Neonode Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 8, 2013. Neonode develops and licenses optical touch and proximity-sensing technology to OEMs and ODMs. It does not manufacture products; royalty revenue generally depends on customers completing development and shipping products. Unless noted, financial figures below are in millions of U.S. dollars.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1.084 | $1.974 | $1.632 | $3.138 |
| Gross profit | $0.422 | $1.480 | $0.954 | $2.395 |
| Gross margin | 38.9% | 75.0% | 58.5% | 76.3% |
| Operating expenses | $3.523 | $4.887 | $7.614 | $7.368 |
| Net loss | $(3.120) | $(3.427) | $(6.690) | $(5.015) |
| Loss per share, basic and diluted | $(0.09) | $(0.10) | $(0.20) | $(0.15) |
| Net cash used in operating activities | — | $(4.112) | $(1.373) |
- At June 30, cash was $5.354 million, down from $9.097 million at year-end 2012. Working capital was $2.807 million, versus $7.702 million at December 31, 2012.
- Six-month investing cash outflow was $0.034 million; financing provided $0.366 million, mainly from option and warrant exercises. Cash declined $3.743 million to $5.354 million.
- Total liabilities were $4.144 million, all reported as current liabilities; the filing reports no debt balance. Current liabilities included $2.813 million of deferred revenue.
- Q2 and six-month tax provisions were $19,000 and $30,000, respectively. Deferred tax assets were fully reserved because future taxable income was uncertain.
Material changes and operating trends
- Revenue fell 45% in Q2 and 48% for the six-month period year over year. Management attributed the decline chiefly to lower license fees from Amazon: Amazon represented 53% of first-half 2012 revenue and less than 1% in first-half 2013. Higher revenue from Kobo and Netronix partly offset the decrease.
- License fees were $0.6 million in Q2 and $1.2 million for the first half of 2013; engineering design fees were $0.45 million and $0.46 million, respectively. License revenue carries a 100% gross margin, so the lower license share contributed to weaker reported gross margin.
- First-half R&D rose to $3.075 million from $2.165 million, while sales and marketing fell to $1.698 million from $2.517 million. General and administrative expense increased to $2.841 million from $2.686 million. First-half stock-based compensation declined to $1.339 million from $2.351 million.
- Although the Q2 net loss narrowed year over year, the first-half loss increased. The company had six customers shipping products in Q2 and nine in the first half; 17 additional customers had signed license agreements but were still in product development. As of June 30, 29 global OEM license agreements had been signed; management said seven customers were shipping after quarter-end.
Outlook, risks and unusual items
- No quantified revenue, earnings, cash-flow or margin guidance is provided. Management said additional customers might begin shipments through 2013 and 2014; product development and release cycles typically take six to 18 months. A new license agreement with a South Korean global OEM was signed after quarter-end.
- Management warned that continued operations may require additional capital if the business does not become cash-flow positive. The company stated it might seek credit facilities, equity or debt financing, with no assurance financing would be available on acceptable terms. One million shares remained registered and available under its shelf registration at June 30.
- Key risks include dependence on customer product launches and a limited customer base, uncertain market acceptance and demand, competition, patent and intellectual-property protection, international operations, and the need for adequate capital. Three customers accounted for 54% of accounts receivable at June 30; Kobo, Netronix and Sony accounted for 27%, 18% and 15% of first-half revenue, respectively.
- Neonode recorded $270,000 of first-half R&D expense under its existing Texas Instruments NN1001 agreement. A new NN1002 development agreement requires up to $500,000 of NRE contributions based on shipments, at $0.25 per unit for the first two million units; the chip was still in development. The filing also records a $166,000 Q2 charge for extending a warrant that was exercised the same day.
- Outstanding operating lease commitments totaled $476,000 at June 30. The company reported no material legal proceedings and no material changes to the risk factors in its 2012 Form 10-K.
Important facts for investors to verify
- Whether customers still in development complete product launches and generate royalty shipments, especially given the sharp drop in Amazon-related revenue.
- Cash burn, available liquidity and the timing and terms of any additional financing; first-half operating cash use was $4.112 million.
- Customer concentration and receivable collection, including the exposure to three customers representing 54% of receivables.
- Shipment-related NRE obligations under the TI agreements, and potential share dilution from outstanding options and warrants and any future equity financing.