Neonode Inc. — Q3 2018 Form 10-Q
Business and period: Neonode develops and licenses optical touch and gesture technology and sells sensor modules. This report covers the quarter and nine months ended September 30, 2018. Unless otherwise noted, financial amounts below are in U.S. dollars and millions; the financial statements present amounts in thousands. Prior-period comparisons are affected by adoption of ASC 606, and share and per-share figures are adjusted for the subsequent 1-for-10 reverse stock split.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.923 | $2.305 | $6.174 | $6.966 |
| Gross margin dollars / percentage | $1.584 / 82% | $2.154 / 93% | $5.700 / 92% | $6.319 / 91% |
| Operating loss | $(0.934) | $(1.411) | $(2.974) | $(3.487) |
| Net loss attributable to Neonode | $(0.809) | $(1.115) | $(2.466) | $(2.986) |
| Basic and diluted loss per share | $(0.14) | $(0.20) | $(0.42) | $(0.59) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(2.275) | $(4.691) |
- Revenue declined 16.6% in Q3 and 11.4% for the nine-month period. License revenue fell 22.9% in Q3 and 7.7% year to date; sensor-module revenue fell 81.5% and 72.2%, respectively. Non-recurring engineering revenue increased to $287,000 in Q3 and $317,000 year to date.
- Q3 gross margin fell to 82%, mainly because sensor-module sales had negative gross margin, including shipping costs for returned AirBars. Operating expenses declined 29.4% in Q3 and 11.5% year to date, helping reduce operating and net losses despite lower sales.
- Cash was $2.689 million at September 30, versus $5.796 million at December 31, 2017. Working capital was approximately $4.644 million. Total assets were $9.665 million and total liabilities $3.633 million.
- Capital-lease obligations totaled $1.844 million, including $569,000 current and $1.275 million noncurrent. The filing reports no note payable outstanding at period-end. Nine-month investing cash outflow was $184,000 and financing cash outflow was $413,000, primarily lease principal payments.
Changes, outlook and risks
- Management attributed lower license revenue principally to reduced printer and automotive royalties, including lower automobile shipments by a Chinese customer; increases from Volvo and Suzuki partly offset the decline. Sensor-module sales weakened as the company shifted focus from consumer AirBar products toward embedded B2B customers. Neonode said AirBar was not expected to be a significant future revenue source and that it was evaluating partner options to monetize the investment.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, so prior periods were not recast. The standard reduced reported Q3 2018 revenue by $322,000 and nine-month revenue by $258,000 versus amounts calculated without the standard; the company also recorded a $1.353 million net reduction to beginning accumulated deficit. Adoption did not affect cash flows.
- Management expected revenue to increase and said its operating plan and capital sources were expected to support operations for at least the next 12 months. It cautioned that revenue targets may not be met and additional financing could be needed if operations do not become cash-flow positive; financing may be unavailable or dilute shareholders. No specific revenue or earnings guidance was provided.
- Liquidity remains a key concern: the company has a history of losses, an accumulated deficit of $184.6 million, and used $2.3 million in operating cash during the first nine months. Management stated that it believed available resources were sufficient for at least 12 months, but gave no assurance on meeting targets or obtaining future financing.
- Revenue and receivables are concentrated: Hewlett Packard represented 33% of Q3 revenue and 34% year to date; four customers represented 73% of receivables at September 30. Other disclosed risks include customer product-launch timing and demand, competition, intellectual-property claims, foreign-exchange movements, and product returns and incentives. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- The 1-for-10 reverse split became effective October 1, 2018. Nasdaq notified Neonode on October 15 that it had regained minimum-bid-price compliance. The company planned to adopt the new lease accounting standard on January 1, 2019 and expected a few operating leases to be recognized on the balance sheet.
Important facts for investors to verify
- Whether license royalties and customer product shipments recover, particularly in printer and automotive markets, and whether customer concentration changes.
- Whether the B2B sensor-module strategy can offset AirBar weakness and generate positive product margins; review the impact of distributor returns and related costs.
- Cash burn, cash runway and financing needs against management’s 12-month outlook; note that the filing gives no numeric revenue guidance.
- Comparability of reported revenue and receivables under ASC 606, including its estimates of unreported royalties and its effect on reported results.
- Capital-lease obligations, future lease commitments, and any subsequent changes following the reverse split and Nasdaq compliance notice.