automotive for new models or new platforms. Here we are no different than any other tier one or tier two supplier working in the automotive space. And the lead times for new applications and new systems in avionics and also military, as many of you realize and know, they can be even longer than in automotive. But the breadth and the width of this portfolio anyway make us very optimistic about the future of our licensing business and that it can grow. And I want to underline that during the development phase, even in the prototyping phase, we can earn actually significant NRE revenues, non-recurring engineering, we also have opportunities to sell prototypes during that period

that can bring additional revenues to us. Moving on to our products business. Currently we offer commercial -the-shelf

touch sensor modules, TSM's, based on the reflective variant of our C-Force technology. We manufacture these TSM's at our subsidiary promenade technologies in Kungsbacka on the west coast of Sweden. And offer them in 11 different lengths from 101 millimeters to 374 millimeters and two main variants distinguish by the direction that the light is emitted and received from the sensor unit at 0 or 90 degrees. The TSM's are ideal for contactless touch applications and can be used in two main configurations to create such features. Either in what we call the parallel plane configuration where our TSM's are used to detect an invisible interaction area or curtain above or in front of the display, keypad, or other surface. The other main variant is to use our TSM's to edit the holographic display technology where our TSM's then should be positioned and aligned with the interactive area from our sensor module, overlapping the projected image in free air. And we try to illustrate that here. If you have very good sight, you can see in the right picture below that tinted glass is an illustration of our sensor module sitting below and pointing up so that when the user extended finger into that projected image, he can actually interact with it. And it's very futuristic and creates a lot of attention whenever we or our partners show that type of solution. As we have described in earlier earnings calls, there are numerous examples of applications where contactless touch is the way to go and has a big potential go for new and extended customer value. For instance, different types of vending machines, coffee machines, self-service kiosks at quick service restaurants or airports, self-checkout, point of sales terminals in supermarkets, for elevators, for other user terminals and medical kiosks and medical equipment where for different reasons the users do not want to touch the display or the buttons and want to experience a new way of interacting with the machines. Contactless touch is possible with our key items for all these types of applications. And why then even consider contactless touch and why is it important? The first argument we give is that it's contactless or touchless as some also call it. You don't have to touch the display or the keypad or buttons that you are interacting with. For a machine, an elevator or a kiosk sitting in a public space where there are many users using the same machine, this can be a significant risk for transmission of different pathogens or can give a non-pleasant user experience. Here is where contactless touch adds value to the customers. You can interact with the machine without touching and avoid getting whatever bacteria or viruses on your hands. Still, if you serve a familiar touch interface or in elevators and you extend your fingers normally today to press the button, you will use our technology in the same way. But before the finger reaches the button, we will highlight the button. So it's very automatic. It's very convenient. In other applications, say in medical or in rugged industrial environments, users may have gloves on their hands and then other touch technologies like capacitive touch will not work. And here we have a solution that works also with gloves or if the user wants to interact with a pen or a key or the corner of the cell phone, for instance. And with our PSMs that are commercial -the-shelf products, you can buy them online or directly from us or from some of our partners. We offer free to use and smart SDK that allows you to develop your own software applications and they fit very well for both new installs

and retrofit solutions. As described in earlier earnings calls,

we use a hybrid -to-market strategy where we combine direct sales and indirect sales via partners. We also have significant sales through our online distributors, mainly DidiKey, which is an American company that covers more or less the whole world. We work with another distributor in China called Serial and in Japan we work with a company called Nexty Electronics, all sizable and well-known online distributors. We work with partners to penetrate markets that are otherwise difficult for us to reach. For instance, in Asia, it has become a success story for us with our value-added resellers and other partners in Japan, Korea, and also China and other parts of Asia. The same in Europe and we are also working to create similar partnerships with companies in North America.

This way of

describing the markets like a pyramid, we feel that we have more and more substance for this argumentation that both elevator markets and the kiosk marketer can be described this way. For instance, as we have discussed in our earnings calls during 2020 and 2020, we have seen that the elevator market is dominated on the top by some 10 major OEMs that often also are multinational companies and they totally dominate the new equipment market. Below them there is a segment of mid-size companies that can work regionally or nationally and below them there could be many smaller firms in the hundreds or thousands. The pattern goes also for interactive kiosks but there the fragmentation is much more apparent and visible. First of all, interactive kiosks span a number of and so on. In each of these and actually in each market there is a plentiful of manufacturers offering these type of products. But overall, also the kiosk market can be described using this pyramid. Of course, we are striving to move upwards here to reach the big players which have the potential to bring high order volumes for us per order and per year. This has to do also with the sales cycle that is actually a fact in our business, in our market. The typical sales cycle starts with a retrofit opportunity if you look at one segment and one market. This is how we and our partners introduce the concept of contactless touch and our PSM solutions. We work then a lot with partners and they develop different solutions and offer them to the market. Our target customers are hence integrators and tech companies but also to some extent OEMs targeting to do their own retrofit solutions. In many cases, the OEMs are interested in this for different reasons. It's about brand reputation quality but also cash flow and profits that they want to have that business for themselves and not allow third parties to make money on their products. In the second phase, what we are seeing and what we are encouraged by this more and more, once they have achieved a certain awareness in the certain demand, the kiosks and elevators OEMs get more and more interested. They may want to do retrofits or they may only want to look at new equipment solutions. For us then there's a shift and of course we want to work directly with OEMs and they typically want to work directly with us. Sales cycles are a little bit longer but on the other hand the potential is bigger per customer, per order. The final step in this sales cycle here is that we are designed in from the beginning. Here I want to make the reference to HP, Lexmark and other of our printing customers where we are featured with our touch technology in more or less every model that they release and have been so for several years now. This is also a development that we are working to achieve and striving for in the PSM business. That may include that we are on the way to the third stage, also change business models from product sales to licensing. We see that as one of our strengths that we have the two business models that are complementing each other and we can serve customers that want to buy low and medium high volumes and at a certain point customers may likely want to shift to licensing when the volumes grow and then we can continue to work with them and support them in a effective way. So basically in the sales cycle we want to penetrate its upside down pyramid and this happens to be the same as we penetrate the market bottom up. So retrofits typically is what we are looking for with small and medium-sized companies and also what our partners are very much hard work in doing and our own direct sales is directed towards medium and large companies looking for new installs and retrofit solutions. So these two pictures describe the dynamics and the way we are working and the way the elevator and kiosk market work. The last two years we have been expanding and developing our partner network. We will be mentioning our distributors. We also have a number of value added resellers. Highline in Germany and then technology in France, whole industries in the US for instance but more prominent is several partners that we have in Japan, Korea, China and other parts of Asia that are very professional, very strong and very active and helping us penetrate these different markets and the different segments. In North America we have built up last year our own network of manufacturers reps and they help us reach customers in North America, US and Canada and they represent Neonode in front of these customers and as you know in North America and US especially is a big ICT market and we see actually very large volume potential in the future from American and Canadian customers. Looking at the progress we have been making in the elevator segment we have actually secured businesses with a number of elevator control panel companies. Findtech in Korea, Eatspeed, IFR, HKPC, China, Enthed Technologies Canada, UHS, UK and so on. Some of these companies are fairly large and well known and they work both in the aftermarket and versus OEM elevator companies such as Multiple Flavor is MAD, another one is Dearest and the third one is Findtech. They all work directly to real estate owners and elevator maintenance firms and upgrade firms but they also offer and sell their solutions and products to the major elevator companies. We are working deeply involved with a number of other elevator OEMs in the world. We cannot disclose the names of these. We have very strict NDAs and also they are sort of secretive towards us and our partners in their plans and their rollout strategies but we are very much encouraged by this and I want to refer back here to the sales cycle description and this is proof that we are entering now in a serious way the second phase where we discuss directly with OEMs and develop new

equipment solutions for elevators. With Kiosks the story is similar. We have actually

secured businesses with a number of kiosk manufacturers and they offer typically both retrofit solutions and new equipment solutions. In many of these cases we can today not disclose the names of these companies but they range from some of the very largest interactive kiosk companies in the world to medium sized and in one case also a small player, a small national player but still very very interesting and together it shows that the interactive kiosk market is there and that we have started to secure a beachhead that we are now trying to expand from and grow our business. This snapshot of our business development pipeline for interactive kiosk solutions show actually just the tip of the iceberg. We have actually many many more opportunities that we're working on. Here are some of the most significant ones. Most of these opportunities and customers they can be found in Japan, Korea, China and other parts of Asia so APAC but we also have some very interesting engagement in Europe and North America and in Europe if I go top down in this picture we work with one company doing a kiosk for transportation and use say picketing machines for train stations and similar and another customer doing vending machines. They happen to do drink vending machines and both these opportunities are significant and quite sizable and so we are partners are working on in APAC and in the area in North America. It also shows a little bit about expected duration of a typical sales and development project and when we can expect that the customers will launch products so this is not immediate and typically what we are experiencing is that the bigger the companies get the slower they are so they are in some of these cases very very large corporations that we are working with and they take time to make decisions to develop products and then to devise a marketing strategy to launch the products and industrialize and actually then launching it. Many of these projects and in the last earnings call I was showing an example of a project with 7-Eleven Japan. That was typical. We had them sort of a consortium of seven different companies working together to create that solution that 7-Eleven Japan bought and installed in some of their stores in Tokyo and other parts of Japan. Also that type of complexity of the supply chain plays a role here in actually slowing us down a little bit but overall we are encouraged by the increased interest and the growing maturity of several of these development projects and engagements and we believe that this is proof that we are on the track and that we can grow our business in the kiosk segment significantly

in the years to come. And that basically brings me to an end of our formal presentation.

I was next going to share some concluding remarks.

So

let's

do that briefly before going to Q&A with our analysts. First point, we see an increasing interest in our key

apartments and our solutions for contactless touch. We have shown snapshots of our business development pipelines for both elevators and kiosks and we are also showing a little bit of our existing customer base. We have multiple customers and multiple new customer engagements in several countries around the world. Japan is leading the way with Korea and Greater China following suit but also we have several opportunities and new customers in North America and Europe that also show great potential. We're also happy to see growing interest in our C4s and multi-sensitive technologies from automotive customers and also avionics customers. And I want to highlight here that we have started a development project with European OEM for driver monitoring and also that we are engaged with several automotive tier ones regarding head-up display object detection which

we are addressing with our C4s platform. We have mentioned in our report

that COVID-19 continues to bring challenges to our sales and business development and first of all we have lockdowns and travel restrictions in for instance China and many of you have followed this and know that in China they are experiencing now a very tough situation with outbreaks of the Omicron variant of the COVID virus and everything is basically shut down in cities like Shanghai and later in cities but also in Taiwan they have very very strict lockdowns whereas Japan and Korea now are starting to open up thankfully. So it's changing but COVID-19 is still here and around and affecting the world. We are not directly affected by semiconductor shortages but our customers are often affected by this and have problems sourcing enough components to scale up their production or launch new products. Also we feel that our customers in some cases are a little bit of a geopolitical situation and general economic uncertainties regarding effects of the war in Ukraine and similar increasing interest rates or even gas prices going up and so on so that's indirectly affecting us and our customers. Overall we believe we are well positioned and well financed to expand our product business and also to revitalize and grow our energy and licensing business and we are hard at work at this every day in the company and we are very much encouraged by the traction we have in our business development work in Japan, in Korea and other parts of Asia. Lots of several opportunities with automotive OEMs and tier one manufacturers. Plus some additional opportunities I mentioned in this call. So we strongly believe that we are on the right track and that we will grow our top line significantly

in the years to come. Thank you. This brings us to the end of

our formal presentation today and now we'd like to open up the call for Q&A.

Thank you. If you would like to ask a question please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing the pound key. Again that is star one if you would like to ask a question. We will pause for a moment to allow questions to queue. Thank you. Our first question will come from Jesper Von Kock with Red Eye.

Hi guys and thanks for taking my question. Let's start with products. For products you have three major ongoing projects that we view as the main revenue drivers for 2022. So 7-Eleven, the Elevator OEM and the Japanese sushi chain. Could you elaborate

on the progress of these? Yeah, first of all I'm not sure

I fully agree that these three products are the main revenue drivers this year but they are indeed significant wins for us and we are very happy with them. We have with starting with that elevator company we made an announcement in the fourth quarter. I believe it was about a new elevator OEM deciding to use our new product. TSM and our contact with the new elevators. They have already developed solutions. They have started in a smaller scale to launch it in the market. They are slowly also opening up the curtain when marketing is publicly and showing commercials and our local people in that market have shared pictures of that and I'm sure they will continue that rollout and I have no information suggesting that they have second thoughts so the rollout is continuing. It's looking good. Also the feedback we have from 7-Eleven Japan is very very positive. They clearly have the ambition to roll this out in a bigger scale across their stores in Japan. Personally today I am missing like day fresh updates regarding this the pace of that rollout but we have no information suggesting that they are backing away. Regarding the sushi chain, one of Japan's major sushi chains have already installed in all their self-service kiosks in all restaurants across Japan. The contactless touch interface so that you can reserve a table and you can also pre-order the food outside of the main restaurant area using the self-service kiosks. They are sitting there in public and being used every day. We are working with other quick service restaurant chains in Japan and often other countries and we hope that this will be like a snowball effect when other chains see what this first chain are doing and how

well the solutions work. All right thanks for the for the cover. So

in light of all the uncertainty factors playing an important role at the moment, what's your view on a potential ramp up of revenues during 2022?

It's apparent that we indirectly is we are under pressure due to COVID pandemic lockdowns and also to some extent the strain of supply chains for semiconductor. We have seen this from some of our licensing customers in automotive and we are also seeing this from some of our products customer and it's like indirect effect so it's a little bit slowing us down and probably taking a little bit of the edge out of our growth this year but overall it's not a significant problem or risk. It's a little bit slowing us down but that's our feeling. Overall the trend is positive and our own suppliers remember our licensing customers buy special circuits AFIX from Texas Instruments which they use to realize the touch features that they are using in their printers and automotive and similar and TI is also a little bit under pressure but they have confirmed to us that the situation is under control all of our customers will get all of the AFIX they need for their production. So it's a tough situation for many but we and our partners we are actively working to mitigate any problems

and risks that this causes.

Okay

good and

so my last question like since the Q4 report you haven't announced any major customer deals you talked a little bit about it but how do you experience the underlying customer activity and the interest?

We are very positive still of course we are also working hard to actually realize new business wins with customers around the world. We have actually a very broad and deep pipeline and we have shared some insights into that pipeline today. We expect during this year actually that we will get positive feedback from several of these customers that we have indicated here and projects we've indicated here in this call from automotive OEMs tier ones and also elevator and kiosk companies. So we are actually very encouraged by that development still although we also would like to see a faster pickup of the sales revenues definitely and of the sales volumes.

Thank you our next question will come from Walter Lindhagen with Pareto.

Hi and thanks for taking my questions. My first question is regarding your input costs. So a hot topic right now among manufacturing companies is increased inputs costs and I wonder how much you've been affected and how kind of what's your ability to raise prices or are you able to do that instantly when you experienced increased costs or

will there be a lag there?

So for our own production of PSNs in Chrono technology we actually have from last year secured significant component stock and also in the cases where we have more recently bought additional components we didn't experience any major cost increases. So for that reason our own situation is sort of stable nevertheless we have reviewed and updated our pricing strategy and also improved on our margin in this product business over the last 18 months. So hence the good margin that Fredrik talked about in his presentation earlier during the call. In other cases we are fully aware that raw materials and components can drive costs up and down. This is a little bit perhaps slowing down some of our kiosk and elevator customers but it's not stopping them completely and I cannot comment on and I don't know about the magnitude of their challenges with the cost increases and their possibility to increase prices of their products but it's like an indirect effect or a risk for us not really a direct issue for NEMO or Chrono technologies.

All right thank

you and

then

just another question related to the gross margin there as you mentioned you showed on one slide that you have had a constantly improved cost margin for quarter over quarter for more than a year. Could you just remind us a little bit what has been driving this development?

Yeah I will let Fredrik

answer this.

Yeah so during the years we have looked into the cost that we have had and we have also increased the prices so we have as you can see in the presentation we have a table showing you a time effects and the one time effects obviously drove the gross margin down and now we can see a more stable gross margin and it's developing well.

So Fredrik means that

in the report there are further details included that explains the one time effects and some of them were taken already before and not in this quarter but in the fourth quarter last year and even earlier than that. Going forward now we think that we have actually cleaned up the books and taken out a lot of these one time effects and we will see like a more stable situation going forward.

All right sounds good thanks that was all for me.

Thank you this concludes today's Q&A. I would now turn the call back over to our presenters for any additional or closing remarks.

We

just want to thank you for taking the time to join in this call and we wish you a good day. Thank you very much.

Thank you ladies and gentlemen this concludes today's event you may now disconnect.