Neonode Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 14, 2013. This annual filing reports full-year results, not a standalone fourth-quarter income statement.
Business context
Neonode develops and licenses optical touch and user-interface technology, including its zForce-based MultiSensing platform, to OEMs and ODMs. It does not manufacture products. Revenue depends substantially on licensees integrating the technology into products and successfully shipping them. In 2012, its NN1001 touch-controller chip began shipping, and the company reported 24 signed technology license agreements, up from 12 at year-end 2011; seven customers were shipping products.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $7.137 million | $6.067 million |
| Technology license revenue | $6.2 million | $5.8 million |
| Engineering services revenue | $925,000 | $287,000 |
| Gross margin | $5.672 million; approximately 79.5% | $5.159 million; approximately 85.0% |
| Operating loss | $9.162 million | $2.044 million |
| Net loss | $9.287 million | $17.145 million |
| Loss per share, basic and diluted | $0.28 | $0.64 |
| Net cash used in operating activities | $3.744 million | $3.453 million |
| Cash at year-end | $9.097 million | $12.940 million |
| Working capital | $7.7 million | $13.6 million |
Operating expenses rose to $14.834 million from $7.203 million, including R&D of $5.741 million, sales and marketing of $4.372 million, and general and administrative expense of $4.721 million. The company reported no convertible debt outstanding at either year-end and no interest expense in 2012. Financing activities provided $223,000 in 2012, primarily from warrant exercises; capital expenditures were $310,000.
Material changes versus the prior year
- Revenue increased approximately 18%, but gross margin percentage declined as cost of revenue grew faster than sales.
- Operating loss widened despite higher revenue, principally as R&D, sales and marketing, and G&A spending increased. Stock-based compensation totaled $3.499 million, versus $550,000 in 2011.
- Net loss improved from 2011, when $14.735 million of non-cash debt-related and derivative charges substantially increased other expense. Those charges and interest expense were absent in 2012.
- Cash declined by $3.843 million. Operating cash use increased modestly, while 2011 had benefited from $15.505 million of financing proceeds.
- Customer concentration remained significant: Amazon, Kobo, and Sony accounted for 32%, 26%, and 17% of 2012 revenue, respectively. Amazon’s share was 40% in 2011.
Outlook, risks and unusual items
- Amazon discontinued shipping Kindle e-readers incorporating Neonode technology in Q4 2012; the company did not anticipate near-term revenue from Amazon. Q4 revenue was approximately $2.3 million, compared with $4.0 million in Q4 2011.
- Management expected e-reader-related license revenue to decline and anticipated potential product launches in mobile phones, printers, tablets, GPS, automotive, and other markets during 2013. Typical customer development and commercialization cycles were described as six to eighteen months. These statements are expectations, not quantified financial guidance.
- Management stated that available liquidity was sufficient to fund operations for at least the next 12 months, but warned that further capital could be needed if operations do not become cash-flow positive. Additional financing may not be available on acceptable terms and equity financing could dilute shareholders.
- Key risks include dependence on a small number of customers and on customers’ product execution, uncertain market acceptance, intense competition and rapid technology change, patent protection and litigation costs, hiring and growth execution, and foreign-currency exposure, particularly to the Swedish krona.
- Deferred revenue was $2.725 million at year-end, including prepayments not yet recognizable as revenue until qualifying product shipments or completed and accepted engineering work. The company also reported $3.568 million of unamortized stock-based compensation expense.
- No material legal proceedings were reported. The financial statement auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2012; management also described control enhancements during the year.
Most important facts for investors to verify
- Whether replacement customers and new product programs can offset the loss of Amazon-related shipments and expected e-reader declines.
- How much of the 24 signed license programs progress to commercial shipments, and the timing and royalty economics of those launches.
- Whether operating spending can be matched to revenue growth, given the wider operating loss and continued cash use.
- Customer concentration, deferred-revenue conversion, and cash runway under scenarios of delayed launches or lower sales.
- Potential dilution from outstanding warrants and options; the filing reported 4.705 million warrants and 1.715 million options outstanding at year-end.