Neonode(NEON) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the period ended June 30, 2020, detailing balance sheets, operations, and cash flows, revealing significant revenue decline, wider net loss, and decreased cash and equity, with notes on liquidity and a crucial August 2020 private placement Condensed Consolidated Balance Sheets The balance sheet as of June 30, 2020, shows total assets decreased to $5.6 million from $7.4 million, total liabilities increased to $4.6 million from $3.6 million, and total stockholders' equity declined sharply from $3.8 million to $0.9 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (Unaudited) | December 31, 2019 (Audited) | | :--- | :--- | :--- | | Total Current Assets | $4,150 | $5,434 | | Total Assets | $5,588 | $7,436 | | Total Current Liabilities | $4,229 | $3,023 | | Total Liabilities | $4,642 | $3,589 | | Total Stockholders' Equity | $946 | $3,847 | Condensed Consolidated Statements of Operations For Q2 2020, total revenues fell 55.7% year-over-year to $0.76 million, operating loss widened to $1.76 million, and net loss increased to $1.61 million, or ($0.18) per share Q2 2020 vs Q2 2019 Statement of Operations (in thousands, except per share amounts) | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Total Revenues | $758 | $1,710 | | Gross Margin | $635 | $1,639 | | Operating Loss | $(1,756) | $(1,314) | | Net Loss attributable to Neonode Inc. | $(1,612) | $(1,264) | | Basic and Diluted Loss per Share | $(0.18) | $(0.14) | H1 2020 vs H1 2019 Statement of Operations (in thousands, except per share amounts) | Metric | H1 2020 | H1 2019 | | :--- | :--- | :--- | | Total Revenues | $2,052 | $3,722 | | Gross Margin | $1,885 | $3,550 | | Operating Loss | $(2,845) | $(1,982) | | Net Loss attributable to Neonode Inc. | $(2,622) | $(1,837) | | Basic and Diluted Loss per Share | $(0.29) | $(0.21) | Condensed Consolidated Statements of Cash Flows For H1 2020, net cash used in operating activities increased to $1.9 million, financing activities provided $1.3 million, resulting in a net cash decrease of $0.6 million and an ending cash balance of $1.8 million Six Months Ended June 30 Cash Flow Summary (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,928) | $(1,475) | | Net cash used in investing activities | $(7) | $(77) | | Net cash provided by (used in) financing activities | $1,344 | $(272) | | Net decrease in cash | $(584) | $(1,917) | | Cash at end of period | $1,773 | $4,638 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's operational focus, significant liquidity challenges, a crucial $13.9 million private placement in August 2020, revenue concentration from key customers, and patent infringement lawsuits against Apple and Samsung - The company has incurred significant operating losses and negative cash flows since inception, with a net loss of $2.6 million for the first six months of 2020[27] - In August 2020, the company completed a private placement, issuing common and preferred stock for an aggregate of $13.9 million in gross proceeds to be used for working capital, crucial for alleviating going concern risks[29][31][34] - As of June 30, 2020, four customers represented approximately 79% of consolidated accounts receivable, with Q2 2020 major revenue contributors being Epson (35%), Hewlett Packard (27%), and Alpine (12%)[64][67] - In June 2020, a subsidiary of Aequitas Technologies LLC, to which Neonode had assigned patents, filed patent infringement lawsuits against Apple Inc. and Samsung Electronics Co. Ltd.[137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of the COVID-19 pandemic, leading to a 44.9% decrease in H1 2020 revenues, a wider operating loss, and highlights the critical $13.9 million private placement in August 2020 for future operations Business Overview The company provides optical sensing solutions for HMI and remote sensing, operating in B2B markets with three main business areas, and as of June 30, 2020, had 36 technology license agreements with 15 actively shipping customers - The company's business is divided into three main areas: HMI Solutions, HMI Products, and Remote Sensing Solutions[161][165][170] - As of June 30, 2020, Neonode had 36 valid technology license agreements, with 15 customers shipping products incorporating its technology, and customer product development cycles typically range from 6 to 36 months[162][163] Results of Operations Total net revenues for Q2 2020 decreased 55.7% to $0.8 million and for H1 2020 decreased 44.9% to $2.1 million, primarily due to lower HMI Solutions license revenues, resulting in a wider operating loss despite reduced expenses Financial Performance Summary (Q2 2020 vs Q2 2019) | Metric | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $758k | $1,710k | (55.7)% | | Gross Margin | $635k | $1,639k | (61.3)% | | Operating Loss | $(1,756k) | $(1,314k) | 33.6% | | Net Loss (to Neonode Inc.) | $(1,612k) | $(1,264k) | 27.5% | - The significant decrease in total net revenues was primarily related to lower license revenues within the HMI Solutions business area and lower estimates for unbilled license fees due to global economic uncertainty[176] - Operating expenses decreased due to lower R&D and G&A costs, partially offset by an increase in Sales and Marketing expenses[180][182][184] Liquidity and Capital Resources The company, with a history of losses and negative cash flows, had $1.8 million cash at June 30, 2020, and addressed liquidity needs through short-term loans and a critical $13.9 million private placement in August 2020 for working capital - As of June 30, 2020, the company had cash of $1.8 million, down from $2.4 million at December 31, 2019, with working capital at negative $(0.1) million[200] - In August 2020, the company raised $13.9 million in gross proceeds ($13.1 million net) through a private placement of common and preferred stock to fund working capital[209][211][214] - The company also issued preferred shares to repay approximately $1.03 million of outstanding debt owed to company directors under loan agreements established in June 2020[208][213] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company states that this section is not applicable for the current reporting period - The company has determined that quantitative and qualitative disclosures about market risk are not applicable for this reporting period[226] Item 4. Controls and Procedures As of June 30, 2020, management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period[227] - No changes occurred in the company's internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[229] PART II OTHER INFORMATION Item 1. Legal Proceedings The company reports that it is not currently involved in any material legal proceedings - As of the filing date, the company is not a party to any material legal proceedings[231] Item 1A. Risk Factors The company highlights that risks disclosed in its Annual Report on Form 10-K are heightened by the COVID-19 pandemic, posing significant threats to its workforce, operations, customers, suppliers, and the broader economy - The company faces heightened risks related to the COVID-19 pandemic, which could adversely affect its business, results of operations, and financial condition through impacts on its operations, customers, and the global economy[233] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including key agreements related to the August 2020 private placement, June 2020 loan agreements, and standard officer certifications - The filing includes key agreements as exhibits, such as the Securities Purchase Agreement and Registration Rights Agreement from August 2020, and Loan Agreements from June 2020[235]