Neonode Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Neonode develops and licenses optical touch and gesture technology and sells sensor modules. Its customers had sold more than 61 million devices incorporating its technology since 2010.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1.876 million | $2.329 million | $4.251 million | $4.661 million |
| Gross margin dollars | $1.787 million | $1.938 million | $4.116 million | $4.165 million |
| Operating loss | $(1.161) million | $(1.198) million | $(2.040) million | $(2.076) million |
| Net loss attributable to Neonode | $(0.964) million | $(0.998) million | $(1.657) million | $(1.871) million |
| Basic and diluted loss per share | $(0.02) | $(0.02) | $(0.03) | $(0.04) |
Reported gross margin was 95% versus 83% in Q2 and 97% versus 89% for the first half. License fees, which carry a 100% gross margin, represented 94% of Q2 revenue and 96% of first-half revenue.
At June 30, cash was $3.693 million, working capital was approximately $5.6 million, and total assets were $11.183 million. Six-month operating cash use was $1.431 million; investing cash use was $0.145 million and financing cash use was $0.277 million, primarily capital-lease principal payments. Cash declined from $5.796 million at year-end 2017. Capital-lease obligations totaled $1.810 million, including $0.529 million current. The company reported an accumulated deficit of $183.819 million.
Changes versus comparable periods
- Revenue decreased 19.5% in Q2 and 8.8% in the first half. Q2 license revenue declined 10.4%; sensor-module revenue fell 60.1% and first-half sensor-module revenue fell 67.6%. Non-recurring engineering revenue declined about 80% in both comparisons.
- Management attributed the quarterly decline mainly to lower automotive license fees, including seasonal effects in China and India. First-half license revenue was essentially flat year over year.
- Operating losses were modestly lower, while first-half net loss attributable to Neonode improved to $1.657 million from $1.871 million.
- Neonode adopted ASC 606 on January 1, 2018 using the modified-retrospective method, so prior periods were not recast. The standard increased reported license revenue by $0.294 million in Q2 and $0.064 million for the first half versus amounts excluding the standard. It also changed the timing of distributor sensor-module revenue recognition.
Outlook, commentary and risks
- Management expects revenue growth and improved operating cash flows over at least the next twelve months, and said it anticipates being able to continue operations for that period. These expectations are not assured; management warned that missed revenue targets could require conserving cash or scaling back activities.
- The company is shifting emphasis from consumer AirBar sales toward business-to-business embedded sensor-module customers. Management said AirBar sales have not met expectations and are not expected to be significant, and is evaluating partner collaborations to monetize the investment.
- Neonode reported 41 technology license agreements and 15 customers shipping products using its technology in the first half. Product development and release cycles typically take six to 36 months.
- Funding remains a risk given the history of losses and negative operating cash flow. Neonode may need additional equity or debt if operations do not become cash-flow positive; financing may be unavailable or dilute shareholders. A $20 million shelf registration was effective through March 2020. Warrants to purchase approximately 3.25 million shares at $2.00 each became exercisable in August 2018 and could provide about $6.5 million if fully exercised.
- Customer and receivable concentration is significant: four customers represented approximately 69% of receivables at June 30. Hewlett Packard generated 29% of Q2 revenue and 34% of first-half revenue.
- Foreign currency movements affected reported results: translation losses were $0.336 million in Q2 and $0.430 million in the first half. The filing also identifies technology acceptance, competition, intellectual property, customer dependence, manufacturing experience, Nasdaq listing and access to capital as risks. No material changes to previously disclosed risk factors or material legal proceedings were reported.
Important facts for investors to verify
- Whether license-fee growth and the anticipated shift to embedded B2B sensor modules can offset declines in AirBar, sensor-module and engineering revenue.
- Cash burn, cash runway and the assumptions behind management’s expectation that current resources will support operations for at least twelve months.
- Revenue-recognition estimates under ASC 606, including unbilled royalties and distributor control, and the effect on comparisons with prior periods.
- Customer concentration, receivable collection and the potential proceeds and dilution associated with warrant exercises or future capital raising.
- Performance and profitability of sensor-module sales, which had negative gross margin in Q2 and only 2% gross margin for the first half of 2018.