Neonode Inc. — Q3 2016 Form 10-Q
Business context and period: Neonode develops and licenses optical touch and user-interface technology and sells sensor modules. This filing covers the quarter and nine months ended September 30, 2016; financial amounts below are in U.S. dollars, generally millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1.639 | $3.113 | $7.345 | $8.152 |
| Gross margin | $1.606 (98%) | $2.204 (71%) | $6.332 (86%) | $6.168 (76%) |
| Operating expenses | $3.747 | $3.552 | $11.052 | $11.319 |
| Operating loss | $(2.141) | $(1.348) | $(4.720) | $(5.151) |
| Net loss attributable to Neonode | $(2.162) | $(1.368) | $(4.860) | $(5.232) |
| Basic and diluted loss per share | $(0.05) | $(0.03) | $(0.11) | $(0.13) |
| Cash used in operations | Not separately provided for quarter | $(3.717) | $(4.886) |
At September 30, cash was $6.278 million, versus $3.082 million at December 31, 2015; working capital was $3.7 million versus $1.5 million. Total liabilities were $6.068 million, including $1.298 million of capital lease obligations. The company had $2.212 million of deferred revenue and $0.919 million of inventory, primarily AirBar components. It reported an accumulated deficit of $178.6 million.
Changes versus prior comparable periods
- Q3 revenue fell 47% year over year, primarily because recognized non-recurring engineering revenue declined from $1.1 million to zero. License revenue also declined, including lower e-reader and tablet fees; growth from automotive and printer customers partly offset the decline.
- Nine-month revenue decreased 10%. Management attributed the reduction to lower e-reader/tablet license fees and less engineering work as the company shifted from customized designs to standardized sensor modules.
- Gross-margin percentages improved in both periods as license fees, which management says carry a 100% gross margin, made up a larger share of revenue. Q3 gross-profit dollars nevertheless decreased with revenue.
- Q3 operating loss increased year over year as lower gross profit and higher R&D outweighed lower sales and marketing and general and administrative costs. Nine-month operating loss narrowed.
- Nine-month operating cash use improved by about $1.2 million year over year. Cash increased primarily after the August equity and warrant financing.
Outlook, management commentary, and risks
- Management said it expected existing cash and operating cash flows to meet anticipated needs for at least the next 12 months and expected revenue from licensing, engineering fees, and AirBar to help reduce 2016 operating losses. It cautioned that revenue targets and loss reduction were not assured and that additional financing could be needed.
- AirBar production and sales began in Q3, with shipments to pre-order customers; initial U.S. shipments to distributor Ingram Micro occurred in October. Neonode also arranged for final assembly in Malaysia while continuing to manufacture sensor modules in Sweden. The filing gives no quantified AirBar revenue outlook.
- In August, Neonode raised approximately $8.7 million gross and $7.9 million net through a private placement. The financing included common shares and immediately exercisable pre-funded warrants, plus purchase warrants for up to 4.314 million shares at $1.12. These instruments create potential dilution; purchase warrants generally could not be exercised for six months.
- Customer concentration is material: Hewlett Packard generated 50% of Q3 revenue and 42% of nine-month revenue. Three customers represented approximately 92% of accounts receivable at quarter-end.
- Other risks include the company’s history of losses and negative operating cash flows, uncertain market adoption and customer product timing, reliance on a limited number of customers, possible need for additional capital, and foreign-exchange exposure. About 72% of nine-month operating costs were denominated in foreign currencies; Neonode said it did not hedge this exposure.
- R&D included approximately $0.6 million of non-recurring costs related to NN1003 ASIC development, staff reductions, and lease termination. The filing also reports $0.2 million accrued for NN1003 product validation and potential future engineering or per-unit payments under ASIC agreements.
- Neonode reported no material legal proceedings, and management concluded disclosure controls were effective. The filing identifies no material change to previously disclosed risk factors other than emphasizing the history of losses and potential need for additional capital.
Important facts for investors to verify
- Whether AirBar shipments and distribution translate into meaningful, sustainable revenue and margins.
- Progress in replacing declining e-reader/tablet revenue and custom engineering fees with licensing growth and standardized sensor-module sales.
- Cash burn, working-capital needs, and management’s stated 12-month liquidity outlook, including the possibility of further financing.
- Potential dilution from the August financing, outstanding warrants, and any additional share issuance.
- Revenue, receivables, and collection exposure to major customers, particularly Hewlett Packard.
- Remaining NN1003 and other ASIC commitments, as well as lease and capital-lease obligations.