Business Context and Reporting Period
Company: Neonode Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Neonode specializes in optical touchscreen technology (zForce). The company underwent a significant restructuring in late 2008. Its Swedish subsidiary, Neonode AB, filed for bankruptcy on December 9, 2008, resulting in the deconsolidation of its mobile phone manufacturing operations. Concurrently, Neonode Inc. acquired AB Cypressen, a Swedish engineering firm, to focus on licensing touchscreen technology to third-party OEMs. The company currently has no active customers for its technology and relies on capital raising to fund operations.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Net Sales | $0 | $391 |
| Operating Loss | $(2,309) | $(6,085) |
| Net Loss | $(5,107) | $(11,439) |
| Net Loss Attributable to Common Stockholders | $(7,848) | $(11,439) |
| Cash and Cash Equivalents (End of Period) | $153 | $656 |
| Working Capital Deficit | $(492) | Not Reported |
| Total Liabilities | $3,797 | Not Reported |
| Stockholders' Deficit | $(3,490) | Not Reported |
Note: Q1 2008 figures include the operations of Neonode AB prior to its bankruptcy. Q1 2009 figures exclude Neonode AB and include the new subsidiary, Cypressen.
Material Changes vs. Prior Period
- Revenue: Net sales dropped to $0 in Q1 2009 from $391,000 in Q1 2008. The 2008 revenue was derived from the sell-through of N2 mobile phones, a business line discontinued following the bankruptcy of Neonode AB.
- Operating Expenses: Total operating expenses decreased significantly to $2.3 million from $5.8 million. This reduction is primarily due to the termination of all employees at Neonode AB and a shift to a leaner structure focused on licensing.
- Non-Cash Charges: A significant non-cash charge of $2.8 million was recorded in Q1 2009 related to the valuation of embedded derivatives and warrants. This contrasts with a $5.5 million charge in Q1 2008. The 2009 charge stems from the adoption of new accounting standards (EITF 07-05) requiring certain warrants with anti-dilution features to be marked-to-market as liabilities.
- Deemed Dividend: A non-cash "Deemed Dividend" of $2.7 million was recorded in Q1 2009. This resulted from a shareholder resolution increasing the conversion ratio of Series A and B Preferred Stock, increasing the fair value of the equity to be issued upon conversion.
- Liquidity: Cash increased from $17,000 at year-end 2008 to $153,000 at March 31, 2009, driven by a $1.1 million private placement of Series A Preferred Stock.
Outlook, Risks, and Management Commentary
- Going Concern: The company's auditors have issued a "going concern" opinion, raising substantial doubt about the company's ability to continue operations. Management states that without additional funding, they may be forced to curtail operations or cease business.
- Capital Needs: Neonode requires additional capital to fund operations and technology development. There is no assurance that financing will be available on acceptable terms. Future financing may be dilutive to existing shareholders.
- Unaudited Review: Due to a lack of cash resources, the company was unable to pay its independent accountants to review the interim financial statements for the quarter ended March 31, 2009, as required by SEC rules.
- 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 recent bankruptcy/acquisition activities.
- Legal Contingencies: The company is facing litigation from a former placement agent (Empire Asset Management) and an investor (David Berman). While management intends to defend these actions vigorously, they represent potential liabilities.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $153,000 cash balance against current burn rates and the timeline for securing new financing.
- Accounting Review: Confirm the status of the independent accountant's review of the Q1 2009 financial statements, which was deferred due to non-payment.
- Warrant Liability: Assess the impact of the $2.9 million warrant liability (classified under EITF 07-05) and its sensitivity to stock price volatility on future earnings.
- Dilution Risk: Review the conversion terms of Series A and B Preferred Stock, which could result in the issuance of over 423 million shares of common stock upon conversion.
- Legal Exposure: Monitor the status of the lawsuits filed by Empire Asset Management and David Berman for potential financial impact.