Neonode Inc. Form 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2010. Neonode Inc. provides optical touchscreen solutions (zForce™) for handheld and industrial electronic devices, licensing technology to OEMs and ODMs. The company is a smaller reporting company incorporated in Delaware with principal offices in Sweden and the USA.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Net Sales | $123,000 | $269,000 |
| Gross Margin | $19,000 (15.4%) | $103,000 (38.3%) |
| Operating Loss | $(2,204,000) | $(4,485,000) |
| Net Loss | $(13,799,000) | $(16,043,000) |
| Cash and Cash Equivalents | $191,000 (Ending Balance) | Net Increase of $163,000 |
| Convertible Debt (Net) | $1,555,000 | $1,555,000 |
| Embedded Derivatives Liability | $16,546,000 | $16,546,000 |
Note: Financial figures are in thousands unless otherwise noted. The company reported a working capital deficit of $2.6 million (excluding embedded derivatives) as of June 30, 2010.
Material Changes vs. Prior Period
- Revenue Generation: The company generated revenue for the first time in the reported periods ($123k Q2, $269k YTD), compared to $0 in the same periods of 2009. Revenue was derived from engineering services and component sales.
- Net Loss Expansion: Net loss increased significantly to $13.8 million for the quarter and $16.0 million for the six months, compared to $2.1 million and $8.1 million in 2009. This is primarily driven by non-cash charges related to the valuation of embedded derivatives and warrants ($11.5 million expense in Q2).
- Financing Activity: In the first six months of 2010, the company completed a private placement of convertible notes and warrants totaling approximately $1.6 million in cash proceeds, plus $163,000 of accounts payable converted to debt.
- Derivative Liability: The liability for embedded derivatives and warrants increased from $4.5 million at year-end 2009 to $16.5 million at June 30, 2010, due to mark-to-market adjustments and new issuances.
Outlook, Risks, and Management Commentary
- Going Concern: Management states that the financial statements are prepared on a going concern basis, but substantial doubt exists regarding the company's ability to continue operations without additional funding. The company has an accumulated deficit of $96.6 million.
- Liquidity: Cash on hand is $191,000. The company relies on raising additional capital through debt or equity to fund operations and product development. Failure to secure funding could require curtailing operations.
- Customer Concentration: Revenue for the three months ended June 30, 2010, was earned from a single customer. Revenue for the six months was earned from two customers.
- Legal Proceedings: The company is involved in lawsuits with Empire Asset Management, David Berman, and Xerox Corporation. A default judgment from Xerox was set aside, and the matter is scheduled for arbitration.
- Internal Controls: Management identified material weaknesses in internal controls, specifically regarding the accounting for complex financing transactions and a lack of formalized documentation due to the small size of the accounting department.
- Subsequent Events: In July 2010, the company signed license agreements with two additional OEMs. Revenue from these will be recognized after a 90-day warranty period.
Investor Verification Checklist
- Capital Adequacy: Verify the company's ability to raise the additional capital required to sustain operations given the $2.6 million working capital deficit and $16.5 million derivative liability.
- Derivative Valuation: Review the assumptions (volatility, term) used in the Black-Scholes model for the $16.5 million embedded derivative liability, as changes in stock price significantly impact reported losses.
- Revenue Sustainability: Assess the progress of the two new OEM license agreements signed in July 2010 and the timeline for revenue recognition post-warranty.
- Legal Exposure: Monitor the outcome of the Xerox arbitration and the status of the Empire Asset Management and David Berman lawsuits.
- Debt Maturity: Note that $2.9 million in convertible notes principal is due by December 31, 2010, creating a significant near-term liquidity requirement.