Neonode Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Business context
Neonode develops optical sensing technology for touch, gesture and scene analysis. It earns revenue from technology license fees, touch sensor module and other product sales, and non-recurring engineering services. Following a May 2021 strategy update, it shifted to a regional sales organization and increased its focus on contactless touch opportunities in the Americas, Asia-Pacific and EMEA. The company reported one segment.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $962 | $1,495 | $4,347 | $3,547 |
| Gross profit / margin | $863 / 90% | $1,294 / 87% | $3,750 / 86% | $3,179 / 90% |
| Operating loss | $(1,822) | $(1,746) | $(5,247) | $(4,591) |
| Net loss attributable to Neonode | $(1,721) | $(1,638) | $(4,946) | $(4,260) |
| Basic and diluted loss per share | $(0.15) | $(0.16) | $(0.43) | $(0.45) |
| Cash used in operating activities | Not separately reported for the quarter | Not separately reported for the quarter | $(4,974) | $(3,707) |
Q3 revenue comprised $821 in license fees, $136 in products and $5 in engineering services. Nine-month revenue comprised $3,474 in license fees, $837 in products and $36 in engineering services. Nine-month product gross margin was 31%, versus 31% in 2020; Q3 product gross margin was 28%, versus 30%.
At September 30, cash was $5.496 million, current assets were $9.247 million and current liabilities were $3.098 million. Working capital was $6.1 million, compared with $10.4 million at year-end 2020. Total liabilities were $3.162 million. Lease obligations included $397,000 of finance leases and $350,000 of operating leases; the filing reports no conventional borrowing outstanding at quarter-end. Total assets were $10.227 million, and accumulated deficit was $201.104 million.
Changes versus comparable periods
- Q3 revenue declined 35.7% year over year: license fees fell 32.0% and product revenue fell 52.1%. Management attributed the decline chiefly to pandemic-related component shortages in the printer and automotive industries and renewed lockdowns in key areas, including Asia.
- Nine-month revenue increased 22.6%, as license fees rose 13.9% and product revenue rose 86.0%; engineering revenue decreased 23.4%.
- Nine-month operating expenses rose 15.8%, including increases in R&D and sales and marketing. Consequently, the operating loss widened to $5.247 million from $4.591 million, despite higher revenue.
- Cash declined by $4.977 million during the first nine months of 2021. Operating cash use increased, and financing provided only $167,000, compared with $13.778 million in the prior-year period, which included substantial equity proceeds.
- Q3 net loss attributable to Neonode widened modestly, while reported loss per share improved to $0.15 from $0.16, partly alongside a higher weighted-average share count. Nine-month loss per share improved to $0.43 from $0.45.
Outlook, risks and unusual items
- Management expects revenue to help reduce operating losses in coming years and intends to pursue operational efficiencies, but gave no numerical forecast and cautioned it may not meet revenue targets or reduce losses. The company has a history of losses and negative operating cash flow.
- Management stated that its operating plan and potential capital sources were sufficient to alleviate going-concern concerns. It also warned that further capital may be needed if operations do not become cash-flow positive; additional financing may not be available on acceptable terms and equity financing could dilute shareholders.
- After quarter-end, Neonode received approximately $1.396 million net from October ATM sales and approximately $13.1 million net from a registered direct offering that closed October 26. The offering sold 1.808 million shares at $7.75 per share. These proceeds strengthen liquidity but increase the share count.
- COVID-19 continued to affect customer demand, component availability, delivery timing and costs. Other stated risks include customer concentration, long product development cycles, reliance on customers’ product shipments and suppliers, royalty verification, competition, intellectual property litigation and foreign-exchange exposure.
- Three customers accounted for at least 10% of nine-month revenue: Hewlett Packard (32%), Seiko Epson (17%) and LG Electronics (13%). Five customers represented approximately 82% of receivables and unbilled revenue at quarter-end.
- AirBar inventory was subject to an $800,000 reserve at September 30. A $100,000 bank guarantee covered remaining manufacturing-partner materials; management expected to sell remaining AirBars and purchase the components and assembly service, and recorded no liability for the guarantee.
- A shareholder-related legal fee action sought $400,000. The company accrued for it at September 30, entered into a settlement agreement on November 3, 2021, and the case was dismissed with prejudice on November 4. The filing does not state a separate settlement amount.
Important facts for investors to verify
- Whether post-quarter offering proceeds, together with cash on hand, provide sufficient runway given continued operating cash burn.
- Whether license and product revenue recover from Q3 declines, and whether component shortages and pandemic disruptions continue to affect customer shipments.
- How customer concentration and the timing of royalty reporting and collections affect revenue and cash generation.
- Whether product inventory, including AirBar inventory, can be sold as anticipated and whether any further reserves or guarantee-related costs arise.
- The final financial impact of the legal settlement and the dilution from ATM and registered direct share issuances.