Neonode Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 6, 2015. Neonode develops and licenses user-interface and optical infrared touch technology to OEMs and ODMs. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial results and position
| Metric | Q1 2015 | Q1 2014 / comparator |
|---|---|---|
| Revenue | $2.263 million | $1.014 million; up 123% |
| Gross profit and margin | $1.925 million; 85.0% | $0.848 million; 83.6% |
| Operating expenses | $3.991 million | $4.855 million |
| Operating loss | $(2.066) million | $(4.007) million |
| Net loss / loss per share | $(2.072) million / $(0.05) | $(4.008) million / $(0.11) |
| Cash used in operating activities | $(1.585) million | $(2.646) million |
| Cash and cash equivalents | $4.453 million at March 31 | $6.129 million at December 31, 2014 |
| Working capital | $1.563 million | $2.983 million at December 31, 2014 |
| Total liabilities / capital lease obligations | $6.399 million / $0.375 million | $5.332 million / $0.428 million at December 31, 2014 |
Revenue comprised $1.8 million of technology license fees and $0.5 million of non-recurring engineering services. License fees carry a stated 100% gross margin. Net loss improved primarily alongside higher revenue and lower operating expenses. The company reported no income-tax benefit; deferred tax assets were fully reserved.
Operating cash use reflected the net loss, noncash expenses of about $0.6 million, and working-capital movements. Accounts receivable rose about $0.9 million from year-end; deferred revenue increased about $0.7 million. Investing cash use was $3,000 and financing cash use was $14,000, principally capital-lease payments. Cash declined $1.676 million during the quarter.
Material changes and business developments
- Revenue growth was attributed mainly to license fees from Amazon e-readers and HP printers, plus automotive-market engineering revenue. Amazon and HP represented 28% and 30% of quarterly revenue, respectively.
- R&D expense fell to $1.579 million from $1.784 million; sales and marketing fell to $0.850 million from $1.042 million; general and administrative expense fell to $1.562 million from $2.029 million. Management cited lower personnel, prototype, legal and compliance costs, and favorable currency movements.
- During the quarter, Neonode entered a joint development and cooperation agreement with Autoliv for a vehicle steering-wheel HMI sensing product. On April 9, 2015, Autoliv paid $1.5 million, initially to be deferred and recognized over the 12-month development period beginning in Q2. Up to another $1.5 million is payable in three milestone-based installments.
- Deferred revenue was $4.146 million at quarter-end, including $2.3 million of deferred license fees and $1.8 million of deferred engineering fees.
Outlook, risks and other notable items
- Management expected revenue to continue increasing and stated it believed cash was sufficient to support operations for at least the next 12 months. This outlook depends on revenue targets and is not assured; the company warned that missing targets could require cash-conservation measures or additional financing.
- Neonode reported significant cumulative losses and negative operating cash flow since inception. It may seek equity, debt or credit facilities if operations do not become cash-flow positive; financing may be unavailable or dilute shareholders or impose restrictive covenants. A shelf registration had 5 million shares available for issuance.
- Customer and collection concentration are notable: one customer represented 68% of accounts receivable at March 31. Revenue also depended materially on a small number of customers. The company had 36 technology license agreements and 16 customers shipping products using its technology in the quarter.
- Foreign-currency exposure affects operating costs: about 64% of Q1 operating costs were denominated in Swedish kronor, Japanese yen, South Korean won or Taiwan dollars. The company did not use currency hedges.
- Potential commitments include up to $500,000 of shipment-linked NRE reimbursements under each of two Texas Instruments agreements; about $81,000 was accrued under the first agreement, while the second ASIC remained in development. Future minimum operating lease payments totaled $1.185 million.
- Neonode reported no material legal proceedings and no material changes to previously disclosed risk factors. Management said disclosure controls were effective and described remediation steps for prior internal-control material weaknesses, including added external accounting resources and written closing procedures.
Important facts for investors to verify
- Whether revenue growth and the Autoliv milestones convert into recurring recognized revenue and cash collections.
- Cash runway assumptions, operating cash burn, and whether additional capital will be required despite management’s 12-month assessment.
- Receivable collectability given the 68% single-customer concentration, and the timing and conditions for recognizing deferred revenue.
- Customer dependence, product shipment timing, and the sustainability of Amazon, HP and automotive-related business.
- Progress in remediating the previously reported internal-control weaknesses, along with potential dilution from the shelf registration, outstanding options and warrants.