Neonode Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2014; filed August 6, 2014. Neonode develops and licenses touch-interface and optical multi-touch technology to OEMs and ODMs, which incorporate it into their products. It reported 36 technology license agreements, with nine customers shipping products. Management said additional customer launches were anticipated during 2014 and 2015; product development and release cycles typically take six to 36 months.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $0.865 | $1.084 | $1.879 | $1.632 |
| Gross margin dollars | $0.413 | $0.422 | $1.261 | $0.954 |
| Gross margin percentage | 47.7% | 38.9% | 67.1% | 58.5% |
| Operating expenses | $4.287 | $3.523 | $9.142 | $7.614 |
| Net loss | $(3.874) | $(3.120) | $(7.882) | $(6.690) |
| Basic and diluted loss per share | $(0.10) | $(0.09) | $(0.20) | $(0.20) |
- Second-quarter revenue fell about 20% year over year, primarily due to lower licensing revenue from e-reader products; new children’s tablet and printer shipments partly offset the decline. First-half revenue rose about 15%, as licensing from children’s tablets, printers and automotive infotainment products more than offset lower e-reader revenue.
- First-half gross margin improved with higher revenue, particularly high-margin licensing revenue. R&D expense increased to $3.526 million from $3.075 million; general and administrative expense rose to $3.818 million from $2.841 million. Management attributed the latter increase mainly to salaries and legal costs, including patent filings, corporate and SEC compliance, and customer contracts.
- Cash and cash equivalents were $12.048 million at June 30, versus $8.815 million at year-end 2013. Working capital was $8.8 million, versus $6.0 million. Current liabilities were $5.290 million; total liabilities were $5.749 million, including $530,000 in capital lease obligations. The filing reports no other conventional borrowing balance.
- First-half operating cash flow was $(6.010) million, investing cash flow $(0.086) million and financing cash flow $9.290 million. Financing included $9.254 million net proceeds from the stock sale and $36,000 from warrant exercises. Capital expenditures were $86,000.
- Deferred revenue was $3.468 million, including $2.5 million of prepaid license fees and $0.9 million of engineering development fees. Stock-based compensation was $1.415 million in the first half.
Material changes, outlook and risks
- In May, Neonode sold 2.5 million shares at $4.00 per share for $10 million gross proceeds (about $9.3 million net) and issued a warrant to purchase up to 2.5 million additional shares at $5.09 through November 15, 2015. Full exercise could yield $12.725 million gross, before any related placement-agent fee; the company also issued the agent a warrant for 75,000 shares. Common shares outstanding were 40,455,352 at June 30, up from 37,933,799 at year-end 2013.
- A six-year capital lease for specialized milling equipment commenced July 1, 2014. The lease carries a 4% interest rate and requires a 10% purchase payment at term end; scheduled lease payments total $602,000, including interest.
- Management believed available cash was sufficient for the next 12 months, but warned that additional capital may be needed if operations do not become cash-flow positive. It gave no quantified revenue or earnings guidance. Liquidity depends on customer product launch timing, licensing activity, expenses, collections and access to financing.
- Key risks include continuing losses and operating cash burn, reliance on a limited customer base and OEM product launches, uncertain market acceptance and demand, competition and intellectual-property costs, and potential need for further financing and dilution. Three customers represented approximately 79% of receivables at quarter-end; six customers generated approximately 75% of Q2 revenue. About $11.6 million of cash exceeded applicable deposit-insurance limits.
- Foreign-exchange exposure relates to Swedish and Japanese operations; management said it did not expect exchange-rate changes to be material and did not hedge. No material legal proceedings were reported; management stated disclosure controls were effective. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Customer-level shipment, royalty and launch updates, given customer concentration and the dependence of licensing revenue on product distribution.
- Cash burn and runway against management’s 12-month liquidity assessment, including the timing and terms of any additional financing.
- Potential dilution from outstanding warrants and options, and whether the investor warrant is exercised.
- Collection of receivables and conversion of deferred revenue into recognized revenue as license and engineering obligations are satisfied.
- Capital lease payments, equipment use and the remaining commitments under the Texas Instruments development agreements.