UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
For the transition period from ________ to ________
Commission file number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
(Address of principal executive offices and zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The |
Indicate by check mark whether
the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No
The number of shares of the
registrant’s common stock outstanding as of November 7, 2022 was
NEONODE INC.
Quarterly Report on Form 10-Q
For the Fiscal Quarter Ended September 30, 2022
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEONODE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable and unbilled revenues, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll and employee benefits | ||||||||
| Accrued expenses | ||||||||
| Contract liabilities | ||||||||
| Current portion of finance lease obligations | ||||||||
| Current portion of operating lease obligations | ||||||||
| Total current liabilities | ||||||||
| Finance lease obligations, net of current portion | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Neonode Inc. stockholders’ equity | ||||||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| License fees | $ | $ | $ | $ | ||||||||||||
| Products | ||||||||||||||||
| Non-recurring engineering | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of revenues: | ||||||||||||||||
| Products | ||||||||||||||||
| Non-recurring engineering | ( | ) | ||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Total gross margin | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income | ||||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss including noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Net loss attributable to noncontrolling interests | ||||||||||||||||
| Net loss attributable to Neonode Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share: | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Comprehensive loss attributable to noncontrolling interests | ||||||||||||||||
| Comprehensive loss attributable to Neonode Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
For the Quarter to Date periods ended September 30, 2021 through September 30, 2022
| Common Stock Shares Issued |
Common Stock Amount |
Additional Paid-in Capital |
Accumulated Other Comprehensive Income (Loss) |
Accumulated Deficit |
Total Neonode Inc. Stockholders’ Equity |
Noncontrolling Interests |
Total Stockholders’ Equity |
|||||||||||||||||||||||||
| Balances, December 31, 2020 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
| Balances, March 31, 2021 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
| Balances, June 30, 2021 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Issuance of common stock under the ATM, net | ||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
| Balances, September 30, 2021 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Issuance of shares for cash, net of offering costs | ||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
| Balances, December 31, 2021 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
| Balances, March 31, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
| Balances, June 30, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Repurchase and retirement of stock | ( |
) | - | ( |
) | - | - | ( |
) | - | ( |
) | ||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
| Balances, September 30, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss (including noncontrolling interests) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation expense | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Recoveries of bad debt | ( | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable and unbilled revenue, net | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenues | ( | ) | ( | ) | ||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock, net of offering costs | - | |||||||
| Repurchase of common stock | ( | ) | - | |||||
| Principal payments on finance lease obligations | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financial activities: | ||||||||
| Property and equipment obtained in exchange for finance lease obligations | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NEONODE INC.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Interim Period Reporting
The accompanying unaudited interim condensed consolidated financial statements include all adjustments consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim period presented. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of results for a full fiscal year or any other period.
The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2022 and 2021 have been prepared by us, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Operations
Neonode Inc., which is collectively with its subsidiaries referred to as “Neonode” or the “Company” in this report, develops advanced optical sensing solutions for contactless touch, touch, gesture sensing, and object detection and scene analysis solutions using advanced machine learning algorithms to detect and track persons and objects in video streams for cameras and other types of imagers. We market and sell our contactless touch, touch, gesture sensing, and object detection products and solutions based on our zForce technology platform, and our scene analysis solutions based on our MultiSensing technology platform. We offer our solutions to customers in many different markets and segments including, but not limited to, office equipment, automotive, industrial automation, medical, military and avionics.
In our operations, we have historically focused on three different business areas, human machine interface (“HMI”) Solutions, HMI Products and Remote Sensing Solutions. On May 4, 2021, we announced a new strategy and organizational update targeting an increased focus on the Company’s contactless touch business and on current market opportunities in North America (“AMER”), Asia-Pacific (“APAC”), and Europe, Middle East and Africa (“EMEA”). We thereby changed from a business area organization to a regional sales organization going forward. Revenues are however primarily monitored for each of our revenue streams consisting of license fees, product sales and non-recurring engineering fees.
Liquidity
We have incurred significant
operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $
The condensed consolidated financial statements included in this report have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment of liabilities in the ordinary course of business.
Management evaluated the significance of the Company’s operating loss and determined that the Company’s current operating plan and sources of potential capital (including the Company’s at-the-market facility described below) would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern.
6
In the future, we may require additional sources of capital to continue operations and to implement our strategy. If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements. No assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available to us on acceptable terms, or at all, we may be unable to adequately fund our business plans, which could have a negative effect on our business, results of operations and financial condition. If funds are available through the issuance of equity or debt securities, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants on us that could impair our ability to engage in certain business transactions.
We expect revenues will enable us to reduce our operating losses in coming years. In addition, we intend to continue to implement various measures to improve our operational efficiencies. No assurances can be given that management will be successful in meeting its revenue targets and reducing its operating loss.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated
financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Neonode Inc. and its wholly-owned subsidiaries,
as well as Pronode Technologies AB, a
Neonode consolidates entities
in which it has a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than
The condensed consolidated balance sheets at September 30, 2022 and December 31, 2021 and the condensed consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the three and nine months ended September 30, 2022 and 2021 include our accounts and those of our wholly-owned subsidiaries as well as Pronode Technologies AB.
Estimates and Judgments
The preparation of financial statements in conformity with U.S. GAAP requires making estimates and judgments that affect, at the date of the financial statements, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates and judgments.
Significant estimates and judgments include, but are not limited to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, the standalone selling price of performance obligations, and transaction prices and assessing transfer of control; measuring variable consideration and other obligations such as product returns and refunds, and product warranties; provisions for uncollectible receivables; determining the net realizable value of inventory; recoverability of capitalized project costs and long-lived assets; for leases, determining whether a contract contains a lease, allocating consideration between lease and non-lease components, determining incremental borrowing rates, and identifying reassessment events, such as modifications; the valuation allowance related to our deferred tax assets; and the fair value of options issued as stock-based compensation.
7
Cash and Cash Equivalents
We have not had any liquid investments other than normal cash deposits with bank institutions to date. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration of Cash Balance Risks
Cash balances are maintained
at various banks in the United States, Japan, Taiwan and Sweden. For
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is stated
at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make
required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer.
Should all efforts fail to recover the related receivable, we will write off the account. We also record an allowance for all customers
based on certain other factors including the length of time the receivables are past due and historical collection experience with customers.
Our allowance for doubtful accounts was approximately $
Projects in Process
Projects in process consist of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering labor costs and project-specific equipment costs. These costs are capitalized on our consolidated balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue recognition policy. There were no costs capitalized to projects in process as of September 30, 2022 and December 31, 2021.
Inventory
The Company’s inventory consists primarily of components that will be used in the manufacturing of our TSMs. We classify inventory for reporting purposes as raw materials, work-in-process, and finished goods.
Inventory is stated at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.
Due to the low sell-through
of our AirBar products, management has decided to fully reserve work-in-process for AirBar components, as well as AirBar related raw materials.
Management has further decided to reserve for a portion of AirBar finished goods, depending on type of AirBar and in which location it
is stored. The AirBar inventory reserve was $
8
Raw materials, work-in-process, and finished goods are as follows for the periods indicated (in thousands):
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets as follows:
Estimated useful lives
| Computer equipment | ||
| Furniture and fixtures | ||
| Equipment |
Depreciation of equipment purchased under a finance lease is recognized over the term of the lease if that lease term is shorter than the estimated useful life.
Upon retirement or sale of property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected in the condensed consolidated statement of operations. Maintenance and repairs are charged to expense as incurred.
Right-of-Use Assets
A right-of-use asset represents a lessee’s right to use a leased asset for the term of the lease. Our right-of-use assets generally consist of operating leases for buildings.
Right-of-use assets are measured initially at the present value of the lease payments, plus any lease payments made before a lease began and any initial direct costs, such as commissions paid to obtain a lease.
Right-of-use assets are subsequently measured at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent, and any initial direct costs not yet expensed.
Long-lived Assets
We assess the recoverability of long-lived assets by estimating the future cash flows from the associated assets in accordance with relevant accounting guidance. If the estimated undiscounted future cash flows related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment of these assets. As of September 30, 2022, we believe there was no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue, which could result in impairment of long-lived assets in the future.
Foreign Currency Translation and Transaction Gains and Losses
The functional currency of
our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar.
The translation from Swedish Krona, Japanese Yen, South Korean Won and Taiwan Dollar to U.S. Dollars is performed for balance sheet accounts
using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted-average exchange rate
during the period. Gains or (losses) resulting from translation are included as a separate component of accumulated other comprehensive
income (loss). Foreign currency translation gains (losses) were $
9
Concentration of Credit and Business Risks
Our customers are located in the United States, Europe and Asia.
As of September 30, 2022,
As of December 31, 2021,
Customers who accounted for
| ● | Hewlett-Packard Company – | |
| ● | Seiko Epson Corporation – | |
| ● | LG Electronics Inc. – | |
| ● | Alps Alpine – |
Customers who accounted for
| ● | Hewlett-Packard Company – | |
| ● | Seiko Epson Corporation – | |
| ● | LG Electronics Inc. – | |
| ● | Alps Alpine – |
Customers who accounted for
| ● | Hewlett-Packard Company – | |
| ● | Seiko Epson Corporation – | |
| ● | LG Electronics Inc. – |
Customers who accounted for
| ● | Hewlett-Packard Company – | |
| ● | Seiko Epson Corporation – | |
| ● | LG Electronics Inc. – |
Revenue Recognition
We recognize revenue when control of products is transferred to our customers, and when services are completed and accepted by our customers; the amount of revenue we recognize reflects the consideration we expect to receive for those products or services. Our contracts with customers may include combinations of products and services (e.g., a contract that includes products and related engineering services). We structure our contracts such that distinct performance obligations, such as product sales or license fees, and related engineering services, are clearly defined in each contract.
License fees and sales of our AirBar and TSMs are on a per-unit basis. Therefore, we generally satisfy performance obligations as units are shipped to our customers. Non-recurring engineering service performance obligations are satisfied as work is performed and accepted by our customers.
10
We recognize revenue net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat all product shipping and handling charges (regardless of when they occur) as activities to fulfill the promise to transfer goods, therefore we treat all shipping and handling charges as expenses.
License Fees
We earn revenue from licensing our internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products, with terms and conditions that vary by licensee. Fees under these agreements may include license fees relating to our IP, and royalties payable to us following the distribution by our licensees of products incorporating the licensed technology. The license for our IP has standalone value and can be used by the licensee without maintenance and support.
For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when the license is made available to the customer and the customer has a right to use that license. At the end of each reporting period, we record unbilled license fees, using prior royalty revenue data by customer to make estimates of those royalties.
Explicit return rights are not offered to customers. There have been no returns through September 30, 2022.
Product Sales
We earn revenue from sales of TSM hardware products to our original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”) and Tier 1 supplier customers, who embed our hardware into their products, and from sales of branded consumer products that incorporate our TSMs that are sold through distributors or directly to end users. These distributors are generally given business terms that allow them to return unsold inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. Our sales agreements generally provide customers with limited rights of return and warranty provisions.
The timing of revenue recognition related to AirBar modules depends upon how each sale is transacted - either point-of-sale or through distributors. We recognize revenue for AirBar modules sold point-of-sale (online sales and other direct sales to customers) when we provide the promised product to the customer.
Because we generally use distributors to provide TSMs and AirBars to our customers, we must analyze the terms of our distributor agreements to determine when control passes from us to our distributors. For sales of TSMs and AirBars sold through distributors, we recognize revenues when our distributors obtain control over our products. Control passes to our distributors when we have a present right to payment for products sold to the distributors, the distributors have legal title to and physical possession of products purchased from us, and the distributors have significant risks and rewards of ownership of products purchased.
Distributors participate in various cooperative marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual credits received by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.
Under U.S. GAAP, companies
may make reasonable aggregations and approximations of returns data to accurately estimate returns. Our TSM and AirBar returns and warranty
experience to date has enabled us to make reasonable returns estimates, which are supported by the fact that our product sales involve
homogenous transactions. The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was
$
Non-Recurring Engineering
For technology license or TSM contracts that require modification or customization of the underlying technology to adapt the technology to customer use, we determine whether the technology license or TSM, and required engineering consulting services represent separate performance obligations. We perform our analysis on a contract-by-contract basis. If there are separate performance obligations, we determine the standalone selling price (“SSP”) of each separate performance obligation to properly recognize revenue as each performance obligation is satisfied. We provide engineering consulting services to our customers under a signed Statement of Work (“SOW”). Deliverables and payment terms are specified in each SOW. We generally charge an hourly rate for engineering services, and we recognize revenue as engineering services specified in contracts are completed and accepted by our customers. Any upfront payments we receive for future non-recurring engineering services are recorded as contract liabilities until that revenue is earned.
11
We believe that recognizing non-recurring engineering services revenues as progress towards completion of engineering services and customer acceptance of those services occurs best reflects the economics of those transactions, because engineering services as tracked in our systems correspond directly with the value to our customers of our performance completed to date. Hours performed for each engineering project are tracked and reflect progress made on each project and are charged at a consistent hourly rate.
Revenues from non-recurring engineering contracts that are short-term in nature are recorded when those services are complete and accepted by customers.
Revenues from non-recurring engineering contracts with substantive defined deliverables for which payment terms in the SOW are commensurate with the efforts required to produce such deliverables are recognized as they are completed and accepted by customers.
Estimated losses on all SOW projects are recognized in full as soon as they become evident. During the three and nine months ended September 30, 2022 and 2021, no losses related to SOW projects were recorded.
The following tables present the net revenues distribution by geographical area and market for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands):
| Three months ended September 30, 2022 | Three months ended September 30, 2021 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| AMER | ||||||||||||||||
| Net revenues from consumer electronics | $ | % | $ | % | ||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| APAC | ||||||||||||||||
| Net revenues from automotive | $ | % | $ | % | ||||||||||||
| Net revenues from consumer electronics | % | % | ||||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| EMEA | ||||||||||||||||
| Net revenues from automotive | $ | % | $ | % | ||||||||||||
| Net revenues from medical | % | % | ||||||||||||||
| Net revenues from distributors and other | % | - | - | % | ||||||||||||
| $ | % | $ | % | |||||||||||||
| Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| AMER | ||||||||||||||||
| Net revenues from consumer electronics | $ | % | $ | % | ||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| APAC | ||||||||||||||||
| Net revenues from automotive | $ | % | $ | % | ||||||||||||
| Net revenues from consumer electronics | % | % | ||||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| EMEA | ||||||||||||||||
| Net revenues from automotive | $ | % | $ | % | ||||||||||||
| Net revenues from medical | % | % | ||||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
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Significant Judgments
Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when one of our customers contracts with us for a product and related engineering services for customizing that product for our customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment. Judgment may also be required to determine the SSP for each distinct performance obligation identified, although we generally structure our contracts such that performance obligations and pricing for each performance obligation are specifically addressed. We currently have no outstanding contracts with multiple performance obligations; however, we recently negotiated a contract that may include multiple performance obligations in the future.
Judgment is also required to determine when control of products passes from us to our distributors, as well as the amounts of product that may be returned to us. Our products are sold with a right of return, and we may provide other credits or incentives to our customers, which could result in variability when determining the amount of revenue to recognize. At the end of each reporting period, we use product returns history and additional information that becomes available to estimate returns and credits. We do not recognize revenue if it is probable that a significant reversal of any incremental revenue would occur.
Finally, judgment is required to determine the amount of unbilled license fees at the end of each reporting period.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when we have an unconditional right to receive future payments from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from our customers.
The following table presents accounts receivable and deferred revenues as of September 30, 2022 and December 31, 2021 (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Accounts receivable and unbilled revenue, net | $ | $ | ||||||
| Contract liabilities (deferred revenues) | ||||||||
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled revenues (contract assets), and customer advances and deposits or deferred revenue (contract liabilities) on the consolidated balance sheets. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets; contract assets are generally classified as current. The Company sometimes receives advances or deposits from its customers before revenue is recognized, which are reported as contract liabilities and are generally classified as current. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.
We do not anticipate impairment of our contract assets related to license fee revenues, given the creditworthiness of our customers whose invoices comprise the balance in that asset account. We will continue to monitor the timeliness of receipts from those customers to assess whether the contract assets have been impaired.
Payment terms and conditions vary by the type of contract; however, payments generally occur 30-60 days after invoicing for license fees and sensor modules to our resellers and distributors. Where revenue recognition timing differs from invoice timing, we have determined that our contracts do not include a significant financing component. Our intent is to provide our customers with consistent invoicing terms for the convenience of our customers, not to receive financing from our customers.
13
Costs to Obtain Contracts
We record the incremental costs of obtaining a contract with a customer as a contract asset, if we expect the benefit of those costs to cover a period greater than one year. We currently have no incremental costs that must be capitalized.
We expense as incurred costs of obtaining a contract when the amortization period of those costs would have been less than or equal to one year.
Product Warranty
The following table summarizes the activity related to the product warranty liability (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Balance at beginning of period | $ | $ | ||||||
| Provisions for warranty issued | ( | ) | ||||||
| Balance at end of period | $ | $ | ||||||
The Company accrues for warranty costs as part of its cost of sales of TSMs based on estimated costs. The Company’s products are generally covered by a warranty for a period of 12 months from the customer receipt of the product.
Contract Liabilities
Contract liabilities (deferred revenues) consist primarily of prepayments for license fees, and other products or services that we have been paid in advance. We earn the revenue when we transfer control of the product or service. Deferred revenues may also include upfront payments for consulting services to be performed in the future, such as non-recurring engineering services.
We defer license fees until we have met all accounting requirements for revenue recognition, which is when a license is made available to a customer and that customer has a right to use the license. Non-recurring engineering fee revenues are deferred until engineering services have been completed and accepted by our customers.
The following table presents our deferred revenues by source (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Deferred revenues license fees | $ | $ | ||||||
| Deferred revenues products | ||||||||
| Deferred revenues non-recurring engineering | ||||||||
| $ | $ | |||||||
During the three and nine months ended September 30, 2022, the Company
recognized revenues of approximately $
Advertising
Advertising costs are expensed
as incurred. Advertising costs for the three and nine months ended September 30, 2022 and 2021 amounted to approximately $
Research and Development
Research and development (“R&D”) costs are expensed as incurred. R&D costs consist primarily of personnel related costs in addition to external consultancy costs such as testing, certifying and measurements.
Stock-Based Compensation Expense
We measure the cost of employee services received in exchange for an award of equity instruments, including share options, based on the estimated fair value of the award on the grant date, and recognize the value as compensation expense over the period the employee is required to provide services in exchange for the award, usually the vesting period.
14
We account for equity instruments issued to non-employees at their estimated fair value.
When determining stock-based compensation expense involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes option pricing model.
Noncontrolling Interests
We recognize any noncontrolling
interest, also known as a minority interest, as a separate line item in stockholders’ equity in the condensed consolidated financial
statements. A noncontrolling interest represents the portion of equity ownership in a less-than-wholly owned subsidiary not attributable
to us. Generally, any interest that holds less than
The Company provides either in the condensed consolidated statement of stockholders’ equity, if presented, or in the notes to condensed consolidated financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest that separately discloses:
| (1) | Net income or loss; | |
| (2) | Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and | |
| (3) | Each component of other comprehensive income or loss. |
Income Taxes
We recognize deferred tax liabilities and assets for the expected future tax consequences of items that have been included in the consolidated financial statements or tax returns. We estimate income taxes based on rates in effect in each of the jurisdictions in which we operate. Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Valuation allowances are recorded against net deferred tax assets when, in our opinion, realization is uncertain based on the “more likely than not” criteria of the accounting guidance.
Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of September 30, 2022 and December 31, 2021. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes paid or payable for the current period.
We follow U.S. GAAP related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits. As of September 30, 2022 and December 31, 2021, we had no unrecognized tax benefits.
Net Loss per Share
Net loss per share amounts have been computed based on the weighted average number of shares of common stock outstanding during the three and nine months ended September 30, 2022. Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period. The weighted-average number of shares of common stock and potential common stock equivalents used in computing the net loss per share for the three and nine months ended September 30, 2022 and 2021 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 8).
Other Comprehensive Income (Loss)
Our other comprehensive income (loss) includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses are reflected as a separate component of stockholders’ equity in the condensed consolidated balance sheets.
15
Cash Flow Information
Cash flows in foreign currencies have been converted to U.S. Dollars at an approximate weighted-average exchange rate for the respective reporting periods. The weighted-average exchange rate for the condensed consolidated statements of operations was as follows:
| Nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Swedish Krona | ||||||||
| Japanese Yen | ||||||||
| South Korean Won | ||||||||
| Taiwan Dollar | ||||||||
The exchange rate for the condensed consolidated balance sheets was as follows:
Fair Value of Financial Instruments
We disclose the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts receivable, accounts payable and accrued expenses are deemed to approximate fair value due to their short maturities.
New Accounting Pronouncements
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”), supplemented by subsequent accounting standards updates. The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13, as amended, is scheduled to become effective for fiscal years beginning after December 15, 2023, with early adoption permitted. In the future, we will evaluate the impact that ASU 2016-13, as amended, will have on our consolidated financial statements, specifically regarding our trade receivables; however, we do not expect any significant impact from implementation of the new standard.
16
3. Stockholders’ Equity
At-the-Market Facility
On
May 10, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc.
(“B. Riley Securities”) with respect to an “at the market” offering program (the “ATM Facility”),
under which we may, from time to time, in our sole discretion, issue and sell through B. Riley Securities, acting as sales agent, up to
$
Pursuant
to the Sale Agreement, we may sell the shares through B. Riley Securities by any method permitted that is deemed an “at the market”
offering as defined in Rule 415 under the Securities Act of 1933, as amended. B. Riley Securities will use commercially reasonable efforts
consistent with its normal trading and sales practices to sell the shares from time to time, based upon instructions from us (including
any price or size limits or other customary parameters or conditions we may impose). We will pay B. Riley Securities a commission of
We are not obligated to sell any shares under the Sale Agreement. The offering of shares pursuant to the Sale Agreement will terminate upon the earlier to occur of (i) the issuance and sale, through B. Riley Securities, of all of the shares subject to the Sales Agreement and (ii) termination of the Sale Agreement in accordance with its terms.
Common Stock
As of September 30, 2022 and
December 31, 2021, our Restated Certificate of Incorporation, as amended, authorized us to issue up to
On August 12, 2021, we issued
On December 29, 2021, we issued
On May 20, 2022, we issued
During the 12 months ended
December 31, 2021, we sold an aggregate of
On October 21, 2021, we entered
into a placement agency agreement with Pareto Securities Inc. and Pareto Securities AB pursuant to which we sold to certain Swedish and
other European investors an aggregate of
On September 15, 2022, we repurchased
Preferred Stock
As of September 30, 2022 and
December 31, 2021, our Restated Certificate of Incorporation, as amended, authorized us to issue up to
There were no transactions in our preferred stock during the three and nine months ended September 30, 2022 and 2021. No shares of preferred stock were issued and outstanding as of September 30, 2022.
Warrants
As of September 30, 2022 and
December 31, 2021, the Company had outstanding warrants to purchase
17
4. Stock-Based Compensation
We have adopted equity incentive plans for which stock options and restricted stock awards are available for grants to employees, consultants and directors. Except for certain options granted to certain Swedish employees, all employee, consultant and director stock options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the grant date. There are no vesting provisions tied to performance conditions for any options. Vesting for all outstanding option grants is based solely on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.
Stock Options and Long Term Incentive Plan
During the year ended December
31, 2020, our stockholders approved the 2020 Plan which replaced our 2015 Stock Incentive Plan (the “2015 Plan”), which in
turn replaced our Neonode Inc. 2006 Equity Incentive Plan (the “2006 Plan”). Although no new awards may be made under the
2006 Plan or 2015 Plan, the 2015 Plan is still operative for awards previously granted under such plan. There are no awards outstanding
under the 2006 Plan. Under the 2020 Plan,
In 2020, we established the
2020 LTIP to provide eligible persons with the opportunity to acquire an equity interest, or otherwise increase their equity interest,
in the Company as an incentive for them to remain in the service of the Company. Through the 2020 LTIP, eligible employees of Neonode
may waive between
On December 29, 2020, we issued
On August 12, 2021, we issued
On December 29, 2021, we issued
On May 20, 2022, we issued
On September 15, 2022, we repurchased
For the three and nine months ended September 30, 2022 and 2021, we
recognized $
18
A summary of the combined activity under all of our stock option plans is set forth below:
| Number of Options Outstanding | Weighted Average Exercise Price | |||||||
| Outstanding at January 1, 2022 | $ | |||||||
| Expired | ( | ) | ||||||
| Outstanding at September 30, 2022 | $ | |||||||
The aggregate intrinsic value
of the
For the three and nine months ended September 30, 2022 and 2021, we recorded no compensation expense related to the vesting of stock options.
During the three and nine months ended September 30, 2022, we did not grant any options to purchase shares of our common stock to employees or members of our board of directors.
Stock options granted under the 2006, 2015 and 2020 Plans are exercisable over a maximum term of 10 years from the date of grant, vest in various installments over a one to four-year period and have exercise prices reflecting the market value of the shares of common stock on the date of grant.
5. Commitments and Contingencies
Litigation
On September 2, 2020, a putative
stockholder of Neonode filed a purported class action lawsuit (Case No. 1:20-cv-01174-UNA) in the United States District Court for the
District of Delaware against Neonode, the Board of Directors of Neonode, and the Chief Executive Officer of Neonode for alleged violation
of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, in connection with disclosure of information concerning
Proposal 5 and Proposal 6 in the proxy statement filed with the SEC by Neonode on August 20, 2020 for the 2020 Annual Meeting of Stockholders
of Neonode (the “Proxy Statement”). These proposals for shareholder approval related to the Private Placement by Neonode on
August 5, 2020 in which two directors and the chief executive officer of Neonode participated. The relief sought by the plaintiff included
a preliminary injunction to enjoin the stockholder votes on Proposal 5 and Proposal 6. On October 20, 2020, the plaintiff voluntarily
dismissed the lawsuit in the United States District Court. However, on February 11, 2021, the plaintiff’s counsel informed Neonode
that they would file a fee petition as a result of Neonode filing the definitive additional materials to the Proxy Statement on September
18, 2020. On September 9, 2021, the plaintiff’s counsel filed a complaint in the Supreme Court of the State of New York, County
of Nassau, to recover plaintiff’s attorneys’ fees and expenses in the amount of $
19
Indemnities and Guarantees
Our bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising because of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and we have no liabilities recorded for these agreements as of September 30, 2022 and December 31, 2021.
We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us regarding intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these indemnification provisions as of September 30, 2022 and December 31, 2021.
One of our manufacturing partners has previously purchased material for the final assembly of AirBars. To protect the manufacturer from losses in relation to AirBar production, we agreed to secure the value of the inventory in a bank guarantee. In December, 2021 the bank guarantee was cancelled.
Patent Assignment
On May 6, 2019, the Company assigned a portfolio of patents to Aequitas Technologies LLC. The assignment provides the Company the right to share potential proceeds generated from a licensing and monetization program.
On June 8, 2020, Neonode Smartphone LLC, a subsidiary of Aequitas Technologies LLC filed complaints against Apple and Samsung in the Western District of Texas for infringing two patents. The case against Apple was subsequently transferred to the Northern District of California. Both matters are still ongoing.
Non-Recurring Engineering Development Costs
20
6. Segment Information
We have
The following table presents net revenues by geographic area for the three and nine months ended September 30, 2022 and 2021, respectively (dollars in thousands):
| Three months ended September 30, 2022 | Three months ended September 30, 2021 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| Japan | $ | % | $ | % | ||||||||||||
| United States | % | % | ||||||||||||||
| South Korea | % | % | ||||||||||||||
| Germany | % | % | ||||||||||||||
| China | % | % | ||||||||||||||
| Sweden | % | % | ||||||||||||||
| Switzerland | % | % | ||||||||||||||
| Other | ( | ) | ( | )% | % | |||||||||||
| $ | % | $ | % | |||||||||||||
| Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| United States | $ | % | % | |||||||||||||
| Japan | % | $ | % | |||||||||||||
| South Korea | % | % | ||||||||||||||
| Germany | % | % | ||||||||||||||
| Switzerland | % | % | ||||||||||||||
| France | % | - | % | |||||||||||||
| Sweden | % | % | ||||||||||||||
| China | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
The following table presents our total assets by geographic region as of September 30, 2022 and December 31, 2021 (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| United States | $ | $ | ||||||
| Sweden | ||||||||
| Asia | ||||||||
| Total | $ | $ | ||||||
21
7. Leases
We have operating leases for our corporate offices and our manufacturing facility, and finance leases for equipment. Our leases have remaining lease terms of two months to three years. One of our primary operating leases includes options to extend the lease for one to three years and the other primary lease includes an option to annually prolong; those operating leases also include options to terminate the leases within one year. Future renewal options that are not likely to be executed as of the balance sheet date are excluded from right-of-use assets and related lease liabilities.
Our operating leases represent
building leases for our Stockholm corporate offices and our Kungsbacka manufacturing facility. Our Stockholm corporate office lease has
a remaining lease term of under one year and both of our leases are automatically renewed at a cost increase of
We report operating lease right-of-use assets, as well as current and noncurrent operating lease obligations on our consolidated balance sheets for the right to use those buildings in our business. Our finance leases represent manufacturing equipment; we report the manufacturing equipment, as well as current and noncurrent finance lease obligations on our consolidated balance sheets for our manufacturing equipment.
Generally, interest rates are stated in our leases for equipment. When no interest rate is stated in a lease, however, we review the interest rates implicit in our recent finance leases to estimate our incremental borrowing rate. We determine the rate implicit in a lease by using the most recent finance lease rate, or other method we think most closely represents our incremental borrowing rate.
The components of lease expense were as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease cost (1) | $ | $ | $ | $ | ||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of leased assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | - | |||||||||||||||
| Total finance lease cost | ||||||||||||||||
| (1) |
22
Supplemental cash flow information related to leases was as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Cash paid for amounts included in leases: | ||||||||||||||||
| Operating cash flows from operating leases | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Operating cash flows from finance leases | - | ( | ) | ( | ) | ( | ) | |||||||||
| Financing cash flows from finance leases | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||||
| Operating leases | ||||||||||||||||
Supplemental balance sheet information related to leases was as follows (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Operating leases | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Current portion of operating lease obligations | $ | $ | ||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Finance leases | ||||||||
| Property and equipment, at cost | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| Current portion of finance lease obligations | $ | $ | ||||||
| Finance lease liabilities, net of current portion | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| September 30, 2022 |
December 31, 2021 |
|||||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted Average Discount Rate: | ||||||||
| Operating leases (2) | % | % | ||||||
| Finance leases | % | % | ||||||
| (2) |
23
A summary of future minimum payments under non-cancellable operating lease commitments as of September 30, 2022 is as follows (in thousands):
| Year ending December 31, | Total | |||
| 2022 (remaining months) | $ | |||
| 2023 | ||||
| 2024 | ||||
| Less imputed interest | ( | ) | ||
| Total lease liabilities | ||||
| Less current portion | ( | ) | ||
| $ | ||||
The following is a schedule of minimum future rentals on the non-cancellable finance leases as of September 30, 2022 (in thousands):
| Year ending December 31, | Total | |||
| 2022 (remaining months) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total minimum payments required: | ||||
| Less amount representing interest: | ( | ) | ||
| Present value of net minimum lease payments: | ||||
| Less current portion | ( | ) | ||
| $ | ||||
8. Net Loss per Share
Basic net loss per common share for the three and nine months ended September 30, 2022 and 2021 was computed by dividing the net loss attributable to common shareholders of Neonode Inc. for the relevant period by the weighted average number of shares of common stock outstanding. Diluted loss per common share is computed by dividing net loss attributable to common shareholders of Neonode Inc. for the relevant period by the weighted average number of shares of common stock and common stock equivalents outstanding.
There were no potentially dilutive common stock equivalents for the three and nine months ended September 30, 2022 and 2021, respectively.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| (in thousands, except per share amounts) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| BASIC AND DILUTED | ||||||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Net loss attributable to Neonode Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share – basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
9. Subsequent Events
On October 1, 2022, we acquired
the remaining
On October 18, 2022, we sold
No other subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes thereto other than as discussed elsewhere in the accompanying notes.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. For example, statements in this Quarterly Report regarding our plans, strategy and focus areas are forward-looking statements. You can identify some forward-looking statements by the use of words such as “believe,” “anticipate,” “expect,” “intend,” “goal,” “plan,” and similar expressions. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to risks relating to the impact of the ongoing COVID-19 pandemic (including the emergence of vaccine resistant COVID-19 variants), the war in Ukraine and its impact on the global economy, our history of losses since inception, our dependence on a limited number of customers, our reliance on our customers’ ability to develop and sell products that incorporate our touch technology, the length of a product development and release cycle, our and our customers’ reliance on component suppliers, the difficulty in verifying royalty amounts owed to us, our limited experience manufacturing hardware devices, our ability to remain competitive in response to new technologies, our dependence on key members of our management and development team, the costs to defend, as well as risks of losing, patents and intellectual property rights and our ability to obtain adequate capital to fund future operations. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in our publicly available filings with the Securities and Exchange Commission. Forward-looking statements reflect our analysis only as of the date of this Quarterly Report on Form 10-Q. Because actual events or results may differ materially from those discussed in or implied by forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statement. We do not undertake responsibility to update or revise any of these factors or to announce publicly any revision to forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and consolidated financial statements for the year ended December 31, 2021 included in our most recent Annual Report on Form 10-K.
Neonode Inc., collectively with its subsidiaries, is referred to in this Form 10-Q as “Neonode”, “we”, “us”, “our”, “registrant”, or “Company”.
Overview
Our company provides advanced optical sensing solutions for contactless touch, touch, and gesture sensing. We also provide software solutions for scene analysis that feature advanced machine learning algorithms to detect and track persons and objects in video streams for cameras and other types of imagers. We base our contactless touch, touch, and gesture sensing products and solutions on our zForce technology platform and our scene analysis solutions on our MultiSensing technology platform. We market and sell our solutions to customers in many different markets and segments including, but not limited to, office equipment, automotive, industrial automation, medical, military and avionics.
License Sales
We license our zForce technology to OEMs, ODMs and Tier 1 suppliers who embed our technology into products they develop, manufacture and sell. Since 2010, our licensing customers have sold approximately 88 million devices that use our patented technology.
As of September 30, 2022, we had 34 valid technology license agreements with global OEMs, ODMs and Tier 1 suppliers.
Our licensing customer base is primarily in the automotive and printer segments. Eleven of our licensing customers are currently shipping products that embed our technology. We anticipate current customers will continue to ship products with our technology in 2022 and in future years. We also expect to expand our customer base with a number of new customers who will be looking to ship new products incorporating our zForce and MultiSensing technologies as they complete final product development and release cycles. We typically earn our license fees on a per unit basis when our customers ship products using our technology, but in the future other business models may also be used.
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Product Sales
In addition to our technical solutions business, we design and manufacture TSMs that incorporate our patented technology. We sell our TSMs to OEMs, ODMs and systems integrators for use in their products. We also sell our Neonode branded AirBar product that incorporates one of our TSMs through distributors.
We utilize a robotic manufacturing process designed specifically for our components. Our TSMs are commercial-off-the-shelf products based on our patent-protected zForce technology platform and can support the development of contactless touch, touch, gesture and object sensing solutions that, paired with our technology licensing offering, give us a full range of options to enter and compete in key markets.
In October 2017, we began selling our TSMs to customers in the industrial and consumer electronics segments. Over time, we expect a significant portion of our revenues will be derived from TSM sales.
Sales of Non-recurring Engineering Services
We also offer non-recurring engineering (“NRE”) services related to application development linked to our TSMs and our zForce and MultiSensing technology platforms on a flat rate or hourly rate basis.
Typically, our licensing customers require engineering support during the development and initial manufacturing phase for their products using our technology, while our TSM customers require hardware or software modifications to our standard products or support during the development and initial manufacturing phases of their products using our technology. In both cases we can offer NRE services and earn NRE revenues.
Impact of COVID-19
Our near-term growth and overall business have been and are continuing to be adversely impacted by the ongoing COVID-19 pandemic and we expect they will continue to be impacted by the pandemic and its impact on the global economy. Although we have noted additional demand for our TSMs for use in contactless touch products and some increases in sales of licenses, COVID-19 has negatively impacted some of our customers’ businesses and their sales volumes and new development projects and product launches, which, in turn, has impacted our business. Our operations have as also been impacted by lockdowns and travel restrictions, which forced us to pause business-related travel and caused a majority of our employees to begin working remotely. In the second quarter of 2022, however, as lockdowns and travel restrictions continued to be lifted, we began to resume business-related travel and more and more of our employees are now returning to the office. The extent of the COVID-19 pandemic’s impact on our operational and financial performance going forward will depend on the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict at this time. We are continuing to monitor the impact of the COVID-19 pandemic and we may take further actions in response. There is a risk that we will not be successful in mitigating the COVID-19 pandemic’s impact on our business over time, and our sales may not increase in line with our expectations and our operating margins could fluctuate or decline.
Impact of War in Ukraine
The ongoing war in Ukraine has impacted the global economy as the United States, the UK, the EU, and other countries have imposed broad export controls and financial and economic sanctions against Russia (a large exporter of commodities), Belarus, and specific areas of Ukraine, and may continue to impose additional sanctions or other measures. Russia may impose its own counteractive measures. We do not procure materials directly from Ukraine or Russia, but the war in Ukraine may further exacerbate ongoing supply chain disruptions that are occurring across the globe. While the precise effects on global economies from the war and related sanctions remain uncertain, there has been significant volatility in the financial markets, fluctuations in currency exchange rates, and an increase in energy and commodity prices globally. Should the war continue or escalate, there may be various economic and security consequences including, but not limited to, additional supply shortages of different kinds; further increases in prices of commodities; significant disruptions in logistics infrastructure and telecommunications services; and risks relating to the unavailability of information technology systems and infrastructure. The resulting impacts on the global economy, financial markets, inflation, interest rates, and unemployment, among others, could adversely impact economic and financial conditions, and may disrupt the global economy’s ongoing recovery from the COVID-19 pandemic.
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Results of Operations
A summary of our financial results is as follows (in thousands, except percentages):
| Three months ended September 30, | 2022 vs 2021 | |||||||||||||||
| 2022 | 2021 | Variance in Dollars | Variance in Percent | |||||||||||||
| Revenue: | ||||||||||||||||
| License fees | $ | 1,045 | $ | 821 | $ | 224 | 27.3 | % | ||||||||
| Percentage of revenue | 85.9 | % | 85.3 | % | ||||||||||||
| Products | 155 | 136 | 19 | 14.0 | % | |||||||||||
| Percentage of revenue | 12.7 | % | 14.1 | % | ||||||||||||
| Non-recurring engineering | 16 | 5 | 11 | 220.0 | % | |||||||||||
| Percentage of revenue | 1.3 | % | 0.5 | % | ||||||||||||
| Total Revenue | $ | 1,216 | $ | 962 | $ | 254 | 26.4 | % | ||||||||
| Cost of Sales: | ||||||||||||||||
| Products | $ | 80 | $ | 98 | $ | (18 | ) | (18.4 | )% | |||||||
| Percentage of revenue | 6.6 | % | 10.2 | % | ||||||||||||
| Non-recurring engineering | (2 | ) | 1 | (3 | ) | (300.0 | )% | |||||||||
| Percentage of revenue | (0.2 | )% | 0.1 | % | ||||||||||||
| Total Cost of Sales | $ | 78 | $ | 99 | $ | (21 | ) | (21.2 | )% | |||||||
| Total Gross Margin | $ | 1,138 | $ | 863 | $ | 275 | 31.9 | % | ||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | $ | 792 | $ | 1,015 | $ | (223 | ) | (22.0 | )% | |||||||
| Percentage of revenue | 65.1 | % | 105.5 | % | ||||||||||||
| Sales and marketing | 348 | 640 | (292 | ) | (45.6 | )% | ||||||||||
| Percentage of revenue | 28.6 | % | 66.5 | % | ||||||||||||
| General and administrative | 960 | 1,030 | (70 | ) | (6.8 | )% | ||||||||||
| Percentage of revenue | 78.9 | % | 107.1 | % | ||||||||||||
| Total Operating Expenses | $ | 2,100 | $ | 2,685 | $ | (585 | ) | (21.8 | )% | |||||||
| Percentage of revenue | 172.7 | % | 279.1 | % | ||||||||||||
| Operating Loss | $ | (962 | ) | $ | (1,822 | ) | $ | 860 | (43.2 | )% | ||||||
| Percentage of revenue | (79.1 | )% | (189.4 | )% | ||||||||||||
| Interest expense | - | (3 | ) | 3 | (100.0 | )% | ||||||||||
| Percentage of revenue | - | % | (0.3 | )% | ||||||||||||
| Provision for income taxes | 32 | 31 | 1 | 3.2 | % | |||||||||||
| Percentage of revenue | 2.6 | % | 3.2 | % | ||||||||||||
| Less: net loss attributable to noncontrolling interests | 194 | 135 | 59 | 43.7 | % | |||||||||||
| Percentage of revenue | 16.0 | % | 14.0 | % | ||||||||||||
| Net loss attributable to Neonode Inc. | $ | (800 | ) | $ | (1,721 | ) | $ | 921 | (53.5 | )% | ||||||
| Percentage of revenue | (65.8 | )% | (178.9 | )% | ||||||||||||
| Net loss per share attributable to Neonode Inc. | $ | (0.06 | ) | $ | (0.15 | ) | $ | 0.09 | (60.0 | )% | ||||||
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| Nine months ended September 30, | 2022 vs 2021 | |||||||||||||||
| 2022 | 2021 | Variance in Dollars | Variance in Percent | |||||||||||||
| Revenue: | ||||||||||||||||
| License fees | $ | 3,102 | $ | 3,474 | $ | (372 | ) | (10.7 | )% | |||||||
| Percentage of revenue | 81.6 | % | 79.9 | % | ||||||||||||
| Products | 512 | 837 | (325 | ) | (38.8 | )% | ||||||||||
| Percentage of revenue | 13.5 | % | 19.3 | % | ||||||||||||
| Non-recurring engineering | 187 | 36 | 151 | 419.4 | % | |||||||||||
| Percentage of revenue | 4.9 | % | 0.8 | % | ||||||||||||
| Total Revenue | $ | 3,801 | $ | 4,347 | $ | (546 | ) | (12.6 | )% | |||||||
| Cost of Sales: | ||||||||||||||||
| Products | $ | 224 | $ | 580 | $ | (356 | ) | (61.4 | )% | |||||||
| Percentage of revenue | 5.9 | % | 13.3 | % | ||||||||||||
| Non-recurring engineering | 24 | 17 | 7 | 41.2 | % | |||||||||||
| Percentage of revenue | 0.6 | % | 0.4 | % | ||||||||||||
| Total Cost of Sales | $ | 248 | $ | 597 | $ | (349 | ) | (58.5 | )% | |||||||
| Total Gross Margin | $ | 3,553 | $ | 3,750 | $ | (197 | ) | (5.3 | )% | |||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | $ | 2,961 | $ | 3,536 | $ | (575 | ) | (16.3 | )% | |||||||
| Percentage of revenue | 77.9 | % | 81.3 | % | ||||||||||||
| Sales and marketing | 1,608 | 2,197 | (589 | ) | (26.8 | )% | ||||||||||
| Percentage of revenue | 42.3 | % | 50.5 | % | ||||||||||||
| General and administrative | 3,023 | 3,264 | (241 | ) | (7.4 | )% | ||||||||||
| Percentage of revenue | 79.5 | % | 75.1 | % | ||||||||||||
| Total Operating Expenses | $ | 7,592 | $ | 8,997 | $ | (1,405 | ) | (15.6 | )% | |||||||
| Percentage of revenue | 199.7 | % | 207.0 | % | ||||||||||||
| Operating Loss | $ | (4,039 | ) | $ | (5,247 | ) | $ | 1,208 | 23.0 | % | ||||||
| Percentage of revenue | (106.3 | )% | (120.7 | )% | ||||||||||||
| Interest expense | (6 | ) | (11 | ) | 5 | (45.5 | )% | |||||||||
| Percentage of revenue | (0.2 | )% | (0.3 | )% | ||||||||||||
| Other income | 21 | - | 21 | 100.0 | % | |||||||||||
| Percentage of revenue | 0.6 | % | - | % | ||||||||||||
| Provision (benefit) for income taxes | 104 | 104 | - | - | % | |||||||||||
| Percentage of revenue | 2.7 | % | 2.4 | % | ||||||||||||
| Less: net loss attributable to noncontrolling interests | 400 | 416 | (16 | ) | (3.8 | )% | ||||||||||
| Percentage of revenue | 10.5 | % | 9.6 | % | ||||||||||||
| Net loss attributable to Neonode Inc. | $ | (3,728 | ) | $ | (4,946 | ) | $ | 1,218 | 24.6 | % | ||||||
| Percentage of revenue | (98.1 | )% | (113.8 | )% | ||||||||||||
| Net loss per share attributable to Neonode Inc. | $ | (0.27 | ) | $ | (0.43 | ) | $ | 0.16 | (37.2 | )% | ||||||
Net Revenues
All of our sales for the three and nine months ended September 30, 2022 and 2021 were to customers located in the United States, Europe and Asia.
For the three months ended September 30, 2022, total net revenues increased 26.4% compared to the same period in 2021. We saw a recovery of license revenues from legacy customers in the printer and automotive markets in the current period compared to the same period in 2021, primarily due to increased sales volumes from these customers. The decrease of 12.6% in total net revenues for the nine months ended September 30, 2022 as compared to the same period in 2021 was primarily due to component shortage within the printer industry and automotive industry and lock-downs in APAC, as a result of the pandemic.
License Fees
For the three months ended September 30, 2022 we saw a slight recovery in volume and our license fee revenues increased with 27.3% compared to the same period in 2021. The decrease in license fee revenues for the nine months ended September 30, 2022 compared to the same period in 2021 was primarily pandemic-related. The component shortage within the printer and automotive industries, resulting from the pandemic, has continued to have an impact on our operations.
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Product Sales
Revenues from product sales were $0.2 million and $0.5 million for the three and nine month ended September 30, 2022 compared to $0.1 million and $0.8 million for the same periods in 2021. We saw a slight recovery for the third quarter compared to the third quarter of 2021, but our product sales continue to be negatively impacted by COVID-19 driven lock-downs in Asia. Our product revenues are also affected by the comparatively long development and launch periods, often 12 to 18 months, or longer, for customer new equipment solutions, which slows our sales growth.
Non-recurring Engineering Revenues
Most of our non-recurring engineering revenues are related to application development and proof-of-concept projects related to our TSMs or to our zForce and MultiSensing technology platforms. Non-recurring revenues increased for the three and nine months ended September 30, 2022 compared to the same periods in 2021.
Revenues related to Remote Sensing Solutions were $0.1 million for the nine months ended September 30, 2022.
The following tables presents the net revenues by geographical area and revenue stream for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands):
| Three months ended September 30, 2022 | Three months ended September 30, 2021 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| AMER | ||||||||||||||||
| License fees | $ | 386 | 97 | % | $ | 376 | 98 | % | ||||||||
| Products | 14 | 3 | % | 8 | 2 | % | ||||||||||
| Non-recurring engineering | (1 | ) | - | % | - | - | % | |||||||||
| $ | 399 | 100 | % | $ | 384 | 100 | % | |||||||||
| APAC | ||||||||||||||||
| License fees | $ | 580 | 89 | % | $ | 411 | 78 | % | ||||||||
| Products | 68 | 11 | % | 108 | 21 | % | ||||||||||
| Non-recurring engineering | 3 | - | % | 4 | 1 | % | ||||||||||
| $ | 651 | 100 | % | $ | 523 | 100 | % | |||||||||
| EMEA | ||||||||||||||||
| License fees | $ | 79 | 48 | % | $ | 34 | 62 | % | ||||||||
| Products | 73 | 44 | % | 20 | 36 | % | ||||||||||
| Non-recurring engineering | 14 | 8 | % | 1 | 2 | % | ||||||||||
| $ | 166 | 100 | % | $ | 55 | 100 | % | |||||||||
| Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| AMER | ||||||||||||||||
| License fees | $ | 1,232 | 98 | % | $ | 1,534 | 92 | % | ||||||||
| Products | 27 | 2 | % | 125 | 8 | % | ||||||||||
| Non-recurring engineering | - | - | % | - | - | % | ||||||||||
| $ | 1,259 | 100 | % | $ | 1,659 | 100 | % | |||||||||
| APAC | ||||||||||||||||
| License fees | $ | 1,675 | 90 | % | $ | 1,716 | 73 | % | ||||||||
| Products | 147 | 8 | % | 589 | 25 | % | ||||||||||
| Non-recurring engineering | 44 | 2 | % | 35 | 2 | % | ||||||||||
| $ | 1,866 | 100 | % | $ | 2,340 | 100 | % | |||||||||
| EMEA | ||||||||||||||||
| License fees | $ | 195 | 29 | % | $ | 224 | 65 | % | ||||||||
| Products | 338 | 50 | % | 123 | 35 | % | ||||||||||
| Non-recurring engineering | 143 | 21 | % | 1 | - | % | ||||||||||
| $ | 676 | 100 | % | $ | 348 | 100 | % | |||||||||
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Gross Margin
Our combined total gross margin was 94% and 93% for the three and nine months ended September 30, 2022, respectively, and 90% and 86% for the three and nine months ended September 30, 2021, respectively. For the three and nine months ended September 30, 2022, gross margin related to products was 48% and 56%, respectively, compared to 28% and 31% for the same periods in 2021, respectively.
Our cost of sales includes the direct cost of production of certain customer prototypes, costs of engineering personnel, engineering consultants to complete the engineering design contracts. Cost of goods sold for TSMs includes fully burdened manufacturing costs, outsourced final assembly costs, and component costs of TSMs.
Research and Development
Research and development (“R&D”) expenses for the three and nine months ended September 30, 2022 were $0.8 million and $3.0 million, respectively. For the same periods in 2021, the R&D expenses were $1.0 million and $3.5 million, respectively. R&D expenses primarily consist of personnel-related costs in addition to external consultancy costs, such as testing, certifying and measurements, along with costs related to developing and building new product prototypes. The decreases were primarily related to the move of administrative costs related to production from R&D to general and administrative partly offset by reallocation of overhead costs from general and administrative to R&D.
Sales and Marketing
Sales and marketing expenses for the three and nine months ended September 30, 2022 were $0.3 million and $1.6 million, respectively. The sales and marketing costs for the same periods in 2021 were $0.6 million and $2.2 million, respectively. The decrease for the three and nine months ended September 30, 2022 were primarily due to lower staff expenses.
Our sales and marketing activities focus on OEM, ODM and Tier 1 customers who will license our technology or purchase and embed our TSMs into their products.
General and Administrative
General and administrative (“G&A”) expenses for the three and nine months ended September 30, 2022 were $1.0 million and $3.0 million, respectively. The G&A expenses for the three and nine months ended September 30, 2021 were $1.0 million and $3.3 million, respectively. The decrease was primarily related to lower staff expenses and lower depreciations.
Income Taxes
Our effective tax rate was (3)% and (3)% for the three and nine months ended September 30, 2022, respectively, and (2)% and (2)% for the three and nine months ended September 30, 2021, respectively. The negative tax rate is due to withholding taxes from sales. We recorded valuation allowances for the three and nine-month periods ended September 30, 2022 and September 30, 2021 for deferred tax assets related to net operating losses due to the uncertainty of realization.
Net Loss
As a result of the factors discussed above, we recorded a net loss attributable to Neonode of $0.8 million and $3.7 million for the three and nine months ended September 30, 2022, respectively, compared to $1.7 million and $4.9 million for the same periods in 2021, respectively.
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Contractual Obligations and Off-Balance Sheet Arrangements
We previously agreed to secure the value of inventory purchased by one of our AirBars manufacturing partners. At December 31, 2021, the guaranteed amount was decreased from $100,000 to $0. We do not have any other transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources other than the operating leases incurred in the normal course of business.
We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support. We do not engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the consolidated financial statements.
Contractual Obligations and Commercial Commitments
Non-Recurring Engineering Development Costs
On April 25, 2013, we entered into an Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments (“TI”) pursuant to which TI agreed to integrate our intellectual property into an ASIC, which is used in our licensed technology. Under the terms of the NN1002 Agreement, we agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first 2 million ASICs sold. As of September 30, 2022, we had made no payments to TI under the NN1002 Agreement.
Operating Leases
On December 1, 2020, Neonode Technologies AB entered into a lease for 6,684 square feet of office space located at Karlavägen 100, Stockholm, Sweden. The lease agreement is valid through November 2022. The lease is extended on a yearly basis unless written notice is given nine months prior to the expiration date.
On December 1, 2015, Pronode Technologies AB entered into a lease agreement for 9,040 square feet of workshop located at Faktorvägen 17, Kungsbacka, Sweden. The lease agreement has been extended and is valid through September 2024. The lease is extended on a three-year basis unless written notice is given nine months prior to the expiration date.
On December 1, 2015, Neonode Taiwan Ltd. entered into a lease agreement located at Rm. 2406, International Trade Building, Keelung Rd., Sec.1, Taipei, Taiwan. The lease is renewed monthly.
On September 1, 2019, we entered into a lease of office space located at NishiShinjuku Takagi Building, 1203 NishiShinjuku, Shinjukuku, Tokyo, Japan. The lease was valid through August 31, 2021 and was not renewed. We now operate through a virtual office in Japan.
For the three and nine months ended September 30, 2022, we recorded approximately $134,000 and $441,000 for total rent expense, respectively. For the three and nine months ended September 30, 2021, we recorded approximately $157,000 and $501,000 for total rent expense, respectively.
See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussions.
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Equipment Subject to Finance Lease
In April 2014, we entered into a lease for certain specialized milling equipment. Under the terms of the lease agreement we are obligated to purchase the equipment at the end of the original six-year lease term for 10% of the original purchase price of the equipment. In accordance with relevant accounting guidance the lease is classified as a finance lease. The lease payments and depreciation period began on July 1, 2014 when the equipment went into service. On July 1, 2020 the lease contract was extended for one year. The implicit interest rate of the extended lease period is 9.85% per annum. The lease expired July 1, 2021 and we paid the residual value.
Between the second and fourth quarters of 2016, we entered into six leases for component production equipment. Under the terms of five of the lease agreements we are obligated to purchase the equipment at the end of the original 3-5 year lease terms for 5-10% of the original purchase price of the equipment. In accordance with relevant accounting guidance the leases are classified as finance leases. The lease payments and depreciation periods began between June and November 2016 when the equipment went into service. The implicit interest rate of the leases is currently approximately 3% per annum. One of the leases is a hire-purchase agreement where the equipment is required to be paid off after five years. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation period began on July 1, 2016 when the equipment went into service. The implicit interest rate of the lease is currently approximately 3% per annum. On April 1, 2022, one of lease contracts was extended for three years. The implicit interest rate of the extended lease period is 2.7% per annum.
In 2017, we entered into a lease for component production equipment. Under the terms of the lease agreement the lease will be renewed within one year of the end of the original four-year lease term. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation periods began in May 2017 when the equipment went into service. The implicit interest rate of the lease is currently approximately 1.5% per annum. On November 1, 2021 the lease contract was extended for two years. The implicit interest rate of the extended lease period is 1.5% per annum.
In 2018, we entered into a lease for component production equipment. Under the terms of the agreement, the lease will be renewed within one year of the original four-year lease term. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation periods began in August 2018 when the equipment went into service. The implicit interest rate of the lease is currently approximately 1.5% per annum.
During 2021, we terminated one finance lease by purchasing the related equipment and extended one finance lease for an additional two years.
During the nine months ended September 30, 2022, we entered into a lease for soundproof office pods. Under the terms of the agreement, the lease will be renewed within one year of the original three-year lease term. In accordance with relevant accounting guidance the lease is classified as a finance lease. The lease payments and depreciation periods began in May 2022 when the equipment went into service. The implicit interest rate of the lease is currently approximately 3.0% per annum.
See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion.
Liquidity and Capital Resources
Our liquidity is dependent on many factors, including sales volume, operating profit and the efficiency of asset use and turnover. Our future liquidity will be affected by, among other things:
| ● | licensing of our technology; | |
| ● | purchases of our TSMs and AirBars; | |
| ● | operating expenses; | |
| ● | timing of our OEM customer product shipments; | |
| ● | timing of payment for our technology licensing agreements; | |
| ● | gross profit margin; and | |
| ● | ability to raise additional capital, if necessary. |
As of September 30, 2022, we had cash of $11.3 million compared to $17.4 million as of December 31, 2021. Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent to the date of this Quarterly Report on Form 10-Q.
Working capital (current assets less current liabilities) was $15.5 million as of September 30, 2022, compared to $19.1 million as of December 31, 2021.
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Net cash used in operating activities for the nine months ended September 30, 2022 was $5.7 million and was primarily the result of a net loss of $4.1 million and approximately $0.5 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use assets and recoveries of bad debt, and changes in operating assets and liabilities of $(2.0) million.
Net cash used in operating activities for the nine months ended September 30, 2021 was $5.0 million and was primarily the result of a net loss of $5.4 million and approximately $1.0 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use assets, partly offset by changes in operating assets and liabilities of $(0.6) million.
Accounts receivable and unbilled revenues decreased by approximately $0.3 million as of September 30, 2022 compared to December 31, 2021. This was due to lower revenues.
Inventory increased by approximately $1.7 million during the nine months ended September 30, 2022 compared to December 31, 2021, primarily due to purchase of components to secure production in line with estimated product sales.
Net cash (used in) provided by financing activities of $(0.1) million and $0.2 million during the nine months ended September 30, 2022 and 2021, respectively, was the result of principal payments on finance lease obligations and the repurchase of common stock.
We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $0.8 million and $3.7 million and $1.7 million and $4.9 million for the three and nine months ended September 30, 2022 and 2021, respectively, and had an accumulated deficit of approximately $206.3 million and $202.6 million as of September 30, 2022 and December 31, 2021, respectively. In addition, operating activities used cash of approximately $5.7 million and $5.0 million for the nine months ended September 30, 2022 and 2021, respectively.
The condensed consolidated financial statements included herein have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment of liabilities in the ordinary course of business. Management evaluated the significance of the Company’s operating loss and determined that the Company’s cash position and considering the Company’s current operating plan and other sources of potential capital, including the ATM Facility, would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern.
In the future, we may require sources of capital in addition to cash on hand and our ATM Facility (described below) to continue operations and to implement our strategy. If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements. Historically, we have been able to access the capital markets through sales of common stock and warrants to generate liquidity. Our management believes it could raise capital through public or private offerings if needed to provide us with sufficient liquidity.
No assurances can be given, however, that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results of operations and financial condition. In addition, no assurance can be given that stockholders will approve an increase in the number of our authorized shares of common stock if needed. The issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.
The functional currency of our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar. They are subject to foreign currency exchange rate risk. Any increase or decrease in the exchange rate of the U.S. Dollar compared to the Swedish Krona, Japanese Yen, South Korean Won or Taiwan Dollar will impact our future operating results.
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Registered Direct Offering
On October 21, 2021, we entered into a placement agency agreement with Pareto Securities Inc. and Pareto Securities AB pursuant to which we sold to certain Swedish and other European investors an aggregate of 1,808,000 shares of our common stock at a price of $7.75 per share in a registered direct offering that closed on October 26, 2021 (the “Offering”). We received net proceeds of approximately $13.1 million from the Offering after deducting placement agent fees and offering expenses.
At-the-Market Offering Program
On May 10, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“B. Riley Securities”) with respect to an “at the market” offering program (the “ATM Facility”), under which we may, from time to time, in our sole discretion, issue and sell through B. Riley Securities, acting as sales agent, up to $25 million of shares of our common stock.
Pursuant to the Sale Agreement, we may sell the shares through B. Riley Securities by any method permitted that is deemed an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended. B. Riley Securities will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the shares from time to time, based upon instructions from us (including any price or size limits or other customary parameters or conditions we may impose). We will pay B. Riley Securities a commission of 3.0% of the gross sales price per share sold under the Sales Agreement.
We are not obligated to sell any shares under the Sale Agreement. The offering of shares pursuant to the Sale Agreement will terminate upon the earlier to occur of (i) the issuance and sale, through B. Riley Securities, of all of the shares subject to the Sales Agreement and (ii) termination of the Sale Agreement in accordance with its terms.
During the 12 months ended December 31, 2021, we sold an aggregate of 235,722 shares of common stock under the ATM Facility, resulting in net proceeds of approximately $1,984,000 after payment of commissions to B. Riley Securities and other expenses of $66,000. During the nine months ended September 30, 2022, no shares were sold under the ATM Facility.
Critical Accounting Policies
Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when one of our customers contracts with us for a product and related engineering services fees for customizing that product for our customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment. Judgment may also be required to determine the SSP for each distinct performance obligation identified, although we generally structure our contracts such that performance obligations and pricing for each performance obligation are specifically addressed. We currently have no outstanding contracts with multiple performance obligations; however, we recently negotiated a contract that may include multiple performance obligations in the future.
Judgment is also required to determine when control of products passes from us to our distributors, as well as the amounts of product that may be returned to us. Our products are sold with a right of return, and we may provide other credits or incentives to our customers, which could result in variability when determining the amount of revenue to recognize. At the end of each reporting period, we use product returns history and additional information that becomes available to estimate returns and credits. We do not recognize revenue if it is probable that a significant reversal of any incremental revenue would occur.
Finally, judgment is required to determine the amount of unbilled license fees at the end of each reporting period.
See Note 2 – Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion of critical accounting policies and discussion of estimates.
There have been no other changes from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2022. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any pending legal proceedings. From time to time, we may become subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including, but not limited to, employee, customer and vendor disputes.
Item 1A. Risk Factors
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 6. Exhibits
| * | Filed or furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NEONODE INC. | ||
| Date: November 10, 2022 | By: | /s/ Fredrik Nihlén |
| Fredrik Nihlén | ||
| Chief Financial Officer, | ||
| (Principal Financial and Accounting Officer) | ||
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