Neonode Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Financial statement amounts are in U.S. dollars; dollar figures below are in millions unless stated otherwise.
Business context
Neonode develops optical sensing and software solutions, including contactless touch, touch and gesture sensing, and scene analysis. Revenue is generated primarily from technology license fees, product sales (including touch sensor modules and AirBar), and non-recurring engineering services. The company reports one segment and has focused its strategy on contactless touch and regional sales since 2021.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Revenue | $1.318 | $1.665 | Down 20.8% |
| License fees | $1.104 | $1.295 | Down 14.7%; 83.8% of Q1 2022 revenue |
| Product revenue | $0.147 | $0.355 | Down 58.6% |
| Non-recurring engineering revenue | $0.067 | $0.015 | Up from a low base |
| Gross profit | $1.258 | $1.388 | Down 9.4% |
| Gross margin | 95% | 83% | Product gross margin was 65%, versus 24% |
| Operating expenses | $2.649 | $3.017 | Down 12.2% |
| Operating loss | $(1.391) | $(1.629) | Loss narrowed |
| Net loss attributable to Neonode | $(1.380) | $(1.568) | Basic and diluted loss per share: $(0.10), versus $(0.14) |
| Cash used in operating activities | $(2.279) | $(1.990) | Operating cash use increased |
At March 31, 2022, cash was $15.126 million, down from $17.383 million at year-end 2021. Working capital was $17.9 million, compared with $19.1 million at year-end. Current assets were $20.535 million and current liabilities were $2.639 million. Total liabilities were $2.835 million, including $0.251 million of finance lease obligations and $0.340 million of operating lease obligations; the filing reports no material conventional borrowing balance. Inventory increased to $3.553 million from $2.520 million, primarily as the company bought components to support expected product sales.
Material changes and management commentary
- Management attributed the revenue decline mainly to pandemic-related component shortages in printer and automotive industries and APAC lockdowns. Product sales were particularly affected by lockdowns and slower customer launches.
- Operating expenses declined, with lower sales and marketing costs largely reflecting lower staff expenses. Research and development and general and administrative costs also decreased, partly due to changes in cost allocation.
- Management said it expects revenues to help reduce operating losses in coming years and intends to improve operational efficiency; it provided no quantified revenue, earnings, or cash-flow guidance.
- Management stated that cash, the current operating plan, and potential capital sources were sufficient to fund operations for the twelve months following the report date. It cautioned that additional financing may be needed if operations do not become cash-flow positive, and that financing may not be available on acceptable terms.
Risks, contingencies, and unusual items
- Customer concentration: Four customers accounted for at least 10% each of Q1 revenue—HP 32%, Seiko Epson 17%, LG 15%, and Alps Alpine 11%. Five customers represented approximately 85% of accounts receivable and unbilled revenue at quarter-end.
- Market and execution risks: The filing cites COVID-19 impacts, the war in Ukraine and possible supply-chain disruption, customer product-development cycles, component suppliers, competition, and dependence on key customers and personnel. Foreign currency movements also affect results.
- Inventory exposure: Neonode recorded an AirBar inventory reserve of $0.4 million at March 31, 2022, down from $0.8 million at year-end, citing low AirBar sell-through. Management also reserved AirBar work-in-process and related raw materials, and a portion of finished goods.
- Capital and dilution: The company has a $25 million ATM offering facility and may seek equity or debt financing if needed. No shares were sold under the ATM in Q1 2022. Equity financing could dilute existing shareholders.
- Legal matters: The prior stockholder fee claim was settled and dismissed with prejudice in November 2021. A note describes ongoing patent-infringement cases against Apple and Samsung brought by Neonode Smartphone LLC, a subsidiary of Aequitas Technologies; elsewhere, the filing states Neonode is not a party to pending legal proceedings.
- Other commitments: Under a 2013 agreement, Neonode owes Texas Instruments $0.25 per ASIC for each of the first two million ASICs sold, up to $0.5 million; no payments had been made through March 31, 2022. A manufacturing-partner bank guarantee related to AirBar inventory was cancelled in December 2021.
- The company reported no material changes to its previously disclosed risk factors, and management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether printer and automotive production, APAC conditions, and customer product launches support a recovery in license and product revenue.
- Whether cash burn moderates and whether the stated cash runway remains adequate; monitor inventory growth and conversion into sales.
- How customer concentration, AirBar inventory reserves, and product returns or distributor credits affect future revenue and margins.
- Whether additional financing is required, and the potential dilution or restrictions associated with equity or debt funding.
- The status and potential financial implications of the Apple and Samsung patent cases, and the scope of the subsidiary litigation described in the notes.