Item 1. Business
ITEM 1. BUSINESS
Our company provides advanced optical sensing solutions
for touch, contactless touch, and gesture sensing. We also provide software solutions for machine perception that feature advanced machine
learning algorithms to detect and track persons and objects in video streams from cameras and other types of imagers. We base our touch,
contactless touch, and gesture sensing products and solutions using our zForce technology platform and our machine perception solutions
on our MultiSensing technology platform. zForce (zero force) is the name for our patented optical sensing technology built on infrared
light, invisible to the human eye. Our MultiSensing platform was designed to provide advanced, safe, and scalable software solutions
to provide situational context. We market and sell our solutions to customers in many different markets and segments including, but not
limited to, office equipment, automotive, industrial automation, medical, military and avionics.
In 2010, we began licensing to Original Equipment
Manufacturers (“OEMs”) and automotive Tier 1 suppliers who embed our technology into products they develop, manufacture, and
sell. Since 2010, our licensing customers have sold approximately 95 million products that feature our technology. In October 2017, we
augmented our licensing business and began manufacturing and shipping touch sensor modules (“TSMs”) that incorporate our patented
technology. We sell these TSMs to OEMs, Original Design Manufacturers (“ODMs”), and systems integrators for use in their products.
As of December 31, 2023, we had nine agreements
with value added resellers (“VARs”) for integration of our TSMs in the products they offer to global OEMs, ODMs and systems
integrators. In addition to this, we distribute our TSMs through Digi-Key Corporation, Serial Microelectronics HK Ltd., and Nexty Electronics
Corporation.
During 2023, we continued to focus our efforts on
maintaining our current licensing customers and achieving design wins for new programs both with current and future customers. In parallel
we continued to market and sell TSMs directly and indirectly through partners. We made investments enhancing the design and improving
the production yield of our TSMs in our production unit Pronode Technologies AB and improving the related firmware and configuration tools
software platforms.
On December 12, 2023, we announced a new, sharpened
strategy with full focus on the licensing business. Consequently, we will phase out the TSM product business during 2024 through licensing
of the TSM technology to strategic partners or outsourcing.
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Licensing
We license our zForce technology to OEMs and automotive
Tier 1 suppliers who embed our technology into products that they develop, manufacture and sell. Since 2010, our licensing customers have
sold approximately 95 million devices that use our patented technology.
As of December 31, 2023, we had 34 valid technology
license agreements with global OEMs, ODMs and automotive Tier 1 suppliers.
Our licensing customer base is primarily in the
automotive and printer segments. Ten of our licensing customers are currently shipping products that embed our technology. We anticipate
current customers will continue to ship products with our technology in 2024 and in future years. We also expect to expand our customer
base with a number of new customers who will be looking to ship new products incorporating our zForce and MultiSensing technologies as
they complete final product development and release cycles. We typically earn our license fees on a per unit basis when our customers
ship products using our technology, but in the future we may use other business models as well.
Product Sales
In addition to our licensing business, we design
and manufacture TSMs that incorporate our patented technology. We sell our TSMs to OEMs, ODMs and systems integrators for use in their
products.
We utilize a robotic manufacturing process designed
specifically for our TSMs. The TSMs are commercial-off-the-shelf products based on our patent-protected zForce technology platform and
can support the development of contactless touch, touch, gesture and object sensing solutions that, paired with our technology licensing
offering, give us a full range of options to enter and compete in key markets.
We began selling our TSMs to customers in the industrial
and consumer electronics segments in 2017. We will phase out the TSM product business during 2024 through licensing of the TSM technology
to strategic partners or outsourcing.
Non-recurring Engineering Services
We also offer non-recurring engineering (“NRE”) services
related to application development linked to our TSMs and our zForce and MultiSensing technology platforms on a flat rate or hourly rate
basis.
Typically, our licensing customers require engineering
support during the development and initial manufacturing phase for their products using our technology, while our TSM customers require
hardware or software modifications to our standard products or support during the development and initial manufacturing phases of their
products using our technology. In both cases we can offer NRE services and earn NRE revenues.
Our Organization
Neonode Inc. was incorporated in the State of Delaware
on September 4, 1997. Our principal executive office is located in Stockholm, Sweden. Our office in the United States is located in San
Jose, California.
We have the following wholly owned subsidiaries: Neonode Technologies
AB (Sweden) (established in 2008 to develop and license touchscreen technology); Neonode Japan Inc., (Japan) (established in 2013); and
Neonode Korea Ltd. (South Korea) (established in 2014). Neonode Korea Ltd. is currently dormant. In 2015, we established a 51% majority
owned consolidated subsidiary, Pronode Technologies AB (Sweden). On October 1, 2022, we acquired the remaining shares in Pronode Technologies
AB.
Strategy and Focus Areas
Our customers use touch, contactless touch, gesture
sensing, and machine perception technologies to grow their businesses, drive efficiencies, and seek competitive advantages. Our strategy
is to deliver value-adding human-machine interaction (“HMI”) and machine perception solutions and products that enable our
customers to achieve these targets. We offer specialized NRE services related to the integration of our solutions and products into customer
systems and products to ensure that optimal functionality and performance is achieved.
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. We are innovators in the HMI and machine
perception areas and our goal is to introduce next-generation products in these areas that offer better price, performance, and architectural
advantages compared to our current offers and those of our competitors. We intend to execute on this strategy through portfolio transformation,
internal innovation, and co-development of products with our customers and the building of strategic partnerships with other technology
companies.
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Markets
Automotive
The automotive value chain consists of OEMs (vehicle
manufacturers) and tiered suppliers (Tier 1 system suppliers, Tier 2 component suppliers etc.). In this market, we mainly act as a Tier
2 technology provider to Tier 1 suppliers who license our technology and deliver different types of systems to OEMs (e.g. infotainment
system displays featuring our touch technology). In some cases, we are also engaged directly by OEMs, following the trend that OEMs are
insourcing more and more of their systems and software development.
During 2023 and 2022, our automotive customers shipped approximately
0.9 million and 0.8 million products with our technology, respectively. Accumulated, since 2014, our automotive customers have shipped
approximately 8 million products featuring our technology.
Printers and Office Equipment
Multi-function printers typically feature touch
displays for user interaction with feature-rich menus and settings. We have operational license agreements with three of the leading global
printers and office equipment OEMs. During 2023 our customers shipped more than 3 million printers using our touch technology and
since mid-2014 they have shipped approximately 55 million printers using our touch technology.
Industrial Automation
We see interesting opportunities for our optical
touch and gesture control solutions in the rugged industrial touchscreen market. We also see potential demand for our machine perception
solutions in industrial settings.
Medtech
We sell our TSMs to customers manufacturing and
selling medical imaging systems with touch screens. Looking to the future, we see interesting opportunities to license our zForce-based
optical touch and gesture control solutions to manufacturers of different medtech systems.
Elevators and Interactive Kiosks
There is strong consumer demand for HMI technologies that improve
the user experience and eliminate direct physical contact between users and different types of machines and systems in public environments
such as self-service kiosks, vending machines, and elevators. Using our TSMs, OEMs can easily create safe, intuitive, and easy-to-use
contactless touch interfaces for their elevator and kiosk products. Our TSMs are also very suitable for retrofit applications and many
of our OEM customers, value-added resellers, and technology partners have or are developing such solutions and marketing and selling them
in their respective markets. Customer demand has decreased after the COVID-19 pandemic ended and in 2024 we will phase out the TSM product
business. OEM customers, value-added resellers, and technology partners can still access our technology through licensing.
Product Backlog
Our TSM product backlog as of December 31, 2023
was approximately $34,000. The product backlog includes orders confirmed for products planned to be shipped within 12 months to one customer.
Our cycle time between order and shipment is generally short and customers occasionally change delivery schedules. Additionally, orders
can be cancelled without significant penalties. As a result of these factors, we do not believe that our product backlog, as of any particular
date, is necessarily indicative of actual product revenue for any future period.
Customers
As of December 31, 2023 we had 34 valid technology
license agreements. As of December 31, 2022, that number was 35. During the year ended December 31, 2023, we had 10 customers using our
touch technology in products that were being shipped to their customers. The products related to these license agreements include e-readers,
tablets, commercial and consumer printers, automotive infotainment system displays, and global positioning system (GPS) devices.
Our customers are primarily located in North America,
Europe and Asia.
As of December 31, 2023, four of our customers
represented approximately 76.4% of our consolidated accounts receivable and unbilled revenues.
As of December 31, 2022, five of our customers
represented approximately 82.5% of our consolidated accounts receivable and unbilled revenues.
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Customers who accounted for 10% or more of our
revenues during the year ended December 31, 2023 are as follows.
●
Hewlett-Packard Company – 22.1%
●
Seiko Epson – 17.7%
●
Alpine Electronics – 16.6%
Customers who accounted for 10% or more of our
revenues during the year ended December 31, 2022 are as follows.
●
Hewlett-Packard Company – 27.1%
●
Seiko Epson – 19.4%
●
LG – 12.2%
●
Alpine Electronics – 10.0%
Customers by Market
The following table presents our revenues by market
as a percentage of total revenues for the years ended December 31:
2023
2022
Net license revenues from automotive
35.1 %
27.4 %
Net license revenues from consumer electronics
50.4 %
51.5 %
Net product revenues from TSMs
13.9 %
17.5 %
Net non-recurring engineering services revenues
0.6 %
3.6 %
Total
100.0 %
100.0 %
Geographical Data
The following table presents our revenues by geographic
region as a percentage of total revenues for the years ended December 31:
2023
2022
United States
35.8 %
32.5 %
Japan
33.5 %
30.7 %
South Korea
11.3 %
15.2 %
Germany
9.0 %
5.3 %
Switzerland
5.0 %
7.0 %
China
1.8 %
2.3 %
France
1.5 %
3.4 %
Sweden
1.2 %
2.7 %
Other
0.9 %
0.9 %
Total
100.0 %
100.0 %
The following table presents our total assets by
geographic region as of December 31 (in thousands):
2023
2022
United States
$ 16,084
$ 15,630
Sweden
2,888
5,511
Asia
42
57
Total
$ 19,014
$ 21,198
Competition
There are various technologies for touch and gesture
control solutions available that compete with our optical zForce technology. The competing technologies have differing profiles such as
performance, power consumption, level of maturity and cost. For touch solutions, the main competition comes from resistive and capacitive
touch solutions. For touch displays, projective capacitive technology is the prevalent standard in mobile phones and tablets and therefore
an important competing technology to ours that many suppliers offer with price being a major differentiation point. This means we must
continuously develop our technology and improve our offers to defend and grow our market share. For gesture control the main competition
comes from other optical technologies and from both ultrasonic and radar technologies. Examples of competitors active in the area of gesture
sensing include Ultraleap and suppliers of radar and ultrasonic sensor chips, for instance Texas Instruments and Acconeer. Detection range,
resolution and cost are the main differentiators.
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For contactless touch opportunities, competing
technologies include camera-based technologies for detecting finger placement and gestures in the airspace in front of a kiosk or button
panel, capacitive sensors capable of detecting a finger hovering above a display or button, as well as voice-activated interfaces and
interfaces using one’s mobile phone to interact with a kiosk or button panel.
There are various driver and in-cabin monitoring
solutions that compete with our MultiSensing technology. Our competitors among Tier 2 software providers include SmartEye, Cipia, Xperi,
Seeing Machines, PUX and Jungo.
Intellectual Property
We rely on a combination of intellectual property
laws and contractual provisions to establish and protect the proprietary rights in our technology. The number of our issued and pending
patents and patents filed in each jurisdiction as of December 31, 2023 is set forth in the following table:
Jurisdiction
No. of Reg.
Designs
No. of
Issued Patents
No. of Patents Pending
United States
5
53
10
Europe
-
11
4
Japan
-
7
2
China
-
6
2
South Korea
-
6
2
Total:
5
83
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Our patents cover optical blocking technologies
for touchscreens and head-up displays, optical reflective technologies for contactless interaction with kiosks and elevators, as well
as machine perception solutions for driver and in-cabin monitoring.
Our software may also be protected by copyright
laws in most countries, including Sweden and the European Union, if the software is deemed new and original. Protection can be claimed
from the date of creation.
In 2023 we filed eleven new patent applications
and had nine new patent grants issued; five patents have lapsed.
The duration of our patent protection for utility
patents is generally 20 years. The duration of our patent protection for design patents varies throughout the world between 10 and 25
years, depending on the jurisdiction. We believe the duration of our intellectual property rights is adequate relative to the expected
lives of our products.
We also protect and promote our brand by registering
trademarks in key markets around the world. Our trademarks include: Neonode (26 registrations, 2 pending applications), the Neonode logo
(8 registrations), zForce (10 registrations), and MultiSensing (3 registrations).
Research and Development
In fiscal years 2023 and 2022, we incurred $3.8
million and $4.0 million, respectively, on research and development activities. Our research and development is performed predominantly
in-house, but may also be performed in collaboration with external partners and specialists.
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Human Capital
We recognize that the development, attraction and
retention of employees is critical to our success. For this reason, we strive to provide a positive work culture for our employees.
We focus on skills enhancement, leadership development,
innovation excellence and professional growth throughout our employees’ careers. Our leadership program provides leadership trainings
to our high-potential emerging leaders.
We provide market competitive compensation aligned
with company performance. We provide a comprehensive benefits package to our employees, including healthcare and retirement plans. We
have a dedicated human resources (HR) person to ensure clear and beneficial HR-related processes and strategy. We work proactively against
all discrimination, harassment and other abusive behavior to ensure the work environment at Neonode is good and healthy. We believe that
a diverse workforce provides different viewpoints on business strategy, risk and innovation.
Since the COVID-19 pandemic has subsided we have adopted a hybrid
workplace. While we encourage employees to come into the office as much as possible, employees are permitted to work part time from home.
As of December 31, 2023, we had 53 employees (including
49 full-time employees) and 8 consultants. We have employees and/or consultants located in the United States, Sweden, United Kingdom,
Japan, South Korea and Taiwan. None of our employees are represented by a labor union. We have experienced no work stoppages. We believe
our employee relations are positive.
Additional Information
We are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and we file or furnish reports, proxy statements,
and other information with the Securities and Exchange Commission (“SEC”). The reports and other information filed by us with
the SEC are available free of charge on the SEC’s website at www.sec.gov.
Our website is www.neonode.com . We make
available free of charge through our website all of our filings with the SEC, including our annual reports on Form 10-K, quarterly reports
on Form 10-Q, and current reports on Form 8-K as well as Form 3, Form 4, and Form 5 reports for our directors, officers,
and principal stockholders, together with amendments to those reports filed or furnished pursuant to Sections 13(a), 15(d), or 16 under
the Exchange Act. These reports are available as soon as reasonably practicable after their electronic filing or furnishing with the SEC.
Our website also includes corporate governance information, such as our Code of Business Conduct (including a Code of Ethics for the Chief
Executive Officer and Senior Financial Officers) and our Board of Directors’ Committee Charters. The information contained on our
website is not a part of, nor is it incorporated by reference into, this Annual Report.
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