Neonode Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless stated otherwise, financial amounts below are in U.S. dollars; statement amounts are in thousands. Neonode develops optical sensing technology for human-machine interfaces (HMI) and remote driver and cabin monitoring. Its reported business areas were HMI Solutions, HMI Products and Remote Sensing Solutions; it recorded no Remote Sensing Solutions revenue in the periods presented.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $758 | $1,710 | $2,052 | $3,722 |
| Gross profit | $635 | $1,639 | $1,885 | $3,550 |
| Gross margin | 84% | 96% | 92% | 95% |
| Operating expenses | $2,391 | $2,953 | $4,730 | $5,532 |
| Operating loss | $(1,756) | $(1,314) | $(2,845) | $(1,982) |
| Net loss attributable to Neonode | $(1,612) | $(1,264) | $(2,622) | $(1,837) |
| Loss per share | $(0.18) | $(0.14) | $(0.29) | $(0.21) |
- Revenue fell 55.7% year over year in Q2 and 44.9% for the first half. HMI Solutions revenue was $678 in Q2 and $1,860 for the first half; HMI Products revenue was $80 and $192, respectively.
- Operating cash use was $1,928 for the first half, versus $1,475 in 2019. Investing cash use was $7; financing provided $1,344, including $966 of director-affiliated short-term borrowings and $542 of Swedish tax credits. Cash declined to $1,773 from $2,357 at year-end 2019.
- At June 30, current assets were $4,150 and current liabilities $4,229, implying working capital of approximately $(79). Total assets were $5,588, liabilities $4,642 and stockholders’ equity $946. Accumulated deficit was $193,142.
- Current liabilities included $967 of short-term borrowings and $563 of short-term tax credits. Finance lease obligations totaled $910 ($517 current); operating lease obligations totaled $201. The tax credit carries 1.25% annual interest and may be repaid earlier than its 12-month term.
Changes versus the prior comparable period
- Management attributed the revenue decline mainly to lower HMI Solutions license revenue and reduced estimates of unbilled license fees amid economic uncertainty. Q2 license fees were $674 versus $1,467 a year earlier.
- Gross margin declined, which management attributed primarily to higher inventory write-offs in 2020. AirBar inventory reserves were $0.7 million at June 30, compared with $0.8 million at year-end 2019.
- First-half R&D expense declined 24.8% to $2,038 and G&A declined 20.3% to $1,499; sales and marketing expense rose 26.9% to $1,193, mainly reflecting staff reallocation to marketing. Despite lower operating expenses overall, the operating and net losses increased.
Outlook, risks and unusual items
- Management expects revenue from its business areas to help reduce operating losses in coming years and plans further operational-efficiency measures, but provided no quantified guidance and cautioned that these goals are not assured.
- Neonode said COVID-19 was adversely affecting near-term growth and could continue to do so. It cited customer demand uncertainty, component-delivery constraints, possible delays and higher costs, and remote work. It also noted increased interest in contactless-touch technology. A Swedish government-backed short-time-layoff program reduced staff working hours by 20%. The overall pandemic impact remained uncertain.
- After quarter-end, Neonode completed an August 7 private placement for $13.9 million gross proceeds and approximately $13.1 million net proceeds, for working capital. It issued 1,611,845 common shares at $6.50 and convertible preferred shares convertible into 684,378 common shares, subject to adjustment and limitations. The preferred shares carry a 5% annual dividend. Insiders purchased $3.05 million of preferred shares; preferred shares were also issued to directors to repay approximately $1.03 million of loan principal and accrued interest. A $659,070 placement-agent fee was paid. The financing strengthens liquidity but entails potential dilution and registration-related obligations, including possible liquidated damages if specified deadlines are missed.
- Management stated that cash following the placement, its operating plan and potential capital sources were sufficient to alleviate going-concern concerns. It also warned that further capital could be required if operations do not become cash-flow positive, and that future financing might be unavailable on acceptable terms.
- Revenue and receivables are concentrated: four customers represented approximately 79% of accounts receivable and unbilled revenue at June 30. Epson, HP and Alpine accounted for 35%, 27% and 12% of Q2 revenue, respectively. The filing also identifies customer dependence, long product-development cycles, supplier reliance, foreign-exchange exposure and intellectual-property risks.
- A $210,000 bank guarantee supports AirBar inventory held by a manufacturing partner and runs through December 31, 2020; no liability was recorded. Separately, Neonode’s patent portfolio assignee filed infringement lawsuits against Apple and Samsung; the filing reports no proceeds from the patent monetization arrangement to date. Neonode stated it was not then involved in material legal proceedings.
Important facts for investors to verify
- Whether license revenue, royalty estimates and customer product shipments recover, especially given the sharp HMI Solutions decline and customer concentration.
- Actual cash burn and liquidity after the August placement, including the timing of working-capital needs and any further financing.
- The placement’s final dilution, preferred-stock conversion and dividend terms, insider participation, registration deadlines and any related damages.
- AirBar sell-through, the adequacy of inventory reserves and whether the manufacturing-partner guarantee leads to an obligation.
- COVID-19 effects on customers, component availability, delivery schedules and operating costs.