Neonode Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Neonode develops and licenses optical touch and user-interface technology to OEMs and ODMs, and is transitioning from custom design work toward standardized sensor modules. Its first consumer module, AirBar, is intended to enable touch functionality on non-touch PCs. The company also formed Neoeye AB, a 50%-owned joint venture with SMART EYE AB, to develop multi-chip modules; the venture had no operations through June 30.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $2.574 | $2.776 | $5.706 | $5.039 |
| Gross profit / margin | $2.189 / 85% | $2.039 / 73% | $4.726 / 83% | $3.964 / 79% |
| Operating loss | $(1.291) | $(1.737) | $(2.579) | $(3.803) |
| Net loss attributable to Neonode | $(1.331) | $(1.792) | $(2.698) | $(3.864) |
| Loss per share, basic and diluted | $(0.03) | $(0.04) | $(0.06) | $(0.10) |
- Six-month operating cash use was $2.075 million, versus $2.819 million in the prior-year period. Investing cash use was $0.269 million; financing cash use was $0.049 million. Cash declined by $2.449 million to $0.633 million.
- At June 30, cash was $0.633 million and working capital was negative $1.4 million, compared with $3.082 million of cash and $1.5 million of positive working capital at December 31, 2015. Total assets were $3.818 million; stockholders’ deficit was $0.878 million.
- Total capital lease obligations were $0.379 million, including $0.077 million current. The filing reports no other borrowings in the presented balance sheet.
- Deferred revenue was $2.242 million, up from $1.475 million at year-end, largely reflecting customer prepayments. Accounts receivable was $0.999 million.
Changes versus prior comparable periods
- Q2 revenue decreased about 7% year over year, while six-month revenue increased about 13%. Q2 technology license fees were $2.0 million and engineering services were $0.6 million; for the six-month period they were $4.5 million and $1.2 million, respectively.
- Management attributed Q2 revenue softness to lower non-recurring engineering (NRE) fees. Six-month growth primarily reflected higher license fees from printer and automotive customers, partly offset by lower e-reader license fees and lower NRE revenue.
- Gross margin increased to 85% in Q2 and 83% for the six-month period, from 73% and 79%, respectively. Management cited the higher revenue contribution from license fees, which carry a stated 100% gross margin.
- Operating expenses fell to $7.305 million for six months from $7.767 million. Lower sales and marketing and general and administrative expenses more than offset higher reported R&D expense.
Outlook, risks and notable items
- Management expected to begin manufacturing and selling AirBar in Q3 2016, using its Gothenburg facility, with Ingram Micro as a distribution channel across Europe, North America and Asia. The filing provides no quantified revenue or earnings guidance.
- Management said it expected revenue from license fees, NRE and AirBar to help reduce 2016 operating losses, and anticipated continuing operations for at least the next twelve months. However, it also stated that additional financing, together with cash on hand and operating cash, would be needed to meet anticipated cash requirements. No assurance was given that financing could be obtained on acceptable terms or at all.
- Key risks include the history of losses, limited cash and negative working capital, dependence on additional financing, customer concentration, uncertain customer product shipments and technology adoption, competition and intellectual-property risks, and foreign-exchange exposure. About 71% of six-month operating costs were denominated in foreign currencies; the company did not hedge with forward contracts.
- Revenue concentration was significant: Hewlett Packard represented 40% of six-month revenue, Autoliv 16%, and Amazon 14%. Three customers represented 87% of accounts receivable at quarter-end.
- Capital commitments include up to $300,000 payable upon completion of product validation under the NN1003 development agreement; validation was not complete at June 30. Operating lease commitments totaled $1.103 million. The company reported no material legal proceedings.
Important facts for investors to verify
- Whether AirBar manufacturing, distribution and sales began as planned, and whether demand and margins support management’s transition strategy.
- Cash runway, operating cash consumption and the timing, availability and terms of additional financing.
- Customer concentration, customer prepayments and the timing of revenue recognition from deferred license and engineering fees.
- Progress and remaining payment obligations under the NN1003 agreement, and any other material commitments.
- Whether reported improvements in gross margin and losses persist as the mix shifts from custom engineering to standardized modules and licensing.