Neonode Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless otherwise noted, financial amounts are in U.S. dollars and in thousands. Neonode develops optical sensing and touch technologies, earns revenue from licenses, products and non-recurring engineering (NRE), and serves markets including automotive, consumer electronics and medical. It reports one segment.
Key financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $1,267 | $1,720 | $2,585 | $3,385 |
| Gross profit | $1,157 | $1,499 | $2,415 | $2,887 |
| Gross margin | 93% | 87% | 94% | 85% |
| Operating loss | $(1,686) | $(1,796) | $(3,077) | $(3,425) |
| Net loss attributable to Neonode | $(1,548) | $(1,657) | $(2,928) | $(3,225) |
| Loss per share, basic and diluted | $(0.11) | $(0.14) | $(0.22) | $(0.28) |
Q2 revenue comprised $953 of license fees, $210 of product sales and $104 of NRE. For the first half, these were $2,057, $357 and $171, respectively. Product gross margin was 63% in Q2 and 64% for the first half, versus 39% and 31% in the prior-year periods.
Liquidity, cash flow and obligations
- Cash was $12,426 at June 30, 2022, down from $17,383 at December 31, 2021. Working capital was $16,355, versus $19,059 at year-end 2021.
- First-half operating cash use was $5,214, compared with $3,405 in the prior-year period. Investing cash use was $47 and financing cash use was $99, mainly finance-lease principal payments. Cash declined by $4,957 overall.
- Total liabilities were $2,253, including $428 of finance and operating lease obligations. The filing reports no conventional borrowing balance.
- Inventory rose to $4,400 from $2,520, primarily because the company purchased components to support anticipated sales. AirBar inventory reserves were $300, down from $800 at year-end.
Changes versus the prior comparable periods
- Revenue fell 26.3% in Q2 and 23.6% in the first half. License revenue declined 29.8% and 22.5%, respectively; product revenue declined 39.3% and 49.1%.
- NRE revenue increased to $104 in Q2 from $16 and to $171 for the first half from $31. Revenue from Remote Sensing Solutions was recognized for the first time in Q2, at $0.1 million.
- Operating expenses decreased 13.7% in Q2 and 13.0% in the first half, but remained well above gross profit. Lower costs included R&D, sales and marketing, and general and administrative expenses.
- Net loss attributable to Neonode narrowed, but revenue contraction meant the loss remained high relative to sales. The weighted-average share count increased to 13.6 million from 11.5 million, reflecting prior-period equity issuance and other share activity.
Outlook, commentary and risks
- Management stated that cash, planned spending and operations were expected to fund the business for the 12 months following the report date, and that the current plan and potential capital sources alleviated going-concern concerns. This is not a guarantee: the company has a long history of losses and negative operating cash flow and may need additional financing if it does not become cash-flow positive.
- Management expects revenue to help reduce operating losses in coming years and intends to improve operating efficiency, but provided no quantified revenue, earnings or cash-flow guidance and cautioned that targets may not be achieved.
- Management attributed lower sales mainly to pandemic-related component shortages in printer and automotive industries and APAC lockdowns. It also cited customer product-development and launch cycles often lasting 12–18 months or longer. The company said the war in Ukraine could worsen supply-chain disruption, commodity costs, currency volatility and broader economic uncertainty.
- Customer concentration is material: HP, Seiko Epson and LG each represented at least 10% of first-half revenue; together they accounted for 60%. Four customers represented 69% of receivables and unbilled revenue at quarter-end.
- Other disclosed risks include dependence on customers’ product shipments and royalty reporting, supplier availability, foreign-exchange exposure, inventory valuation and possible dilution or restrictive terms if future financing is required. The $25 million ATM facility remained available; no shares were sold under it in the first half of 2022.
- The filing reports no pending legal proceedings against the company. It also describes ongoing patent-infringement cases brought by Neonode Smartphone LLC, a subsidiary of Aequitas Technologies, against Apple and Samsung. The former stockholder-related fee claim was settled and dismissed with prejudice in 2021.
- Management reported disclosure controls effective at a reasonable-assurance level and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether license and product revenue recover from pandemic-related production constraints, and whether the newer NRE and Remote Sensing activity can scale.
- Cash burn relative to the $12.4 million cash balance, including the working-capital effect of the inventory build and the stated 12-month funding assessment.
- Customer concentration, expected shipment timing, and the accuracy of license royalty and distributor-return estimates.
- AirBar inventory reserve adequacy and whether the elevated component inventory converts into sales without further write-downs.
- Potential financing needs and dilution, the terms and remaining capacity of the ATM facility, and developments in the disclosed patent cases.