NEONODE INC. Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some forward-looking statements by the use of words such as "believe," "anticipate," "expect," "intend," "goal," "plan," and similar expressions. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to risks relating to the impact of the COVID-19 pandemic, our history of losses since inception, our dependence on a limited number of customers, our reliance on our customers' ability to develop and sell products that incorporate our touch technology, the length of a product development and release cycle, our and our customers' reliance on component suppliers, the difficulty in verifying royalty amounts owed to us, our limited experience manufacturing hardware devices, our ability to remain competitive in response to new technologies, our dependence on key members of our management and development team, the costs to defend, as well as risks of losing, patents and intellectual property rights, our ability to obtain adequate capital to fund future operations, the outcome and expense of lawsuits against us and our directors and officers (including the pending lawsuit in theDelaware Court of Chancery related to the Private Placement), our ability to terminate our registration as aU.S. public company, and the future status of our common stock listing on theNasdaq Stock Market and potential listing on the Nasdaq Stockholm. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and in our publicly available filings with theSecurities and Exchange Commission . Forward-looking statements reflect our analysis only as of the date of this Quarterly Report on Form 10-Q. Because actual events or results may differ materially from those discussed in or implied by forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statement. We do not undertake responsibility to update or revise any of these factors or to announce publicly any revision to forward-looking statements, whether as a result of new information, future events or otherwise. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and consolidated financial statements for the year endedDecember 31, 2019 included in our Annual Report on Form 10-K.
OverviewNeonode provides advanced optical sensing solutions for human-machine interface ("HMI") and remote sensing solutions for driver and cabin monitoring features in automotive and other application areas.
We mainly operate in the business-to-business ("B2B") markets.
HMI Solutions
We license our technology to Original Equipment Manufacturers ("OEMs") and Tier
1 suppliers who embed our technology into products they develop, manufacture and
sell. Since 2010, our HMI Solutions customers have sold approximately 77 million
devices that use our technology and within this business area we derive revenues
through technology licensing and engineering consulting services.
As of
25
Our licensing customer base is primarily in the automotive and printer
industries. Fifteen of our licensing customers are currently shipping products
that embed our touch and gesture technology. We anticipate current and new
customers will initiate product shipments throughout 2020 and in future years as
they complete final product development and release cycles. Customer product
development and release cycles typically take between 6 months to 36 months. We
earn our license fees on a per unit basis when our customers ship productsusing our technology.
We also offer engineering consulting services to our licensing customers on a flat rate or hourly rate basis. Typically, our customers require engineering support during the development and initial manufacturing phase for their products using our technology. HMI Products
In addition to our technical solutions business, we design and manufacture
sensor modules that incorporate our patented technology. We sell our embedded
sensors components to OEMs, Original Design Manufacturers ("ODMs") and Tier 1
suppliers for use in their products. Within this business area we derive
revenues through selling embedded sensor modules and engineering consulting
services.
We utilize a robotic manufacturing process designed specifically for our
components. Industry specific sensor modules with a common technology platform
provides hardware touch, gesture and object sensing solutions that, paired with
our technology licensing platform, gives us a full range of options to enter and
compete in key markets.
We also offer engineering consulting services to our sensor module customers on
a flat rate or hourly rate basis. Typically, our customers require hardware or
software modifications of our standard products or support during the
development and initial manufacturing phase for their products using our
technology.
In
Our offerings include a consumer product, AirBar. As a plug and play accessory, AirBar enables touch and gesture functionality for notebook computers. AirBar is powered by our sensor modules. In 2016 and 2017, we began shipping 15.6 inch, 13.3 inch and 14 inch AirBar to distributors and customers inthe United States andEurope . We have no current plans to develop newNeonode branded products for the consumer markets. Remote Sensing Solutions
With this newly formed business area, we intend to address the demand for cost-effective driver and cabin monitoring systems. We have developed a software platform for driver and cabin monitoring that is flexible, scalable and hardware-agnostic, and uses computationally efficient machine-learning algorithms. Within this business area we expect to derive revenues through technology licensing and engineering consulting services.
Impact of COVID-19 InDecember 2019 , a novel strain of coronavirus disease ("COVID-19") was first reported inWuhan, China . Less than four months later, onMarch 11, 2020 , theWorld Health Organization declared COVID-19 a global pandemic. Our near term growth and overall business is being adversely impacted and we expect will continue to be adversely impact by COVID-19 and the related global economic slowdown. Although we anticipate potential additional demand in our contactless touch products, we expect COVID-19 will have negative effects on our customers' businesses and their sales volumes. We are experiencing challenges in obtaining deliveries of components needed to manufacture our sensor modules and we may have difficulties delivering our products to our customers in time and at a reasonable cost. Our operations have been impacted as we paused business-related travel and our employees to a high extent work remotely. The extent of COVID-19's impact on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considered the rapidly evolving landscape. To mitigate the financial effects of the COVID-19 pandemic, we have undertaken cost-reduction measures. In particular, we implemented a Swedish government-backed program of short-term layoffs that resulted in the reduction of staff working hours by 20% between mid-April to mid-August. We are monitoring the impact of the COVID-19 pandemic and we may take further actions in response. There is a risk that we will not be successful in mitigating COVID-19's impact on our business, and our sales may not increase in line with our expectations and our operating margins could fluctuate or
decline.
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Results of Operations
A summary of our financial results is as follows (in thousands, except
percentages):
Three months ended
September 30, 2020 vs 2019
Variance in Variance in
2020 2019 Dollars Percent
Revenue:
HMI Solutions $ 1,211 $ 1,214 $ (3 ) (0.2 )%
Percentage of revenue 81.0 % 92.7 %
HMI Products $ 284 $ 96 $ 188 198. 8%
Percentage of revenue 19.0 % 7.3 %
Total Revenue $ 1,495 $ 1,310 $ 185 14.1 %
Cost of Sales:
HMI Solutions $ - $ - $ - - %
Percentage of revenue 0.0 % 0.0 %
HMI Products $ 201 $ 64 $ 137 214.1 %
Percentage of revenue 13.4 % 4.9 %
Total Cost of Sales $ 201 $ 64 $ 137 214.1 %
Total Gross Margin $ 1,294 $ 1,246 $ 48 3.9 %
Operating Expense:
Research and development $ 901 $ 1,167 $ (266 ) (22.8 )%
Percentage of revenue 60,3 % 89.1 %
Sales and marketing 604 491 113 23.0 %
Percentage of revenue 40.4 % 37.5 %General and administrative 1,535 777 758 97.6 % Percentage of revenue 102.7 % 59.3 % Total Operating Expenses$ 3,040 $ 2,435 $
605 24,8 %
Percentage of revenue 203.3 % 185.9 %
Operating Loss $ (1,746 ) $ (1,189 ) $ (557 ) (46.8 )%
Percentage of revenue (116,8 )% (90.8 )%
Interest expense 11 8 3 37.5 %
Percentage of revenue 0.7 % 0.6 %Provision (benefit) for income taxes (9 ) 2 (11 ) (550.0 )% Percentage of revenue (0.6 )% 0.2 % Net loss attributable to noncontrolling interests$ 110 $ 113 $ (3 ) (2.7 )% Percentage of revenue 7.4 % 8.6 % Preferred dividends$ (33 ) $ - $ (33 ) - % Percentage of revenue 2.2 % - % Net loss attributable to common shareholders of Neonode Inc.$ (1,671 ) $ (1,086 ) $ (585 ) 53.9 % Percentage of revenue (111.8 )% (82.9 )% Net loss per share attributable to Neonode Inc.$ (0.16 ) $ (0.12 ) $ (0.04 ) 33.3 % Percentage of revenue 0.0 % 0.0 % 27 Nine months ended September 30, 2020 vs 2019 Variance in Variance in 2020 2019 Dollars Percent Revenue: HMI Solutions$ 3,071 $ 4,625 $ (1,554 ) (33.6 )% Percentage of revenue 86.6 % 91.9 % HMI Products$ 476 $ 407 $ 69 17.0 % Percentage of revenue 13.4 % 8.1 % Total Revenue$ 3,547 $ 5,032 $ (1,485 ) (29.5 )% Cost of Sales: HMI Solutions$ 1 $ 5 $ (4 ) (80.0 )% Percentage of revenue (0.0 )% 0.1 % HMI Products$ 367 $ 231 $ 136 58.9 % Percentage of revenue 10.3 % 4.6 % Total Cost of Sales$ 368 $ 236 $ 132 55.9 % Total Gross Margin$ 3,179 $ 4,796 $ (1,617 ) (33.7 )% Operating Expense:
Research and development$ 2,939 $ 3,878 $
(939 ) (24.2 )%
Percentage of revenue 82.9 % 77.1 %
Sales and marketing 1,797 1,431 366 25.6 %
Percentage of revenue 50.7 % 28.4 %General and administrative 3,034 2,658 376 14.1 % Percentage of revenue 85.5 % 52.8 % Total Operating Expenses$ 7,770 $ 7,967 $
(197 ) (2.5 )%
Percentage of revenue 219.1 % 158.3 %
Operating Loss $ (4,591 ) $ (3,171 ) $ 1,420 44.8 %
Percentage of revenue (129.4 )% (63.0 )%
Interest expense 25 27 (2 ) (7.4 )%
Percentage of revenue 0.7 % 0.5 %Provision for income taxes 10 15 (5 ) (33.3 )% Percentage of revenue 0.3 % 0.3 % Net loss attributable to noncontrolling interests$ 366 $ 290 $ 76 26.2 % Percentage of revenue 10.3 % 5.8 % Preferred Dividends$ (33 ) $ - $ (33 ) - % Percentage of revenue (0.9 )% - % Net Loss attributable to common shareholders of Neonode Inc.$ (4,293 ) $ (2,923 ) $ (1,370 ) 46.9 % Percentage of revenue (121.0 )% (58.1 )% Net Loss per share attributable to Neonode Inc.$ (0.45 ) $ (0.33 ) $ (0.12 ) 36.4 % Percentage of revenue 0.0 % 0.0 % 28 Net Revenues
All of our sales for the three and nine months ended
SinceJanuary 1, 2020 , we have allocated revenues to three different business areas. Revenues allocated to HMI Solutions consist of license fees and related non-recurring engineering revenues while revenues allocated to HMI Products are derived from the sale of sensor modules and related non-recurring engineering revenues. We expect that future revenues within our Remote Sensing Solutions business area will be derived from license fees and non-recurring engineering revenues.
The increase of 14.12% in total net revenues for the three-month period in 2020 as compared to the same period in 2019 was primarily related to significantly higher revenues from sensor module sales offset by slightly lower license revenues. The decrease of 29.51% in total net revenues for the nine-month period in 2020 as compared to the same period in 2019 was primarily related to lower license revenues within our HMI Solutions business area. The following tables present the net revenues distribution per business area and revenue stream for the three and nine months endedSeptember 30, 2020 and 2019 (dollars in thousands): Three months ended Three months ended September 30, September 30, 2020 2019 Amount Percentage Amount Percentage HMI Solutions License fees$ 1,207 100 %$ 1,213 100 % Non-recurring engineering 4 - % 1 - %$ 1,211 100 %$ 1,214 100 % HMI Products Sensor modules$ 282 99 %$ 95 99 % Non-recurring engineering 2 1 % 1 1 %$ 284 100 %$ 96 100 % Nine months ended Nine months ended September 30, September 30, 2020 2019 Amount Percentage Amount Percentage HMI Solutions License fees$ 3,050 99 %$ 4,622 100 % Non-recurring engineering 21 1 % 3 - %$ 3,071 100 %$ 4,625 100 % HMI Products Sensor modules$ 446 94 %$ 368 90 % Non-recurring engineering 30 6 % 39 10 %$ 476 100 %$ 407 100 % 29 Gross Margin Our combined total gross margin was 87% and 90% for the three and nine months endedSeptember 30, 2020 , respectively, and 95% for the three and nine months endedSeptember 30, 2019 , respectively. The decrease in total gross margin in 2020 as compared to 2019 was primarily due to higher costs relating to write off of inventory in 2020. For the three and nine months endedSeptember 30, 2020 , revenues from HMI Solutions business area accounted for 81% and 87%, respectively, of total revenue compared to 93% and 92%, respectively, in the same periods in 2019 and revenues from HMI Products business area accounted for 19% and 13%, respectively, of total revenue compared to 7% and 8%, respectively, in the same periods 2019. There were no revenues from our Remote Sensing Solutions business area for the three or nine months endedSeptember 30, 2019 and 2020. 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 and cost of goods sold for sensor modules includes fully burdened manufacturing costs, outsourced final assembly costs, and component costs of sensor modules. Research and Development Research and development ("R&D") expenses for the three and nine months endedSeptember 30, 2020 were$0.9 million and$2.9 million , respectively. For the same periods in 2019, the R&D expenses were$1.2 million and$3.9 million . The decrease was primarily related to lower staff expenses for the nine months endedSeptember 30, 2020 and a large number of scrapped inventory during the three months endedSeptember 30, 2019 . 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. Sales and Marketing
Sales and marketing expenses for the three and nine months endedSeptember 30, 2020 were$0.6 million and$1.8 million , respectively. The sales and marketing costs for the same periods in 2019 were$0.5 million and$1.4 million . The increase was primarily due to higher staff expenses due to a reallocation of employees to the marketing function. Our sales activities focus on OEM, ODM and Tier 1 customerswho will license our technology or purchase and embed our touch sensor modules into their products. Our customers will then sell and market their products incorporating our technology to their customers. We expect to expand our HMI Solutions and Product sales and marketing activities in 2020 and future years to capture market share in our target markets. General and Administrative General and administrative ("G&A") expenses for the three and nine months endedSeptember 30, 2020 were$1.5 million and$3.0 million , respectively. The G&A expenses for the three and nine months endedSeptember 30, 2019 were$0.8 million and$2.7 million , respectively. The increase was primarily due to costs relating to a lawsuit further described in Note 8 - Commitments and Contingencies - Litigation in the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. Income Taxes Our effective tax rate was 0% and 0% for the three and nine months endedSeptember 30, 2020 , respectively, and (0)% and (0)% for the three and nine months endedSeptember 30, 2019 , respectively. The negative tax rate in the three and nine months endedSeptember 30, 2020 andSeptember 30, 2019 is due to withholding taxes from sales. We recorded valuation allowances for the three and nine-month periods endedSeptember 30, 2020 andSeptember 30, 2019 for deferred tax assets related to net operating losses due to the uncertainty of realization. Preferred Dividends Pursuant to the Securities Purchase Agreement entered into onAugust 7, 2020 ,Neonode issued Series C-1 Preferred Stock and Series C-2 Preferred Stock (together, the "Preferred Shares"). The holders of the Preferred Shares were entitled to receive dividends at the rate per share of 5% per annum until conversion into common stock. As ofSeptember 30, 2020 ,$2,000 of preferred dividends had been paid and$31,000 was accrued. Net Loss As a result of the factors discussed above, we recorded a net loss attributable to common shareholders ofNeonode Inc. of$1.6 million and$4.3 million for the three and nine months endedSeptember 30, 2020 , respectively, and$1.1 million and$2.9 million for the same periods in 2019. 30
Off-Balance Sheet Arrangements
We have a bank guarantee of$210,000 for AirBar packaging material held at a manufacturing partner. We do not have any other transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources other than the operating leases incurred in the normal course of business We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support. We do not engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the consolidated financial statements.
Contractual Obligations and Commercial Commitments
Non-Recurring Engineering Development Costs
OnApril 25, 2013 , we entered into an Analog Device Development Agreement with an effective date ofDecember 6, 2012 (the "NN1002 Agreement") with Texas Instruments ("TI") pursuant to which TI agreed to integrate our intellectual property into an ASIC. Under the terms of the NN1002 Agreement, we agreed to pay TI$500,000 of non-recurring engineering costs at the rate of$0.25 per ASIC for each of the first 2 million ASICs sold. As ofSeptember 30, 2020 , we had made no payments to TI under the NN1002 Agreement. Operating Leases OnJuly 1, 2014 ,Neonode Technologies AB entered into a lease for 7,007 square feet of office space located at Storgatan 23C,Stockholm, Sweden . The lease agreement was renegotiated and renewed inDecember 2019 and is valid throughNovember 2020 . The lease agreement has been terminated and will not be extended. OnDecember 1, 2015 ,Pronode Technologies AB entered into a lease agreement for 9,040 square feet of workshop located at Faktorvägen 17, Kungsbacka,Sweden . The lease is valid throughDecember 9, 2020 and can be terminated with nine months' written notice before the termination date.
In
OnDecember 1, 2015 ,Neonode Taiwan Ltd. entered into a lease agreement located at Rm. 2406,International Trade Building ,Keelung Rd. , Sec.1,Taipei, Taiwan . The lease is renewed monthly. OnSeptember 1, 2019 , we entered into a lease of office space located atNishiShinjuku Takagi Building , 1203 NishiShinjuku, Shinjukuku,Tokyo, Japan . The lease is valid throughAugust 31, 2021 and is extended on a yearly basis unless written notice three months prior to expiration date. OnSeptember 1, 2020 , we entered into a lease of a mailbox at2880 Zanker Road ,San Jose, CA 95134. The lease is valid throughAugust 2021 and is extended on a yearly basis unless written notice three months prior to expiration date. EffectiveDecember 1, 2020 , we have agreed to enter into a new lease for 621 square meters of office space located at Karlavägen 100,Stockholm, Sweden . The lease agreement is valid throughNovember 2022 and may be extended on a yearly basis unless written notice nine months prior to expiration date. In connection to the new office, we have also entered into a lease for a storage facility, valid throughNovember 2022 and extended on a yearly basis unless written notice nine months prior to expiration date.
For the three and nine months ended
See Note 8 - Leases in the Notes to Unaudited Condensed Consolidated Financial
Statements included elsewhere in this Quarterly Report on Form 10-Q for further
discussions of our operating leases.
31
Finance Leases
In April 2014 , we entered into a lease for certain specialized milling
equipment. Under the terms of the lease agreement we are obligated to purchase
the equipment at the end of the original six-year lease term for 10% of the
original purchase price of the equipment. In accordance with relevant accounting
guidance the lease is classified as a finance lease. The lease payments and
depreciation period began on July 1, 2014 when the equipment went into service.
The implicit interest rate of the lease is 4% per annum.
Between the second and the fourth quarters of 2016, we entered into six leases
for component production equipment. Under the terms of five of the lease
agreements entered into during 2016, we are obligated to purchase the equipment
at the end of the original three to five years lease terms for 5-10% of the
original purchase price of the equipment. In accordance with relevant accounting
guidance these five leases are classified as finance leases. The lease payments
and depreciation periods began between September and November 2016 when the
equipment went into service. The implicit interest rate of these five leases is
currently approximately 3% per annum. The additional lease entered into during
2016 is a hire-purchase agreement that requires the equipment 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 this lease is approximately 3% per annum.
In 2017, we entered into one lease for component production equipment. Under the
terms of the lease agreement the lease will be renewed within one year of the
end of the original four-year lease term. In accordance with relevant accounting
guidance, the lease is classified as a finance lease. The lease payments and
depreciation periods began in May 2017 when the equipment went into service. The
implicit interest rate of the lease is approximately 1.5% per annum.
In 2018, we entered into one 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 approximately 1.5% per annum.
See Note 8 - Leases in the Notes to Unaudited Condensed Consolidated Financial
Statements included elsewhere in this Quarterly Report on Form 10-Q for further
discussion of our finance leases.
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: ? actual versus anticipated licensing of our technology; ? actual versus anticipated sales of sensor products, including AirBar; ? actual versus anticipated operating expenses; ? timing of our OEM customer product shipments; ? timing of payment for our technology licensing agreements; ? actual versus anticipated gross profit margin; and ? ability to raise additional capital, if necessary.
As of
Working capital (current assets less current liabilities) was
Net cash used in operating activities for the nine months endedSeptember 30, 2020 was$3.7 million and was primarily the result of a net loss of$4.6 million and approximately$0.8 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use assets. Net cash used in operating activities for the nine months endedSeptember 30, 2019 was$2.9 million and was primarily the result of a net loss of$3.2 million and offset by approximately$1.0 million in non-cash operating expenses, comprised primarily of depreciation and amortization of operating lease right-of-use assets.
Accounts receivable and unbilled revenues decreased by approximately
32
Inventory increased by approximately
Deferred revenues increased by approximately
During the nine months ended
Net cash provided by financing activities of
Net cash used in financing activities of
We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately$1.6 million and$4.3 million and$1.1 million and$2.9 million for the three and nine months endedSeptember 30, 2020 and 2019, respectively, and had an accumulated deficit of approximately$194.8 million and$190.5 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. In addition, operating activities used cash of approximately$3.7 million and$2.9 million for the nine months endedSeptember 30, 2020 and 2019, respectively. OnJune 17, 2020 , the Company entered into short-term loan facilities (the "Loan Agreements") with two entities beneficially owned respectively by each ofUlf Rosberg andPeter Lindell , directors ofNeonode (each, a "Director"). Pursuant to the Loan Agreements, each Director made16,145,000 SEK (Swedish Krona), which is approximately$1.7 million inU.S. dollars, principal amount available to the Company. The Company made an initial drawdown of an aggregate of approximately$1.0 million under the Loan Agreements. OnAugust 5, 2020 , the Company entered into a securities purchase agreement (the "Securities Purchase Agreement") with institutional and accredited investors as part of a private placement (the "Private Placement"). OnAugust 6, 2020 , in connection with the Private Placement,Neonode designated (i) 365 shares of its authorized and unissued preferred stock as Series C-1 5% Convertible Preferred Stock (the "Series C-1 Preferred Stock") by filing a Series C-1 Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of theState of Delaware and (ii) 4,084 shares of its authorized and unissued preferred stock as Series C-2 5% Convertible Preferred Stock (the "Series C-2 Preferred Stock") by filing a Series C-2 Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of theState of Delaware . The Series C-1 Preferred Stock and Series C-2 Preferred Stock are substantially the same, except the conversion of the Series C-2 Preferred Stock required additional shareholder approval in accordance with Nasdaq listing rules. OnAugust 7, 2020 ,Neonode issued 517 shares of Series C-2 Preferred Stock toUMR Invest AB , the entity beneficially owned byUlf Rosberg , to repay the indebtedness and accrued interest under the Loan Agreement. To effect a similar transaction with entities beneficially owned by the other Director,Peter Lindell , (i) onAugust 7, 2020 , at the closing of the Private Placement, Cidro Förvaltning AB paid for an additional 517 shares of Series C-2 Preferred Stock, and (ii) onAugust 10, 2020 , the next business day after the closing of the Private Placement,Neonode repaid toCidro Holding AB the debt and accrued interest due under the Loan Agreement, an amount that equaled the price of the 517 shares of Series C-2 Preferred Stock. As a result of the repayments to each Director, the Loan Agreements terminated in accordance with their terms.
The closing of the Private Placement occurred on
Pursuant to the Securities Purchase Agreement,Neonode issued a total of 1,611,845 shares of common stock (the "Common Shares") at a price of$6.50 per Common Share, and a total of 3,415 shares with a conversion price of$6.50 per share and a stated value of$1,000 of Series C-1 Preferred Stock and Series C-2 Preferred Stock, for an aggregate purchase price of$13.9 million in gross proceeds.
The net proceeds of the Private Placement are being used for working capital purposes.
Pursuant to their terms and the provisions of the Securities Purchase Agreement, the Series C-1 Preferred Stock and Series C-2 Preferred Stock (together, the "Preferred Shares") were converted into 684,378 shares ofNeonode common stock. The holders of the Preferred Shares were entitled to receive dividends at the rate per share of 5% per annum, totaling$33,000 . As ofSeptember 30, 2020 ,$2,000 of preferred dividends had been paid and$31,000 was accrued. In connection with the Securities Purchase Agreement,Neonode entered into a Registration Rights Agreement (the "Registration Rights Agreement") pursuant to whichNeonode filed a registration statement with theSecurities and Exchange Commission (the "SEC") relating to the offer and sale by the holders of the Common Shares, and the shares of common stock that were underlying the Preferred Shares. Pursuant to the Registration Rights Agreement,Neonode was obligated to file the registration statement within 30 calendar days and to use reasonable best efforts to cause the registration statement to be declared effective within 75 calendar days. The registration statement was declared effective by theSEC onSeptember 18, 2020 . Failure to maintain the effective registration of the Common Shares and the shares of common stock underlying the Preferred Shares will subjectNeonode to payment for liquidated damages.
In connection with the Private Placement,
33
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.
We aim to grow our revenues in all business areas and 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.
In the future, we may require sources of capital in addition to cash on hand 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 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 funds and sufficient authorized shares are available, 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 theU.S. Dollar compared to the Swedish Krona, Japanese Yen, South Korean Won orTaiwan Dollar will impact
our future operating results. Critical Accounting Policies Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when the contract covers 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 stand-alone 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. 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.
See Note 2 - Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q 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
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