Neonode Inc. — Q1 2019 Form 10-Q
Business and period: Neonode develops and licenses optical-touch and gesture technology, sells embedded sensor modules, and markets the AirBar consumer product. This summary covers the three months ended March 31, 2019, compared with Q1 2018; balance-sheet figures are compared with December 31, 2018. Amounts are in U.S. dollars.
Financial performance and position
- Revenue: $2.012 million, down 15.3% from $2.375 million. License fees were $1.942 million (down 16.4%); sensor module revenue was $50,000; non-recurring engineering revenue was $20,000. Lower printer license revenue from Canon and HP was partly offset by Lexmark revenue and new engineering fees.
- Profitability: Gross profit was $1.911 million, with a 95% gross margin versus 98% a year earlier. Operating expenses declined 19.6% to $2.579 million. Operating loss improved to $668,000 from $879,000. Net loss attributable to Neonode was $573,000 versus $693,000; basic and diluted loss per share was $0.07 versus $0.12.
- Cash flow: Operating activities used $460,000, compared with $561,000 in Q1 2018. Investing activities used $47,000 and financing activities used $137,000, primarily for finance-lease principal payments. Cash decreased $733,000 to $5.822 million.
- Liquidity: Working capital was $6.980 million, down from $8.181 million at year-end. Current assets were $9.701 million and current liabilities were $2.721 million. Accumulated deficit was $185.795 million.
- Lease obligations: Finance lease liabilities totaled $1.490 million and operating lease liabilities totaled $806,000. The filing reports no other material borrowing; total reported lease liabilities were $2.296 million.
Changes and notable items
- Revenue fell, primarily due to lower printer licensing fees. Printer licenses generated $1.284 million, down from $1.570 million; automotive license revenue was $496,000 versus $519,000.
- Research and development expense declined 17.1% to $1.259 million; sales and marketing declined 19.2% to $449,000; general and administrative expense declined 23.2% to $871,000. Management attributed reductions mainly to lower personnel and consulting costs, and less travel.
- Neonode adopted the lease accounting standard on January 1, 2019, recording operating lease right-of-use assets of $798,000 and operating lease liabilities of $806,000 at March 31. Management reported no equity adjustment on adoption.
- Cash and working capital declined from year-end. The company also reported a $181,000 foreign-currency translation loss in comprehensive income and $171,000 of foreign-currency transaction losses in general and administrative expense.
- Three customers accounted for 67% of Q1 revenue: HP 38%, Epson 17%, and Alpine 12%. Three customers represented 61% of accounts receivable at quarter-end.
Outlook, risks, and contingencies
- Management expects revenue from licensing, sensor modules, engineering services, and AirBar to help reduce 2019 operating losses, and expects improved operating cash flow for at least the next 12 months. It states that it anticipates being able to continue operations for at least 12 months, but cautions that revenue targets may not be met. No specific numerical guidance was provided.
- The company has a history of operating losses and negative operating cash flow. If operations do not become cash-flow positive, Neonode may need additional equity or debt financing; management gave no assurance financing would be available on acceptable terms. Equity financing could dilute shareholders.
- Management said substantially all remaining authorized common shares were reserved for outstanding options and warrants, potentially limiting equity financing unless securities expire or shareholders approve an increase in authorized shares at the 2019 annual meeting. A $20 million shelf registration statement was effective through March 24, 2020, subject to share availability.
- Key risks include customer concentration, dependence on customers’ product development and shipment timing, uncertain demand and market acceptance, competition and intellectual-property risks, foreign-exchange exposure, and the need for additional capital. The filing reported no material changes to the risk factors in the 2018 Form 10-K.
- Neonode reported no material legal proceedings and no material off-balance-sheet arrangements. It disclosed a contingent payment obligation to Texas Instruments of $0.25 per ASIC for each of the first 2 million ASICs sold, up to $500,000; no payments had been made as of March 31, 2019. Obligations under its STMicroelectronics development agreement were reported as satisfied.
Important facts for investors to verify
- Whether license revenue and customer product shipments can stabilize or grow, given the 15.3% quarterly revenue decline and concentration in a few customers.
- Cash use, liquidity, and the assumptions behind management’s expectation that available resources support operations for at least 12 months.
- The availability of authorized shares and shareholder approval prospects for any increase, as well as potential dilution from future financing.
- The source financial statements contain inconsistent weighted-average share counts: the statement of operations reports 8.800 million, while the EPS note reports 8.880 million for Q1 2019. Confirm the correct figure.
- Shares outstanding were reported as 8,800,313 at March 31 and 8,800,577 as of May 2, 2019; verify the subsequent share-count change.