10-K: Neonode Inc. Announces Strategic Shift to Licensing, Phasing Out TSM Product Business in 2024

Neonode Inc. will focus solely on its licensing business and phase out its touch sensor module (TSM) product business during 2024.

Summary

• Neonode Inc. is transitioning to a licensing-focused business model, phasing out its touch sensor module (TSM) product sales during 2024.
• The company's core technology platforms are zForce for touch and gesture sensing, and MultiSensing for machine perception.
• Since 2010, Neonode's licensing customers have shipped approximately 95 million products incorporating their technology.
• As of December 31, 2023, Neonode had 34 active technology license agreements, primarily in the automotive and printer sectors.
• In 2023, automotive customers shipped approximately 0.9 million products with Neonode technology, and printer customers shipped over 3 million.
• The company's TSM product backlog as of December 31, 2023, was approximately $34,000.
• Neonode's total revenue for 2023 was $4.4 million, a decrease of 21.5% compared to 2022.
• License revenues were $3.8 million, product revenues were $0.6 million, and non-recurring engineering revenues were $26,000 in 2023.
• The company reported a net loss of $10.1 million for 2023, compared to a net loss of $4.9 million in 2022.
• Research and development expenses were $3.8 million in 2023, a slight decrease from $4.0 million in 2022.
• As of December 31, 2023, Neonode had cash and cash equivalents of $16.2 million.

Sentiment

Score: 4

Explanation: The document indicates a significant strategic shift with the phase-out of the TSM business, coupled with a substantial net loss and revenue decline. While the focus on licensing could be positive long-term, the current financial results and risks raise concerns.

Positives

• The company has a strong history of technology licensing with 95 million products shipped by customers using their technology since 2010.
• Neonode has 34 active technology license agreements, indicating a solid customer base.
• The company has a significant presence in the automotive and printer markets.
• The company has a strong cash position with $16.2 million in cash and cash equivalents as of December 31, 2023.
• The company is focusing on its core strength of technology licensing.

Negatives

• The company is phasing out its TSM product business, which will result in a loss of revenue.
• Total revenue decreased by 21.5% in 2023 compared to 2022.
• The company reported a net loss of $10.1 million for 2023.
• The company's gross margin was negative at -2.1% in 2023.
• The company has a history of losses since inception.

Risks

• The company is dependent on a limited number of customers, with three customers representing 56.4% of net revenues in 2023.
• The company relies on its customers' ability to design, manufacture, and sell products incorporating Neonode's technology.
• The product development and release cycle for customers is lengthy and unpredictable, which can impact revenue timing.
• The company relies on third-party component suppliers, which exposes them to supply chain risks.
• It can be difficult to verify royalty amounts owed under licensing agreements.
• The company operates in a highly competitive and rapidly evolving environment.
• The company is dependent on key personnel, and the loss of senior management could adversely affect operations.
• The company may need to raise additional capital, which may not be available on commercially attractive terms.
• The company is exposed to currency risks due to its international operations.
• Security breaches and disruptions to the company's IT infrastructure could interfere with operations.

Future Outlook

Neonode will focus solely on the licensing business and phase out the TSM product business during 2024. The company anticipates current customers will continue to ship products with their technology in 2024 and future years and expects to expand its customer base.

Management Comments

• With the new, sharpened strategy, announced in December 2023, we focus solely on the licensing business.
• This allows customers to license our unique and advanced TSM technology to create bespoke products and solutions that bring value to end customers.
• We continue to be a leader in optical touch and gesture sensing by licensing our zForce technology to customers in the printer, automotive, and other sectors.
• We also aim to capture a significant share of the growing automotive driver and in-cabin monitoring market by developing our machine perception business.

Industry Context

The shift towards licensing aligns with a trend in the technology industry where companies focus on their core competencies and leverage their intellectual property. The automotive and printer markets are key areas for human-machine interface technologies, and Neonode's focus on these sectors positions them to capitalize on these trends.

Comparison to Industry Standards

• Neonode's shift to a licensing model is similar to other technology companies that focus on intellectual property rather than manufacturing.
• The company's revenue decline of 21.5% in 2023 is concerning and indicates a need for improved sales performance.
• The negative gross margin of -2.1% in 2023 is significantly below industry standards and highlights the challenges in the TSM product business.
• The company's net loss of $10.1 million in 2023 is substantial and requires a turnaround strategy.
• Compared to competitors like SmartEye, Cipia, and Seeing Machines in the driver monitoring space, Neonode is a smaller player and needs to demonstrate its ability to capture market share.
• The company's cash position of $16.2 million is relatively strong, providing a buffer for the transition to a licensing-focused model.

Stakeholder Impact

• Shareholders may experience dilution if the company raises additional capital through equity offerings.
• Employees in the TSM product business may be affected by the phase-out.
• Customers of the TSM product business will need to find alternative suppliers or license the technology.
• Licensing partners may benefit from the company's increased focus on technology licensing.
• Suppliers of components for TSMs may see a decrease in orders.

Next Steps

• The company will phase out the TSM product business during 2024 through licensing of the TSM technology to strategic partners or outsourcing.
• The company will focus on maintaining current licensing customers and achieving design wins for new programs.
• The company will continue to develop its machine perception business to capture a share of the automotive driver and in-cabin monitoring market.

Key Dates

Keywords

licensing, touch technology, gesture sensing, machine perception, zForce, MultiSensing, automotive, printers, TSM, optical sensing