Neonode Inc. — 2016 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2016; quarterly figures below include the three months ended December 31. Neonode develops optical touch and gesture technology. In 2016 it began manufacturing standardized sensor modules and selling its AirBar consumer accessory, while shifting away from licensing-only growth. The company stopped entering new license agreements in late 2016 and plans to transition existing customers to sensor-module purchases over several years.
Financial performance and position
| Metric (USD millions, except per-share data) | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $10.213 | $11.115 | Down 8.1% |
| Gross profit | $8.875 | $7.335 | Up 21.0% |
| Gross margin | 86.9% | 66.0% | Up 20.9 percentage points |
| Operating loss | $(5.144) | $(7.696) | Loss narrowed |
| Net loss attributable to Neonode | $(5.291) | $(7.820) | Loss narrowed |
| Basic and diluted loss per share | $(0.12) | $(0.19) | Improved |
| Cash used in operating activities | $(6.252) | $(8.063) | Use decreased |
- Revenue mix: License fees were $8.350 million, up 18.5%, and 81.8% of revenue. Non-recurring engineering (NRE) revenue fell 57.9% to $1.714 million. Sensor-module revenue was $149,000, including the initial AirBar launch.
- Margins and expenses: Higher license-fee share lifted gross margin; NRE gross margin also improved. The 2015 cost of revenue included a one-time $1.2 million write-off for the zForce PLUS platform. R&D expense increased 12.6% to $7.069 million, including $1.1 million of pre-production manufacturing start-up costs and about $0.8 million for final NN1003 ASIC development. Total operating expenses declined 6.7% to $14.019 million.
- Fourth quarter: Revenue was $2.868 million versus $2.963 million in Q4 2015. Net loss attributable to Neonode was $431,000, compared with $2.588 million in Q4 2015.
- Liquidity and balance sheet: Cash was $3.476 million at year-end, versus $3.082 million; working capital was $3.1 million, versus $1.5 million. Total assets were $9.703 million and total liabilities $5.568 million. Capital-lease obligations had a present value of $1.188 million, including $228,000 current; the filing reports no other material borrowing balance.
- Cash flow and funding: Investing activities used $985,000, including $987,000 of property and equipment purchases. Financing activities provided $7.797 million, largely from the August 2016 equity and warrant placement. Net cash increased $394,000 for the year.
Material changes versus the prior comparable period
- Total revenue declined as NRE revenue dropped, despite higher licensing revenue. Licensing growth reflected higher printer and automotive royalties, partly offset by lower e-reader royalties.
- Gross margin rose substantially, principally because licensing revenue—reported at 100% gross margin—made up a larger share of sales, and because 2015 included the platform write-off.
- Operating and net losses narrowed, but the business remained loss-making and used $6.3 million of operating cash.
- Neonode invested in manufacturing capacity: inventory rose to $696,000 from zero, property and equipment to $2.031 million from $594,000, and capital-lease obligations increased. The company began mass production of AirBar in Q4 and shipped approximately 9,000 units during the initial rollout.
- Customer concentration remained significant: HP, Amazon and Autoliv accounted for 38%, 11% and 11% of 2016 revenue, respectively. The three largest customers represented about 59% of year-end receivables, down from 78% in 2015.
Outlook, risks and unusual items
- Management expected license fees to increase in 2017 and 2018 as customers release products in development, while anticipating minimal NRE revenue in 2017 and future years. It expects sensor modules to become the majority of revenue over time.
- Management expected 2017 revenue from licensing, NRE and AirBar to reduce operating losses, citing distributor purchase orders, an OEM sensor-module agreement and improved cost efficiency. It cautioned that achieving revenue targets and reducing losses is not assured. The filing does not provide numerical revenue or earnings guidance.
- AirBar’s year-end launch was at an early stage. Management expected AirBar gross margin to range from 40% to 50% over time and planned broader product sizes, markets and marketing in 2017. The approximately $356,000 backlog reported at March 10, 2017 consisted of orders expected to ship within 90 days; orders could be rescheduled or canceled without significant penalties.
- Liquidity remains a key risk: the company reported a history of losses, an accumulated deficit of $179.0 million, and continuing operating cash use. Management concluded its operating plan and capital sources alleviated going-concern concerns, but warned additional capital may be needed if operations do not become cash-flow positive. Neonode intended to file a shelf registration statement permitting up to $20 million of offerings. August 2016 warrants could provide about $4.8 million if fully exercised; none had been exercised as of March 10, 2017.
- Key risks include reliance on a small number of customers and customers’ product-release schedules, limited hardware-manufacturing experience, component supply and production capacity, competition, intellectual-property protection, foreign-exchange exposure, and potential future dilution or difficulty raising capital. The company did not hedge foreign-currency exposure.
- No material legal proceedings were reported. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether sensor-module and AirBar orders convert into sustained shipments, revenue and the targeted 40%–50% AirBar gross margin.
- Whether licensing revenue grows as forecast from customer product launches, and how quickly existing license customers transition to module purchases.
- Cash burn, working-capital needs and the timing or terms of any additional financing, shelf offering or warrant exercise, including resulting dilution.
- Customer concentration, distributor sell-through, cancellable backlog, product returns and warranty costs as hardware sales scale.
- Manufacturing capacity, yields, supplier availability and capital-lease commitments associated with the production expansion.