Neonode Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. Financial amounts are in U.S. dollars. Neonode develops optical touch and gesture technology, licensing it to OEMs and Tier 1 suppliers and selling standardized sensor modules, including its AirBar consumer product.
Financial results and liquidity
- Revenue: $2.332 million, down 25.5% from $3.132 million. License fees were $2.121 million (down 14.1%); sensor-module/AirBar sales were $210,000, versus none reported in Q1 2016; non-recurring engineering (NRE) revenue was $1,000, versus $664,000.
- Gross profit and margin: $2.227 million, down from $2.537 million. Gross margin rose to approximately 95% from 81%, largely because license fees—which carry nearly 100% margin—made up a larger share of revenue. AirBar gross margin was 52%.
- Operating expenses and loss: Operating expenses were $3.105 million, down 18.8%, including R&D of $1.315 million (down 32.5%), sales and marketing of $702,000 (down 14.0%), and G&A of $1.088 million (up 2.6%). Operating loss narrowed to $878,000 from $1.288 million.
- Net loss: Net loss attributable to Neonode was $873,000, compared with $1.367 million; diluted loss per share was $0.02 versus $0.03. The reported income-tax provision was $74,000.
- Cash flow: Operations used $1.605 million, compared with $21,000 provided in Q1 2016. Investing used $104,000 and financing used $58,000. Cash declined $1.770 million during the quarter to $1.706 million.
- Balance sheet and liquidity: Working capital was approximately $2.1 million, down from $3.1 million at December 31, 2016. Current assets were $6.423 million and current liabilities $4.325 million. Total assets were $8.434 million; total liabilities were $5.241 million. Capital-lease obligations totaled $1.149 million, of which $233,000 was current. No other borrowings are identified in the supplied filing text.
- Other balance-sheet items: Inventory increased to $1.544 million from $696,000; accounts receivable declined to $1.007 million from $1.548 million. Deferred revenue was $1.580 million on the balance sheet, versus $1.921 million at year-end.
Material changes and business developments
- Revenue fell primarily because NRE revenue declined and Q1 2016 included a one-time $300,000 HP license-fee catch-up. The company attributed lower R&D spending mainly to fewer resource-intensive custom-design projects.
- Management said Neonode stopped entering new license agreements in late 2016 and plans to transition existing license customers to sensor-module purchase agreements over several years. The company reported 41 technology license agreements and 16 customers shipping products using its touch technology.
- AirBar had entered mass production in late 2016. Neonode said it was rolling out 13.3-inch and 14-inch Windows versions and a 13.3-inch MacBook Air version. Sensor-module agreements and automotive development work were also described.
- Revenue concentration remained significant: HP, Canon, Amazon and Robert Bosch represented 31%, 17%, 12% and 11% of Q1 2017 revenue, respectively. Three customers represented 72% of accounts receivable at quarter-end.
Outlook, risks and contingencies
- Management expected license fees, NRE and AirBar sales to help reduce operating losses in 2017, and expected revenue to increase and improve operating cash flow over at least the next 12 months. It cited AirBar distributor purchase orders, an OEM sensor-module agreement and improved cost efficiency, but gave no quantified revenue or earnings guidance and cautioned that targets may not be achieved.
- The filing reports a $20 million shelf registration effective March 24, 2017, available for potential future offerings; it does not mean proceeds had been raised. An earlier shelf had 1.8 million shares remaining and was due to expire June 12, 2017. Warrants exercisable for up to 4.314 million shares at $1.12 could provide approximately $4.8 million if fully exercised; none had been exercised as of May 5, 2017.
- Neonode reported recurring historical losses, an accumulated deficit of approximately $179.9 million and Q1 operating cash use of $1.6 million. Management stated its operating plan and capital sources were sufficient to alleviate going-concern concerns and that it anticipated continuing operations for at least 12 months, while acknowledging possible need for additional financing and no assurance of availability on acceptable terms. Equity financing could dilute shareholders; debt could impose restrictive covenants.
- Key risks include customer and market concentration, uncertain adoption and shipment timing, lengthy product-development cycles, competition and intellectual-property costs, dependence on key personnel, foreign-exchange exposure, and the ability to raise capital. Approximately 79% of Q1 operating costs were denominated in foreign currencies; the company said it did not hedge currency exposure.
- The filing identifies $200,000 accrued under the STMicroelectronics NN1003 development agreement and potential per-unit NRE payments under agreements with STMicroelectronics and Texas Instruments. No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal controls.
Important facts for investors to verify
- Assess whether AirBar sales, distributor orders and OEM sensor-module programs can grow enough to offset declining NRE and license revenue, and whether margins remain sustainable as product sales become a larger revenue share.
- Review cash burn, available financing and the assumptions supporting management’s 12-month liquidity outlook; distinguish shelf capacity and potential warrant proceeds from cash already received.
- Reconcile the deferred-revenue discussion: the balance sheet shows a decrease from $1.921 million to $1.580 million, while the liquidity discussion says deferred revenues increased by approximately $0.3 million. The filing text does not clearly resolve this inconsistency.
- Monitor customer concentration, receivable collection, inventory build and the timing of customer product shipments.
- Confirm the status and potential cash impact of outstanding warrants, capital leases and NRE commitments.