Neonode Inc. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009. Neonode Inc. is a smaller reporting company specializing in touchscreen technology (zForce, ClearTouch, SAT). The company underwent significant restructuring in late 2008, including the bankruptcy and deconsolidation of its Swedish subsidiary, Neonode AB (mobile phone business), and the acquisition of AB Cypressen. As of June 30, 2009, the company has no revenue-generating operations and is focused on licensing its technology. The financial statements are unaudited and were not reviewed by independent accountants due to a lack of cash resources.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Net Sales | $0 | $792 |
| Net Loss | $(7,191) | $(24,037) |
| Net Loss Attributable to Common Stockholders | $(9,952) | $(24,037) |
| Cash and Cash Equivalents (End of Period) | $7 | $2,096 |
| Net Cash Used in Operating Activities | $(1,050) | $(12,868) |
| Total Assets | $111 | $179 |
| Total Liabilities | $4,085 | $1,232 |
| Stockholders' Deficit | $(3,974) | $(1,053) |
| Working Capital Deficit | $(991) | $(962) |
Note: Working capital deficit excludes the non-cash warrant liability of $2.86 million.
Material Changes vs. Prior Period
- Revenue Cessation: Net sales dropped to zero in 2009 compared to $792,000 in the prior year, as the mobile phone business (Neonode AB) was liquidated in December 2008.
- Expense Reduction: Operating expenses decreased significantly due to the termination of the majority of the workforce in late 2008. R&D expenses fell from $2.7 million to $432,000, and Sales & Marketing dropped from $3.0 million to $139,000.
- Non-Cash Charges: A significant non-cash expense of $3.2 million was recorded for the amortization of stock issued to related parties for the acquisition of AB Cypressen. Additionally, a $2.7 million "deemed dividend" was recorded due to the revaluation of preferred stock conversion ratios.
- Liability Increase: Total liabilities increased from $1.2 million to $4.1 million, primarily driven by the reclassification of warrants as liabilities ($2.86 million) under new accounting standards (EITF 07-05) and the issuance of a $65,000 bridge note.
- Cash Position: Cash reserves dwindled from $17,000 at year-end 2008 to $7,000 at June 30, 2009.
Outlook, Risks, and Management Commentary
- Going Concern: The company's auditors have raised substantial doubt about its ability to continue as a going concern. Management states there is no assurance of obtaining sufficient funding on acceptable terms. If additional capital is not secured, the company may be forced to curtail operations or cease operations entirely.
- Liquidity: The company has a working capital deficit of $991,000 (excluding warrant liabilities). It relies on raising additional funds through debt or equity to fund operations and technology development.
- Legal Proceedings: The company is facing lawsuits from Empire Asset Management and an individual investor (David Berman) alleging misrepresentation of business success. The company intends to defend these actions vigorously, with D&O insurance covering legal representation subject to a $150,000 retention.
- Internal Controls: Management concluded that disclosure controls and procedures were not effective due to material weaknesses in accounting for complex financing transactions, derivatives, and the bankruptcy of the former subsidiary.
- Unusual Items: The financials include significant non-cash adjustments related to the fair value of warrants and embedded derivatives, which are marked-to-market each period.
Investor Verification Checklist
- Cash Runway: Verify the company's ability to fund operations beyond the current $7,000 cash balance given the lack of revenue.
- Financing Status: Confirm if the $65,000 bridge note issued in June 2009 has been converted or if new financing has been secured to meet the December 31, 2009 maturity.
- Warrant Liability: Monitor the fair value of the $2.86 million warrant liability, as volatility in the stock price will directly impact reported net loss.
- Legal Exposure: Track the status of the lawsuits filed by Empire Asset Management and David Berman, including potential settlement costs beyond the $150,000 insurance retention.
- Preferred Stock Conversion: Review the terms of the Series A and Series B Preferred Stock, specifically the high conversion ratios (480.63 and 132.07 respectively) which could lead to massive dilution upon conversion.