Neonode Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; it does not provide a clear standalone fourth-quarter income statement or cash flow statement. Financial amounts below are in U.S. dollars.
Business context
Neonode develops optical touch and gesture technology, earning revenue primarily from per-unit licensing royalties, with smaller contributions from sensor modules, AirBar consumer products, and engineering services. The company is shifting toward supplying embedded sensor modules alongside its licensing business. Licensing customers had shipped approximately 67 million devices using Neonode technology cumulatively. The company reported 41 license agreements, 17 customers shipping products, and six sensor-module supply agreements at year-end.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $8.538 million | $10.241 million |
| Gross profit; gross margin | $7.617 million; 89% | $7.898 million; 77% |
| Operating expenses | $11.494 million | $13.374 million |
| Operating loss | $3.877 million | $5.476 million |
| Net loss attributable to Neonode | $3.060 million; $0.52 per share | $4.705 million; $0.89 per share |
| Net cash used in operations | $2.859 million | $5.581 million |
- Revenue comprised $7.954 million in license fees, $227,000 in sensor modules, and $357,000 in non-recurring engineering (NRE). License fees carried a reported 100% gross margin; NRE gross margin was 21% in both years.
- Cash was $6.555 million at year-end, versus $5.796 million. Working capital was approximately $8.2 million, versus $6.2 million. Current assets were $10.494 million and current liabilities $2.313 million.
- Capital lease obligations totaled $1.703 million, including $570,000 current and $1.133 million long-term. Interest expense was $49,000, primarily related to capital leases.
- Investing activities used $232,000, including $236,000 of property and equipment purchases. Financing activities provided $4.069 million, primarily from a December 2018 stock placement, partly offset by lease principal payments. Cash increased by $759,000 during the year.
- Reported net loss for the consolidated group, including noncontrolling interests, was $3.942 million. The $3.060 million figure above is the loss attributable to Neonode shareholders.
Changes versus 2017
- Revenue fell 16.6%. License fees declined 8.4%, sensor-module revenue 72.1%, and NRE revenue 52.0%. Management attributed the license decline mainly to lower automotive and e-reader royalties, partly offset by higher printer royalties.
- Gross margin improved to 89% from 77%, mainly because of the revenue mix and lower inventory write-downs. Neonode recorded approximately $400,000 of sensor/AirBar inventory write-downs in 2018, compared with a $1.1 million AirBar inventory write-down in 2017.
- Operating expenses declined 14.1%, including lower R&D, sales and marketing, and general and administrative costs. Despite lower revenue, operating and net losses narrowed.
- Operating cash use improved to $2.9 million from $5.6 million. Deferred revenue fell to $75,000 from $1.248 million, largely as prepaid license fees were recognized.
Outlook, risks and unusual items
- Management expects licensing, sensor-module, NRE, and AirBar revenue, along with operational efficiency improvements, to reduce operating losses in 2019. It gives no quantified revenue or earnings guidance and cautions that targets may not be met. Management believed cash and the December 2018 financing would cover short-term operating needs, but warned additional capital may be needed if operations do not become cash-flow positive.
- The December 2018 private placement generated approximately $4.6 million net proceeds through the issuance of 2,940,767 shares at $1.60 per share. The financing included purchases by directors, executives, employees, and existing investors. Shares outstanding were 8,800,313 at March 1, 2019.
- After the October 2018 1-for-10 reverse split, authorized common shares were reduced from 100 million to 10 million. The filing says issued or reserved shares exceeded available authorization by 27,305, although some warrants could not legally be exercised; Neonode anticipated seeking shareholder approval to increase authorized shares. This could constrain future equity financing and employee awards.
- Revenue and customer concentration are significant: HP represented 35% of 2018 revenue, Epson 14%, and Canon 12%; the three together accounted for 61%. Four customers represented 67% of year-end receivables. Revenues depend on customers’ product launches and shipment schedules, which can be lengthy and unpredictable.
- Other key risks include persistent operating losses and capital needs; uncertain demand and execution in hardware manufacturing; supplier and production-capacity dependence; technology competition and intellectual-property costs; foreign-currency exposure (the company does not currently hedge); and continued Nasdaq listing. The CFO notified the board of plans to resign and was expected to remain through mid-2019 while a successor search proceeded.
- Adoption of ASC 606 increased 2018 license revenue by $65,000 and included a $1.583 million opening equity adjustment; prior-year figures were not recast, limiting comparability. The company reported no material legal proceedings. Its auditor issued an unqualified opinion on the financial statements, and management concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether 2019 product launches, royalties, and sensor-module orders translated into revenue growth and lower cash burn.
- Cash runway, capital-lease payments, and whether further financing was required; also verify the status and terms of any authorized-share increase.
- Revenue and receivables concentration, customer shipment trends, and the sustainability of the reported 89% gross margin.
- Sensor-module demand, production economics, backlog conversion, and inventory valuation; the disclosed March 1, 2019 backlog was approximately $22,000 for sensor modules and $131,000 for AirBar, and the filing cautions that backlog may not predict revenue.
- The impact of ASC 606 estimates and revenue timing, including unbilled royalties, distributor returns, and customer reporting lags.