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. 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. 25 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. 26 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 )% 27 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. 28 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 % 29 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. 30 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. 31 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. 32 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. 33 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. 34 Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.