Neonode Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report. All information in the following discussion and analysis present the results of continuing operations and exclude amounts related to discontinued operations for all periods presented unless otherwise stated. Overview Neonode provides advanced optical sensing solutions for touch, contactless touch, and gesture sensing. We also provide software solutions for machine perception that feature advanced machine learning algorithms to detect and track persons and objects in video streams from cameras and other types of imagers. We base our contactless touch, touch, and gesture sensing products and solutions using our zForce technology platform and our machine perception 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. Recent Accounting Pronouncements The information set forth under Note 1 to the consolidated financial statements is incorporated herein by reference. 16 Critical Accounting Estimates Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires us to make certain estimates, judgments and assumptions that can affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure. Critical accounting estimates are those estimates that involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on our financial condition or results of operations. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. To the extent that there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. We have not identified any critical accounting estimate. Refer to Note 1 of our consolidated financial statements for more discussion of our significant accounting policies. Results of Operations The following table provides our consolidated results for the continuing operations: Years ended December 31, Variance in Variance in (in thousands) 2024 2023 Dollars Percent Revenues: License fees $ 2,687 $ 3,803 $ (1,116 ) (29.3 )% Percentage of revenue 86.5 % 99.3 % Non-recurring engineering 421 26 395 1,519.2 % Percentage of revenue 13.5 % 0.7 % Total revenues $ 3,108 $ 3,829 $ (721 ) (18.8 )% Cost of revenues: Non-recurring engineering 116 12 104 866.7 % Percentage of revenue 3.7 % 0.3 % Total cost of revenues $ 116 $ 12 $ 104 866.7 % Gross margin $ 2,992 $ 3,817 $ (825 ) (21.6 )% Operating expenses: Research and development $ 3,444 $ 3,833 $ (389 ) (10.1 )% Percentage of revenue 110.8 % 100.1 % Sales and marketing 2,328 2,455 (127 ) (5.2 )% Percentage of revenue 74.9 % 64.1 % General and administrative 3,767 3,266 501 15.3 % Percentage of revenue 121.2 % 85.3 % Total operating expenses $ 9,539 $ 9,554 $ (15 ) (0.2 )% Percentage of revenue 306.9 % 249.5 % Operating loss $ (6,547 ) $ (5,737 ) $ (810 ) 14.1 % Percentage of revenue (210.6 )% (149.8 )% Other income, net 687 736 (49 ) (6.7 )% Percentage of revenue 22.1 % 19.2 % Provision for income taxes 15 115 (100 ) (87.0 )% Percentage of revenue 0.5 % 3.0 % Loss from continuing operations $ (5,875 ) $ (5,116 ) $ (759 ) 14.8 % Percentage of revenue (189.0 )% (133.6 )% Loss per share from continuing operations $ (0.37 ) $ (0.33 ) $ (0.04 ) 12.1 % Revenues All of our sales for the years ended December 31, 2024 and 2023 were to customers located in the United States, Europe and Asia. Total net revenues were $3.1 million and $3.8 million for the years ended December 31, 2024 and 2023, respectively. The decrease in total net revenues by 18.8% for the year ended December 31, 2024 as compared to 2023 was caused by lower revenues from license revenues offset by higher revenues from non-recurring engineering. 17 The following table present the net revenues distribution by business area and revenue stream: Years ended December 31, 2024 2023 (in thousands) Amount Percentage Amount Percentage Automotive License fees $ 949 77.9 % $ 1,560 98.8 % Non-recurring engineering 270 22.1 % 19 1.2 % $ 1,219 100.0 % $ 1,579 100.0 % IT & Industrial License fees $ 1,738 92.0 % $ 2,243 99.7 % Non-recurring engineering 151 8.0 % 7 0.3 % $ 1,889 100.0 % $ 2,250 100.0 % The following table presents disaggregated revenues by revenue stream: Years ended December 31, 2024 2023 (in thousands) Amount Percentage Amount Percentage Net license revenues from amusement $ 150 4.8 % $ - - % Net license revenues from automotive 948 30.5 % 1,559 40.7 % Net license revenues from consumer electronics 1,589 51.2 % 2,244 58.6 % Net non-recurring engineering services revenues 421 13.5 % 26 0.7 % $ 3,108 100.0 % $ 3,829 100.0 % Revenues from license fees were $2.7 million and $3.8 million for the years ended December 31, 2024 and 2023, respectively. The decreased of 29.3% in 2024 as compared to 2023 were mainly due to lower demand for our legacy customers products within printer and passenger car touch applications offset by revenues from new licensing customers. Revenues from non-recurring engineering revenues were $0.4 million and $26,000 for the years ended December 31, 2024 and 2023. Our non-recurring engineering revenues are related to application development and proof-of-concept projects related to our zForce and MultiSensing technology platforms. The increase of 1,519.2% in 2024 compared to 2023 was mainly attributable to the DMS project with the commercial vehicle OEM customer that was announced at the end of 2023 and the new agreement with NEXTY Electronics for an evolution of our licensable Touch Sensor Module (“TSM”) technology. Gross Margin Our gross margin was 96.3% in 2024 compared to 99.7% in 2023. The decrease in 2024 compared to 2023 were due to more NRE projects. Our cost of revenues includes the direct cost of production of certain customer prototypes, costs of engineering personnel, engineering consultants to complete the engineering design contracts. Research and Development R&D expenses for 2024 and 2023 were $3.4 million and $3.8 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 decrease of 10.1% in 2024 compared to 2023 was primarily related to lower payroll and related costs. 18 Sales and Marketing Sales and marketing expenses for were $2.3 million and $2.5 million, respectively. Sales and marketing expenses in 2024 decreased 5.2% compared to 2023 primarily due to lower cost for personnel and related costs offset by higher cost for marketing. There is no non-cash stock-based compensation included in sales and marketing expenses for the year ended December 31, 2024 compared to $8,000 for the year ended December 31, 2023. Our sales and marketing activities focus on OEM, ODM and Tier 1 customers who will license our technology. General and Administrative General and administrative (“G&A”) expenses for 2024 and 2023 were $3.8 million and $3.3 million, respectively. The increase of 15.3% from 2023 was primarily due to higher for cost payroll and related costs and professional fees. There is approximately $3,000 of non-cash stock-based compensation included in G&A expenses for the year ended December 31, 2024 compared to $50,000 for the year ended December 31, 2023. Other Income Other income for the year ended December 31, 2024 was $0.7 compared to $0.7 million for the year ended December 31, 2023. The other income for 2024 and 2023 was mainly related to interest income earned. Income Taxes Our effective tax rate was (0.3)% for the year ended December 31, 2024 and (2.3)% for the year ended December 31, 2023. We recorded valuation allowances in 2024 and 2023 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 of $5.9 million for the year ended December 31, 2024, compared to a net loss of $5.1 million for the year ended December 31, 2023. 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; ● 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 December 31, 2024, we had cash and cash equivalents of $16.4 million, as compared to $16.2 million as of December 31, 2023. 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 Annual Report. Working capital (current assets less current liabilities) was $16.1 million as of December 31, 2024, compared to working capital of $16.1 million as of December 31, 2023. Net cash used in operating activities for combined continuing and discontinued operations for the year ended December 31, 2024 was $5.6 million and was primarily the result of a net loss of $6.4 million and approximately $0.5 million in non-cash operating expenses, comprised of stock-based compensation expense, inventory impairment loss, depreciation and amortization and amortization of operating lease right-of-use assets, and changes in operating assets and liabilities of $0.3 million. Net cash used in operating activities for the year ended December 31, 2023 was $6.3 million and was primarily the result of a net loss of $10.1 million and approximately $3.8 million in non-cash operating expenses, comprised of stock-based compensation expense, inventory impairment loss, depreciation and amortization and amortization of operating lease right-of-use assets, and changes in operating assets and liabilities of $25,000. 19 Accounts receivable and unbilled revenues for combined continuing and discontinued operations decreased by approximately $134,000 as of December 31, 2024 compared to December 31, 2023, due to lower revenues. Inventory for discontinued operations increased by approximately $223,000 as of December 31, 2024, not considering the $357,000 non-cash impairment charge recorded during 2024, compared to December 31, 2023. Accounts payable and accrued expenses for combined continuing and discontinued operations decreased approximately $342,000 as of December 31, 2024 compared to December 31, 2023. For the year ended December 31, 2024, we purchased $37,000 of fixed assets, consisting primarily of ERP software. For the year ended December 31, 2023, we purchased $123,000 of fixed assets, consisting primarily of manufacturing equipment. Net cash provided by financing activities for the year ended December 31, 2024 was $5.8 million and was primarily the result of issuance of common stock under the ATM Facility (as defined and described below). Net cash provided by financing activities for the year ended December 31, 2023 was $7.8 million and was primarily the result of issuance of common stock under the ATM Facility (as defined and described below). We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses for combined continuing and discontinued operations of approximately $6.5 million and $10.1 million for the years ended December 31, 2024 and 2023, respectively, and had an accumulated deficit of approximately $224.1 million and $217.6 million as of December 31, 2024 and 2023, respectively. In addition, operating activities used cash of approximately $5.6 million and $6.3 million for the years ended December 31, 2024 and 2023, respectively. The 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 negative cash flows from operations and determined that the Company’s current operating plan and sources of liquidity would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern. Management has prepared an operating plan and believes that the Company has sufficient cash to meet its obligations as they come due for a year from the date the financial statements were issued. During the year ended December 31, 2024, we sold an aggregate of 1,423,441 of our common stock under the ATM Facility with aggregate net proceeds to us of $5.8 million, after payment of commissions to Ladenburg and other expenses of $0.2 million. In the future, we may require sources of capital in addition to cash on hand and our Ladenburg ATM Facility 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 and the South Korean Won. 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 or South Korean Won will impact our future operating results. 20 Contractual Obligation and Off-Balance Sheet Arrangements We do not have any 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. Operating Leases Neonode Inc. operates solely through a virtual office in California. 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 has been extended and is valid through November 2026. It is extended on a yearly basis unless written notice is provided nine months prior to the expiration date. For the years ended December 31, 2024 and 2023, we recorded approximately $449,000 and $428,000, respectively, for rent expense in continuing operations. Equipment Subject to Finance Leases In 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. 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 Application Specific Integrated Circuit (“ASIC”). 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 2,000,000 ASICs sold. As of December 31, 2024, we had made no payments to TI under the NN1002 Agreement. At-the-Market Offering Program On May 10, 2021, we entered into an At Market Issuance Sales Agreement (the “B. Riley Sales Agreement”) with B. Riley Securities, Inc. (“B. Riley Securities”) with respect to an “at the market” offering program (the “B. Riley 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, in any method permitted that is deemed an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended. On May 29, 2024, we terminated the B. Riley Sales Agreement with B. Riley Securities. On June 4, 2024, we entered into an At The Market Offering Agreement (the “Ladenburg Sales Agreement”) with Ladenburg Thalmann & Co. Inc. (“Ladenburg”) with respect to an “at the market” offering program (the “Ladenburg ATM Facility”), under which we may, from time to time, in our sole discretion, issue and sell through Ladenburg, acting as agent or principal, up to approximately $10 million of shares of our common stock. 21 Pursuant to the Ladenburg Sales Agreement, we may sell the shares through Ladenburg 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. Ladenburg 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 Ladenburg a commission of 3.0% of the gross sales price per share sold under the Ladenburg Sales Agreement. We are not obligated to sell any shares under the Ladenburg Sales Agreement. The offering of shares pursuant to the Ladenburg Sales Agreement will terminate upon the earlier to occur of (i) the issuance and sale, through Ladenburg, of all of the shares of our common stock subject to the Ladenburg Sales Agreement and (ii) termination of the Ladenburg Sales Agreement in accordance with its terms. During the year ended December 31, 2024, we sold an aggregate of 1,423,441 shares of our common stock under the Ladenburg ATM Facility with aggregate net proceeds to us of $5.8 million, after payment of commissions to Ladenburg and other expenses of $0.2 million. During the year ended December 31, 2023, we sold an aggregate of 903,716 shares of our common stock under the ATM Facility with aggregate net proceeds to us of $7.9 million, after payment of commissions to B. Riley Securities and other expenses of $0.2 million. Future Sources of Liquidity In the future, we may require sources of capital in addition to cash on hand and our Ladenburg ATM Facility 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 and the South Korean Won. 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 or South Korean Won will impact our future operating results. Patent Assignment On May 6, 2019, the Company assigned a portfolio of patents to Aequitas Technologies LLC (“Aequitas”), an unrelated third party. The assignment provides the Company the right to share the potential net proceeds generated from possible licensing and monetization program that Aequitas may enter into. Under the terms of the assignment, net proceeds mean gross proceeds less out of pocket expenses and legal fees paid by Aequitas. The Company’s share would also be net of the Company’s own fees and expenses, including a brokerage fee payable by the Company in connection with the original assignment to Aequitas. As reflected in publicly available court filings, on June 8, 2020, Neonode Smartphone LLC, an unrelated third party that is a subsidiary of Aequitas (“Aequitas Sub”), filed complaints against Apple Inc. (“Apple”) (assigned docket number 6:20-cv-00505-ADA), and Samsung Electronics Co., Ltd., and Samsung Electronics America, Inc. (collectively, “Samsung”) (assigned docket number 6:20-cv -00507-ADA; see also 6:23-cv-00204-ADA), in the Western District of Texas alleging infringement of two patents, U.S. Patent Nos. 8,095,879 and 8,812,993. 22 U.S. Patent No. 8,095,879 In November 2020, Samsung and Apple filed a petition for inter partes review of certain challenged claims in U.S. Patent No. 8,095,879, assigned proceeding number IPR2021-00144. As reflected in publicly available records, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (“PTAB”) denied the petition in June 2021. Apple and Samsung filed a request for rehearing, which was ultimately granted on December 3, 2021, and inter partes review was instituted. The court case against Apple was subsequently transferred to the Northern District of California in November 2021 and assigned docket number 3:21-cv-08872, which was subsequently stayed pending the PTAB’s decision. The case against Samsung in the Western District of Texas was likewise stayed pending PTAB ruling. Meanwhile, in June 2021, Google LLC (“Google”) filed a separate petition with the PTAB seeking inter partes review of certain challenged claims in U.S. Patent No. 8,095,879, assigned proceeding number IPR2021-01041. As reflected in publicly available records, the PTAB granted the petition in January 2022 The PTAB found in favor of Aequitas Sub and against Apple and Samsung in December 2022 in connection with the inter partes review proceedings, ruling that none of the challenged claims were unpatentable. The PTAB similarly held in favor of Aequitas Sub and against Google in January 2023. Apple and Samsung appealed to the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”) in February 2023 (assigned docket number 23-1464, and Google filed its appeal in the Federal Circuit in March 2023 (assigned docket number 23-1638. On July 18, 2024, the Federal Circuit affirmed the PTAB’s rulings, found in favor of Aequitas Sub and against Google and Apple/Samsung, and held that none of the challenged claims in U.S. Patent No. 8,095,879 are unpatentable. As reflected in publicly available court records, on July 14, 2023, the United States District Court for the Western District of Texas entered its final claim constructions in the Samsung case (docket number 6:20-cv-507), and based on those claim constructions, entered judgment in favor of Samsung and against Aequitas Sub. Aequitas Sub filed an appeal with the Federal Circuit in August 2023 (assigned docket number 23-2304), and oral argument was held on June 6, 2024 As reflected on the public court docket, on August 20, 2024, the Federal Circuit issued its written opinion, reversing and remanding the case to the Western District of Texas for further proceedings. Specifically, the Federal Circuit held that claim 1 of the ‘879 patent was not indefinite. Mandate issued returning the case to the Western District of Texas on September 26, 2024. On November 5, 2024, Samsung filed its Answer to the Complaint. The case against Apple remains pending in the United States District Court for the Northern District of California. On November 13, 2024, the Court granted the parties’ motion to continue the stay pending resolution of the Samsung case pending in the Western District of Texas (case number 20-cv-00507-ADA) by settlement or final judgment. U.S. Patent No. 8,812,993 Based on information in public records, in November 2020, Samsung and Apple collectively sought inter partes review of certain claims in U.S. Patent No. 8,812,993 (assigned proceeding number IPR2021-00145). In June 2022, the PTAB invalidated U.S. Patent No. 8,812,993, which Aequitas Sub appealed to the Federal Circuit in August 2022 (assigned docket number 22-2134). The Federal Circuit affirmed the PTAB’s decision on June 11, 2024. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 23