Neonode Inc. — FY2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; it also provides supplemental fourth-quarter results. Neonode develops optical touch and gesture technology, earning revenue from technology licensing, sensor modules, AirBar consumer products, and engineering services. The company is transitioning from customized licensing toward supplying embedded sensor modules to OEMs and Tier 1 suppliers.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $10.241 million | $10.213 million |
| Gross profit / margin | $7.898 million / 77% | $8.875 million / 87% |
| Operating loss | $5.476 million | $5.144 million |
| Net loss attributable to Neonode | $4.705 million; $0.09 per share | $5.291 million; $0.12 per share |
| Cash used in operations | $5.581 million | $6.252 million |
| Cash at year-end | $5.796 million | $3.476 million |
- Revenue mix in 2017: license fees $8.684 million (84.8%); sensor modules $814,000 (7.9%); non-recurring engineering (NRE) $743,000 (7.3%). License fees had a 100% gross margin; sensor modules and NRE generated costs of $1.758 million and $585,000, respectively.
- At December 31, 2017, total assets were $13.127 million, total liabilities $5.264 million, and working capital $6.2 million. Capital lease obligations totaled $2.249 million on a present-value basis; operating lease commitments were $679,000.
- Financing activities provided $8.641 million, including $9.079 million net proceeds from an August 2017 stock offering. The share count rose from 48.845 million at year-end 2016 to 58.595 million at year-end 2017.
- Fourth-quarter 2017 revenue was $3.275 million and net loss attributable to Neonode was $1.719 million, compared with $2.868 million revenue and $431,000 net loss in fourth-quarter 2016.
Changes versus prior period
- Annual revenue was nearly flat, up 0.3%. License fees increased 4%, while NRE fell 56.7%; sensor-module revenue rose from $149,000 to $814,000 as shipments began in 2017.
- Gross margin declined from 87% to 77%, primarily due to weak AirBar sales and a $1.1 million AirBar inventory write-down. Neonode also recorded $600,000 of inventory-related write-offs and repricing in R&D expense.
- Operating expenses decreased 4.6% to $13.374 million, including a 14% reduction in R&D, but the operating loss increased to $5.476 million as gross profit declined.
- Net loss attributable to Neonode improved, but consolidated net loss including noncontrolling interests was $5.495 million versus $5.649 million in 2016. The company continued to use cash in operations.
Outlook, commentary, and risks
- Management expects a combination of licensing, sensor-module sales, AirBar, and NRE to reduce operating losses in 2018. It expects sensor modules to become the majority of revenue over time and anticipates continued product development and customer launches. These expectations are not assured.
- Management said the August 2017 financing and its operating plan should provide sufficient liquidity for short-term needs, while acknowledging that further capital may be needed if operations do not become cash-flow positive. The statements are prepared on a going-concern basis; the filing reports substantial accumulated losses and continuing operating cash outflows.
- AirBar sales were below expectations. Neonode was considering discontinuing the line or selling it to, or partnering with, an established consumer-market company; it reported no current plans to develop additional Neonode-branded consumer products.
- Customer concentration is significant: HP, Canon, and Bosch represented 55% of 2017 revenue; two customers represented 69% of year-end receivables. Revenue also depends on customers’ product development and shipment schedules.
- Other key risks include limited hardware-manufacturing experience, component-supplier dependence, competition and technology changes, patent protection and litigation costs, foreign-currency exposure, recurring losses, and possible need for additional financing. Neonode does not currently hedge currency exposure.
- NASDAQ notified Neonode in December 2017 that its share price had been below the $1 minimum bid requirement for 30 consecutive business days. The company had until June 25, 2018 to regain compliance and said its board intended to seek stockholder approval for a reverse stock split.
- The CEO resigned in December 2017; a director became interim CEO. Neonode announced Håkan Persson as the incoming CEO, expected to take office April 1, 2018. The filing reports no material legal proceedings, an unmodified audit opinion, and management’s conclusion that disclosure controls and internal control over financial reporting were effective.
Most important facts for investors to verify
- Whether 2018 revenue growth and loss-reduction expectations were achieved, particularly sensor-module orders, shipments, and customer conversions from licensing.
- Whether cash burn, working capital, and available financing support operations without additional potentially dilutive equity or debt financing.
- AirBar’s disposition and the effect of inventory reserves, returns, and product margins on future results.
- Customer concentration, customer product-launch timing, and collections from major accounts.
- NASDAQ listing compliance, any reverse stock split, and dilution from outstanding warrants and future capital raises.
- The quantified opening equity adjustment from adoption of the new revenue-recognition standard; the filing says the amount was pending a final royalty report.