Neonode Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; compared with the same periods in 2016. Unless otherwise noted, amounts are in U.S. dollars. Financial statement amounts are in thousands.
Business context
Neonode develops optical touch and gesture technology, earning revenue from technology licenses, engineering services and sensor components. The company is shifting from custom licensing and engineering work toward standardized sensor products, including AirBar, and expects sensor components to become the majority of revenue over time. It reported 41 technology license agreements and 19 customers shipping products using its technology during the first nine months of 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2.305m | $1.639m | $6.966m | $7.345m |
| Gross profit | $2.154m | $1.606m | $6.319m | $6.332m |
| Operating expenses | $3.565m | $3.747m | $9.806m | $11.052m |
| Operating loss | ($1.411m) | ($2.141m) | ($3.487m) | ($4.720m) |
| Net loss attributable to Neonode | ($1.115m) | ($2.162m) | ($2.986m) | ($4.860m) |
| Basic and diluted loss per share | ($0.02) | ($0.05) | ($0.06) | ($0.11) |
Revenue rose 41% year over year in Q3, primarily on printer licensing tied to Canon and Epson product launches and AirBar sales; lower e-reader fees were offset. Nine-month revenue declined 5%, mainly because non-recurring engineering revenue fell 86%, from $1.228m to $0.174m, as planned. License fees were $6.158m for the first nine months, roughly flat with 2016; sensor-component revenue was $0.634m versus none in the prior-year period.
Gross margin was approximately 93% in Q3 2017 versus 98% a year earlier, and approximately 91% for the first nine months versus 86%. Management attributed the nine-month improvement to a greater share of high-margin license revenue. AirBar gross margin was 28% in Q3 and 20% year to date; management expected it to stabilize near 40% in the near term and improve with volume.
Cash, liquidity and capital
Cash was $6.872m at September 30, 2017, up from $3.476m at December 31, 2016. Working capital was $8.2m, compared with $3.1m at year-end. Nine-month operating cash use was $4.691m, versus $3.717m in 2016; investing cash use was $0.643m. Financing provided $8.781m, principally from the August 2017 stock-and-warrant placement.
The August placement raised $9.75m gross and approximately $9.1m net through 9.75m shares sold at $1.00 each. The company also issued warrants for up to 3.25m shares at $2.00, exercisable from August 2018; full exercise would bring approximately $6.5m. Neonode repaid a $1.713m short-term note in August. At September 30, total liabilities were $5.701m, including $2.410m of capital-lease obligations; the filing reports no remaining note payable. Common shares outstanding were 58.595m as of November 6, 2017.
Changes, outlook and risks
- R&D expense declined 25% year to date, largely reflecting fewer custom-design projects; total operating expenses fell 11%. G&A increased 6%, primarily on payroll and professional fees.
- Management expected revenue to increase and believed available capital and its operating plan would support operations for at least the next 12 months. It cautioned that revenue targets may not be met and additional financing may be needed if operations do not become cash-flow positive; financing may not be available on acceptable terms and equity issuance could dilute shareholders.
- The company launched its zForce AIR Touch Sensor in October 2017 and reported initial sales of touch sensor components to 12 customers for approximately $20,000 in Q3. It anticipated sensor-component sales growth, but provided no quantified revenue guidance.
- Customer and concentration risks remain material: three customers represented about 80% of receivables at quarter-end. Hewlett Packard represented 31% of nine-month revenue, Canon 15% and Bosch 11%. Foreign-currency movements, product adoption and customer development and shipment schedules also affect results.
- The company reported an accumulated deficit of $182.0m and a history of operating losses and negative operating cash flow. It expects transition to standardized components to improve cost efficiency, but gave no assurance of achieving its revenue or loss-reduction goals. No material legal proceedings were reported; management concluded disclosure controls were effective.
Investor verification points
- Track cash burn, working capital and whether management’s at-least-12-month liquidity assessment remains supported by actual results.
- Verify growth, unit economics and margins for AirBar and embedded sensor components, including whether the anticipated roughly 40% AirBar margin is achieved.
- Assess the durability of licensing revenue and the timing and scale of the transition from licensing/custom engineering to component sales.
- Monitor customer concentration, receivable collection and customer product-launch schedules.
- Review dilution and potential share supply from the 2017 placement, warrants, and any future shelf offerings; the filing also identifies a proposed Stockholm dual listing as a liquidity and trading-price risk.