Neonode Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Neonode develops and licenses optical touch and gesture technology and sells sensor modules. Since 2010, customers have sold approximately 59 million devices using its technology.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $2.375 million | $2.332 million |
| Gross profit / margin | $2.329 million / 98% | $2.227 million / 95% |
| Operating expenses | $3.208 million | $3.105 million |
| Operating loss | $879,000 | $878,000 |
| Consolidated net loss | $900,000 | $969,000 |
| Net loss attributable to Neonode | $693,000; $0.01 per share | $873,000; $0.02 per share |
| Cash used in operations | $561,000 | $1.605 million |
License fees were $2.323 million, up 9.5%, and represented 97.8% of revenue. Sensor-module revenue fell 75.2% to $52,000; non-recurring engineering revenue was zero. License fees from printers rose to $1.570 million, while e-reader/tablet and automotive license revenue declined to $234,000 and $519,000, respectively. Gross margin improved mainly because licensing, which carries near-100% margin, made up a larger share of revenue. Sensor-module gross margin decreased to 13% from 52%.
R&D expense increased 15.4% to $1.518 million; sales and marketing declined 20.8% to $556,000, primarily due to lower AirBar advertising; G&A increased 4.2% to $1.134 million. Operating loss was essentially unchanged, while the lower parent-attributable net loss reflects, in part, a larger loss allocated to noncontrolling interests.
Liquidity, assets and obligations
Cash was $4.907 million at quarter-end, down $889,000 from year-end. Working capital was $6.836 million, versus $6.214 million at December 31, 2017. Operating cash use improved from the prior-year quarter. Investing activities used $133,000 and financing activities used $143,000, primarily for property purchases and capital-lease principal payments.
Total liabilities were $4.499 million, including $2.078 million of capital-lease obligations ($563,000 current). The filing reports no conventional debt balance. Total assets were $12.963 million; accumulated deficit was $182.855 million. Operating-lease commitments were $580,000, and future minimum capital-lease payments totaled $2.152 million before $74,000 of interest.
Material changes, outlook and risks
- ASC 606 adoption: Neonode adopted the revenue standard on January 1, 2018 using the modified retrospective method, so prior periods were not recast. The standard reduced reported Q1 2018 revenue by $230,000 versus the amount excluding the standard. Adoption increased opening accumulated deficit by $1.353 million, increased receivables and unbilled revenue, and reduced deferred revenue. Management says the change had no cash-flow impact.
- Business focus: Management said AirBar sales had not met expectations and were not expected to be a significant future revenue source; it was evaluating partner collaborations to monetize the investment. The company is shifting sales focus toward B2B embedded sensor customers. Management expects sensor-module sales and marketing activity to expand.
- Outlook and liquidity: Management expects revenue to increase and says its operating plan and capital sources should support operations for at least the next twelve months. It cautions that revenue targets may not be met and that additional financing may be needed if operations do not become cash-flow positive; financing may be unavailable or could dilute shareholders or impose restrictive terms. No numerical revenue or earnings guidance is provided.
- Concentration and execution risks: HP, Epson and Canon contributed 38%, 14% and 13% of Q1 revenue, respectively; three customers represented approximately 66% of receivables. Risks include customer shipment timing, reliance on a limited number of customers, product adoption and development cycles, competition, intellectual-property matters, foreign exchange exposure, and the ability to raise capital. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Potential dilution: Approximately 3.25 million warrants from the August 2017 private placement become exercisable in August 2018 at $2 per share; full exercise would yield approximately $6.5 million. The company also reported 58.595 million common shares outstanding at March 31, 2018.
Important facts for investors to verify
- Whether license revenue growth, particularly printer royalties, continues and offsets declines in automotive and e-reader/tablet licensing.
- Whether the ASC 606 royalty estimates and distributor revenue timing produce material changes in reported results or working capital.
- Whether cash burn continues to improve and whether management’s stated twelve-month liquidity assessment remains supportable.
- Progress and economics of B2B sensor-module programs, and the outcome of efforts to monetize AirBar.
- Customer concentration, collection of receivables, capital-lease obligations, and possible financing or warrant-related dilution.