Neonode Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial statements are unaudited. Unless noted otherwise, amounts are in U.S. dollars.
Business context
Neonode develops and licenses MultiSensing and zForce optical touch technology to OEMs and ODMs; it does not manufacture products. Six customers shipped products incorporating its technology during Q1, and 17 additional customers were in product development under signed license agreements. The company reported 28 signed technology license agreements as of March 31. Management said seven customers were shipping products by the time of the filing and expected further launches during 2013; product development and release typically takes six to 18 months.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $548,000 | $1.164 million |
| Gross profit | $532,000 | $915,000 |
| Gross margin | 97.1% | 78.6% |
| Operating expenses | $4.091 million | $2.481 million |
| Operating loss | $3.559 million | $1.566 million |
| Net loss | $3.570 million | $1.588 million |
| Basic and diluted loss per share | $0.11 | $0.05 |
| Operating cash flow | $(1.663) million | $523,000 provided |
Revenue fell approximately 53%, primarily reflecting lower licensing revenue: license fees were $539,000, compared with $896,000 a year earlier. Engineering services revenue was $9,000, versus $268,000. Management noted license fees have a 100% gross margin, so changes in their share of revenue affect overall gross margin.
R&D expense rose to $1.634 million from $687,000; management cited continued technology development and a larger R&D team (29 full-time employees versus 17). G&A increased to $1.652 million from $995,000, attributed to finance staffing and legal costs for patent filings and customer contract reviews. Sales and marketing was broadly flat at $805,000 versus $799,000. Stock-based compensation increased to $586,000 from $34,000, including $576,000 related to stock-option vesting.
Financial position and liquidity
| Metric | March 31, 2013 | December 31, 2012 |
|---|---|---|
| Cash | $7.582 million | $9.097 million |
| Current assets | $9.125 million | $11.770 million |
| Current liabilities | $4.225 million | $4.068 million |
| Working capital | $4.9 million | $7.7 million |
| Total liabilities | $4.225 million | $4.068 million |
Cash declined by $1.515 million during the quarter. Investing cash use was $28,000; financing provided $167,000, principally from stock-option exercises. The filing reports no debt or long-term liabilities. Deferred revenue was $2.920 million, including $2.0 million of deferred license fees and $0.9 million of deferred engineering fees. Management said it believed cash on hand was sufficient for the next 12 months, but warned additional capital may be needed if operations do not become cash-flow positive; financing may not be available on acceptable terms and equity financing could dilute shareholders.
Outlook, risks and other notable items
- Management anticipated additional customer product shipments during 2013, while emphasizing that launches depend on customers completing development and manufacturing.
- Revenue is exposed to shipment timing, customer product success, and concentration: Kobo generated 44% of Q1 revenue, Netronix 21%, Sony 20%, and Barnes & Noble 10%. Five customers represented 72% of receivables.
- The company reported $217,600 of Texas Instruments NN1001 non-recurring engineering expense in Q1, with no cash payment made to TI as of March 31. The agreement provides for up to $500,000 of contributions based on unit shipments.
- Cash deposits included approximately $7.2 million above applicable insurance limits. The company also faces foreign-exchange exposure and did not hedge it with derivatives.
- Operating lease commitments totaled $571,000 as of March 31. No material legal proceedings or material changes to the risk factors in the 2012 Form 10-K were reported.
- Subsequent to quarter-end, warrant exercises and issuance generated additional shares and cash proceeds; common shares outstanding were 34,080,153 as of May 3, compared with 33,875,625 at March 31.
Important facts for investors to verify
- Whether customers in development convert signed licenses into commercial shipments and recurring royalty revenue, and how concentrated revenue remains.
- Cash burn relative to management’s 12-month liquidity assessment, and whether additional financing will be needed.
- Drivers and sustainability of higher R&D and G&A spending and stock-based compensation.
- Timing and cash-payment obligations associated with the TI engineering agreement and deferred customer fees.
- Potential dilution from outstanding options and warrants and any future capital raises.