Neonode Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unless otherwise noted, figures are in U.S. dollars; financial amounts are in millions. Neonode develops and licenses optical sensing technology, sells touch sensor modules and AirBar products, and provides related engineering services.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1.003 | $1.216 | $3.456 | $3.801 |
| Gross profit | $0.776 | $1.138 | $3.145 | $3.553 |
| Gross margin | 77% | 94% | 91% | 93% |
| Operating expenses | $2.233 | $2.100 | $7.801 | $7.592 |
| Operating loss | $(1.457) | $(0.962) | $(4.656) | $(4.039) |
| Net loss attributable to Neonode | $(1.266) | $(0.800) | $(4.198) | $(3.728) |
| Basic and diluted loss per share | $(0.08) | $(0.06) | $(0.27) | $(0.27) |
Revenue mix: Q3 license fees were $0.836 million, products $0.163 million, and non-recurring engineering (NRE) $0.004 million. For the first nine months, the respective amounts were $3.078 million, $0.349 million, and $0.029 million. License fees were the dominant revenue source.
Cash flow and balance sheet: Cash and equivalents were $18.471 million at September 30, 2023, versus $14.816 million at year-end 2022. Nine-month operating cash use was $4.100 million; investing cash use was $0.058 million; financing provided $7.789 million, principally from stock issuance under the ATM program. Working capital was $22.7 million. Total liabilities were $1.837 million, including $0.059 million of finance lease obligations and $0.066 million of operating lease liabilities; the filing reports no conventional borrowings.
Material changes versus comparable periods
- Revenue declined 17.5% in Q3 and 9.1% for the first nine months year over year. Management attributed the Q3 decline mainly to lower license fees and NRE, partly offset by product revenue; nine-month declines affected all three revenue streams.
- Q3 license revenue fell 20% to $0.836 million, primarily due to lower customer shipment volumes. Nine-month product revenue declined 31.8% to $0.349 million, which management attributed mainly to low customer demand. NRE revenue dropped 84.5% to $0.029 million for the nine months, reflecting fewer projects.
- Gross margin weakened, particularly in Q3. Product gross margin was negative 39% for the quarter versus 48% a year earlier; the company cited a one-time $143,000 customer-claim cost. Nine-month product gross margin was 13%, compared with 56%.
- Nine-month operating expenses rose 2.8% to $7.801 million: lower R&D was outweighed by higher sales and marketing and general and administrative costs. The company raised $7.866 million net through its ATM facility during the nine months, issuing 903,716 shares; no ATM shares were sold in Q3. Shares outstanding increased from 14,455,765 at year-end 2022 to 15,359,481 at September 30, 2023.
- Neonode acquired the remaining 49% of Pronode Technologies AB on October 1, 2022. Consequently, 2023 results have no noncontrolling-interest allocation, unlike 2022; this affects comparison of net loss attributable to Neonode.
Outlook, risks, and unusual items
- Management said cash, the current operating plan, and potential capital sources, including the ATM facility, were sufficient to support operations for the 12 months following the filing date. The financial statements are prepared on a going-concern basis. The company has a history of operating losses and negative operating cash flow and cautioned that additional financing may be needed if operations do not become cash-flow positive; financing may not be available on acceptable terms and equity issuance could dilute shareholders.
- Management expects revenue to help reduce operating losses in coming years and intends to improve operating efficiency, but gave no numerical revenue, earnings, or cash-flow guidance and offered no assurance it will meet targets.
- Revenue is concentrated: four customers accounted for approximately 75% of receivables and unbilled revenue at quarter-end. In the first nine months, HP represented 30% of revenue, Seiko Epson 18%, Alpine Electronics 15%, and LG Electronics 13%.
- Other disclosed risks include dependence on customer product shipment and development cycles, customer concentration, supply-chain and component availability, foreign-exchange movements, competition, intellectual-property costs, and economic and geopolitical uncertainty, including the wars in Ukraine and Israel/Gaza.
- AirBar inventory remains subject to a $0.3 million reserve because of low sell-through. Management reported no impairment of long-lived assets. The filing reports no pending legal proceedings against Neonode. Separately, an unrelated Aequitas subsidiary’s patent case against Samsung resulted in judgment for Samsung in August 2023; an appeal relating to a patent invalidation and a separate case against Apple remained ongoing. Neonode may share in potential net proceeds from Aequitas’s patent monetization, if any.
Important facts for investors to verify
- Whether customer shipment volumes, product demand, and NRE project activity improve, and whether revenue concentration changes.
- Whether the $143,000 customer claim is nonrecurring and whether product margins recover; review the inventory balance and AirBar reserve for further write-down risk.
- Cash burn relative to management’s 12-month liquidity assessment, remaining ATM capacity, and the potential for additional financing and dilution.
- Customer receivable collection, the status of the concentrated receivables, and foreign-currency effects on results.
- Developments in the Aequitas patent matters and whether they produce any proceeds for Neonode; the filing provides no clear expected amount or timing.