Neonode Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter ended September 30, 2013; filed November 7, 2013. Neonode develops and licenses patented optical touch and proximity-sensing technology to OEMs and ODMs. It does not manufacture products; royalty revenue depends on customers shipping products that use its technology.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1.076 | $1.679 | $2.708 | $4.817 |
| Gross profit | $0.311 | $1.342 | $1.265 | $3.737 |
| Gross margin | 28.9% | 79.9% | 46.7% | 77.6% |
| Operating expenses | $3.589 | $3.457 | $11.203 | $10.825 |
| Net loss | $3.343 | $2.144 | $10.033 | $7.159 |
| Loss per share, basic and diluted | $0.09 | $0.06 | $0.29 | $0.22 |
Revenue declined about 36% for the quarter and 44% for the nine-month period. Management attributed the decrease primarily to lower Amazon royalties after the Kindle Paperwhite did not include Neonode technology. Amazon represented less than 1% of nine-month 2013 revenue, versus 46% in the comparable 2012 period. Growth from Kobo, LeapFrog and Netronix partly offset the decline. License fees were $0.9 million for Q3 and $2.1 million for nine months; engineering services contributed $0.2 million and $0.6 million, respectively.
Gross profit and margin fell as revenue and the share of high-margin licensing revenue declined. R&D expense rose to $2.2 million for Q3 and $5.3 million for nine months, reflecting increased engineering time devoted to research and development. Nine-month sales and marketing expense fell to $2.1 million from $3.4 million; G&A was approximately $3.8 million, broadly unchanged. Stock-based compensation was $2.1 million for nine months, down from $3.0 million.
Cash, liquidity and financing
- Cash was $10.568 million at September 30, 2013, versus $9.097 million at December 31, 2012. Working capital was approximately $8.1 million, versus $7.7 million.
- Operating activities used $6.529 million of cash in the first nine months, compared with $1.602 million in 2012. Investing activities used $0.136 million.
- Financing activities provided $8.122 million, including $6.899 million net proceeds from a September equity financing and proceeds from option and warrant exercises. The financing raised approximately $7.7 million before about $0.8 million of offering costs.
- The balance sheet reports $4.801 million of current liabilities, principally deferred revenue; it shows no interest-bearing debt. The filing reports no interest paid.
- Deferred revenue was $3.479 million, including $2.5 million of deferred license fees and $1.0 million of deferred engineering fees. Cash balances included approximately $9.3 million above applicable deposit-insurance limits.
Business developments, outlook and risks
At quarter-end, Neonode reported 33 signed technology license agreements and 12 customers shipping products; it also described 15 signed-license customers in product development. Management said additional product shipments might begin during the remainder of 2013 and 2014. Product development and release cycles typically take six to 18 months. The filing provides no quantified revenue, earnings or cash-flow guidance, and cautions that interim results are not necessarily indicative of full-year results.
On September 3, the Board authorized exploration of strategic alternatives for the user-interface patent and licensing subsidiary, including a possible merger, sale or spin-off. No transaction was assured. Customer concentration remained material: LeapFrog accounted for 36% of Q3 revenue; for the first nine months, Kobo, LeapFrog, Sony and Netronix accounted for 19%, 16%, 15% and 14%, respectively. One customer represented 31% of accounts receivable at quarter-end.
Other notable commitments include shipment-based non-recurring engineering payments to Texas Instruments: $344,000 had been paid under the NN1001 agreement through September 30, and a separate NN1002 agreement could require payments as production shipments occur. Operating lease commitments totaled $512,000. Management cited ongoing losses, dependence on a limited number of customers and customer product launches, market acceptance, competition, intellectual-property risks, international operations and the potential need for additional capital. It cautioned that financing may not be available on acceptable terms and that future equity issuance could dilute shareholders.
Most important facts for investors to verify
- Whether licensees successfully launch products and generate royalty-bearing shipments, especially given the sharp decline in Amazon-related revenue.
- Revenue and receivable concentration, customer payment patterns, and the timing and conditions for recognizing deferred revenue.
- Cash burn relative to the $10.6 million cash balance and whether additional financing may be needed; the filing gives no cash-runway forecast.
- Progress and potential outcomes of the strategic-alternatives review for the patent and licensing subsidiary.
- Future R&D spending, TI shipment-linked commitments, lease obligations, and potential dilution from outstanding options and warrants.