Neonode Inc. — Q3 2020 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2020. Neonode develops optical touch, gesture-control and remote-sensing solutions. It reports HMI Solutions, HMI Products and Remote Sensing Solutions; no revenue was reported from Remote Sensing Solutions in either period.
Financial performance
Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.495 | $1.310 | $3.547 | $5.032 |
| Gross profit / margin | $1.294 / 87% | $1.246 / 95% | $3.179 / 90% | $4.796 / 95% |
| Operating expenses | $3.040 | $2.435 | $7.770 | $7.967 |
| Operating loss | $(1.746) | $(1.189) | $(4.591) | $(3.171) |
| Net loss attributable to common shareholders | $(1.671) | $(1.086) | $(4.293) | $(2.923) |
| Basic and diluted loss per share | $(0.16) | $(0.12) | $(0.45) | $(0.33) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(3.707) | $(2.873) |
- Q3 revenue rose 14%, driven by HMI Products revenue of $284,000, up from $96,000; HMI Solutions revenue was essentially flat at $1.211 million. Nine-month revenue declined 29.5%, primarily from lower HMI Solutions license revenue.
- HMI Products’ higher sales were accompanied by higher costs. Management attributed lower gross margins in 2020 principally to increased inventory write-offs.
- Q3 operating loss widened as operating expenses increased 24.8%, including higher G&A and sales and marketing costs. G&A rose to $1.535 million, primarily due to lawsuit-related costs. For the nine months, expenses declined slightly overall, but lower revenue drove a wider operating loss.
Financial position and liquidity
- At September 30, 2020, cash was $12.212 million, versus $2.357 million at December 31, 2019; working capital was $12.0 million. Total assets were $16.625 million and total liabilities were $3.642 million.
- Cash increased by $9.855 million over the nine-month period, chiefly reflecting $13.530 million of net proceeds from stock issuance, partly offset by operating cash use. Capital expenditures were $17,000.
- Finance lease obligations totaled $927,000, including $650,000 current; operating lease obligations totaled $118,000. The short-term loans from director-affiliated entities were repaid and terminated in connection with the August financing. The filing also describes repayment of Swedish tax-credit borrowing.
- Neonode issued common and convertible preferred securities in an August private placement for $13.9 million gross proceeds; reported net cash proceeds were $13.530 million. Preferred shares converted into 684,378 common shares. Directors and the CEO participated in the offering; the filing reports aggregate insider purchases of $3.1 million of Series C-2 preferred stock.
Outlook, risks and unusual items
- Management said cash after the private placement, its operating plan and potential capital sources were sufficient to alleviate going-concern concerns at the time of the filing. The company nevertheless has a history of losses and negative operating cash flow, and may need additional financing if operations do not become cash-flow positive. No quantified revenue or earnings guidance was provided.
- Management aims to grow revenue across business areas, reduce operating losses and improve efficiency, but cautioned that success is not assured. It expects product-development and release cycles to continue affecting the timing of license revenue.
- COVID-19 was described as adversely affecting near-term growth and customers’ businesses, while also increasing interest in contactless touch technology. Neonode reported component-supply and delivery risks, remote-work and travel impacts, and a 20% staff-hours reduction under a Swedish short-time-work program from mid-April to mid-August.
- Customer concentration is significant: Hewlett-Packard generated 31% of Q3 revenue and 32% of nine-month revenue; four customers represented about 75% of receivables and unbilled revenue at September 30.
- AirBar sell-through remained low. The company held a $0.7 million AirBar inventory reserve and had a $210,000 bank guarantee related to inventory at a manufacturing partner; no liability for the guarantee was recorded at quarter-end.
- A stockholder fiduciary-duty action in Delaware remained pending, with potential legal fees and expenses; a separate federal action was voluntarily dismissed in October 2020. The filing says Q3 and year-to-date operating expenses include actual and estimated lawsuit costs.
- The filing identifies foreign-exchange exposure and warns that COVID-19, customer dependence, supplier constraints, financing needs, litigation and product-development timing could materially affect results.
Most important facts to verify
- Whether the post-placement cash balance can sustain operations given continued operating losses and cash burn.
- Whether HMI Solutions license revenue stabilizes and HMI Products sales grow profitably, including the timing of customer product launches and backlog conversion. The disclosed $495,000 sensor-module backlog was limited to three customers and was not necessarily indicative of future revenue.
- Whether inventory write-offs, AirBar reserves and the manufacturing-partner guarantee result in additional costs or cash obligations.
- The outcome and ultimate cost of the pending Delaware litigation, and compliance with the private-placement registration obligations, including potential liquidated damages if registration is not maintained.
- The extent of customer concentration, COVID-19 effects and component-supply constraints on future revenue, margins and cash flow.