UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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NEONODE INC.
Quarterly Report on Form 10-Q
For the Fiscal Quarter Ended March 31, 2024
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEONODE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable and unbilled revenues, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll and employee benefits | ||||||||
| Accrued expenses | ||||||||
| Contract liabilities | ||||||||
| Current portion of finance lease obligations | ||||||||
| Current portion of operating lease obligations | ||||||||
| Total current liabilities | ||||||||
| Finance lease obligations, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues: | ||||||||
| License fees | $ | $ | ||||||
| Products | ||||||||
| Non-recurring engineering | ||||||||
| Total revenues | ||||||||
| Cost of revenues: | ||||||||
| Products | ||||||||
| Non-recurring engineering | ||||||||
| Total cost of revenues | ||||||||
| Total gross margin | ||||||||
| Operating expenses: | ||||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income: | ||||||||
| Interest income, net | ||||||||
| Total other income | ||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ||||
| Provision for income taxes | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Loss per common share: | ||||||||
| $ | ( | ) | $ | ( | ) | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Other comprehensive income: | ||||||||
| Foreign currency translation adjustments | ( | ) | ||||||
| Other comprehensive loss | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
For the three months ended March 31, 2024 and 2023
| Common Stock Shares Issued | Common Stock Amount | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||
| Balances, December 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances, March 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Common Stock Shares Issued | Common Stock Amount | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||
| Balances, December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Issuance of shares for cash, net of offering costs | ||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances, March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation expense | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Inventory impairment loss | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable and unbilled revenue, net | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable, accrued payroll and employee benefits, and accrued expenses | ||||||||
| Contract liabilities | ( | ) | ||||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock, net of offering costs | ||||||||
| Principal payments on finance lease obligations | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ||||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NEONODE INC.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Interim Period Reporting
The accompanying unaudited interim condensed consolidated financial statements include all adjustments consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim period presented. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of results for a full fiscal year or any other period.
The accompanying condensed consolidated financial statements for the three months ended March 31, 2024 and 2023 have been prepared by us, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Operations
Neonode Inc., which is collectively with its subsidiaries referred to as “Neonode” or the “Company” in this report, develops advanced optical sensing solutions for contactless touch, touch, gesture sensing, and object detection and machine perception solutions using advanced machine learning algorithms to detect and track persons and objects in video streams for cameras and other types of imagers. We market and sell our contactless touch, touch, and gesture sensing, and object detection products and solutions based on our zForce technology platform, and our scene analysis solutions based on our MultiSensing technology platform. We offer our solutions to customers in many different markets and segments including, but not limited to, office equipment, automotive, industrial automation, medical, military and avionics. With the new, sharpened strategy, announced in December 2023, we focus solely on the licensing business. This allows customers to license our unique and advanced technology to create bespoke products and solutions that bring value to end customers.
Liquidity
We have incurred significant
operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $
The condensed consolidated financial statements included in this report have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment of liabilities in the ordinary course of business.
Management evaluated the
significance of the Company’s operating loss and determined that the Company’s current operating plan and sources of
potential capital (including the Company’s ATM Facility, as defined and described below) would be sufficient to alleviate
concerns about the Company’s ability to continue as a going concern. During the three months ended March 31, 2023, the Company
sold an aggregate of
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 has evaluated the significance of the Company’s operating loss and has determined that the Company’s current operating plan and sources of potential capital (including the Company’s at-the-market facility described above) are sufficient to alleviate concerns about the Company’s ability to continue as a going concern.
6
In the future, we may require additional sources of capital to continue operations and to implement our strategy. If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements. No assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available to us on acceptable terms, or at all, we may be unable to adequately fund our business plans, which could have a negative effect on our business, results of operations and financial condition. If funds are available through the issuance of equity or debt securities, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants on us that could impair our ability to engage in certain business transactions.
We expect revenues will enable us to reduce our operating losses in coming years. In addition, we intend to continue to implement various measures to improve our operational efficiencies. No assurances can be given that management will be successful in meeting its revenue targets and reducing its operating loss.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Neonode Inc. and its intercompany subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
The condensed consolidated balance sheets at March 31, 2024 and December 31, 2023 and the condensed consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the three months ended March 31, 2024 and 2023 include our accounts and those of our intercompany subsidiaries.
Estimates and Judgments
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 capitalized project costs and long-lived assets; 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 as stock-based compensation.
7
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration of Cash Balance Risks
Cash and cash equivalents
balances are maintained at various banks in the United States, Japan, Taiwan and Sweden. For deposits held with financial institutions
in the United States, the U.S. Federal Deposit Insurance Corporation provides basic deposit coverage with limits up to $
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 March 31, 2024 was $
| Balance at January 1, 2024 | $ | |||
| Change in expected credit losses | ||||
| Write-offs, net of recoveries | ||||
| Balance at March 31, 2024 | $ |
Inventory
The Company’s inventory consists of components that will be used in the manufacturing of our touch sensor modules (“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 impair TSM related inventories
which are expected to remain after production ends in 2024. The TSM inventory impairment was $
In December 2023, management decided to dispose of the fully reserved AirBar inventory.
8
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Ending inventory | $ | $ | ||||||
Property and Equipment
Property and equipment are
stated at cost, net of accumulated depreciation and amortization.
| Estimated useful lives | ||||
| Computer equipment | ||||
| Furniture and fixtures | ||||
| Equipment |
Depreciation of equipment purchased under a finance lease is depreciated over the term of the lease if that lease term is shorter than the estimated useful life.
Upon retirement or sale of property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected in the condensed consolidated statement of operations. Maintenance and repairs are charged to expense as incurred.
Right-of-Use Assets
A right-of-use asset represents a lessee’s right to use a leased asset for the term of the lease. Our right-of-use assets generally consist of operating leases for buildings.
Right-of-use assets are measured initially at the present value of the lease payments, plus any lease payments made before a lease began and any initial direct costs, such as commissions paid to obtain a lease.
Right-of-use assets are subsequently measured at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent, and any initial direct costs not yet expensed.
Long-lived Assets
We assess any impairment by estimating the future cash flows from the associated asset in accordance with relevant accounting guidance. If the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment of these assets. As of March 31, 2024, we believe there was no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue, which could result in impairment of long-lived assets in the future.
9
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 and 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 $(
Concentration of Credit and Business Risks
Our customers are located in the United States, Europe, Oceania and Asia.
As of March 31, 2024, four
of our customers represented approximately
As of December 31, 2023, four
of our customers represented approximately
Customers who accounted for 10.0% or more of our net revenues during the three months ended March 31, 2024 are as follows:
| ● | Hewlett-Packard Company – | |
| ● | Alps Alpine – | |
| ● | Seiko Epson – |
Customers who accounted for 10.0% or more of our net revenues during the three months ended March 31, 2023 are as follows:
| ● | Hewlett-Packard Company – | |
| ● | Seiko Epson – | |
| ● | Alps Alpine – | |
| ● | LG – |
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.
10
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 in 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 March 31, 2024.
Product Sales
We earn revenue from sales of TSM hardware products to our Original Equipment Manufacturer (“OEM”), Original Design Manufacturer (“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 generally 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 $
11
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 services are recorded as unearned revenue until that revenue is earned.
We believe that recognizing non-recurring engineering services revenues 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 three months ended March 31, 2024 and 2023, we recorded no losses.
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| North America | ||||||||||||||||
| Net revenues from Automotive | $ | % | $ | % | ||||||||||||
| Net revenues from IT & Industrial | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| Asia Pacific | ||||||||||||||||
| Net revenues from Automotive | $ | % | $ | % | ||||||||||||
| Net revenues from IT & Industrial | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| Europe, Middle East and Africa | ||||||||||||||||
| Net revenues from Automotive | $ | % | $ | % | ||||||||||||
| Net revenues from IT & Industrial | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
12
Significant Judgments
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.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when we have an unconditional right to receive future payments from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from our customers.
| March 31, 2024 | December 31, 2023 | |||||||
| Accounts receivable and unbilled revenue, net | $ | $ | ||||||
| Contract liabilities (deferred revenues) | $ | $ | ||||||
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled revenues (contract assets), and customer advances and deposits or deferred revenue (contract liabilities) on the consolidated balance sheets. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets; contract assets are generally classified as current. The Company sometimes receives advances or deposits from its customers before revenue is recognized, which are reported as contract liabilities and are generally classified as current. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
We do not anticipate impairment of our contract assets related to license fee revenues, given the creditworthiness of our customers whose invoices comprise the balance in that asset account. We will continue to monitor the timeliness of receipts from those customers to assess whether the contract assets have been impaired.
The allowance for credit losses reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
Payment terms and conditions vary by the type of contract; however, payments generally occur 30-60 days after invoicing for license fees and sensor modules to our resellers and distributors. Where revenue recognition timing differs from invoice timing, we have determined that our contracts do not include a significant financing component. Our intent is to provide our customers with consistent invoicing terms for the convenience of our customers, not to receive financing from our customers.
13
Costs to Obtain Contracts
We record the incremental costs of obtaining a contract with a customer as a contract asset if we expect the benefit of those costs to cover a period greater than one year. We currently have no incremental costs that must be capitalized.
We expense as incurred costs of obtaining a contract when the amortization period of those costs would have been less than or equal to one year.
Product Warranty
| March 31, 2024 | December 31, 2023 | |||||||
| Balance at beginning of period | $ | $ | ||||||
| Provisions for (adjustments to) warranty issued | ( | ) | ||||||
| Balance at end of period | $ | $ | ||||||
The Company accrues for warranty costs as part of its cost of sales of TSMs based on estimated costs. The Company’s products are generally covered by a warranty for a period of 12 months from the customer receipt of the product included as a component of accrued expenses on the condensed consolidated balance sheet.
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.
| March 31, 2024 | December 31, 2023 | |||||||
| Deferred revenues license fees | $ | $ | ||||||
| Deferred revenues products | ||||||||
| Deferred revenues non-recurring engineering | ||||||||
| $ | $ | |||||||
During the three months ended
March 31, 2024, the Company recognized revenues of approximately $
Advertising
Advertising costs are expensed
as incurred. Advertising costs for the three months ended March 31, 2024 and 2023 amounted to approximately $
14
Research and Development
Research and development (“R&D”) costs are expensed as incurred. R&D costs consist primarily of personnel related costs in addition to 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.
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.
Income Taxes
We recognize deferred tax liabilities and assets for the expected future tax consequences of items that have been included in the consolidated financial statements or tax returns. We estimate income taxes based on rates in effect in each of the jurisdictions in which we operate. Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Valuation allowances are recorded against net deferred tax assets when, in our opinion, realization is uncertain based on the “more likely than not” criteria of the accounting guidance.
Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of March 31, 2024 and December 31, 2023. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes paid or payable for the current period.
We follow U.S. GAAP related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits. As of March 31, 2024 and December 31, 2023, we had no unrecognized tax benefits.
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 three months ended March 31, 2024 and 2023. 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 the three months ended March 31, 2024 and 2023 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 8).
15
Other Comprehensive Income (Loss)
Our other comprehensive income (loss) includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses are reflected as a separate component of stockholders’ equity as accumulated other comprehensive income (loss) in the accompanying condensed consolidated balance sheets.
Cash Flow Information
Cash flows in foreign currencies
have been converted to U.S. Dollars at an approximate weighted-average exchange rate for the respective reporting periods.
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Swedish Krona | ||||||||
| Japanese Yen | ||||||||
| South Korean Won | ||||||||
| As of | ||||||||
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Swedish Krona | ||||||||
| Japanese Yen | ||||||||
| South Korean Won | ||||||||
Fair Value of Financial Instruments
We disclose the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, are deemed to approximate fair value due to their short maturities.
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 requires, among other updates, enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker. The ASU also clarifies that entities with a single reportable segment are subject to both new and existing reporting requirements under Topic 280. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which updates several disclosures regarding the accounting for income taxes. ASU 2023-09 will become effective for public business entities for fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact ASU 2023-09 will have on our consolidated financial statements.
16
3. Stockholders’ Equity
At-the-Market Facility
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
$
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
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.
Subsequent to the filing of our Form 10-K on February 28, 2024, the aggregate
market value of our outstanding common stock held by non-affiliates was approximately $
Common Stock
As of March 31, 2024 and December
31, 2023, our Restated Certificate of Incorporation, as amended, authorized us to issue up to
During the three months ended
March 31, 2024, no shares were sold under the ATM Facility. During the three months ended March 31, 2023, we sold an aggregate of
Preferred Stock
As of March 31, 2024 and December 31, 2023, our Restated Certificate
of Incorporation, as amended, authorized us to issue up to
There were transactions in our preferred stock during the three months ended March 31, 2024 and 2023. shares of preferred stock were issued and outstanding as of March 31, 2024 and December 31, 2023.
17
4. Stock-Based Compensation
We have adopted equity incentive plans for which stock options and restricted stock awards are available for grants to employees, consultants and directors. Except for certain options granted to certain Swedish employees, all employee, consultant and director stock options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the grant date. There are no vesting provisions tied to performance conditions for any options. Vesting for all outstanding option grants is based solely on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.
Stock Options and Long-Term Incentive Plan
During the year ended December 31, 2020, our stockholders approved the
2020 Stock Incentive Plan (“2020 Plan”) which replaced our 2015 Stock Incentive Plan (the “2015 Plan”), which
in turn replaced our Neonode Inc. 2006 Equity Incentive Plan (the “2006 Plan”). Although no new awards may be made under the
2006 Plan or 2015 Plan, the 2015 Plan is still operative for awards previously granted under such plan. There are no awards outstanding
under the 2006 Plan. Under the 2020 Plan,
In 2020 we established the 2020 long-term incentive program (the “2020
LTIP”) to provide eligible persons with the opportunity to acquire an equity interest, or otherwise increase their equity interest,
in the Company as an incentive for them to remain in the service of the Company. Through the 2020 LTIP, eligible employees of Neonode
may waive between
On August 12, 2021, we issued
On December 29, 2021, we issued
On May 20, 2022, we issued
18
For the three months ended March 31, 2024 and 2023, we recognized $
As of March 31, 2024 and December 31, 2023 we had no outstanding options. For the three months ended March 31, 2024 and 2023, we recorded no compensation expense related to the vesting of stock options.
During the three months ended March 31, 2024, we did not grant any options to purchase shares of our common stock to employees or members of our board of directors.
5. Commitments and Contingencies
Legal
The Company is subject to legal proceedings and claims that may arise in the ordinary course of business. The Company is not aware of any pending or threatened litigation matters at this time that would have a material impact on the operations of the Company.
Indemnities and Guarantees
Our bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising because of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and we have no liabilities recorded for these agreements as of March 31, 2024 and December 31, 2023.
We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us regarding intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these indemnification provisions as of March 31, 2024 and December 31, 2023.
Patent Assignment
On May 6, 2019, the Company assigned a portfolio of patents to Aequitas Technologies LLC (“Aequitas”), an unrelated third party. The assignment provides the Company the right to share the potential net proceeds to Aequitas generated from possible licensing and monetization program that Aequitas may enter into. Under the terms of the assignment, net proceeds means gross proceeds less out of pocket expenses and legal fees paid by Aequitas. The Company’s share would also be net of the Company’s own fees and expenses, including a brokerage fee payable by the Company in connection with the original assignment to Aequitas.
On June 8, 2020, Neonode Smartphone LLC, an unrelated third party that is a subsidiary of Aequitas (“Aequitas Sub”), filed complaints against Apple and Samsung in the Western District of Texas for infringing two patents. The case against Apple was subsequently transferred to the Northern District of California. In December 2022, the Patent Trial and Appeal Board invalidated one of the two patents, which Aequitas Sub is appealing. On August 2, 2023, the United States District Court for the Western District of Texas entered judgment in favor of Samsung. Aequitas Sub has filed an appeal to change this decision to the Federal Circuit and an oral hearing is scheduled to be held on June 6, 2024. The case against Apple is still pending in the United States District Court for the Northern District of California.
19
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 $
6. Segment Information
We have
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| Japan | $ | % | $ | % | ||||||||||||
| United States | % | % | ||||||||||||||
| France | % | % | ||||||||||||||
| South Korea | % | - | - | % | ||||||||||||
| Germany | % | % | ||||||||||||||
| Sweden | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| March 31, 2024 | December 31, 2023 | |||||||
| United States | $ | $ | ||||||
| Sweden | ||||||||
| Asia | ||||||||
| Total | $ | $ | ||||||
7. Leases
We have operating leases for
our corporate offices and our manufacturing facility, and finance leases for equipment. Our leases have remaining lease terms of three
months to
Our operating leases represent
building leases for our Stockholm corporate offices and our Kungsbacka manufacturing facility. Our Stockholm corporate office lease has
a remaining lease term of under one year and both of our leases are automatically renewed at a cost increase of
We report operating lease right-of-use assets, as well as current and noncurrent operating lease obligations on our condensed consolidated balance sheets for the right to use those buildings in our business. Our finance leases represent manufacturing equipment; we report the manufacturing equipment, as well as current and noncurrent finance lease obligations on our condensed consolidated balance sheets for our manufacturing equipment.
Generally, interest rates are stated in our leases for equipment. When no interest rate is stated in a lease, however, we review the interest rates implicit in our recent finance leases to estimate our incremental borrowing rate. We determine the rate implicit in a lease by using the most recent finance lease rate, or other method we think most closely represents our incremental borrowing rate.
20
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Operating lease cost (1) | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of leased assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total finance lease cost | $ | $ | ||||||
| (1) |
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash paid for amounts included in leases: | ||||||||
| Operating cash flows from operating leases | $ | ( | ) | $ | ( | ) | ||
| Operating cash flows from finance leases | ( | ) | ( | ) | ||||
| Financing cash flows from finance leases | ( | ) | ( | ) | ||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| As of March 31, 2024 | As of December 31, 2023 | |||||||
| Operating leases | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Current portion of operating lease obligations | $ | $ | ||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Finance leases | ||||||||
| Property and equipment, at cost | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| Current portion of finance lease obligations | $ | $ | ||||||
| Finance lease liabilities, net of current portion | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted Average Discount Rate: | ||||||||
| Operating leases (2) | % | % | ||||||
| Finance leases | % | % | ||||||
| (2) |
21
| Year ending December 31, | Total | |||
| 2024 | ||||
| Less imputed interest | ( | ) | ||
| Total lease liabilities | $ | |||
| Less current portion | ( | ) | ||
| $ | ||||
| Year ending December 31, | Total | |||
| 2024 | ||||
| 2025 | ||||
| Total minimum payments required: | ||||
| Less amount representing interest: | ( | ) | ||
| Present value of net minimum lease payments: | ||||
| Less current portion | ( | ) | ||
| $ | ||||
8. Net Loss per Share
Basic net loss per common share for the three months ended March 31, 2024 and 2023 was computed by dividing the net loss attributable to common shareholders of Neonode Inc. for the relevant period by the weighted average number of shares of common stock outstanding. Diluted loss per common share is computed by dividing net loss attributable to common shareholders of Neonode Inc. for the relevant period by the weighted average number of shares of common stock and common stock equivalents outstanding.
| Three months ended March 31, | ||||||||
| (in thousands, except per share amounts) | 2024 | 2023 | ||||||
| BASIC AND DILUTED | ||||||||
| Net loss attributable to Neonode Inc. | $ | ( | ) | $ | ( | ) | ||
| $ | ( | ) | $ | ( | ) | |||
9. Subsequent Events
On April 10, 2024, we and Dr. Forssell entered into a Termination Agreement (the “Termination Agreement”), pursuant to which Dr. Forssell was discharged from his position as our President and Chief Executive Officer (“CEO”) and will act as a Senior Advisor to the management team of Neonode Technologies AB, our subsidiary, and our board of directors until December 31, 2024.
In connection with the departure of Dr. Forssell, our board of directors appointed our Chief Financial Officer, Fredrik Nihlén, as our Interim President and CEO effective immediately. Mr. Nihlén will serve as Interim President and CEO until a new President and CEO is appointed.
22
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 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 or the Gaza Strip. 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, our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 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. 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 and consolidated financial statements for the year ended December 31, 2023 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 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.
Licensing
We license our zForce technology to Original Equipment Manufacturers (“OEMs”) and automotive Tier 1 suppliers who embed our technology into products that they develop, manufacture and sell. Since 2010, our licensing customers have sold approximately 95 million devices that use our patented technology.
As of March 31, 2024, we had 34 valid technology license agreements with global OEMs, Original Design Manufacturers (“ODMs”) and automotive Tier 1 suppliers.
Our licensing customer base is primarily in the automotive and printer segments. Ten 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 2024 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 licensing business, we design and manufacture Touch Sensor Modules (“TSMs”) that incorporate our patented technology. We sell our TSMs to OEMs, ODMs and systems integrators for use in their products.
We utilize a robotic manufacturing process designed specifically for our TSMs. The 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.
We began selling our TSMs to customers in the industrial and consumer electronics segments in 2017. We will phase out the TSM product business during 2024 through licensing of the TSM technology to strategic partners or outsourcing.
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.
Global Conflicts
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. In addition, the war in Israel and Gaza and the possible expansion of such war has created political and potential economic uncertainty in the Middle East. While the precise effects on global economies from the Israel-Hamas war, the war in Ukraine 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 wars 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.
24
Results of Operations
A summary of our financial results is as follows (in thousands, except percentages):
| Three months ended March 31, | 2024 vs 2023 | |||||||||||||||
| 2024 | 2023 | Variance in Dollars | Variance in Percent | |||||||||||||
| Revenues: | ||||||||||||||||
| License fees | $ | 773 | $ | 1,148 | $ | (375 | ) | (32.7 | )% | |||||||
| Percentage of revenue | 76.2 | % | 91.6 | % | ||||||||||||
| Products | 200 | 102 | 98 | 96.1 | % | |||||||||||
| Percentage of revenue | 19.7 | % | 8.1 | % | ||||||||||||
| Non-recurring engineering | 41 | 3 | 38 | 1,266.7 | % | |||||||||||
| Percentage of revenue | 4.0 | % | 0.2 | % | ||||||||||||
| Total Revenue | $ | 1,014 | $ | 1,253 | $ | (239 | ) | (19.1 | )% | |||||||
| Cost of revenues: | ||||||||||||||||
| Products | $ | 380 | $ | 47 | $ | 333 | 708.5 | % | ||||||||
| Percentage of revenue | 37.5 | % | 3.8 | % | ||||||||||||
| Non-recurring engineering | 17 | - | 17 | - | % | |||||||||||
| Percentage of revenue | 1.7 | % | - | % | ||||||||||||
| Total cost of revenues | $ | 397 | $ | 47 | $ | 350 | 744.7 | % | ||||||||
| Total gross margin | $ | 617 | $ | 1,206 | $ | (589 | ) | (48.8 | )% | |||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | 895 | $ | 802 | $ | 93 | 11.6 | % | ||||||||
| Percentage of revenue | 88.3 | % | 64.0 | % | ||||||||||||
| Sales and marketing | 816 | 592 | 224 | 37.8 | % | |||||||||||
| Percentage of revenue | 80.5 | % | 47.2 | % | ||||||||||||
| General and administrative | 1,160 | 1,384 | (224 | ) | (16.2 | )% | ||||||||||
| Percentage of revenue | 114.4 | % | 110.5 | % | ||||||||||||
| Total operating expenses | $ | 2,871 | $ | 2,778 | $ | 93 | 3.3 | % | ||||||||
| Percentage of revenue | 283.1 | % | 221.7 | % | ||||||||||||
| Operating loss | $ | (2,254 | ) | $ | (1,572 | ) | $ | (682 | ) | 43.4 | % | |||||
| Percentage of revenue | (222.3 | )% | (125.5 | )% | ||||||||||||
| Other income (expense) | 180 | 158 | 22 | 13.9 | % | |||||||||||
| Percentage of revenue | 17.8 | % | 12.6 | % | ||||||||||||
| Provision for income taxes | 10 | 11 | (1 | ) | (9.1 | )% | ||||||||||
| Percentage of revenue | 1.0 | % | 0.9 | % | ||||||||||||
| Net loss | $ | (2,084 | ) | $ | (1,425 | ) | $ | (659 | ) | 46.2 | % | |||||
| Percentage of revenue | (205.5 | )% | (113.7 | )% | ||||||||||||
| Net loss per share | $ | (0.14 | ) | $ | (0.09 | ) | $ | (0.05 | ) | 55.6 | % | |||||
25
Revenues
All of our sales for the three months ended March 31, 2024 were to customers located in the United States, Europe, Asia and Oceania. All of our sales for the months ended March 31, 2023 were to customers located in the United States, Europe and Asia.
Total net revenues were $1.0 million and $1.3 million for the three months ended March 31 2024 and 2023, respectively. The decrease in total net revenues by 19.1% for the three months ended March 31, 2024 as compared to the same period in 2023 was caused by lower license revenues offset by higher products and NRE revenues.
License Fees
Revenues from license fees were $0.8 million and $1.1 million for the three months ended March 31, 2024 and 2023, respectively. The decrease of 32.7% for the three months ended March 31, 2024 as compared to the same period in 2023, mainly due to lower demand for our legacy customers’ products, resulting in high inventory levels at some customers and thus lower revenues for us.
Product
Revenues from product were $0.2 million and $0.1 million for the three months ended March 31, 2024 and 2023, respectively. The increase of 96.1% for the three months ended March 31, 2024 as compared to the same period in 2023 was primarily due to customers securing TSM inventory after receiving news about our company phasing out TSM manufacturing.
Non-recurring Engineering
Revenues from non-recurring engineering were $41,000 and $3,000 for the three months ended March 31, 2024 and 2023. 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 increase for the three months ended March 31, 2024, compared to the same periods in 2023 was the result of a potential TSM licensing project after announcing our change in strategy, with full focus on our licensing business and a phase-out of our products business.
The following tables presents the net revenues by market and revenue stream for the three months ended March 31, 2024 and 2023 (dollars in thousands):
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| Automotive | ||||||||||||||||
| License fees | $ | 337 | 100.0 | % | $ | 445 | 100.0 | % | ||||||||
| Products | - | - | % | - | - | % | ||||||||||
| Non-recurring engineering | - | - | % | - | - | % | ||||||||||
| $ | 337 | 100.0 | % | $ | 445 | 100.0 | % | |||||||||
| IT & Industrial | ||||||||||||||||
| License fees | $ | 436 | 64.4 | % | $ | 703 | 87.0 | % | ||||||||
| Products | 200 | 29.5 | % | 102 | 12.6 | % | ||||||||||
| Non-recurring engineering | 41 | 6.1 | % | 3 | 0.4 | % | ||||||||||
| $ | 677 | 100 | % | $ | 808 | 100 | % | |||||||||
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Gross Margin
Our combined total gross margin was 60.8% and 96.2% for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024 and 2023, gross margin related to products was (90.0)% and 53.9%, respectively. The gross margin for products for the three months ended March 31, 2024 was impacted by a cost of $278,000 related to a write-down on inventory due to the phasing out of the TSM manufacturing.
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.
Research and Development
Research and development (“R&D”) expenses for the three months ended March 31, 2024 and 2023 were $0.9 million and $0.8 million, respectively. R&D expenses primarily consist of personnel-related costs in addition to external consultancy costs, such as testing, certifying and measurements, along with costs related to developing and building new product prototypes. The increase of 11.6% for the three months ended March 31, 2024 compared to the same period in 2023 was primarily related to higher product development costs.
Sales and Marketing
Sales and marketing expenses for the three months ended March 31, 2024 and 2023 were $0.8 million and $0.6 million, respectively. The increase of 37.8% for the three months ended March 31, 2024 compared to the same period in 2023 was primarily related to participation in technology events.
Our sales and marketing activities focus on OEM, ODM and Tier 1 customers who will license our technology.
General and Administrative
General and administrative expenses for the three months ended March 31, 2024 and 2023 were $1.2 million and $1.4 million, respectively. The decrease of 16.2% from the same period 2023 was primarily due to lower cost for professional fees.
Other Income
Other income for the three months ended March 31, 2024 and 2023 were $0.2 million and $0.2 million, respectively. The other income for both periods was mainly related to interest income earned.
Income Taxes
Our effective tax rate was (0.5)% for the three months ended March 31, 2024 and (0.8)% for the three months ended March 31, 2023. The negative tax rate is due to withholding taxes from sales.
Net Loss
As a result of the factors discussed above, we recorded a net loss of $2.1 million for the three months ended March 31, 2024, and $1.4 million for the same period in 2023.
Liquidity and Capital Resources
Our liquidity is dependent on many factors, including sales volume, operating profit and the efficiency of asset use and turnover. Our future liquidity will be affected by, among other things:
| ● | licensing of our technology; | |
| ● | 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. |
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As of March 31, 2024, we had cash and cash equivalents of $14.3 million, as compared to $16.2 million as of December 31, 2023. Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent to the date of this Report.
Working capital (current assets less current liabilities) was $14.7 million as of March 31, 2024, compared to $16.8 million as of December 31, 2023.
Net cash used in operating activities for the three months ended March 31, 2024, was $1.9 million and was primarily the result of a net loss of $2.1 million and approximately $0.3 million in non-cash operating expenses, comprised of stock-based compensation expense, depreciation and amortization, amortization of operating lease right-of-use assets and inventory impairment loss and changes in operating assets and liabilities of $0.2 million. Net cash used in financing activities for the three months ended March 31, 2024, was approximately $9,000 and was primarily the result of principal payments on finance lease.
Accounts receivable and unbilled revenues decreased by approximately $0.2 million as of March 31, 2024, compared to December 31, 2023. This was mainly due to the timing of receipts of customer payments.
Inventory decreased by approximately $0.3 million during the three months ended March 31, 2024, compared to December 31, 2023.
Accounts payable and accrued expenses increased approximately $76,000 during the three months ended March 31, 2024 compared to December 31, 2023.
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 (as defined below).
We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $2.1 million and $1.4 million for the three months ended March 31, 2024, and 2023, respectively, and had an accumulated deficit of approximately $219.7 million and $217.6 million as of March 31, 2024 and December 31, 2023, respectively. In addition, operating activities used cash of approximately $1.9 million and $1.7 million for the three months ended March 31, 2024 and 2023, 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 has evaluated the significance of the Company’s operating loss and has determined that the Company’s current operating plan and sources of potential capital (including the Company’s ATM Facility) are 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 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.
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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.
Operating Leases
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 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 three months ended March 31, 2024 and 2023, we recorded approximately $126,000 and $122,000, respectively, for total rent expense.
See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussions.
Equipment Subject to Finance Lease
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 5.0-10.0% 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 3.0% 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 3.0% 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.
See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion.
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, 2024, we had made no payments to TI under the NN1002 Agreement.
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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 three months ended March 31, 2024, we sold no shares. During the three months 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.
Subsequent to the filing of our Form 10-K on February 28, 2024, the aggregate market value of our outstanding common stock held by non-affiliates was approximately $26.7 million. Pursuant to General Instruction I.B.6 of Form S-3, since the aggregate market value of our outstanding common stock held by non-affiliates was below $75.0 million at the time of such Form 10-K filing, the aggregate amount of securities that we are permitted to offer and sell was reduced to $ 8,901,792, which was equal to one-third of the aggregate market value of our common stock held by non-affiliates as of February 27, 2024.
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 standalone selling price for each distinct performance obligation identified, although we generally structure our contracts such that performance obligations and pricing for each performance obligation are specifically addressed. We currently have no outstanding contracts with multiple performance obligations; 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, 2023.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2024. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any pending legal proceedings. From time to time, we may become subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including, but not limited to, employee, customer and vendor disputes.
Item 1A. Risk Factors
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information
Item 6. Exhibits
| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NEONODE INC. | ||
| Date: May 8, 2024 | By: | /s/ Fredrik Nihlén |
| Fredrik Nihlén | ||
| Interim President and Chief Executive Officer and Chief Financial Officer, | ||
| (Principal Financial and Accounting Officer) | ||
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