Neonode Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also presents unaudited fourth-quarter results. Neonode develops and licenses optical infrared touch and user-interface technology to device makers; it does not manufacture products or components.
Financial performance and position
Amounts are U.S. dollars; annual figures in millions unless otherwise noted.
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $3.717 | $7.137 |
| Gross profit | $2.075 | $5.672 |
| Gross margin | 55.8% | 79.5% |
| Operating loss | $(12.971) | $(9.162) |
| Net loss | $(13.080) | $(9.287) |
| Loss per diluted share | $(0.37) | $(0.28) |
| Cash used in operations | $(8.801) | $(3.744) |
| Cash at year-end | $8.815 | $9.097 |
| Working capital | $6.0 | $7.7 |
- Revenue comprised $2.9 million in technology license fees and $0.8 million in engineering services. License fees have a 100% gross margin, while total gross margin fell with lower revenue and engineering-related costs.
- R&D expense rose to $7.235 million from $5.741 million; sales and marketing fell to $2.732 million from $4.372 million; general and administrative expense increased to $5.079 million from $4.721 million.
- Cash from financing was $8.666 million, including approximately $6.9 million net proceeds from an equity offering and proceeds from option and warrant exercises. Capital expenditures were $0.155 million.
- Total liabilities were $5.123 million, consisting of current liabilities, including $3.666 million deferred revenue. No convertible debt was outstanding. The company reported no interest expense in 2013 or 2012.
- Auditor and management reported effective internal control over financial reporting; the financial statement audit opinion was unqualified.
Material changes and quarterly results
- Revenue declined 48% year over year, principally because Amazon’s contribution fell to less than 1% of 2013 revenue from 32% in 2012 after it discontinued a Kindle product using Neonode technology. Amazon contributed 40% in 2011.
- Net loss widened to $13.080 million from $9.287 million, as lower gross profit and higher R&D spending more than offset reduced sales and marketing expense.
- For Q4 2013, revenue was $1.009 million, gross profit $0.810 million and net loss $3.047 million, compared with Q4 2012 revenue of $2.320 million, gross profit $1.935 million and net loss $2.128 million.
- At September 2013, the company sold 1,168,939 common shares, raising approximately $7.7 million gross and $6.9 million net. Shares outstanding increased from 33.3 million at year-end 2012 to 37.9 million at year-end 2013.
Outlook, commentary, risks and unusual items
- Management said cash was sufficient to fund operations for at least the next 12 months, but warned further financing could be needed if operations do not become cash-flow positive; additional financing may be unavailable or dilutive.
- Management anticipated further customer product launches during 2014 and 2015. Twelve customers were shipping products at year-end, out of 33 technology license agreements. The NN1002 controller chip was in development, with shipments expected in 2014; timing and customer product releases remain uncertain.
- The business remained exposed to e-reader demand, customer concentration, long and variable product-development cycles, intense competition, and reliance on Texas Instruments for customized controller chips. Four customers accounted for at least 10% of 2013 revenue: Kobo 28%, Netronix 18%, LeapFrog 12%, and Sony 11%. Kobo represented 46% of year-end receivables.
- Effective October 16, 2013, Neonode began recognizing license revenue when customer royalty reports were received rather than when products shipped. As a result, $713,000 relating to Q4 2013 shipments was deferred to Q1 2014.
- Deferred revenue at year-end included $2.5 million of prepaid license fees and $1.2 million of engineering fees. Revenue recognition depends on customer shipments or completion and acceptance of engineering work.
- The board was exploring strategic alternatives for the user-interface patent and licensing business, including a possible merger, sale, or spin-off; no transaction was assured. No material legal proceedings were reported.
- Neonode reported a history of losses and no assurance of future profitability. Currency exposure, patent protection and enforcement, and the ability to expand beyond e-readers are additional risks. The company did not hedge foreign-currency exposure.
Investor facts to verify
- Whether anticipated customer launches in 2014–2015 occurred and generated recurring license revenue, especially outside e-readers.
- Whether the $713,000 shifted from Q4 2013 was recognized in Q1 2014, and how the royalty-report timing policy affected comparability.
- Cash burn, liquidity runway, and financing needs relative to management’s stated 12-month funding expectation.
- Customer concentration and receivable collection, particularly Kobo’s 46% share of year-end receivables.
- Progress and customer adoption of the NN1002 chip, and fulfillment of related Texas Instruments development commitments.
- Any outcome of the board’s strategic-alternatives review, including potential effects on the licensing business and shareholders.