Neonode Inc. 10-Q

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. 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 COVID-19 pandemic (including the emergence of COVID-19 variants), 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, 2020 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, 2020 included in our 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, gesture sensing, 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, and gesture sensing products and solutions using our zForce technology platform, and our scene analysis solutions using our MultiSensing technology platform. We offer our solutions to customers in many different markets and segments including, but not limited to, consumer electronics, office equipment, automotive, industrial automation, medical, military and avionics.. License Sales We license our zForce technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who embed our technology into products they develop, manufacture and sell. Since 2010, our licensing customers have sold approximately 83 million devices that use our patented technology. As of September 30, 2021, we had 35 valid technology license agreements with global OEMs, Original Design Manufacturers (“ODMs”) and Tier 1 suppliers. Our licensing customer base is primarily in the automotive and printer segments. Thirteen of our licensing customers are currently shipping products that embed our technology. We anticipate current customers will continue product shipments throughout the remainder of 2021 and in future years. We also anticipate new customers will initiate product shipments of new products incorporating our zForce and MultiSensing technologies as they complete final product development and release cycles, which typically take between 6 months to 36 months. We earn our license fees on a per unit basis when our customers ship products using our technology. 26 Product Sales In addition to our technical solutions business, we design and manufacture touch sensor modules (“TSMs”) that incorporate our patented technology. We sell our embedded sensors components to OEMs, ODMs and Tier 1 suppliers for use in their products. We utilize a robotic manufacturing process designed specifically for our components. Our TSMs are commercial-off-the-shelf products based on a technology platform and provide hardware touch, gesture and object sensing solutions that, paired with our technology licensing platform, 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. Our product offerings also include a consumer product, AirBar. As a plug and play accessory, AirBar enables touch and gesture functionality for notebook computers and other devices. AirBar is powered by our TSM technology. We have no current plans to develop new Neonode branded products for the consumer markets. Non-recurring Engineering Services Sales We also offer engineering consulting services to our licensing and TSM customers 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 of our standard products or support during the development and initial manufacturing phase for their products using our technology. Impact of COVID-19 On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Our near-term growth and overall business has been and is continuing to be adversely impacted by COVID-19 and we expect it will continue to be impacted by COVID-19 and the emergence of new COVID-19 variants and their 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 licensed products, COVID-19 has negatively impacted some of our customers’ businesses and their sales volumes, which, in turn, has impacted our business. We are experiencing challenges in obtaining deliveries of components needed to manufacture our TSMs and we may have difficulties delivering our products to our customers in time and at a reasonable cost. Our operations were impacted as we paused business-related travel and our employees to a large extent still work remotely. The extent of the COVID-19 pandemic’s impact on our operational and financial performance going forward will depend on future developments, including the duration, spread and intensity of the pandemic (including the emergence of new COVID-19 variants), and the effectiveness, distribution and acceptance of COVID-19 vaccines, all of which are uncertain and difficult to predict at this time. To mitigate the financial effects of the COVID-19 pandemic, we have undertaken cost-reduction measures. In particular, we implemented a Swedish government-backed program of short-term layoffs that resulted in the reduction of staff working hours by 20% between mid-April to mid-August last year. 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, and our sales may not increase in line with our expectations and our operating margins could fluctuate or decline. 27 Results of Operations A summary of our financial results is as follows (in thousands, except percentages): Three months ended September 30, 2021 vs 2020 2021 2020 Variance in Dollars Variance in Percent Revenue: License fees $ 821 $ 1,207 $ (386 ) (32.0 )% Percentage of revenue 85.3 % 80.7 % Products 136 284 (148 ) (52.1 )% Percentage of revenue 14.1 % 19.0 % Non-recurring engineering $ 5 $ 4 $ 1 25.0 % Percentage of revenue 0.5 % 0.3 % Total Revenue $ 962 $ 1,495 $ (533 ) (35.7 )% Cost of Sales: Products $ 98 $ 198 $ (100 ) (50.5 )% Percentage of revenue 10.2 % 13.2 % Non-recurring engineering $ 1 $ 3 $ (2 ) (66.7 )% Percentage of revenue 0.1 % 0.2 % Total Cost of Sales $ 99 $ 201 $ (102 ) (50.7 )% Total Gross Margin $ 863 $ 1,294 $ (431 ) (33.3 )% Operating Expense: Research and development $ 1,015 $ 901 $ 114 12.7 % Percentage of revenue 105.5 % 60.3 % Sales and marketing 640 604 36 6.0 % Percentage of revenue 66.5 % 40.4 % General and administrative 1,030 1,535 (505 ) (32.9 )% Percentage of revenue 107.1 % 102.7 % Total Operating Expenses $ 2,685 $ 3,040 $ (355 ) (11.7 )% Percentage of revenue 279.1 % 203.3 % Operating Loss $ (1,822 ) $ (1,746 ) $ (76 ) 4.4 % Percentage of revenue (189.4 )% (116.8 )% Interest expense 3 11 (8 ) (72.7 )% Percentage of revenue 0.3 % 0.7 % Provision (benefit) for income taxes 31 (9 ) 40 (444.4 )% Percentage of revenue 3.2 % 0.6 % Less: net loss attributable to noncontrolling interests $ (135 ) $ 110 $ 25 22.7 % Percentage of revenue 14 % 7.4 % Preferred dividends $ - (33 ) $ 33 - % Percentage of revenue - % 2.2 % Net loss attributable to common shareholders Neonode Inc. $ (1,721 ) $ (1,671 ) $ (50 ) (3.0 )% Percentage of revenue (178.9 )% (111.8 )% Net loss per share attributable to common shareholders Neonode Inc. $ (0.15 ) $ (0.16 ) $ 0.01 (6.3 )% Percentage of revenue 0.0 % 0.0 % 28 Nine months ended September 30, 2021 vs 2020 2021 2020 Variance in Dollars Variance in Percent Revenue: License fees $ 3,474 $ 3,050 $ 424 13.9 % Percentage of revenue 79.9 % 86.0 % Products 837 450 387 86.0 % Percentage of revenue 19.3 % 12.7 % Non-recurring engineering $ 36 $ 47 $ (11 ) (23.4 )% Percentage of revenue 0.8 % 1.3 % Total Revenue $ 4,347 $ 3,547 $ 800 22.6 % Cost of Sales: Products $ 580 $ 306 $ 274 89.5 % Percentage of revenue 13.3 % 8.6 % Non-recurring engineering $ 17 $ 62 $ (45 ) (72.6 )% Percentage of revenue 0.4 % 1.7 % Total Cost of Sales $ 597 $ 368 $ 229 62.2 % Total Gross Margin $ 3,750 $ 3,179 $ 571 18.0 % Operating Expense: Research and development $ 3,536 $ 2,939 $ 597 20.3 % Percentage of revenue 81.3 % 82.9 % Sales and marketing 2,197 1,797 400 22.3 % Percentage of revenue 50.5 % 50.7 % General and administrative 3,264 3,034 230 7.6 % Percentage of revenue 75.1 % 85.5 % Total Operating Expenses $ 8,997 $ 7,770 $ 1,227 15.8 % Percentage of revenue 207.0 % 219.1 % Operating Loss $ (5,247 ) $ (4,591 ) $ (656 ) 14.3 % Percentage of revenue 120.7 % (129.4 )% Interest expense 11 25 (14 ) (56.0 )% Percentage of revenue 0.3 % 0.7 % Provision for income taxes 104 10 94 940.0 % Percentage of revenue 2.4 % 0.3 % Less: net loss attributable to noncontrolling interests $ 416 $ 366 $ 50 13.7 % Percentage of revenue 9.6 % 10.3 % Preferred dividends - (33 ) 33 - % Percentage of revenue - % (0.9 )% Net Loss attributable to Neonode Inc. $ (4,946 ) $ (4,293 ) $ (653 ) 15.2 % Percentage of revenue (113.8 )% (121.0 )% Net Loss per share attributable to Neonode Inc. $ (0.43 ) $ (0.45 ) $ 0.02 (4.4 )% Percentage of revenue 0.0 % 0.0 % Net Revenues All of our sales for the three and nine months ended September 30, 2021 and 2020 were to customers located in the U.S., Europe and Asia. The decrease of (35.7)% in total net revenues for the three months ended September 30, 2021 as compared to the same period in 2020 is mainly explained by component shortage within the printer industry and automotive industry and lock-downs in key areas as a result of the pandemic. For the nine months ended September 30, 2021 as compared to the same period in 2020 we saw an increase of 22.6% in total net revenues, which was related to higher license fees and higher TSM sales, partly offset by a decrease in non-recurring engineering revenues. License Fees Revenues The decrease in license fees revenues for the three months ended September 30, 2021 compared to the same period in 2020 is mostly pandemic-related. The component shortage within the printer industry and automotive industry resulting from the pandemic reduced production volumes of printers and cars equipped with our technology. License fees revenues for the nine months ended September 30, 2021 were higher than those from the same period in 2020 mostly due to licensing fees revenues being depressed as a result of the general economic slow-down associated with the pandemic in the first and second quarters of 2020. 29 Product Revenues The interest for contactless touch is the main driver for our TSM sales, with Asia leading the way as the first adopter of our contactless touch technology. As expected, most of our sales are related to retrofit solutions due to long product development cycles. For the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 we experienced a drop in sales mostly related to new lock-downs in Asia as a result of the pandemic. Non-recurring Engineering Revenues Most of our non-recurring revenues are related to both hardware and software related customization of our TSMs and decreased for the three and nine months ended September 30, 2021 compared to the same periods in 2020. There were no revenues related to Remote Sensing Solutions for the three and nine months ended September 30, 2021. The following tables presents the net revenues by geographical area and revenue stream for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands): Three months ended September 30, 2021 Three months ended September 30, 2020 Amount Percentage Amount Percentage AMER License fees $ 376 98 % $ 453 93 % Products 8 2 % 34 7 % Non-recurring engineering - - % - - % $ 384 100 % $ 487 100 % APAC License fees $ 411 79 % $ 625 76 % Products 108 21 % 194 23 % Non-recurring engineering 4 1 % 6 1 % $ 523 100 % $ 825 100 % EMEA License fees $ 34 62 % $ 129 70 % Products 20 36 % 54 30 % Non-recurring engineering 1 2 % - - % $ 55 100 % $ 183 100 % Nine months ended September 30, 2021 Nine months ended September 30, 2020 Amount Percentage Amount Percentage AMER License fees $ 1,534 92 % $ 1,257 93 % Products 125 8 % 79 6 % Non-recurring engineering - - % 8 1 % $ 1,659 100 % $ 1,344 100 % APAC License fees $ 1,716 73 % $ 1,517 87 % Products 589 25 % 211 12 % Non-recurring engineering 35 1 % 15 1 % $ 2,340 100 % $ 1,743 100 % EMEA License fees $ 224 65 % $ 276 60 % Products 123 35 % 156 34 % Non-recurring engineering 1 - % 28 6 % $ 348 100 % $ 460 100 % 30 Gross Margin Our combined total gross margin was 90% and 86% for the three and nine months ended September 30, 2021, respectively, and 87% and 90% for the three and nine months ended September 30, 2020, respectively. For the three and nine months ended September 30, 2021, gross margin related to TSM sales was 28% and 31%, respectively, compared to 30% and 31% for the same periods in 2020, 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, 2021 were $1.0 million and $3.5 million, respectively. For the same periods in 2020, the R&D expenses were $0.9 million and $2.9 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 increases were primarily related to higher staff expenses for the three and nine months ended September 30, 2021, which can be explained by the reduced working hours associated with the governmental pandemic related support program in Sweden during 2020. Sales and Marketing Sales and marketing expenses for the three and nine months ended September 30, 2021 were $0.6 million and $2.2 million, respectively. The sales and marketing costs for the same periods in 2020 were $0.6 million and $1.8 million, respectively. The increases for the three and nine months ended September 30, 2021 were primarily due to higher staff expenses and the Swedish governmental support program during 2020 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, 2021 were $1.0 million and $3.3 million, respectively. The G&A expenses for the three and nine months ended September 30, 2020 were $1.5 million and $3.0 million, respectively. The decrease for the three months ended September 2021 is primarily due to one-time legal costs in 2020. The increase for the nine months ended September 30, 2021 was primarily due to higher costs related to staff and in-house consultants in combination with higher professional fees. Income Taxes Our effective tax rate was (2)% and 2% for the three and nine months ended September 30, 2021, respectively, and 1% and (0)% for the three and nine months ended September 30, 2020, respectively. The positive tax rate for the nine months ended September 30, 2021 and three months ended September 30, 2020 is due to decreased withholding taxes from sales. The negative tax rate for the three months ended September 30, 2021 and the nine months ended September 30, 2020 is due to increased withholding taxes from sales. We recorded valuation allowances for the three and nine-month periods ended September 30, 2021 and September 30, 2020 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 $1.7 million and $4.9 million for the three and nine months ended September 30, 2021, respectively, and $1.6 million and $4.3 million for the same periods in 2020, respectively. 31 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, 2020, the guaranteed amount was decreased from $210,000 to $100,000. 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, 2021, we had made no payments to TI under the NN1002 Agreement. Operating Leases We did not renew our lease for the office space located at 2880 Zanker Road, San Jose, CA 95134 in August 2020 and we now operate 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 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 can be terminated with nine months’ written notice prior to the termination date. In January 2015, our subsidiary Neonode Korea Ltd. entered into a lease agreement located at B-1807, Daesung D-Polis. 543-1, Seoul, South Korea. The lease was terminated on December 18, 2020 and we now only have a virtual office in South Korea. 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, 2021, we recorded approximately $157,000 and $501,000 for rent expense, respectively. For the three and nine months ended September 30, 2020, we recorded approximately $154,000 and $435,000 for rent expense, respectively. See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussions. 32 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. Between the second and the fourth quarters of 2016, we entered into six leases for component production equipment. Under the terms of five of the lease agreements entered into during 2016, we are obligated to purchase the equipment at the end of the original three to five years lease terms for 5-10% of the original purchase price of the equipment. In accordance with relevant accounting guidance these five 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 these five leases is currently approximately 3% per annum. The additional lease entered into during 2016 is a hire-purchase agreement that requires the equipment 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 this lease is approximately 3% per annum. In 2017, we entered into one 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 approximately 1.5% per annum. In 2018, we entered into one 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 approximately 1.5% 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 sensor products, including AirBar; ● 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, 2021, we had cash of $5.5 million compared to $10.5 million as of December 31, 2020. Working capital (current assets less current liabilities) was $6.1 million as of September 30, 2021, compared to $10.4 million as of December 31, 2020. 33 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. Net cash used in operating activities for the nine months ended September 30, 2020 was $3.7 million and was primarily the result of a net loss of $4.6 million and approximately $0.8 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use assets. Accounts receivable and unbilled revenues decreased by approximately $1.0 million as of September 30, 2021 compared to December 31, 2020. This was due to estimated lower revenues. Inventory increased by approximately $1.2 million during the nine months ended September 30, 2021 compared to December 31, 2020, primarily due to purchase of components to secure production in line with estimated product sales. Deferred revenues decreased by approximately $1,000 during the nine months ended September 30, 2021 compared to December 31, 2020. During the nine months ended September 30, 2020 we purchased approximately $17,000 of property and equipment, primarily furniture and test equipment. Net cash used in financing activities of $0.2 million during the nine months ended September 30, 2021 was the result of principal payments on finance leases and proceeds from issuance of preferred and common stock, net of offering. Net cash provided by financing activities of $13.7 million during the nine months ended September 30, 2020 was the result of proceeds from short-term borrowings of $1.0 million and proceeds of issuance of preferred and common stock net of offering costs of $13.5 million, offset by principal payments on short-term borrowings and finance leases of $742,000. We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $1.7 million and $4.9 million and $1.6 million and $4.3 million for the three and nine months ended September 30, 2021 and 2020, respectively, and had an accumulated deficit of approximately $201.1 million and $196.2 million as of September 30, 2021 and December 31, 2020, respectively. In addition, operating activities used cash of approximately $5.0 million and $3.7 million for the nine months ended September 30, 2021 and 2020, respectively. 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 would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern. In October 2021, the Company received aggregate net proceeds of approximately $1.4 million from a registered direct offering and sales under its at the market offering program, as described below. In the future, we may require sources of capital in addition to cash on hand 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 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. 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. 34 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 three and nine months ended September 30, 2021, we sold an aggregate of 93,553 shares of common stock under the ATM Facility, resulting in net proceeds of approximately $593,000 after payment of commissions to B. Riley Securities of $18,000. During October 2021 we sold an aggregate of 142,169 shares under the ATM Facility with aggregate net proceeds to us of $1,396,000 after payment of commissions to B. Riley Securities of $43,000. Critical Accounting Policies Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when the contract covers 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 stand-alone selling price 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. 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. 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, 2020. 35 Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.