Business context and reporting period
Neonode Inc.’s Form 10-K covers the fiscal year ended December 31, 2011, with 2010 as the comparable year; it does not provide standalone fourth-quarter results. The company licenses optical infrared zForce touchscreen technology and related software to device makers, rather than manufacturing finished devices. Its technology was used in e-readers and was being developed for phones, tablets, printers, GPS devices and automotive applications.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $6.067 million | $440,000 |
| Gross profit / margin | $5.159 million / approximately 85% | $172,000 / approximately 39% |
| Operating loss | $2.044 million | $9.023 million |
| Net loss | $17.145 million | $31.626 million |
| Basic and diluted loss per share | $0.64 | $1.73 |
| Cash used in operating activities | $3.453 million | $3.195 million |
| Cash at year end | $12.940 million | $911,000 |
| Working capital | $13.6 million | $(3.2) million adjusted for non-cash derivative and warrant liabilities |
Revenue grew sharply, primarily from technology-license fees ($5.8 million in 2011); engineering services contributed $287,000. The company reported 2011 gross margin of approximately 85%. The net loss included $14.735 million of non-cash items related to debt discounts, financing fees and the valuation of conversion features and warrants. Cash flow remained negative from operations despite the reported loss narrowing.
At December 31, 2011, total current liabilities were $2.954 million and the balance sheet reported no convertible debt or embedded derivative liabilities. Convertible notes were paid or converted during 2011. Total assets were $16.627 million and stockholders’ equity was $13.673 million. Capital expenditures were $114,000. No standalone interest-rate or debt maturity outlook is provided.
Material changes versus 2010
- Revenue rose from $440,000 to $6.067 million as customer products began shipping and license royalties were recognized.
- Operating loss narrowed to $2.044 million from $9.023 million. The 2010 comparison included $3.168 million of amortization of stock issued to related parties; that expense did not recur in 2011.
- Net loss improved to $17.145 million from $31.626 million, but remained substantially affected by non-cash financing and derivative accounting charges.
- Cash increased to $12.940 million, supported principally by $15.505 million of financing cash flow. In December, the company sold 3.0 million shares for $12.0 million gross and reported $11.2 million net proceeds before approximately $0.4 million of other offering expenses.
- Four customers each accounted for at least 10% of 2011 revenue: Amazon 40%, Barnes & Noble 26%, Sony 21% and Kobo 11%. The filing says 2010 revenue was concentrated 84% in two customers.
Outlook, risks and unusual items
Management said it expected possible quarterly losses during 2012 but expected net income and positive operating cash flow for full-year 2012. It stated that cash should fund operations for the remainder of 2012 and expected customer license agreements to provide sufficient cash thereafter for at least the next twelve months. These are expectations, not guarantees; the filing also warns that additional capital may be needed if operations do not become cash-flow positive.
- Commercialization depends on OEMs’ ability to complete product development, manufacture devices and ship them. The company described typical development and release cycles of six to eighteen months, creating timing and revenue uncertainty.
- Customer and collection concentration are material: 2011 revenue came from seven customers, and year-end receivables were due from five customers.
- As of year end, $1.5 million of prepaid license fees and $0.4 million of engineering fees were deferred. Engineering services were expected to be completed by the fourth quarter of 2012.
- A revenue-recognition estimate change in the third quarter increased 2011 revenue by $236,000 and reduced loss per share by $0.01.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year end, citing material weaknesses in segregation of duties, tax accounting, financial-statement disclosures, cash-flow statement preparation and foreign-currency consolidation. The auditor gave an unqualified opinion on the financial statements but did not attest to internal controls.
- Other identified risks include continued operating losses, dependence on a limited number of customers, competition and technology adoption, intellectual-property protection, access to future financing, foreign-currency exposure and potential dilution. The company reported no legal proceedings.
After year end, Neonode announced Multi-Sensing technology and signed additional license agreements in GPS, printing, tablet and children’s tablet applications. These developments are not evidence of recognized 2011 revenue.
Important facts for investors to verify
- Whether 2012 profitability and positive operating cash flow were achieved, and whether the year-end cash and management’s stated runway assumptions held.
- Whether signed licensees progressed from development to commercial shipments, and the actual timing and amount of royalty receipts.
- Customer concentration, receivables collection and the status of the $1.5 million deferred license fees and $0.4 million deferred engineering fees.
- The composition and cash versus non-cash effects of the $14.735 million financing-related charges, and confirmation that convertible debt was fully settled or converted.
- Whether management remediated the disclosed material weaknesses and improved financial reporting controls.
- The dilution implications of the December equity offering, outstanding warrants and equity-plan share authorization increase.