Hello, everyone. Thank you for standing by. And welcome to Neonode’s Third Quarter Ended September 30, 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. At this time, for opening remarks and introductions, 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 three and nine months ended September 30, 2016 financial results and provide a corporate update. Our update will include details of customer activities, technology developments, and other items of interest. Before turning the call over to Thomas, I would like to make following remarks concerning forward-looking statements. All statements in this conference call, other than historical facts, are forward-looking statements. The words anticipate, believe, estimate, expect, tend, will, guides, confidence, targets, projects, and other similar expressions typically are used to identify forward-looking statements. These forward-looking statements do not guarantee the future performance that may involve or be subject to risks, uncertainties and other factors that may affect Neonode’s business, financial position and other operating results, which include, but are not limited to, the risk factors and other qualifications contained in Neonode’s Annual Report on 10-K, Quarterly Reports on 10-Q, and other reports filed by Neonode with the SEC to which your attention is directed. Therefore, actual outcomes and results may differ materially from what is expected or implied by these forward-looking statements. Neonode expressly disclaims any intent or obligation to update these forward-looking statements. At this time, it is my pleasure to turn the call over to Thomas Eriksson, Chief Executive Officer of Neonode.

Thank you, David, and good day everyone. First, I would like to introduce the team that we have on the call today. We have Mr. Lars Lindqvist, our CFO; Mr. Remo Behdasht, VP of our AirBar business. They will provide an update on the respected responsibility areas during this call and I will provide final remarks and a summary. We will start today’s call with comments from our CFO, Lars Lindqvist. Lars, go ahead.

Thanks, Thomas. You can find our Form 10-Q and the third quarter earnings release, available for download from the Investor section of our website at neonode.com. During this year, we made investments in manufacturing and distribution and sales [indiscernible] at AirBar. The manufacturing process is in place and is now starting to generate revenue. We are on our target to reach our goal of $3 million in third quarter quarterly operating expenses. And on the combination of that cost reductions and expected increases in license fees and revenue from AirBar phase are the keys to take us to profitability in the fourth quarter. With the transition of selling modules and products, we do expect a unit revenues to go up and dollar margins to increase compared to our current license business. The effect of the exchange and business model that creates three revenue streams, that they come from our Canada and [indiscernible] customers, our module sales and our own product like AirBar. Our ambition is to convert the current 10 million plus units this year rose to 20 million plus units this year business and add sales from the modules and products to the mix. Our customers have asked to simplify the integration of our solution into the product. And as a result, we have done significant investments building a faster with a scalable process that can produce our sales at the lower cost and today at higher dollar margins. During the quarter, we completed a financing transaction with stocks and volumes raised approximately 8.7 million gross and received approximately 7.9 million in cash. Net of direct offering cost, the AirBar securing the financing necessary to fund the manufacturing and distribution of our first consumer product AirBar. I want to talk in more detail about this in my further comments.…

Thank you, Lars. Good morning, everyone, I am super excited to announce that U.S. customers can now order AirBar from provantage.com. and within days U.S. customers will be ordering AirBar online from Amazon, Best Buy, CDW, Dell, Newegg, Staples and Walmart. All of these quality retailers have agreed to offer AirBar to their customers. A recent development and that we also in the setup process with QVC. This is a very important sales channel for AirBar as it represents an opportunity to get to AirBar message into 100 million households just in the U.S. and also serves as an internal part of their marketing plan. So, what is the market opportunity. Throughout the past 11 months, people sometimes ask me, why don’t all laptops had a touch screen? And the answer is this. Greater than 95% of existing 600 million laptops worldwide and more than 85% of the 160 million new laptops we sold today don’t have touch. There are a number of reasons for this including late, out of thickness, excessive battery consumption and screen glare associated with capacity touch technologies. And this is information given to us by Microsoft and the PC OEMs. The fact is people are keeping their laptops longer but still want the latest functionality and then want to buy new laptop just to have a touchscreen. AirBar is the perfect affordable accessory upgrade. AirBar brings the best of Windows 10 to existing and new laptops devices and makes the Windows experience even better. Microsoft is very motivated to convert Windows users to Windows 10 and this works very well for our cause. There is a huge market opportunity and AirBar is now ready. With all this infrastructure in place in the U.S. and replicated in Europe and Asia, we have a solid foundation to…

Thank you, Remo. I would like to start by talking about our diversified business model. We now have three revenue streams which are all based on our patented technology free force. We have our royalty business model; we have our new B2B embedded sensor module sales and we also have revenues from our consumer products like AirBar. Although the focus my remarks on how these three business segments will impact us in the fourth quarter 2016 and next year. We expect to see in terms of product to allow performance in our key markets and key technology advances. I'd like to start with the summary of our accomplishments regarding AirBar over the last 11 months, which is really amazing. First, after working with the business market for long time. We find on this - allow the touch penetration release and that is spread among many devices and OEMs and that the big opportunity is really touch as an accessory like a mouse or a keyboard. So, we invented a plug and touch accessory product that could touch enabled laptops using a standard USB port. We developed a new sensor module to power the new product that scales which can support all current bestselling sites as called Notebook PCs, 13.3, 14-inch and 15.6-inch. We built a new fully automated factory to produce high precision sensors at low cost to high volume applications with the roadmap to get the full automatic qualification. We signed worldwide distribution agreements Ingram Micro, the world's largest distributor for consumer electronics. We shipped the first unit to customers and to resale this via Ingram Micro and we are ramping now. The first online store has gone live in the U.S. We have started to receive great reviews for the product. We have an estimated sale of approximately…

Thank you. [Operator Instructions]. Our first question comes from the line of Rob Stone with Cowen and Company.

Guys, last quarter I have few questions. The first one is on AirBar production for Remo or Thomas I guess. Are you - production constrained or what is it that means you are only able to release one size so far but we’re keep stacks the 14 and 13.3-inch model?

The market for notebook is I think 68% of the notebook with approximately 15.6 inch and you have like the 13 inch and the 14 inch is roughly 10% each but our main focus has been to deliver 15.6 inch virtual first and then we working on getting up to 13 and 14 inch as the second step. This has been our focus. 11 inch we have seen quite little demand still an approximately on top and we are looking into and as Remo talked about earlier, we will have first to support from back and even largely size like 17 inch for gaming notebooks in 2017. That’s the focus.

Okay. So, there is nothing special about the other size is it just going where the fact part of the demanding, great. With respect to the auto customer or there is the model that declined, was there an issue with the touch display that you supply into or is there something else about that car that car get to we have a big different sale?

No, it’s related to some other problems. There is nothing to do with our touch or anything like that. And then less than surprise to see that coming from the particular number but that’s I guess on a mark to work.

Okay. A couple of housekeeping questions from our, if I may and now jump back in the queue. Lars, could you give us the capital expenditures and depreciation amount in Q3 and you have an expected number for weighted average shares in the fourth quarter. Thanks.

Rob, this is Lars. Can you actually repeat, because I didn’t see the cash exactly build the couple of questions you would?

I see a meaningful jump in property plan and equipment and also, I think from equipment, do you think so if you could just give us some more details on what where your capital expenditures in the third quarter and what is the run rate for depreciation that results from that, that was the for the part of the question. And then the second one with just how do you think about the share account for the fourth quarter?

Let me start with the basic what you asked about the property, plants and equipment and as you know when it comes to property, plant and equipment mainly related to manufacturing line as for the sensor AirBar manufacturing. So, that what you have there then that is that 2.1 million you can see in the balance sheet and all on that is basically eventually capital lease and we leasing it through banks, Swedish Bank. So, that’s the setup. And then and I think you could repeat the second question.

So, you don’t have a figure for what the capital - in terms of the cash flow the CapEx and depreciation - I can this offline if you don’t have it handy, but then the other question was since you did a recent offering, if you just have a weighted average share number in view for the fourth quarter especially as it sounds like you're expecting to be profitable for the fourth quarter. And so, that might be bringing some covenant stock equivalence. So, I'm just wondering if you have an estimate for what will be the average shares as we're computing earnings per share in the fourth quarter. Thanks.

There are number of shares we have at the as far as approximately 48 million shares.

Okay. Thank you.

Our next question comes from Mike Malouf with Craig-Hallum Capital.

Great. Thanks guys for taking my questions. I just want to talk a little bit more about AirBar. As far as the manufacturing goes, Thomas maybe you can talk a little bit about what you're doing on the fine tuning in particular. And where you are with production and where you expect that to ramp over the next I don't know say month or two just as we get through this initial phase of mass production. Thanks.

Yeah, hi. So, our target is to reach about 3000 units per day by end of December. And we are ramping from now so improving everything. When we assemble something like this is a quite sophisticated process which we have done to reduce the cost and improve the performance of this modules. And always we had increase a dollar margin and to be able to get the engineered type of products like an AirBar.

Where are you now in production?

Yeah, I won't go into exactly where we are, it's going from Sierra which was started few months ago and been ramping from that point. We have been getting products into Ingram we start shipping products too to our preordered customers. So, we expect to see approximately 20,000 to 50,000 produced by end of December. And that's something we will account revenues if we could ship it approximately two weeks before the end of December.

Okay, great. And then when you take a look at your forecast of 500,000 for next year. Is that an I mean if you get to the 3000 per day obviously, that would be over a million per year. So is that 500,000 a number, how did you come up with that number and is there some supply constraints around that at all or is it more of just all how much demand and that you've received on the product. Thanks.

Yeah, I think Remo can answer exactly that's the estimate based on what we see from our customers and what they see as the market and how big it is and different ways have been to sell this product. And of course, it's also associated with the marketing exports. And if you could sell more and less that depending on how much you can invest in marketing. Our production capacity as we said is roughly 100,000 or 150,000 per month with this production line we have set up. We have an ambition to produce urban modules in this factory not only for AirBar, which is important for customers that are transitioning now like a print to customer transitioning into using modules. And we also have all the type of sizes of AirBar and other similar products in the pipeline that will be coming out from this module, coming out from this line. We also have divided it, so in this factory it's a fully automatic factory producing sensors and then we have for products final assembly of the product with partners. So, our focus is to sort of embedded sensor and then work with partners for encapsulation and packaging and testing and so on so forth for these consumer products we are doing. So, we are looking up adding more software features too, it's like MacBook support, increased license for it for gaming notebooks. We are now being looking at different functionality for this sensor type function like iTracking for example. So, we should work with some partners to shift.

Okay, great. And then Lars, I think you said earlier on the call Rob sort of reiterated this to in his question, that you’re going to be that you’re expecting to be cash flow positive in the fourth quarter and I am just wondering what level of AirBar sales does that assume?

We have not - to range between 20 to 50 to discussed and if we reach it would ways in that range we’re getting closer and that’s we also said we do expect that revenues royalties from the new - two new printer customers, we also gave support to do licensing business on top of that you have we see the recovery of the automotive and on top of that getting closer to 2 million to 3 million in OpEx. I think we are getting closer.

Great. Thanks a lot for my questions. Appreciate it.

Our next question comes from the line of Tom Basin [ph] with Pogrom [ph].

Good afternoon, guys. The - can I start with AirBar. The - getting to the previous question about production. Is the current line portable to new lengths AirBars?

You mean different sizes, or

Yes, different sizes.

Yeah, yeah it’s actually, in spite the module segment, so we can if you would open it out by you would see a segment kind of structure. So, we can easily replace and add lenses and optics and there to do different sizes are very simple. So, we have for other customers the 8.9 inch, 11 inch as long coming, we have the 13.3 and 14 inch for the decent market and we having a long like 17 inch for a gaming market coming as well. Everything can be done in this factory and basically we can see that we are using different material and with automatically get adjust to different sizes.

So, this current line is producing is can be portable to any length or any size.

Yes, any size and in fact, it’s a portable we can put it in California if you want to. So, we did this is Sweden because we had to really focus on getting this fairly complicated technology working and be flawless and now it’s for scale to different sizes and different locations even different partners. So, that’s not we are also looking into see how do we do that because all of our customers, last talked about 10 million printer customers we have is going to transitioning to using these modules and that requires obviously not the million capacity per year, 10 million per year capacity we need. So, we’re looking into how we scale this during the initial 2017. We also have working on a very low cost type of sensors embedded for this market for a current E-Reader customers and other low cost applications as well.

And so, the one follow-up question to that. How long does it take to switch from the current size to the 17 inch let’s say? Can you do that in seconds or hours, or days?

It’s in little time. So, basically the equipment reads on the PCB that we fitted equipment it reads the barcode and see what kind of thing is coming into the - including into the equipment and then sensor - reprocess to different sizes. And then when it comes out, it comes out in format in different with these different sizes identified from fully processing.

Great, and then on the 2017, 500,000 units, where are you coming up with that number or how are you getting to that 500,000?

Hi, this is Remo. The 500,000 units that we came up with is essentially based on the indications that we're getting looking at a global perspective. So, for example, we are looking and that number may actually be maybe too optimistic or too conservative. But we believe we could have pick the million as Mike saying before, you could be revising or be making 100,000 units a month excess 1.2 million. We could have taken 1.2 million, but realistically based on a steady stable growth plan that we have we are looking to make sure we have good penetration in the U.S. market, European markets and selected Asian markets. And of course, India is a major opportunity for us as well. So, we believe that to grow this business sustainably there are the markets we need to target and that initial target for us is going to be 500,000. The partners that we're talking to as the indications they are giving us that's the number which we feel comfortable with.

Great. And then do you sale these in local currencies? In other words, when you sale into Asia Pacific or Europe, do you sale in euros and yen or Chinese yuan or is it all U.S. dollar based?

To simplify our business, we focused only on USD. So, that happened for India, that will happen to Singapore. And that just simplifies and streamlines our business model. So, we'd have to work to much of our conversion rates and exchange rates et cetera.

So, you sell that to Ingram Micro in US dollars?

Correct exactly, yes.

And then one follow up question I'll get back in the queue. Gross margin on the AirBar?

So, gross margin on the AirBar is essentially the type of numbers in most consumer electronic companies aim for. So, we're looking for some way between 50% and 60%.

Okay, thank you. I'll get back in the queue.

Thank you.

[Operator Instructions]. Our next question comes from Ron Chase, a private investor.

And good afternoon. And maybe I missed this, a lady - was interrupting me. So maybe I missed this when did you say cash flow breakeven? Hello?

Hello, Lars here. What I said was initially that based on what I discussed about expected increase and not just see the revenue from AirBar within the key drivers together with at least getting close to the $3 million per quarter in operating expenses. We say it come back a little bit that we will be there fourth quarter.

And is that a wish or realistic?

Well, you can say like that. I starting to believe with all the time it's naturally excessively what we will getting from our customers. But we have the license, so we expect based on the new - two new printer customers that are quite substantial together with recovery of the automotive, we believe there are huge operating opportunity that previous restate target. That we don't have adjust that in the license fee reporting of the. To getting more visibility when it accounts for AirBar day-per-day.

As you're gathering more information what have you done to control expenses or reduce expenses as you're ramping up?

I would say, we have been very focused to - basic - that this transition means a lot to how we are structured when it comes to say what cash cost structure, because we do less custom design work. And - about the expenses that developed. Basically, that if you took expenses last year third quarter, and included all three expenses we basically move into balance sheet related customer project - project it was $4.7 million and now we are down $3.8 million the quarter. and if you take out even that would non-recurring expenses of 600 you down to 3.2 from 4.7 to 3.2 that’s reduction was $1.5 million that’s over 30% that’s required to work down.

And do you have further cuts planned?

To account more we think we have a line motivated overseas are - and so forth but we believe we’re getting closer now to do $3 million per quarter which has been our target to ship.

Okay, thank you.

And we do have a follow up question from the line of Rob Stone with Cowen and Company.

Hi. A couple of questions related to the module business for OEMs, you announced by press release the automotive win it’s expected to be around the $11 million over the life of the project, can you tell us for which model year that’s expected to launch?

We expect production to start in small quantities by end of 2017 and then the big volumes coming in 2018 and beyond so typical life cycle of car today could be anything from three to five years.

Okay. So, that sound like a big follow of the typical launch window for 2018 model vehicle great, and then when you mentioned a number of different projects for B2B modules printers and some other things and can you say when we might see the first B2B module mass production for AirBar is your B2C business when will see the first module production for B2B for something else?

Yeah, we’re working on that I think we will announce more about when we know exactly and the business and what we can say going forward we just a start business model will be similar to this business relationship that we announced that we can seeing it’s forecasting we can get orders and will be much added for us to predict the future revenues, which is historical being quite complicated with the slightest in business for every quarter could be a surprise party sometimes, so it is a nice thing that’s going to happen and we think that during 2017, there is going to be several of these kind of businesses coming up and it could be of going into product similar to AirBar. So, it could be consuming products and aftermarket type of application for automotive, but the built in total automotive applications normally take longer. So, I guess in terms of automotive applications, the only one we're going to see in 2017 would be at this stage, so then on top of there is going to be aftermarket products in automotive and consumer electronics products and we will announce that when that happens.

Okay. So, do you have any design win for modules outside of automotive in hand already or are you still pursuing those deals?

No, we talked about we have a quite deeper relationship with some of our Tier 1 in door handles, if you have a car coming from the U.S. should probably using their door handles so that’s expected to products coming out next year. So, we have actually some relationships going with customers for embedded modules as well, but we can’t talk about that right now but we will announce when it happens.

Okay. So, it sounds like there is a pretty good chance for at least one OEM project for modules during the course of 2017, is that…?

It can also add that we are going to work with companies like ST Micro and Texas to distribute our embedded sensors and in terms of sales, we’re also working with ST Micro and Texas Instruments, which is our silicon partners to sell our embedded modules to all of their customers, because there you’re seeing their chip inside. We have quite a great relationship and can utilize the salesforce with it. For example, we were together with ST Micro last year on CVS promoting our products inside of their home.

Great. Looking forward to the upcoming news. Thanks, Thomas.

Thank you.

We also have a follow-up from the Tom [ph] with Pogrom [ph].

Hey, guys on the auto business, can you help me bridge from 2016 to 2017 both in units and average selling price?

I mean for the overall business or AirBar or...

On the auto business. It’s my assumption that the units, because your 50% production statement, that production is going to be up materially, and also the ASP should be rising. Can you help me understand what we should be looking for in 2017 and some type of a little more granularity?

Yeah, we are - I just had it will be approximately twice as much of what we have in 2016 and we will add to the mix of some small quantities of module sales, which are significantly higher selling ASP and gross margin. For example, our recent deal with [indiscernible]. So, the revenue stream will be not only for licensing, but also our modules, it might be also from quantities coming from off the market sales. But some testaments we have for all the market products.

So, more than two times the volumes that if ASPs are running around $3 in 2016 are you talking 50% higher in 2017?

No, not on the license fee, we don’t see that. We see that we’ll have the transition into selling this not just the customers is that we might see a much, much higher revenue number on each module we sell. So, today, we have an average of slight less than $3 per unit for our auto multi-customer, but it could be almost 10 times more than that for a module that we sell directly to our customers. And also, we’re targeting in gross margin of 50% to 60% from these module signals, not in the dollar numbers on the unit is sales is going up quite a lot. And this is really where we want to deal with our business and something that - it's part of the problem with licensing is that is what difficult to get what we want from our technology.

So, if I hear you correctly, it’s not only is your revenues multiplying versus current run rates because you're switching from 100% royalty rate to a module business, but your gross profit dollar contribution will dwarf that’s currently coming in?

Yeah, exactly.

Okay. And then follow-up...

That’s why we have done this the transitional business is to go of course, you’re going to have 100% gross margin but dollar margin is much higher in the revenue number, much higher as a result.

Okay. And then is there - it seems like we're told after after-the-fact a lot of these design wins, which I understand why you do that? But could you tell us how many cars are in the pipeline and you’ve given the ability to win for Neonode?

I think it’s roughly half of this, you know, we have 50, 60 cars in manufacturing in the [indiscernible] starting this year and next year. We have 32, 33 cars last with our technology and more to come that we see. We also have other application areas, this is for the infotainment system for the touch for the infotainment system, but we also have quite interesting things coming along now with tailgate sensor with handles gesture sensing technology are steering wheels which is kind of crucial part for self-driving cars for handling the handle processes. So, we have not only one type of slot for the car. We kind of see a lot of different applications for single car. So, that means also that it might be that we sell more than one year the car going forward.

So, there is 15 to 16 currently in manufacturing. There is 32 to 33 that will be launched or completely in manufacturing over the next 12 months. How many you have in the queue that you are trying to win?

Sorry, we take - we want to take the whole market, but it takes time. We calculated that we have sort of a 4% market share. We have about 26 million cars with tops estimated for 2016 I believe. If you calculate what we have it's roughly 3% to 4% market share. Of course, our ambition is to get up in market share and the strategy to do that of course is to continue I mean people have seen this technology to be very premium and we have gone into cars anything from really luxuries sports cars like [indiscernible] down to premium cars like Volvo and all the way down to sort of low cost cars like the [indiscernible] for example the car. So, we sort of map the whole segment. So, it's just to scale as we see it, but we really want our customers to take on and use our modules and there is also to be mentioned that we are working on the qualification process to do to actually start shipping this directly to OEMs as a result of what we would do in our factory setup. And that means that we can shift cost directly to OEM to their assembly line, which build of course have quite impact on revenues and the results first.

Okay. And then one follow-up question for Lars, what is the cash operating expenses on a quarterly basis.

Lars here, they are basically against a simplified $3 million that's what they are because what they talked about earlier that we are less capital funding that we don’t move from our [indiscernible] expense into the balance sheet and take into revenue when we lead to milestone for detail, basically it's a 3 million what you can use in your modeling.

And for 2017, I should use three times four is 12 million?

Yes, you can use that.

Okay. Thank you very much.

At this time, there are no further questions. I will hand the program back over to management for any closing or additional remarks.

Thank you for listening in our call. This concludes our prepared remarks. We want to thank you all for joining us on this call and have a good day.

Ladies and gentlemen, thank you for joining Neonode’s third quarter ending September 30, 2016. You may now disconnect your lines and have a wonderful day.