Neonode Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless stated otherwise, amounts are in U.S. dollars; financial statement figures below are in millions. Neonode develops and licenses optical sensing and touch technologies, and sells touch sensor modules and AirBar products. The filing reports one operating segment.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1.216 | $0.962 | $3.801 | $4.347 |
| Gross margin dollars | $1.138 | $0.863 | $3.553 | $3.750 |
| Gross margin rate | 94% | 90% | 93% | 86% |
| Operating loss | $(0.962) | $(1.822) | $(4.039) | $(5.247) |
| Net loss attributable to Neonode | $(0.800) | $(1.721) | $(3.728) | $(4.946) |
| Basic and diluted loss per share | $(0.06) | $(0.15) | $(0.27) | $(0.43) |
- Q3 revenue increased 26.4% year over year, led by license fees, which rose 27.3% to $1.045 million. Product sales were $0.155 million and NRE revenue was $0.016 million.
- Nine-month revenue decreased 12.6%. License fees fell 10.7% to $3.102 million and product revenue fell 38.8% to $0.512 million; NRE revenue increased to $0.187 million from $0.036 million.
- Operating expenses declined 21.8% in Q3 and 15.6% year to date. Management attributed the reductions principally to lower staff costs and changes in cost allocation; lower product cost also contributed to improved gross margin.
- Cash was $11.302 million at September 30, 2022, versus $17.383 million at December 31, 2021. Nine-month operating cash use was $5.694 million, compared with $4.974 million in 2021. Investing used $0.054 million; financing used $0.147 million.
- Working capital was $15.5 million, versus $19.1 million at year-end 2021. Current assets were $17.329 million and current liabilities $1.801 million.
- Total liabilities were $1.902 million, including $0.337 million of lease obligations: $0.161 million finance leases and $0.176 million operating leases. The filing reports no conventional borrowings.
- Total assets were $17.792 million and total stockholders’ equity $15.890 million. Accumulated deficit was $206.336 million.
Material changes and business developments
- Management attributed the nine-month revenue decline mainly to pandemic-related component shortages in printer and automotive markets and APAC lockdowns. Q3 licensing revenue showed a recovery in legacy printer and automotive customers.
- Product revenue remained affected by COVID-related restrictions in Asia and customer development and launch cycles that commonly run 12–18 months or longer.
- Inventory increased $1.822 million from year-end to $4.342 million, primarily as the company purchased components to support anticipated production. AirBar inventory reserves were $0.3 million, down from $0.8 million at December 31, 2021.
- Four customers represented approximately 75% of accounts receivable and unbilled revenue at quarter-end. In Q3, HP and Seiko Epson each contributed 26% of revenue; LG Electronics contributed 12% and Alps Alpine 11%.
- On October 1, 2022, Neonode acquired the remaining 49% of Pronode Technologies AB for a nominal cash payment. On October 18, it sold 622 shares under its ATM program for net proceeds of $3,000.
Outlook, risks and contingencies
- No quantified revenue, earnings or cash-flow guidance was provided. Management expects revenue to help reduce operating losses in coming years and intends to improve operating efficiency, but gave no assurance of achieving revenue targets or reducing losses.
- Management stated that cash, its operating plan and potential capital sources, including the ATM facility, were expected to fund operations for the 12 months following the report. The company has a history of losses and negative operating cash flow and may need additional financing; financing may not be available on acceptable terms and equity issuance could dilute shareholders.
- COVID-19, supply constraints, the war in Ukraine and related economic and market effects, foreign-exchange movements, customer concentration, long product cycles, supplier dependence, competition, intellectual-property costs and access to capital are identified risks.
- Patent infringement cases against Apple and Samsung relating to assigned patents are described as ongoing; Neonode’s subsidiary assigned the patent portfolio and has rights to share potential monetization proceeds. The filing states Neonode is not party to pending legal proceedings. The previously disclosed shareholder fee dispute was settled and dismissed with prejudice.
- The company’s financial statements use a going-concern basis. Management fully reserved net deferred tax assets because realization was uncertain. Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether licensing volumes recover and whether the nine-month revenue decline reverses, particularly in printer and automotive markets.
- Cash burn, inventory conversion and the assumptions behind management’s stated 12-month funding outlook.
- Customer concentration and the durability of shipments from HP, Seiko Epson, LG Electronics and Alps Alpine.
- AirBar inventory reserve adequacy and the commercial outlook for products and planned production.
- Progress and potential economics of the Apple and Samsung patent matters, including Neonode’s contractual rights to any proceeds.
- Effects of the Pronode acquisition on ownership, operations and reported noncontrolling interests.