Neonode(NEON) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents Neonode Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, financial position, and performance for the periods ended September 30, 2020 Condensed Consolidated Balance Sheets | Metric | Sep 30, 2020 (Unaudited, $ thousands) | Dec 31, 2019 (Audited, $ thousands) | | :----- | :------------------------------------ | :---------------------------------- | | Total Assets | 16,625 | 7,436 | | Total Liabilities | 3,642 | 3,589 | | Total Stockholders' Equity | 12,983 | 3,847 | - Total assets significantly increased from $7.4 million to $16.6 million, primarily driven by an increase in cash from $2.4 million to $12.2 million[9] Unaudited Condensed Consolidated Statements of Operations Three months ended September 30: | Metric | 2020 ($ thousands) | 2019 ($ thousands) | YoY Change ($ thousands) | YoY Change (%) | | :----- | :----------------- | :----------------- | :----------------------- | :------------- | | Total Revenues | 1,495 | 1,310 | 185 | 14.1% | | Total Gross Margin | 1,294 | 1,246 | 48 | 3.9% | | Operating Loss | (1,746) | (1,189) | (557) | (46.8)% | | Net Loss attributable to Neonode Inc. | (1,638) | (1,086) | (552) | 50.8% | | Basic and Diluted Loss per Share | (0.16) | (0.12) | (0.04) | 33.3% | Nine months ended September 30: | Metric | 2020 ($ thousands) | 2019 ($ thousands) | YoY Change ($ thousands) | YoY Change (%) | | :----- | :----------------- | :----------------- | :----------------------- | :------------- | | Total Revenues | 3,547 | 5,032 | (1,485) | (29.5)% | | Total Gross Margin | 3,179 | 4,796 | (1,617) | (33.7)% | | Operating Loss | (4,591) | (3,171) | (1,420) | 44.8% | | Net Loss attributable to Neonode Inc. | (4,260) | (2,923) | (1,337) | 45.7% | | Basic and Diluted Loss per Share | (0.45) | (0.33) | (0.12) | 36.4% | Unaudited Condensed Consolidated Statements of Comprehensive Loss | Metric | Three months ended Sep 30, 2020 ($ thousands) | Three months ended Sep 30, 2019 ($ thousands) | Nine months ended Sep 30, 2020 ($ thousands) | Nine months ended Sep 30, 2019 ($ thousands) | | :----- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net loss | (1,748) | (1,199) | (4,626) | (3,213) | | Foreign currency translation adjustments | (228) | (145) | (251) | (300) | | Comprehensive loss attributable to Neonode Inc. | (1,866) | (1,231) | (4,511) | (3,223) | Unaudited Condensed Consolidated Statements of Stockholders' Equity | Metric | Sep 30, 2020 ($ thousands) | Dec 31, 2019 ($ thousands) | | :----- | :------------------------- | :------------------------- | | Common stock | 11 | 9 | | Additional paid-in capital | 211,587 | 197,543 | | Accumulated other comprehensive loss | (890) | (639) | | Accumulated deficit | (194,813) | (190,520) | | Total Neonode Inc. stockholders' equity | 15,895 | 6,393 | - Total stockholders' equity increased significantly from $3.8 million at December 31, 2019, to $12.9 million at September 30, 2020, primarily due to the issuance of shares for cash and preferred stock conversions[11][16] Unaudited Condensed Consolidated Statements of Cash Flows | Metric | Nine months ended Sep 30, 2020 ($ thousands) | Nine months ended Sep 30, 2019 ($ thousands) | | :----- | :------------------------------------------- | :------------------------------------------- | | Net cash used in operating activities | (3,707) | (2,873) | | Net cash used in investing activities | (17) | (89) | | Net cash provided by (used in) financing activities | 13,778 | (403) | | Net increase (decrease) in cash | 9,855 | (3,530) | | Cash at end of period | 12,212 | 3,025 | - A significant increase in cash at the end of the period (from $3.0 million to $12.2 million) was primarily driven by net cash provided by financing activities, including proceeds from preferred and common stock issuance[19] Notes to Unaudited Condensed Consolidated Financial Statements 1. Interim Period Reporting - Neonode develops optical touch and gesture control solutions for human interaction with devices and remote sensing solutions for driver and cabin monitoring in automotive and other applications[23] - The company incurred net losses attributable to Neonode Inc. of approximately $1.6 million for the three months and $4.3 million for the nine months ended September 30, 2020, and had an accumulated deficit of approximately $194.8 million as of September 30, 2020[25] - On August 7, 2020, Neonode completed a private placement, issuing common stock and convertible preferred stock for an aggregate purchase price of $13.9 million in gross proceeds, which are being used for working capital purposes[30][32] - Management believes the company's cash position after the private placement, current operating plan, and sources of potential capital are sufficient to alleviate concerns about its ability to continue as a going concern[36] 2. Summary of Significant Accounting Policies - The financial statements are prepared in accordance with U.S. GAAP and include Neonode Inc. and its majority-owned subsidiary, Pronode Technologies AB[39] - Revenue is recognized when control of products or services is transferred to customers, disaggregated into HMI Solutions (license fees, engineering) and HMI Products (sensor modules, engineering)[63][65][108] Disaggregated Revenues by Market (Three months ended Sep 30, 2020): | Market | Amount ($ thousands) | Percentage | | :----- | :------------------- | :--------- | | HMI Solutions (Automotive) | 538 | 44% | | HMI Solutions (Consumer Electronics) | 673 | 56% | | HMI Products (Medical) | 56 | 20% | | HMI Products (Distributors and other) | 228 | 80% | - The company has significant customer concentration, with four customers representing approximately 75% of consolidated accounts receivable and unbilled revenues as of September 30, 2020[61] 3. Short-Term Borrowings - Neonode received a $563 thousand Swedish government COVID-19 tax credit, which was repaid in August 2020[109] - The company entered into short-term loan facilities totaling approximately $1.7 million with two directors, drawing down $1.0 million, which was subsequently repaid or settled by issuing Series C-2 Preferred Stock in August 2020[110][112] 4. Stockholders' Equity | Metric | Sep 30, 2020 ($ thousands) | Dec 31, 2019 ($ thousands) | | :----- | :------------------------- | :------------------------- | | Common stock | 11 | 9 | | Additional paid-in capital | 211,587 | 197,543 | | Accumulated other comprehensive loss | (890) | (639) | | Accumulated deficit | (194,813) | (190,520) | | Total Neonode Inc. stockholders' equity | 15,895 | 6,393 | - Total stockholders' equity increased significantly from $3.8 million at December 31, 2019, to $12.9 million at September 30, 2020, primarily due to the issuance of shares for cash and preferred stock conversions[11][16] 5. Stock-Based Compensation - No stock-based compensation expense was recorded for the three and nine months ended September 30, 2020 and 2019[121] - As of September 30, 2020, the company had 10,500 stock options outstanding with an aggregate intrinsic value of $0[125] 6. Commitments and Contingencies - Neonode is a defendant in a putative class action lawsuit in the Delaware Court of Chancery for alleged breach of fiduciary duty related to disclosures concerning a private placement, which management believes is without merit[128] - A separate class action lawsuit in the U.S. District Court with similar allegations was voluntarily dismissed by the plaintiff on October 20, 2020[129] - The company has a bank guarantee of $210 thousand for AirBar inventory at a manufacturing partner, which management expects to sell, thereby avoiding the need to record a liability[134][135] - An Aequitas subsidiary, Neonode Smartphone LLC, filed patent infringement lawsuits against Apple Inc. and Samsung Electronics Co. Ltd. in U.S. federal court in September 2020[137] 7. Segment Information Net Revenues by Geographic Area (Three months ended Sep 30): | Region | 2020 Amount ($ thousands) | 2020 Percentage | 2019 Amount ($ thousands) | 2019 Percentage | | :----- | :------------------------ | :---------------- | :------------------------ | :---------------- | | United States | 486 | 33% | 548 | 42% | | Japan | 395 | 26% | 498 | 38% | | South Korea | 240 | 16% | - | -% | | China | 154 | 10% | 49 | 4% | | Germany | 130 | 9% | 106 | 8% | | Switzerland | 54 | 4% | 52 | 4% | | Other | 36 | 2% | 57 | 3% | | Total | 1,495 | 100% | 1,310 | 100% | Net Revenues by Geographic Area (Nine months ended Sep 30): | Region | 2020 Amount ($ thousands) | 2020 Percentage | 2019 Amount ($ thousands) | 2019 Percentage | | :----- | :------------------------ | :---------------- | :------------------------ | :---------------- | | United States | 1,340 | 38% | 2,510 | 50% | | Japan | 1,229 | 35% | 1,515 | 30% | | Germany | 274 | 8% | 477 | 9% | | South Korea | 267 | 7% | - | -% | | China | 203 | 6% | 177 | 4% | | Switzerland | 161 | 4% | 109 | 2% | | France | - | -% | 152 | 3% | | Other | 72 | 2% | 61 | 1% | | Total | 3,547 | 100% | 5,032 | 100% | Total Assets by Geographic Region: | Region | Sep 30, 2020 ($ thousands) | Dec 31, 2019 ($ thousands) | | :----- | :------------------------- | :------------------------- | | U.S. | 6,602 | 2,898 | | Sweden | 9,914 | 4,430 | | Asia | 109 | 108 | | Total | 16,625 | 7,436 | 8. Leases - The company has operating leases for corporate offices and a manufacturing facility, and finance leases for equipment, with remaining lease terms ranging from two months to 2.42 years[142] Lease Costs (Three months ended Sep 30): | Lease Type | 2020 ($ thousands) | 2019 ($ thousands) | | :--------- | :----------------- | :----------------- | | Operating lease cost | 139 | 145 | | Total finance lease cost | 167 | 161 | Lease Liabilities (as of Sep 30, 2020): | Metric | Sep 30, 2020 ($ thousands) | Dec 31, 2019 ($ thousands) | | :----- | :------------------------- | :------------------------- | | Total operating lease liabilities | 118 | 390 | | Total finance lease liabilities | 927 | 1,076 | 9. Net Loss per Share Basic and Diluted Loss per Share (Three months ended Sep 30): | Metric | 2020 | 2019 | | :----- | :--- | :--- | | Weighted average number of common shares outstanding (thousands) | 10,128 | 8,811 | | Net loss attributable to common shareholders of Neonode Inc. ($ thousands) | (1,671) | (1,086) | | Net loss per share - basic and diluted | (0.16) | (0.12) | Basic and Diluted Loss per Share (Nine months ended Sep 30): | Metric | 2020 | 2019 | | :----- | :--- | :--- | | Weighted average number of common shares outstanding (thousands) | 9,492 | 8,804 | | Net loss attributable to common shareholders of Neonode Inc. ($ thousands) | (4,293) | (2,923) | | Net loss per share - basic and diluted | (0.45) | (0.33) | - Potential common stock equivalents (stock options, warrants, and shares issuable upon conversion of preferred stock) were excluded from the diluted earnings per share calculation due to their anti-dilutive effect[153] 10. Subsequent Events - No subsequent events requiring recognition or disclosure occurred through the filing date, other than the ongoing analysis of COVID-19's potential impacts on the company's operational and financial performance[155][156] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Neonode's financial condition and results of operations, covering business overview, the impact of COVID-19, detailed financial performance analysis, off-balance sheet arrangements, contractual obligations, liquidity, and critical accounting policies for the periods ended September 30, 2020 Overview - Neonode provides advanced optical sensing solutions for human-machine interface (HMI) and remote sensing for driver and cabin monitoring, primarily operating in B2B markets[160][161] - HMI Solutions involves licensing technology to OEMs and Tier 1 suppliers, with 36 valid agreements and 15 customers currently shipping products[162][163][164] - HMI Products includes designing and manufacturing sensor modules for OEMs/ODMs/Tier 1 suppliers, and previously included the consumer product AirBar, for which no new branded products are planned[166][170] - Remote Sensing Solutions is a newly formed business area focused on cost-effective driver and cabin monitoring systems, expecting revenues from technology licensing and engineering consulting services[171] Impact of COVID-19 - The COVID-19 pandemic has adversely impacted the company's near-term growth, causing challenges in obtaining component deliveries and potential difficulties in product delivery to customers[172] - Neonode implemented cost-reduction measures, including a Swedish government-backed program of short-term layoffs, to mitigate the financial effects of the pandemic[172] - The pandemic has created an increased interest in the company's germ-free contactless touch technology[156][172] Results of Operations Net Revenues - Total net revenues increased by 14.1% for the three months ended September 30, 2020, primarily due to significantly higher sensor module sales, but decreased by 29.5% for the nine-month period due to lower license revenues within HMI Solutions[177] Revenue Distribution by Business Area (Three months ended Sep 30): | Business Area | 2020 Amount ($ thousands) | 2020 Percentage | 2019 Amount ($ thousands) | 2019 Percentage | | :------------ | :------------------------ | :---------------- | :------------------------ | :---------------- | | HMI Solutions | 1,211 | 81.0% | 1,214 | 92.7% | | HMI Products | 284 | 19.0% | 96 | 7.3% | | Total | 1,495 | 100% | 1,310 | 100% | Revenue Distribution by Business Area (Nine months ended Sep 30): | Business Area | 2020 Amount ($ thousands) | 2020 Percentage | 2019 Amount ($ thousands) | 2019 Percentage | | :------------ | :------------------------ | :---------------- | :------------------------ | :---------------- | | HMI Solutions | 3,071 | 86.6% | 4,625 | 91.9% | | HMI Products | 476 | 13.4% | 407 | 8.1% | | Total | 3,547 | 100% | 5,032 | 100% | Gross Margin - The combined total gross margin decreased from 95% in 2019 to 87% for the three months and 90% for the nine months ended September 30, 2020, primarily due to higher costs relating to inventory write-offs in 2020[179] Research and Development R&D Expenses: | Period | 2020 ($ thousands) | 2019 ($ thousands) | YoY Change ($ thousands) | YoY Change (%) | | :----- | :----------------- | :----------------- | :----------------------- | :------------- | | Three months | 901 | 1,167 | (266) | (22.8)% | | Nine months | 2,939 | 3,878 | (939) | (24.2)% | - The decrease in R&D expenses was primarily related to lower staff expenses for the nine months ended September 30, 2020, and a large number of scrapped inventory during the three months ended September 30, 2019[182] Sales and Marketing Sales and Marketing Expenses: | Period | 2020 ($ thousands) | 2019 ($ thousands) | YoY Change ($ thousands) | YoY Change (%) | | :----- | :----------------- | :----------------- | :----------------------- | :------------- | | Three months | 604 | 491 | 113 | 23.0% | | Nine months | 1,797 | 1,431 | 366 | 25.6% | - The increase in sales and marketing expenses was primarily due to higher staff expenses resulting from a reallocation of employees to the marketing function[183] General and Administrative G&A Expenses: | Period | 2020 ($ thousands) | 2019 ($ thousands) | YoY Change ($ thousands) | YoY Change (%) | | :----- | :----------------- | :----------------- | :----------------------- | :------------- | | Three months | 1,535 | 777 | 758 | 97.6% | | Nine months | 3,034 | 2,658 | 376 | 14.1% | - The increase in G&A expenses was primarily due to costs relating to a lawsuit, as further described in Note 8 – Commitments and Contingencies – Litigation[185] Income Taxes - The effective tax rate was 0% for both the three and nine months ended September 30, 2020 and 2019, with valuation allowances recorded for deferred tax assets due to the uncertainty of realization[186] Preferred Dividends - Preferred dividends of $33 thousand were accrued for the Series C-1 and C-2 Preferred Stock issued pursuant to the Securities Purchase Agreement on August 7, 2020[187] Net Loss Net Loss attributable to common shareholders of Neonode Inc.: | Period | 2020 ($ thousands) | 2019 ($ thousands) | YoY Change ($ thousands) | YoY Change (%) | | :----- | :----------------- | :----------------- | :----------------------- | :------------- | | Three months | (1,671) | (1,086) | (585) | 53.9% | | Nine months | (4,293) | (2,923) | (1,370) | 46.9% | Off-Balance Sheet Arrangements - The company has a bank guarantee of $210 thousand for AirBar packaging material held at a manufacturing partner[190] - Neonode does not have any other significant off-balance sheet arrangements that are reasonably likely to affect its liquidity or capital resources[190] Contractual Obligations and Commercial Commitments Non-Recurring Engineering Development Costs - Neonode has an agreement with Texas Instruments to pay $500 thousand in non-recurring engineering costs at a rate of $0.25 per ASIC for the first 2 million ASICs sold, with no payments made as of September 30, 2020[191] Operating Leases - The company has various operating lease agreements for office and workshop spaces in Sweden, South Korea, Taiwan, Japan, and the U.S., with varying terms and renewal options[192][193][194][195] - A new lease for 621 square meters of office space in Stockholm, Sweden, is effective December 1, 2020, valid through November 2022, with yearly extension options[196] Finance Leases - Neonode has several finance lease agreements for specialized milling and component production equipment, with obligations to purchase the equipment at the end of the lease terms[198][199][200][201] - The implicit interest rates for these finance leases range from approximately 1.5% to 4% per annum[198][199][200][201] Liquidity and Capital Resources Liquidity Metrics: | Metric | Sep 30, 2020 ($ millions) | Dec 31, 2019 ($ millions) | | :----- | :------------------------ | :------------------------ | | Cash | 12.2 | 2.4 | | Working Capital | 12.0 | 2.4 | - Net cash used in operating activities was $3.7 million for the nine months ended September 30, 2020, primarily due to a net loss of $4.6 million[204] - Net cash provided by financing activities was $13.7 million for the nine months ended September 30, 2020, mainly from proceeds of preferred and common stock issuance ($13.5 million) and short-term borrowings ($1.0 million)[209] - The company has incurred significant operating losses and negative cash flows from operations since inception, with an accumulated deficit of $194.8 million as of September 30, 2020[210] - A private placement in August 2020 generated $13.9 million in gross proceeds, used for working capital, and involved the conversion of preferred shares into 684,378 shares of common stock[215][216][217] - Management believes current cash and operating plans are sufficient, but future capital may be required, potentially through equity investments or debt arrangements, which could dilute existing shareholders[220][221][222] Critical Accounting Policies - Significant judgment is required for revenue recognition, particularly in determining distinct performance obligations for contracts with multiple products and services, and in estimating product returns and credits[224][225] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section states that there are no quantitative and qualitative disclosures about market risk applicable to the company for the reporting period - This section is marked as 'Not applicable' for the current report[227] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of disclosure controls and procedures - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[228] Changes in internal control over financial reporting - There were no changes in internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[230] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to the detailed description of legal proceedings provided in the notes to the financial statements and confirms no other material legal proceedings are currently ongoing - For a description of legal proceedings, the company refers to Note 8 – Commitments and Contingencies – Litigation in the Notes to Unaudited Condensed Consolidated Financial Statements[232] - The company is not currently involved in any other material legal proceedings[232] Item 1A. Risk Factors This section updates the risk factors, highlighting new and heightened risks related to the COVID-19 pandemic and ongoing litigation - The company faces heightened risks related to the impact of the COVID-19 pandemic, affecting its workforce, operations, customers, vendors, suppliers, and partners[234][235] - Neonode and its directors are defendants in a purported class action lawsuit in the Delaware Court of Chancery concerning disclosures related to a private placement, with potential for additional lawsuits[236] Item 6. Exhibits This section provides a comprehensive list of all exhibits filed as part of this Form 10-Q, including corporate governance documents, agreements, and certifications - The section lists various exhibits filed with the Form 10-Q, including the Restated Certificate of Incorporation, Loan Agreements, Securities Purchase Agreement, Registration Rights Agreement, and certifications[238] SIGNATURES This section contains the official signature certifying the accuracy and completeness of the report on behalf of the registrant - The report is signed by Maria Ek, Chief Financial Officer, Vice President, Finance, Treasurer and Secretary, on behalf of Neonode Inc. on November 10, 2020[241]