Neonode Inc. — Q1 2014 Form 10-Q
Business and period: Neonode develops and licenses touch-interface and optical multi-touch technology to OEMs and ODMs; it does not manufacture products. This unaudited report covers the three months ended March 31, 2014, compared with Q1 2013. Unless stated otherwise, financial figures are in U.S. dollars.
Financial performance and position
- Revenue: $1.014 million, up 85% from $548,000. Q1 2014 included $896,000 of license fees and $118,000 of engineering services, versus $539,000 and $9,000, respectively, in Q1 2013.
- Gross profit and margin: Gross profit was $848,000, up from $532,000. Gross margin was approximately 84%, down from 97%, as cost of revenue rose to $166,000 from $16,000. Management stated license fees carry a 100% gross margin.
- Operating expenses: $4.855 million, up from $4.091 million. R&D was $1.784 million, sales and marketing $1.042 million, and general and administrative $2.029 million.
- Loss: Operating loss before taxes was $4.007 million, versus $3.559 million. Net loss was $4.008 million, versus $3.570 million; basic and diluted loss per share was $0.11 in both periods.
- Cash flow: Operating cash use was $2.646 million, versus $1.663 million. Investing cash use was $46,000; financing provided $36,000 from warrant exercises. Cash declined $2.623 million during the quarter to $6.192 million.
- Liquidity and debt: Working capital was $3.135 million, down from $6.013 million at December 31, 2013. The balance sheet reported no borrowings; total liabilities were $5.305 million, principally deferred revenue of $3.713 million. Total assets were $8.788 million.
- Other metrics: Stock-based compensation was $1.072 million, compared with $586,000. Deferred revenue totaled $3.713 million, including $2.4 million of deferred license fees and $1.3 million of deferred engineering fees.
Material changes and notable items
- Revenue growth included approximately $0.7 million of license revenue recognized in Q1 2014 for products shipped or distributed in Q4 2013. The company changed its licensing-revenue recognition timing in October 2013 to the period when customer royalty reports are received; therefore, reported growth is not solely attributable to Q1 shipments.
- Revenue came from 14 customers, compared with nine in Q1 2013. Four customers accounted for at least 10% each of Q1 2014 revenue: LeapFrog 30%, Sony 16%, Netronix 14%, and Kobo 11%. R&D headcount increased to 36 from 29 a year earlier.
- On May 9, 2014, after quarter-end, Neonode agreed to sell 2.5 million shares for $10 million gross proceeds and issue a warrant for up to 1,964,636 shares at $5.09. Closing was expected by May 15 and remained subject to conditions. A placement-agent fee of $600,000 was agreed, with up to an additional $600,000 tied to warrant exercise, plus a warrant for 117,879 shares.
Outlook, risks, and contingencies
- Management said it believed existing cash was sufficient to operate for the next 12 months. It cautioned that additional capital may be needed if operations do not become cash-flow positive and that financing may not be available on acceptable terms.
- The company reported 36 license agreements, with 12 customers shipping products, and anticipated additional customer shipments as development and release cycles progress through 2014 and 2015. These cycles typically take six to 36 months; no quantified revenue or earnings guidance was provided.
- Key risks include continuing losses and cash burn, reliance on customer product development and shipment timing, customer concentration, market acceptance and competition, intellectual-property disputes, and access to capital. Foreign-currency movements may affect results; the company did not hedge currency exposure and said it did not expect exchange-rate changes to be material.
- Potential commitments include up to $500,000 of shipment-based NRE reimbursements under each of two Texas Instruments development agreements; the second chip remained in development with no payments made through March 31. Operating lease commitments totaled $232,000. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether and when the May 2014 equity financing closed, its net proceeds after fees, and the resulting dilution and registration obligations.
- How much reported revenue growth reflects the $0.7 million timing shift versus new-period shipments, and whether customer royalty-report timing continues to affect comparisons.
- Cash burn, working-capital trends, and the basis for management’s 12-month liquidity assessment.
- Customer concentration, shipment launches, and the conversion of deferred revenue and development programs into recognized revenue.
- Future stock-based compensation and potential share issuance from outstanding options, warrants, and the post-quarter financing.