Neonode Inc.

We consider these various risks uncertainties and other factors. Any forward looking statements included in the presentation are made as of today's date. We undertake no duty to update or revise forward looking statements. This presentation has been prepared by us, the company, based on our own information as well as information from public sources. Certain of the information contained in the presentation may be derived from information provided by other industry sources. The company believe that such information is accurate and the sources from which we have obtained it are reliable. However, we have not independently verified such information and cannot guarantee the accuracy of such information. Thank you for your patience. And with this, we swiftly move on to the next point in the agenda, the presentation of the financial results.

Fredrik. Thank you, everyone. You can find our earnings release and thank you on our website, neo.com, under our IR section. I will in this presentation just summarize the key points. Revenues for the third quarter was 1.2 million. That is an increase of 26% compared to the same quarter last year. We saw a recovery in license revenues for the third quarter, mainly due to that our licensed customers within the printer and automotive market has had more volumes. We also saw in products a slight recovery to 155,000 US dollars, an increase of 14% compared to the same quarter last year. We are still affected by the COVID-19 pandemic lockdowns and also the long cycle for our customer to launch and develop products. Our gross profit and gross margin for Q3 2022 was 48%. That is an increase of 20 percentage point compared to the same quarter last year. It is on decrease compared to the previous quarters and it is due to the product mix. For the fourth quarter, we think that the product or the gross margin for products will increase again thanks to favorable product mix from current customer orders. Operating expenses for third quarter 2022 was 2.1 million. That is a decrease of 22% compared to the same quarter last year. We are very cost conscious and that is one of the effects that it goes down, but we are also helped by the weak Swedish currency. As we stated in the last earnings calls, our main part of our costs are in Swedish Krona. So our net loss for Q3 2022 was 0.8 million compared to 1.7 million for the quarter last, compared to the same quarter last year. And this is due to increased revenues and decreased costs as explained in this and previous slides. Cash used in operating activities was 0.5 million. That is a decrease of 69% compared to the same quarter last year. This is due to an effect from currencies on inventory and also a reduced net loss. The first half of 2022, we purchased components to secure the production of TSM's and that affected our cash flow heavily. For the third quarter, we have not purchased components to the same extent. Cash and accounts receivable decreased with 1.2 million for Q3 2022 as compared with 2.7 for Q3 2022. And Q2, 2.4 for Q1. And with that, I will leave the word back to you again.

Thank you, Fredrik. Moving on, next point in the agenda is a strategy and business update. And for those of you that haven't followed us in the last year or so, I just wanted to underline and explain our overall business strategy to combine technology licensing and product sales. If you start with technology licensing, we illustrate that in the left part of this slide. We address the printer and automotive markets mainly today with our offerings. We license two technology platforms, one we call Z-Force, which is based on infrared technology and suitable for different types of applications, as I explained shortly. And Multisensing, which is a camera-based scene analysis technology. The business model we apply here is to combine sales of engineering services, NRE, non-recurring engineering services, and technology licensing or software licensing. In the other part of our business that we internally refer to as our products business, we sell products that we call touch sensor modules or TSMs for short. They are a particular realization of our Z-Force technology platform, and these are ideal for use for touch, contactless touch, gesture sensing applications and similar. Here we mainly today target elevator customers and customers within the interactive kiosk segment. And the main revenue opportunity for us is to sell these products as standard products. It's also some opportunity to sell adaptation services or NRE in this case, which we have used in the last couple of years and we hope that we can expand on going forward. Regarding Z-Force, to understand what this platform is and what it can be used for, we have just included one simple slide today. This is a very proven and battle-hardened technology platform featured in close to 90 million products from leading printer manufacturers, automotive suppliers and also other customers. It can be used for touch on both displays and other surfaces. Gesture sensing, mid-air, contactless touch or object detection. Today we are trying to revive this business and we mainly target a high volume automotive market with this technology platform. And the two application areas where we focus the most today is head-up display object detection, illustrated on this background picture here. Head-up displays are becoming more and more common in especially premium vehicles and we will see more of them also in normal vehicles going forward. And then it's imperative that you can detect foreign objects sitting on top of that display and hindering the projected image. The other area where we focus is interior controls, both on displays but also on other surfaces, plastic, glass or other interior panels. Multi-sensing is a software framework for scene analysis using camera inputs. Here in the automotive context, the focus is driver and in cabin monitoring. Multi-sensing is a flexible and scalable platform. It's hardware agnostic, has minimal hardware footprint and works with also low-cost cameras which gives us an edge over most competitors today. Also since it's scalable and prepared to support lifetime updates in the vehicles using -the-air updates or by other means, we have got quite some interest from vehicle OEMs and tier ones for this platform that we are trying to capitalize on and grow this business on. The touch sensor modules or the TSMs, they are standardized commercial -the-shelf products and as I mentioned, it features the C-Force technology and in particular, the reflective variant of this technology. These are standard electronic modules that we offer in different lengths. We produce them in our own factory in the west of Sweden and we ship to distributors, to value-added resellers and customers worldwide today. Going back and expanding a little bit on our business strategy, we have in previous earnings calls explained our growth strategy and we are refining this continuously and today I was gonna share an update of this growth strategy in three simple steps. What we have been doing and we are still doing in some cases is to try to make the best use of this and try to establish beachheads in certain key markets and segments. We are also working actively with POC or proof of concept projects or other demo projects to show the value of our technology. This applies both for our licensing business and our products business. Today, we are at a state where I can say and I will show examples that we have established beachheads in the elevator and interactive kiosk segments for our TSM products and in particular when it comes to contactless touch applications. In other cases, we are still working really to secure a stable beachhead. So the status today for our licensing business is more that we are still working here to establish a solid beachhead whereas in the products business, we are actually already since some time working to scale this business. So in the products business, you can look in the center pillar here under bullet number two that today and going forward, we are trying to scale this business aggressively but doing this in selected key markets and also narrowing down and focusing also efforts on key subsegments in the interactive kiosk industry and also elevators. For our licensing business, the second step is to simply add more customer projects to the first ones that we are working on today. As you know, you that have followed us the last couple of years, we follow a strategy where we combine direct sales with indirect sales through distributors and value-added resellers and also other partners. To scale up and accelerate our growth, we still believe it's a good method to combine direct sales with indirect sales through these partners. And as a fairly small company with a global market opportunity, this is in practice the only way we can scale this fast and also as explained before in earlier earnings calls and in other presentations, as a Western company based in Sweden and US and working in many Asian markets like Japan, Korea, China and so on, it's actually almost necessary to open up doors using local partners in the many of these markets. We also have a clear site where we wanna go once we are up to speed and so on. And this is simply to expand to more segments and more geographical markets. But today, what we are doing is really focusing on the step one and two and trying to be very, very focused. And this also is our cost-conscious approach. While at the same time, we believe very much in the potential, we are conscious about the cost and the cashflow and we are trying to balance this today and the key is focus. And we have been focused and we will be even more focused and place our bets where the chances are highest that we can accelerate in the coming quarters. To illustrate some of this strategy and the points that I claim that we have made, I wanna show some examples. From Elevator, I want today to focus on MAD Elevator, our customer and partner in Canada. They are a well-known supplier of elevator control panels. They address both the OEM market and aftermarket. Today, two of the leading top 10 elevator OEMs use MAD Elevator's control panels in their standard offerings, both for aftermarket and new equipment. In addition, MAD Elevator is also offering their solutions on the North American aftermarket and have what I see, they are building momentum in this aftermarket business. And besides MAD Elevator, we are working with similar companies, one in the UK called Dewhurst and in South Korea, our partner FinTech is playing a similar game there with both OEM relationships and aftermarket sales. So this is one example. And the approach that MAD Elevator is taking is this one that we have called in Neonode, the parallel plane approach. You use our TSM to project an invisible detection field in front of the normal elevator buttons. And when you reach out with your finger to touch a button, you activate that half an inch or so before the finger reaches the button. So it's very intuitive, it's very quick and everyone can use it. And like shown here in this picture, still for blind people, you preserve the Braille text, which is a legal requirement in many markets. And you can retrofit this and you can also install it in new elevators, the same type of solutions. MAD have developed some different offerings and the same we see with other customers and partners. So both retrofit and new equipment sales. And it's a very, very nice solution. Further with elevators, we have several companies, especially in the Asian countries, Japan, Korea and China, that have developed different hall call and elevator control panel solutions based on holographic displays. We show here one example, Chinese company GSR. And this example shows a typical hall call module where you at the entrance floor maybe or any floor, you will call on the elevator and you, in this case, you enter the floor number that you wanna go to and then you simply step into the elevator. Similar solutions of course, are applied inside the elevator cars. And we have many examples of other companies doing this as mentioned, both in Japan, Korea and China. We have some companies in Canada and also in Europe offering similar solutions based on holographic or other technologies. This is both for new equipment, new elevators and new installations, but also retrofit. And many elevators live 50, if not more years and they are on a regular basis upgraded and refurbished and refitted. And every time an elevator or building is refurbished and so on, there's an opportunity for us and our partners to step in with a retrofit. And the good thing with elevators is that that retrofit module that you typically install, the same module you can use in the new elevators. So it's very standardized this way. So we think we have a solid beachhead in elevators actually globally. Today we have four of the top 10 elevator OEMs working with our technology and offering this to new equipment customers and aftermarket customers. We also have some mid-sized OEM customers and we have several say control panel and button companies offering modules with our technology integrated. Regarding interactive kiosk, retail and self checkout stations like this one, project with 7-Eleven Japan that I reported about in the earlier earnings call, that project is progressing. Feedback continues to be very, very positive, both from 7-Eleven in Japan, the shop owners and the users. It's very positive, it's looking very good. We are placing a lot of hopes to this, not least because the 7-Eleven brand is strong, is global. And just recently we have established contacts to companies here in Europe, also working with 7-Eleven, but tech companies and this is now spreading and giving side effects, this little project that we have ongoing in Japan. And the solution here is a holographic display combined then with a barcode reader and payment terminals so that the interaction is very intuitive, very quick, simple, I tried it myself when I was in Japan in June, works just perfectly and it's much quicker than using the normal self checkout and certainly much quicker than using the manual checkout with a cashier. So for every reason, this is what we believe is one cool new feature in convenience stores and other stores for self checkout and also other applications. Another sub-segment is point of sales terminals. And just to illustrate, we took this from Holo Industries webpage and they have recently released a press release that they are developing together with Aska, which also is a partner of Neonode, that they are developing holographic point of sales payment system for MasterCard using our TSM products. And the same idea here is that you project up the image, you interact with that image using our TSM and you have contactless payment with a card, everything is very convenient. We think that you will see many more of these solutions. Already two years ago, we presented in another earnings call a similar solution developed by a Japanese company called Nidex Sankyo. And we also have further companies working on this type of POS solutions for retail and other uses. Regarding general kiosk application, I wanted to show today this very nice product from our German partner, Highline, which is a virtual keyless keyboard. Highline has most of their customers in the industry segment, but this little nice product shows the flexibility of our TSM technology. And obviously you can use this also for kiosk application. Indeed, when we have presented previously about contactless touch for kiosk using the parallel plane approach is this approach. You can have a display, a normal display behind this, or like they have done here, like a plate or any surface and project or print symbols that represent icons. So you don't need any physical keys or a display, you can do it much cheaper and you can configure this with software only. So it's very flexible. And this is the way Highline is now marketing this to their customers. And obviously we are glad to help them to promote this also worldwide to ship this to customers outside Europe. Very interesting product. See more on Highline's website if you're interested. So speaking a lot about holographic displays and this parallel plane approach for contactless touch, I still want to return to our origin and that we are still taking new orders from customers using our TSM for touch applications. This is one certain information and payment kiosk from a company called IncAviation. They are very, very proud because they have developed a range of kiosks that are very slim and take minimal space, still can offer a lot of value for our customers at airports and shopping malls and similar. Here they use our TSM basically as a retrofit to their display solution, offer now interaction using touch on that display. So very flexible, you see very neat integration and looks super nice this product. Similarly, we announced recently an extension with our Swiss partner, Elix, who is supplying displays for MRI systems and X-ray systems. It's a range of products used by a leading Medtech OEM in five different products. I believe it's two or three X-ray systems and two or three MRI systems that use the same type of display arrangement in different sizes. The point here was that doctors and nurses need and it's even required by law in some markets, when you examine X-ray pictures or MRI pictures, you need to have a certain image quality and contrast on that picture to be able to make the correct diagnosis. Then this Medtech OEM wanted to offer touch interaction on the same screen. And our solution is basically the only way to do that without interfering with the contrast, the brightness and the resolution on the screen. So together with Elix, we have developed a retrofit solution to their original display that was previously passive. Now it's interactive. So very, very nice example. And this is touch and we are proud of this, even though in many cases we promote contactless touch. And this shows that both are very much viable in the medical area. And this is a future growth potential, although we haven't really focused on it 100% so far. But I'm just saying that this is an area where we think we have unused potential and we will also increase our focus on this going forward. We are still affected by effects of COVID, but thankfully more and more countries are more or less back to normal. You can travel, you can visit customers. And we are trying to do that more and more now. It's a little bit unusual because the previous two years been basically impossible to travel, meet people face to face. But we are doing more and more events. We are also continuing in parallel to do online advertising and marketing campaigns using digital means in different channels. Here's just a overview of certain events we have visited recently and some that we will join shortly. In closing, I would like to highlight this one is an upcoming event called Japan Build Expo in Tokyo in the beginning of December. This is a picture of the booth. We will have it at show. This is a joint project with our three Japanese value added resellers, Metatechno, NextElectronics and Global Electronics. We also have invited and got strong support from our tech partners, Aska3D and Parrot Innovation. These two companies, they develop and produce and sell plates for holographic displays. They're actually competitors, but we are working with both and they are joining us both together on this show. Also joining us in our booth and separately is eight different Japanese and international companies including large corporations like Maxell, Toppan, JDI and medium sized companies next to them. In total, we are showing here with our customers and partners in Japan, 15 different products. Most of them are holographic display products, but we also have some other showing how to use our TSM for contactless touch interaction on, for instance, building entry systems. As I mentioned before, POS systems, self checkout system, information kiosks and elevator control panels. Some different variations to the technology and the application, but it shows a very strong statement that this technology is reliable. We have strong backing by major players like Maxell, Hoseiden, JDI, Kanda Kogyo. And we are very happy to be on this show together with them. And of course, around this in Japan and internationally, both we and these customers and our partners are trying to spin this and use this as a showcase. Going forward, we will do more events like this in Japan, Korea and China, but also some in Europe and US. So this is a little bit a snapshot into our marketing and business development work. And I hope you can appreciate this. Follow us on social media and through our website for regular updates on shows and other campaigns and advertisements we do, because I think you will enjoy it. And they also contain a lot of information. With that, we are basically nearing the end of the presentation. I just wanted to round off with some concluding remarks. And after this, Jesper will come back up and we'll have a short Q&A session. So today we have reported the Q3 2022 financial results. The summary is that sales revenues and net results are much improved compared to the same quarter last year. It's due to increased sales, but also cost control. Cash flow, also much improved. And Fredrik gave the main reasons for that. Actually, we have purchased during the first and second quarter a lot of components stocked up and that's by necessity because some of these component suppliers require us to place big orders. So the minimum order quantity we can order is actually quite large. But now we are well stocked on all these components. So for the third quarter, we didn't have to buy anything. But also we see effects of our cost control and currency that really improved cash flow this quarter. Although we see light in the tunnel, we see that we have a clear break in the sort of boring trend that we saw from third quarter last year until the second quarter this year. So the third quarter we have seen much higher activity level. Even in China where we have some significant headwinds due to lockdowns, but during the third quarter we got spontaneous calls from previous and new customers and partners in China. So things are starting to move there again. But I must mention this, COVID-19 related lockdowns in China is a problem. And yesterday I read in the news that in the south part of China around the Guangzhou area, they have now record high COVID rates. And they are planning to have a super strict continued lockdown. So just shows that this pandemic unfortunately is a serious issue in China at least. Semiconductor shortage and other supply chain issues, those are affecting some of our automotive and printer customers. Volvo Cars is one of our end customers. And they have reported problems and they will stop production. Of course that type of issues hurt our sales because if they produce less vehicles, our customers who are supplying these infotainment systems to Volvo, they can sell less of their products. Also we are a little bit surprised, but we are now learning how to adapt to this. But both in the licensing business, where we knew that we will have long sales cycles and long development and long shankers. But we see actually the same in the products business in some cases. One of these leading elevator OEMs that have now launched products that they have developed in-house. They are launching this now and scaling up that business. They actually presented a fully working and nice looking prototype in spring or mid 2020. Now two years later, they are like ready to start to launch and build up. This is a fact and it's nothing we can do to change that because this is a multi, it's like a fortune 200 company. They of course have their processes for quality assurance and the launch and operations planning and so on. But that clearly is affecting us and it's holding us back a little bit. So as I said before, we are now focusing on scaling the business. We feel that in the products business, we have created strong beachheads in elevators and kiosks. Now we need to scale that up. And in the licensing business, it's more like securing the solid beachheads and then scale up. And we have promising first customers that are very positive to our technology offerings and that we work very, very closely to finalize evaluation projects and other development projects that in some time will start to generate new royalty revenues. So overall, I'm quite optimistic, even though I can understand that some of you investors feel as it's frustrating that our development has been slower than expected. I will admit, I'm also at times a little bit frustrated, but I'm also still very, very motivated and think that we are on the right track and that we are starting to see now a shift in the trend here in the third quarter. We think we will present also good results in the fourth quarter. And then of course, we want to continue that trend into the next year. Thank you very much. And then I invite Jesper back on stage for Q&A.

Perfect. Thank you very much for that presentation. So, I mean, let's start with your, I mean, kind of optimistic and ending words that it seems like, okay, it's been very slow for quite a while, but now things are starting to happen. Is this much better than the previous year? Is it mostly in terms of new customers that are starting to becoming interested or is it existing customers that are starting to kind of placing orders on these TSMs?

Of course, it's a mixture of both, but in many cases, actually, we have had relationships. We have had some orders from these customers, but maybe just for evaluation or maybe just small ramp up orders. And then some actually stopped during the preceding 12 months, and then they came back now. So it's a mix. But we have to realize that when you work with, for instance, one of the top 10 elevator companies, we talk about companies with 100,000, if not more, employees, billions of US dollars in turnover. They are huge companies and they have global operations and in different regions, they don't really talk to each other. So there's also that issue. And they are, of course, cautious and watching trends in the market. But what we can say now during the third quarter, we have confirmation that also say the water lily effect. So one of these top, actually top five elevator OEMs came back now. They have evaluated it, they have also offered it before, but a little bit passively. Now they said that they wanna actively start to promote this and scale up. And I believe that this is also because they are seeing what other competitors are doing. And this is a slowly but steadily effect that we have been, of course, prepared for and working for. But I agree, it has taken a little bit longer than I expected, but I strongly think we are on the right track here and that this is now the basis to scale now seriously in the coming couple of years.

Yes, because I mean, as you mentioned previously, you have in the first half of 2022, you built up quite an inventory of 4.3 million US dollars. So, I mean, how, for how long can you stock that? I mean, of course you can stock it for a long time, but when do you expect it to be reduced by producing the sales?

Yeah, this is probably next year or say 24 months, we have enough stock. So some of these minimum order quantities I referred to before, they are like 10 million or 50 million of a single component. Now our TSM use up to 53 per TSM. So there is also a ratio of how quickly we consume this. But yes, we have been forced to buy certain, not all, but certain components in very, very high numbers. And on the other hand, now we have them, they can be stocked and we can also, when I mentioned that in the future, we are looking to have a second source production partner, we can of course share some of our components with that production partner as part of the commercial agreement. So it's on our balance sheet. I don't see it as a big liability. It's like we have it, it costs cashflow in the first and second quarter this year, but now we have it and we will consume it in the coming, say, 18, 24 months.

Good. And then also, I mean, you went into some of the elevator OEMs as customers and their progress. Could you mention anything about any other of your largest customer contracts, if you see any tendency towards moving into larger volumes?

Yeah, so elevator, I would say we are solidly in a beachhead situation, we are scaling and this is looking quite good, both in Japan, Korea, China, and Europe. And so there's a lot of things going on there. Interactive kiosk, you must understand that that segment is much more fragmentized from the beginning. So many of the players, they are regional or national and their products are also sort of fragmentized. So they have a number of different kiosks and they can look, even if it's a big, one of the big companies, global companies, they will have one product in Japan, another one in France, and the third one in Canada, and it's still branded in the same way. So that's why we are seeing like it's more diverse. But we have explained before that we always see this market as a pyramid where at the bottom we have many small customers. They can be big corporations, but one program can be fairly small, but we need to add more of these and it's slowly but steadily going upwards. If I can highlight a couple of example, one I can mention is with our partner, MZ Technology in France. They are working with a company called Ion Group. They are a leading provider of kiosks for passport controls, identity controls, and similar. There is one area where we have quite good hopes, retail, self-checkout point of sales, similar to this 7-Eleven project in Japan, several such projects, both in Asia and Europe and some in US. Also this MasterCard project could pan out and then it's like a POS again. So there's some retail self-checkout POS, maybe transportation, we have been talking about this type of -check-in, self-service kiosks. There you have the main drivers I think for the coming period.

So if I just understand it correctly, it seems like you can grasp the, or you can sense the upcoming volumes in elevators whereas you see the traction in other segments but it's harder to quantify perhaps.

Yeah and I think what we have, it's the case is that it will not be just one silver bullet like one customer steps up and at one time orders two million TSMs, it's gonna be slowly but steadily, even from these large corporations. Because today, everyone works just in time. They don't stock up on anything, so they order as they deliver or as they produce. So more and more of this and hopefully then more orders and more frequent. But it's definitely potential here to scale, definitely.

Good and then we have one other question from one of the other analysts. So it's, okay. Okay and that's about the OPEX. And I mean that was reduced from like 2.8 million in the quarter and down to 2.1 million. So how much of that was currency effect and how much is more of you being cost conscious?

Well, cost conscious is a piece of it but also we have had a development in currency that is favorable for us. So of course, a lot of it is currency effect but it is still also that we are cost conscious and we save costs and do things with purpose.

Okay, good. And then it doesn't seem like we have any other questions from the other analysts. So with that said, I thank you very much for this conference call and wish you good luck. Thank you. Thank you.