Neonode Inc. (NEON) is a leading provider of advanced optical sensing solutions for touch, contactless touch, and gesture sensing. The company has a rich history of innovation, consistently pushing the boundaries of what's possible in the world of human-machine interaction.
Company Background and Evolution
Founded in 1997 and headquartered in Stockholm, Sweden, Neonode has evolved from a small startup to a global player in the touch sensor market. The company's origins trace back to the development of its patented zForce technology, which introduced a new approach to touch and gesture sensing. Over the years, Neonode has expanded its portfolio, adding the MultiSensing technology platform to its repertoire, enabling sophisticated machine perception capabilities. In 2010, Neonode made a strategic shift by beginning to license its zForce technology to Original Equipment Manufacturers (OEMs) and automotive Tier 1 suppliers, who embedded Neonode's technology into their products. This licensing strategy allowed Neonode to scale its business without the capital investment required for manufacturing.
In addition to its core licensing business, Neonode has offered non-recurring engineering (NRE) services to support its customers' product development and manufacturing phases. These NRE projects have generated additional revenue streams for the company, complementing its licensing income. Despite these strategic moves, Neonode has faced significant financial challenges, including operating losses and negative cash flows from operations since its inception. To manage these financial difficulties, the company has accessed the capital markets through sales of common stock and warrants.
Financials
Neonode's financial performance has been a mixed bag in recent years. The company reported annual revenue of $4.45 million in 2023, down from $5.67 million in 2022 and $5.84 million in 2021. Net income has also been in the red, with losses of $10.12 million in 2023, $5.28 million in 2022, and $7.27 million in 2021. Operating cash flow and free cash flow have also been negative, at -$6.31 million and -$6.43 million, respectively, in 2023.
Despite these financial challenges, Neonode has maintained its focus on innovation and strategic partnerships. The company's licensing business model, which accounted for 86.3% of total revenue in the first nine months of 2024, has been a key area of emphasis. Neonode has established 37 valid technology license agreements with global OEMs, ODMs, and automotive Tier 1 suppliers, with 10 of these customers currently shipping products that embed the company's technology.
Recent Performance
In the third quarter of 2024, Neonode reported revenues of $838,000, a slight decrease of 0.2% compared to the same period in the prior year. The company's licensing fees accounted for $731,000, or 87.2% of total revenue, while non-recurring engineering revenue was $107,000, or 12.8% of the total. The gross margin for the quarter was 97.1%.
Neonode's research and development expenses for the third quarter of 2024 were $822,000, a decrease of 0.6% compared to the same period in the prior year. Sales and marketing expenses were $484,000, a decrease of 6.2%, while general and administrative expenses were $734,000, a decrease of 2.7%. The company's net loss from continuing operations for the quarter was $1.04 million, a decrease of 1.8% compared to the same period in the prior year.
Comparing Q3 2024 to Q3 2023, net income decreased by 14.2%, while operating cash flow and free cash flow both decreased. These declines were primarily attributed to lower demand for Neonode's legacy products in printer and passenger car touch applications, partially offset by revenue from new licensing customers.
Neonode sells its products globally, with the majority of revenue coming from Asia Pacific (65.9% in Q3 2024) and North America (19.5% in Q3 2024). Europe, Middle East, and Africa accounted for the remaining 14.6% in Q3 2024.
Strategic Initiatives
In December 2023, Neonode announced a new, sharpened strategy with a full focus on the licensing business and a phase-out of its Touch Sensor Module (TSM) product business through licensing to strategic partners or outsourcing. This strategic shift aims to capitalize on the growing demand for advanced touch and gesture sensing technologies in various industries, including automotive, office equipment, and industrial automation.
The company's recent initiatives include the signing of a new license agreement with NEXTY Electronics Corporation, a subsidiary of the Toyota Tsusho Group, for the development and manufacturing of next-generation amusement machines in Japan. This agreement, valued at an estimated $2-3 million over the next four to five years, underscores Neonode's ability to secure lucrative partnerships and leverage its technology in new markets.
The strategic shift towards a licensing-only business model came with significant changes in leadership. In April 2024, CEO Dr. Urban Forssell left the company, and CFO Fredrik Nihlén was appointed as interim CEO until a permanent replacement is found.
Challenges and Opportunities
Neonode's transformation is not without its challenges, however. The company has faced increasing competition from larger players in the touch sensor market, as well as the ongoing global supply chain disruptions and macroeconomic uncertainties. These factors have contributed to the company's recent financial woes and the need for a strategic pivot.
Despite these challenges, the global touch sensor market presents significant opportunities for growth. The market is expected to expand at a compound annual growth rate (CAGR) of around 10% from 2023 to 2028, driven by increasing adoption of touch-based interfaces in consumer electronics, automotive, and industrial applications. Neonode's focus on licensing its proprietary touch sensor technology positions the company to capitalize on this industry growth.
Liquidity
To address its financial challenges, Neonode has relied on capital market activities, including sales of common stock and warrants. These efforts have been crucial in maintaining the company's operations and funding its ongoing research and development initiatives. However, the company's ability to achieve sustainable profitability and positive cash flow remains a key concern for investors.
As of September 30, 2024, Neonode had a debt-to-equity ratio of 0.00022, indicating very low leverage. The company's balance sheet showed $17.6 million in cash and cash equivalents, with no outstanding credit facilities or credit lines. Neonode's current ratio and quick ratio were both 11.93 as of September 30, 2024, suggesting strong short-term liquidity. This financial flexibility provides Neonode with a solid foundation to execute its revised strategy and navigate the ongoing transformation of its business model.
Product Segments
Neonode operates in two main product segments:
1. Licensing Business: This is Neonode's primary focus, providing advanced optical sensing solutions for touch, contactless touch, and gesture sensing. The company licenses its zForce technology platform to OEMs and automotive tier-1 suppliers. Since 2010, Neonode's licensing customers have sold approximately 95 million devices using the company's technology. The licensing customer base is primarily in the automotive and printer segments. License fees revenue was $731,000 and $2.12 million for the three and nine months ended September 30, 2024, respectively, compared to $836,000 and $3.08 million for the same periods in 2023.
2. Non-recurring Engineering Services: Neonode provides NRE services related to application development linked to its zForce and MultiSensing technology platforms. These services are typically required by licensing customers during the development and initial manufacturing phases of their products. NRE revenues were $107,000 and $335,000 for the three and nine months ended September 30, 2024, respectively, compared to $4,000 and $29,000 for the same periods in 2023. The significant increase in NRE revenues was due to new TSM licensing projects and a new MultiSensing project with a commercial vehicle OEM.
Conclusion
Despite the headwinds faced by Neonode, the company remains committed to its vision of revolutionizing human-machine interaction. The strategic shift towards a licensing-only business model, coupled with the company's strong liquidity position and low leverage, provides a foundation for potential future growth. As Neonode navigates the evolving touch sensor landscape, its ability to execute on its strategic plan and capitalize on the expanding global touch sensor market will be crucial for long-term success. Investors will be closely watching the company's progress in expanding its licensing partnerships, improving financial performance, and leveraging its innovative technologies in new markets and applications.