Neonode Inc. — Q3 2014 Form 10-Q
Business and period: For the quarter and nine months ended September 30, 2014; filed November 6, 2014. Neonode develops and licenses touch-interface technology to OEMs and ODMs, which incorporate it into products they manufacture and sell. The interim financial statements are unaudited. At quarter-end, the company reported 36 technology license agreements, with nine customers shipping products.
Financial performance
Amounts below are in U.S. dollars; millions except per-share data and percentages.
- Q3 revenue: $1.126 million, up 5% from $1.076 million a year earlier. License fees were $0.6 million and engineering services $0.5 million. The company attributed growth to printer and PC shipments and automotive engineering services, offsetting a 74% decline in license fees from e-reader and tablet shipments.
- Nine-month revenue: $3.005 million, up 11% from $2.708 million. License fees were $1.9 million and engineering services $1.1 million. New printer and PC shipments and automotive engineering work offset a 37% decline in e-reader license fees.
- Gross margin: Q3 gross profit was $0.704 million versus $0.311 million; gross margin was approximately 62.5% versus 28.9%. Nine-month gross profit was $1.965 million versus $1.265 million; gross margin was approximately 65.4% versus 46.7%. Neonode cited lower prototype and product-development costs charged to customer engineering projects and higher revenue.
- Expenses and losses: Q3 operating expenses rose to $3.949 million from $3.589 million; net loss was $3.245 million versus $3.343 million, or $(0.08) per share versus $(0.09). Nine-month operating expenses rose to $13.091 million from $11.203 million; net loss increased to $11.127 million from $10.033 million, or $(0.28) per share versus $(0.29). Sales and marketing and general and administrative expenses increased; nine-month R&D expense was essentially unchanged at $5.293 million.
- Cash flow and liquidity: Cash was $8.844 million at September 30, 2014, versus $8.815 million at year-end 2013. Nine-month operating cash use was $9.053 million, compared with $6.529 million in 2013. Financing provided $9.271 million, mainly from $9.253 million net proceeds from a stock sale. Working capital was $5.739 million, down from $6.013 million at year-end.
- Debt and obligations: The balance sheet reports $0.476 million in capital lease obligations, including $0.066 million current. No other borrowings are identified in the provided filing text. Deferred revenue was $3.252 million, including $2.7 million of deferred license fees and $0.6 million of deferred engineering fees.
Material changes and notable items
- In May 2014, Neonode sold 2.5 million shares at $4.00 each, raising $10.0 million gross and approximately $9.3 million net. Shares outstanding increased to 40.455 million from 37.934 million at December 31, 2013.
- A May 2014 investor warrant covers up to 2.5 million shares at $5.09 per share and could provide $12.725 million gross if fully exercised; a placement-agent warrant covers a further 75,000 shares. These potential proceeds are not assured.
- Neonode entered a capital lease for specialized milling equipment; the equipment began service in July and is amortized over six years.
- Two customers accounted for approximately 77% of accounts receivable at September 30, compared with 56% at year-end 2013. One customer represented approximately 30% of Q3 revenue; four represented 49% of nine-month revenue.
Outlook, risks and contingencies
- Management said it believed cash on hand was sufficient for the next 12 months, while also warning that additional capital may be needed if operations do not become cash-flow positive. The filing provides no quantitative revenue or earnings guidance.
- Management expected additional customers to begin shipments as they complete product development and release cycles during 2014 and 2015; such cycles typically take six to 36 months. Timing and customer adoption remain uncertain.
- Key risks include continuing losses and operating cash burn, reliance on a limited number of customers and on customers’ ability to launch products, uncertain market acceptance, competition and intellectual-property costs, and potential need for further financing. Additional equity financing could dilute shareholders.
- Foreign-currency translation and transaction exposure affected results; management said it did not believe exchange-rate changes would be material and did not use currency hedges. Approximately 91% of revenue and 50% of costs were denominated in U.S. dollars.
- The filing reports no material legal proceedings and no material changes to previously disclosed risk factors. It identifies no subsequent events requiring disclosure beyond the matters in the notes. Approximately $93,000 remained accrued under the Texas Instruments NN1001 engineering-cost agreement; the NN1002 chip remained in development and had not entered mass production.
Important facts for investors to verify
- Whether customers complete development and launch products on the expected schedule, and whether shipments convert into recurring license revenue.
- Whether gross-margin improvement is sustainable as revenue mix and customer engineering costs change.
- Cash runway relative to the $9.1 million nine-month operating cash outflow, and the assumptions behind management’s 12-month liquidity assessment.
- Customer concentration, receivable collectibility, and the composition and timing of deferred-revenue recognition.
- Potential dilution from outstanding warrants and future financing needs; warrant exercise proceeds are conditional, not committed cash.