Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be
read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report.
Overview
Our company provides advanced optical sensing solutions
for touch, contactless touch, and gesture sensing. We also provide software solutions for machine perception that feature advanced machine
learning algorithms to detect and track persons and objects in video streams 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.
In 2010, we began licensing 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 95 million devices that use our technology. In 2017, we augmented our licensing
business and began manufacturing and shipping touch sensor modules (“TSMs”) that incorporate our patented technology. We sell
these TSMs to OEMs, Original Design Manufacturers (“ODMs”), and systems integrators for use in their products.
As of December 31, 2023, we had 34 valid technology
license agreements with global OEMs, ODMs and Tier 1 suppliers. As of December 31, 2022, that number was 35. During the year ended December
31, 2023, we had 10 customers using our touch technology in products that were being shipped to their customers. The majority of our license
fees earned in 2023 and 2022 were from customer shipments of printers.
As of December 31, 2023, we had nine agreements with value added resellers
(“VARs”) for integration of our TSMs in the products they offer to global OEMs, ODMs and systems integrators. In addition
to this, we distribute our TSMs through Digi-Key Corporation, Serial Microelectronics HK Ltd, and Nexty Electronics Corporation. During
2023, our three distributors sold and shipped approximately 7,400 TSMs and related development kits.
15
During 2023 and 2022, we continued to focus our
efforts on maintaining our current licensing customers and achieving design wins for new products both with current and future customers.
In parallel we continued to market and sell TSMs directly and indirectly via partners. We made investments enhancing the design and improving
the production yield of our TSMs and improving the related firmware and configuration tools software platforms. We also made investments
to expand our partner networks for sales and distribution of TSMs.
On December 12, 2023, the Company announced a new,
sharpened strategy with full focus on the licensing business. Consequently, we will phase out the TSM product business during 2024 through
licensing of the TSM technology to strategic partners or outsourcing.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include
the accounts of Neonode Inc. and its wholly owned subsidiaries, as well as Pronode Technologies AB (Sweden), wholly owned subsidiary of
Neonode Technologies AB, one of our wholly owned subsidiaries. The noncontrolling interests are reported below net loss including noncontrolling
interests under the heading “Net loss attributable to noncontrolling interests” in the consolidated statements of operations,
below comprehensive loss under the heading “Comprehensive loss attributable to noncontrolling interests” in the consolidated
statements of comprehensive loss and shown as a separate component of stockholders’ equity in the consolidated balance sheets. See
“Noncontrolling Interests” below for further discussion. All inter-company accounts and transactions have been eliminated
in consolidation.
The accounting policies affecting our financial
condition and results of operations are more fully described in Note 2 of our consolidated financial statements. Certain of our accounting
policies require the application of judgment by management in selecting appropriate assumptions for calculating financial estimates, which
inherently contain some degree of uncertainty. Management bases its estimates on historical experience and various other assumptions that
are believed to be reasonable under the circumstances. The historical experience and assumptions form the basis for making judgments about
the reported carrying values of assets and liabilities and the reported amounts of revenue and expenses that may not be readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following
are critical accounting policies and related judgments and estimates used in the preparation of our consolidated financial statements.
Estimates
The preparation of financial statements in conformity
with U.S. GAAP requires making estimates and judgments that affect, at the date of the financial statements, the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could
differ from these estimates and judgments.
Significant estimates and judgments include, but
are not limited to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, the standalone
selling price of performance obligations, and transaction prices and assessing transfer of control; measuring variable consideration and
other obligations such as product returns and refunds, and product warranties; provisions for uncollectible receivables; determining the
net realizable value of inventory; recoverability of long-lived asset; for leases, determining whether a contract contains a lease, allocating
consideration between lease and non-lease components, determining incremental borrowing rates, and identifying reassessment events, such
as modifications; the valuation allowance related to our deferred tax assets; and the fair value of options issued for stock-based compensation.
16
Revenue Recognition
We recognize revenue when control of products is
transferred to our customers, and when services are completed and accepted by our customers; the amount of revenue we recognize reflects
the consideration we expect to receive for those products or services. Our contracts with customers may include combinations of products
and services (e.g., a contract that includes products and related engineering services). We structure our contracts such that distinct
performance obligations, such as product sales or license fees, and related engineering services, are clearly defined in each contract.
License fees and sales of our TSMs are on a per-unit
basis. Therefore, we generally satisfy performance obligations as units are shipped to our customers. Non-recurring engineering service
performance obligations are satisfied as work is performed and accepted by our customers.
We recognize revenue net of allowances for returns
and any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat all product shipping and
handling charges (regardless of when they occur) as activities to fulfill the promise to transfer goods. Therefore, we treat all shipping
and handling charges as expenses.
License fees
We earn revenue from licensing our internally developed
intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees the right to incorporate
our IP components into their products, with terms and conditions that vary by licensee. Fees under these agreements may include license
fees relating to our IP, and royalties payable to us following the distribution by our licensees of products incorporating the licensed
technology. The license for our IP has standalone value and can be used by the licensee without maintenance and support.
For technology license arrangements that do not
require significant modification or customization of the underlying technology, we recognize technology license revenue when the license
is made available to the customer and the customer has a right to use that license. At the end of each reporting period, we record unbilled
license fees, using prior royalty revenue data by customer to make estimates of those royalties.
Explicit return rights are not offered to customers.
There have been no returns through December 31, 2023.
Product Sales
We earn revenue from sales of TSM hardware products
to our OEM, ODM and Tier 1 supplier customers, who embed our hardware into their products, and from sales of branded consumer products
that incorporate our TSMs that are sold through distributors or directly to end users. These distributors are generally given business
terms that allow them to return unsold inventory, receive credits for changes in selling prices, and participate in various cooperative
marketing programs. Our sales agreements generally provide customers with limited rights of return and warranty provisions.
Because we use distributors to provide TSMs to
our customers, we must analyze the terms of our distributor agreements to determine when control passes from us to our distributors. For
sales of TSMs sold through distributors, we recognize revenues when our distributors obtain control over our products. Control passes
to our distributors when we have a present right to payment for products sold to the distributors, the distributors have legal title to
and physical possession of products purchased from us, and the distributors have significant risks and rewards of ownership of products
purchased.
Distributors participate in various cooperative
marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual credits received
by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue
could be adversely affected.
Under U.S. GAAP, companies may make reasonable
aggregations and approximations of returns data to accurately estimate returns. Our TSM returns and warranty experience to date has enabled
us to make reasonable returns estimates, which are supported by the fact that our product sales involve homogenous transactions. The reserve
for future sales returns is recorded as a reduction of our accounts receivable and revenue and was $8,000 and $9,000 as of December 31,
2023 and 2022, respectively. The warranty reserve is recorded as an accrued expense and cost of sales and was $30,000 and $49,000 as of
December 31, 2023 and 2022, respectively. If the actual future returns were to deviate from the historical data on which the reserve had
been established, our revenue could be adversely affected.
Non-Recurring Engineering
For technology license or TSM contracts that require
modification or customization of the underlying technology to adapt the technology to customer use, we determine whether the technology
license or TSM, and required engineering consulting services represent separate performance obligations. We perform our analysis on a
contract-by-contract basis. If there are separate performance obligations, we determine the standalone selling price (“SSP”)
of each separate performance obligation to properly recognize revenue as each performance obligation is satisfied. We provide engineering
consulting services to our customers under a signed Statement of Work (“SOW”). Deliverables and payment terms are specified
in each SOW. We generally charge an hourly rate for engineering services, and we recognize revenue as engineering services specified in
contracts are completed and accepted by our customers. Any upfront payments we receive for future non-recurring engineering are recorded
as unearned revenue until that revenue is earned.
17
We believe that recognizing revenue from non-recurring
engineering as progress towards completion of engineering services and customer acceptance of those services occurs best reflects the
economics of those transactions, because engineering services as tracked in our systems correspond directly with the value to our customers
of our performance completed to date. Hours performed for each engineering project are tracked and reflect progress made on each project
and are charged at a consistent hourly rate.
Revenues from non-recurring engineering contracts
that are short-term in nature are recorded when those services are complete and accepted by customers.
Revenues from non-recurring engineering contracts
with substantive defined deliverables for which payment terms in the SOW are commensurate with the efforts required to produce such deliverables
are recognized as they are completed and accepted by customers.
Estimated losses on all SOW projects are recognized
in full as soon as they become evident. During the years ended December 31, 2023 and 2022, we recorded no losses.
Accounts Receivable and Credit Losses
Accounts receivable is stated
at net realizable value. We estimate and record a provision for expected credit losses related to our financial instruments, including
our trade receivables. We consider historical collection rates, the current financial status of our customers, macroeconomic factors,
and other industry-specific factors when evaluating for current expected credit losses. Forward-looking information is also considered
in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable,
we believe that the carrying value, net of expected losses, approximates fair value and therefore, we rely more on historical and current
analysis of such financial instruments, including our trade receivables.
Further, we consider macroeconomic
factors and the status of the technology industry to estimate if there are current expected credit losses within our trade receivables
based on the trends and our expectation of the future status of such economic and industry-specific factors. Also, specific allowance
amounts are established based on review of outstanding invoices to record the appropriate provision for customers that have a higher probability
of default.
The accounts receivable balance
on our consolidated balance sheet as of December 31, 2023 was $0.9 million, net of approximately $30,000 of allowances. The following
table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable
to present the net amount expected to be collected at December 31, 2023:
Balance at January 1, 2023
$ 30,000
Change in expected credit losses
-
Write-offs, net of recoveries
-
Balance at December 31, 2023
$ 30,000
Inventory
The Company’s
inventory consists primarily of components that will be used in the manufacturing of our TSMs. We classify inventory for reporting purposes
as raw materials, work-in-process, and finished goods.
Inventory
is stated at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method. Net realizable
value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current
period.
With the new, sharpened strategy, announced in December 2023, the Company
focuses solely on the licensing business. Consequently, we will phase out the TSM product business through licensing of the TSM technology
to strategic partners or outsourcing. Management has decided to reserve TSM related raw materials which are expected to remain after production
ends in 2024. The TSM inventory reserve was $3.6 million as of December 31, 2023.
Due to the low sell-through of
our AirBar products, management has decided to fully reserve work-in-process for AirBar components, as well as AirBar related raw materials
and finished goods. The AirBar inventory reserve was $0.3 million as of December 31,
2022. In 2023, management decided to scrap the fully reserved AirBar inventory.
Research and Development
Research and development (“R&D”) costs are expensed
as incurred. R&D costs consist mainly of personnel-related costs in addition to some external consultancy costs such as testing, certifying
and measurements.
Stock-Based Compensation Expense
We measure the cost of employee services received
in exchange for an award of equity instruments, including share options, based on the estimated fair value of the award on the grant date,
and recognize the value as compensation expense over the period the employee is required to provide services in exchange for the award,
usually the vesting period.
18
We account for equity instruments issued to non-employees
at their estimated fair value.
When determining stock-based compensation expense
involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes option pricing model.
Noncontrolling Interests
We recognize any noncontrolling interest, also
known as a minority interest, as a separate line item in stockholders’ equity in the consolidated financial statements. A noncontrolling
interest represents the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to us. Generally, any interest
that holds less than 50% of the outstanding voting shares is deemed to be a noncontrolling interest; however, there are other factors,
such as decision-making rights, that are considered as well. We include the amount of net income (loss) attributable to noncontrolling
interests in consolidated net income (loss) on the face of the consolidated statements of operations.
The Company provides either in the consolidated
statement of stockholders’ equity, if presented, or in the notes to consolidated financial statements, a reconciliation at the beginning
and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the Company, and equity
(net assets) attributable to the noncontrolling interest that separately discloses:
(1)
Net income or loss;
(2)
Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and
(3)
Each component of other comprehensive income or loss.
Net Loss per Share
Net loss per share amounts have been computed based
on the weighted-average number of shares of common stock outstanding during the years ended December 31, 2023 and 2022. Net loss per share,
assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and
potential common stock equivalents outstanding during the period. The weighted-average number of shares of common stock and potential
common stock equivalents used in computing the net loss per share for years ended December 31, 2023 and 2022 exclude the potential common
stock equivalents, as the effect would be anti-dilutive.
Contract Liabilities
Contract liabilities (deferred revenues) consist
primarily of prepayments for license fees, and other products or services that we have been paid in advance. We earn the revenue when
we transfer control of the product or service. Deferred revenues may also include upfront payments for consulting services to be performed
in the future, such as non-recurring engineering services.
We defer license fees until we have met all accounting
requirements for revenue recognition, which is when a license is made available to a customer and that customer has a right to use the
license. Non-recurring engineering fee revenues are deferred until engineering services have been completed and accepted by our customers.
The following table presents our deferred revenues
by source (in thousands):
Years ended
December 31,
2023
2022
Deferred revenues license fees
$ 2
$ 20
Deferred revenues products
8
9
Deferred revenues non-recurring engineering
-
7
$ 10
$ 36
19
Results of Operations
A summary of our financial results for the years
ended December 31, 2023 and 2022 is as follows (in thousands, except percentages):
2023
2022
Variance in
Dollars
Variance in
Percent
Revenues:
License fees
$ 3,803
$ 4,470
$ (667 )
(14.9 )%
Percentage of revenue
85.5 %
78.8 %
Products
620
995
(375 )
(37.7 )%
Percentage of revenue
13.9 %
17.5 %
Non-recurring engineering
26
205
(179 )
(87.3 )%
Percentage of revenue
0.6 %
3.6 %
Total revenues
$ 4,449
$ 5,670
$ (1,221 )
(21.5 )%
Cost of revenues:
Products
$ 4,168
$ 776
$ 3,392
437.1 %
Percentage of revenue
93.7 %
13.7 %
Non-recurring engineering
12
28
(16 )
(57.1 )%
Percentage of revenue
0.3 %
0.5 %
Loss on purchase commitment
362
-
362
- %
Percentage of revenue
8.1 %
- %
Total cost of revenues
$ 4,542
$ 804
$ 3,738
464.9 %
Total gross (loss) margin
$ (93 )
$ 4,866
$ (4,959 )
(101.9 )%
Operating expenses:
Research and development
$ 3,833
$ 3,963
$ (130 )
(3.3 )%
Percentage of revenue
86.2 %
69.9 %
Sales and marketing
2,455
2,034
421
20.7 %
Percentage of revenue
55.2 %
35.9 %
General and administrative
4,363
4,155
208
5.0 %
Percentage of revenue
98.1 %
73.3 %
Total operating expenses
$ 10,651
$ 10,152
$ 499
4.9 %
Percentage of revenue
239.4 %
179.0 %
Operating loss
$ (10,744 )
$ (5,286 )
$ (5,458 )
103.3 %
Percentage of revenue
(241.5 )%
(93.2 )%
Other income
736
121
615
508.3 %
Percentage of revenue
16.5 %
2.1 %
Provision for income taxes
115
118
(3 )
(2.5 )%
Percentage of revenue
2.6 %
2.1 %
Less: net loss attributable to noncontrolling interests
-
400
(400 )
(100.0 )%
Percentage of revenue
- %
7.1 %
Net loss attributable to Neonode Inc.
(10,123 )
(4,883 )
(5,240 )
107.3 %
Percentage of revenue
(227.5 )%
(86.1 )%
Net loss per share attributable to Neonode Inc. per share
$ (0.66 )
$ (0.36 )
$ (0.30 )
83.3 %
20
Revenues
All of our sales for the years ended December 31,
2023 were to customers located in the United States, Europe, Asia and Oceania. All of our sales for the years ended December 31, 2022
were to customers located in the United States, Europe and Asia.
Total net revenues were $4.4 million and $5.7 million for the
years ended December 31, 2023 and 2022, respectively. The decrease in total net revenues by 21.5% for the year ended December 31, 2023
as compared to 2022 was caused by lower revenues from all three revenue streams.
The following tables present the net revenues distribution
by geographical area and revenue stream for the years ended December 31, 2023 and 2022 (dollars in thousands):
2023
2022
Amount
Percentage
Amount
Percentage
North America
License fees
$ 1,455
90.9 %
$ 1,812
98.5 %
Products
145
9.1 %
27
1.5 %
Non-recurring engineering
-
- %
-
- %
$ 1,600
100.0 %
$ 1,839
100.0 %
Asia Pacific
License fees
$ 1,988
94.7 %
$ 2,369
85.7 %
Products
105
5.0 %
348
12.6 %
Non-recurring engineering
7
0.3 %
46
1.7 %
$ 2,100
100.0 %
$ 2,763
100.0 %
Europe, Middle East and Africa
License fees
$ 360
48.1 %
$ 289
27.1 %
Products
370
49.4 %
620
58.0 %
Non-recurring engineering
19
2.5 %
159
14.9 %
$ 749
100.0 %
$ 1,068
100.0 %
21
The following table presents disaggregated revenues
by revenue stream for the years ended December 31, 2023 and 2022 (dollars in thousands):
Year ended
December 31, 2023
Year ended
December 31, 2022
Amount
Percentage
Amount
Percentage
Net license revenues from automotive
$ 1,559
35.1 %
$ 1,551
27.4 %
Net license revenues from consumer electronics
2,244
50.4 %
2,919
51.5 %
Net product revenues from TSMs
620
13.9 %
995
17.5 %
Net non-recurring engineering services revenues
26
0.6 %
205
3.6 %
$ 4,449
100.0 %
$ 5,670
100.0 %
Revenues from license fees were $3.8 million and
$4.5 million for the years ended December 31, 2023 and 2022, respectively. The decreased of 14.9% in 2023 as compared to 2022 is primarily
the result of the macro economic downturn.
Revenues from product sales were $0.6 million and
$1.0 for the years ended December 31, 2023 and 2022, respectively. The decrease of 37.7% in 2023 compared to 2022 was mainly due to low
customer demand.
Revenues from non-recurring engineering revenues
were $26,000 and $0.2 million for the years ended December 31, 2023 and 2022. 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. The
decrease of 87.3% in 2023 compared to 2022 was mainly due to fewer projects.
Gross (Loss) Margin
Our combined total gross (loss) margin was (2.1)% in 2023 compared
to 85.8% in 2022. Gross (loss) margin related to product sales was (630.6)% in 2023 compared to 22.0% in 2022. The gross loss for products
for the year ended December 31, 2023 was impacted by one-time costs of $362,000 related to a loss on purchase commitment, $143,000 related
to a customer claim and $3.6 million related to inventory write-down. The gross margin for products for the year ended December 31, 2022
was impacted by a one-time cost of $262,000 related to inventory write-down.
Our cost of revenues includes the direct cost of
production of certain customer prototypes, costs of engineering personnel, engineering consultants to complete the engineering design
contracts. Cost of goods sold for TSMs includes fully burdened manufacturing costs, outsourced final assembly costs, and component costs
of TSMs. Cost of sales also includes loss on purchase commitment after cancelling an order of components related to the TSMs.
Research and Development
R&D expenses for 2023 and 2022 were $3.8 million
and $4.0 million, respectively. R&D expenses primarily consist of personnel-related costs in addition to external consultancy costs, such as testing,
certifying and measurements, along with costs related to developing and building new product prototypes. The decrease of 3.3% in 2023
compared to 2022 was primarily related to lower product development costs.
Sales and Marketing
Sales and marketing expenses for were $2.5 million
and $2.0 million, respectively. Sales and marketing expenses in 2023 increased 20.7% compared to 2022 primarily due to higher cost for personnel and
related costs and higher cost for marketing. There is approximately $8,000 of stock-based compensation expense included in sales and
marketing expenses for each of the years ended December 31, 2023 and 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.
22
General and Administrative
General and administrative (“G&A”) expenses for
2023 and 2022 were $4.4 million and $4.2 million, respectively. The increase of 5.0% from 2022 was primarily due to higher cost for professional
fees. There is approximately $50,000 of non-cash stock-based compensation included in G&A expenses for the year ended December 31,
2023 compared to $114,000 for the year ended December 31, 2022.
Other Income
Other income for the year ended December 31, 2023 was $736,000 compared
to $121,000 for the year ended December 31, 2022. The other income for 2023 was mainly related to interest income earned. The other income
for 2022 was related to interest income earned and gain from recovery of bad debt offset by primarily finance leases.
Foreign Currency Translation and Transaction Gains and Losses
The functional currency of our foreign subsidiaries is the applicable
local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar. The translation from Swedish Krona, Japanese
Yen, South Korean Won or the Taiwan Dollar to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for income statement accounts using a weighted average exchange rate during the period. Gains or (losses)
resulting from translation are included as a separate component of accumulated other comprehensive income (loss). Foreign currency translation
gains (losses) were $(56,000) and $68,000 during the years ended December 31, 2023 and 2022, respectively. Gains (losses) resulting from
foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations
were $(5,000) and $35,000 during the years ended December 31, 2023 and 2022.
Income Taxes
Our effective tax rate was (1.1)% for the year ended December 31, 2023
and (2.3)% for the year ended December 31, 2022. We recorded valuation allowances in 2023 and 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
of $10.1 million for the year ended December 31, 2023, compared to a net loss of $4.9 million for the year ended December 31, 2022.
Contractual Obligation and Off-Balance Sheet
Arrangements
We do not have any transactions, arrangements,
or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources other than
the operating leases incurred in the normal course of business.
We have no special purpose or limited purpose entities
that provide off-balance sheet financing, liquidity, or market or credit risk support. We do not engage in leasing, hedging, research
and development services, or other relationships that expose us to liability that is not reflected on the face of the consolidated financial
statements.
Operating Leases
Neonode Inc. operates solely through a virtual
office in California.
23
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 2024. 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. Pronode Technologies AB has informed the landlord
of its intention to not renew its lease upon expiration in September 2024.
For the years ended December 31, 2023 and 2022,
we recorded approximately $485,000 and $577,000, respectively, for rent expense.
Equipment Subject to Finance Leases
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 was approximately 1.5% per annum.
In November, 2021, the lease contract was extended for two years. The implicit interest rate of the extended lease period was 1.5% per
annum. In November, 2023, the equipment was purchased.
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 2022, we entered into a lease for soundproof
office pods. Under the terms of the agreement, the lease will be renewed within one year of the original three-year lease term. In accordance
with relevant accounting guidance the lease is classified as a finance lease. The lease payments and depreciation periods began in May
2022 when the equipment went into service. The implicit interest rate of the lease is currently approximately 3.0% per annum.
Non-Recurring Engineering Development Costs
On April 25, 2013, we entered into an Analog Device
Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments (“TI”)
pursuant to which TI agreed to integrate our intellectual property into an Application Specific Integrated Circuit (“ASIC”).
Under the terms of the NN1002 Agreement, we agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC
for each of the first 2,000,000 ASICs sold. As of December 31, 2023, we had made no payments to TI under the NN1002 Agreement.
24
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;
●
operating expenses;
●
timing of our OEM customer product shipments;
●
timing of payment for our technology licensing agreements;
●
gross profit margin; and
●
ability to raise additional capital, if necessary.
As of December 31, 2023, we had cash and cash equivalents
of $16.2 million, as 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 Annual Report.
Working capital (current assets less current liabilities) was $16.8
million as of December 31, 2023, compared to working capital of $19.1 million as of December 31, 2022.
Net cash used in operating activities for the year ended December 31,
2023 was $6.3 million and was primarily the result of a net loss of $10.1 million and approximately $3.8 million in non-cash operating
expenses, comprised of stock-based compensation expense, inventory impairment loss, depreciation and amortization and amortization of
operating lease right-of-use assets, and changes in operating assets and liabilities of $25,000. Net cash used in operating activities
for the year ended December 31, 2022 was $6.8 million and was primarily the result of a net loss including noncontrolling interests of
$5.3 million and approximately $0.6 million in non-cash operating expenses, comprised of stock-based compensation expense, 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 $(2.1) million.
Accounts receivable and unbilled revenues decreased
by approximately $539,000 as of December 31, 2023 compared to December 31, 2022, due to lower revenues.
Inventory increased by approximately $395,000 as
of December 31, 2023, not considering the $3.6 million non-cash impairment charge recorded during 2023, compared to December 31, 2022.
Accounts payable and accrued expenses increased approximately $173,000
as of December 31, 2023 compared to December 31, 2022.
25
For the year ended December 31, 2023, we purchased
$123,000 of fixed assets, consisting primarily of manufacturing equipment. For the year ended December 31, 2022, we purchased $52,000
of fixed assets, consisting primarily of office equipment.
Net cash provided by financing activities for the
year ended December 31, 2023 was $7.8 million and was primarily the result of issuance of common stock under the ATM Facility (as defined
and described below). Net cash provided by financing activities for the year ended December 31, 2022 was $4.5 million and was mainly the
result of the issuance of common stock, partly offset by principal payments on finance leases.
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 Sales 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
Sales Agreement. The offering of shares pursuant to the Sales 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 Sales Agreement in
accordance with its terms.
During the year ended December 31, 2023, we sold
an aggregate of 903,716 shares of our common stock under the ATM Facility with aggregate net proceeds to us of $7,866,000, after payment
of commissions to B. Riley Securities and other expenses of $244,000.
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.
26
Future Sources of Liquidity
In the future, we may require sources of capital
in addition to cash on hand and our ATM Facility to continue operations and to implement our strategy. If our operations do not become
cash flow positive, we may be forced to seek equity investments or debt arrangements. Historically, we have been able to access the capital
markets through sales of common stock and warrants to generate liquidity. Our management believes it could raise capital through public
or private offerings if needed to provide us with sufficient liquidity.
No assurances can be given, however, that we will
be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available on acceptable
terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results
of operations and financial condition. In addition, no assurance can be given that stockholders will approve an increase in the number
of our authorized shares of common stock if needed. The issuance of equity securities or securities convertible into equity could dilute
the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive
covenants that could impair our ability to engage in certain business transactions.
The functional currency of our foreign subsidiaries
is the applicable local currency, the Swedish Krona, the Japanese Yen, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
27