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 (this “Quarterly Report”) 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 our history of losses since inception, our dependence on a limited number of customers, our reliance on our customers’ ability to design, manufacture 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, our ability to obtain adequate capital to fund future operations, and general economic conditions, including inflation, or other effects related to the COVID-19 pandemic or future pandemics or epidemics, or geopolitical conflicts such as the ongoing war in Ukraine. 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, 2022 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, 2022 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 machine perception 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 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. License Sales We license our zForce technology to OEMs and Tier 1 suppliers who embed our technology into products they develop, manufacture and sell. Since 2010, our licensing customers have sold approximately 90 million devices that use our patented technology. As of March 31, 2023, we had 35 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 2023 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 we may use other business models as well. 23 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 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. 24 Results of Operations A summary of our financial results is as follows (in thousands, except percentages): Three months ended March 31, 2023 vs 2022 2023 2022 Variance in Dollars Variance in Percent Revenues: License fees $ 1,148 $ 1,104 $ 44 4.0 % Percentage of revenue 91.7 % 83.8 % Products 102 147 (45 ) (30.6 )% Percentage of revenue 8.1 % 11.2 % Non-recurring engineering 3 67 (64 ) (95.5 )% Percentage of revenue 0.2 % 5.1 % Total Revenue $ 1,253 $ 1,318 $ (65 ) (4.9 )% Cost of revenues: Products $ 47 $ 51 $ (4 ) (7.8 )% Percentage of revenue 3.8 % 3.9 % Non-recurring engineering - 9 (9 ) (100.0 )% Percentage of revenue - % 0.7 % Total cost of revenues $ 47 $ 60 $ (13 ) (21.7 )% Total gross margin $ 1,206 $ 1,258 $ (52 ) (4.1 )% Operating expenses: Research and development $ 802 $ 1,023 $ (221 ) (21.6 )% Percentage of revenue 64.0 % 77.6 % Sales and marketing 592 616 (24 ) (3.9 )% Percentage of revenue 47.2 % 46.7 % General and administrative 1,384 1,010 374 37.0 % Percentage of revenue 110.5 % 76.6 % Total operating expenses $ 2,778 $ 2,649 $ 129 4.9 % Percentage of revenue 221.7 % 201.0 % Operating loss $ (1,572 ) $ (1,391 ) $ (181 ) 13.0 % Percentage of revenue (125.5 )% (105.5 )% Other income (expense) 158 (2 ) 160 (8,000.0 )% Percentage of revenue 12.6 % (0.2 )% Provision for income taxes 11 44 (33 ) (75.0 )% Percentage of revenue 0.9 % 3.3 % Less: net loss attributable to noncontrolling interests - 57 (57 ) (100.0 )% Percentage of revenue - % 4.3 % Net loss attributable to Neonode Inc. $ (1,425 ) $ (1,380 ) $ (45 ) 3.3 % Percentage of revenue (113.7 )% (104.7 )% Net loss per share attributable to Neonode Inc. $ (0.09 ) $ (0.10 ) $ 0.01 (10.0 )% 25 Net Revenues All of our sales for the three months ended March 31, 2023 and 2022 were to customers located in the United States, Europe and Asia. For the three months ended March 31, 2023, total net revenues decreased 4.9% compared to the same period in 2022. License Fees For the three months ended March 31, 2023, license fee revenues increased 4.0% compared to the same period in 2022. The increase was primarily the result of an increase in volume as the global supply chain challenges related to semiconductor supply shortages that hampered our printer and automotive customers’ production and sales for the last two years are beginning to improve. Product Sales Revenues from product sales were $0.1 million for the three month ended March 31, 2023 compared to $0.1 million for the same period in 2022. The first quarter is typically slow due to the high number of holidays, but the decrease is also due to high inventory levels at some key customers after purchases during the fourth quarter 2022. 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 decreased for the three months ended March 31, 2023 compared to the same period in 2022. The following tables presents the net revenues by geographical area and revenue stream for the three months ended March 31, 2023 and 2022 (dollars in thousands): Three months ended March 31, 2023 Three months ended March 31, 2022 Amount Percentage Amount Percentage AMER License fees $ 448 95 % $ 481 98 % Products 23 5 % 12 2 % Non-recurring engineering - - % - - % $ 471 100 % $ 493 100 % APAC License fees $ 611 97 % $ 567 88 % Products 20 3 % 57 9 % Non-recurring engineering 3 - % 17 3 % $ 634 100 % $ 641 100 % EMEA License fees $ 89 60 % $ 56 30 % Products 59 40 % 78 43 % Non-recurring engineering - - % 50 27 % $ 148 100 % $ 184 100 % 26 Gross Margin Our combined total gross margin was 96% for the three months ended March 31, 2023 and 95% for the three months ended March 31, 2022. For the three months ended March 31, 2023, gross margin related to products was 54% compared to 65% for the same period in 2022. 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 months ended March 31, 2023 were $0.8 million. For the same period in 2022, the R&D expenses were $1.0 million. 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 was primarily related to lower personnel and related costs. Sales and Marketing Sales and marketing expenses for the three months ended March 31, 2023 were $0.6 million, the same as for the same period in 2022. 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 months ended March 31, 2023 were $1.4 million. The G&A expenses for the three months ended March 31, 2022 were $1.0 million. The increase was primarily related to higher professional fees and higher personnel and related costs. Income Taxes Our effective tax rate was (1)% for the three months ended March 31, 2023 and (3)% for the three months ended March 31, 2022. The negative tax rate is due to withholding taxes from sales. We recorded valuation allowances for the three-month period ended March 31, 2023 and March 31, 2022 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 $1.4 million for the three months ended March 31, 2023 and $1.4 million for the same period in 2022. 27 Contractual Obligations 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. 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 March 31, 2023, 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, California 95134 in August 2020 and Neonode Inc. now 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 2023. It is extended on a yearly basis unless written notice is provided 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. It is extended on a three-year basis unless written notice is given nine months prior to the expiration date. On September 1, 2019 we entered into a lease of office space located at the 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 months ended March 31, 2023, we recorded approximately $122,000 for total rent expense. For the three months ended March 31, 2022, we recorded approximately $161,000 for total rent expense. See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussions. 28 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. In 2021, we terminated one finance lease by purchasing the related equipment and extended one finance lease for an additional two years. During 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 March 31, 2023, we had cash of $21.0 million compared to $14.8 million as of December 31, 2022. 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 Report. Working capital (current assets less current liabilities) was $25.6 million as of March 31, 2023, compared to $19.1 million as of December 31, 2022. 29 Net cash used in operating activities for the three months ended March 31, 2023 was $1.7 million and was primarily the result of a net loss of $1.4 million and approximately $0.1 million in non-cash operating expenses, comprised of stock-based compensation expense, depreciation and amortization and amortization of operating lease right-of-use assets, partly offset by changes in operating assets and liabilities of $(0.3) million. Net cash used in operating activities for the three months ended March 31, 2022 was $2.3 million and was primarily the result of a net loss of $1.4 million and approximately $0.2 million in non-cash operating expenses, comprised of stock-based compensation expense, depreciation and amortization and amortization of operating lease right-of-use assets, partly offset by changes in operating assets and liabilities of $(1.0) million. Accounts receivable and unbilled revenues increased by approximately $0.5 million as of March 31, 2023 compared to December 31, 2022. This was mainly due to the timing of receipts of customer payments. Inventory increased by approximately $11,000 during the three months ended March 31, 2023 compared to December 31, 2022. Net cash provided by financing activities of $7.8 million during the three months ended March 31, 2023 was the result of issuance of common stock under the ATM facility. Net cash used in financing activities of $61,000 during the three months ended March 31, 2022, was the result of principal payments on the finance lease obligation. We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $1.4 million and $1.4 million for the three months ended March 31, 2023 and 2022, respectively, and had an accumulated deficit of approximately $208.9 million and $207.5 million as of March 31, 2023 and December 31, 2022, respectively. In addition, operating activities used cash of approximately $1.7 million and $2.3 million for the three months ended March 31, 2023 and 2022, 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. 30 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 year ended December 31, 2022, we sold an aggregate of 886,065 shares of common stock under the ATM Facility, resulting in net proceeds of approximately $4,686,000 after payment of commissions to B. Riley Securities and other expenses of $167,000. During the three month ended March 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 $7,866,000, after payment of commissions to B. Riley Securities and other expenses of $244,000. 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, 2022. 31 Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.