Neonode Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing; management did report that fourth-quarter license revenue rose 60% from the third quarter.
Business context
Neonode develops optical sensing technology for contactless touch, touch and gesture interfaces, and software for scene analysis. It earns revenue from technology licensing, touch sensor module (TSM) and other product sales, and non-recurring engineering (NRE) services. The company announced a strategic shift toward contactless touch and regional sales in 2021. It expects sensor products could become the majority of revenue over time, while continuing its licensing business.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $5.836 million | $5.984 million | Down 2.5% |
| License revenue | $4.787 million | $4.618 million | Up 3.7% |
| Product revenue | $0.955 million | $0.950 million | Up 0.5% |
| NRE revenue | $0.094 million | $0.416 million | Down 77.4% |
| Gross profit / margin | $4.881 million / 83.6% | $4.906 million / 82.0% | Margin up 1.6 percentage points |
| Operating loss | $7.107 million | $6.191 million | Loss widened |
| Net loss attributable to Neonode | $6.450 million | $5.605 million | Loss widened |
| Basic and diluted loss per share | $0.54 | $0.56 | Loss per share narrowed |
| Cash used in operating activities | $7.678 million | $5.752 million | Use increased |
Operating expenses rose 8.0% to $11.988 million. Research and development fell 14.3% to $3.546 million, while sales and marketing increased 12.0% to $2.839 million and general and administrative expense increased 26.7% to $5.603 million. Management attributed some of the expense mix shift to moving production-related administrative costs from R&D to G&A. Product gross margin fell to 3.5% from 15.6%, affected by inventory write-downs and other one-time adjustments.
Liquidity, cash flow and obligations
Cash was $17.383 million at year-end, compared with $10.473 million a year earlier. Current assets were $22.032 million and current liabilities $2.973 million, implying working capital of approximately $19.059 million. The MD&A contains an apparent date error in its working-capital comparison; the balance-sheet figures show 2020 working capital of approximately $10.440 million.
Financing activities provided $14.575 million, principally from stock issuance, while investing activities used $0.067 million. Year-end finance lease obligations totaled $0.323 million; operating lease obligations totaled $0.542 million. The filing reports no other material debt balance. Despite the cash balance, the company remains loss-making and management cautions that additional capital could be needed if operations do not become cash-flow positive.
Material changes, outlook and risks
- Revenue mix and customers: Licensing contributed 82.0% of revenue, products 16.4%, and NRE 1.6%. Three customers accounted for approximately 63% of revenue: HP 32%, Seiko Epson 18%, and LG 13%. Four customers represented 76% of receivables and unbilled revenue at year-end.
- Market and supply conditions: Management cited semiconductor shortages, supply-chain constraints, and COVID-related restrictions as factors affecting customer shipments and product sales. License revenue recovered in the fourth quarter as component supply improved. Product revenue was flat year over year.
- Product execution: TSM product backlog was approximately $239,000 for orders planned to ship within eight months. Orders may be rescheduled or cancelled without significant penalties, so backlog is not a reliable revenue forecast. Inventory rose to $2.520 million; reserves included $0.8 million for AirBar inventory and $0.2 million for TSM inventory affected by a production quality issue.
- Capital and dilution: A registered direct offering of 1.808 million shares generated approximately $13.1 million net. ATM sales of 235,722 shares generated approximately $1.984 million net. Shares outstanding increased from 11.505 million to 13.576 million during 2021. The company also had an ATM facility permitting up to $25 million of sales, subject to its terms.
- Outlook: No quantified revenue, profit, or cash-flow guidance is provided. Management expects revenue from its business areas and operational efficiency measures to reduce losses in coming years, but gives no assurance of achieving revenue targets. It plans to expand TSM offerings and partner networks.
- Key risks: Persistent losses and operating cash burn; customer and product-cycle concentration; dependence on customers’ product shipments and third-party semiconductor suppliers; long and uncertain development cycles; competition; foreign-exchange exposure without current hedging; and potential need for further financing, which could dilute shareholders.
- Legal and audit matters: A shareholder-related fee claim was settled and dismissed with prejudice in November 2021. The filing says Neonode is not party to pending legal proceedings; it also discloses ongoing patent litigation brought by a subsidiary of Aequitas Technologies, to which Neonode previously assigned patents. The independent auditor issued an unqualified opinion on the financial statements and identified licensing-revenue estimates, especially unbilled royalties, as a critical audit matter. Management concluded internal control over financial reporting was effective; the auditor did not attest to that assessment.
Important facts for investors to verify
- Whether licensing revenue and fourth-quarter shipment recovery continue, given component shortages and the company’s reliance on a small number of customers.
- Whether TSM sales and margins improve, and how quickly the company can address the disclosed production-quality issue and inventory reserves.
- Whether operating losses and cash burn decline sufficiently to avoid further equity or debt financing.
- How customer royalty estimates and unbilled license revenue compare with subsequently reported customer shipments and payments.
- The status and potential financial implications of the assigned-patent litigation, and any future share issuance under the ATM facility.