Neonode Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unless otherwise noted, financial figures below are in U.S. dollars; statements present amounts in thousands. Neonode develops optical touch and gesture technology, licensing it to OEMs and Tier 1 suppliers and selling standardized sensor modules and AirBar consumer products.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2.329m | $2.574m | $4.661m | $5.706m |
| Gross profit | $1.938m | $2.189m | $4.165m | $4.726m |
| Gross margin | 83.2% | 85.0% | 89.4% | 82.8% |
| Operating loss | $(1.198)m | $(1.291)m | $(2.076)m | $(2.579)m |
| Net loss attributable to Neonode | $(0.998)m | $(1.331)m | $(1.871)m | $(2.698)m |
| Basic and diluted loss per share | $(0.02) | $(0.03) | $(0.04) | $(0.06) |
- Revenue mix: Q2 revenue included $1.965m in license fees, $0.213m in sensor modules, and $0.151m in non-recurring engineering (NRE). Six-month revenue included $4.086m, $0.423m, and $0.152m, respectively.
- Cash flow: Operating activities used $3.033m in the first half, versus $2.075m a year earlier. Investing activities used $0.605m; financing activities provided $1.553m, primarily from a new note payable. Cash fell to $1.408m from $3.476m at year-end 2016.
- Balance sheet and liquidity: Current assets were $7.072m and current liabilities $6.660m, leaving working capital of about $0.4m, compared with $3.1m at year-end. Total assets were $10.800m and total liabilities $8.568m. Accumulated deficit was $180.911m.
- Debt and leases: The company recorded a $1.776m short-term unsecured note, bearing 2.5% interest and due September 1, 2017. Capital lease obligations totaled $2.438m, including $0.530m current and $1.908m long-term.
Changes versus comparable periods
- Revenue declined 9.5% in Q2 and 18.3% in the first half. Management attributed the decreases principally to lower NRE revenue as the company reduced custom-design work; six-month NRE fell 87.6%. License fees fell 2.3% in Q2 and 8.8% in the first half.
- AirBar and sensor-module revenue began contributing in 2017; there were no AirBar sales in the 2016 comparison periods. AirBar generated $0.213m in Q2 and $0.423m in the first half.
- Operating losses narrowed year over year, alongside lower R&D expense and total operating expenses. The first-half operating cash outflow nevertheless increased, reflecting working-capital uses, including a $1.323m increase in inventory and lower deferred revenue.
- Customer and geographic mix shifted. Hewlett Packard represented 31% of revenue in both 2017 comparison periods, down from 40% in 2016. Asia accounted for 36% of first-half revenue versus 18% a year earlier.
Outlook, commentary, risks, and unusual items
- Management expected revenue from license fees, NRE, and AirBar to help reduce 2017 operating losses and expected revenue and operating cash flow to improve over at least the next twelve months. It cautioned that revenue targets may not be met; no specific revenue or earnings guidance was provided.
- The company is transitioning from custom licensing and engineering work toward standardized sensor modules. It had 41 technology license agreements and 19 customers shipping products using its technology as of June 30, 2017; management said customer product development and release cycles typically take 6–36 months.
- AirBar had negative gross margin in Q2 due in part to an estimated $0.1m of additional costs associated with initial production of new sizes and models. Management expected AirBar gross margin to stabilize near 40% in the near term and rise to 50% as volumes increase.
- On August 2, 2017, after quarter-end, Neonode agreed to a private placement of 9.75m common shares at $1.00 per share, for $9.75m gross proceeds, plus warrants for up to 3.25m shares at $2.00. The company anticipated using proceeds to repay the $1.8m short-term debt and for general corporate purposes. This transaction was not included in June 30 cash or equity balances.
- Management cited persistent losses and negative operating cash flows, dependence on future revenue and possible additional financing, customer concentration, uncertain market acceptance and product timing, competition and intellectual-property risks, and foreign-currency exposure. Five customers represented about 80% of accounts receivable at June 30. The filing states management believed available capital and its operating plan supported going-concern assumptions and operations for at least twelve months, while noting there could be no assurance.
- There were no material legal proceedings reported. Management concluded disclosure controls and procedures were effective at June 30, 2017; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether AirBar and embedded sensor-module demand converts into sustained sales, and whether the expected product margins are achieved.
- How cash burn, working capital, and the September 2017 note repayment evolved after the quarter; confirm the use and sufficiency of the August private-placement proceeds.
- Whether license revenue stabilizes as Neonode reduces new licensing and custom NRE work, and whether OEM product launches occur on schedule.
- Customer concentration, collection of receivables, inventory realization, and the effect of distributor sell-through and return arrangements.
- Potential dilution and trading effects from the August share issuance and warrants, as well as any proposed Nasdaq OMX Stockholm dual listing.