Neonode Inc. — Q1 2016 Form 10-Q
Business and period. The filing covers the three months ended March 31, 2016, compared with Q1 2015. Neonode develops and licenses optical touch and user-interface technology, provides engineering services, and is transitioning toward offering sensor hardware. Its single reportable segment is touch technology licensing.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $3.132 million | $2.263 million |
| Gross profit; gross margin | $2.537 million; 81% | $1.925 million; 85% |
| Operating expenses | $3.825 million | $3.991 million |
| Operating loss | $1.288 million | $2.066 million |
| Net loss attributable to Neonode; loss per share | $1.367 million; $0.03 | $2.072 million; $0.05 |
| Cash from (used in) operations | $21,000 | $(1.585) million |
| Cash at quarter-end | $2.940 million | $3.082 million at Dec. 31, 2015 |
| Working capital | $118,000 | $1.5 million at Dec. 31, 2015 |
| Total liabilities; capital lease obligation | $4.976 million; $337,000 | $4.094 million; $340,000 at Dec. 31, 2015 |
Revenue comprised $2.5 million of technology license fees and $0.6 million of non-recurring engineering services. Q1 2016 consolidated net loss, including noncontrolling interests, was $1.399 million. The company reported $156,000 of property and equipment purchases and $15,000 of capital lease principal payments; cash decreased by $142,000 during the quarter. No impairment of long-lived assets was identified.
Changes versus Q1 2015 and prior quarter-end
- Revenue increased 38%, mainly from higher license fees in printer and automotive markets, partly offset by lower e-reader fees. License-fee mix shifted to 51% printers, 23% automotive and 26% e-readers, versus 34%, 5% and 61%, respectively, a year earlier.
- Gross margin percentage fell four percentage points, which management attributed primarily to higher automotive project costs.
- Operating expenses declined overall: R&D rose to $1.949 million from $1.579 million, while sales and marketing was $816,000 versus $850,000 and G&A was $1.060 million versus $1.562 million. Lower stock-based compensation and professional fees contributed to lower G&A.
- Operating loss narrowed by $778,000, and net loss attributable to Neonode improved by $705,000. Accounts receivable fell $698,000 from year-end; deferred revenue rose $461,000, including a customer license-fee prepayment of $850,000, partly offset by completed engineering services.
- Working capital contracted to $118,000 from $1.5 million at year-end, despite positive operating cash flow in the quarter.
Outlook, risks and other items
- Management expects to begin manufacturing and selling the AirBar PC sensor module in Q2 2016 at its Gothenburg facility. Ingram Micro agreements cover distribution in Europe and North America. This is an expectation, not reported completed sales.
- Management said existing cash and expected operating cash flows should fund operations for at least 12 months, and expects license and engineering revenue to reduce or eliminate operating losses in 2016. It also cited expense reductions and said it may seek financing if operations do not become cash-flow positive; financing may not be available on acceptable terms and equity financing could dilute shareholders.
- Customer concentration is material: HP generated 40% and Amazon 18% of Q1 2016 revenue; Autoliv generated 12%. Five customers represented approximately 100% of quarter-end receivables. Revenue and cash needs therefore depend on a limited customer base and customer product shipment timing.
- Operating lease commitments totaled $1.331 million, including $574,000 for the remainder of 2016 and $664,000 for 2017. A further $300,000 milestone payment under the NN1003 development agreement was contingent on product validation, which was incomplete at quarter-end; unit-based fees may also apply. Payments under the NN1002 agreement were tied to shipments, with none made as of quarter-end.
- Approximately 71% of Q1 operating costs were denominated in foreign currencies; Neonode did not hedge this exposure. The filing reports no material legal proceedings and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective, with no material change in internal control over financial reporting.
Investor verification points
- Assess whether AirBar production, distribution and sales began as expected, and whether licensing and engineering revenue supports the 2016 outlook.
- Monitor cash, working capital, operating cash flow and financing needs, especially given the company’s accumulated deficit of $175.1 million and thin working-capital cushion.
- Track revenue and receivable concentration, royalty-report timing, customer shipments and the sustainability of the Q1 revenue mix.
- Verify the timing and potential amount of NN1003 and NN1002 milestone or shipment-based costs, and the effect of lease commitments.
- Reconcile the filing’s descriptions of net proceeds from the October 2015 stock offering: one disclosure states approximately $5.4 million net, while another states approximately $5.6 million net. The filing text does not provide a clear consistent value.