Neonode Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2012. Neonode develops and licenses optical multi-touch technology, primarily to OEMs and ODMs. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1.679 | $1.287 | $4.817 | $2.109 |
| Gross profit | $1.342 | $0.954 | $3.737 | $1.383 |
| Gross margin | 80.0% | 74.1% | 77.6% | 65.6% |
| Operating expenses | $3.457 | $1.314 | $10.825 | $4.472 |
| Operating loss | $(2.115) | $(0.360) | $(7.088) | $(3.089) |
| Net loss | $(2.144) | $(1.930) | $(7.159) | $(14.373) |
| Basic and diluted loss per share | $(0.06) | $(0.07) | $(0.22) | $(0.55) |
- Revenue increased 30% year over year in Q3 and 128% for the nine months. 2012 revenue included license fees of $1.6 million for Q3 and $4.1 million year to date, plus engineering services fees of $120,000 and $765,000, respectively.
- Operating expenses rose substantially, including research and development of $1.5 million for Q3 and $3.6 million year to date, sales and marketing of $0.9 million and $3.4 million, and general and administrative expense of $1.1 million and $3.8 million. Stock-based compensation was $606,000 in Q3 and $3.0 million year to date.
- Q3 net loss widened despite higher revenue, while the nine-month net loss improved substantially from 2011. The 2011 comparison included significant noncash debt-related charges: $11.0 million for the nine months, as well as interest expense. Neonode reported no debt-related expense in 2012 and said all convertible debt had been converted or paid by December 2011.
Cash, liquidity and capital
- Cash was $11.246 million at September 30, 2012, versus $12.940 million at December 31, 2011. Working capital was $9.3 million, down from $13.6 million; current assets were $13.154 million and current liabilities $3.829 million.
- For the first nine months, operating activities used $1.602 million, investing activities used $0.290 million, and financing activities provided $0.155 million, principally from warrant exercises. Cash decreased by $1.694 million.
- Total liabilities were $3.829 million, all current; the balance sheet reported no debt. Deferred revenue was $2.594 million, including $2.3 million of prepaid license fees from one customer and $0.3 million of deferred engineering fees.
- Management stated that available cash should fund operations for at least the next 12 months, but warned additional financing may be needed if operations do not become cash-flow positive. Future financing may be unavailable on acceptable terms and could dilute shareholders or impose restrictive debt covenants.
Business developments, outlook and risks
- Management reported 20 signed technology license agreements as of quarter-end and two additional agreements with a global OEM signed after September 30. It described product release cycles of six to 18 months and said customer design phases are often lengthy and subject to delays. The TI NN1001 controller chip began shipping to customers in May 2012.
- Revenue concentration remained significant: Amazon represented 31% and Kobo 27% of Q3 revenue; Amazon accounted for 46% of nine-month revenue. Three customers represented 77% of accounts receivable at quarter-end. Management expects continued reliance on a limited number of customers.
- Risks include customer product shipment timing and market acceptance, technology and pricing competition, dependence on customers’ ability to commercialize devices incorporating Neonode’s technology, intellectual property claims or loss, access to capital, and foreign exchange exposure. The company does not currently hedge currency exposure; a stronger Swedish krona could increase costs relative to U.S.-dollar revenue.
- Management said higher license fees as a share of revenue support gross margin because license fees carry a 100% gross margin. No numerical revenue or earnings guidance was provided.
- Disclosure controls and procedures were deemed ineffective due to material weaknesses in segregation of accounting duties and the quarterly and annual close process. Remediation included adding accounting resources and engaging a Sarbanes-Oxley consulting firm. Management nevertheless stated that the financial statements fairly present the company’s financial position and results in all material respects.
- The company reported no material legal proceedings and no subsequent events requiring financial statement recognition or disclosure. It noted ordinary-course indemnification commitments with potentially unlimited maximum payments, but recorded no related liability because estimated fair value was considered minimal.
Important facts for investors to verify
- Whether the two post-quarter OEM agreements progress to product launches and recurring royalty revenue, and the timing of customer shipments.
- Whether customer concentration, especially Amazon’s share of revenue and receivables, changes materially.
- Cash burn and runway relative to management’s estimate of at least 12 months, including the timing and collection of deferred revenue and receivables.
- Whether expense growth, particularly stock-based compensation and operating costs, translates into commercial growth and improved operating results.
- Progress remediating the disclosed material weaknesses and whether disclosure controls become effective.