Neonode Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; financial results are compared with the quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Neonode develops and licenses user-interface and optical infrared touch technology to OEMs and ODMs; it does not manufacture products or components. At September 30, 2015, the company reported 40 technology license agreements and 16 customers shipping products using its technology during the first nine months of 2015. Revenue comes primarily from technology licenses and non-recurring engineering (NRE) services.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3.113 | $1.126 | $8.152 | $3.005 |
| Gross profit | $2.204 | $0.704 | $6.168 | $1.965 |
| Gross margin | 70.8% | 62.5% | 75.7% | 65.4% |
| Operating loss | $(1.348) | $(3.245) | $(5.151) | $(11.126) |
| Net loss | $(1.368) | $(3.245) | $(5.232) | $(11.127) |
| Basic and diluted loss per share | $(0.03) | $(0.08) | $(0.13) | $(0.28) |
Revenue comprised $2.0 million of license fees and $1.1 million of NRE services in Q3 2015; for the first nine months, the respective amounts were $5.4 million and $2.8 million. Management attributed revenue growth chiefly to higher license fees from e-reader, printer and automotive customers, alongside increased NRE revenue. License fees carry a 100% gross margin, according to management.
Operating expenses were $3.552 million in Q3 and $11.319 million for the nine-month period, versus $3.949 million and $13.091 million in the comparable 2014 periods. R&D and G&A declined year over year for the nine months; sales and marketing increased modestly. The company recorded $165,000 of cost of sales for expected losses on two engineering projects in Q3 2015, compared with none in Q3 2014.
Cash flow, balance sheet and liquidity
- Cash was $0.950 million at September 30, 2015, down from $6.129 million at December 31, 2014. Working capital was a deficit of $1.4 million, compared with positive working capital of $3.0 million at year-end 2014.
- Net cash used in operating activities was $4.886 million for the first nine months of 2015, versus $9.053 million in 2014. Investing activities used $0.137 million; financing activities used $0.040 million.
- Total liabilities were $4.858 million, including $0.354 million of capital lease obligations. Total stockholders’ equity was a deficit of $1.078 million. The filing reports no conventional long-term borrowings; capital lease obligations are the disclosed debt-like obligations.
- Accounts receivable was $0.489 million; projects in process were $1.044 million, up from $0.200 million at year-end. Deferred revenue fell to $1.873 million from $3.403 million.
- On October 13, 2015, after quarter-end, Neonode sold 3.2 million shares at $1.90 per share, receiving approximately $5.6 million net proceeds. The filing reports 43,724,984 shares outstanding on November 5, 2015, versus 40,524,984 at September 30.
Changes, outlook and risks
Revenue increased 176% in Q3 and 171% for the first nine months compared with 2014; net losses narrowed substantially. Management said it expects revenue to continue increasing and believes the company can fund operations for at least the next 12 months, including in light of the October offering. It cautioned that this depends on achieving revenue targets and that further capital could be needed if operations do not become cash-flow positive. No specific numerical revenue or earnings guidance was provided.
An Autoliv development and cooperation agreement includes an initial $1.5 million payment and up to $1.5 million in milestone-based payments. Neonode recognized $0.75 million of the initial payment and $0.5 million for completed milestones during the first nine months of 2015. The company also disclosed a potential TI reimbursement of up to $0.5 million under the NN1002 agreement, tied to shipments; no expense or payments had been recorded through September 30, 2015. The NN1001 agreement’s $0.5 million cap had been reached and paid.
Key risks include continuing operating losses and cash use, customer and revenue concentration, reliance on customers’ product development and shipments, possible need for additional financing and resulting dilution or debt restrictions, and foreign-exchange exposure. Three customers generated at least 10% of Q3 revenue: Barnes & Noble (22%), Hewlett Packard (21%) and Autoliv (18%). Management reported no material legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls; it also reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the October 2015 offering proceeds and updated share count are reflected in subsequent reporting, and how proceeds are being used.
- Revenue sustainability and customer/product concentration, including shipment timing and the contribution of license versus NRE revenue.
- Whether Neonode meets its revenue and cash-flow expectations and maintains liquidity beyond the stated 12-month outlook.
- Milestone achievement and remaining payment terms under the Autoliv agreement, and shipment-linked costs under the NN1002 agreement.
- The impact of foreign-currency movements and the company’s exposure to unhedged operating costs denominated in foreign currencies.