Neonode Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012; filed August 14, 2012. Neonode develops and licenses zForce optical multitouch technology to OEMs and ODMs. All figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Revenue | $1.974 | $3.138 |
| Gross profit / gross margin | $1.480 / 75.0% | $2.395 / 76.3% |
| Operating expenses | $4.887 | $7.368 |
| Operating loss | $(3.407) | $(4.973) |
| Net loss | $(3.427), or $(0.10) per share | $(5.015), or $(0.15) per share |
Revenue included $1.6 million of e-reader license fees and $377,000 of engineering services in the quarter; year-to-date amounts were $2.5 million and $645,000, respectively. License fees carry a 100% gross margin, according to management.
For the six months, operating cash use was $1.373 million, investing cash use was $268,000, and financing provided $8,000. Cash declined $1.665 million to $11.275 million. Working capital was $10.7 million. At June 30, total liabilities were $2.670 million, all current; the company reported no debt, as all convertible debt had been paid or converted by December 2011.
Changes versus comparable periods
Second-quarter revenue rose from $283,000 in 2011 to $1.974 million in 2012; first-half revenue rose from $822,000 to $3.138 million. Gross margin increased from 15.9% to 75.0% for the quarter and from 52.2% to 76.3% year to date. The second-quarter net loss widened from $2.722 million to $3.427 million, while the first-half net loss narrowed from $12.443 million to $5.015 million. The year-over-year first-half comparison reflects $9.703 million of other expense in 2011, largely noncash debt-discount and derivative valuation items, versus none in 2012.
Operating expenses increased substantially, including R&D, sales and marketing, and G&A. First-half stock-based compensation was $2.351 million, compared with $472,000 in 2011. The company granted 1.46 million options during the first half and reported $3.607 million of remaining unamortized stock-based compensation expense.
Outlook, risks, and unusual items
Management stated that cash on hand should fund operations for at least the next 12 months. It provided no specific revenue or earnings guidance and cautioned that additional capital may be needed if operations do not become cash-flow positive; financing may be unavailable on acceptable terms and equity financing could dilute shareholders. Product development and customer commercialization cycles are long: management cited typical customer sales cycles of 9–18 months and product release cycles of 6–18 months.
Revenue is highly concentrated: Amazon accounted for 53% of revenue in both the quarter and first half. Three customers represented 84% of accounts receivable at June 30. Management also cited risks involving market acceptance, technology competition, intellectual property, customer product launches, key personnel, international operations, and foreign-exchange exposure. The company does not currently hedge currency risk. Approximately $10.4 million of cash exceeded applicable deposit insurance limits.
Disclosure controls and procedures were deemed ineffective because of material weaknesses in segregation of accounting duties and the financial close process. Management described remediation efforts, including adding accounting resources and engaging a Sarbanes-Oxley consultant. The company reported no material legal proceedings and no subsequent events requiring disclosure. Neonode began trading on Nasdaq under ticker NEON on May 1, 2012.
Important facts for investors to verify
- Whether revenue growth and the unusually high customer concentration, particularly Amazon’s 53% share, persist in subsequent periods.
- Whether customer products reach commercial shipment on schedule and generate recurring license royalties.
- Whether operating cash use, excluding noncash stock compensation, remains manageable and the stated 12-month cash runway is maintained.
- The scale and timing of future stock-based compensation, option dilution, and any additional financing needs.
- Whether management remediates the reported material weaknesses and improves disclosure controls.
- Whether cash concentration, foreign-exchange exposure, and potential intellectual-property or market risks materially affect results.