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 and our ability to obtain adequate capital to fund future operations. 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, 2020 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 in Item 1 of this Quarterly Report on Form 10-Q and consolidated financial statements for the year endedDecember 31, 2020 included in our Annual Report on Form 10-K.
Overview
Our company 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.
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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 over 80 million devices
that use our technology and within this business area we derive revenues through
technology licensing and engineering consulting services.
As of
Our licensing customer base is primarily in the automotive and printer industries. Thirteen 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 2021 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 products
using 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, 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, powered by our sensor modules. As a plug and play accessory, AirBar enables touch and gesture functionality for notebook computers. 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
OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a global pandemic. Our near term growth and overall business has been and is continuing to be adversely impacted by COVID-19 and we expect it will continue to be adversely impact by COVID-19 and the related global economic slowdown. Although we have noted additional demand in our contactless touch products and some increases in sales of licensed products, COVID-19 has negative impacted some of 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 were 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 going forward will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict at this time considering 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 last year. We are continuing to monitor 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. 24 Results of Operations A summary of our financial results is as follows (in thousands, except percentages): Three months ended March 31, 2021 vs 2020 Variance in Variance in 2021 2020 Dollars Percent Revenue: HMI Solutions$ 1,299 $ 1,182 $ 117 9.9 % Percentage of revenue 78.0 % 91.3 % HMI Products$ 366 $ 112 $ 254 226.8 % Percentage of revenue 22.0 % 8.7 % Total Revenue$ 1,665 $ 1,294 $ 371 28.7 % Cost of Sales: HMI Solutions $ -$ 1 $ (1 ) (100.0 )% Percentage of revenue 0.0 % 0.1 % HMI Products$ 277 $ 43 $ 234 544.2 % Percentage of revenue 16.6 % 3.3 % Total Cost of Sales$ 277 $ 44 $ 233 529.5 % Total Gross Profit$ 1,388 $ 1,250 $ 138 11.0 % Operating Expense: Research and development$ 1,142 $ 995 $ 147 14.8 % Percentage of revenue 68.6 % 76.9 % Sales and marketing 788 545 243 44.6 % Percentage of revenue 47.3 % 42.1 %
General and administrative 1,087 799
288 36.0 %
Percentage of revenue 65.3 % 61.7 %
Total Operating Expenses $ 3,017 $ 2,339 $ 678 29.0 %
Percentage of revenue 181.2 % 180.8 %
Operating Loss $ (1,629 ) $ (1,089 ) $ 540 49.6 %
Percentage of revenue (97.8 )% (84.2 )%
Interest expense (5 ) (7 ) 2 (28.6 )%
Percentage of revenue (0.3 )% (0.5 )%Provision for income taxes (36 ) (16 ) (20 ) 125.0 % Percentage of revenue (2.2 )% (1.2 )% Less: net loss attributable to noncontrolling interests$ 102 $ 102 $ - 0.0 % Percentage of revenue 6.1 % 7.9 % Net Loss attributable to Neonode Inc.$ (1,568 ) $ (1,010 ) $ (558 ) 55.2 % Percentage of revenue (94.2 )% (78.1 )% Net Loss per share attributable to Neonode Inc.$ (0.14 ) $ (0.11 ) $ (0.03 ) 27.3 % Percentage of revenue 0.0 % 0.0 % 25 Net Revenues
All of our sales for the three months ended
The increase of 29% in total net revenues for the first quarter 2021 as compared to the same period in 2020 was primarily related to higher module and Airbar sales within our HMI Products business area. Revenues within our HMI Solutions business area during the three-month period endedMarch 31, 2021 was somewhat higher than the same period last year, mainly driven by strong sales within the automotive market segment.
There were no revenues from our Remote Sensing Solutions business area for the
three months ended
The following table presents the net revenues by business area and revenue stream for the three months endedMarch 31, 2021 and 2020 (dollars in thousands): Three months ended Three months ended March 31, 2021 March 31, 2020 Amount Percentage Amount Percentage HMI Solutions License fees$ 1,295 99 %$ 1,169 99 %
Non-recurring engineering 4 1 % 13
1 %
Total $ 1,299 100 % $ 1,182 100 %
HMI Products
Sensor modules $ 355 97 % $ 98 88 %Non-recurring engineering 11 3 % 14
12 %
Total $ 366 100 % $ 112 100 %
Three months ended Three months ended
March 31, 2021 March 31, 2020
Amount Percentage Amount Percentage
HMI Solutions
Net revenues from automotive $ 502 39 % $ 401 34 %
Net revenues from consumer electronics 797 61 %
781 66 %
Total $ 1,299 100 % $ 1,182 100 %
HMI Products
Net revenues from medical $ 21 6 % $ 53 47 %Net revenues from distributors 184 50 %
39 35 %
Net revenues from other 161 44 % 20 18 %
Total $ 366 100 % $ 112 100 %
Gross Margin
Our combined total gross margin was 83% and 97% for the three months endedMarch 31, 2021 and 2020, respectively. The decrease in total gross margin in 2021 as compared to 2020 was primarily due to higher product sales with lower margins. For the three months endedMarch 31, 2021 , revenues from our HMI Solutions business area accounted for 78% of total revenue compared to 91% in the same period in 2020 and revenues from our HMI Products business area accounted for 22% of total revenue compared to 9% in the same period 2020. There were no revenues from our Remote Sensing Solutions business area for the three months endedMarch 31, 2021 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 months ended March 31,
2021 and 2020 were $1.1 million and $1.0 million , respectively. R&D expenses
primarily consist of personnel-related costs in addition to external consultancy
costs, such as testing, certifying and measurements, along with costs related to
developing and building new product prototypes.
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Sales and Marketing
Sales and marketing expenses for the three months endedMarch 31, 2021 and 2020 were$0.8 million and$0.5 million , respectively. 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 customers
General and Administrative
General and administrative ("G&A") expenses for the three months ended March 31,
2021 and 2020 were $1.1 million and $0.8 million , respectively. The increase was
primarily due to higher costs related to staff and in-house consultants.
Income Taxes
Our effective tax rate was (1%) and (1%) for the three months ended March 31,
2021 and 2020, respectively. The negative tax rate in the three months ended
March 31, 2021 and March 31, 2020 was due to withholding taxes from sales. We
recorded valuation allowances for the three-month periods ended March 31, 2021
and March 31, 2020 for deferred tax assets related to net operating losses due
to the uncertainty of realization.
Net Loss
As a result of the factors discussed above, we recorded a net loss attributable
to
Contractual Obligation and Off-Balance Sheet Arrangements
We previously agreed to secure the value of inventory purchased by one of our AirBars manufacturing partners. AtDecember 31, 2020 , the guaranteed amount was decreased from$210,000 to$100,000 . 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, 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 ofMarch 31, 2021 , we had made no payments to TI under the NN1002 Agreement. 27 Operating Leases We did not renew our lease for the office space located at2880 Zanker Road ,San Jose, CA 95134 inAugust 2020 andNeonode Inc. now operates through a virtual office.
OnDecember 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 is valid throughNovember 2022 . The lease is extended on a yearly basis unless written notice is given nine months prior to the expiration date.
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 can be terminated with nine months' written notice prior to the termination date. InJanuary 2015 , our subsidiaryNeonode Korea Ltd. entered into a lease agreement located at B-1807, Daesung D-Polis. 543-1,Seoul, South Korea . The lease was terminated onDecember 18, 2020 and we now only have a virtual office inSouth Korea . 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 is given three months prior to the expiration date.
For the months ended
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
InApril 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 onJuly 1, 2014 when the equipment went into service. OnJuly 1, 2020 , the lease contract was extended for one year. The implicit interest rate of the extended lease period is 9.85% 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 June andNovember 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 onJuly 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 inMay 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 inAugust 2018 when the equipment went into service. The implicit interest rate of the lease is approximately 1.5% per annum.
See Note 7 - Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion.
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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 sensor products, including AirBar; ? operating expenses; ? timing of our OEM customer product shipments; ? timing of payment for our technology licensing agreements; ? gross profit margin; and ? ability to raise additional capital, if necessary.
As of
Working capital (current assets less current liabilities) was
Net cash used in operating activities for the three months endedMarch 31, 2021 was$2.0 million and was primarily the result of a net loss of$1.7 million and approximately$0.4 million in non-cash operating expenses, comprised of stock based compensation expense, depreciation and amortization and amortization of operating lease right-of-use assets. Net cash used in operating activities for the three months endedMarch 31, 2020 was$1.0 million and was primarily the result of a net loss of$1.1 million and approximately$0.3 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use assets. Accounts receivable and unbilled revenues decreased by approximately$0.4 million as ofMarch 31, 2021 compared toDecember 31, 2020 . This was due to some large customer invoices outstanding at year end 2020 that settled during the first three months of 2021. Inventory increased by approximately$0.5 million during the three months endedMarch 31, 2021 due to purchased components to secure our estimated sales for the coming twelve months.
Deferred revenues decreased by approximately
During the three months ended
Net cash used in financing activities of$148,000 and$132,000 during the three months endedMarch 31, 2021 and 2020, respectively, was the result of principal payments on finance leases.
We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately$1.7 million and$1.1 million for the three months endedMarch 31, 2021 and 2020, respectively, and had an accumulated deficit of approximately$197.7 million and$196.2 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. In addition, operating activities used cash of approximately$2.0 million and$1.0 million for the three months endedMarch 31, 2021 and 2020, respectively. 29 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.
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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.
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 (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
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