Neonode Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unless otherwise noted, financial amounts are in U.S. dollars; statement amounts are in thousands. Neonode develops and licenses optical touch and gesture technology, and sells sensor modules and AirBar products. It reported one operating segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1.710 million | $1.876 million | $3.722 million | $4.251 million |
| Gross profit | $1.639 million | $1.787 million | $3.550 million | $4.116 million |
| Gross margin | 96% | 95% | 95% | 97% |
| Operating loss | $1.314 million | $1.161 million | $1.982 million | $2.040 million |
| Net loss attributable to Neonode | $1.264 million | $0.964 million | $1.837 million | $1.657 million |
| Basic and diluted loss per share | $0.14 | $0.16 | $0.21 | $0.28 |
| Cash used in operating activities | Not separately stated for quarter | Not separately stated for quarter | $1.475 million | $1.431 million |
- Q2 revenue comprised $1.467 million in license fees, $223,000 in sensor modules, and $20,000 in non-recurring engineering (NRE). For the first half, those amounts were $3.409 million, $273,000, and $40,000, respectively.
- Q2 license revenue declined 16.7% year over year; sensor-module revenue rose 162.4%. First-half revenue declined 12.4%, while sensor-module revenue increased 99.3%.
- Management attributed the revenue decline mainly to lower printer license revenue from Canon, partly offset by higher Lexmark license revenue and sensor-module sales. Q2 license revenue included a negative $46,000 e-reader/tablet adjustment; the filing does not explain its specific cause in the supplied text.
- Q2 operating expenses were $2.953 million, broadly flat year over year; first-half expenses fell 10.1% to $5.532 million. First-half R&D decreased 5.9% and G&A decreased 16.4%, while Q2 R&D increased 6.6%.
Liquidity, balance sheet and capital
- At June 30, cash was $4.638 million, versus $6.555 million at December 31, 2018. Working capital was $5.7 million, down from $8.2 million.
- Total assets were $11.346 million and total liabilities $3.719 million. Current assets were $8.358 million and current liabilities $2.646 million.
- Lease obligations totaled $2.047 million: $693,000 operating leases and $1.354 million finance leases. The company reported no conventional borrowing in the supplied financial statements; finance lease obligations are its disclosed debt-like obligations.
- First-half cash use included $1.475 million from operations, $77,000 for property and equipment, and $272,000 for finance-lease principal payments. Cash also declined by $93,000 from exchange-rate effects.
- Neonode reported an accumulated deficit of $187.1 million and a history of operating losses and negative operating cash flow. Management said its operating plan and capital sources were sufficient to alleviate going-concern concerns and anticipated it could continue operations for at least the next 12 months, but acknowledged that additional financing may be needed if operations do not become cash-flow positive.
Changes, outlook and notable items
- Management expected revenue from licensing, sensor modules, NRE and AirBar to help reduce 2019 operating losses, citing improved cost efficiency from standardized sensor modules. No quantified revenue, earnings or cash-flow guidance was provided, and management cautioned it might not meet targets.
- In April 2019, Neonode agreed that Finetek would act as a system integrator and future manufacturing partner. It also reported a roughly $0.6 million sensor-module purchase order from a medical-device OEM, with delivery beginning in June as expected. A July distributor agreement for China, Taiwan and Hong Kong occurred after quarter-end.
- In May, Neonode assigned a portfolio of nine U.S. patents, five non-U.S. patents and three pending U.S. applications to Aequitas Technologies LLC, retaining a right to share potential proceeds from licensing and monetization. Proceeds are not assured.
- Four customers represented about 70% of accounts receivable. Hewlett Packard accounted for 45% of Q2 revenue and 41% of first-half revenue, underscoring customer concentration.
- Neonode adopted lease accounting standard ASC 842 on January 1, 2019, recording operating-lease right-of-use assets and obligations of approximately $0.9 million at adoption. At June 30, operating-lease assets were $728,000 and liabilities $693,000.
- The company had an effective $20 million shelf registration statement expiring March 24, 2020 and approximately 5 million authorized common shares available, subject to shares reserved or otherwise unavailable. Future equity financing could dilute shareholders; debt financing could impose restrictive covenants.
- Other risks include customer product-development and shipment timing, market acceptance, competition and intellectual-property costs, foreign-currency movements, manufacturing execution, and access to capital. The filing reported no material legal proceedings and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether license revenue stabilizes, particularly printer and consumer-electronics royalties, and whether the negative Q2 e-reader/tablet adjustment recurs.
- Whether sensor-module growth, including the medical-device order, converts into sustained revenue and positive margins.
- Cash burn, available financing, and the assumptions underlying management’s expectation of at least 12 months of operations.
- Customer concentration and the timing and reliability of customer product launches and royalty reporting.
- Potential proceeds and terms of the Aequitas patent monetization arrangement, which are not quantified in the filing.