Neonode Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless otherwise noted, financial amounts below are in U.S. dollars; statements report amounts in thousands. Neonode develops and licenses optical touch and gesture technology and sells sensor modules, including its AirBar product.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.310m | $1.923m | $5.032m | $6.174m |
| Gross margin | $1.246m; 95% | $1.584m; 82% | $4.796m; 95% | $5.700m; 92% |
| Operating loss | $(1.189)m | $(0.934)m | $(3.171)m | $(2.974)m |
| Net loss attributable to Neonode | $(1.086)m | $(0.809)m | $(2.923)m | $(2.466)m |
| Basic and diluted loss per share | $(0.12) | $(0.14) | $(0.33) | $(0.42) |
- Revenue was predominantly license fees: $1.213m for the quarter and $4.622m for the nine months. Sensor-module revenue rose to $95,000 and $368,000, respectively; non-recurring engineering revenue fell to $2,000 and $42,000.
- At September 30, cash was $3.025m, down from $6.555m at year-end 2018. Current assets were $6.932m and current liabilities $2.523m, for working capital of approximately $4.409m.
- For the first nine months, operating cash use was $2.873m, investing cash use $89,000, and financing cash use $403,000, mainly finance-lease principal payments. Cash declined by $3.530m.
- Total liabilities were $3.227m. Lease obligations comprised $1.151m of finance leases and $518,000 of operating leases; the filing does not report a separate conventional borrowing balance.
Changes versus the prior comparable period
- Revenue declined 32% for Q3 and 19% for the nine-month period. Management attributed the decrease mainly to lower e-reader and printer license fees following customers’ adoption of new technology platforms, and completion of an automotive engineering project that contributed revenue in Q3 2018.
- Automotive license revenue increased 61% in Q3, partly offsetting the decline in printer and e-reader fees. Sensor-module revenue increased, while NRE revenue dropped sharply.
- Gross margin improved, which management attributed mainly to lower NRE direct costs and the greater share of high-margin license revenue. Despite lower operating expenses overall, operating and attributable net losses widened.
- Loss per share improved despite the larger attributable loss, with weighted-average shares rising to 8.811m from 5.859m in Q3 (and 8.804m from 5.859m for nine months). The filing describes a December 2018 private placement that issued approximately 2.94m shares.
Outlook, risks and notable items
- Management expected revenue growth from licensing, sensor modules, NRE and AirBar to improve operating cash flow for at least the next 12 months, and stated its operating plan and capital sources were sufficient to alleviate going-concern concerns. It cautioned that revenue targets and cost reductions were not assured.
- The company reported persistent operating losses and negative operating cash flow, and said it may need additional equity or debt financing if operations do not become cash-flow positive. Financing may be unavailable or unfavorable; equity issuance could dilute shareholders and debt could impose restrictive covenants. Its $20m shelf registration was due to expire March 24, 2020.
- Customer and receivable concentration are material: three customers accounted for 72% of Q3 revenue, and four customers represented 88% of receivables at September 30. Timing of customer product launches, shipments and payments also affects liquidity.
- A roughly $0.6m sensor-module purchase order from a medical-device OEM was being delivered beginning September 2019. Neonode also assigned a patent portfolio to Aequitas Technologies in May 2019, retaining a right to share potential monetization proceeds; realization is uncertain.
- Adoption of lease accounting in January 2019 added operating lease assets and obligations; no equity adjustment was required. All outstanding Series B preferred shares converted into common stock in July 2019. Management reported no material legal proceedings and no material change in previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether licensing revenue stabilizes and the expected customer product launches and shipments occur on schedule.
- Whether sensor-module growth, including the medical-device order, translates into sustained sales and positive margins.
- Cash burn and liquidity trends, lease payments, financing needs, and the status or use of the shelf registration.
- Ongoing customer concentration, receivable collection, and the effect of customer platform changes on royalty revenue.
- Progress and potential proceeds, if any, from the assigned patent portfolio’s licensing and monetization program.