Neonode Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. Neonode develops and licenses zForce optical multi-touch technology to OEMs and ODMs. Its licensing model avoids manufacturing finished products.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $1.164 million | $539,000 |
| Gross profit / margin | $915,000 / 78.6% | $384,000 / 71.2% |
| Operating expenses | $2.481 million | $1.492 million |
| Operating loss | $(1.566) million | $(1.108) million |
| Net loss | $(1.588) million | $(9.721) million |
| Basic and diluted loss per share | $(0.05) | $(0.43) |
| Cash from operating activities | $523,000 | $(1.385) million |
Revenue rose about 116%. Q1 2012 revenue included $896,000 in license fees related to eReader shipments and $268,000 in engineering design services. The net loss narrowed substantially, largely because the prior-year quarter included $8.554 million of non-cash debt discount, financing fee and conversion-feature charges. Operating loss increased as operating expenses grew faster than gross profit.
Research and development expense increased to $687,000 from $276,000; sales and marketing rose to $799,000 from $352,000; general and administrative expense increased to $995,000 from $864,000. Management attributed the increases primarily to engineering activity, added sales and marketing staff and activity, and higher salaries, legal and compliance costs.
Financial position and liquidity
- Cash was $13.307 million at March 31, 2012, versus $12.940 million at December 31, 2011. Cash increased $367,000 during the quarter.
- Working capital was $11.9 million, down from $13.6 million at year-end. Current assets were $14.666 million and current liabilities were $2.801 million.
- Accounts receivable declined to $1.091 million from $3.345 million. Operating cash flow benefited substantially from the $2.273 million reduction in receivables.
- Capital spending was $201,000. The filing reports no financing cash flows in Q1 2012.
- Total liabilities were $2.801 million, including $1.917 million of deferred revenue. The filing states that all outstanding convertible debt and accrued interest had been paid or converted into common stock in December 2011; no debt balance is reported at March 31, 2012.
- Deferred revenue included approximately $1.5 million of prepaid license fees and $0.4 million of engineering fees. The company expected to complete the related engineering services by Q4 2012.
Management said cash was sufficient to fund operations through Q1 2013 and expected customer license agreements then in place to provide sufficient cash to operate for at least the following 12 months. Management cautioned that further capital may be needed if operations do not become cash-flow positive; additional financing may be unavailable, dilutive or restrictive.
Changes, outlook and risks
- Revenue sources and customer mix shifted: Q1 2012 revenue came from ten customers, compared with two in Q1 2011. Amazon represented 55% and Sony 16% of Q1 2012 revenue; Sony had represented about 97% in Q1 2011. Two customers accounted for 76% of quarter-end receivables.
- At March 31, the company reported 16 technology license agreements and disclosed signing another global OEM agreement after quarter-end. Product development and qualification cycles typically take 6–18 months; management described customer sales cycles as commonly 9–18 months for new customers.
- All convertible debt had been converted or repaid by December 2011, eliminating the related debt and derivative-related charges from Q1 2012 results.
- The company reported a history of losses and dependence on market acceptance, a limited number of customers, customers’ ability to commercialize products incorporating its technology, continuing product development, intellectual property protection, and access to capital. It also faces foreign-exchange exposure, particularly to the Swedish krona, and said it does not currently hedge that exposure.
- Disclosure controls and procedures were concluded to be ineffective because of material weaknesses in segregation of accounting duties and quarterly and annual financial close processes. Management said it was taking steps to address them.
- No material legal proceedings were reported. The company began trading on Nasdaq under symbol NEON on May 1, 2012.
The filing provides no formal numerical revenue or earnings guidance. Management’s liquidity expectations are forward-looking and depend on customer shipments, license revenue and payment timing, expenses, margins and access to financing.
Investor verification checklist
- Track whether licensees’ product shipments convert into recurring license revenue, and whether the disclosed OEM pipeline reaches commercialization.
- Monitor customer and receivables concentration, collections, deferred revenue recognition and completion of contracted engineering work.
- Assess cash burn and whether the stated operating runway is supported by actual operating cash flows and customer receipts.
- Confirm remediation of the disclosed material weaknesses and review subsequent filings for any changes in internal-control assessments.
- Review potential dilution: 5.206 million warrants were outstanding at March 31, 2012; common shares outstanding were 32.956 million at quarter-end.